Wednesday, March 06, 2013

Gold cup half full or half empty?

With the Dow making a new all time record high a couple of notes on gold. On ZeroHedge they show a graph of gold vs. the Dow from the last high in 2007 (link1). It would be even more dramatic going to the older high in 2000, when gold was in the $400 range. Basically during these 13 years, those buying SPY at the highs have nothing but the modest dividends, and gold investors are up 300% ($400 to $1600 in round numbers).

The gold half empty case is mentioned on some stock market shows, that during the past 14 months gold is flat. For calendar 2013, gold is down. From the lows of 2008/2009 gold is up, but has underperformed the broad stock market from its lows. So gold vs. the S&P 500 can show what a person wants it to show, depending on the time frame chosen.

The hindsight trader can claim to have bought the lows, got out at each high, for each asset. Of course most reporting that they did this are liars, and I wouldn't believe them unless they had a real time audited account and no dummy accounts (like playing multiple March madness sheets picking so many possible winners, that one sheet is almost sure to have the winner). No one is that smooth that smart to be in the best asset every year, and get in at the lows and out at the highs, at least no one I have ever met.

The more important questions are what next. I already posted an idea for the stock market of early 2014 being a high, using the cycle time between the two previous tops instead of price. Time is just as important as price for option traders. For gold, I would like GDX, the gold miner ETF to make higher highs to confirm a turn in GLD. For now, any rallies in GLD are suspect. 

The big fundamentals for GLD are the Asian economies, because they drive 70%+ of the demand for physical. Some will argue about currencies, but the bottom line demand for physical is what ultimately is the long term driver. Some will point to record gold buying by central banks. I see this more as a negative in the long term. The bottom in gold was when the Bank of England clumsily sold their gold holdings at below $300 per ounce. Now that central banks are buying, it is more likely indicative of a longer term top than a bottom.

Some like to say the Fed is pumping up the stock market. However, the Fed pump is likely helping bonds, stocks, and gold. If Treasuries were yielding 5% or 7%, the opportunity cost of owning gold goes up dramatically.

On this trading blog, I have mostly avoided gold for the past year. With my bullish bias towards gold, it has been the right call. There have been better opportunities else where. That isn't to say that gold has no place in a long term investment portfolio, but trading and investing are different hats. For trading, I much prefer tailwinds and a high probability of profits, and that hasn't been happening in gold.

To recap, rallies in gold are suspect until the gold miner index GDX can start trending up. The back of envelope stock market top is scheduled for early 2014. Readers know that I view predictions as entertainment, so keep that in mind when reading my missives. The money is made with correct position sizing and risk management, predictions are less important.

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