October 19, 2007

Riding The Bull


Gold keeps rallying higher, confirming a powerful bullish consensus.

But gold bugs should be careful...because this bull seems ready to start bucking at any time.

In recent sessions, gold has continued to power ahead, setting new multi-decade highs almost every day.

Moreover, the gold stocks have been leveraging the metal’s gains to maximum effect, with the Gold Bug’s Index soaring over 45% since the late-summer lows...and now new discoveries, rich take-overs and renewed investor enthusiasm have begun to selectively generate some big gains in the juniors.

I hate to be the one pointing out an odd odor emanating from the punch bowl, but the party might be ending soon.

You see, far too many people, from all corners of the investment world, are pointing out that things couldn’t get better for gold. But to lean on a couple of old industry adages, when one side of a boat gets too crowded, a capsize isn’t far away...and when things can’t get any better, well...they get bad.

Frankly, I’m worried about the near-term future for gold. Here are the bearish factors that concern me:

  • The bullish consensus for gold and gold stocks has soared above 90%

  • The large commercials have gone short to a record degree

  • The speculators have amassed towering, top-heavy positions on the long side, and...

  • Sticker-shock has temporarily stunted Indian physical demand.

All of this argues for a significant price correction in the not-too-distant future.

But hold on -- there’s some bullish news too:

  • U.S. monetary policy has reversed from restraint to accommodation

  • Foreign dollar holders are now dumping U.S. Treasurys and dollar investments at a record rate

  • Geopolitical tensions -- and oil prices -- are rising

  • New information is confirming that U.S. gold reserves have been, to some degree, depleted in a futile attempt to depress the metal’s price, and...

  • Weakness in U.S. stocks -- and the latest economic numbers -- are pointing toward a slowing economy, and a possible recession.

Add it all up, and you have two possible scenarios:

  1. A much-needed, healthy -- but quite sharp -- correction as the speculative longs run for the exits. Or...

  2. A continued rally for just a little while longer, forcing the shorts to cover their massive positions, with the resulting short-squeeze spawning an extraordinary “melt-up” in the gold price.

Experienced readers will remember that we’ve been in this situation a few times before during this bull market. The commercial short position has periodically gone to extreme levels during gold rallies, raising hopes of a short-squeeze.

But then, just when it seems the pain has become unbearable for the sellers, some event or outside intervention nails gold...sending the longs scurrying and rescuing the commercial shorts.

Unfortunately, given the track record, the odds favor a similar outcome this time around. Gold investors need to be honest and objective about this likelihood, and make sure they are prepared for it.

On the other side of the coin, of course, is the possibility that some exogenous event will send gold sharply higher, forcing a short-squeeze. For example, oil’s recent surge has supported the gold price and kept the pressure on the shorts.

Any major surprise development, whether economic or geopolitical, could trigger an explosive rally in gold.

No matter what happens in the near term, we’ve come a long way in the gold price, and we’re going to go a great deal further. But there will be stumbles along the way, and the path just ahead appears littered with hazards.



Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com.

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.




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