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How to Trade Gold in 2012

Wealth Daily's Weekend Edition

Written by Brian Hicks
Posted November 26, 2011

I look forward to Thanksgiving dinner with my in-laws the way I imagine my dog looked forward to that fateful trip to the vet to be fixed.

I  claw at the door, whine, and whimper as we make our way down the drive way.

It's not my in-laws... I love them to death.

And it's not the food —  or even the damned kids, treating me like a human trampoline after I've put away turkey, green beans, potatoes, corn, pies, and half a case of beer...

It's the investing questions I get once people find out what I do for a living. (And no, feigning a tryptophan coma doesn't help.)

This year was no different. We gathered around the table for dinner, and as soon as the bird had been carved, the offering of opinions and market commentary came at me before I could even ask my wife to pass the gravy.

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All Things Gold

At this year's event, everyone was an expert on all things gold.

My Uncle Mike was an economic pundit all of a sudden, explaining why gold would run to $2,600 after Europe's problems die down.

I'm telling you right now that gold will run to $2,500 next year,he said. 

I was stuffed and not completely awake yet from my nap. The last thing I wanted to talk about was investing.

“Is that so?” I asked, eyelids heavy, contemplating loosening a notch on my belt.

“Yep. I bought recently at $1,900. I don't think this latest drop lasts long, though.”

I didn't have the heart to tell him I've been holding since $600...  

And I didn't dare remind him that I told him to buy those dips under $1,600.

How could I tell my 65-year-old uncle he'd made a horrible move far too early?

Hell, even I knew not to buy at $1,900. I knew that at $1,900, gold was too stretched — and I told my readers at the time:

Gold has simply run up too far, too fast. It's up close to 35%, or $500, since January 2011. And it's up close to 18% in just the last few weeks. Heck, it broke $1,900 the other night, less than two weeks after hitting $1,800.

The herd is far too bullish. Gold margins could get hiked again. It's technically overdue for a significant pullback on overextended conditions.

I also knew that gold would bounce once it pulled back, like it has so many times before running to new highs.

You can plainly see it on a multi-year chart:

gold chart 112211

The latest one — which could result in a test of $1,900 — is no exception.

Citigroup agrees, calling for $1,950 gold in 2012:

Increased global risk, U.S. dollar weakness, growing inflationary fears, the U.S. debt downgrade and continuing sovereign debt risks in Europe have increased investor appetite for gold. This has been supported by central banks reversing activities from being sellers for most of the past 15 years to net buyers more recently and is supported by the Fed's stated desire to keep interest rates at super- low levels in the medium term.

2012: Gold to $2,200

Let's be honest here; the only benefactor of the European debt situation is gold.

The European Central Bank (ECB) could print an insane amount of euros, or we could see a dismantling of the currency...

Both would lead to higher gold.

If the ECB prints (which it says it won't), it'd need to print more than four trillion euros, considering Italy and France hold more than $3.5 trillion alone.  That kind of cash would create quite a surge in the market, as compared to what the Fed's $1.85 trillion did for the United States.

Just imagine for a moment what four trillion euros would do to gold...

Because of the debt crisis — and the ripple effects on European banks the European Central Bank (ECB) could easily print billions if not trillions to get out of debt. And that appears to be one of the best options, since the European Financial Stability Facility (EFSF) doesn't seem to have enough money to help.

Of course, this would go against Germany's anti-inflation stance. But Europe really has no choice at this point.

In one fell swoop, the ECB could reduce the value of debt burdens and stimulate economies. Not only would a money-printing move flood global markets with liquidity; it would send world markets to the moon and the likes of gold to more than $2,000 in a heartbeat.

This is not a done deal, though. If it were, you'd buy just about everything.

It's far too early to buy large chunks of everything on European QE hopes...

But it's worth paying attention to.

On the other side, should the euro be dismantled, gold would run amok. The very introduction of newer currencies for “euro pull-out” countries would be enough to send gold screaming higher.

I'd buy gold options and even gold stocks on weakness.

Something has to give in Europe. And gold could easily become the historical buying opportunity of a lifetime on these latest dips.

How to Trade It

Just as I told you back in October — before the bounce — buy gold on dips. Short it on over-extensions. That's how you trade gold.

You can buy the underlying stock on the SPDR Gold Shares (GLD).

You can play long-dated calls with the SPDR Gold Shares (GLD) March 2012 167 calls (GLD120317C00167000).

As Andrew Mickey has found, you can also turn a profit from "useless gold mines" that are now hugely profitable on gold's heels. Get all the details in his latest report.

Stay long gold. Buy it on dips.

It's going much, much higher... just have patience.

Take care,


Ian L. Cooper
Analyst,
Wealth Daily


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