Fakeout Moves Before the Gold Rally

I look for fakeout moves. For example, following the “fat finger” waterfall crash last year, there was a major rally. The spike rally in silver earlier in the year was a fakeout move in reverse. Sustained rallies and sell-offs tend to last longer than people expect, but eventually the opposite trend emerges. The market gets just enough people bulled or beared up before a suckerpunch move. This is what makes markets fun; you have to be balanced at all times.

It’s hard for me to explain, but remember in 2008 when the whole financial system malfunctioned and gold collapsed to $700? Gold was the most obvious buy, yet it fell. The debt crisis in Europe is now obvious to everyone. But while everyone else is saying gold should be shooting to the moon, I remain cautious. I am still expecting a big correction. When everyone is a doubter of gold, that will be the time to buy.

The ECB is coordinating with the Fed to get dollars into the banking system. This will help banks service loans denominated in dollars in the short term, I don’t dispute this. But these are stop-gap measures that do nothing to change the long term picture in Europe. The unemployment rate in Spain for people under the age of 25 is over 40%. People are losing skills as the long-term unemployment crisis drags on and this is a disaster in the making.

The rich are getting richer, but this is not because of some global conspiracy; it is because of the ongoing shift in the global economy. Workers need to be much more skilled than they were in the past, and the education systems of the world have yet to catch up to this market dynamic. For people about to go to college, please stay away from fields like law and accounting. And please don’t get your MBA unless you have some kind of passion for doing case study after case study. You’ll thank me later. Read widely and expand your knowledge; this will give you the kind of versatility that is cherished in the marketplace.

It’s important to understand that even though the American economy is slowing, there is a ton of capital out there. An explosion in movable assets is coming because there just isn’t any confidence in government. This isn’t some conspiracy theory- I’m just explaining human nature. Why would people buy real estate in overpriced markets when they know governments are broke and will raise property taxes? Is it not wiser to buy gold, artwork, or even stocks? When the going gets tough, people want to unload their assets as quickly as possible. This is an advantage that stocks provide.

I continue to be amazed at the stupidity of our leaders. A huge crisis awaits us, but probably after a temporary calm in markets. At $1500-$1600 gold, I will be very aggressive because a tripling of gold prices from those levels is not out of the question. This is a level of fiscal mismanagement on a global scale that I have yet to find a precedent for in history. Even the sovereign debt crisis during the Great Depression pales in comparison. Connect the dots, it’s not that hard.

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  • Robert

    why do you think gold will correct down to the $1500-$1600 range ? The demand for physical gold is out of control .Except for us gold bugs who are always thinking gold should be higher( probably would be if not for all the manipulation and recent central bank intervention )most people feel gold is in a bubble  Just turn on those stupid cable shows and all they do is interview people who slam gold–I have read many times that its like less than 1% of mutual funds and investment companies have invested in gold or gold companies–
    With expirations coming up at the end of the month you might see gold go below 1700, but that may be the best you will get-
    anyway i think you do a great job–just don’t agree with your assessment on gold–only time will tell

    • http://www.expectedreturnsblog.com Moses

      A great deal of the money in gold right now is speculative, which is why the down days tend to be more extreme. There is always new supply coming on the market so demand alone isn’t enough to drive prices higher. Plus there is short-term manipulation of prices. I don’t think it’s time yet, gold needs a breather. Gold expressed in dollars should come under pressure as the dollar rises. 

  • Angie

    Hi Moses,

    Just some though about shorting treasury.  Do you see the recent upward spike of Treasury as another shorting opportunities? Or should we continue to wait a bit more?

    Angie

    • http://www.expectedreturnsblog.com Moses

      Hi Angie,

      I think all rallies in Treasuries are selling opportunities.

      Moses

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