Avoiding the Gold Trap

NEW YORK ( TheStreet) -- Gold has finally cracked $1,000 an ounce. It's been what all the gold bugs have been waiting for. Is now the time to go "all in" on gold? I think there's a classic trader's trap in gold right now and I'd advise you to steer clear.

Everything is working to gold's advantage right now and every argument that can be made seems to point to it moving higher and for you to consider being long gold and gold stocks.

There is, of course, the very obvious inflation trade that draws many investors to gold.

The historic deficit spending by the federal government to try to avoid a cataclysmic, "Depression-era" replay does not come as a free lunch, the gold advocates say.

The huge stimulus package, bailouts for financial institutions like the Troubled Asset Relief Program, the Term Asset Loan Facility program, guarantees of various other commercial and residential debt instruments and even "cash for clunkers" have sent the federal deficit in 2009 to an estimated $11.8 trillion dollars. Inflation surely looms and with it, higher gold prices.

And September is historically an excellent month to be long gold. Experts note that gold has rallied in 16 of the last 20 Septembers. They cite the start of gold accumulation in the fall by commercial metals providers for Christmas jewelry, as well as the oncoming Ramadan holiday, when gold is a traditional gift.

The $1,000-dollar-an-ounce mark has taken on a magical aura since gold had failed to break through it twice previously. An old saying on the floor among commodity traders is "there ain't no such thing as a triple top", meaning that the third time up, markets generally follow through. With gold above $1000 today, it would seem the perfect time to get in.

But I don't buy it.

First, the inflation trade has been for me too obvious. Because of it, everyone has seen the logic and been long gold -- at times it has seen tremendous short-term selloffs because the trade has had only buyers and been a 'crowded' trade.

The run-up from $965 we saw just before the holiday is a great indicator of how "crowded" that trade has become: It's only at moments when no one is talking or thinking about gold that it makes its most decisive moves. Right now, everyone's talking about gold. That's not a good sign.

The chart also looks too obvious. I think gold is ripe for what we used to call a "head fake" -- where the breakout looks to be taking off and then quickly reverses, catching everyone long. Under this scenario, I'd expect gold to rally enough to confirm the breakout, maybe for another day or two, then quickly take a dive of perhaps 5% -- forcing many of the "weakies" (investors who cannot sustain a loss) out of the gold market again.

Finally, I particularly dislike the gold and mining stocks -- mostly because they've massively outperformed the metal itself so far this year. Even if the run-up in gold continues, I'm not going to bet on the continued strong run up in mining stocks. For example, Freeport McMoRan Copper & Gold ( FCX) has rallied from a low of $16 dollars when it suddenly cut its dividend to trade Tuesday at $68.50 a share.

Now, Freeport was woefully underpriced in December 2008, as I pointed out then and recommended buying it. But now I think it's gotten far too far ahead of itself. In the gold trade, I'd much rather be long the physical metal than long the metal mining stocks, based on comparative value. That goes for Yamana Gold ( AUY), Randgold Resources ( GOLD), Newmont Mining ( NEM) and most of the other mining stocks which have followed a similar pattern to Freeport.

For all these reasons, I'm waiting for a better value in gold to add to my positions, both with the metal and associated stocks. But let me be clear: I believe you need gold as part of your portfolio. I believe that gold will trade $2000. I believe in the inflation thesis and don't see how the federal government can raise interest rates in so delicate a way as to avoid at least some significant inflation.

But as with all trades, timing is everything -- and right now it's just too obvious to be a buyer of gold and gold stocks.

That's why it has to be wrong.

-- Written by Dan Dicker in New York
At the time of publication, Dicker owned SPDR Gold Shares, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.

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