Why I Am Short Gold Futures

After a set of unmitigated bullish opinions, we now see some experts correctly identifying that we are in a deflationary cycle and that deflation hurts gold prices as here. They nevertheless then proceed on the basis of Elliot Wave theory or some other technical wizardry to forecast... a spike to higher prices. Some justify this stance on “oversold conditions” or “prevalent excessive bearishness."

That makes up for good readership, as does anything pampering to gold fans, but little sense. On what basis can one reckon that there's prevalent bearishness? I see truckload of articles predicting price spikes, after an 11-year-old bull market.

Gold bulls swarm all over numerous websites, gloating over price rises and advocating backing up the truck anytime prices move down. Is that prevalent bearishness?

Any increase in central banks balance sheets has (ignorant) commentators predicting that "fiat currencies" are headed to inflation Armageddon, not realizing that those bloated balance sheets are just a (so far mostly futile) central banks effort to counteract deflationary forces. Anticipating hyperinflation on that basis alone is in fact giving central banks more credit than they deserve: they can indeed boost money supply at will (the M in MV), but only the market decides if and when that money will be put to use (the V in MV). And the market is in deleveraging mood (V nosedived), so PT (nominal GDP) at best creeps up.

Look at the Bank of Japan balance sheet in the last 10 years or so and show me Japanese hyperinflation, then I’ll believe you when you say a bloated central bank balance sheet means prices will rise.

As was pointed out elsewhere, it costs at most about $1000 to get an ounce of gold above ground, and add to the 170,000 above-ground-tons of gold ever mined, which are still around and will never disappear. As we speak, 2500 tons of gold are added annually to that stock. At current prices, miners enjoy at least a 50% net profit.

Gold was trading in the triple digits as recently as September 2009 (I am sure most readers forgot this simple fact). It has since enjoyed a 100% ride in 2 years so everyone is used to current prices and, most importantly, used to this trend, just as people were used to Phoenix or Las Vegas real estate moving up 25% each and every year.

In a deflationary environment, I see no reason why we would not get back to the triple digits in a matter of 18 months to 2 years.

Hedgies (including the best and the brightest such as John Paulson and David Einhorn) are rumored to have huge bets on gold and enjoyed the ride up. If they feel the party’s over, count on them to walk the thing back down to the lobby where it started.

Am I sure of this? Of course not, in markets anything can happen.

Is it worth the trade? Yes. I am short Gold futures (“GC”) and will roll it over until something makes me change my mind or my stop gets hit. At $1,920, that stop is -- at least for now -- safely out of reach.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.