Shorting gold

As of early this AM, we have a trendline break on the hourly chart. Still none on the daily or monthly, but as we saw last week after a similar trendline break, this market is capable of cracking with little warning. This is a 1-month view of February gold futures. Last night’s high is the uncle point for the trade.

Source: Interactive Brokers

Gold is much more overbought than even at the March 2008 peak, when it first broke $1000:


Even hard-core gold bugs like Jim Grant and Gary Savage are backing off for now. The smart money bought gold years ago, and I bet a lot of big players are hedging or pruning positions.

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4 thoughts on “Shorting gold

  1. I don’t think a true gold mania is possible because the fundamentals don’t support it. We need runaway inflation (not price stability!) to have a full fledged gold bubble. So this is just a mini-bubble, and it can pop without the general public becoming gold bugs.

  2. I wish you good luck on your trade, although my personal experience is that shorting the strongest bull market sector on what you think might be a top is a less profitable strategy than shorting a weak sector that has clearly already rolled over.

    I think shorting Gold here is hoping. I think you will end up being a “hobby bear” (I think that was your term for those who were bearish on the general stock market this summer) on Gold and this trade would only be good for a quick scalp anyway even if it were successful. Gold isn’t done going higher – not even close.

    By the way, silver drops faster and harder than Gold once a precious metals run completes, so this is a higher reward scenario if you are convinced the bull run is over and want to go short.

    Just my 2 cents as a long term Gold bull that had to wait 1.5 years for this breakout over 1,000 and now that it has happened, everyone wants to call it a bubble after only a 20% move higher?! I love the wall of worry and it just lets me know how much further Gold has to run to the upside.

  3. Maybe you are right, Adam. But with DSI bullishness over 90% for a month straight and every other technical indicator screaming overbought, the short potential here is much more than just a scalp. Silver should certainly fall more in % terms than gold, but the chart is always sloppier and prone to stop-whacking fits.

    Also, you can’t ignore the high correlation of gold and stocks this year, and stocks are extremely overvalued and overbought, and the technicals are increasingly weak. Once the deflation/carry trade begins to unwind in earnest, we will see 2008 redux — everything down but dollars and yen. Gold could only be up relative to the rest of the reflation beneficiaries (energy, base metals, silver, stocks, junk bonds).

    Very, very few people truly believe that deflation is still in the house, but with the amount of unserviceable debt even higher than a year ago and banks still reducing lending, the sum of money + outstanding credit will be contracting for at least another couple of years.

    When the hyperinflation boogeyman fails to show by then, people will sound the all clear and reconsider the merits of their despised script, since it will still buy more house, stock, man-hours and gasoline than in 2007. That will be the time when paper money’s prospects are at its worst, and when it will be most important to hold hard assets, even real estate – but not yet.

    I beleive it’s never the thing that the crowd of investors fears that does them in.

  4. I don’t believe in hyperinflation, I believe in Exter’s liquidity pyramid and hyperdeflation during a fiat implosion driving people to Gold at the apex of the pyramid as the best and most liquid form of safe cash/wealth preservation.

    Gold may also be forming a bubble. If it is, look out! I just finished a post you may be interested in along these lines:

    Remember that Gold is at new all-time highs. The relative strength of Gold, given the strength of deflationary forces, is shocking and easy to fade on fundamentals unless one views it as a currency. Why short a hard currency during a wicked deflation? I am a deflationist, I have just come to the conclusion that it’s deflation in Gold terms much more than Dollar terms. I think Prechter is correct, he’s just recommending/focusing on the wrong currency. Our government and central bank cannot stop deflation, but they do have the power to destroy the currency if this is really their goal and they are willing to ignore the laws of common sense and destroy confidence in the United States to achieve their goal. We seem to be progressing admirably in this regard.

    A major secular theme is that the U.S. is going to lose its status as reserve currency of the world (don’t know what will replace it – certainly not any one country’s currency) during this secular bear market.

    Just my opinion, obviously, and I love to read your insights into the markets. Keep ‘em coming!

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