As everyone is proclaiming the wisdom in buying gold and buying more gold, is it blasphemous to be uttering the idea of shorting gold and related exchange traded funds (ETFs)?

It may be unconventional and risky, but the prospects of profitability in shorting gold are there if an investor is intrepid enough to take on the gold rush head on, writes Louis Basenese for Investment U. We don’t necessarily agree with the points Basenese makes, as we’ve bullish on gold for a long time now, especially as long as it’s above its trend line.

But he sure makes some interesting points and arguments for taking the short side.

  1. It’s contrarian. Everyone is buying gold, but a contrarian investor will be the one deliberately going against the conformists.
  2. Informercials. When investments get so popular that they are advertised in the wee hours of the day with “but wait, there’s more” offers, it may just be time to get out of the general flow.
  3. Truth in rumors. There was a false rumor floating around about Germany, the world’s second-largest holder of gold, selling gold to offset its deficit. This may be a prudent idea with gold prices as high as they are, and if governments start dumping gold, then prices will quickly drop.
  4. Gold-to oil-ratio. History has shown that an ounce of gold would purchase around 14 barrels of oil, but now gold can get you almost 23 barrels, which is 64% above the historical mean.
  5. Gold-to-silver ratio. An ounce of gold usually buys 31 ounces of silver, but the ratio currently hovers around 73 ounces, which is 134% above its historical mean.
  6. High HGNSI index. The Hulbert Financial Digest has tracked the average recommended gold exposure among some newsletters, which comes out around 32.6%, but it is now at 60.9%. They found an inverse correlation where if the index is high then gold is heading down.
  7. Jewelry drives demand. Around 75% of gold is demanded by the jewelry market. Investors, be it government or speculators, won’t be able to sway the gold market as much as consumers.
  8. Right now. Gold is supposed to increase in value as the economy worsens, but gold has not flown past last March’s high. By factoring all the cash infusions into the markets on a global level, we are at a low economically and at a peak for gold.
  9. Analysts. A majority of analysts believe gold will reach a minimum of last March’s high of around $1,032 an ounce this year. Yet, these were probably the same analysts that screwed up all the other forecasts we already heard about.
  10. Hedge funds. Hedge funds, or institutional speculators, do provide a boost in gold, but a majority of them have keeled over last year. Gold prices should reflect the absence of these former behemoths.
  11. Vacillating investors. In a tumultuous market, we use gold as a safe haven, but once the economy stabilizes, investors will flock to riskier assets.
  12. Recovering economy? The Federal Reserve and Obama see the recession ending by the second half of ’09. An average recession lasts 14.4 months. The Baltic Dry Index has also experienced a 61.4% rally from its December low.

PowerShares DB Gold (DGL): up 5.2% in the last week; up 17.3% in the last month; up 32.9% in the last three months

ETF DGL performance

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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