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Posted August 21, 2018

When I was about 20 and going to college in Baltimore, my roommate burst through the door one night after the bars closed with a shit-eating grin on his face.

“What are you so happy about?” I asked.

“I just bought a car,” he replied. Now, my roommate wasn’t exactly poor, but at the time he was driving a 10-year-old hand-me-down Civic. The last thing I was expecting was that he would buy a car.

But sure enough, we go out to the parking lot, and there in all its glory is a five-year-old Ford Escort hatchback.

“Why?” I stammered.

“Well, this guy at the bar needed $500. He had ID and the numbers matched?”

“Escort hatchback?”

“The guy wanted crack more than a car. It’s worth $3K and will be gone next week,” my roommate said nonchalantly.

In investment terms, this type of transaction is called “capitulation.” The previous owner of the car no longer valued it and was willing to sell at any price.

Those on the buy side of asset capitulation can make a great deal of money as the market learns to value said asset.

This is the current situation with gold. The price of an ounce of gold has dropped from $1,350 in April to $1,175.

Investors are tossing it out with the rubbish. And the hedge funds, what’s left of them, think it’s going lower.

According to Bloomberg:

Exchange-traded funds tracking the metal have bled assets for 13 consecutive weeks, the longest run in five years, investors have placed the biggest gold short on record...

Hedge funds and other large speculators increased net-short bets on the precious metal in the week ending Aug. 14 to the most on record, according to data published Friday going back to 2006.

The reasons, as my good friend and coworker Luke Burgess wrote yesterday, have to do with a strong dollar and emerging market weakness, as well as the perception that you can make more money in tech.

But here’s the deal with investing: No one knows if a stock or any asset will go up in value. What you do is immerse yourself in the middle of value and let the odds roll in your favor.

For example, Ford Motor Company (NYSE: F), which sold 230,635 cars in June, has a market cap of $38 billion. (For those who don’t know, a market capitalization is another way of saying market value. It is the number of shares out multiplied by the share price.)

Tesla (NASDAQ: TLSA) has a market cap of $51 billion. It sold 14,000 cars in June.

Don’t get me wrong; I don’t like the automakers, but it is more likely that in the long run, TLSA will trade more like Ford than it will like Netflix, Amazon, or Google.

Tesla has no value, no scalability, and no margins.

But gold does have value. Just not to dollar holders. Again from Bloomberg:

In Europe, gold ETFs have added $1.3 billion since January, led by the X-Trackers Physical Gold product, which has more than tripled in size. Money managers across Asia have been almost as keen, adding $1.1 billion to the products this year.

“We’ve seen strong inflows over the last two weeks,” Nitesh Shah, a London-based commodity strategist at WisdomTree, which runs a Europe-listed ETF, said on Friday. “A lot of investors are seeing a bargain-hunting opportunity.”

Right now you have a situation where the rest of the world is supporting the gold price, but U.S. hedge funds are record short due to an abnormally strong dollar.

The odds are that the greenback will revert to the mean and blow the shorts out of the water, thus causing a short squeeze.

Just to refresh your memory, a short squeeze is when the price of an asset goes up and the short sellers have to cover or lose money. This creates a situation where the shorts rush to buy back the asset, which in turn drives said asset even higher.

There is a good possibility that this will happen over the next few months. If you care to speculate, the Direxion Daily Gold Miners Bull 3X ETF (NYSE: NUGT) aims to move 300% of the NYSE Arca Gold Miners Index. It’s not a buy and hold; it’s a short-term trade.

I’d be a buyer under $14.25, with a look to sell around $18.50 over the next week or so.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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