Gold bugs get squashed...

If you really can't help buying expensive froth, have a cappuccino; after all, Starbucks needs the business. Back in March most leading resource analysts were opining that gold's break above $1000 was but a pitstop on the way to $1500 and higher. The rationale for this optimism was thin indeed, as fundamentals such as jewellery demand were crumbling, and hinged in many instances on hysterical visions of the collapse of global capitalism and the debauching of fiat currency.


Personally, I don't see gold as a serious investment in any rational portfolio. Any inflation hedging value that gold had in the 1970's bull run can now be replicated efficiently via index linked government bonds or a range of financial derivatives. As for the resource shortage angle, you could have played it more profitably since 2003 in most industrial metals, which at least have a fundamental supply/demand underpinning and actually get consumed. Just about every ounce of gold ever mined is still extant in some form, and much of it has been melted down recently to profit from record prices, capping the rally (in Japan, charities are even extracting gold fillings from corpses to raise funds). Unless a Bond villain like Goldfinger manages to nuke Fort Knox, that makes it a very dubious long term investment, however many gold baubles the new rich in Russia and elsewhere can afford. At the time (see post) I suggested selling, which I did by shorting the June future at just over $1000, as gold seemed the most extreme manifestation of a general commodity mania, driven by huge speculative flows (much of it retail via ETFs) into the complex as a dollar hedge. Although a long-term commodity bull, I know an overcrowded momentum trade when I see one. The chart indicates how dramatically gold has underperformed the CRB index since, falling $175 since mid March, despite supportive record highs for oil and lows for the dollar through most of this period. I have also argued repeatedly the bullish case for the dollar (see post) and in the past week the first signs of a potential medium term dollar reversal have emerged.



Precious metals are now leading the commodity complex sharply lower, but I expect that just about all commodities are facing a 20% plus sell off in coming weeks, which is already well underway in softs, as the wheat price chart above indicates. When the 'food & energy crisis' becomes front page news, and you see the kind of trend acceleration apparent in all commodity price charts recently, it's a classic sell signal, as powerful at that on the NASDAQ in early 2000 when tech mania was in full swing. Gold is now trading at its 200 day MA and has possibly seen the worst of the correction near term so I'm taking profits, but energy has just begun a sharp reversal that will see crude trade well below $100 over the Summer. Investors should avoid resource stocks in coming weeks as the deleveraging in the commodity bubble will lead to sharp under performance in related stocks from mining and energy to agriculture, and those indices most heavily weighted in these commodity plays. This overdue correction will offer long term opportunities later in the year, particularly in the soft commodities and agriculture exposed stocks (see previous post).

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