Gold Q&A: Answers to our Subscribers' Most Pressing Questions

• Is gold overvalued? If not, how high can it go?

  December 14, 2012, 12:00 PM

  I am basically coming to the conclusion that the price of gold has been outstripping the fall in the purchasing power of the USD for a while now. The main explanation for this is simply that gold traders are building in a premium into gold prices based on future erosion of the USD as a possible outcome of QE and global major central bank monetary easing i.e. expected inflation. Currently inflation is expected to rise. This has not happened, and interest rates will remain low for at least two years if not longer. Consequently there is no real reason for gold to trade relatively high – until inflation is confirmed which may take several years. In the meantime, gold will either stay range-bound at best, or could drop much further. My question is how far could you see gold falling in this "overvalued" context, and how long could it then take before gold prices break out decisively?

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• Why would I use gold and silver ETFs?

  December 14, 2012, 12:00 PM

  I'd like to hear an explanation of where security lies in holding ETFs. I hear they are in trusts, but why should anyone be trusted now? I certainly don't trust overseas bullion vaults.

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• Will silver soar to $75?

  November 16, 2012, 12:00 PM

  When gold broke above its 1980 all-time high it quickly accelerated towards new, higher highs, whereas silver is still below its all-time nominal high. When silver breaks above its April 2011 high, is it reasonable to expect it to soar towards $75?

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• What do you think of BullionVault and GoldMoney as platforms to buy physical gold?

  November 16, 2012, 12:00 PM

  What is your view on BullionVault vs. GoldMoney as a platform to buy physical gold?

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• What do you think of allegations that JPMorgan manipulates the silver market?

  November 16, 2012, 12:00 PM

  What is your take on the allegation of JPMorgan's manipulation of the price of silver with a gigantic short position for around 4 years? Thanks.

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• Is it OK to be ultra bullish on precious metals and take huge speculative positions?

  November 16, 2012, 12:00 PM

  I appreciate your earlier email and plan on subscribing to your market letter for 1 month and then will go from there.

  Because I'm so ultra bullish on precious metal stocks for at least another month, I've decided to go whole hog on out of the money mining stocks options.

  If I'm wrong, then I just blew $5k!

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• Why do you suggest closing long positions but not opening short ones?

  November 16, 2012, 12:00 PM

  If I am confident enough that I need to take a loss in the face of more impending declines, why am I not confident enough to hold short in anticipation of the same?

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• Why do you suggest looking at each trade individually?

  November 16, 2012, 12:00 PM

  I see the point about looking at each trade individually, but allow me to present you with a different real-world scenario: I will call my stock 'GOLD' and assume it behaves like GDX, but moves about 50 cents for every $1 move in GDX. Consider, please, the following situation:

  1. My BUY price is $34.50, which nets me a total of 9,155 shares. GOLD falls to $33.77. If I exit here, I incur a loss of $6,774, or, let us say, about 200 shares of GOLD…
  2. …At this point, GOLD must fall to $33.10 before I can use my proceeds to buy back in and 'erase' my loss. Obviously, if it falls further I am ahead; but if GOLD doesn't decline to at least $33.10 and instead moves back up, I must now buy back in at a higher price and add to my $6,774 loss.
  3. Now, in the current environment, GOLD could go up or down. I am going to assume that at some point GOLD will return to $34.50 - that's a pretty sure bet. The question is, how much further below $33.77 might it move first, and am I inclined on betting on that move? Again, to break even it has to hit $33.10. To make any real money, it has to hit $32.50 or so. My position is that, in order to risk the 'loss' of my 200 shares, I must be adequately compensated. And of course, that depends on the size/probabilities of a move downward.

  My point is, if I were to look at this trade in isolation, yes, sell now before it goes lower. But that is not always the way to look at it in practical terms. I might suffer a bigger paper loss here temporarily, but there is really little chance of me translating that to a real loss - unless the bull in gold changes. And I am all about preventing losses. If you see anything wrong with my approach, I would appreciate (really) knowing.

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