Tuesday, May 18, 2010

Bought Paper Gold Today

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As a short-term trade. Today's post over at Trader's Narrative confirms the cognitive dissonance that I have been feeling in Gold - there's too much bullishness. I don't mean in a secular sense, I mean in a short-term trading sense. To quote from this post (I am too cheap to subscribe to this service for now):

The Daily Sentiment Index, from trade-futures.com, however is showing an extremely high level of bullishness for gold. At last Wednesday’s high [NOTE: which was May 12th, 2010], the DSI for gold reached 98% - implying that basically everyone agrees that gold is going higher in price. This level is not only extremely high by its own regard, it is also the highest DSI reading for gold in the history of this indicator reaching back to 1987!
The last time we came close to this DSI level was on November 17th 2009 (97%), March 3rd 2008 (97%) and November 7th 2007 (97%).

I am not bearish on Gold or Gold stocks. But I have an itchy trigger finger after buying some double bullish levered paper Gold today (ETF with ticker UGL). I am looking for a quick pop into the $1300-$1350 range and then I will likely take profits. My physical Gold is a long-term buy and hold. My trading account is for trading. For those who like to scream that the sky is falling and Gold is going to ten gazillion dollars tomorrow, all I have to say is: that's fine - I will profit immensely if this occurs. However, traders have to be cognizant of short-term swings and when you are actually in the thick of it, it almost always seems to take longer than you expect.

Gold stocks continue to disappoint, which also tells me we are not due for a sustained explosion in the Gold price here. I know many Gold bulls want to hear about imminent hyperinflation and the imminent destruction of all paper fiat currencies, but that is not my take on things. I think another deflationary impulse is imminent, which is being telegraphed by copper, lumber and oil.

The bond market is smarter than you think, whether it's manipulated or not, and its money flows dwarf the equities and Gold markets. Needless to say, the international bond markets are not suggesting imminent hyperinflation. Gold will be a safe haven because it is a currency. It's tough to get rich trading currencies unless you use major leverage. If the stock market drops 50% over the next year, I hope Gold bulls won't be upset if Gold only manages to gain 25-50% over the next 12 months.

Batten down the hatches. Not because the end of the world is coming. If I believed that, I wouldn't bother caring about the markets nor about writing this blog. I am optimistic enough on the future to bother with speculating. There is no doom and gloom in my mind, just a re-adjustment period to get ready for the next period of prosperity. In the mean time, Rome burns around those who own Gold and those who hold real money at the bottom of the crash will have an opportunity to go from doing well to becoming rich.

For Gold doesn't grow, although it is quite tasty to eat. It doesn't pay dividends, but it does rise in value 15-20% every year. It may be confiscated from pooled accounts, ETFs or banks but never from the private hoards of smart individual investors. It may not track inflation well, but it will consistently rise in real terms during secular credit contractions like the one we are in now.

Bullishness is too high right now on Gold only in terms of short-term traders bets, but I think Gold will get to $1300 or higher in the next few weeks. Notice the last time we hit this level of bullishness in the short term was on November 17th, 2009. We were at about $1140/oz that day and ended up at $1225 for the high two weeks later. It is characteristic of bull markets that irrational exuberance will last for longer and longer periods during bull runs.

However, after the next peak that is likely upon us within the next few weeks, we could easily have a decent correction back to the mid-1100 range. Don't shoot the messenger for advocating sound investing principles. When I was shouting BUY! in the Gold patch, I was told I was a cheerleader and told Gold would go below $1000 and possibly even to $800 an ounce. Now that I am urging caution, I am being told that I will miss the boat in Gold and Gold stocks. Perhaps, but I am willing to take that risk when dealing with the short-term. Of course, I am talking about a trading account, not a long term position in the metals or miners.

For now, I am long paper Gold and short the stock market, trying to scalp a few more U.S. Dollars so I can buy more physical Gold and Gold stocks on the next decent correction. My physical Gold (and a little silver) aren't for sale at current prices and are never traded. And if anyone ever tries to come for my metals, I hope they like to eat lead more than Gold...

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