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October 18, 2005
Sell/Short Gold
The Consumer Price Index
(goods at the consumer level came out Friday with its
BIGGEST ONE MONTH JUMP IN 25 YEARS.
The Producer Price Index
(goods at the manufacturing level) came out this morning
with the BIGGEST ONE MONTH JUMP IN 31 YEARS.
Gold, the "inflation
hedge", has gone NO WHERE on either number and, in fact,
closed down $2.00 today.
There is an old trading rule
that when a bull market doesn't respond to bullish news, you
need to assume it is going the other way.
I have recently been pointing
out the Gold market, in my opinion, has become severly
overloaded with speculative buyers. Predictions seem to
be everywhere that $500 an ounce, and higher, is an imminent
inevitability.
What I'm talking about, to some
degree, can be seen in the Gold Open Interest chart below.
Open Interest is the total number of longs and shorts in a
market, and shows you how many participants are in a
specific futures market, as well as if they have been
entering or exiting that market, which, if you think about
it, is ultimately what drives price changes in any futures
contract. On the year long Gold chart shown here,
you can easily note four distinct occasions when open
interest built up as Gold prices rose, then declined as
prices came down, most likely
reflecting speculative liquidation taking place, with those
downswings having been anywhere between $20 and $45 in
size....And finally, you'll note Gold's most
recent rise has seen open interest rise one again, this time
to what are record all time levels....
So what's next? Take a look for
and decide for yourself what looks likely....
There is nothing that says there
aren't plenty more buyers to carry gold higher, meaning I am
dead wrong...But it is my feeling the latest eye-popping
inflation numbers (which, again, did nothing bullish for the
market) are just about as much ammo as the gold bulls are
going to get....that the last real inflation number has been
fired, and what you now will have is a bunch of
people trying to stay long a 4 year bull market that has
come to an end....And to begin the process, I believe
you start with a nasty, nasty sell off as all of those
record spec longs head for the doors....at the same time.
For one thing, do not forget the
Fed's stated number one enemy is inflation. They didn't
start raising rates over a year ago for no reason at all and
the effects of those raises have been/will be felt in the
economy. You can't fight city hall and YOU CAN'T
BEAT THE FED....They will squelch inflation.
The funny, but logical, thing
about the futures market is you are
trading the future. However, more often than not, the media
presents the past as though it will be the future...that
what has happened absolutely will
continue to happen. The latest case would be the media
headlines of late seeming to imply inflation, driven by
higher energy prices, is here to stay......to which I
totally disagree. I again ask you to remember how NUTS the
media was about Crude Oil and Gasoline prices during the
back to back hurricanes.....how prices had no place to go
but higher!, higher!, higher!...Well, quite the opposite has
been taking place....
Check out what Unleaded Gas has
done since the hurricanes....
I think something of the same is
coming in Gold....
The next chart is of the current
December 2005 Gold contract.....I'll repeat what I've
pointed out in previous newsletters by asking you to note
how Gold has been swinging in one direction or
another for every one of those 20 months shown here.
In fact, you can almost say there are no 30 day periods,
anywhere on the chart, in which there was not at least a
$20.00 move, one way or the other....Then
I would note the last 30 days are just about the tightest
"action" anywhere to be found on the chart....The
implication?.... That something big is about to
happen, one way or the other, and I don't think it's on the
upside....And also think it's going to more than a "$20.00
swing".
I may be way off here
but I think Gold is about to drop in a BIG way, with at a
minimum, the 425 lows being the first big target.
Think about it.....
We've had
Terrorism. We've had the Iraq WAR. We've had the OIL MANIA.
We've had INFLATION (!). We've had the DOLLAR (remember the
CRASHING DOLLAR headlines at the beginning of this
year?...The Dollar is now up about 11% since
January)....We've had Tsunamis, Earthquakes and
Hurricanes......What I would ask is: With all of this, who,
that would buy gold, has not already
done so? Every bull market reaches a point where "everybody
is in"....and when you get there, what it usually means is,
IT'S OVER....Who, that's bullish, could not possibly already
be "in" this market?
Maybe I'm wrong but I
think Gold is a big time sale...I am selling futures and
buying puts in the December 2005 and February 2006 contracts
looking for, at least, $40-$60 on the downside.
I'm sure there must be some
people out there who are truly bearish gold but I haven't
seen them. Have you?
Thanks....Give me a call if
interested.
Bill Rhyne
800-578-1001
770-514-1993
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