Investing in gold has been one of the best ideas of the past couple of years.
Gold December futurespassed $1300 for the first time. The potential for dollar-weakening further Fed easing is likely a driver behind the continued rise. If the economy continues to weaken, the Fed may push more dollars into the economy by purchasing more debt securities. This could hurt the dollar, and lead to a rise in the price of gold.
Which is why a smart hedge fund manager would start shorting gold.
Let me explain right away that this is not a prediction about the direction of the price of gold. I suspect that the tendency of a deficit spending government concerned with high unemployment will be to debase the dollar, which implies a nominal rise in the price of gold. Bernanke is a believer in the power of inflationary policy to spur the economy. Fundamentally, this should be a bullish analysis for gold.
But that analysis is not new. Pretty much everyone has heard it from guys like Jim Rogers. Everyone watching the Glenn Beck show has heard a bullish case for gold. So even though the macroeconomic case for rising gold is solid, it may be that the market has fully priced in this case.
Nonetheless, a clever hedge fund manager should short gold right now.
You see, right now there's very little reputational upside to making money being long gold. If you are a fund manager you are too late. You will simply be riding the trend. And the odds are that you have already missed a huge part of the upside.
But if you bet against gold here you are a contrarian. If you are right, you'll be hailed as a hero. Your next fund will be oversubscribed. You'll get to chat with Becky, Carl and Joe on Squawk Box.
What if you are wrong? You'll lose money, of course. But getting gold wrong on a historically unprecedented rise that depends, in part, on impossible to predict government policy will not ruin your reputation.
Even if gold runs way up because of fears of inflation, you'll be able to blame a "policy mistake" by the Fed. It wasn't your mistake that lost all that money; it was the Fed's.
The outcomes are asymmetric. Go long gold and win: you're just a trend follower who will eake out year end results slightly weaker than the commodity you chased. Go long and lose: you failed to see a bubble and now you're lemming. Go short and win: you are a contrarian hero. Go short and lose: it was the Fed's fault.
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