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There must be a good explanation for gold's $50 drop today...

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April 04, 2012 – Comments (18) | RELATED TICKERS: GOLD , DY , ING

The other day, I had a short discussion with TMFSinch on one of his blogs, alluding that PM ultrabulls might be poor losers.

Namely, it seems to me every time gold drops (or doesn't go to $5,000 as they are predicting), the permabulls here on CAPS come out with posts like: "Fed manipulating Gold", "Big Western Banks manipulating Gold", "Pekingese dogs at Westminster Show manipulating Gold", etc.

Today, I expect no different. Somebody somewhere in the world is manipulating gold. I just wonder who it is this time.

Also, I see from this post here, PM ultrabulls are counting on gold's next leg up (meaning gold will reach a new all-time high on the next run).

I, personally, am not so sure about that. I actually think I'm definitely going to start shorting gold here on CAPS next time it hits $1750 - $1800. I'm thinking gold might have another run left in it, but it's not going to be an all-time breaking (by a significant $ amount) run.

I think the gold permabulls are leaving in the same la-la land that the housing-stocks permabulls lived in 2005-2006.

I can almost hear (if I haven't heard them already) the gold permabull saying stuff like "Buy gold, they are not making any more of it", "Buy gold, it will always go up in value",  "Buy gold, people will always need something to live in", etc.

I'm saying this just to make a point that even though your investing premise might be right (current monetary policy/mess, etc.), the market you are investing in still might crash.

I don't think gold will go as low as some gold permabears are predicting, but I think will go low enough to make some of the people who bought (or will buy) near the top feel not so great about themselves.

18 Comments – Post Your Own

#1) On April 04, 2012 at 1:15 PM, dragonLZ (99.59) wrote:

In this post here from August of 2010, I said I expect both gold and Dow to keep going up for another 2 years or so. We are closing in on the 2-year mark.

From this point on, I'm bullish stocks only.

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#2) On April 04, 2012 at 1:19 PM, TheDumbMoney (37.72) wrote:

Also, real yields have been trending less negative since the beginning of February.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

See also:

http://www.crossingwallstreet.com/archives/2010/10/a-model-to-explain-the-price-of-gold.html

http://www.crossingwallstreet.com/archives/2011/08/updating-the-gold-model.html

http://www.crossingwallstreet.com/archives/2011/12/refining-the-gold-model.html

http://econompicdata.blogspot.com/2011/08/gold-model-still-rockin.html

http://peterlbrandt.com/the-dominant-fundamental-theory-explained/

http://seekingalpha.com/article/313547-the-gold-medal-gold-model

http://abnormalreturns.com/tuesday-links-low-expectations/

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#3) On April 04, 2012 at 3:25 PM, Valyooo (99.35) wrote:

Also, note how gold according to them can only be manipulated down, not up.  Funny though, that stocks can only be manipulated up, and not down.

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#4) On April 04, 2012 at 4:04 PM, dragonLZ (99.59) wrote:

Valyooo, I said the same thing in my comments here.

Dummberthanafool, you are getting to be worse than Porte with all those links. I do have to admit, though, you put them all in one single comment while Porte spreads them over multiple comments (one after another). Just kidding, your (and Porte's) comments are always very welcome.

p.s.

I think I have to apologize to gold permabulls for my cynicism used in this post. It's nothing personal, it's just the way I sometimes write to make a point (or get attention).

I fully understand that because of it, I might be considered a complete moron when gold reaches $2500 by the end of the year, but I'm fine with it. I'm willing to take that risk and won't mind people calling me a moron if that happens.

I also do not consider a word permabull as something bad. To me, that's just a way of saying one is a little bit more in love with a certain equity/commodity than others. I'm a permabull on equities (especially Nasdaq ones) right now.

And also just to clarify, I'm not a gold permabull. I think that gold will always be a good long term investment, especially when bought at the right price. For example, buying at $1700 when gold is going to be at $1300 a few months later is not "buying at the right price". That's not to say whoever bought at $1700 is not going to make money off of it a few years down the road.

p.p.s.

In this post here from the end of 2011, I said there is a good chance Dow's and gold's price might intersect at $13,500 (one zero more or less). 

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#5) On April 04, 2012 at 5:54 PM, SN3165 (< 20) wrote:

You're entitled to your own opinion. I strongly feel the gold stocks are a great value here. You don't have to be a gold bull to see that they are very undervalued.

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#6) On April 04, 2012 at 7:18 PM, awallejr (85.54) wrote:

I suspect the hint of maybe no QE3 had a lot to do with gold's drop as well as a strengthening dollar.  In my view gold has 2 main reasons for holding, as a hedge against inflation and as a hedge against global chaos.

I think everyone should have some gold in their portfolio.  Personally I own SNDXF as my gold play.  I love their business model.  As long as gold doesn't crash to extremely low values, that company should only flourish over time.

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#7) On April 05, 2012 at 1:24 AM, whereaminow (< 20) wrote:

Funny but pointless. You go after the low hanging fruit.

As an example, I could spend days arguing the points made by Van Jones, but why not leave that to a 3rd grader? I have better things to do.

Whenever people attack gold bulls (and I'm at least glad that you don't refer to them as gold bugs), they don't discuss markets, money and the State. They don't discuss end games for the Federal Reserve interventionary plans, never ending wars that destroy our currency, economic cylces, or bureaucracy.

They make fun of people for being passionate or for making over-the-top predictions. 

Well, have at it. You make no headway that way.

Investors are often confused by Fed pronouncements, whether gold bulls or not. When Operation Twist was announced, gold fell $400. People took at as a tightening of monetary policy, which of course it wasn't. And promptly gold rallied back $250.  

That's the way it works. Wake me when monetary policy actually changes, not just the rhetoric from the Technocrat-in-Charge.

David in Liberty

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#8) On April 05, 2012 at 7:41 AM, VExplorer (29.63) wrote:

As I wrote before, nice thing about gold is what Main Street don't worry about. IMO: Gov, Fed or any another "bureaucrat" should not worry too. They have had issue with rising gasoline prices (even not price of oil), but not with gold. All people around me I asked have not had idea about price of gold. Usually, they know price is "high" (overestimate 500% price of ring on their hand) and is rising NOW (no history, no forecast, no INTEREST). So, if gold price will reach $10,000, who will care? Like, who will care if price of art or antique totes are going to skyrocket?

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#9) On April 05, 2012 at 8:32 AM, ryanalexanderson (< 20) wrote:

I'm definitely on the gold-heavy side of things. I don't begrudge the comments against gold. It has risen rather a lot - but not exactly parabolic. But I figure the western world will be moving into one of four states at any time:

1. Normal/high interest rates, economy booming (buy equities)

2. Low interest rates/QE, economy booming (buy commodities)

3. Normal/high interest rates, economy stagnant (buy bonds)

4. Low interest rates/QE, economy stagnant (buy PM's)

I also think that we cannot raise interest rates very much, ever again. We will certainly never see state 3 in the next few decades; the Fed has made that clear.  So a mixture of the other three in equal measures seems respectable to me, in a time when the money supply is not sound. 

The one thing that keeps me in PM's pretty heavy, though, is the blaise attitude people have taken towards money now. In the 70's, people would swoon over bailouts in the neighbourhood of 10-20 billion dollars. Now, the government spends literally trillions more than it takes in revenues - and people just don't care.

Because they've hit that magical point where money had become abstract. "A trillion? Well, it's a bigger number than a billion. I guess that's bad." It doesn't sink in that it's actually 1000 times bigger of a problem. 

Honestly, I feel that way myself about it. The numbers are abstract. And the feeling that money is "abstract" is just a different way of saying "devalued", at the macro level.


 

 

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#10) On April 05, 2012 at 10:05 AM, dragonLZ (99.59) wrote:

Funny but pointless.

whereaminow, I tried to make two points:

1. Gold permabulls might be whiners (One thing I don't understand: If one has made a killing in gold holding it from $300 to $1800, why is he/she "complaining" about the gold not being at $2,500 - $3,000 due to "manipulation".)

2. One can be wrong even if one's investing premise is right (if you are too early or too late, or if the market doesn't care about your premise, you lose money whether your premise is valid or not).

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#11) On April 05, 2012 at 10:19 AM, Frankydontfailme (27.20) wrote:

dragonLZ, I find your criticisms of "perm gold bulls" to be reasonable, and some of the best I've seen on this forum. Far better than any Mfool paid writer.

I disagree with you that stocks will outperform gold over the next couple of years, but I agree with you that the Dow and Gold are likely to cross at 1. Opinions are just opinions anyway, who cares?

One point though, it's not exactly fair to call all gold bulls, permabulls. Even if they remain perpetually bullish over this extended time period. Sinch for example, might be called a perma gold bull, despite the fact that he wasn't bullish in 1995, and probably won't be bullish when gold hits 10,000 (if I suppose).

In other words, there's a difference between a pure permabull and someone who invests for 'supercycles', and remains bullish throughout the supercycle even though the investor knows that there will be major corrections along the way.

Personally I've learned that dodging the corrections is more enjoyable than gutting them out, but there are advantages to just waiting it out.

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#12) On April 05, 2012 at 12:30 PM, dragonLZ (99.59) wrote:

Frankydontfailme, Thanks for the nice words, but I'm afraid I have to disappoint you.

I did not say that the DOW and Gold will cross at 1. I said they will cross at 10:1.

 

One point though, it's not exactly fair to call all gold bulls, permabulls.

I agree with that. And I do realize I'm unjustly calling some gold bulls permabulls. But I don't think that's anything bad.

Take Sinch for example. I think he is a gold permabull based on everything I read written by him. However, that doesn't mean that I'm right and that he indeed is a permabull.

If gold goes down to $900-$1000, I think it will be safe to say that he is (or was a permabull) as he was saying at gold $1800 that gold will be over $2000 soon.

I also think it will be safe to say he is a gold permabull if he continues to say DOW and Gold will be at 1:1 ratio when not even 1:2 (or 1:3) happens in some reasonable amount of time.

By the same token, if gold does raech $2500 any time soon, and/or if Dow/Gold does reach 1:1 ratio, I think it's safe to say that I'm a gold permabear (or Dow permabull) and that Sinch was actually right in his predictions.

I don't think there is any reason to have any hard feelings when talking about stuff like this. We are all sometimes wrong and sometimes right (and sometimes a little too much in love with what has been working for us in the past).

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#13) On April 05, 2012 at 12:56 PM, whereaminow (< 20) wrote:

But what about gold perma bears like Alex Dumortier? Do you call them out? Do you mock them?  He's been predicting gold <$1k for about 4 years now.  They have a whole slew of conspiracy theories too, like Glenn Beck drove up the price, Ron Paul's followers did it, Cash4Gold stores did it!  It's a conspiracy!

It's fine if you're doing it to both sides, but I don't see it so that makes me think you have a bias at work.

You might not believe this LZ, but I don't want gold at anything over $2k anytime soon, nor do I want silver to cross $50.  I like owning it. I like buying it. I can't buy it anymore if it starts to climb to high. I have a target number of ounces I'd like in my safe one day, and were not anywhere close yet.

Not only that, the implications of a sudden rise to $5k and what that would mean about the world are a bit freaking scary.

So a nice slow steady climb to say about $3k over thenext 5 yeras or so (about a 90% rise over 5 years is not outside of the realm of possibility, or crazy. The dollar halves in value pretty much at that rate since 1971 anyway) would be just perfect.

David in Liberty

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#14) On April 05, 2012 at 3:57 PM, dragonLZ (99.59) wrote:

It's fine if you're doing it to both sides, but I don't see it so that makes me think you have a bias at work.

whereaminow, I thought it's pretty obvious I'm biased (I wasn't hidding it).

Maybe the confusion came from the sentence toward the end of my first comment where I wrote: "And also just to clarify, I'm not a gold permabull. I think that gold will always be a good long term investment, especially when bought at the right price".

I meant to say "I'm not a gold permabear."

But I am a gold bear right now. Even two years ago, when I said gold will continue to go up (and said it again at the beginning of 2011), I wasn't a gold bull.

 

But what about gold perma bears like Alex Dumortier?

When there was a TMF article about the gold a year ago or so (something like "Ignorance of Investing in Gold"), in which two TMF analysist were making fun of gold investors (and TMFSinch) by saying it's stupid to invest in gold, I commented that they have no idea how the World works.

I think there was at least another comment or two I made by positively mentioning gold, but no, I have never mocked Alex D. (I don't read his stuff almost at all) for being the permabear.

Once again, I don't hide my bias that I prefer non-PM-related equities over PM-related equities (by a lot).  

However, the point of my post was slightly different than something that would deserve "mocking equality":

When DOW drops, I don't see (non-PM related) equity permabulls whining how somebody somewhere in the world is manipulating it on the downside.  

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#15) On April 05, 2012 at 4:07 PM, TheDumbMoney (37.72) wrote:

Liberty,

The things you mistate as the 'conspiracy' theories of the permabears are actually just factors they have cited as a reason why there might be a bubble.  If you can link to one post here in particular where Alex or anyone else has talked about these things as 'conspiracies', I will at least metaphorically eat my shoe.

Personally, I just adhere to the real yield model as described in the links I posted above.  I don't think it predicts where the price of gold will go; it's not a predictive model.  But it loosely predicts where gold prices will go if the we can predict where real yields will go.  The verdict is still out on that, because the verdict is still out on the success or lack of success of the Fed's intervention, and on whether our fiscal authorities will get our house in some sort of order.

I do think the conspiracy theories about gold and silver price manipulation are a bit pathetic, but you know that.

All best. 

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#16) On April 05, 2012 at 4:11 PM, whereaminow (< 20) wrote:

dragonLZ,

Cool enough. I'm just pointing out that it works on both sides. The PriceLine/Cash4Gold theories are conspiracy theories of the gold-hating crowd. I know that you're not a part of that.

As for DOW/Gold being in step, you know that I generally agree with you on that. But since I don't see the DOW popping anytime soon, I don't see gold doing it either. 

dumberthanafool,

There are facts in every theory, conspiracy or not. It's the level of conjecture required to piece it together that makes the difference. Like I said, in that regard - and as an example - Paul Krugman's hilarious post on Glenn Beck being behind the rise in gold prices is clearly a conspiracy theory.

David in Liberty

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#17) On April 17, 2012 at 12:24 PM, dragonLZ (99.59) wrote:

Sorry, I forgot to comment on this:

As for DOW/Gold being in step, you know that I generally agree with you on that.

I guess you missed the part where I said I'm not bullish on gold anymore. I don't expect them to move in step any longer. I expect Dow to go up, gold down (thus my 13500:1350 prediction for 2012). 

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#18) On April 17, 2012 at 12:38 PM, DJDynamicNC (36.32) wrote:

@Ryanalexanderson - it's a quick sentence in your comment, but I wanted to highlight your assertion that we may never see higher interest rates again.

I just wanted to link to this article which supports that assertion and points out the role that demographic trends play in establishing that development:

http://www.slate.com/blogs/moneybox/2012/04/17/population_aging_and_the_zero_bound.html

Thought you might be interested.

Fool on!

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