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Is Gold Tapped Out?

Written By Brian Hicks

Posted April 12, 2011

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No over-long stories today, just an answer to one damn good question: What’s gold got left in the tank?

There are two reasons folks buy into the whole gold thing.

The first is classic: “It represents durable, lasting value as compared to more fickle assets like stocks or fiat currencies.”

I will grant that there is a limited supply of gold, seeing as most all of our supply derives from a singular stellar event, a neighboring star going supernova right about the time our own precious Terra was firming up.

I will also grant that gold has some really neat properties…

Its atoms line up in the most attractive grid form. On a chemical level, it minds its own business, generally declining to bond with others.

And on a more tangible level, it is quite malleable, hammered out into ridiculously thin wires and sheets. It also makes for rather attractive jewelry.

The Idea of Gold

Over time, many cultures have glommed onto these properties as excellent reasons to use gold as a preferred form of currency.

I applaud these efforts, and am even inclined to retain a good bit of the stuff myself.

But please understand that I do so not for gold’s mineralogical properties, but rather for its memetic ones.

This is going to hurt the brains of some gold bugs out there, but the very moment folks began thinking too damn much about gold, we left the ranch so far as its physical properties are concerned.

Now, it’s all about the idea of gold.

Concept Trumps RealityWD 041211 img1 gold futures

Here is the chart (click to enlarge) for gold futures going back about 25 years.

Note that for about half that time, gold oscillated within a pretty solid range. 

In fact, it even lost a bit of ground overall.

But as of 2002, the shiny stuff commenced to launch itself skyward almost as if it were trying to return to its long-lost exploded birth star…

Some credit this hot ride to the advent of deliberate inflation here in the United States — a fact that seems to be confirmed by a collapse in the value of U.S. Dollar Index Futures post 2002.WD 041211 img2 dollar index

But to be frank, the previous decade’s behavior would seem to put the lie to that concept.

Inflation was certainly a fact of life then as well, and yet wild perturbations in the value of the dollar did not translate into similar peaks and valleys in gold.


It IS a Bubble and That’s a Good Thing

Something is different now… and that difference is perceptual, memetic, viral, and to a certain extent, self perpetuating.

Note the incredible increases in volume in both the dollar and gold futures charts as more and more folks pile into a market that was once the exclusive preserve of doddering old billionaires in London and New York.

Here’s the part that really hurts gold’s long-term fans: Today, gold is up more than 400% because an inordinate number of idiots (that’s a technical term, really!) have convinced themselves it is going up.

While gold may indeed have properties that render it genuinely valuable over the (very) long term, today’s wild price action IS A SPECULATIVE BUBBLE.

Not that there’s anything wrong with that…

After all, there’s a lot of money to be made off bubbles — if you have the proper attitude and the right tools at hand.

Defining Gold’s Trend

WD 041211 img3 GLDHere’s your chart for the SPDR Gold Trust ETF (NYSEArca: GLD), which attempts to replicate the performance of the price of gold bullion.

I’ve heard many a “bug” complain that these ETFs might or might not actually possess all the physical gold they claim on any given day.

But that’s okay, because I am not asking you to buy the damn thing as a replacement for physical gold…

Rather, I want you to note the memetic properties of the index — specifically its alternating cycles of price compression and break out within the context of its long-term rising trend.

The recent spike in gold prices has some folks worried that the shiny stuff is approaching a blow-off top.

While that is always possible in a speculative bubble, the chart indicates the higher probability over the next few weeks is a breakout move to at least GLD 152 — and quite possibly as high as GLD $159.

Strategy and Tactics

Now here comes the cool part…

While the gold bugs and gold bears are still arguing about gold’s divinity, you can purchase GLD July 142 Calls (GLD1116G142), available as I sit to write to you for $515 with a posted Delta of 0.6325.

A 6% rise to our initial target of GLD $152 ought to push this contract to $1,084 for a gain of some 111%.

Should GLD hit my higher target of $159, your calls might rise as high as $15.27 for gains of 197%.

For some folks, this sort of gaming with gold’s most ephemeral properties is the worst sort of investing sin…

Hey, if it makes you guys feel any better, you can always buy more gold with your gains.

Sincerely yours,

Adam Lass
Editor, Wealth Daily