Wednesday, May 26, 2010

If Gold (GLD) Tracks NASDAQ, Housing Peaks It's Headed to $3000... in 18 Months

This chart really has little analytical value other than extreme eye candy. It basically takes a 10 year bull market scenario for gold and overlays it over the housing and NASDAQ bull (bubble) markets - of course putting 3 random series together like this is extreme data mining but hey... it's fun!

What it does show is what any stock investor knows - any asset that is in bubble usually goes parabolic in its last stages. That is generally when short sellers get demolished even if conceptually they are correct... and ironically by the time a true collapse happens they are out of money (or heart) to pursue their intellectual rigor.

While it is interesting to note homebuilder stocks and the NASDAQ followed a very similar path (which gold thus far seems to also be on during it's 8.5 year run), I would doubt there is much statistical value from this. But on the off chance gold is about to go parabolic and follow the paths of the other two asset classes, this would forecast to a price of 2.5 current levels, in the next 18 months.

Translation? Gold $3000 by Thanksgiving 2011. ;) You can imagine what world events would be required for that to happen...

And can you imagine the smile on John Paulson's face... who is now has holdings of gold instruments larger than most countries? [Oct 13, 2009: Largest Gold Reserves by Country]

[Nov 19, 2009: John Paulson Set to Launch Gold Hedge Fund]
[May 16, 2009: John Paulson Continues to Pile Into Gold]
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]


Eye candy courtesy of WSJ ROI blog
  • It's been the amazing, runaway boom of the past decade. If you'd put your money into gold at the lows about 10 years ago, you'd have made a nearly 400% return. That's left pretty much everything else—stocks, China, let alone housing—in the dust.
  • But if gold is a bubble, here's why it may not be over—and, indeed, may it may be about to go vertical.
  • First, the recent rise is deceptive. Yes, gold has risen from around $250 an ounce to $1,200. But that rise started at very depressed levels. Gold had been falling in price for two decades. In 2000-01, it was at the bottom of a very deep bear market. It had touched historic lows compared to consumer prices or other assets like shares. A lot of the past decade's boom has simply seen it recover toward longer-term averages.
  • Second, before we assume the gold bubble has hit its peak, let's see how it compares with the last two bubbles—the tech mania of the 1990s and the housing bubble that peaked in 2005-06.
  • So far gold has followed the same path as the previous two bubbles. And if it continues along the same trajectory—a big if—gold today is only where the Nasdaq was in 1998 and housing in 2003. In other words, just before those markets went into orbit.
  • Maybe the smart money is out of gold today. But how easily we forget that the smart money got out of these past bubbles way too early. The really smart money knows you make the most money in a bubble right at the end, when it goes manic.
  • There is, of course, no guarantee gold will turn into another mania. But the fact that we now seem to live in Bubblonia—the land of perpetual bubbles—would suggest there is a current opening for the role. And in many ways, gold may be well cast.
  • Dylan Grice, a strategist at SG Securities in London, thinks global conditions today could unleash another gold boom like the one in the 1970s. Then, as now, the world lost confidence in the U.S. dollar as a store of value. Back then, central banks started hoarding gold instead. Today, he notes, they are net purchasers of gold for the first time since 1988.
  • And although gold has risen a long way, so has the U.S. money supply. Mr. Grice calculates that even at today's prices, the bullion that the U.S. government holds in places like Fort Knox is still only worth enough to back 15% of the U.S. monetary base. That is near a record low.
  • At the peak of the gold mania in 1979-80, gold prices rose so far that the backing exceeded 100%. How far would gold rise if that happened again? To around $6,300 an ounce, Mr. Grice says.

Long Powershares DB Gold Double Long in fund; no personal position

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