Let's start with a lesson that every investor eventually learns: Short-term trends are almost impossible to play consistently. I base this on both common sense (lots of smart people are trying to do the same thing so unless you have inside information you shouldn't be playing their game) and painful personal experience: Every time I try to get cute and time a market, I end up wishing I'd gone to the beach instead.
And yet...gold and silver look ready for a tradable correction, based on the following:
The COTs are extremely negative
For most gold bugs, this indicator needs no introduction. For everyone else, COT stands for Commitment of Traders report and is a measure of what the big players are doing in the gold and silver markets. There are two main groups here: The commercial users (mints and jewelry makers) that buy metal and make things with it, and the leveraged speculators, mostly hedge funds that bet on precious metals for their clients.
Time and again over the past few years the commercials have accumulated big short positions in gold/silver futures during rising markets, while the hedge funds have followed the trend and built up big long positions. The commercials then engineer a sharp drop in metals prices, buying back their shorts at the hedge funds' expense. Lately the commercial short positions have hit record levels. If the pattern holds, gold and silver are due for sharp, fast corrections.
The mainstream media is starting to gush
The New York Times just published a hugely-favorable article titled "Inside the Global Gold Frenzy" which includes reporting like this:
"It's not that gold has changed, but gold buyers have changed," said Suki Cooper, a precious-metals strategist for Barclays Capital. "It's a structural shift we're seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins."
In addition to high anxiety about the future, recent political trends may also be playing a part in the global gold fever. With a crackdown on tax havens worldwide and Swiss bankers handing over the names of wealthy American clients to authorities, some experts say rich people now prefer an investment that can easily be hidden from the prying eyes of tax collectors.
"In Europe, people want physical gold to store themselves, with no documents," said Bernhard Schnellmann, director for precious-metal services at Argor-Heraeus. Often, the company doesn't know the ultimate destination of the bars it makes, only the identity of the bank in Zurich or London that is handling the order.
This isn't a Business Week cover story -- which would be an iron-clad death knell -- but it is a sign that the mainstream media is noticing and starting to chase the trend. Not a good omen for any asset class.
The broker on my radio is sick of gold
Out here in Idaho there's a Spokane, WA stockbroker who has a Saturday radio show which I occasionally catch while driving around. Like most traditional brokers he hates gold because it's not a "financial asset". But last Saturday he was forced to discuss it because, he lamented, about half the calls from listeners were about gold. He finished a rant about why gold isn't a good investment and in any event is too popular to be undervalued, and then said "let's go to the phones; Bill, you're on the line."
"Uh, hi," said Bill. "I think gold is headed up because we're destroying the dollar but I'm not sure how to buy it. Should I get coins or gold mining stocks?"
The broker took a deep breath and in a patient but exasperated voice told the caller that he wasn't going to go there, because "this show is about making listeners money."
This is anecdotal, of course, but if 50% of the calls to local investment shows are about gold it's a safe bet that the metal's recent string of record closes has gotten the attention of individual investors.
Stocks need a correction
The S&P 500 has rebounded from 676 to 1046. That's a 50% gain with hardly a downward squiggle on the way, which means a correction is due simply because markets don't move in straight lines. Elliott Wave International's Robert Prechter called the March bottom and is now telling clients to sell and/or start shorting.
Stocks falling wouldn't necessarily cause gold to do the same. But lately they've both been the beneficiaries of the liquidity that's flooding in from the world's central banks. So it's not unreasonable for gold to fall if declining stocks lead to renewed deflation fears. Look for a lot of comparisons between the current market and that of 1931.
So -- again with the caveat that I'm the world's worst trader -- this seems like a pretty good time to bet on a temporary drop in the price of gold. But only for traders. Most people with money in precious metals and long time horizons should play golf or hang out with the kids for another five years while the broad, long-term forces of monetary destruction work their magic. But if you're someone who can't help playing with his money once in a while, the nice pop that the junior miners, for instance, have seen lately might be a good excuse to raise some cash.