Thursday, August 12, 2010

Gold's shine growing dim...

There is so much talk about gold. A few months ago, the started putting in Gold ATM's in the Middle East. If that isn't the sign of a top...I don't know what is. Millions of Americans...and probably people from all over the world are long gold now, and it has to be one of the most crowded trades in the universe.

A crowded trade is when so many people are in it, that the last one out of it should expect to see losses well over 20%, maybe even over 50% before the selling is done. Let me just mention a couple things that worry me about gold.

1) Everyone owns it, and the way investments least when you make money on them, is to sell it to someone else for more than you bought it. If everyone owns gold...who is going to buy yours?

2) Gold is rarely used anymore outside of jewelry. Gold used to be in dental applications...but it's just too soft (and too expensive) to be used regularly for many industrial uses. Metals like aluminum, copper, steel, and even silver, platinum, and palladium all have industrial uses (which provide a level of natural or healthy demand).

3) The demand for gold, as we see it, is largely investor driven. Every investment falls out of favor eventually...why would this be the ONE that didn't?

4) Most people own gold through the GLD or other ETF that tracks gold. Those ETFs actually have to hold the physical gold in order to track the index as a percentage of assets under management. Who in the HECK is going to buy all that gold from them when people hit the sell button? What will that do to the price?

5) Gold is HEAVILY correlated to the S&P...don't believe me, check out the video we did a few months back and see the chart yourself:

6) I spoke with Guy Adami on America's Favorite Traders about Gold and his comments were disturbing. This is a man who was the head gold trader at TWO FIRMS, who has met the biggest gold traders out there, and who "wouldn't own gold if someone put a gun to his head." For more details you can listen to the full interview here:

I think Jim Cramer is right, the world will run out of gold to pull out of the ground, and the places to get it will become more and more the most dangerous places left on the earth to go mining for them between the government risk and military risk. So, if that's the case...why not own a gold miner in that instance, especially a foreign one that may be able to avoid some of the "anti-American" sentiment that is found in places that are a little scarier in the world.

Compania de Minas Buenaventura (BVN) is a Peruvian Gold Miner with a forward P/E of 11.82, a PEG of 1.65, Cash of $444 Million with only $27 Million in debt, and pays a dividend of 1.6%. I get why people WANT to own gold...we just think you should strongly consider not doing it any way.

If the world's economy collapses, you're kidding yourself if you think I'll trade you my food for your gold. You're better off stocking up on food storage and a taser to fend people off. But, until then, consider owning a gold miner instead of the GLD or the physical least until someone pulls the fire alarm and everyone presses the sell button at the same time.