November 17, 2010

I Repeat: Who has not bought Gold that would buy Gold?

In response to my newsletter from this past weekend, one of you sent me the link to an article titled, “Is Gold In a Bubble ... And If So, How Much Further Can It Rise Before It Pops?”  The whole idea behind this piece was to argue that gold was not in a bubble, and to “prove” it, the author listed opinions from 11 different purportedly expert sources…all of whom exhibited varying degrees of fairly extreme bullishness towards Gold...To me, however, this article, written in support of dramatically higher gold prices, is actually just one more blatant indication that virtually the entire analytic/investment advisor/economic “expert” community is TOTALLY on one side of this trade…And if this is so, you KNOW what comes next…GET SHORT GOLD NOW.

Here are excerpts of all the sources that were quoted…

1.“the super rich - who presumably know a thing or two about investing - are buying gold by the ton.”

2. “Lewis wrote in September: Gold prices would need to surpass USD 1,455/oz to be considered extreme in real terms and hit USD 2,000/oz to represent a bubble.”

3. “Myles Zyblock, chief institutional strategist at RBC Capital Markets, said last month gold may soar to $3,800 within three years as it follows the pattern of previous investment manias.”

4. “Louise Yamada remarked in a client note that gold—based on its current trajectory—most likely wouldn't represent a true bubble unless and until it gets to $5,200 an ounce.”

5. “University of Michigan economics professor Mark J. Perry noted in July that inflation-adjusted gold prices are lower now than in 1980… Adjusted for inflation, the price of gold today is 41.5% below the January 1980 peak of more than $2,000 per ounce (in 2010 dollars).”

6. “Frank Holmes, the CEO of US Global Investors…If you take a look at previous cycles, super cycles, we're far from it...“If gold were to go to 1980 prices like most commodities have gone to, gold would be over $2300/oz.”

7. “WJB Capital Group's John Roque pointed out in May that the current gold bubble is still much smaller than the bubble in the 1970s when priced against the S&P.”

8. “Brett Arends, a columnist for The Wall Street Journal and MarketWatch, estimated that "individuals bought $5.4 billion worth of gold, and sold about $2.7 billion, (so) their total net investment comes to $2.7 billion" in 2010, through early summer. Arends also concluded that "if it continues along the same trajectory (of past bull markets) -- a big if -- gold today is only where the Nasdaq was in 1998 and housing in 2003."

9. “JP Morgan’s Michael Cembalest indicates that ownership of gold in dilutable terms (aka dollars), as a portion of global financial assets has declined from 17% in 1982 to just 4% in 2009. And even though the price of gold has doubled in the time period, as has the amount of investible gold, the massive expansion in all other dollar-denominated assets has drowned out the true worth of gold. Were gold to have kept a constant proportion-to-financial asset ratio over the years, the price of gold would have to be well over $5,000/ounce.”

10. “Aden Forecast...We clearly believe that gold and silver are far from being in a bubble.... The value of the whole monetary system is under question and until this very issue is resolved, gold and silver will prevail.”

This is just a start…I think I could easily dig up 10 more comments just like this in just a few minutes…What this, and all the bullish press like it, very much reminds me of is the bond market earlier this year when I listed comments from 12 different “experts” about how bonds were absolutely a gigantic short…right before they started a 20 point rally…And while there is nothing that guarantees this is the same sort of situation (in reverse), it sure as hell feels like it…Even bigger when you get down to it…I literally could not count the times I’ve recently read something like, “Everybody thinks this is a bubble…but I don’t. Here’s why I think gold is going to $2500 etc.”

At any rate, just to emphasize the point here are excerpts from that April 5, 2010 newsletter in which I noted the overwhelmingly one sided opinion on Bonds…and a chart thereafter to demonstrate, one more time, why it is eventually so disastrous to listen, really, to any of those guys you see chattering on TV or the internet…

April 5, 2010

As just a FEW examples of how overwhelming is this bearish “groupthink” on Treasury Bonds, here are some quotes I picked up from the handful of media sites I scan, just in the last few days. I count 12 different guys here, and they are ALL saying the same thing….and they are ALL sure they are right…

3/25/10, “Bonds have seen their best days.” Bill Gross

3/29/10  “The rally in Treasuries is over.” James Caron

4/1/10 “Our research suggests that we are in the early stages of a long term bear market for Treasuries, especially for the long end.” Alan Bush

3/30/10 “Could this be the start of the ‘Great Bear Market in Bonds’?” Jeff Cox

3/30/10 “The bond market is a bubble. It’s getting ready to burst.” Bob Froelich 

3/31/10 “Yields are headed higher over the next year or two, with the 30 year yield (now at 4.75%) very likely hitting the 6% level”, Dan Siever

3/31/10 “Bearish on bonds: Why bond yields may be headed much higher”. Mark Hulbert

3/31/10 “Ten-year Treasury rates (currently 3.87%) will climb…to about 6.25% in coming years.” Dan Fuss

4/1/10 “Bonds and Utilities at risk…”, “investors should prepare their strategies for coping with a rising interest rate environment”. Michael Kahn

4/1/10“Announced the confirmation of a major trend: the breakdown of the bond market”, “the great post-1980 bond bull market has finally reversed.” Aden Sisters

4/1/10 “Investors are preparing for bond yields to head higher and the end of the massive bond rally in the past year.” David Callaway

4/1/10 “Our experts give you a dozen great ways to defend yourself from—or profit from—rising interest rates. And they may rise sooner than you think.” Marketwatch

Again, this is just a small sampling of what all the “suits” almost unanimously are saying…and if absolutely ALL of these guys (and ALL of their cohorts) are so dead certain, who could possibly be left on the sell side of this market? Again, it’s like stocks  a year ago…You DO reach the point where anyone who would sell, HAS sold, and it’s then time for the market to go  back up.

By no means does it mean Gold is going to react the same way (but opposite, by crashing), but here is how Bonds played out when all those supposed experts were saying “SELL!”…

SO I SAY GOLD HAS REACHED EXACTLY THIS SAME PSYCHOLOGICAL POINT…WHERE, AT A MINIMUM, THE OVERWHELMING MAJORITY OF OPINIONS ARE ALL ON ONE SIDE OF THE TABLE…AND IT MAY BE MEANINGLESS…I MAY STILL BE ON THE WRONG SIDE OF THIS MARKET…BUT IN MY 30 YEARS DOING THIS, I DON’T THINK I HAVE EVER SEEN IT QUITE THIS UNANIMOUS…I WOULD ALSO ADD, THERE ARE A BOATLOADS (AS IN THE TITANIC?) OF THOSE TALKING HEADS WHO HAVE SPENT THEIR ENTIRE INDUSTRY LIVES SPOUTING ABOUT ONE SUBJECT ONLY, THAT BEING STOCKS, BUT OF LATE THEY HAVE ALL BECOME NOVEAU GOLD AND COMMODITY MARKET  EXPERTS…AND I FIRMLY BELIEVE THIS STORY WILL END WITH THEM ALL HAVING THEIR HEADS HANDED TO THEM.

I CONTINUE TO SEE GOLD AS A MONSTER SHORT AND CONTINUE TO RECOMMEND EITHER SELLING FUTURES OR BUYING PUTS…THIS IS THE GRANDDADDY OF THE COMMODITY MARKETS AND WHAT IT AIN’T GOING TO DO IS JUST DRIBBLE AROUND…IT’S GOING TO MOVE, AND MOVE BIG…BUT I JUST DON’T THINK IT’S GOING TO BE IN THE DIRECTION THAT WILL MAKE ALL THE SHEEP VERY HAPPY.

GET ON NOW. FIGURE OUT HOW MUCH YOU WANT TO RISK AND CALL ME. MY FEELING IS YOU DON’T NEED TO LOAD THE BOAT…IF I AM RIGHT (AND MAKE NO MISTAKE, I MIGHT NOT BE) A FEW BUCKS COULD GO A LONG, LONG WAY.

Over and out,

Bill

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