Hola Amigos. Been a while since I posted, that pesky day job is keeping me busy again. Everyone seems to be in general agreement that we are in the worst recession/depression in a generation; hundreds of thousands of jobs are being lost every month, government is enacting huge stimulus bills and consumer spending has nosedived.



All of this uncertainty and government spending would seem to be positive catalysts for an investment in gold, and they have proven to have been so as gold has been one of the few positively performing assets over the past year. But has this run up in gold been overdone? I am starting to become of the opinion that it has. I'll start with an idea - has gold's performance been due to its use as a parking spot for cash proceeds of unwound trades and investments? Consider that short term treasury debt has been yielding close to zero and has been on a downward trend for the entire previous year.



Also consider that in 2008 money markets broke the buck and 25 banks, including some very large ones like IndyMac and Washington Mutual, failed. In addition, U.S. companies are expected to default on record amounts of corporate debt in 2009, making corporate bonds unattractive to park cash in (as a speculative investment I think there are some good opportunities). Given this choice of zero yielding instruments, I believe a large amount of cash was parked in gold by big money players during the crisis. This trade has paid well for those who got into it early but I think it will suffer as risk appetite returns to the market, and the data is beginning to show that it is. Notice in the above figure that short term rates are beginning to creep up slightly.

Bank borrowing from the Fed is coming down.



The usd/yen is bottoming



Investment grade corporate borrowing rates are easing



Additionally, gold is starting to take on some of the classic warning signs of bubble behavior; exhibit A is the super bowl commerical bought by "Cash4Gold". I have also heard a lot of "man in the street chatter" about gold as an investment, similar to people getting excited about buying oil at $140/bbl. Finally, I will post a monthly chart of the gold ETF GLD. In my opinion it is setting up for a possible double top formation. This in and of itself does not mean much but coupled with the economic data and bubble characteristics I think it gives gold a favorable risk reward for a short entry around $1000 an ounce. For the trade to be successful I would like to see gold break through $1000 on good volume sucking in all the late weak hands and then stall and violently reverse. If it breaks through, re-tests and continues upwards I think that would be evidence supporting a long entry and a continued bull run in gold. As always, not intended as advice.