Two Reasons Why Gold Is Set To Decline!

As expected, the gold bugs were out in force, giving me a lot of heat regarding my prediction that gold will retreat to $1,000 in the near-term.

Thanks for all of your comments. There were some strong opinions as to why my thesis was incorrect. So allow me to offer my rebuttal and show you why I’m still right!

To quickly refresh your memory… my belief that gold is heading back to $1,000 is based on two arguments: technical and behavioral, let me explain…

Two Reasons Why Gold is Set to Decline

• Technical: The technical argument includes the fact that gold was +2 standard deviations above its 200-day moving average - something that only occurs 5% of the time. Additionally, put options are now more expensive than calls for the first time in two months. That tells me that the smart money expects gold to head lower. Check out my original column on why you should take profits on gold for a more detailed explanation.
• Behavioral: In this case, I mentioned that with the mainstream media covering gold ad nauseam, this is a sign of a top. Additionally, hedge fund manager John Paulson (with his enormous win betting against the housing market still in mind) has placed some huge wagers on gold going considerably higher.

It stirred up quite a debate on Investment U. The quotes below are taken directly from readers’ comments left on the page where my column appeared. As always, I invite you to leave yours here, too.

You Write… And I Respond

• Argument #1: “Comparing it to the 2000 stock bubble is ridiculous. The market was at absurd valuations back then, while gold would have to rise to over $2,000 just to reach an equivalent inflation-adjusted value compared to its 1980 high.“

My rebuttal: I’m not saying that the valuations are the same from 2000… just that we’ve seen a meteoric rise and now everyone is talking about it. When the “morning zoo” radio jocks are talking about gold instead of Tiger Woods’ latest escapades, that’s a strong hint we’re at a top. Even in stock markets, valuations at the top are often different, but the behavior of investors is usually the same.

• Argument #2: “It’s also evidence of your bias to be talking about Paulson being a ‘top-ticker’ on gold. Of course, you would never say anything like that if he made a stock sector bet of the same amount. You’d be talking about what a brilliant investor he is, and what a great track record he has.“

My rebuttal: If Paulson placed a huge bet on biotech, CNBC had a biotech index ticker running on its screen, and mainstream media that never cover financial news started talking about monoclonal antibodies, I’d say the same thing about biotech as I’m saying about gold.

On the other hand, if Paulson was buying an out-of-favor stock sector, you’re right, I’d say he’s brilliant.

Note that I never said a word about Warren Buffett’s huge play on transportation. That’s because no one is talking about transportation stocks and I have no reason to believe that from a behavioral finance standpoint, transportation stocks are overbought.

• Argument # 3: “Complete tripe! Gold’s not going up, printed money is declining in value due to QE (Ed Note: quantitative easing). You can’t print more gold and it’s a good hedge against the activities of rouge banks and gangster governments!“

My rebuttal: I have no problem with the fundamental reasons why gold should go higher. But my argument is based on gold being overbought, not the macro reasons behind the value of the metal.

• Argument #4: “I would suggest that if healthcare is your specialty, you should stick with that. You can ’sharpen the saw’ on fine tuning your skills in that area. Leave the gold market to the experienced. I think it’s unfair when somebody as yourself gets to use the public as a sounding board when they don’t have all their ducks lined up. I would further recommend that you get your analysis out BEFORE a correction if you really want to assist people with better entry points. When I picked up your piece, gold spot stood @ $1,121.“

My rebuttal: While I’m not a gold expert, I am pretty good with technical analysis and understanding market psychology. Those are useful tools for spotting trends and potential turning points in any market.

As for as the timing of the piece, I wrote it just as gold fell from its high and about 24 hours before we published the article. Unfortunately, the decline didn’t stop for our publication schedule and before you read the column. But if gold hits my $1,000 target, I think getting people out before a $121 correction is still plenty valuable.

• Argument #5: “Watching CNBC and reading most newsletters is a waste. It’s primarily about selling advertising and mining for the uninitiated subscriber that motivates these opinions, IMHO.“

My rebuttal: I actually agree with this statement. Do we want you to sign up for one of our products? Absolutely. Do we add a tremendous amount of value and help investors increase their returns from the stock market? I know we do.

But you don’t have to take my word for it. Take it from the tens of thousands of subscribers who receive first-class research and moneymaking recommendations from The Oxford Club and The White Cap Research Group every day.

Alexander Green is a sensational stock picker. Louis Basenese has nerves of steel and has proven to be one of Wall Street’s utmost contrarians. Karim Rahemtulla and Lee Lowell are the two best options strategists I’ve encountered in my 14-year career. And I’ll put my track record up against any one of them.

I’m extremely proud to be associated with this group of people. And I can tell you this: Not one opinion or investment idea is produced with the purpose of selling a subscription. The only goal is to make our subscribers money. If we don’t do that, or perform well for our subscribers, we wouldn’t be in business very long.

See you at $1,000.