Thursday, April 21, 2011

Cautionary Comment From Wall Street Pit

Roger Nusbaum smells mania in the air, for gold and more so silver. His earmark is optimistic short-term forecasts from traders who are not gold permabulls.
I’ve read several commentaries from people who are not gold perma bulls making the case for some sort of big leg up in price over a short period of time. We own gold across the board for its diversification benefits and I have often said that if gold is the best performer you own then chances are stocks are struggling. That is true the vast majority of the time but not in the last couple of years.

If prices are starting to blow off up to some level then predicting how long it lasts and to what level prices could go is well beyond what I can do but I think it makes sense to think about proportion....
As is clear from the context, he's using a shorter-term prespective for "mania" - but he does take seriously the possibility of gold falling 50% from these levels. He suggests using stop-loss orders, selling some now or pre-planning an exit strategy.

One option for those who use gold for portfolio insurance would be to rebalance now. If the target percentage is 10%, and the portfolio now holds 12 or 13%, whittling the gold down to 10% would book profits and leave some room to buy more should the price tumble.

As for Nusbaum's worry that gold could fall 50% from here, it's at best too early. Gold has not gone parabolic yet.

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