Why I'm Betting Against Gold

Gold has been a savvy investor's dream since the markets’ tumble a few months ago. Not only has its priced soared, but it's a great hedge against inflation and the dive-bombing dollar. In fact, these last two reasons are probably the cause for the price increases. Many investors were (and still are) really concerned about inflation and the US dollar as the Fed furiously slashed interest rates. The increase in demand for hedges against these two risks, Gold being a classic and popular one, has driven prices through the roof. Gold Futures broke $1000 per troy oz about a week ago, from levels six months ago around $730. Futures a year ago were trading between $650 and $700. This is around a 50% increase this year.
So great, right? You see everywhere 'buy gold.' Gold has momentum. Gold still has huge upside. Gold will not only save you from inflation but you'll make a huge wad of cash on it too. Well, maybe. If the economy continues to collapse at the current rate, then yes. Gold should continue to rise, and would be a wise investment. However, I'm betting that the economy isn't going to do that. I'm betting that the market is bottoming out, and that soon the stock market will begin to recover. I'm not saying were not in a recession (I think we are) or that were out of the storm (were not) but I am saying that I think the price depressions in stocks are coming to a close. The Fed's opening of lending to Investment Banks does not only help, but shows they are willing to act in new ways to help Wall Street. I'm betting investor confidence will begin to recover, stocks will flourish, and Gold will TANK.
Tank? Yes. Tank. Look what happened last week. The market surged on the Fed's actions and Investment Bank's better than expected earnings reports, (The Dow Jones was up 410.23 or 3.43% to 12361.32) and Gold fell to $919.60, a drop of $78.60 or 7.87%. Yeahh. Gold’s volatility due to investor sentiment is unmatched right now, and this is because the increases in Gold's price is largely due to fears about the economy. This makes Gold scary. Gold's price is a bubble, and like all bubble's, it has got to burst. When it does, Gold will fall big, and fast. Last time Gold went crazy, in the early 1980's, Gold peaked around $1000. (This is like $2250 in real terms.) It fell in a matter of weeks to a fraction of that. I don't want to be long on Gold when that happens.
Really, unless your chasing a short term gain, which is definitely there, I see little upside in going long on Gold. Price bubbles ALWAYS correct themselves, and there is nothing different about Gold. The forces pushing demand right now are warranted, because the fears about the economy are real. However, the legitimacy of these forces will dissipate sooner or later, and Gold will be a big, juicy bubble waiting to pop just like tech stocks in 1999 and just like home prices last year. Only go long on Gold if you think the US stock market is going to continue its slide long term, because this is the only situation in which the current forces pushing Gold will remain. Otherwise, you'll be bummed in a year when your stuck with a bunch of Gold you bought for $900-$1000/oz which is now only worth $600-$700. That’s a 33% loss. Ouch.

Exposure to Gold other than Your Grandmothers Earrings:

• streetTRACKS Gold Trust (NYSE:GLD) 3/21 Close-89.80 (-3.36%)


• iShares Comex Gold Trust (NYSE:IAU) 3/21 Close-90.17 (-3.58%)


• Deutche Bank Gold Dbl Long (NYSE:DGP) 3/21 Close-22.44 (-7.46%)


• Deutche Bank Gold Dbl Short (NYSE:DZZ) 3/21 Close-27.66 (6.59%)


• PowerShares Gold (NYSE:DGL) Fri Close- $33.92 (-3.28%)

These are Exchange Traded Funds (ETFs.) They are a great way to gain exposure to commodities without having to actually purchase futures. Also, while futures may be hundreds of dollars, ETFs are usually similarly prices to stocks, making them affordable for everyone. Their behavior, while not exactly the same as the commodity futures they follow, are very similar, as you can see from the prices these Gold ETFs closed at last week.