Gold Investing Momentum

Is it only "momentum trading" behind Gold Investment's latest surge to record high prices...?

WITH Gold Prices hitting a new record high, long-term bulls have got to be smiling, says Mike Norman at Hard Assets Investor.

Here, he speaks to Matt McCall, president of Penn Financial Group, the independent investment advisory, about the outlook for Gold Investing from today's new Dollar highs.

Hard Assets Investor: There had been a lot of skepticism about whether or not gold could sustain its recent run. What's behind it – and how far do you think it can go?

Matt McCall: That's a good question because you're seeing money actually go into equities over the last few weeks, at the same time as money is going into gold. And most people would say, "Well, you're Buying Gold for safety. And when you want to get out of this, you have this potential double-dip coming." But, we haven't actually heard double-dip in a little while, so now people are still Buying Gold.

I think the main reason that it is going up – there are probably two main reasons, Mike. One is the fact that it's an alternative to currencies. People do not believe in the Euro. People do not believe in the US Dollar. So, where are you going to put your money? It goes into Gold Investment. You see a lot of emerging market governments doing that, too.

The second reason is its momentum. Clearly, when any type of stock or asset class breaks to a new high, which gold is, it's going to make the cover of major publications. People are going to be running into it. So, you have the combination of a little bit of the fundamentals behind it and technicals behind it. I think now we'll probably see $1500 sometime by the end of this year. And that was my call at the beginning of the year. If we get $1500, I may start selling.

We've had our position for three years; back around $650, we started legging in. And my goal, at that point, was $1200. If we hit $1500 we'll probably start selling a little. But what we might do, in lieu of that, is buy some more silver or some more platinum.

HAI: So, what you're saying is, fundamentally, the only way for gold to pull back is if we saw a resurgence in the Dollar?

Matt McCall: Exactly. I think the combination of one or two things: If the US Dollar rallies substantially, you will see money coming out of gold, or if we see a substantial rally in equities. Because you're also going to see money coming out of gold, and think, "You know what? Things are good. We're in the midst of a global expansion. Let's put everything we can into equities at this point."

But I don't know if I see either one really happening in the next few months. That's why I think this momentum can continue. Do I think it goes into next year? It could. The big question longer term is: Is gold now an asset class that everybody owns? In the past, at certain times, you would own it during inflationary times. If it became an asset class – which it could, because a lot of investors I talk to now believe you have to own gold – that could make it sustainable long term.

You also talk about inflation, too; inflation does occur. Now deflation is a big fear. I know we may not agree on this but, if you keep putting money … I think inflation will eventually creep into the economy. And then we'll see that.

HAI: We've all seen what can happen with a "momentum trade" – the dot-coms, even housing. So where is gold on the danger scale – say, with 10 being the year 2000 with the dot-coms, or 2006 with housing...?

Matt McCall: I think we're probably about a seven, or pretty close to that. Everybody thought the bubble was blowing up a few months ago when gold hit a high and started pulling back. But in a technical perspective, it pulled right back to the 200-day moving average and bounced. So, the way I look at it is, as long as it stays in this longer-term uptrend, I keep it in my portfolios. Because it's going to pull back along the way.

But, when it does blow up, Mike, it's going to blow up big time. And I think it's going to bring down silver and platinum. It's going to bring down all the commodities with it. But what triggers that? And that's the big question right now. But at the same time, what triggers an equity rally? What triggers a gold bubble? Nothing yet.

HAI: Let's talk a little bit about silver. In the small speculator category of US futures contracts, you've now got a ratio of 8-to-1 long...

Matt McCall: I know. When you see that number, I typically take the contrarian view and say, "You get the hell out of there." Because if all the little guys are doing it, it's probably about to blow up. But silver, actually, if you look at basis, if you take the ratio from gold to silver, we're still trading at a ratio where silver is a more attractive trade right now.

And, if you are concerned about a gold bubble, you know what you do? You go short to GLD, which is gold, and you go long the SLV, which is the silver ETF. And you hedge your trade. Because I think silver has got a better opportunity. And what I like even more now is platinum – PTM – the platinum ETF. I own that, and I think that's due to break out right now. So, go long silver, platinum; short gold, if that concerns you.

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