Gold Rally

The easy money has been made with the gold trade.  Futures hit a low of $681 in late October and have since rallied to $1008 (02/20/09).  The government has flooded the economy with dollars and future inflation is evitable (Obama’s pledge to cut the federal deficit in half by the end of his first term is laughable).  Everyone knew gold should go higher and it did – a 48% rally trough to peak.  Gold has also been bid up as it is also a flight-to-safety trade given the highly uncertain and tepid equities market.  However, gold is still off its all-time high of $1034 (March 17, 2008, Bear Stearns collapse).

Five years from now, I believe, gold and other precious metals will be trading at much higher levels, but recently, the gold trade has become very crowded.  That is, everyone (and I mean everyone), is buying gold or on CNBC saying you should buy gold.  Gold has since pulled-back to $930. 

Here's the rule to follow: Do not chase what everyone else is buying (or saying to buy).  Just because other people are buying does not mean you have to buy.  The thesis may be correct, but the price may not be correct.  When people say to buy something, it is probably too late.  Wait for the pullback and the pounding-the-table "buys" to subside to get a good entry point.