As a commodity broker, I have the luxury of observing and listening to many clients expressing their different ideas and convictions about various commodities. One particular client intrigued me a year and a half ago (August 2005 to be precise) with an order to purchase the 500 Dec06 Gold Calls with the futures trading around 430.0. I asked him why he was bullish on gold on the near term and he emphatically responded that gold will eventually reach 1,000. I started to chuckle to my all-knowing broker self, but proceeded to ask why fundamentally he thought gold would hit 1,000. After all, the dollar was on a rebound, the stock market was still in tact and inflation was in check. The only thing that looked positive was a technical pattern known as a “Cup and Handle” made famous by William O’Neil, the founder of Investor’s Business Daily (see accompanying chart below). My customer responded that the government is in massive debt, the dollar will eventually fall and that silver will be going to even higher levels because of a new ETF fund that will spark a lot of interest. “Well, maybe that will push gold higher,” I conceded, “but 70.00 in six months?” He just said calmly, “Place the order please.” I went home that evening and studied my charts very carefully and saw that technically gold would breakout soon and the next morning I suggested buying gold at the breakout price above the market on a stop - a great way to get in on momentum, by the way! Well, gold did breakout and my orders were filled. Gold continued to rally and my clients that bought gold were happy, including the client who bought the 500 calls.
Weekly Continuous Gold Chart
CHART DISCLAIMER:Chart courtesy of FutureSource.Notations to chart were added by George J. Cocalis and are for informational purposes only and were obtained from sources believed to be reliable.Past results are no indication of future performance.Information is in no way guaranteed.
As gold advanced to 630.0, I was starting to realize that something out of the norm was happening. New clients were opening accounts and they were expressing the same hypothesis about the negativity of the U.S. dollar. They all had that “doom and gloom” view of the world, but their passion and confidence was intriguing, I started my research with the definition and the origin of the term “gold bug.” According to Wikipedia (the on-line encyclopedia), “gold bug” is “a term used to describe investors who are very bullish on buying the commodity gold.” It originated in the 1896 U.S. Presidential election, when the supporters of the Gold vs. Silver money took to wearing lapel pins of small insects to show their positions on the matter.
Gold bugs are also people who believe that the stock market will crash, the housing bubble will burst, and that the U.S. dollar will eventually collapse which would lead to an economic crisis. They also believe that wealth will be measured by hard assets and that gold is among the few investments that maintains its value. Also, they are aware of higher commodity prices, especially in crude, and those higher prices support their rationale to purchase gold.
Other arguments supporting gold:the emergence of China and India, two superpowers arriving simultaneously on the international scene and dominating today’s manufacturing and service sectors, a situation which could be a nail in the U.S. dollar’s coffin; future entitlements that will cost over $72 trillion when the Baby Boomers start retiring in 2008; and the ever-present consumers that keep spending.
After searching, reading and listening to all these arguments it finally hit me!Everything made sense, mathematically it is an improbability that the U.S. will ever pay off trillions of debt and the budget deficit is accelerating at a dizzying rate.We are transferring our wealth to other nations and the majority of the U.S. citizens do not even have a clue about what’s around the corner.I tell everybody I know about the situation - family and friends, even strangers!I feel that it is my duty, even my obligation, to let people know what lies ahead.Does this make me a gold bug?
Disclaimer:Futures and options trading involves substantial risk and may not be suitable for every investor. The valuation of futures and options may fluctuate, and as a result, clients may lose more that their original investment. The impact of seasonal and geopolitical events is already factored into market prices. In no event should the content of the following message be construed as an express or implied promise, guarantee or implication by Brewer Futures Group, LLC or any of its affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided in the following message is intended for informational purposes only and is obtained from sources believed to be reliable. This information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.
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