Gold is Parabolic

Posted by Jeff Carter
on August 22nd, 2011

The rally in gold ($GC_F) is a feeding frenzy.

If you are long gold, remember pigs get slaughtered.

I know all the reasons to be long gold. Fear. Countries are debasing their currencies. But does your local grocery store have a scale and an up to the minute $GLD ticker so that you can actually use it? You can convert gold holdings to cash, but the transaction costs need to be added in to see your real return on investment. You also won’t want to convert to cash in a hyperinflation environment which seems to be one of the strongest reasons I get for buying gold.

If you are a trader, I can see entering the market and playing momentum to make a few ticks. However, if you are the average Joe, keep your feet out of the water. The sharks will bite, and bite hard. You are going to pay up to get into this market, and you will sell down to get out.

SPDR Gold Trust ETF Price Stock Chart by YCharts

This reminds me of a lot of markets that begin to feed on themselves. You can call it the greater fool theory, or a bubble, but when they turn, they turn HARD.

The door is considerably smaller on the way out than it was on the way in.

I haven’t bought gold ever. Haven’t sold it either. To me it’s just an indicator. Lately, if the stock market rallies and gold rallies hard, I know to start selling S&P’s ($SPY, $ES_F). Gold rallying shows me that there is a considerable amount of fear in the market. Fear doesn’t bring stock market rallies.

But I find that there are reasons to be positive about the stock market, even on banks. Banks are carrying more capital than they did in 2008. The EU is going to work out the problems it has. While the US is poised for really slow growth, most of our financial issues are not going to hit until 2015-and we will have an election that sorts them out before then. Insiders are buying stock. When executives actually put their own capital at risk in their companies, that means something. Buybacks mean nothing. Multinational corporate balance sheets are healthy.

For average Joe’s-take this opportunity to invest in a fund that replicates the S&P. In twenty years you won’t be sorry.

For the first time ever, I am looking at buying some puts in Gold. I love to fade parabolic moves and this one looks like a classic one.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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