When Everyone in the World Loves Gold, Should You?

Turn on your TV, read a newspaper, magazine, or billboard, listen to the radio, go to lunch, go snorkeling (ok, maybe not snorkeling ), and it seems that all anyone can talk about gold – it is inescapable. It is not without good reason, however. Stock markets throughout the world are in chaos and investors are genuinely concerned. In times of uncertainty such as these, people flock to what they feel is the safest, which historically, has been gold. The result of that concern has been a meteoric six month, 32% rise in one of the world's oldest asset classes - a 50% rise over the past 12 months. With gold trading over $1,800 per ounce for the first time in history in today's session (high of $1801), investors need to start to ask themselves whether or not now is the time to start to sell. Gold has had only had four losing sessions out of the past 28. In that time, gold has hit a new all-time high on 18 occasions - including today. The contract price is now trading 12% higher than its 50-day simple moving average ($1,574 on a one year chart) and 18% higher than its 200-day simple moving average ($1,457 on a one year daily chart). When the price of anything in the market spikes and it is all that anyone can talk about, that has historically been the time to get out. Why? Because when an asset, in this case gold, is continuously in the spotlight, it naturally garners constant buying. When the volume in that asset starts to go through the roof, the market is telling you that the euphoria is reaching a fever pitch. Such moves are unsustainable, as the volume naturally has no place to go but down. That loss of volume is usually accompanied with a loss of value. In yesterday's session (Tuesday, August 9th), gold futures (/GC) volume hit an all time high - an astounding 366,921 contracts were traded. The last time volume has come close to that was on December 4th, 2009 when 354,055 contracts changed hands (which was accompanied with a 5.8% plunge). As an investor, one has to constantly assess risk versus reward. The gold market is extremely volatile and is notorious for its violent price declines. Given how far gold has come over the past 6 months, combined with the spike in volume and high “sex appeal”, the risk is definitely starting to lean toward the bull side. The first sign of possible weakness (selling) will send bulls rushing towards the exit, and given the fact that there are no support levels anywhere near current prices, the decline could be huge. Do not get caught holding the bag here. Institutions and big holders need to get out at some point to realize a profit, and they need new buyers to do so. Those new buyers unfortunately tend to be “main street” participants. Do not play into their hand. Whether gold prices will start to decline today, tomorrow, next week or next month, is anyone's guess. But when the downward correction happens, it will be nasty. As Warren Buffet often says, “Be fearful when others are greedy and greedy when others are fearful”. There is a tremendous amount of greed in the gold market, which is being driven by fear – so you, in turn, should be terrified. Time will tell.