Homeowners quickly learn that their knowledge is limited. Last night my hot water heater went bust so I decided I’d try to be a real man and fix it. While I have a general knowledge of how a hot water heater works, it soon became clear that knowing how it works and fixing it are two different things.

The repair man arrived and I asked if I could watch both out of curiosity and to learn about the man that was fixing it. He took the time to explain my issue thoroughly and began to replace my heating elements.

The interesting thing about this whole chain of events is that he brought up investments with me. When you live in a small town and people knew what you do for a living, they are generally quick to ask questions. He told me what he was doing with his retirement accounts.

I respected him for his knowledge and that he had done his homework. He had saved money and invested wisely. He was planning for a quality retirement and it sounded as though his planning was going to pay off. He had purchased the copper ETF JJC when he noticed that copper pipe was becoming more difficult to acquire and he was paying more for it.

Then the conversation changed as he explained that he had recently bought gold coins and the gold ETF GLD. He had bought around the $1,200 an ounce price level and wanted to know if I thought he should buy more on dips. I replied that I was not qualified to offer investment advice, but that I expected gold was likely going to go through a mild pullback in coming weeks.

I told him that longer term I think gold will be an outstanding asset class to own, but I would be patient and wait to buy when the weakest gold bulls bow out. Eventually he got back to his work and I got back to my screens. I immediately looked at the GLD chart and this is what I saw.

My previous article, “A Correction in Gold is an Option” discussed the overwhelming bullishness that gold and silver were garnering with the retail crowd. After publishing that article last week I received more than a dozen emails that I would classify as hate mail. I was called names, I was sent a poorly written manifesto of the future collapse of fiat currency, and finally my favorite email which was just two words in the subject line, mother $#$$@#. (I’ll let your imagination try to figure out that one). I have written about a variety of asset classes and none of them have the near vigilante bullishness associated with gold.

Gold bugs believe that the world as we know it is going to collapse. They believe that in a few months they will be bartering their gold for food, land, and valuables. Some of them believe the central bankers are working together to create a giant world order. The emails that I have received speak for themselves. There is a growing fear among the retail/middle class investor and the war often discussed between the haves and the have-nots wages on.

When sentiment is running this high and the repair man working on my hot water heater is discussing with me his gold ownership and his desire to own more, it would seem bearish. I have heard and read countless stories about taxi cab drivers talking about the stocks they were trading during the dot-com bubble. I vividly remember having coworkers who had no experience in real estate buying multiple homes to “flip” during the housing boom. Today the man working on my hot water heater is telling me about his gold ownership and how he plans on buying more.

I do not need to remind readers what happened after the technology bubble or the housing bubble, but what if commodities are in bubble? Some have argued they are, others say they are only beginning to rise as hyperinflation is on the way. It seems the real argument in this discussion is more about inflation versus deflation. I am not an expert but financial markets tend to operate in the opposite of the herd’s expectations.

There are many expert economists that are screaming inflation is coming and that commodity prices such as precious metals, grains, and energy prices are going to skyrocket. It seems that the rally cry coming from economists and the herd’s investment habits seemingly back up this notion. I am a contrarian trader and investor as I have struggled to make money following the herd. Is the herd leaning toward inflation right now?

Gold can hold its value during a deflationary period so long as that period of time is relatively short. However, a long term deflationary period could be troublesome for gold bulls. Again, I am not an expert in these matters, but it sure seems as though there is a growing battle between the deflationists and inflationsists and the herd appears to back the inflationists. While that does not necessarily mean that inflation will not rear its head, it just might mean a period of deflation will occur prior to that move. It would appear to me that a mild correction in gold is possible and I intend to use that correction as a buying opportunity. Here is the U.S. Dollar Index futures chart.

With sentiment running this high, retail investors crowding into precious metals, and the dollar receiving no love – this is a perfect contrarian storm. This situation is the very reason that gold could correct deeper and longer than what many investors might expect. That would cause the retail investors that bought around the $1,425-$1,450 price level to get nervous and sell, just when the price is about to change direction. This seems to be an ongoing situation that inevitably happens in almost every asset class.

While I do expect lower prices in gold in the short run, I still remain bullish in the long term. At the end of the day, I have always made more money trading against the herd than trading with it. If my hot water repair man is discussing buying gold, it would make sense that the smart money would be selling into the retail investors and traders during price peaks and buying from them near the intermediate lows. Interestingly enough, the chart below illustrates the heavy volume sell offs that have been taking place in gold.

In closing, I’m sure this article will arouse more gold bugs from their slumber and fill my email inbox with more hate mail. I will shrug it off as I always do, but the real question I have is am I going to have hot water tonight?