Monday, December 06, 2010

Gold: Be Very Afraid

Gold, that storehouse of value, has had an amazing bull run over the last two years. Gold prices have nearly doubled since 2008, and it’s up more than 25% this year alone. The financial press is full of praises for gold investing and every day I notice another gold broker ad on the TV or radio attempting to attract more buyers to the yellow metal. The public has started to notice and are piling into this supposed can’t-lose-investment in untold numbers.

Gold bugs point out that prices are still well below the inflation adjusted high of $2300 per oz hit in 1980. Some of the more optimistic gold bugs are even calling for prices to eventually hit $5000 per oz before this move is over. They cite worldwide economic turmoil and potential debasement of the currency as prime reasons for the massive bull market to continue. Even analysts from respected investment houses have jumped on the bullish bandwagon. Goldman Sachs has recently issued a statement calling for gold to continue climbing into 2012 with a target price of $1750 per oz.

While many signs point toward further up-moves in price, I would suggest extreme caution in going long at these levels. It’s a basic tenant of the markets that when most are saying one thing its time to start thinking the opposite way. Remember, these firms are heavily invested in gold and are likely talking their book. John Nadler, senior analyst at Kitco Metals told that all these Wall Street buy recommendations remind him of the speculation in 2008 that drove oil to record heights.

“I don’t think gold is an opportunity at $1400 per oz. Just because the price has been above $1000 per oz for the last 14 months, everyone thinks this is a new paradigm. It’s very similar to what we heard about oil a couple of years ago,” Nadler stated.

The fact is that gold costs around $400 per oz to $500 per oz to produce and is trading near triple this cost. If that doesn’t signal a momentum bubble, I don’t know what does. In addition, the daily chart pattern looks like a double top may form in the $1424 range at the previous high. Can gold go higher? Absolutely. Is it a sure thing? No way. I believe its time to start looking to hedge your holdings or get ready to go short in the near future. You don’t want to get caught buying the top tick, or holding the bag.

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