Wednesday, October 07, 2009

Gold at New Highs

Top Line: The market does not seem to want to go down. Our key indicators are still negative on stocks. No buying should be done here.

As we look at the last three days trading, the Dow has run up over 200 points. GDX has jumped back up to the 48 level even as gold has mounted a rally to new highs. TLT has remained pretty strong in spite of these developments and we watch it carefully.

The key item for us is the dollar which is struggling under the strain of negative press, mostly. Gold has popped to a new high but the dollar and the TLT have remained steadfast. The dollar should be making new relative lows along with the spurt in gold and TLT should be dropping due to the same.

Let's concentrate on GDX for the moment. We are in a position that GDX is getting close to a long term capital gain if you purchased it last year at this time and haven't sold it. This makes the decision to hold on much easier since we still think GDX will enjoy some remarkable gains going into 2010.

Right now, with GDX under performing gold, we are getting a little concerned about GDX and frankly the gold move as well. Gold could well pop to $1100 and is moving up as we write. That price isn't too far away and we'll see how GDX reacts to any more upside in gold. With all of this bullishness in gold, we contrarians get nervous. The interesting thing is that no one actually believes that inflation may be a problem but still gold rallies. Imagine if people begin to think that inflation may come will soar. This is exactly what we think. We don't really think a lot of inflation is coming but we do think enough will appear so as to scare gold much higher which will be led by the GDX.

We mostly think that GDX Leads gold, not the other way around. If GDX is struggling to follow gold up, which it currently is, we would want to lighten up on both. Again, if you have a taxable position, we would be more cautious about selling if the position is close to a long term capital gain. If it is, then we may recommend a legal tax hedge just in case the complex drops.

Since we are trying to focus on GDX, we would want to short something else. This is not something that you should do without some serious thinking. In fact we're not sure we would recommend this to you unless you are close to a long term capital gain. If you are near a year, holding out until then would be an extremely tax friendly transaction.

We will explain this further if you like. Send an email or make a comment here. First of all you will need to get a margin account in order to short something. Please do not attempt this without full consideration of taxes and whether you really want to deal with selling your position.

This recommendation to buy GDX over the past year has yielded us great gains. That is not a good reason to sell necessarily but when you have a good gain you sometimes want to protect it. In this case, there are plenty of reasons not to sell. If you have been trading it all along and there is no pretense of a long term holding period, then you can feel free to do more trading.

The question then becomes is this a good time to get out. If it is, we would recommend a strict buy back point which we will be watching and waiting for.

With that in mind, the stock market is currently being led by GDX. If GDX leads the market and gold, at least in the current environment, then we need to watch GDX for clues. If GDX does manage to rally with gold here, we would need to consider that the market can go up as well. We do not have this position at the moment, as we are fairly bearish stocks. This, as you know, has not served us well over the past couple of months.


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