A Gold Correction Now is More Likely Than Not

24 February, 2009

At the beginning of October, 2008, I remember reading a number of articles covering US stock markets that heavily pushed the message “it’s time to buy US stocks!” However, since the beginning of October, 2008, the major US stock indexes have sunk like a stone, shedding roughly 23% of their value. Since these analysts were severely wrong in October, they decided to push the same message again in early January, 2009. Surely, if US markets had moved 23% lower from the previous supposed “bottom” of US markets, then these same analysts were certain the start of this new year most definitely offered a low-risk, high-reward setup to make very quick profits in US markets. In fact, in January, 2009, I recall a headline that blared, “THREE SCREAMING BUY SIGNALS!” (emphasis mine). Again, these bold declarations of US markets hitting bottom turned out to be premature as the US S&P 500 (NYSE: SPY) has plummeted another 17% in value. See a pattern developing here? It’s the PT Barnum approach of finding the sucker in all these articles. You see, investment companies are looking for suckers everyday because everyday they know they’ll find several, or perhaps even many. After all, Albert Einstein (1879-1955) once stated: “Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.”

In investing, absent of solid investment guidance, there are two psychological ploys investment companies can rely on to sell their products and services — (1) Fear and (2) Greed. The above messages sent out at the end of 2008 and the very start of 2009 were designed to appeal to an investor’s fear of being on the sidelines in cash if US stock markets were to furiously rebound. Now, because these “sucka” messages have failed miserably, a lot of investment companies have resorted to pushing the one single thing that has been working recently — gold and precious metal markets. However, if you were burned by any of the messages above, don’t be burned again by these same messengers in the gold markets.

Though I’m sure a lot of you are being bombarded daily now with messages of why you should buy gold today and why gold is going much higher, realize that investment companies that have just jumped on the gold bandwagon simply to “sell you” are likely to offer you terrible guidance in the gold markets. How would you know if these companies have just jumped on the gold bandwagon? That’s the beauty of the internet. “Google” them. Find out if they employed analysts last year that disseminated stories about gold being a “barbarous relic”, a terrible “non-interest bearing asset”, and just an all-around poor investment just a few months ago when they were trying to sell you traditional stocks. And then find out if these same companies are now spreading “buy gold” messages. If so, avoid them like the plague. Why? Such flip-flopping demonstrates that these analysts have zero understanding that this current global crisis is a monetary crisis and that they will sell you whatever they think you will buy without the ability to dispense any decent guidance along the way.

To use an analogy, these analysts’ commentary about gold is likely to be no better than finance sector analysts that wrote about “the bottom” of banking stocks six months ago. On July 15, 2008, when some analysts were calling a bottom in bank stocks, Bank of America (NYSE: BAC) closed at $17.75 a share, Wells Fargo Stock (NYSE: WFC) at $19.72 a share, and Citigroup (NYSE: C) at $14.10 a share. Today? Their stocks respectively stand at $3.91 a share, $11.03 a share, and $2.14 a share. Similar to these analysts that failed to understand the structural defects in the global banking system and recommended banking stocks solely due to their low valuations (that they did not understand could go much much lower), analysts that don’t understand the severity of this current monetary crisis will never offer you solid guidance about investing in gold.

You see, gold is a terribly complex market and it takes years of training and understanding to develop a sense of when and what gold investments to buy and to understand what signals to ignore and what signals to value. With US Treasury and US Federal Reserve intervention into gold markets at levels not seen since the 1930s, it becomes even more paramount to know exactly where and what to look for to understand where gold markets are heading. Even with an asset that may seem simple to buy such as physical gold, some physical gold investments will yield much stronger profits over the years than other types of physical gold investments. Even how you buy gold bullion could create differences of thousands of dollars in your entry price when compared to another investor that purchases the same amount of ounces on the same day. Now that gold is making headlines of major financial media outlets, analysts and companies that know nothing about gold are telling you to buy now. It’s a similar strategy to mining companies that have no gold expertise but change their company names to include the word “gold” so that they can fool investors into buying their stock. However, gold is such a complex market that it is impossible for any investment company or analyst that is jumping on the gold bandwagon to offer you sage advice. If you don’t consult an expert, everything about the gold market will probably be explained improperly to you.

Though many investment companies will push gold ETFs as an easy way to buy gold, I can tell you right now that gold ETFs (NYSE: GLD) are one of the absolute worst gold investments you could ever buy. The companies that push gold ETFs either are ignorant about the dangers of these ETFs or just want the commissions for pushing this paper form of gold. If you have no idea what I’m speaking of, and have been advised to buy the GLD, then you have proven my point about these Johnny-come-lately gold “experts”.

As I stated before, not all gold investments are equal. Not even close. There are major producers, junior producers, explorers, developers, bullion coins, rare coins, bullion bars and many other ways you can invest in gold. At certain times, gold stocks may be a better value than gold bars and at other times, gold bars will be a better value than gold stocks. And what about right now? The precious metal stocks still have greater upside than the underlying commodities at this point, but both assets are very vulnerable to a correction, and perhaps a significant correction right now.

Besides the significant psychological barrier of the $1,000 an ounce landmark (due to the enormous tumble in gold prices that occurred last July, 2008 right after gold reached this pinnacle), other developments in futures markets that lurk beneath the surface also point to a temporary correction in the works over the next few weeks. Furthermore, despite the strong showing of gold prices in recent days, the “leveling-off” behavior of major gold stocks like Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) also raises a red flag. Although relentless negative news about the financial industry contributed to 3-4% selloff disasters in China, Hong Kong and South Korea markets today, and these ongoing developments can be expected to give support to gold markets as a continued “safe haven”, one has to understand that what one expects to happen in gold markets is not necessarily what will happen in gold markets because they have not been “free” markets for quite some time now, and certainly never during the 6+ years that I have carefully been studying them now.

I’ve been advocating gold as an investment since 2005 and have publicly stated my affinity for gold on my blog since September, 2006 with an article entitled “Gold’s Glitter is Genuine”. Before that, I started advocating purchases of physical gold to my company’s clients as far back as when gold was trading at $580 an ounce.

With gold having a history of volatility, one needs to buy or add to existing gold positions with solid discretion and not indiscriminately. The odds of a correction occurring can change week to week, depending on behavior in the COMEX markets. However, as of today, the odds favor a correction so buying into gold right now is not a low-risk, high-reward proposition. Even if I turn out to be wrong, and gold does not correct in a meaningful manner, in hindsight, I would still not have bought gold today because the risk-reward setup is less than average right now. You only want to buy into gold when you have a favorable strong risk-reward setup. In addition, when investing in gold, one has to dig into government free-market intervention schemes into gold markets as a result of the carnage that is happening in stock markets worldwide to accurately anticipate the best ways to invest in gold.

The information I’ve uncovered in this regard tells me that a correction, and perhaps a significant correction in gold prices, is likely to occur in the coming weeks, though the long-term trend is still higher and significantly higher. But don’t misinterpret my message. Physical gold is one of the most conservative investments you could own right now. And even from today’s price, it is destined to go much higher. However, right now, the risk-reward scenario is not attractive at all. So despite the deluge of articles telling you to buy, buy, buy gold now, don’t take the bait, no matter how tempting.

[tags]gold, GLD, SPY, BAC, C, WFC, NEM, ABX[/tags]

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