Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Forecast and Profit From the Bursting of the Gold Bubble

Commodities / Gold and Silver 2010 Nov 15, 2010 - 05:41 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleAmos Richards writes: Gold last week careened to a record high $1,414.85 an ounce in a surge that was sparked by the U.S. Federal Reserve's plan to purchase $600 billion of U.S. Treasuries in a second phase of quantitative easing (QE2).

The yellow metal may have yet more room to run, as uncertainty in the marketplace remains high and the dollar low.

Still, at this pace gold is increasing too quickly to account for inflationary concerns.

That's saying a lot, because there are some pretty serious reasons to be concerned about inflation. With these new rounds of quantitative easing, the massive debt loads the U.S. has incurred, and Treasury Inflation-Protected Securities (TIPS) going into a negative yield structure, you'd have to be a little off to expect stable growth.

But gold has a history of bubbles in situations like this. It's a metal that's prone to a little bit of excitement. In the late 1970s the United States was on the heels of an oil embargo, and facing massive inflationary pressures. To help combat inflation, the U.S. Federal Reserve tightened the money supply shooting interest rates through the roof.

Of course, there's a downside to high interest rates when, say, you're looking to buy a house.

Housing traditionally has been the most stable hedge against inflation. Assuming the house is liquid after the round, it appreciates at a rate at or near par with inflation. When interest rates go through the roof, however, it suddenly becomes wholly impractical to buy a house. Few can afford to secure credit at such an astronomically high cost, nor should they.

When real estate becomes impractical to buy, we see a rush to gold. From 1976 to 1980, gold appreciated by roughly 700%, far out of line with long-term inflationary pressures.

Current conditions in real estate and the economy in general have left the market in much the same condition as in the late 1970s. We're facing stagflation as we were in the late '70s, and we're hesitant or unable to buy real estate, just as we were in the late '70s. Gold has appreciated as it did in the late '70s. And sooner or later, as logic has it, the bubble will burst just as it did in the early 1980s.

What to Look For Just Before The End of The Bubble
It's important to realize this bubble burst will happen in stages that depend more on group dynamics than on pure valuation theories.

First, we'll have to see either the restoration in value of the preferred holding for inflationary concerns (like real estate), or the creation of an alternative holding. In short, the money that's tied up in the gold is going to have to be put somewhere else. Moreover, people are going to have to want to put it somewhere else.

Second, we'll have the "fall-guy," or the first of fall guys. It will be something seemingly innocuous: An analyst at one firm calls another analyst's recommendation to buy gold, silver, or platinum "ill advised," and will go on to explain that the commodity is over-invested, simultaneously hocking the alternative store for value. At first, the mainstream will shun the analyst, but other analysts will soon join rank and a full out media blitz will ensue.

Finally, we'll see the sell-off.

Protecting Yourself from a Sell-Off
The downside of bubbles can happen pretty quickly, and being the last person out can mean losing everything. But if you're smart about how you structure your entry and exit, you can make a small fortune from the collapse.

It may sound cliché, but remember to buy the rumor and sell the news. When you see the news on gold start to head south, it's time to consider a change in strategy. It's infinitely better that you capture your gains near the top and miss out on a little upside, than inadvertently give back earnings and not be able to exit cleanly.

If you insist on holding on to your long position through the down news cycle, hedge your position by buying put options. Puts will allow you to hold on to your gains for a modest price. You'll pay a premium to the market, and as a result, you can lock in your gain if you want. If gold decides to take a dive, you can exercise your option and deliver your long shares at the pre-negotiated contract price, or close the put with a call. If gold rebounds through the news, you can choose not to do anything.

Finally, if you're just now investing in gold, take positions that you can easily close.

If you're scared of getting stuck behind a massive sell-off, don't be afraid to buy the calls instead. You can always close out your call and take the earnings before the expiration date. Look for smaller exchange-traded funds (ETFs) that trade at a fraction of the price if you don't have the capital to drop on the larger investments. The percentage gains will stay the same, but you won't have to deal with the massive options premiums. The downside of buying more, cheaper ETFs is dealing with the higher trade commissions. Be sure you weigh your cost of entry.

Capture the Downside
If you're not looking to profit on the downside of a market, you're only considering half of the picture. While betting on the downside requires twice the amount of research, you stand to make twice as much money. When things start to go south, look at these strategies:

First, buy more puts.

Puts become more and more valuable the closer to zero, and farther from strike, the underlying instrument goes. It's important to try to beat the market to the punch when trying to time the purchase of derivatives, though. Smart people write those contracts; they're not in this to lose money. If you wait too long, be ready to pay a premium.

There are two great places to buy puts on the downside of gold:

•Companies that produce gold.
Companies that produce gold may see a drop in their underlying equity prices as valuations on the companies themselves return to their pre-bubble level. As a result, if you can time the derivative contract at-or-near the stock's high, you could make a pretty penny.

•Gold ETFs.
Gold ETFs are highly traded, and generally very liquid. People are in gold to make money, and as a result, the derivatives traders keep a close eye on expectations. If you can beat them to the punch, however, you should capture some, if not all, of the downside.

You might also go long on ETFs that short gold.

A reasonable, and often advised, alternative to investing in options yourself is to let someone else do it for you: You can go long on inverse ETFs and exchange-traded notes (ETNs) that are designed to short in a market.

Great examples of these include the PowerShares DB Gold Short ETN (NYSE: DGZ), which mimics a single leveraged short position, and the PowerShares DB Gold Double Short ETN (NYSE: DZZ), which seeks to double the expected gain from a short position.

[Editor's Note: Amos Richards is a former IT professional, who helped with the startup of two middle market Internet companies before attending college. After graduating from the University of Arkansas's Walton College of Business with a Bachelor of Science (BSBA) degree in Economics, Richards worked for A.G. Edwards and Wachovia Corp., which is now a division of Wells Fargo & Co.]

Source :

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules