Defying Gold’s Slump

Gold gained more than $30 over the weekend. And the bets are on the table, Bloomberg reports:

‘Hedge Fund Gold Wagers Defy Worst Slump in 33 Years…’

Undeterred by last week’s crash, some big names are getting back into gold. Nevermind the two-day, 13% drop. These guys want in on the action right now…

‘Official- sector purchases and demand in Asia will support bullion, Paulson & Co. said in a letter to clients last week, joining BlackRock Inc., the world’s biggest money manager, in predicting a rebound,’ according to Bloomberg.

So we have some of the biggest names in the business betting on a V-shaped recovery in gold. But I’m still sceptical…

First of all, what’s the rush? When have you ever seen any asset magically repair severe damage to its price in a matter of days? Gold is just now coming off its worst decline in decades. Give it a few weeks. Allow shorts a chance to cover. Reassess. Unless you’re a short-term trader, there’s no reason to attempt to play the bounce in gold just yet.

These big downdrafts can be tricky because they’re so abrupt. To the untrained eye, everything looks normal. Then one day, the trap door opens – and no one’s prepared to act. That’s when you tend to see the chatter about ‘weak hands’ rushing for the exit and the initial rush by the hopeful to buy more at lower prices. It happens in stocks. It happens in commodities. This is nothing new…

In reality, every single ‘weak hand’ was not flushed out of gold in just two trading days. The over-levered latecomers took the brunt of the damage (they always do). But I suspect that many nervous investors who were paralysed by the initial drop are waiting for a chance to get out on this bounce.

We’ll know for sure soon enough. As gold attempts to pull itself out of the hole this week, its price action will leave plenty of clues regarding its short-term future. My thinking has not changed. I believe gold will ‘rest’ between $1,350-$1,450 before beginning its next leg lower.

If you’re a bargain hunter, you don’t have to follow BlackRock and Paulson into this minefield. Lower prices are on the horizon…

If you’re looking for a shorter-term trade, oversold miners are your best bet. Look to play a snap-back rally – but keep your stops extra-tight.


Greg Guenthner
for Markets and Money

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