It is obvious that during the summer of 2011, as the European debt situation unravels, the solvency of the United States is questioned and inflated economies the world over show signs of deceleration, the public has taken an incremental step toward acknowledging gold as a viable asset in a sensible portfolio.
This article will not discuss the obvious contrarian signals that are implied by the public's entry into the realm of gold, as the barbarous relic is now 'channel busting' up, but shows no signs of waning momentum. We will just warn that at some point, momentum always slows and the market in question, always corrects; at some point. For reference, see silver earlier this year.
What is the 'Price' of Value?
Okay, so you are a newly minted gold bug. You understand that policy makers are under extreme pressure to "do something!" in accordance with the implied confidence that the public continues to show in their ability to centrally manage economies and markets. Interest rate manipulation, currency manipulation and a host of other tools are employed to get things on the right track again.
The idea of gold ownership stems from the fact that the currencies of the realm are routinely and competitively debased in the name of growth, which the stock market demands. Unfortunately, around 10 years ago, under the stewardship of Alan Greenspan, the idea of productive growth was abandoned in favor of inflationary growth, by policy. Enter the secular gold bull market, that is now in its 11th year.
But understand that a bull market in gold is really a bear market in paper, or more precisely, confidence in official paper, and confidence in official power, which has been slowly declining for years. So it is helpful to understand concepts like 'value' and 'insurance' as opposed to 'price' and money making 'plays.' Gold is not going to make you money. It is acting as if it is money; the only money capable of retaining value in current conditions. Buying it in hopes of scoring a big hit is sure to end in heartbreak, because the buyer would not be strong enough of will and mindset to endure what is sure to lay ahead in volatility. We are talking swings of 100s of points within days.
I was taught years ago that "gold is not about price... gold is about value." Be measured, be balanced and don't make more of it than it is. Gold is just a tool, an anchor to sound money; to value.
'Okay, I want to be a gold bug and I understand that I am simply insuring myself and my family against worst case monetary scenarios. I get it, but how do I buy the stuff and where do I put it?'
Hey, I cannot give that advice. But if it were me, I would resist the urge to keep it at home and I might even resist the urge to keep it in the country. What I would do is get to researching the varied options pronto, because there are many viable ones. There are also services from which you can buy bullion and have it stored globally. These include BullionVault, GoldMoney and Perth Mint. And the first two at least, are also handy for bullion trading and/or commerce using gold. There are many other reputable sources out there.
But it would probably be best to resist the urge to hole up in a cabin (or your home) with a gold, guns and ammo mentality. I personally adopted 'guns and ammo' several years ago, but only because I was a Boy Scout and they taught me to 'be prepared.' In this case, I want to be prepared against social discord, or worse. I have tried to prepare in several areas, including alternative heating, food supply... the whole schtick. But do me a favor and keep your moorings. Wearing a tin foil hat accomplishes nothing.
Gold, an ancient monetary metal and store of value is and should be a positive thing. Unfortunately, its reputation has been tarnished by a 20-year secular bear market (ended 2000) and the associated public mentality that went with it. Early adopters of gold in the current secular bull market were subject to ridicule, and why not? The public has been managed by the vast financial services industry into a mentality of something like 'Should I have a 60% stocks, 40% bonds allocation or the other way around?'
If this were not bad enough, all you have to do is watch or read some of the sleazy gold ads, especially those pitching 'rare' coins or those trying to scare you into buying. When things start going wrong in the macro, primal instincts can rise to the surface; like survival for instance. But a knee-jerk approach seldom succeeds in the financial world.
So it is advised that you take a balanced approach and realize that buying opportunities in the precious metals tend to be best when everybody hates them, not loves them. So try to at least filter the touts during times of emotion. There are reputable services and there is much reputable analysis that explains the rational case for gold. Go find them.
Have an Overall Plan
My own father recently asked me "So Ga, how's your gold letter going?" before he caught himself.
When I finished cringing I said "It's not a gold letter, Dad." But there is something about the power of gold... it is more dynamic for instance than "How's your macro fundamental and technical analysis newsletter going?"
Today's events are not about gold. Please, if you have not done so, drop this mentality right away. Gold is one tool for the tool box. But its historical and religious connotations are undeniable. Yet for our purposes, we are managing the realm of financial survival and prosperity. This is not a Richard Burton / Elizabeth Taylor movie.
Debt is a big issue. Get rid of it if at all possible. When the system finally belches and keels over, it is probably wise not to be tied to it with too many obligations denominated in a failing currency. Inflationists say 'the more debt the better, the government will just inflate it away.' But they forget that there is the deflationary Yang in play to inflation's Yin. Gold and debt elimination, that's a start.
How about property of value... like open space, farmland or the like, as opposed to McMansions clustered tightly with so many others? I know, these subdivisions can have some good cook outs, block parties and holiday gatherings, but... How about productive enterprise?
There is a new world being formed here and I am convinced that it will be a better one than that which is ending. It will be a painful transition, but what will be needed going forward? That's a good question to ask. Millions of people squatting over bags of gold and silver in cabins with rifles pointed out the front window is not a good answer.
Let's get one thing straight right off the bat... they are not gold. They are plays on gold, companies run by often faulty people in often remote and threatening environments. Insofar as one speculates, they also happen to be lining up for what I believe is an epic capital appreciation opportunity for very rational reasons I focus on each week in my newsletter.
But they are not gold. They are all about price and leverage, when the time is right. Some may wish to think about a 'play' on the currently undervalued miners with a plan to cycle gains into something of... you guessed it, value, down the road.
The mainstream media are finally on the job, scaring the $*#% out of you about all that is wrong in the global construct. Early adopters became aware that gold was entering a bull market many years ago. They also sought to deleverage from the system in myriad sensible ways. Now, the enchilada is unwinding for all to see. Gold is becoming a crowded trade that I suspect is going to become much more crowded in the years ahead.
But volatility can visit with a simple meeting of international ministers in high places and a resolution with some official sounding words on it. Gold is the tattle tale that cannot resist ratting out the futility of these macro managers. Gold is simply a store of value, and its Value Proposition has not changed in the years and centuries of ups and downs in its nominal price. Just remember the old saw about how an ounce of gold will always be able to buy a nice men's suit. It still can.