Time to go for the gold?

First some comments about the market. Another disappointing non-farm payroll report today. That makes it 2 in a row now. Concerning? Just a little bit but again, this inability for robust job creation  is not unusual given what tends to happen in the first few years of post housing bubble recoveries. This "stop and go" recovery has everyone frustrated. The bears are frustrated because they've never let go their expectations of armageddon since the crash while optimists are frustrated that the recovery can't shift into that higher gear. But in the end when it comes to the stock market it's all about earnings and liquidity and those trends are still robust. After today's close the market is now officially in a sideways IT trend. Should that really be surprising given the move we had from November to March? How many times did I say that the market was on pace for an unsustainable 40-50% gain earlier in the year? At some point the market had to rest regardless of the reason(s) for it.

Now I'm sure a lot of people out there are bracing for another big spring/summer drop like what happened in 2010 and 2011. The 2 major differences between now and then are...you guess it...fund flows and bond yields especially the latter. It bears repeating that just prior to the peaks in 2010 and 2011 the long bond had been selling off significantly for several weeks wheres this time it hasn't. That argues for a more muted consolidation phase this time around.

I'm noticing the housing market in the US is showing signs of a pulse. This is captured by NAHB housing market index which is at a 5 year high at 25. Mind you, 25 is still a very low reading as anything under 50 signals weak conditions, but at least it's heading in the right direction. The homebuilders ETF (ticker XHB) has been an out performer this year. This is good news for the bulls longer term because housing needs to find its footing for the economy to become self-sustaining and get itself off life government/fed life support. I'm also noticing that the oil price is finally comming down. Commodities in general have declined a notable amount since last year all except for oil. Energy prices have been stubbornly elevated and if they can come down it would give emerging market countires like China more incentive to take aggressive easing measures

Ok now let's talk about the title of this post...gold. First of all let me say that at current prices, I'm not a LT believer in gold. In a previous post I discussed how gold had risen far above what was justified relative to the decline in the US dollar. Gold is an example of how a bubble is formed. At first, the rise in the asset is justified given a positive fundamental backdrop but then people take it too far. That's what happening with gold in my view.  I was bullish on gold in early 2001 when it was around $270. At the begging of the gold bull market it was trading below the cost of production while the US dollar was overvalued. Nobody but the die hard, tin foil hat wearing gold bugs who were relics of the 70's, was interested in gold...the herd was still focused on bagholding their favorite tech stocks. When the gold bull market made its first big rally to $350 guys like Cramer an Kass ridiculed the bulls.  I remember it very clearly.  I also clearly remember some "pro" on CNBC saying that gold should be traded not invested in. Fast forward 10 years and  most "pros" including Cramer are now advocating holding gold for the LT at $1600+. Go figure. Herd mentality folks...even the so called pros are victims of it.

The trade weighted US dollar has declined about 35% from it's peak in 2001 which surely deserves a higher gold price but is a 500% rise justified? I don't think so. Thanks to the combination of a equity secular bear market, doomsday propaganda and the creation of gold backed ETFs like GLD, the boom in gold turned into a bubble.  While it's certainty arguable and perhaps impossible to know what the true fair price of gold is, I'd say it's closer to $700 than $1700. Now, it doesn't matter what I think and even if I'm right it could take years before gold trades to $700. In the meantime, as a investor/speculator, I have to play the cards that are dealt and right now despite all I've said, gold actually looks like it could be just about ready to make another leg up! Here's the way I see it. If gold was in a bubble and the bubble popped last August,  it should have crashed 35-50% by now. That's how bubbles pop. Instead, gold dropped  about 16% in September and has basically traded sideways since. That to me suggests the gold bull market, although aged is still not over. Bubbles, especially when dealing with emotionally charged assets like gold, don't end with a whimper like this. While there can always a be first, you have to go with the odds and the odds suggest the gold bull is still alive. From a trader sentiment perspective, the enthusiasm for gold has certainty cooled since it peaked last year. Mark Hulbert just reported that gold market timers are net short gold 15% which has coincided with ST/IT lows in the past. Public opinion of futures traders are at 55% bulls which is near the bottom of the LT range that has been in place over the past several years with 85% on the high side and 45% on the low side which was touched in late December. I'm contemplating LT calls on GLD and/or SLV here but make no mistake, such a bet would be a pure speculative play. There's no "investment" conviction to this and that's fine by me. I have no problem making a pure speculative bet if 1) I think there's a good edge and the risk/reward is worth it and 2) I'm only risking a small amount.  If I go ahead with the calls, it would be an "all in" type bet where I make the bet and I'm committed. No stops. For instance I would buy the 2013 January or March GLD $170 call.   If I'm right and gold has another upleg starting soon, I stand to more than double my money. If I'm wrong I risk losing 100%. I'm going to take the weekend to think about this trade.

I just read an article on marketwatch describing the outlook of some key commodities by some trader. He has pretty much the same view on gold as I do but he has a clearly different take on nat gas. Here's what he said

“We have such a huge supply of natural gas in this country, more gas than can be consumed.”
“I have no desire to be involved in natural gas whatsoever,” Brandt said. “I don’t think there’s any way for an investor to make money.”

My response to his first statement is one word: "duh". By now, even my grandmother is aware of the oversupply condition in nat gas. This is old news. And don't you think that maybe, just maybe with nat gas collapsing from already low prices in the $3-4/mcf level to $2/mcf, it reflects this oversupply issue and more? I just described earlier how the herd tends to take things too far like with gold. Clearly, the supply/demand imbalance for nat gas has not been appealing but does it deserve to punished this badly given it's trading far, far below the avg cost of production and the energy equivalent value of oil? Not to mention the desire from practically every nation in the world to be less oil and coal dependent and more environmentally friendly. My response to his 2nd statement is that these are the exact sort of things you hear people say at the bottom of a bear market when an asset is fundamentally cheap and nobody wants to touch it. It seems like we're at or very close to the point of maximum pessimism as Templeton would say.