-- Posted Thursday, 29 July 2010 | | Source: GoldSeek.com
By Andrew Mickey, Q1 Publishing
Have you “rethought” your gold?
That’s what Phil Smith at Reuters Technical in Beijing thinks is going on in gold.
Smith says, “Gold seems to be undergoing a rethink by some investors after its huge rally over the past years.”
After all, gold prices haven’t hit an all-time high in nearly an entire month and it up and unsustainable 25% in the past year, day traders telling themselves their investors that who are looking for a quick ride in gold naturally get a little scared when one of the world’s most volatile assets loses 8% in a month.
It all seems a bit preposterous in reality, but it does signal something really interesting going on in gold. It’s something that is helping to create an even bigger opportunity in gold than most investors expect.
Follow the “Hot” Money
Gold really became the “hot” new investment on Wall Street well over a year ago when John Paulson, of Paulson & Company, placed a multi-billion dollar bet on gold and gold stocks. Then Soros, Einhorn, and plenty of the world’s most successful investors started moving into gold. Gold rose steadily.
The consistent rise of gold inspired a lot of confidence. And gold quickly became one of the last investment classes investors could trust.
However, in Gold Glitters Once Again we warned at the time:
You see, Paulson is good – really good. But a lot of investors are good at finding opportunities. The difference with Paulson is he’s patient and disciplined enough to maximize an opportunity. Just take a look at his bet against the subprime lending market.
According to Pensions & Investments magazine, “Convinced that subprime mortgages would falter, [Paulson] did extensive research, hired staff with necessary expertise and in April 2005 began making a big bet, using credit default swaps to short the asset class.”
Think about that for a second. Paulson began betting against subprime mortgages in 2005. That was well before the housing market peaked and nearly two years before subprime markets started to falter in 2007.
Right now, it’s playing out nearly exactly as expected.
Gold Volatility and Sentiment
Gold is historically a very volatile asset class.
The Chicago Board Options Exchange (CBOE), which tracks the implied volatility of options on gold via the Gold Volatility Index (a.k.a the “Gold VIX”), shows just how volatile gold prices are:
According to the Gold VIX, gold prices have been half as volatile as oil prices, equally as volatile as stocks, and twice as volatile as the Euro.
An 8% move in gold prices, according to recent historical norms, is cause for as much concern as a $12 drop in oil prices.
In other words…not much to be concerned with at all for most investors. But for short-term traders, it’s a sentiment change that could last for weeks and months. And that divergence is where the opportunities lie.
Rethinking the Gold Bubble
For those willing to take this correction opportunity to “rethink” gold, will see a much clearer picture of where gold prices are headed.
The chart below, from the Wall Street Journal and featured here, shows we’re eight and a half years into a bull market in gold:
As you can see, if gold really is the next “bubble” asset class (what else has the fundamentals, consistent uptrend, and increasing media exposure?), there’s a lot more room to run.
Compared to just the other two most recent mega-bubbles, gold prices should more than double from here. That means $2,400 gold within the next 1 to 3 years.
But the circumstances are strikingly similar in some ways and much different in others. And know the difference
The tech bubble grew out of a solid fundamental story – the Internet is going to change everything – and the Fed’s liquidity infusions in response to the Asian Currency Crisis and the Russian debt default.
The housing bubble grew out of a sustained period of 1% short-term interest rates and artificially low long-term rates due to implied government guarantees on most mortgages.
The gold bubble, however, will likely be bigger than them all. The Fed response to the credit crunch – 0% interest rates, monetization of debt, and implied government guarantees pushing long-term rates to lowest levels since the Great Depression - has been unprecedented and the bubble which follows will likely be equally unprecedented.
In the end, markets will fluctuate greatly in the short-term. They are random and sentiment can, have, and will continue to turn sharply with little notice.
But if you’ve take this opportunity to “rethink” gold, you’ll feel more confident than ever about the future prospects of gold.
As we wrote in our exclusive gold research report in early 2009 (click here to claim your free copy):
Normally, gold is a poor investment. Just look at the gold bear market between 1981 and 2001. Not much money was made in gold. And from a fundamental perspective, gold is a metal with virtually no industrial uses. Gold’s not like a piece of manufacturing equipment. It’s not productive capital which you can invest in and use to increase production of something. It’s gold.
Every few decades though, the right conditions come along to make an absolute fortune in gold and gold stocks. Right now the conditions are right.
And if you think about, rethink about it, or re-re-think about (I guess that’s the next progression) conditions still are very right for gold.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
-- Posted Thursday, 29 July 2010 | Digg This Article
| Source: GoldSeek.com
