Friday, November 6, 2009

Gold is overbought

I have been an advocate of gold as an investment for many years. I allocated the greatest part of my savings to gold in 2003 when it traded below $350 an ounce, and I can't say I regret that decision. I believe gold is still in a bull market, however now may not be a fantastic entry point:
  • The Fed is not going to stay on hold forever. Although we are many months away from removing accomodation, Fed officials have already started to discuss exit options. Moreover, Fed balance sheet expansion is probably over (at least for now, until and if we get a second economic leg down). Fedspeak might also become increasingly hawkish as the dollar falls and bubbles develop everywhere (see previous posts). So we may see a short term sell off if and when that happens.
  • Inflation is not an immediate problem. Fiscal deficits by themselves don't cause inflation, money does. Inflation might become a problem eventually as the money supply has increased quite a lot last year, but since the rate of growth in the money supply has slowed of late, one could still imagine that the money supply will be reined in before inflation pressures develop. I personally don't think that will happen, but that possibility can at some point be priced in by the market, which will not be gold-friendly. Finally, I believe we will see slower than expected growth next year, which will put a damp on inflation expectations (at least for a little while longer).
  • Gold is overbought. Just look at any chart: it's overbought by any measure on daily charts and weekly charts. Plus it has closed up almost every week in the past several months, which means it has become a one-sided bet.
Since gold tends to go up in spikes, it might go up another 10% or 20% before it corrects. However, when that happens, it is likely that it will go down back to the current levels, maybe even lower. I already own gold and I'm in for the long-term, so I'm not selling (I'm not trading gold, I'm just sitting with it until I believe the bull is over). However, I wouldn't advise anyone to buy a significant amount of gold right now, and short sellers should be on the lookout for a potential short candidate in the near future.

Hulbert Sentiment Index


  1. What else is worth more than gold? Wine! What do the vinters buy that is more precious than what they sell. Not even gold! Omar Kayyaam

  2. Fainthearted buy gold. These faithless wretched have no without a country. Dead already.