Saturday, July 5, 2008

Urgent Alert: Why Gold Will Jump $200 in One Day

I am sounding a "trading alert" in this column. The alert is cheap gold. Dirt-cheap gold.

As any contrarian knows, the biggest, fastest payoff a speculator can earn is when an extreme situation corrects itself.

For instance, betting against tech stocks was unbelievably profitable in 2000. This was one of the greatest extremes in the history of finance. Techs traded for 100+ times earnings (many had zero earnings), so the likes of Cisco, Yahoo, and JDS Uniphase had tremendous distances to fall.

The same goes with homebuilding and mortgage stocks in 2007. "Extremely" stupid lending practices helped send mortgage giant Countrywide Financial from $43 per share to $5 per share in just 12 months. Shorting Countrywide and homebuilding shares was like sitting down at a broken slot machine.

Right now, we have an extreme situation in the commodities market… one you can use to make a lot of money in gold. It all comes down to the gold/oil ratio. Because gold and oil respond similarly to inflationary pressures, the two tend to trade in a predictable range.

Over the past 25 years, one ounce of gold has bought, on average, 15 barrels of oil. When an ounce of gold can buy 20 barrels of oil, it's expensive and due for a fall. When an ounce of gold can buy less than eight barrels of oil, it's cheap and due for a rise.

Right now, gold buys you just 6.5 barrels of oil – less than half its traditional purchasing power. The tremendous rise in crude oil prices is the cause of this situation. Crude has gained 155% in the last 18 months. Gold has gained "just" 50% in the same time. As you can see from the chart below, this disparity has left the rubber band pulled extremely tight.

There's no guarantee this extreme will work itself out quickly. But this is one trade worth keeping on the radar. If oil stubbornly refuses to correct from its levels above $140, gold could easily pop to $1,000 and beyond in just a few days. In 2005, a similar extreme reading preceded gold's rise from the mid-$400s to the mid-$600s.

If you haven't bought gold as "catastrophe insurance," now is a great time to do so. If more cockroaches crawl out of the mortgage debacle and into mainstream headlines, you'll likely get a $100-$200 per ounce jump in your investment. Whether it's through buying bullion, gold stocks, or an ETF, right now is an extreme opportunity in gold.

Good investing,

Brian Hunt,
Editor in Chief, DailyWealth


  1. What is more likely to happen at the beginning of summer oil go down or up?

    Also if oil goes up gold will follow. I think owning some gold and silver is a great idea. If the ratio comes back to 15:1 and oil stays at $140 gold will be $2100 an oz!

  2. One assumption that needs to be addressed is...

    Who is driving whom?

    Is gold driving the price of oil, or is oil driving the price of gold.

    Basically, the ratio says that the g/o ratio is historically 15.. OK.

    So if oil stays at $140ish, then gold goes to $2100..OK....

    That means that Oil drives gold.

    But, what if Gold drives Oil.. Which is something to consider.

    In that case, the historic ratio is still 15:1, but with gold at $925, then oil should be $61.

    So, long gold OR short oil.. That's the question.

    My thinking is that that short oil option is the lower risk of the two.

    You could always take both plays, or set up a couple of spreads that take advantage of this situation.

  3. How do I invest in gold? Were do I look,Whatt firms to use etc..

  4. So, it looks like if people would have followed my advice and shorted oil on July 7th, at $142/bbl, today with it at $124 they'd be money

    Which was the bigger play recommended..

    But, you'd also be money ahead with the other option of longing gold... On July 7th it was about 924/oz... today it is slightly higher at 927/oz..not worth the volatily swings, but still $ ahead.

    I say, stay with the trade... don't liquidate winners!!

    Good luck.

  5. So hopefully those fateful followers of mine who have been following this trade have exited their gold position back at the end of July when their trade went slightly negative...

    But, hopefully they have stayed with the short oil play, as they would be smiling quite big right now.

    Stay with the short oil play.. This little bear run isn't over yet.

    Also, get ready to load up on Gold... I'd say within a week or two, a bottom should be placed, and the bull will continue..I have a target of about $775 or so as the bottom of this little bear run.

    Good luck.

  6. What about silver? What do you predict the bottom to be for silver?

  7. I'd put the bottom for silver to be about $13.75 or so.

  8. Right now is the time to start picking up some Silver..

    I'd put protective puts around 12 or 12.50.

    Good luck.



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