All should have emboldened gold prices. And yet, the metal struggled to tread water. It’s actually down 2% since February.

Of course, the roar from gold bugs remains uninterrupted. They consider it heresy to suggest commodities correct, especially their supreme yellow leader. But they do. And I’m here to warn you to expect a correction in the short term for gold.

Four Reasons Gold Prices Are Headed for a Correction

Forget $1,000. The price of gold will hit $800 first. And here are the most compelling reasons why…

1. The technical indicators point to a pullback.

On Monday, gold hit its lowest price in five weeks. Ever since hitting $1,033.90 last March, it has struggled to gain momentum. While I’ll concede the long-term trend remains bullish, the short-term charts clearly point to a pullback. Most commodities experts agree that support rests around the $915 level. We’re perilously close now. If we break through that price, look out below.

2. Seasonality – the tendency for prices to strengthen or weaken throughout the year – bodes poorly for gold.

Historically, gold prices weaken the most in June and July. (They tend to spike in late September as demand for jewelry picks up ahead of the October-November festival and wedding season in India.) This week’s sell off could be the beginning of the traditional summer swoon. Now, gold bugs will refute seasonality this go round by asserting we’re not living in “normal” times. Thus, we’re not headed for a “normal” summer. That’s nonsense. The market is littered with poorer souls that invested based on the mantra, “It will be different this time.”

3. The primary catalyst to invest in gold – to hedge against inflation – is lacking.

We’re not anywhere near an inflationary environment. Instead, we’re staring down deflation. Case in point: The latest consumer price index (CPI) and produce price index (PPI) readings came in sharply lower than forecasts. In fact, CPI dropped 1.3% in the last year through May, the largest drop in 59 years. Gold won’t make any meaningful and lasting moves higher until inflation rears its ugly head again. Although inevitable, it could be a year or two before that happens.

4. Speculation and sentiment remain at fever-pitch levels.

Market-leading hedge fund managers remain heavily over-weighted to gold. The taxicab drivers of Wall Street – insurance companies – are even getting into the game. This month, Northwestern Mutual Life Insurance Co. announced a $400 million stake in gold, its first ever in 152 years. In perhaps the biggest sign of a top, though, Germany plans to unveil gold vending machines in airports and train stations. Bottom line, when everyone piles into one side of a trade, we know what happens. The market moves in the opposite direction.

Gold Prices: The Smart Money is Already Bracing for a Pullback

Please realize all we need for a gold price correction to materialize is a slight shift in sentiment… from wildly bullish to positive, not to neutral or negative. And the latest evidence suggests that shift could be upon us.

In the last week, the total volume of U.S. gold futures and options fell 3.6%, according to the U.S. Commodities Futures Trading Commission. Hedge funds and large institutional speculators hit reverse even faster, with “net long” positions dropping 9%.

Of course, retail investors – always late to a reversal – are clueless. The SPDR Gold Shares ETF (NYSE: GLD) – the largest gold-holding trust fund and most common gold investment for us working stiffs – ended last week unchanged, holding 1,132 tonnes.

I urge you not to be as foolish.

Remember, no investment goes straight up and no investment goes straight down. When it comes to gold, sharp and violent corrections are typical. I’m convinced another reversal is afoot.

To profit from it, consider taking a small stake in the PowerShares DB Double Short Gold ETN (NYSE: DZZ). It will provide you with 200% the inverse move in gold prices.

Now, if you’re too chicken to be contrarian, or remain an unrepentant gold bug, that’s fine. Just hold off on adding to your gold stockpiles. A better buying opportunity is coming.

Good investing,

Louis Basenese

Source: Why You Shouldn’t Expect $1,000 Gold Anytime Soon

Q: What are your thoughts on the drillers? – J.D.

A: That’s a pretty broad question, because there are several different kinds of drillers. However, high oil prices are good for all of them…

Natural gas, for example, is the commodity of the minute. The price of natural gas rose 113% since its low of $5.25 in September 2007. That’s important because 79% of the rigs drilling in the U.S. are looking for natural gas, not oil.

High natural gas prices mean strong demand for drill rigs. More demand means higher day-rates for the rigs. That means it’s a great time to own drillers. But is it a great time to buy?

It is… if you can find ones that aren’t making new highs already. Helmerich & Payne (HP), to pick one natural gas driller, is hitting all-time highs right now. You’re paying 15 times earnings and taking on the risk of the natural gas price falling.

I wouldn’t buy HP right now. But I do think there are other opportunities. I’m researching a couple for my S&A Oil Report subscribers right now.

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Q: What do you think of all the protests against high gas prices? – R.T.

A: In my introductory biology class at Penn State, my professor told us a story…

Some years ago, in central Pennsylvania, there was an abundance of rain, and the clover grew thick. Lots of clover meant the rabbits had plenty to eat. Happy rabbits did what rabbits do… and pretty soon, the place was overrun with rabbits.

Lots of rabbits meant the foxes had plenty to eat. They got fat and sleek. They also made lots of baby foxes. But after a while, those rabbits ate all the extra clover. That meant they weren’t making more rabbits quite as fast as before. Fewer bunnies meant more hungry foxes.

Eventually some of those foxes starved.

In terms of oil, we’ve run out of clover – big, easy-to-find, easy-to-pump deposits. So refining companies (the rabbits in our story) are hurting. There is too much competition for too few resources. Now the airlines, truckers, and SUV drivers (our foxes) are getting hungry.

The world’s demand for fuel is catching up with an industry that really hasn’t changed much since the 1970s. Oil and gas prices must respond to market forces (and go up) to make us change. The protests are simply the whimpers of starving foxes.

Note: I got loads of responses to my request for more gold funds…

The big one you mentioned was the Central Fund of Canada (CEF). This $1.5 billion fund holds gold and silver bullion. Currently, shares trade nearly 9% above the value of the fund’s assets. That means you’re paying $90 more than you need to on every $1,000 you invest in the stock.

That’s fairly unusual among gold funds. The largest of them all, GLD, trades at a 0.42% premium to its assets. IAU trades at a 0.16% discount to its net asset value. If you are just trying to buy gold, find a fund that is liquid and trades close to its net asset value.

Another mixed fund is the Gabelli Global Gold, Natural Resources, and Income trust (GGN). The fund focuses on global natural resource and mining stocks. So it isn’t a pure play on gold. This fund’s largest holding is actually Petrobras, the Brazilian oil company. It’s trading at nearly an 8.5% discount to the value of its assets and it uses creative financial strategies (selling covered calls) to generate a 5.8% yield.

Finally, you’ve got Deutsche Bank’s Double Short (DZZ) and Double Long (DGP) Exchange Traded Notes. These two funds use gold futures and treasury notes to return twice the fall or twice the rise of gold, respectively. These funds are extremely risky, since they double the performance of the metal. You shouldn’t ever invest more money than you can afford to lose into this type of fund.

Good investing,

Matt

P.S. If you’ve got a question about commodities or commodity producers, shoot me an e-mail. (Bear in mind, I can’t give out personalized investment advice.) I answer reader questions every Wednesday in Growth Stock Wire.

Source: The Commodity Investor Q&A Wednesday, June 4, 2008