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Louis Basesense
from Seeking Alpha reports about 12 Reasons to Short Gold.
(emphasis mine) [my
comment]
12
Reasons to Short Gold
by: Investment U February 11, 2009
about stocks: GLD / IAU
By Louis Basesense
[This article was emailed to me, and I felt compelled to write a response]
If you’re a self-professed “Goldbug,” feel free to read no
further. Or at least spare me your hate mail. Because no matter what I say
today, I know you’ll cry foul… or something much more colorful.
But for those of you with an open mind - especially after my last three
contrarian predictions proved dead accurate - read on.
Because it’s time to start shorting gold!
[FLAW#1: Louis Basesense doesn’t consider the possibility of a
dollar collapse.
Going short gold is going long the dollar. In other words, if the
dollar’s value crashes against foreign currencies, gold prices in
dollars will skyrocket. ANYONE who writes an article about shorting gold in
this environment without considering the possibility of a dollar collapse is
an idiot, pure and simple.]
You won’t find many, if anyone else, making this case. But as the first
reason of 12 below reveals, that’s precisely why you should give it
more credence.
12 Reasons To Start
Shorting Gold
1) It’s
decidedly contrarian. If a contrarian investor is someone who
deliberately decides to go against the prevailing wisdom of other investors,
shorting gold certainly fits the bill. Right now, everyone else is buying gold, or
at least recommending it. If you have any doubt we’ve reached such
fever pitch levels, consider No. 2.
[FLAW#2:
Believing the dollar won’t collapse doesn’t make you a
contrarian, it makes you part of the mainstream. Is gold the world’s reserve
currency? Are investors around the world hoarding piles of gold? Is the word
“cash” equated with gold? The answer is no. The dollar is the
world's reserve currency, investors are hording piles of dollars/treasuries,
and the word cash still means dollars (for now). Anyone shorting gold ends up
sitting on a pile of dollars, just like the rest of the world. In what way is
this contrarian?
No, as long as Mike “Mish” Sherlock remains in the deflation
camp, buying gold is the contrarian play]
2) The infomercial
factor. The best indicator of a turning point for any
investment, in my experience, is infomercials. If an investment gets so
popular it invades the pre-dawn hours with non-stop
but-wait-there’s-more offers, it’s time to get out. And
that’s exactly what’s happening now. So much so companies like
Cash4Gold.com are invading primetime television. They even splurged for a
Super Bowl ad spot. And they recruited washed-up celebrities Ed McMahon and
M.C. Hammer to boot. In case you forgot, the Hammer filed bankruptcy in 1996.
And Eddie boy almost lost his 7,000 square-foot, $6.5 million Beverly Hills
pad to foreclosure. No offense, if you take investment cues from these two,
you deserve to lose money.
[FLAW#3: Anyone who bases their investment decisions from “the
infomercial factor” deserves to lose money.
Question for Louis: How do you ridicule investors from taking cues from Super
Bowl ad spots, and then, IN THE SAME PARAGRAPH, urge investors to short gold
based on cues from Super Bowl ad spots.]
3) There is always
some truth in a rumor. Recent news reports suggested Germany,
the world’s second-largest holder of gold, was selling some from its
vaults to trim its deficit. It turned out to be a rumor. But you gotta wonder
if there’s some truth behind it. After all, high gold prices would be
an easy way to raise cash. In other words, the scenario is completely plausible.
And if Germany’s considering it, even remotely, so, too, are plenty of
other deficit-ridden governments. It goes without saying that a government
dumping supply on the market will send prices lower, quickly.
[FLAW#4: Central banks’ selling off their reserves to fund deficits is
INCREADIBLY bullish for gold, because the majority of those reserves happen
to be in dollars. For example, China, who is also running a deficit, only has
0.9% of its reserves in gold but has close to 2 trillion dollar assets available
for sale. If as Louis suggests, central banks start selling reserves to fund
their deficits, the dollar will get killed and gold prices will fly into the
stratosphere]
4) The gold-to-oil
ratio is out of whack. Historically, an ounce of gold will
buy you about 14 barrels of oil. But with oil around $40 per barrel, an ounce
of gold gets you almost 23 barrels - a whopping 64% above the historical
mean. If you believe in statistics, a reversion to the mean is imminent!
[FLAW#5: Comparing gold to oil is comparing apples to oranges. Gold is an
investment whose value is determined by ebb and flow of confidence in paper
currencies. Oil is a demand-driven investment whose value is highly dependent
on the business cycle. Applying statistics to compare these two assets is
stupid. (I do expect oil to revert to the mean in about a year and a half,
when global demand begins to recover from the dollar’s collapse.]
5) So is the
gold-to-silver ratio. Historically, an ounce of gold will buy
you 31 ounces of silver. But now the ratio stands at 73 - an unbelievable
134% above the historical mean. Here, too, a reversion to the mean is
imminent. And I’d rather place my bets on a 57% decrease in the price
of gold, than silver more than doubling to make it happen.
[FLAW#6: Louis bets on deflation without even bothering to explain why.
Here, Louis openly betrays is mindless belief in deflation: he would rather
bet on a “57% decrease in the price of gold” (deflation) than on
the doubling of silver prices (hyperinflation). This proves that Louis buys
into the mainstream idea of deflation and is no contrarian.
In fact, Louis belief in conventional wisdom of deflation is so total that he
doesn’t think it even needs to be explained.]
6) The HGNSI index
is too high at 60.9%. For the past 25 years, Hulbert Financial Digest
has tracked the average recommended gold market exposure among a subset of
gold-timing newsletters. It usually fleshes out around 32.6%. But now it
rests at 60.9%, a level it’s only exceeded 13% of the time. The key -
Hulbert found an inverse correlation exists between his proprietary index and
the short-term market direction of gold. In other words, if the index is
high, like now, gold is headed lower.
[FLAW#7: After a year that has made a mockery of all manners of technical
signals, Louis believes traditional ways of foretelling market direction
still apply. Think about it: if the dollar is about to collapse,
wouldn’t you expect the HGNSI index to be high?]
7) Trinkets drive
demand, not governments or speculators. Nearly 75% of gold
demand comes from the jewelry market. And if Indian brides balk at buying
above $750 per ounce as the Bombay Bullion Association reports -
India’s gold imports cratered 81% in December - look out below. And
don’t be fooled into thinking investors (governments or speculators)
will pick up the slack. As HSBC reports, rising demand from investors,
particularly from ETFs, only offset half of the 33% decline in jewelry market
demand since 2001.
[FLAW#8: Louis assumes that the gold market will return to
“normal”.
A) When the world was on the gold standard, 90% of the demand for gold came
from governments and speculators.
B) In recent year, “75% of gold demand comes from the jewelry
market”
Despite a seven year trend of “rising demand from investors,
particularly from ETFs”, Louis assumes we will be returning to
“normal”, trinkets-driven gold market.]
8) What makes now
“different?” If the global economic crisis keeps
getting worse, as goldbugs like to point out, why hasn’t gold tested
last March’s high of $1,030.80 per ounce? Or blown right by it? After
all, gold is supposed to increase in value as economic conditions worsen. But
it hasn’t lived up to expectations, not one bit. And I don’t
think it ever will. Ultimately, when you factor in the massive amounts of
stimulus being injected into the markets, on a global level, we’re
close to the worst of times… and the peak for gold.
[FLAW#9: Louis doesn’t think now is “different”
Now is unquestionably “different”: These are unprecedented times
“why hasn't gold tested last March's high of $1,030.80 per
ounce?”
Because in the second half of 2008, hedge funds were forced to sell large
quantities of gold to deleverage and meet redemptions demands
“Or blown right by it?”
Gold hasn’t blown “right by it” because everytime gold
tried to do so last year, some of the fed’s big member banks (ie:
JPMorgan) sold huge quantities of “paper gold”.
“After all, gold is supposed to increase in value as economic
conditions worsen.”
Yeah, that is strange isn’t it? It almost seems like there is someone
out there who is intentionally suppressing gold prices as they try to rally.
“it hasn't lived up to expectations, not one bit.”
It was only one of the best performing assets of 2009.
“I don't think it ever will”
Saying that is about as stupid as saying we will never seen inflation again.
Gold prices were around $40 in 1970.
“when you factor in the massive amounts of stimulus being injected into
the markets, on a global level, we're close to the worst of times”
Those who believe we can print/spend our way to prosperity are fools.]
9) Analysts love it.
According to Bloomberg,
16 of 24 analysts surveyed by the London Bullion Market Association believe
gold will reach a minimum of $1,032 per ounce this year. As we all know,
analysts’ track records are deplorable. Instead of just ignoring them,
why not bet against them? The odds are definitely in our favor.
[FLAW#10: Louis uses blatantly bias evidence. How can someone claim
“analysts love gold” based on a survey conducted by “the
London Bullion Market Association”?]
10) Hedge fund
buying dried up. Institutional speculators (hedge funds)
played a large part in gold’s run-up. But 920 of them went Kaplooey
last year, according to Hedge Fund Research, Inc. Not to mention, hundreds of
others hemorrhaged capital as investors demanded their money back, while
those left standing ratcheted down borrowing to close to nothing, according to
Rasini & C., a London-based investment adviser. In the end, gold
prices will eventually reflect the absence of these former heavyweights.
[FLAW#11: Hedge fund buying didn’t “dry up”.
For the last six months, hedge funds have been selling billions of dollars
worth of gold to deleverage and meet redemptions demands. Only recently has
this hedge fund selling ended.
When six months of intensive selling by hedge funds has come to an end, is
the correct expression:
A) “Hedge fund BUYING dried up.”
B) “Hedge fund SELLING dried up.”
Louis believe the answer is A.]
11) Gold is
schizophrenic and the wrong personality is in control.
Multiple motivations exist to buy gold including the desire for a safe haven,
currency, adornment, raw material, or inflation hedge. But much like
Treasuries, the bulk of buyers come from the safe haven camp today. And
once the economy shows any signs of perking up, we can expect these same
investors to flee for more risky assets. And don’t be so quick to rule
out a second half recovery…
[FLAW#12: An economic recovery (which I don’t believe will occur)
would be a BULLISH development for gold. The majority of economists expect
the US’s economic recovery to trigger serious inflation, causing a big
rise in gold prices.]
[FLAW#13: Louis suggests “a second half recovery”. Bullish
comments like this are the reason this site is called Market Skeptics. I have
ZERO tolerance for those who make weak bullish projections in the face of
overwhelmingly bearish evidence. These delusionally optimistic comments are
misleading for everyday investors.
For there to be a recovery in the second half of the year, the US would have
to escape its crushing debt burden and somehow resurrect its manufacturing
sector. Both of these are impossible without a dollar collapse.]
12) The Fed, the
President, history and the Baltic Dry Index concur - the economy’s on
the mend. Despite dismal data, both the Fed and
President Obama point to the current recession ending by the second half of
2009 [Politicians always forecast economic recovery in the middle of a
recession!]. Moreover, the average recession only lasts 14.4 months [This
is OBVIOUSLY not an average recession]. So even if this one is longer
than usual, we’re still near the tail end of it - a fact underscored
by the recent 61.4% rally in the Baltic Dry Index from its early December low
[The rise in the Baltic Dry Index is actually a clear signal that the US
economy is on the verge of collapse. If Louis thinks this is an optimistic
development, it is because he doesn’t have a clue what is going on].
As I wrote in November 2008, the index is the first pure indicator of an
uptick in global activity [“An uptick in global activity”
doesn’t meant an uptick in US activity]. And once the economy gets
back into gear, the Fed will act quickly to rein in the money supply and curb
inflation.
[FLAW#14: The 61.4% rally in the Baltic Dry Index is being driven by the
shipping of grains, not renewed consumer spending. It is evidence that global
droughts are forcing nations around the world to import more grain, and means
global food inflation. Rising food prices will end deflation fears and cause
a panic into gold.]
[FLAW#15: the Fed will unable to “act quickly to rein in the money
supply and curb inflation”.
For the US/fed “to rein in the money supply”, it would have to:
A) Stop bailing out banks and allow the financial system to crash
B) Back out of all government guarantees (FDIC, etc…) to avoid printing
more cash
C) Default on the US’s federal debt
D) Eliminating social security and medicare, because when the US defaults, it
will wipe out the trillions of dollars worth of treasuries held held in trust
to pay for the baby boomers retirement. US default = no more social security
or medicare.
Somehow, I doubt the US/fed would be willing to take the steps needed to
“curb inflation”]
Clearly the gold rush is on [no it isn’t. The majority of investors
are still in “cash” (dollars)]. But that’s all the more
reason to move in the opposite direction, against the herd. I realize this
might be the most unpopular recommendation right now, but that means it could
also be the most profitable.
And before you brand me a fool [you are a fool] for recommending
shorting Treasuries and gold in the span of two months, here’s the
intersection. The driving force behind both assets in recent months has
been safe haven buying [, but the fears have been different.]. And it
will remain the dominant variable in determining price in the months ahead.
So when investors go back on the attack for more risky assets, prices for
both assets will fall.
[FLAW#16: While the “driving force” behind gold and treasuries
“has been safe haven buying”, this safe haven buying has been
buying driven by two different fears. Those buying treasuries are afraid of
deflation, and those buying gold are afraid of hyperinflation. Because of
these different fears, gold and treasuries are unlikely to move together.]
It’s already happening for Treasuries. And I’m convinced gold
is next.
[FLAW#17: Falling treasuries means deflation fears are being discredited,
and it makes gold more attractive.]
Investment U
Editor’s Note:
In the past year, Lou’s been dead on with his predictions. He called
the U.S. dollar bottom versus the euro within 26 days… oil’s peak
within 24 days… and the top in U.S. Treasuries within two days. So when
he makes a big call like this, we listen.
[My predictions over the last year and a half have also been pretty
dead on. This makes me want to dig up another batch of my old emails.]
My reaction: I
don’t know why, but taking apart this article was rather refreshing.
Below is the summary of the 17 flaws in Louis Basesense case for shorting
gold:
FLAW#1: Louis Basesense doesn't consider the possibility of a dollar
collapse.
FLAW#2: Believing the dollar won't collapse doesn't make you a contrarian, it
makes you part of the mainstream.
FLAW#3: Anyone who bases their investment decisions from "the
infomercial factor" deserves to lose money.
FLAW#4: Central banks' selling off their reserves to fund deficits is
INCREADIBLY bullish for gold, because the majority of those reserves happen
to be in dollars.
FLAW#5: Comparing gold to oil is comparing apples to oranges.
FLAW#6: Louis bets on deflation without even bothering to explain why.
FLAW#7: After a year that has made a mockery of all manners of technical
signals, Louis believes traditional ways of foretelling market direction
still apply.
FLAW#8: Louis assumes that the gold market will return to "normal".
FLAW#9: Louis doesn't think now is "different"
FLAW#10: Louis uses blatantly bias evidence.
FLAW#11: Hedge fund buying didn't "dry up".
FLAW#12: An economic recovery (which I don't believe will occur) would be a
BULLISH development for gold.
FLAW#13: Louis suggests "a second half recovery".
FLAW#14: The 61.4% rally in the Baltic Dry Index is being driven by the
shipping of grains, not renewed consumer spending.
FLAW#15: the Fed will unable to "act quickly to rein in the money supply
and curb inflation"
FLAW#16: While the "driving force" behind gold and treasuries
"has been safe haven buying", this safe haven buying has been
buying driven by two different fears.
FLAW#17: Falling treasuries means deflation fears are being discredited, and
it makes gold more attractive.
Eric
de Carbonnel
Market Skeptics
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