Gold Got You Down? Expect Further Declines

TheStreet.com

NEW YORK (TheStreet) -- About a year ago I warned investors to avoid gold and silver in these two articles, here and here.

My warnings were met with enthusiastic acclamation, praise and thanks. Here is a sample of the comments received:

John: "Is this guy for real????"

Rafi Farber: "The market is a Zero Sum game. Smart money buys low and sells high. Dumb money buys high and sells low to compensate. This guy Robert Weinstein will be the dumb money on this trade. God bless him."

Robertfwaxman: "Thanks, you are the epitome of contrarian indicators."

Texas: "...Mr. Weinstein fails to discuss the macro economic reasons that led to , and will continue to push gold/silver prices higher. Analysts like Mr. Weinstein (which i submit are in a majority right now) seem to bash silver gold without due regard to the fundamentals..."

It's ok, I'm used to it. When you write a bearish article, you normally don't gain a lot of friends. But if you do your homework, you gain respect. I remain bearish on metals and believe gold, as shown by the SPDR Gold Shares, will test $100 before $200. In other words, GLD hasn't reached the bottom yet.

I'm not nearly as bearish with silver, as shown by iShares Silver Trust, though. Don't take it the wrong way, it's not a deal yet, but it may bottom out in 2013. The key takeaway with buying dips is that they generally fall further than they "should." The markets are based primarily on emotion in the short term and fundamentals over the long term.

Emotion is why we see blow-off tops and dead cat bounces. Logically and fundamentally, silver (as represented with SLV) isn't worth 85 cents an ounce less today than it was yesterday. Silver probably wasn't worth $45 an ounce either (I didn't think so or I wouldn't have written the bear thesis published).

Wait for SLV to fall below $15 before buying, and I strongly suggest selling put options as a conservative synthetic hedge for those who want exposure to the shiny metal. For example, if SLV is trading at $15, instead of buying the ETF, sell a $15 strike price put option with at least 60 days until expiration. Doing so will provide a timing buffer and lower your risk.

Your most reliable compass for inflation is energy prices. You can track energy using United States Oil Fund ETF and United States Natural Gas Fund ETF . Without rising energy prices, inflation will remain tame. Without inflation fear, inflation hedges including gold and silver will trade closer to their industrial use price equilibrium.

For reference, you can use $22 as a marker for UNG. When natural gas prices are falling to levels that push UNG under $22, it suggests near zero inflation. A sub-$22 UNG means some production rigs will remain or become offline because producers won't receive the return needed to justify operation.

You can also use USO as a barometer of inflation. USO is perhaps more indicative to worldwide inflation because oil is more of a world market product compared to natural gas. Watch the price trend through the moving averages to get a sense of inflation fears.

Lastly, instead of buying physical gold bars and coins, consider jewelry or guns. Jewelry and guns offer the same or more benefits of gold coins while providing utility today. I wrote an article on why, and you can read it here.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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