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Is Gold Signaling the End?

Written By Brian Hicks

Posted May 10, 2011

Last week, metals futures traders tossed a real bomb into the stock market pits, what with gold peeling away some 7.6% and silver topping that with a whopping 34% loss…

Needless to say, this has been THE topic of conversations in trading rooms, drawing rooms, chat rooms, and Starbucks across the planet as the herd attempts to integrate and discount this dramatic reversal.

Gold and Silver Plunge A brief survey of the memes bubbling up to the top of the great boiling stew pot of public consciousness yielded all sorts of millennial foolishness: “It’s the end for noble metals… the end for stocks… the end for bonds…”

Heck, one correspondent actually emailed me a note out of Texas warning of the imminent arrival of the Biblical rapture — literally the end of everything as we know it come May 21st.

This is silly, because everyone knows that the world is slated to burn up on December 21, 2012.

(No, no, don’t write in to the publisher about this latest act of supposed apostasy: I am not making fun of the Torah, Bible, or Koran here; just an overexcited rural preacher.)

It was actually almost amusing watching investors and speculators try to run in six directions at once.

But after a while, I found it both exhausting and uninformative, and was forced to look away for a bit till the dust settled.

From Contrapuntal…

I have now taken a second look, and have come to the following conclusions:

We have not seen the end for stocks or gold — but we have been reminded of their mortality, and we may have gotten an advance peak at the forms their end will take.

Gold and Blue Chips in LockstepTo truly understand this, you have to remember that once upon a time, stocks and gold ran contrapuntal to each other. Folks bought stocks when they wanted growth and were willing to tolerate certain risks to get it…

And they ran to the safe harbor of gold when they thought things were looking dotty, and wanted to protect themselves from various wolves at the door.

Nowadays, the reverse is true.

For the better part of the past decade, the wise guys have been buying and selling gold in lockstep with their stock purchases because they know damn well that the deliberately depressed dollar is propping up stocks, and this sordid relationship will inevitably bite them on the ass.

… to Lockstep

Now let’s follow the breadcrumbs a little farther…

Washington — or to be more specific, Washington Democrats — have a bit of a dilemma. No party in recent memory has held onto the White House when unemployment exceeds 7%, or dips under 4%. The former is obvious, as it signals moribund economic growth. However, the latter is usually accompanied by soaring inflation, and is equally distasteful to the electorate.

Needless to say, Washington’s political hacks are uniquely sensitive to these limiting brackets, as re-election come 2012 is pretty much the only thing they give a rat’s behind about. Problem is, they can only go after one side or the other.

Either they print out a bunch of free dollars so as to jack the economy into a Dexedrine-driven hiring frenzy, and suffer the ensuing increase in material costs… Or they raise up the cost of capital just a tad so as to at least slow down inflation.

Less Common and More Dangerous

There are two other scenarios that can happen here, mind you. But they are either somewhat rare or really, really unpleasant.

Every now and then, a currency collapse in Europe or Asia will allow Washington to print dollars with impunity, as the excess just gets sucked up by folks looking for shelter. We saw just that last year when Greece’s collapse allowed Washington to “stimulate” with temporary impunity.

The problem here is twofold: First, it doesn’t really do all that much good in terms of stimulating our economy, as all the money flows overseas. Come to think of it, that’s exactly what just happened.

And second, the inflation exemption doesn’t last but so long. Come to think of it, that’s happening right now also.

The Return of the Stagflation Meme
 Stagflation Meme Rises Again
This brings us to the other unpleasant scenario. Back in the bad old days of the last century, we saw several presidents try to have it both ways. They tried to stimulate the economy by taking us off the gold standard. And they tried to control the inevitable inflation with all sorts of whack plans including price controls and WIN pins.

The end result was an awful thing called “stagflation,” wherein no one worked and prices shot up anyway, and we fired several presidents in a row. (Yes, I know there were all sorts of “extenuating circumstances” surrounding those firings, but I think you’ll find that this central theme undergirds all these excuses.)

And indeed, indeed, you will note that the stagflation meme is suddenly rising ten- and even 20-fold, as the old hands tell the young kids just what to expect over the next year or three.

Gold’s Silver Lining

Here’s the upside of this whole sordid story…

Yes, gold is prone to occasional temporary reversals, particularly when the dollar is rising and stocks are selling off. But the dollar’s recent rise is just that — temporary, driven primarily by bad news out of Europe.

We’ve yet to see another Volcker show up on the scene, prepared to do what’s necessary to break inflation’s back. In the meantime, you can bet that Washington Democrats will attempt to print their way to re-election.

Come to think of it, you ought to do just that: bet on inflation and bet on gold.

There are, of course several ways to do this. But my personal favorite remains call options against the SPDR Gold Trust ETF (NYSE: GLD).

202% Gains

I should point out that the July 142 calls I recommended to you back in mid April picked up as much as 202% during the last cyclic upstroke. Heck, even with the recent “end-of-gold-collapse” and such, they are still good for some 75% gains.

If all gold does is return to its recent high, a second set of GLD calls — let’s posit August 146 contracts (GLD1120H146), currently trading for $629 with a posted Delta of 0.6112 — would pick up a quick return of some 65%.

Should gold hit its next benchmark high at $1,600 an ounce, these calls would breach 100% gains in short order.  

Da Rules (and a Heads Up)

Moving on to other business…

Yes, I am now receiving your letters at, so we need to set a few ground rules for our conversations.

First off, whoever is sending me all those invites to participate in your ill-got Ghanaian banking scheme should know that I habitually forward such letters to the Feds.

Second, I am absolutely forbidden by rule, regulation, and common sense from doling out specific individual investment advice.

I can say what I want from a soap box in Hyde Park (so long as I can back it up with facts). But the moment we huddle one on one, I am seriously gagged. The Feds have a cold cell waiting for any journalist who dares trod THAT sacred ground.

Finally, all of you who have been bugging the boss here at Angel have succeeded. He has indeed decided to drag my sorry behind out of retirement and launch a service over my byline. Now be patient, as it will take some weeks to work out all the details of same.

Trust me — you’ll be the first to hear about it once all the ts are crossed and is dotted.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page

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