Time to Take Some Profits on Gold

On September 2^nd the price of gold broke above an important trend line. Gold had put in a superb base, lasting nearly 18 months from March 2008. The last seven months of the base featured increasingly tight trading, auguring a powerful break out.

 

And so it has been. The position has been up over 20% at recent intraday highs. And it’s probably not over yet. An 18 month base suggests a measured move is a valid target, and that would take us to about 1300 or so.

Twenty percent is a fine profit for a commodity trade. For those that took our suggestion to go long we believe this is a good time to cash some in. Not all of it, just enough to make the inevitable, likely volatile pullback easier to endure.

Why lock down some profits now when technicals tell us 1300 is a not unreasonable target?

Because the animal spirits are starting to flow. Novice money is being attracted into the trade. The number of advertisements on TV and other media is mounting. And this evening we received an unsolicited e-mail from The Street.com to subscribe to their products that pump gold investments. It was headlined by a smiling Jim Cramer posing with thumb up and this superb analysis in the caption: “Cramer says: ‘The rally in gold is a good thing.” What an oracle.

These are signs that the intelligent investor, who leads the crowd, should accommodate those less knowledgeable who are eager to make a purchase best made months ago.

We don’t know when or even if the price of gold will correct. We do know that it has become unmoored from all reality. Previously it was tethered to the US Dollar index, rising as the dollar fell. But lately even as the dollar has stabilized gold has continued its ascent, accelerating as the dollar moves sideways. This is a sign of an overheated, overcrowded trade. It is as likely to continue in the near term as it is to react to a seemingly innocuous headline as an excuse to embark upon a harsh correction.

Investors make the most money when risk seems at its highest. Paradoxically as prices rise those that are increasingly risk averse become emboldened to commit. The most risk averse tend to invest at what turns out to be the moment of greatest peril. They do so because they perceive that a constantly rising price has removed the risk. These are the people that are beginning to plunge into gold. They are exposing themselves to the likelihood of a harsh lesson.