The Right Position in Gold for the Short Term
Source: Seeking Alpha, Jason Kelly (2/23/09)
". . .even if gold has long-term appeal, the right position in the short term is making money on the downside."
Put differently, there looks to be a global currency devaluation underway, where the value of all fiat currencies becomes questionable. They'll fluctuate relative to each other, but with much more pretty paper on the planet, the absolute value of money is heading down.
Eastern Europe is on the verge of a collapse far worse than the orderly declines we've seen in the U.S., Japan, the U.K. and China. If it crumbles, it will take parts of Western Europe with it.
Japan, as I noted last week, is in trouble as exports dropped 45% last quarter, factories scaled back production and employees are now working part-time jobs at ramen shops to make up for lost income.
The U.S. has dropped interest rates to zero and is now involved in quantitative easing, soon to be joined by the Euro zone via the ECB and England via the BOE. The U.K. might even opt into the euro, which would devalue the pound.
The traditional way to protect against deteriorating money value is to own gold. Governments can't make more of it, so it retains its value even as currencies rise and fall.
That's why gold has always been and will always be a way to protect purchasing power over time. It's also the reason its price has risen in the past several months as government activity exploded. The gold Spider (GLD) rose 40% from $70 on Nov. 12 to $97.80 on Friday. The leveraged approach via PowerShares Gold 2x (DGP) gained 88%.
With a current RSI of 71, however, GLD is almost certainly going to pull back before moving on to new highs. Therefore, even if gold has long-term appeal, the right position in the short term is making money on the downside.
That's what we're doing here, though not the way you might expect. Turns out another famous commodity tracks gold, but with more volatility. It's even more overbought than gold and I expect it to settle back even farther.
It's the downside of that commodity that we're betting on this Monday morning.