Thursday, May 13, 2010

Black Bile Bearish

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I am now loaded up with shorts on the S&P 500 (using puts on the triple bullish UPRO ETF) and commercial real estate (using puts on the triple bullish DRN ETF). Despite the powerful move by Gold stocks the other day, I don't like the way Gold stocks are acting. Though I may be totally wrong and may regret it, I am going to wait for a significant correction before putting previous profits back into Gold stocks. My biggest concern: Gold is at confirmed new all-time highs, the "real" price of Gold (i.e. Gold:commodities ratio) is rising, and traditional major Gold stock indices have been unable to make significant new highs. They are close, yes, but they should be leading the charge instead of being "pulled" higher by the Gold price.

Now please don't misunderstand what I am saying. I am not bearish on Gold stocks. Not by a long shot. But we are due for a powerful new bull market in Gold stocks that should be racing ahead of the Gold price. The fundamentals are there to support it and the timing is right. So perhaps Gold stocks are about to race higher and leave this short-term skeptic in the dust.

But I found a potential interesting template for what may happen over the shorter term. It's from the 2002-2004 time frame. Here's a chart of the price action in the Gold Bugs Mining Index ($HUI) with a plot of the Gold price below during the period I was looking at:

Now, this is not bearish, but it raises the possibility that Gold stocks may be getting set to disappoint in the short-term. They could then bottom in the summer before embarking on a meteoric rise. I am a loyal Gold holder, but Gold stocks are for renting in my opinion. Now, it is important to ask why would something like this happen again right now?

Well, this ties into my black bile bearish theme. I am VERY, VERY BEARISH on general stocks right now and think a big move down is imminent. If we are getting set for a multi-week stock market meltdown, Gold stocks may need to correct for a brief period until the general stock market fear subsides a little. Gold, as a crisis hedge, may go the other way from Gold stocks for a time as it continues in its clash of the titans against the U.S. Dollar as the ultimate safe haven currency. This would build the fundamentals up for Gold stocks and make them even juicier for the next leg up once the stock market calms down.

In fact, such a scenario would set us up for what would likely be the biggest and fastest leg up in Gold stocks for the entire secular Gold stock bull market so far. Additionally, it has the propensity to fool the greatest number of market participants, which makes it an ideal scenario for Mr. Market. Perhaps I'm just California dreamin' and about to miss the boat on Gold stocks...

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