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Beware the Coming Collapse of Gold

Last year’s sure thing is rapidly turning into this year’s sure loser. After bringing in a torrid 29% return in 2010, the barbarous relic has only managed a flaccid 7% loss so far this year, much to the distress of hedge funds and gold bugs alike. The triple top on the charts that set up over the last three months could not be more clear. What is giving traders ulcers now is the prospect of a much more serious sell off in the yellow metal in coming weeks and months.  

They are right to be worried. The shift out of hard assets and into paper ones, like stocks, has been undeniable in 2011. One of the main drivers for gold in recent years has been buying from a newly enriched middle class in emerging nations. They have been joined by their own central banks, which have been scrambling to find alternatives to the US dollar to store massive reserves generated by record trade surpluses.

 It’s looking like inflation fears are going to pee on this parade. A witch’s brew of rising commodity prices, soaring real estate, and increased wage demands has sent inflation over 5% in China. Much higher figures can be found in India and Vietnam. This is prompting governments to sharply raise local interest rates, making gold a less attractive investment alternative.

That’s just for starters. The CFTC has already raised margin requirements for the entire metals complex to dampen unwarranted speculation. While JP Morgan and Goldman Sachs managed to get “grandfather” exemptions to keep the markets open (as I do), most smaller players are having to pay up, increasing the amount of capital they must commit to each trade, reducing returns. Small and medium sized hedge funds and wealthy individuals trading on margin provided much of the juice for last year’s bull market.

Have you seen all of those late night ads on TV offering to buy your old gold? These fly by night companies have sent scrapage supplies soaring to four times 2009 levels, even though they often only offer ten cents on the dollar. The rise of this new supply has been so fast that many wholesalers are becoming glutted with inventory.

The selling has been so aggressive, that it has spread like an out of control virus to the rest of the entire metals complex. So far this year, silver (SLV) is down 8.5%, and platinum (PPLT) %. To throw the fat on the fire, one large hedge fund was seen yesterday unloading a long term position which took it down to a new three month low at $1,224. Others such hurried liquidations are expected to follow. This is truly the commodity that takes the stairs up and the elevator down.

To prove that I put money where my mouth is, I have been actively shorting gold for the last few weeks. “Macro Millionaires” who followed me into my options play are now up 25% in ten trading days, and have been up as much as 35%. If you can’t, or don’t want to put the options trade on, you can look at the 1X short gold ETF, (DGZ), or the leveraged 2X ultra short version (GLL).

How far can gold fall? Let me provide some frightening downside targets:

*$1,324 – The October and November support level we touched today.
*$1,277 – The 200 day moving average, the next stop.
*$1,150 – The summer, 2010 low.
*$1,050 – The old resistance level that was shattered in October, 2009 by the Reserve Bank of India 200 tonne purchase.
*$1,000 – Worst case technical support suggested by analyst Charles Nenner.

Mind you, I think gold is still going up long term, and think that the old inflation adjusted high of $2,300 is a chip shot in a couple of years. This is just a little counter trend scalp to take advantage of overly bullish traders who have been caught off guard.

By. Mad Hedge Fund Trader




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  • Anonymous on January 26 2011 said:
    Interesting take, MHFT. I believe it was Marc Faber who pointed out that during gold's incredible bull run from 1971 to 1980 there was a huge pullback - around 50% in 1974 (I think ;-) ). He also talked about how savvy investors who knew that the fundamentals for a bull market in gold were still there, if they could keep their heads, bought through the correction on a dollar cost average basis and came out... well, "golden" on the other side. I agree with your "chipshot" theory of $2300. I think it's going way over that. I wonder, what is your take on silver? I also wrote an article on the recent downtrend in metals at http://www.schaefreport.com/2011/01/26/pullback-in-precious-metals-a-buying-opportunity-or-a-bubble-bursting/ although mine doesn't hold a candle to yours. Check it out if you want.-Schaef
  • Anonymous on January 26 2011 said:
    OMG! You must work directly for the Obama administration...do you think paper and ink are worth anything? then I can sell you my monopoly money!
  • Anonymous on January 26 2011 said:
    in reply to Steelerdude remark:No (I don't think so not knowing the person who wrote this article) He is only trying to alert the more intelligent readers that there may be a short term pull back in gold and to buy it when it drops because he (As well as I do expect it will)the writer even says that in his last statement:"Mind you, I think gold is still going up long term, and think that the old inflation adjusted high of $2,300 is a chip shot in a couple of years. This is just a little counter trend scalp to take advantage of overly bullish traders who have been caught off guard."Which I think is too low in my estimation.. I am more inclined to be with the people like George Celente and Porter Stansbury who say that we (will) have gold going to as high as $5000- $6000..
  • Anonymous on January 26 2011 said:
    All the gov has to do to send the price of silver to the ground an buried forever is to. call all in the coinage an melt what ever is in them. then sell this on the open market. Gold to open the vault in fort knox an sell. Any way i think the gov plan is to get every thing worthless. So when the collapse comes we will except the nwo currency
  • Anonymous on January 26 2011 said:
    @ SteelerdudeWhile I agree with your base argument that fiat currencies are manipulated and the trend is for them to lose value, it's beyond ludicrous for you to insinuate that they have no value. If they have no value, why do merchants accept them in exchange for my daily hamburger or my package of toilet paper rolls? If what you are saying is true, then why not see gold trade at $1,000,000 per ounce? Why stop there? Maybe $1,000,000,000? See how dumb your argument becomes? The author himself said that he viewed $2300 gold as a near certainty, but that technical conditions exist that could temporarily depress the price towards $1000. I don't think that qualifies for him "working for Obama".
  • Anonymous on January 26 2011 said:
    Hey hear that everyone?!Sell all your gold and buy STOCKS!!! :D
  • Anonymous on January 26 2011 said:
    I think to have a long gold position will prove to be a good insurance policy against the daily devaluation of paper & ink.That ain't rocket science!Gold remains rare and it's price can only be manipulated to a given level as it's cost is about 850 USD per Oz to mine Vs paper & ink.Regardless of this, gold will always remain a true store of wealth. Paper can be printed at will and the more they print the less purchasing power we will have. The only thing keeping our fiat currencies afloat is our faith in the paper it is made from as an honest method of exchange. The fiat paper and monetary system we trust is far from being honest and we the people will always pay for the consequences of engineered, legalised robbery & corruption of a debt based system. We need a revolution!
  • Anonymous on January 26 2011 said:
    very few of us can time these pullbacks, so it's best to be conservatively invested in PM's, with adequate cash and other investments, light on leverage.Wake me up when the correction's over, dude.However, one needs to be ready for sea changes, like when the smart money finally realized that Volcker and Reagan were serious about slowing down inflation-- 1980. That started a 20 year bear market, which I wouldn't have deep enough pockets or time to wait out.
  • Anonymous on January 26 2011 said:
    :lol: What everyone seems to be missing, is the simple fact, that an investment in SILVER, has more 'leverage', than an investment in gold - for the 'small' investor... 200 or 300 ounces of silver, bought at $20 or even $30, and sold at $50, is much more likely to happen, than a similar rise in gold...
  • Anonymous on January 26 2011 said:
    Dang, That is a naive viewpoint... what do you think will be "backing" the new currency? A country will cannot default on its paper, and then merely print new... paper. It is actually an incredible strategy - if our govt could actually pull it off - to let the USD be slowly devalued (deny and delay policy) so we actually do pay off our debts with cheap dollars, AND THEN use the gold in our possession (assumed but no longer certified at 8K tonnes) to back a new US currency. That would be genius!Remember, the US still has (supposedly) the largest amount of gold than any other nation.
  • Anonymous on January 26 2011 said:
    @Larry...Supposedly there has not been an audit of the amount in American gold in over thirty years...State Secret...so Fort Knox may be empty
  • Anonymous on January 26 2011 said:
    [quote name="Dang"]All the gov has to do to send the price of silver to the ground an buried forever is to. call all in the coinage an melt what ever is in them. then sell this on the open market. Gold to open the vault in fort knox an sell. Any way i think the gov plan is to get every thing worthless. So when the collapse comes we will except the nwo currency[/quote]????Yes! YES!!! and then the Treasury (or Treasonry) Dept. can issue colored beads instead! I vote for a nice shade of teal for the dime.
  • Anonymous on January 27 2011 said:
    I make no claim to being highly experienced or qualified in the matters of world finance and I do not base my opinion on historical theories and infamous American trading greats. I do find it a little amusing that a lot of the comments are losely based upon what America will or wont do with mush less priority being based upon what the rest of the world is actually doing..... So as a day to day trader in the real nuts and bolts of raw base commodities and being involved in the actual physical buying and selling of ores,nuggets, diamonds and cathodes, allow me to present a real fact to all of you. Most of the smaller traders are instinctively way ahead in this US Dollar game in that they no longer trade in Dollars and most insist in commissions now being paid in alternative currencies! Fact... none pf them want to be caught holding dollars in their accounts or being stuck in a contract that dtermines that their payments over the next year or so is going to be in US Dollars.
  • Anonymous on January 27 2011 said:
    [quote name="Scott"]@ SteelerdudeWhile I agree with your base argument that fiat currencies are manipulated and the trend is for them to lose value, it's beyond ludicrous for you to insinuate that they have no value. If they have no value, why do merchants accept them in exchange for my daily hamburger or my package of toilet paper rolls? [/quote]Steelerdude is correct in that 'intrinsically', fiat currency has no value. The only reason why you can exchange fiat for a hamburger is because it is exactly that, "fiat", meaning the Government says it has value, not because it has intrinsic value. And if you trust the Government long term, then God help you.
  • Anonymous on January 27 2011 said:
    The Treasury has already taken the copper out of pennies so our coins will be made of cardboard next.
  • Anonymous on January 28 2011 said:
    :eek: What about treasuries?
  • Anonymous on January 29 2011 said:
    [quote name="Dang"]All the gov has to do to send the price of silver to the ground an buried forever is to. call all in the coinage an melt what ever is in them. then sell this on the open market. Gold to open the vault in fort knox an sell. Any way i think the gov plan is to get every thing worthless. So when the collapse comes we will except the nwo currency[/quote]NWO is going for the SDR. you'll still have your basic currencies. Gold will go up - we have some testing of support - that is all.
  • Anonymous on January 29 2011 said:
    I wonder what would have happened to my health if one of my finance students had told me that gold was going to 2300, but might temporarily fall back to 1000. With luck I would just have taken a seat and done some deep breathing. But if other students had agreed with him or her, that would have been it. I would have left the building on a stretcher.
  • Anonymous on January 29 2011 said:
    As long as the Middle East continues to be a powder keg, and fiat currencies contunue to be manipulated by desperate govt's who take the easy routes to stave off collapse, people will turn to gold and silver. The clear-thinking people of the world already see what's happening, and more are jumping on board everyday. The world banking conglomerates are a power & control consolidation scam, hence the masses must turn to time-tested precious metals.
  • Anonymous on January 30 2011 said:
    [quote name="Silver Dollar Value"]The Treasury has already taken the copper out of pennies so our coins will be made of cardboard next.[/quote]Most of our money does not exist in physical form at all and I am sure those in power would like to keep it that way.
  • Anonymous on January 30 2011 said:
    [quote name="Silver Dollar Value"]The Treasury has already taken the copper out of pennies so our coins will be made of cardboard next.[/quote]If that's the case I'm buying into pulp and paper. lol
  • Anonymous on January 30 2011 said:
    Gold is money & has been for 5000 years. It will be money after we are papering our bathroom walls with federal reserve notes & burning them in the fire place.From a technical perspective there is no such thing as a triple top. Double top yes. But each time it bumps up against there it is chipping away at supply until it lets loose.
  • Anonymous on January 30 2011 said:
    I wonder what kind of people are teaching economics and finance these days.I hear university graduates saying things about fiat currency that belong in comic books. What went wrong in the US was that the voters reelected George W. Bush, and he left a mess that the next president was not smart enough to clean up. I didn't think much of Ludwig Erhard in Germany, but by sticking to fundamentals he put the German economy on the high road.
  • Anonymous on January 31 2011 said:
    Lets talk about the money supply...real money is to be issued by a government...but let discuss the 300 Trillion (yes trillion) in Derivatives are being traded...over 50,000 jobs in the NY finical district just trading Derivatives! So when this part of the money supply (funny money) corrects from speculation...collapse is not only obvious, but can be predicted by history.
  • Anonymous on February 01 2011 said:
    You gotta see the bigger picture here guys - the powers that be want a world currency called the Bancor. The IMF published a paper calling for this. But to get people and nations to accept this they need to create problems with the dollar and other major currencies then hail the Bancor as the solution. Same old strategy. How many economic experts have you seen calling US economic policy ill-advised at best? It's all part of a carefully constructed plan being executed one step at a time. Just make sure you're well positioned when it all hits the fan.
  • Anonymous on February 01 2011 said:
    I can understand why this article does not list an author's name. Actually the "Mad Hedge Fund Trader" is a fairly good name for someone who believes gold could actually drop to the $1000 oz. level.He conveniently forgets about the demand from the rest of the world. China alone is encouraging its population to purchase gold on the open market and yes, it is available without the high fees charged by US gold dealers. China knowing it can't buy as much gold on the open market as it would like, without pushing up the price simply buys gold mines with the billions in US treasury notes it holds. Then there is India. The Indians have this quaint custom of buying gold jewelry rather than putting their money into banks. This year, the two countries alone will buy half the gold mined in the world. At its worst gold may drop slightly below the $2000 level but the $1000 level, NEVER.
  • Anonymous on February 02 2011 said:
    2007.5-Two Bear Stearns major hedgefundsfailed in Silver Shorts & Real Estate Long2008-JPMorgen took over B.S.toxic assets By Aug'10-JPM had liquidated Silver ShortsSince then silver has played catch up toreach 50/1 gold/silver ratio 1400/50=281st Great Depression set ratio at 35/1 soif gold pulls back to $1000/35=28 means silver is most stable currency for nowebay bids on silver coin prove this out
  • Anonymous on February 25 2011 said:
    [quote name=""]very few of us can time these pullbacks, so it's best to be conservatively invested in PM's, with adequate cash and other investments, light on leverage.Wake me up when the correction's over, dude.However, one needs to be ready for sea changes, like when the smart money finally realized that Volcker and Reagan were serious about slowing down inflation-- 1980. That started a 20 year bear market, which I wouldn't have deep enough pockets or time to wait out.[/quote] Umm.. Reagan sworn in on 1/20/81. Dow= 946.25. Reagan leaves office 8 yrs later on 1/20/89. Dow=2239.11 for a 236% increase. Ill take that bear market any day.
  • Anonymous on February 26 2011 said:
    How are those shorts working out? Can you update us with your latest position and thoughts?

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