October 1, 2010 - Gold is Now At the Deep End of the Pool

Featured Trades: (GOLD), (GLD)
SPDR Gold Shares Trust

3) Gold is Now At the Deep End of the Pool. For me, the best case scenario which I have been predicting for nearly two years has arrived. But as much as I love gold for the long term, I have to take note when a number of short term technical and momentum models start flashing red lights that it is entering extremely overbought levels. The yellow metal has now risen for 12 out of the past 14 days.

Aaron Regent, Barrack Gold's (ABX) CEO, the world's largest gold producer, says he can't imagine ever needing to hedge the company's output again. Not a day goes by without an emerging market central banks making new purchases, with announcements this week coming from India and Sri Lanka. Gluskin Sheff's permabear David Rosenberg, trotted out his own target for the barbarous relic of $3,000/ounce.

Look at the chart below of the S&P 500 priced in gold, and you can only conclude that gold has to reach $10,000/ounce for the ratio to reach the last trough we saw in 1979. Higher predictions are more common than National Rifle Association bumper stickers at a Sarah Palin rally.

I remember all too well when gold last traded like this in that earth-shaking year. Just as I boarded a flight in Hong Kong, my long futures position ticked $750. By the time I landed in Johannesburg 20 hours later, it was trading at $900. I bailed. The fat lady then sang, and gold then bled for 20 years. Investors married to their positions got wiped out.

Traders who stay involved here should do so only against buying cheap out of the money puts for insurance. Remember, this is the commodity that takes the elevator up and the elevator down, and year end book closings are not far off.

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