{"id":24908,"date":"2011-11-02T13:00:51","date_gmt":"2011-11-02T17:00:51","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/11\/02\/whats-next-for-gold\/"},"modified":"2011-11-02T13:00:51","modified_gmt":"2011-11-02T17:00:51","slug":"whats-next-for-gold","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/11\/02\/whats-next-for-gold\/","title":{"rendered":"What\u2019s Next for Gold?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>The silence in the major financial media on gold and precious metals this month has been deafening.\u00a0 As recently as a few weeks ago, you couldn\u2019t get away from gold headlines if you wanted to.\u00a0 For months leading up to gold\u2019s parabolic jump, the financial press was inundated with articles about gold.\u00a0 Most were wildly bullish, but there were also quite a few bearish articles to be found\u2014and a few of those bearish one were written by me (see Sizemore\u2019s articles on gold<\/a>).<\/p>\n

The yellow metal certainly gave us all plenty to write about. In a short-lived bout of speculative hysteria the price of gold soared above $1,900 in early September before quickly falling back down to earth, losing $300 in a matter of weeks.<\/p>\n

But throughout the month of October, there has been very little published on gold, bullish or bearish.\u00a0 It\u2019s as if the investing public suddenly lost interest in the yellow metal.<\/p>\n

Some of the waning interest is understandable.\u00a0 Gold\u2019s reputation as a \u201csafe haven\u201d certainly lost its shine with last month\u2019s action.\u00a0 Safe havens do not exhibit that kind of volatility.\u00a0 And when it really does appear that the world is ending, it is to the safety and liquidity of U.S. Treasuries that they run, not that most barbarous of relics, gold.<\/p>\n

Yet a funny thing has happened.\u00a0 Quietly, under the radar, gold has mounted a comeback, rising over $100 per ounce in just the last week.<\/p>\n

As a professed gold bear, this makes me pause.<\/p>\n

Gold is rising quietly<\/em>, in the absence of the usual blustery gold bug bravado.\u00a0 \u00a0This suggests that the weaker buyers were shaken out by last month\u2019s volatility and that the current rise might be a little more durable.<\/p>\n

It appears that gold\u2019s role has shifted from that of \u201ccrisis hedge\u201d to \u201crisk asset.\u201d\u00a0 After Europe\u2019s announcement that it is finally taking the sovereign debt crisis seriously jolted investors\u2019 animal spirits,\u00a0 all<\/em> risky assets have gotten a boost.\u00a0 This includes global equities, industrial commodities, and yes, gold.<\/p>\n

I\u2019ve made known my skepticism of gold\u2019s value as a long-term investment in past articles.\u00a0 It pays no interest or dividends, it has little in the way of intrinsic or industrial value, and the only way you profit from gold is by finding someone willing to pay more for it than you did.\u00a0 That\u2019s not an investment; it\u2019s a high-risk speculation.<\/p>\n

There is nothing wrong<\/em> with the occasional high-risk speculation, of course.\u00a0 But as investors, we need to be honest with ourselves about the risk we are taking and we should separate long-term investment capital from short-term trading capital.<\/p>\n

With investor risk appetites returning, I see virtually all risky assets doing well for the remainder of 2011.\u00a0 This would\u2014and I say this through gritted teeth\u2014include gold.<\/p>\n

Still, investors wanting to profit from a short-term move in the yellow metal shouldn\u2019t get too attached.\u00a0\u00a0 Gold jewelry and industrial demand has been stagnant for most of the past decade; virtually all of the new demand that has caused the price to quintuple has been due from \u201cinvestors\u201d ranging from hedge funds and ETFs to individual investors who have given up on the stock market.\u00a0 \u00a0Gold is still quite trendy, and trendy investments often prove to be disastrous.\u00a0 Just ask investors who bought Netflix ($<\/span>NFLX<\/a>)<\/strong> at $300 per share.<\/p>\n

Gold is also looking overpriced relative to other precious metals and particular to platinum.\u00a0 Let\u2019s take a look at Figure 1, which tracks the gold\/platinum ratio over the past two and a half decades.<\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

Figure 1<\/p>\n<\/div>\n

Today, gold is more expensive relative to platinum than at any time in the history of the chart.<\/strong> \u00a0It should be noted that platinum is a far rarer metal than gold.\u00a0 And unlike gold, platinum also has extensive industrial use (particularly in the auto industry) in addition to its use in jewelry.<\/p>\n

In 2008, the price of gold surged relative to platinum (note the vertical move in the chart) in large part because <\/em>of platinum\u2019s industrial value.\u00a0 Gold\u2019s uselessness was actually a virtue because its demand was not tied to auto production.\u00a0 But as life returned to normal in subsequent months, platinum rallied relative to gold.\u00a0 I would expect to see a repeat of this in the months ahead.<\/p>\n

If you are determined to buy a precious metal, platinum might be the better bet at current prices.\u00a0 But whether you\u2019re a skeptical gold bear like myself or a dedicated gold bug, you might try something a little different.\u00a0 Consider a pair trade\u2014buy platinum and short gold.\u00a0 <\/strong>This can be done via the futures markets or by using the more pedestrian gold and platinum ETFs\u2014$<\/span>GLD<\/a> and $<\/span>PPLT<\/a>, respectively.<\/strong><\/strong><\/p>\n

Whether precious metals rise or fall\u2014and whether the market remains in \u201crisk on\u201d mode or lurches back into \u201crisk off\u201d mode\u2014investors can profit from the gold\/platinum ratio returning to something a little closer to normal.<\/strong><\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter The silence in the major financial media on gold and precious metals this month has been deafening.\u00a0 As recently as a few weeks ago, you couldn\u2019t get away from gold headlines if you wanted to.\u00a0 For months leading up to gold\u2019s parabolic jump, the financial press was inundated with articles about … <\/p>\n

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