Steadfast FinancesTraders Know it's a Gold Bubble, Why Don't You?

Traders Know it’s a Gold Bubble, Why Don’t You?

Filed in Commodities , Investing 101 , Investor Psychology 41 comments

This is how seasoned commodity traders view the current gold bubble. Whoops! I mean gold rush.

Experienced traders know very well that the gold market is teeming with multibillion dollar hedge funds and professional speculators, which means they are after one thing… fast money!

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Granted, the popularity of investing in gold is also being fed by nations topping off their gold coffers, Forex traders shorting the U.S. Dollar, and even the possibility the U.S. Dollar will no longer be the world’s reserve currency. These are all highly valid reasons for gold to spike higher. But this far, this fast?

One has to remember that the story fueling the oil bubble (e.g. the BRIC emerging markets) was also a highly plausible argument, until the speculators dropped it like a bad habit. They even began shorting oil and the oil related equities they pumped up months before.

But still, the warning signs of an investment bubble are everywhere:

  • Magazine covers, newspapers, blogs, and mainstream media constantly say The Dollar Is Dead.
  • CNBC commercials trying to convince you to own gold over cash (These ads aren’t always on the level considering CNBC ran a few loan modification scams.)
  • Late night infomercials giving you the hard sell on why you should be buying gold or silver coins.
  • The sudden popularity of discount brokers offering Forex trading.
  • The water cooler talk at work revolves around the Gold ETF (NYSE: GLD).

This is why that I continue to state that gold above the $1000 mark is a trade… not an investment!

As my Grandfather used to say: when everyone has jumped aboard the bandwagon, the wagon breaks down. (Apparently, that’s a fairly common adage considering Mark Haines says something similar in the CNBC segment.)

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Posted by CJ   @   10 November 2009 41 comments
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Apr 20, 2010
6:53 pm
#1 jhon mcqie :

Every financial TV network i look at is saying buy gold its going to 2000 every financial adviser is saying the same it just reminds me of the 2000 dot com bubble when every one said to buy. Be careful

Apr 20, 2010
9:06 pm
#2 Matt SF :

Well said Jhon! I agree, it’s very much like the 2000 tech bubble or the 2008 commodities bubble.

Apr 21, 2010
12:19 am
#3 Doug Digger Eberhardt :

Points to ponder…

Why is gold breaking out to new highs in EUROs?

Gold’s just a shiny rock right? You bury it in your back yard 10 years ago and dig it up today, clean it off and it’s still a shiny rock.

What changed?

It’s what gold is priced in that changes.

Right now gold is in a cyclical trend lower priced in U.S. Dollars as the Dollar Index is in a cyclical trend higher.

Right now gold is in a cyclical trend higher priced in EUROs as the EURO declines with the problems of the PIGS (Portugal, Ireland, Greece and Spain).

I’m looking for gold priced in YEN to be the next big mover. There is no reason for the YEN to be as strong as it is.

As far as comparing it to the bubble, what you’re really saying is the U.S. Dollar is going to get stronger (and thus gold would go lower).

Nothing could be further from the truth.

National debt over 12 trillion and a congress complicit in continually raising the debt ceiling, budget deficits, undeclared wars, state and city fiscal issues, pension shortfalls, bank failures, etc. etc. etc.

Add to that, future obligations in the trillions for Medicare, Social Security and Obamacare and GDP that is only fueled by the green shoots of government spending at present, with no hope of lower unemployment on the horizon and the writing is on the wall. Unfortunately it’s written in a language that few understand.

Hope you’re doing well Matt…and look! no url’s! lol

Apr 21, 2010
8:29 am
#4 Matt SF :

Yeah, you’re about 4 months behind Dennis Gartman on the long gold / short Euro trade, but better late than never. Have to dance while the music is playing, so the traders say.

Apr 21, 2010
11:24 am
#5 Doug Digger Eberhardt :

Actually, that’s not true. Gartman called the trade to go long gold in the British Pound in November. I wrote an article November 18th to look at going long gold in EUROs with a complete analysis as to how the EURO was approaching its all-time high, which made no sense as their debt situation as a whole was as bad as the U.S. Gartman subsequently added the EURO gold trade to his list.

Then in his January 22nd Newsletter he told everyone to get out of the Pound and EURO gold trade;

“We, however, are making a material shift in our sentiment toward gold this morning and we shall again mince no words as we make that shift: rather than owning gold in foreign currency terms, we wish to own it in US dollar terms, for we now fear for the dollar rather than cheer for it in the light of this battle between the President and the Banks. Where we once wished to avoid the bearish dollar bet that one is making when one owns gold in US dollar terms, in light of the battle that is shaping up between the President and the capital markets, we shall instead embrace that dollar risk.”

March 19th I wrote an article calling him out on it. He has since flip flopped again.

I met Gartman at the LPL conference in Chicago. He gave a speech where he readily admits he’s wrong 80% of the time. For that people pay him $5,000 a year for his investment advice.

His secret is in cutting his losers and letting his winners ride. Unfortunately, he quit dancing with the gold EURO trade which by March was up 7.92% from when I called it. At least he’s back on it.

January 22nd, he told traders in his Newsletter to get out of the

Apr 21, 2010
11:25 am
#6 Doug Digger Eberhardt :

that last line shouldn’t be there…delete please…

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