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Monday, May 27, 2013

The Top Reason Gold Will Drop From Here

English: A view from the Member's Gallery insi...
English: A view from the Member's Gallery inside the NYSE (Photo credit: Wikipedia)
By Investment U

Boston, May.27, top stocks .- No one likes to hear an investment analyst say, "I told you so."

It's unseemly. And it grates.

After all, we know market pundits can look back on the good calls and conveniently forget about the bad ones. On top of this selective memory, a good call doesn't necessarily show any particularly acumen. Maybe a stock or a currency or a commodity went up or down as predicted but not for the reasons the analyst foresaw.

However, gold has hit the skids - it recently broke through a
2 1/2-year low - and for exactly the reasons I've been warning about for months.

If you have a big position in gold... it's time to cup your groin.
As I've said many times before, whether gold is overvalued or undervalued is difficult to ascertain under any circumstances.

Gold accrues no interest, pays no dividends, generates no earnings and provides no rental income. So you can forget about P/E ratios, book value, discounted cash flow or yield to maturity.

It is a speculative asset. Period.

An Unreasonable Trend

Why then did I keep harping on its coming collapse? For three reasons, including one big one.

The first is that gold surged during the financial crisis as faith in paper assets ebbed. It was entirely reasonable.

What was unreasonable, though, was that gold kept rising - and stayed high - even as the crisis abated and the economy and financial markets gained traction.

The second reason gold rallied was fear of higher inflation.

Again, it made sense. Gold is a traditional inflation hedge and investors were scared that Congress (with its easy spending ways) and the Federal Reserve (headed by Helicopter Ben and his open spigot) would inflate us out of the crisis.

But Uncle Sam's debt as a percentage of GDP will decline over the next two years. The Fed is weighing when to end the monetary stimulus. The dollar is strengthening. And inflation is MIA.

Hot Hands

However, the biggest reason I forecast a decline in gold prices was that the metal had fallen into the hands of the "hot money." By that I mean traders and hedge fund managers who have no interest in holding anything that is not moving in the right direction.

Bear in mind that until 2005 only 15% of all gold was purchased by investors each year. (The vast majority - about 78% - was consumed in jewelry.) But by 2009, more than 40% of gold was being bought by investors.

In particular, gold was under heavy accumulation by a number of big hedge funds. These folks are very different from mom-and-pop investors who think of the yellow metal as their "forever investment."

These are gunslingers with no interest in fighting a major trend. And - trust me - a 2 1/2-year low is a major trend.

I've heard some investors insist the drop in gold is some kind of government conspiracy to restore confidence in the financial markets.


More than 300 metric tons of gold have flowed out of gold ETFs in the last few months. George Soros, for example, dumped his entire position in SPDR Gold Shares (NYSE: GLD).

As I write, gold is down 19% year-to-date. And the World Gold Council recently announced that overall demand for gold was down 13% in the first quarter alone.

I'll be the first to admit that gold could suddenly rally. After all, it is protection not just against inflation but against all sorts of unforeseen political and economic calamities. That's exactly why you should own both bullion and blue chip gold shares as long-term financial insurance.

But understand that the short-term money is now bailing out of gold with both hands. That means the near-term direction is pretty clear...

The Most Profitable Gold Trade of 2013

Back on April 23, resident commodities expert Matthew Carr explained what's going on with gold right now.

First, investors and traders who have been betting on gold through ETFs such as the SPDR Gold Trust (NYSE: GLD) are selling their paper. This means that the fund, and any others that are holding physical gold, must liquidate holdings.

This is flooding the market with supply, along with hedge funds as Alex explains above.

Secondly, this time of year is typically weak for gold. That's why Matt recommends investors on both sides of the gold trade take a look at ProShares Ultra Short Gold ETF (NYSE: GLL).

According to Matthew:

"If you're long gold - a gold bull riding out the downturn - trying to hold onto profits, GLL is a good hedge. If you're a gold bear, GLL is a good bet to place on gold's move lower."

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