Gold: Two Sides of the Coin

By Minyanville Staff  APR 20, 2009 4:10 PM

Is yellow metal really the best investment?


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Gold Bulls: Heads I Win, Tails You Lose
James Kostohryz, 3 p.m.

I find it quite interesting that advocates of gold will one minute argue that heavy purchases of gold by ETFs (see GLD) is a very bullish sign - and will then inform us that heavy sales of gold by ETFs is also a very bullish sign.

Gold bulls frequently declare that gold is a great play on the prospect of inflation. They also tell us that it is a great play on the prospect for deflation. (As it turns out, neither theory has much support empirically, but that is another story).

In sum: Buy gold because it is the best investment no matter what is happening. Heads I win, tails you lose.

This manner of investment thinking is not unique to gold fans. However, it is quite prevalent in these circles.

This isn't a critique, as it is quite possible that seemingly contradictory theories can be reconciled and ultimately be proved correct. For example, I myself have argued in particular situations that a rise in the VIX might be a bullish sign and in other situations I have said that a decline of the VIX is a bullish sign. These statements can be logically reconciled as they applied to different situations and different points in time.

However, I thought I would bring this interesting situation regarding gold advocacy to the attention of readers of this forum so that they can reflect on it themselves and make their own judgments.

The Other Side of the Gold Coin
Lance Lewis, 4 p.m.

I find it quite interesting that those who passionately dislike gold can often not understand simple patterns based on observed past behavior of a market.

For example, given that selling of bullion by the GLD ETF has been rare and tended to occur at important lows (as I discussed earlier), the pattern suggests that heavy sales by the ETF that occur for one or 2 days and then stop as the price begins to rise again are indicative of capitulatory lows.

We can see similar dynamics at work with heavy put buying or heavy mutual fund selling in stocks, which have both been known to mark lows in the stock market, even though obviously heavy mutual fund selling every single day would be bearish. This is not rocket science.

Clearly, if the GLD ETF sold metal every single day, that would tend to be bearish unless another source of demand was taking down the added supply. On the other hand, for the ETF to buy metal every other day and not sell any (as occurred for much of the first quarter) is a clear sign of steady accumulation and therefore bullish. This is simple math 101.

There is no flipping of a 2-sided coin here. I would suggest gold haters perhaps look at “the other side of the coin” and examine why gold has continually proven them wrong with new annual gains for the past 8 years straight.

“Something” might be going on there other than “random noise."
Position in gold and gold stocks

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