Is This the Gold Buying Opportunity of a Lifetime?

Everyone has been saying how gold is going through the roof, right? All those predictions of massive inflation and that gold was the only safe place to hide. What happened you might ask? Why is it not working? Well, here is one answer and should it be right, this is the last best chance to catch the gold bus!

I am one of those that bet on gold and gold miners. How is it working out so far? Well, not so well. What am I doing? Buying more and this is why.

I saw the problem with the mortgages coming and the economy going south while inflation was being jacked higher by the retarded green-movement inspired ethanol subsidies and regulations that inflated the cost of food, the worldwide oil and commodity demand explosion caused by expanding populations and the entrance of the Chinese and Indian masses into the fast early economic growth stage while the worldwide printing presses were churning out more and more paper money. Does this make me a genius? No. Did this foresight even make me rich on this trade? No. What happens next and the important question is, 'What are you going to do now?' This is always the most important question a trader faces.

The mortgage mess did implode the financial system and the market crashed. The funny thing is that the dollar rallied, the market crashed and gold still did not break out as the inverse relationship to the dollar held it down like holding a beachball under water.

Lets start with the dollar. Gold and the dollar trade with a strong inverse relationship. This is because gold is a real asset in short supply that was the worlds first currency (and unfortunately I think someday it might be its last) and money. All currencies used to be backed by gold as a fiat currency for gold. That linkage was broken decades ago with the Bretton-Woods Agreement. Basically the more paper currency that you have in relation to something that people hold dear and real and difficult to get, the more paper money you have to trade to get it. Now lets say this 'it' is shiny, does not corrode or oxidize and is buried deep in the ground, and then throw on top of all this the fact that you can make things out of it that are pretty and helps a guy get the girl and people will start to value this 'it' a whole lot. Let's call this 'it' gold.

The dollar is the world's dominant currency. This is a result of the Marshall Plan that was launched after World War II when the United States provided Europe with a lot of dollars to rebuild. Europe's economic infrastructure was destroyed, as was Russia's and Japan's. The U.K. and France were a little less blown up but I think you get the idea. The only country with factories and productive assets that were not destroyed by the bombing and warring was the United States and thus the only unit of currency that had productive assets and value behind it was the dollar. With the Bretton-Woods Agreement the dollar became a fiat currency not tied to gold but tied to the economic productivity of that country. So enter stage right Mr. King Dollar.

The world has quite a few currencies from the pound to the yen to the euro to the Dollar. If you noticed I did not capiltalize all but the Dollar as the Dollar is still King. Oil and gold are traded in dollars and for good reason - the United States still has the most productive assets and the largest economy in the world and on top of that, for a long time we have been selling debt to all the other countries that print the other currencies.

Now this selling of debt gets people all very nervous, but in reality it was and is a sneak attack. Ask yourself how much the yen would be worth if all those Dollars the Japanese are holding were worth less? Ha ha - you got it. They hold all our debt and in a perverse manner their currency is reliant on our currency staying strong or the dollar assets they hold are worth less and they are not as rich and their currency is worth less. Also, should they start selling the dollar and it goes down, the dollars they still have are worth less. We have successfully co-opted the world into our own good fortune. Now use this same logic with the Chinese yuan, the euro and the Middle Eastern petrodollars. This is not even to mention all the lovely factories Toyota (TM) built in the United States but that is a whole different subject. We go broke - you go broke. Period! Have a nice day.

But I digress…

The tech/internet bubble and resulting market crash was solved by making credit and money easy. Interest rates were slashed and every clown in the country was given access to easy money through dubious mortgage lending and government policies. The natural human desire to keep up with the Joneses and the feeling that 'Hey, I was rich and now I am poor as that internet company I invested in that shipped fifty pound bags of dog food turned out to be a dud' turned the populace into greedy pigs wanting more. So what did all these newly awakened traders start doing? They started trading real estate saying 'They are not making any more land are they?' and 'Real estate never goes down.' Newsflash - sand found on beach - what goes up too fast must come down too fast.

This positivity and group-think that real estate could not go down had the people dealing in it lose all trace of caution and voila! Another bubble!

How did we get out from under the rubble of the tech bubble crash? We made credit more available and printed money. How do you think we are going to get from under this one?

The United States Government just passed a $700 billion bailout plan. In actuality it was bigger, but what's another $150 billion? The European governments have done the same. Russia even pumped its petro-rubles into its fledgling stock market as it crashed day after day. All this means is there is a whole lot more fiat currency floating around representing a not as fast growing worldwide economy and still pretty much the same amount of gold.

The dollar has rallied as the market crashed as foreign investors took the Concorde flight to safety - the safest asset on the planet - United States Treasury Bonds. In order to do this first a foreign investor has to swap out of the currency they are holding into the dollars to buy the Treasuries. This drives up the demand for dollars and the dollar goes up relative to the currencies they are selling. You ask 'Why don't they just use the dollars they already have?' Well this is because these dollars are already invested in Treasuries and they want to buy more.

So the market has crashed and the dollar has run up. Now what?

That huge bailout bill money has not been pumped into the economy yet. From what I hear this will start happening this week. You getting wise yet? All that paper money the United States Government has been printing will start hitting the mainstream this week. The whole $700 billion won't be spent on Tuesday or Wednesday but it is starting. A huge amount of the credit default swaps on Lehman Brothers came due yesterday. Events like these, a lot of times, mark reversals in various markets. I believe this to be the beginning of the bottoming process in gold.

Over the past weeks we have seen every asset class drop but Treasuries and the dollar. Stocks plunged, commodities got taken apart and corporate bonds got smoked. What has been happening is a massive deleveraging (not a real word but it is now) across the financial markets. I just read that over 350 hedge funds have gone out of business recently. When the guys are at the door to repossess the office furniture (and in the markets this is called a 'margin call') you sell everything - your winners, your losers - everything. This deleveraging is what has caused what was supposed to be a big winner, gold, to decline.

So what we are looking for is when will all this deleveraging end. First of all, the government pumping those $700 billions in is a good start. The Lehman settlement event will also give the market a better grip on the size of that calamity and that means less uncertainity and the market hates uncertainity. Will this be enough to slow or stop the deleveraging? Also, if the stock markets start to look better around the world, the money that ran to the safety of Treasuries will reverse flow and start back into equities. If this selling of Treasuries also causes foreign investors to decrease their exposure to the dollar that means selling in the dollar and the dollar goes down and gold goes up.

What makes me right or wrong in this matter is whether or not the world experiences deflation or inflation now. I pick inflation. The financial price deflation has done damage across most all asset classes. For a decade now every country on the planet has been running its printing presses and the world's most voracious consumers (U.S.) have been taking on debt to buy things. The amount of paper/fiat currency has been growing at dangerous levels and I have faith that all the worldwide governments can do to get out from under this mess is to keep printing and spending.

No government wants a depression. During depressions citizens get pissed off and start thinking that whomever is running the goverment should not be. That reaction can be as extreme as a revolution or a voting revolution. Politicians certainly don't want that - they like to keep their jobs so they can take money from lobbyists. They will run the printing presses overtime and let the inflation genie out of the bag.

Throw on top of all this the possiblity of a socialist hitting the White House with an agenda of 'spreading the wealth around' and that means more inflation. 'Spreading the wealth around' has been an economic disaster throughout the annals of history as it diverts money from productive assets to non-productive assets. One has only to look at the productivity decline of the Venezeulan and Mexican oil industries to see the latest prime examples of this ill-guided policy.

I think gold is cheap here. I think the politicians are going to inflate the economy to get out from under this mess. I think inflation is going to ramp up from here and gold is going to be the next bubble.

Want to get in early on this ride or would you like to buy the top again?

We all love bubbles until they pop in our faces.

Disclosure: Long GLD, AUY.

Comments

[GUS100CORRINA:]

I think your comments are on the mark based on articles I have read during last four (4) weeks. My assessment on AUY is that it currently is trading at 4-5 Forward PE and is currently priced at a point that only represent about 40% of dollar value of reserves currently in the ground. Clearly with good balance sheet, low debt-to-equity and debt-to-asset ratios, AUY has got to be a ruby among GEMS. Below is some information that I recently shared:

Gold miners, as a group, are truly undervalued. I also looked at currency translation as well as some statistical measures of fear and greed. With regards to currency translation, the strong dollar while bearish for Gold is bullish for miner costs for mines outside of USA. Nearest I can tell it is entirely possible that strong U.S. DOLLAR may have reduced miner costs in excess of 10%. I am expecting some commentary from miners confirming this reality in the coming weeks. The other more interesting metric on value which is defines fear and greed is a metric that is defined as the value that the daily closing price of an index or stock is away from it's 200 Day MA. For example, the XAU index that I used was plotted for time frame inclusive of 1999 thru present. Resulting Histogram (which I couldn't believe) contained 2245 samples. Using this simple greed and fear metric, it appears that XAU has 99% chance of advancing over coming days/weeks/months based on population of data points and XAU's price behavior in relation to 200 Day MA.

One other item, my calculations also indicate that Gold and Silver mining stocks look to be priced at about 40% of proven and probable as well as Measured and Indicated reserves that they currently have in the ground.

God Bless.

2008 Oct 22 12:47 PM

[Robert Perrego:]

The dollar is a piece of paper and its value is measured against other little colored pieces of paper. Emerging markets inflation is running high and the level of all of these colored pieces of paper is flat out too much.

Dollar trades as a proxy RELATIVE to the other paper which is incorrect when compared to gold. There is a lot more paper out there and pretty much the same amount of gold. Once the hedge fun deleveraging is completed and the TARP becomes mostly distributed ALL the paper will be worse a lot less.

There is no need to watch for a TV ad or want to even go to France. Its all relative and once that false dollar-gold linkage breaks and people realize the dollar is quoted in other pieces of paper, gold goes vertical.

2008 Oct 22 01:24 PM

[Robert Perrego:]

You are forgetting that gold WAS a currency and still is as a result of its not deteriorating, is difficult to find, and the value humans place on it.

Todays melt down across asset classes seems to be another wave of margin calls as the recently settlement of Lehmans CDS at 9 cents means someone(s) is holding the bag on 91 cents in liability. Just as the wave of recent CEO's that have had to sell their stocks at large losses in response to margin calls, hedge funds and market players are now being forced out of all their positions and while I do not know for sure it is the Lehman event it seems too coincidental in timing for me.

As far as the dollar is concerned the major reason for its rally is the flight to Treasuries. The Fed is meeting in a week and they will most likely cut rates again making this piece of paper weaker against other pieces of paper.

As far as watching French TV for ads about travel to determine the dollars weakness - that is a bit pedestrian and I expect the euro to weaken along side but as right now with Canada's cut this week and other major currency cuts the Fed is trying not to show panic and do it on a schedule.

Flight to treasuries, other worldwide cuts and the Fed trying not to show panic.

That all unwinds soon.

Margin selling today and for gold a chance to get in on the cheap.

2008 Oct 22 03:48 PM

[Robert Perrego:]

You do not have to be a Peter Lynch to see what multiple non-coincidental events can predict. My assumption of a bottoming in gold beginning is from...

a) Lehman huge CDS settlement
b) the cascading margin calls from those holding the 91 cent side of obligation from the Lehman settlement.
c) Fed meeting next week - 25 cut priced 100% in and 50 bips 90% in today
d) Release of the TARP funds accelerating
e) Oct end of month hedgie redemptions

I saw all the tourists here in Manhattan - no need to wait till they reverse flow and get wise.

Next week is time slice buy into gold as the wave is turning

2008 Oct 22 04:29 PM

[LightnRod:]

Hope you have big warchest....timing is everything, stay with the trend. It could be long ride down. You will have time to get back in, later.

2008 Oct 22 05:05 PM

[Dave Eriqat:]

While I completely agree with the fundamentals you cite in support of gold, everybody seems to ignore or underestimate how much power manipulators wield. Today it seems beyond contest that gold and silver prices are being massively manipulated, so much that it's producing bizarre consequences, such as shortages of physical metal and <i>increased<... buying in spite of a falling price!

I've been hearing for years how gold and silver are "gong to the moon," given the fundamentals. The fundamentals keep improving for gold and silver, yet they haven't even left earth yet.

Dave
daveeriqat.wordpress.c.../

2008 Oct 22 05:59 PM

[PocketJJ:]

I hope more people hold on or add to their gold positions. When the deleveraging really comes to an end, there will be no more longs in the gold trade and the result will be a dramatic cliff dive in gold prices. Just because there are still guys like RTSC and guys writing about inflations and how they are long gold, it is a good sign that we are NOT done deleveraging. I'll long some gold when everybody's done selling the inflation story, by then gold would hit a triple bottom... there's no gold rush!

2008 Oct 22 11:11 PM

[Robert Perrego:]

Markets can only be manipulated for so long and as far as Pocket's comments go, for the last month Kitco.com has reported shortages of physical gold coins and I have read many other similar articles across the web.

The human perception element of value defaults to gold as we are seeing people across the world buy gold coins and lock them away. New Zealand is at 13 year inflation highs AND they just cut rates again. The only way out of this crisis is to re-inflate the system.

Once the human perception obsession with dollar-down gold-up and vice-versa breaks which will lead to paper-vs-gold as well as those buying jewelry (India especially) readjust to the new levels of gold valuation the upward move will resume.

These inflationary times are very real and as gold started in human perception as a currency it will come full circle and end up there again as the only thing you can do with paper money when the world is awash with it is wallpaper your walls.

As far as deleveraging goes, this cycle will reverse as there is a lot of liquidity on the sidelines that will need to be invested again. One of the largest steps of deleveraging are the transformation of traditional broker dealers at 30x and up morphing into the more commercial bank 10x such as Merrill and Goldman with the demise of Bear and Lehman from 30x to zero. The second large move is the contraction of the hedge fund industry which is being quickened by the Lehman CDS settlement and the margin call that went out Wednesday after Tuesdays event hence the market slide Tuesday.

These were the largest pockets of leverage and they were halfway done when Bear went belly up and Lehman croaked. I suspect the b/d unwinding is 75% complete at least and that the hedge funds are close as well.

The re-leveraging would be the U.S. Government investing in banks at a 10 to 1 multiplier effect and the TARP. Also, the dollar run up has effectively releveraged the large foreign dollar holdings which will start to flow into the U.S, equity markets soon as the only place you can trult spend a dollar is in the United States with stocks about to be at bargain basement prices. All this has begun such that the simultaneous deleveraging by the b/d's and the hedgies will complete as the releveraging by large foreign holdings of dollars and the bailout programs kick into full gear.

The bottom is near and after that - inflation takes over.

Respect to Dr. Nouriel Roubini as his 7,000 Dow prediction is looking much more likely right now. Inverted flag pattern in the Dow is actually targeting mid 6,000's but I suspect the bottom pickers will halt it all at low 7,000's. Think aby of the coming market fear in the event that pattern follows through will flee to gold?

2008 Oct 23 01:09 AM

[NOWHEREMAN:]

The Dow might hold above 7,000 because of the oils. But another 10% drop in S&P likely.

Hedge fund redemptions are being assisted by Mutual Fund redemptions where outflow in the first 2 weeks of October has exceeded all of Septembers so far.

The Fed's Bernanke is supposed to be an "Oracle" as far as Depressions go, But if he can't see A deflationary spiral as the dollar gets stronger and commodities weaker, We are doomed to repeat that Particular Cycle.

If the dollar continues to go up while US internals get weaker, Kiss the Internationals, the Alt. Es, Gold, Ag, you name it, goodbye.

2008 Oct 23 01:57 AM

[PocketJJ:]

What makes you so sure that Lehman settlement signals the end of the deleveraging? The TARP, government capital infusion are just band-ads for the banks to stop the bleeding. The government would like them to use this opportunity to shore up other failing banks, and spend that free cash, but all that money is being used to pad against future losses. I am afriad we are only seeing the tip of the iceberg, big hedge funds like citadel will follow suit too. Their 30% drop in September sure doesn't look good, you can forget about October's return if they kept on selling those out of the money puts. As long as dollar is being demanded, it will remain strong, and as long as the dollar is strong, all other assets priced in dollar will be weak. I am not questioning the level of gold prices 10 years from now, I am questioning the price of gold at today's level.

2008 Oct 23 10:22 AM

[User 30121:]

As I was reading this really lucid article, I was thinking how much of a whipping the author was going to endure from the nay-sayers. So, far, its been rather quiet. Amazing. Maybe they have been busy running around their locations BUYING gold!!!! Good Luck! Gold just ain't easy to come by right now. Try silver. Nope, that's a daunting task, too. Gee, wonder why that is????? (Smile).

2008 Oct 23 11:36 AM

[Robert Perrego:]

Pockets - the Lehman failure was the largest ever and the settlement of the CDS on Lehman debt is to date the largest event in that market (as AIG was 'saved')

Also reading European banks dumped a ton of gold last week. The bottom is lower for the dow, etc.. The bottom is much closer for gold.

Start your time slicing.

2008 Oct 23 12:46 PM

[Robert Perrego:]

As far as the comment on Bernanke and his knowledge/study of the depression goes - he was asked about it and thats when he got the 'Helicopter Ben' nickname...

He said its easy - just throw money out of a helicopter.

Think his answer is to reflate?

2008 Oct 23 06:58 PM

[montyman:]

Could someone please explain what posters mean by huge Lehman CDS settlement??????

The loss reported on October 21 was just a few million dollars instead of the 200 billion everyone was expecting ... ???????

2008 Oct 23 09:46 PM

[NOWHEREMAN:]

Try $2.7 Billion loss on a $30 Billion worth of morgages.

CDS sales are occuring but so far all have occured at .91 on the dollar. So Far.

Say it stays there. Take the $55 Trillion still estimated to be out there, it averages out to about $5 Trillion in losses. This will be over and above everything that has been done to date.

Lots a ruck with the $700 Billion Ben...Hank.

2008 Oct 24 09:03 AM

[Robert Perrego:]

Hey Pocket JJ - yes, I am going to say it... 'Told Ya So!'

Article published Oct 22 - On Oct 23 we got the lowest close in Gold (GLD - 70.65) since Sepetember of 2007.

Current price 75.47 and looks like a nice classic double bottom. Also indicated I had AUY which closed at $3.62 on the 23rd - current price $5.48 showing a great V-bottom. I expect AUY to go much higher and GLD to never see $70 again.

Have a nice day

2008 Nov 04 03:48 PM

[Robert Perrego:]

Follow up - GLD saw $70 once more in a classic 2 day bear trap - now at $81.58 and AUY at $5.10. Expect resistance at $82 (200 day EMA) but an upside break of that level leaves the GLD in a mid 80's consolidation zone targeting $900+ easily. I may have been a few days early but you had a month to get in and now you are holding a winner - and in the future a big winner.

2008 Nov 24 11:37 AM