Gold has gone parabolic: Time to hedge

Everyone is talking about gold. We own it. We've owned it for a long time. What are we doing today?

The red dots you see on the above gold daily chart is the parabolic stop and reverse (pSAR) indicator.

Zoom in on the February to mid-April 2024 period or the August-September period. Or more recently, the Jan-Feb 2025 period when we saw a parabolic move in gold after it had already run ‘too far’.

A parabolic move is not necessarily a Sell signal. A strong bull market should have several such moves going into the mania phase.

How high can it go?

Commodities aren’t constrained by PE ratios or management decisions. When a commodity becomes a momentum asset, it can run far higher than anyone imagines possible.

If investors at one point obsessed over digital gold and ran it up 10x, can they obsess over actual gold and run it up 5x?

Gold has 5000 years of monetary history. That history was slowly lost after Nixon severed the dollar’s link to gold in 1971 and gold was demonetized. Having grown up on the dollar standard, we assume that such a state of affairs is permanent.

But it may not be. The failure of the free silver movement, made famous by William Jennings Bryan’s Cross of Gold speech, led to the Gold Standard Act of 1900. The failure of the dollar as a result of Trump’s actions and threats to fire Powell is directly contributing to gold being rediscovered as a monetary asset and store of value.

This trend can last a long time, and I wouldn’t be premature in taking profits based on a parabolic move on the daily chart.

Gold is a commodity. Gold stocks are not.

I don’t expect management teams to take the long view, nor do I expect it of momentum chasers.

So even though the long-term bull case is intact, it is time to put on some short-term hedges. I don’t want to “take profits” and watch the bull market from the sidelines. I don’t want to stop the compounding on my winners. Instead, I’ll hedge.

The market is so volatile, buying puts isn’t worth it due to put premiums reflecting high implied volatility. So, the best hedge is shorting some miners.

I want to short the high-quality large caps. These stocks are owned by rational investors who care about PE ratios and other valuation metrics. That puts a cap on how high the stock price can go. Palantir can command a 100x PE but <<company name redacted>> likely won’t.

If gold keeps rising, the miners keep rising, but the quality names rise less than the juniors and explorers. Sometimes, quality stocks go after acquisitions using their high priced shares as currency, which dampens subsequent price rises.

If gold falls, investors take profits across the space, and the short positions hedge my temporary losses in the juniors and explorers.

This will help me dampen portfolio level volatility without having to guess at where to take profits on my winners.

I’m short:

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