Gold Fever! Time to Sell...? - 7 October 2010

With Gold Prices making headlines, should smarter investors be selling...?

"WE'RE ABOUT to get the first sell signal of the year for Gold Mining stocks," my friend Jeff Clark told his Short Report subscribers yesterday, says Dr.Steve Sjuggerud in Daily Wealth.

And when Jeff talks, I listen. He is the best short-term trader I know.

Jeff says Gold Mining stocks are seriously "overbought" on his studies. And he's looking for a 10% or so fall in the major gold mining stocks, starting about now. The duration of the trade could be anywhere from two to six weeks.

It's not just Jeff. Other "smart money" traders are worried about gold today, too. In Monday's Gartman Letter, Dennis Gartman was perfectly clear:

"We will caution against any and all Buying Gold at these levels."

Dennis knows commodity trading. He's written The Gartman Letter, daily, for 23 years. It's the one letter I read every day.

But does this mean it's time to sell? Is it time to get out of Gold Mining stocks?

Actually, no...

That's the short answer from me. The longer answer is, it depends on your situation. You see, in my True Wealth newsletter, where we're long-term investors, we're keeping our position in GDX, the big Gold Mining stock fund. Instead of trying to time the zigs and zags, we're staying in.

Chris Weber, a fantastic investor, is clearly long-term bullish on gold as well . He's also staying in.

But in the short run, if you need the money, and if you're sitting on huge gains that you don't want to give back – or you're too levered by using, say, futures or options to play the Gold Mining sector – you might want to scale back. Listen to the smart traders, like Jeff Clark and Dennis Gartman. They think odds are high, respectively, for a 10% pullback in gold stocks and a $100 fall in the price of gold.

They call gold and gold stocks "overbought", which is a term from technical analysis. I see gold as just too popular now. Dennis Gartman touched gold's popularity anecdotally in yesterday's Gartman Letter, saying he's never had so many calls for interviews from the media – and 100% of the calls are for his opinion on gold. He said gold fever is high... but that "fever's break".
 
It's not just Jeff and Dennis that see it...and it's not just anecdotal evidence. My friend Jason Goepfert at SentimenTrader studies sentiment. He says right now, public opinion on gold is at its highest level this year. The commodity futures contracts show the same thing. Large speculators are more "long" Gold Futures now than at any time this year.

So the time is ripe for a correction in gold – more so than we've seen so far in 2010.

But Dennis Gartman and Jeff Clark don't want you to confuse their short-term positions with their long-term beliefs. Dennis says:

"We are not bearish of gold and we shall not even for a moment consider being short of gold."

And even though Jeff is making a short-term bet against gold stocks, he won't stay short.

"It's difficult to short the sector as a long-term investment," he says, "because logic argues for higher gold and Silver Prices over time."

So long-term investors (like my True Wealth readers) should be prepared for some volatility, at the very least. No need to rush for the exits, unless you have an itchy trigger finger.

And if you're thinking about Buying Gold mining stocks, you might want to give it a couple weeks, based on the advice of better short-term traders than me – Dennis Gartman and Jeff Clark.

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