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Why Gold's Rally May Be a Short One


The charts say it all.

The smart money remains gaga for gold but veteran technicians, eyeballing the charts, think the yellow metal's recent pop could be punctured.

In the past few days, renowned investors have filed quarterly 13F disclosures of their equity positions with Uncle Sam. The 13Fs give the rest of us a quick look at where these headline-grabbing investors have been committing capital.

One investment many of them clearly still dig on: the barbarous relic.

For instance, George Soros' shop -- Soros Fund Management -- increased its stake in SPDR Gold (GLD) in the fourth quarter to 6.2 million shares, or $664 million, from 2.5 million shares, or $245 million in the third quarter. Check out his SEC filing here.

Then there's the mighty John Paulson of New York-based Paulson & Co., who raked in Sun King-like riches betting hard against subprime mortgages.

The hedgie remains a dedicated gold bull: GLD is the biggest holding in his fund, followed by sizable positions also in Bank of America (BAC), AngloGold Ashanti (AU), and Citi (C).

Peruse Paulson's portfolio for yourself here.

Finally, David Einhorn of Greenlight, whose bearish bet against Lehman Brothers proved prescient, also revealed he's still got some love for gold.

His latest 13F reveals that Einhorn did cut back his position in Barrick Gold (ABX), but he continues generally to like the gold miners, maintaining a stake of 3.2 million shares in Market Vectors Gold Miners (GDX), an ETF with holdings including Eldorado Gold (EGO), Goldcorp (GG), and Kinross (KGC), worth $147.9 million.

In October 2009, in a speech before the Value Investing Congress, Einhorn outlined why he thought gold could be a worthwhile investment, looking ahead.

"I have seen many people debate whether gold is a bet on inflation or deflation," he said. "As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker's austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked."

Einhorn added, "Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis."

More news for gold bulls to noodle on: This morning, Dennis Gartman, editor of The Gartman Letter, notes that Russia's central bank has again increased its holdings of gold a bit in January compared to December, having added 800,000 ounces of gold.

This is one more bullish endorsement for gold, notes Gartman: "Russia has long said that it intends to bring its holdings of gold eventually to 1,200-1,300 tonnes. As of the end of January it has approximately 640 tonnes of gold on hand. It has a long way to go to reach its goal."

The yellow metal's move in the past few months has been a twisty one: Gold surged to a record high of $1226.56 an ounce on December 3, but then slipped to $1096.95 by year-end as the greenback strengthened.

However, gold has since bounced back, gaining 2.36% last week to close at $1119.20, according to Bloomberg data.

But gold's recent pop is in trouble, according to Tom McClellan of The McClellan Market Report.

In a recent note to clients, the technician pointed out that, when gold prices move upward but GLD ounces move downward, it's a sign that the gold rally isn't likely to continue. When GLD ounces move up along with gold prices, he emphasizes, that provides confirmation of the move.

Here is a chart McClellan passed along for our review:

Examining GLD assets can also be a means of gauging investor sentiment on a larger time scale, McClellan says. GLD, he writes, is now the easy way for the average investor to get invested into gold, without having to rent a safe deposit box.

"So when the assets grow or shrink too much on a larger time scale than this," McClellan notes, "that can be a sign of a sentiment extreme. For now, I see the tepid response in GLD ounces as a sign that gold's pop is in trouble."
No positions in stocks mentioned.
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