By Sean Hannon, CFA, CFP, of EPIC Advisors from

Differences of opinion make markets. When I look to buy, someone with the opposite viewpoint must be willing to sell. Knowing this, we often expect diverse opinions to exist about the value of any asset. Nowhere is such disagreement more evident than with respect to gold.

We know the value of an asset should be the sum of its expected future cash flow adjusted by a discount factor that accounts for risks taken. As a commodity, gold does not offer a series of cash flows. Whereas other commodities satisfy set needs -- i.e., oil for fuel, corn for food -- gold has little industrial use and its main benefit is its role as a store of value.

Over centuries, gold has been seen as true money that represents tangible wealth. Having lived through a world of market manipulation, groups of investors long for the time when gold as true money will replace fiat money, which is backed by nothing other than a government's promise to honor the value of the paper currency.

I agree that the current fiat system is flawed and opens itself to disruptive forces. However, I am not convinced gold is much better. What the gold bugs fail to answer is why does gold represent true wealth? Their answer tends to be that it always has. My counter would be that placing faith in gold as true wealth is no different than placing faith in fiat currency as a store of wealth.

If we reach a point of chaos where paper money fails, people will value gold as a means to attain that which is needed to survive -- i.e., food and energy. If you need to invest in a commodity, why not skip this middle step and buy oil and corn as opposed to gold?

I am certain my attack upon the value of gold will spur many points of agreement and disagreement. That is the essence of how markets exist.

In light of the economic events of the past year, the current environment is one in which gold should shine. The financial markets have imploded and interest rates have been cut to zero. As an inflation hedge and store of value, gold should skyrocket. Instead, we see a spike above $1,000 in March 2008 as Bear Stearns failed.

From that point, the news grew worse, but gold set a series of lower highs -- $977 in July, $913 in October and $882 in December -- while maintaining a persistent downtrend. Lower highs within an existing downtrend are clearly bearish. Combine the bearish view with an uptrend from the October low and we see a triangle that should offer a dramatic move for the price of gold.

Traditionally, one would wait for a triangle to result in the price spiking higher or lower before taking a position. I believe gold will break lower. Therefore, in my weekly newsletter EPIC Insights, I recommend a short position as this week's technical trade. If the triangle does break lower, we can expect to see gold trade toward $700 in the coming weeks.

For individual investors, ETFs offer the easiest way to short gold. I have always used the iShares Comex Gold Trust ( IAU) as a proxy for gold. With the expectation that gold will retest $700, I recommend a short position in IAU as this week's technical trade. By using the 10-day moving average -- currently $865 -- as our stop-loss, we have a trade with very limited downside (1%) and tremendous upside (18%).
At the time of publication, Sean Hannon was short IAU.

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