Doug Kass Says Gold Is Overbought

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." -- John Maynard Keynes

I wrote last week that one of the mysteries is the markets' continued and inexplicable optimism surrounding the monetary and fiscal policy, which has contributed to rising gold prices and a plunging U.S. dollar. Apparently, some in China might agree and appear to be growing concerned about the speculative frenzy in gold prices. Gold is now clearly overbought now and is trading at nearly 35% above its 350-day moving average ($916 per ounce), but, as I have remarked, shorting everyone's favorite long is a dangerous proposition considering the commodity's remarkable price momentum
According to the lynx-eyed Bill King, the price of gold failed after rising 40% above its 350-day moving average in May 2006 and again in March 2008. After hitting the 40% gap in 2006, gold fell from $720 per ounce to $542 per ounce in only four weeks, and it fell from $1,032 per ounce to $682 per ounce within seven months of advancing 40% above its moving average two years later. By comparison, Bill writes that the Nasdaq peaked at 75% above its one-year moving average in 2000 and oil peaked at 60% above its moving average in 2008.
It is possible that the gains in the price of gold will fall imminently or that history could repeat itself and the price of gold will fall as the price approaches the 40% gap above its one-year moving average. Maybe gold prices could even advance in a continued parabolic manner, ultimately resembling the chart of Cisco Systems' (CSCO Quote) shares in 2000 (when they peaked at over $80 a share) or that of Pulte Homes' (PHM Quote) shares in 2005 (when its shares topped out at almost $50).

"We stand today at a crossroads: One path leads to despair and utter hopelessness; the other leads to total extinction. Let us hope we have the wisdom to make the right choice." -- Woody Allen

Again, reread financial history. What it shows is that if you owe your bank a hundred dollars, you have a problem. But if you owe your bank a million dollars, the bank has problems.
 The same can be said for our country.
Contrary to growing belief embraced by some in the trading community (many of whom couldn't define purchasing power parity and others who couldn't tell the difference between a Norwegian krone and a Nigerian naira) that a lower U.S. dollar is healthy, a plunging currency is not stock-market-friendly in the long run. It does not sow the seeds of a sustainable market and economic advance -- for if our country owes central banks trillions of dollars, everyone has a problem.

Somewhere, over the rainbow, bluebirds fly.
Birds fly over the rainbow.
Why then, oh, why can't I?
If happy little bluebirds fly beyond the rainbow,
Why, oh, why can't I? -- "Somewhere Over the Rainbow," The Wizard of Oz

Like the other two or three people in the investment world, I have missed the move in gold. While the yellow brick road is today paved with gold, there may not be a rainbow at the end of the road, just a man behind the curtain.