Seeking Alpha
Macro, gold, value, contrarian
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My nerd-like tendencies are readily apparent in that I am fascinated to be living in such drastic times of change. It's like a real-time walk through history with an added twist due to new variables. The same themes of history are recurring: Excessive spending, unsustainable debt, and government corruption followed by inflation and civil unrest. We have loads of information at our fingertips, yet we can't reconcile it. We have content, but no context.

This is a different paradigm from the 1970's, that's for sure. After being net sellers for decades, central banks are now net buyers. Demand remains strong as investors globally are subtly shifting to tangible assets. The smart money is unloading bonds and buying gold, as gold is undervalued on an objective level.

Yet people still believe gold is a bubble. Why? Well I think it has something to do with the long tail phenomenon. Because there are now forums for like-minded people to talk about gold, there is this perception in the mainstream that gold is a bubble. But go out in the real world and try to get people to buy an ounce of gold at $1360. Get ready for resistance. Gold still makes up less than 1% of global financial assets. This is a hard fact. Gold is overbought based on people's opinion.

The China Factor

Those who think China is a bubble are dead wrong. China is going to change the world. This is the first time in modern history that one of the largest economies in the world is still a developing country. Let that sink in for a second. The rise of China will have a dramatic effect on the price of gold.

It is estimated that Chinese demand will account for roughly a quarter of global gold production in 2011. Chinese imports were up 5x in 2010, and mind you, this is from the biggest gold producer in the world. Retail demand rose dramatically in 2010 as well. The Chinese think very differently from Americans. They have been through their fair share of monetary crises. They understand long-term value. They have a healthy distrust of paper money. On the next correction, the Chinese will be buyers. On the next correction, gold permabears will be saying "I told you so." Smart money, dumb money. There is a difference.

Patience, Patience, Patience

No asset goes up in a straight line except in the final blow-off stage. Gold bulls should rest assured that the price action in gold is implying higher prices. Bubbles don't spend four months consolidating. I always say that I love being bored by the gold market because I know something major is brewing. A major upside move is lining up for late 2011 or 2012. This is the calm before the storm.

Let the mainstream hype an "economic recovery" based on $1.5 trillion deficits. Let the Fed say that they can buy debt directly and keep yields down when reality paints a different picture. Yields are flying. Inflation is picking up everyone in the world except the U.S., which surely has nothing to do with the manipulated CPI. The unemployment rate is falling because jobs are created out of thin air with magical seasonal adjustments.

The lack of big picture thinking is shocking. How people get fooled over and over again I will never know. All of you went through the crisis of 2008 and saw first-hand how inept our leaders were in predicting and reacting to the crisis. Think for yourself this time around. Fool me once, shame on you; fool me twice, shame on me.

Disclosure: I am long GOLD.

Source: The China Factor: A Changing Paradigm for Gold