Time to Buy and Hold Gold

Jul.27.08 | About: SPDR Gold (GLD)

Before making today's observations, I'd like to point you all to a great Seeking Alpha article written by Mike Stathis.

I'm not sure why I was not able to leave a comment on this article, but let me say now: right on Mike! Excellent analysis and commentary.

I recently spent some time in Colorado fly-fishing, hiking, and camping. I always meet some interesting characters whenever I take my summer trips to CO, and this year was no different. In particular, when it comes to economics and investing, two of these characters stand out in my mind.

The first person I met while fishing in the Arkansas River near Salida, CO. I was wading up the river, and noticed that the low growl I had been hearing was the result of gasoline powered pump. A couple guys had about a 4 inch rubber hose in the river, and were pumping water up the bank and running it through some kind of contraption in order to separate gold from sediment. This was on BLM land. I thought to myself, wow, they must actually be finding some gold in order to rationalize running a pump powered by $4/gallon gasoline.

Later that same morning, I saw an old man in the willow bushes next to the bank leaning out into the river. I thought he might be fishing. Not wanting to step on his toes, I politely asked him if he minded that I go around and upstream of him. He says, "Oh, you are fishing? No problem, go right ahead." He seemed relieved. As I walked by, I noticed he had a pan and he too was mining for gold - the old-fashioned way. So, I asked him, are you really finding any gold here? He eyed me suspiciously and stroked his long grey beard. He didn't want to talk, so I told him hey, I am a fly-fisherman taking a vacation here and I am not interested in panning for gold, I am just curious.

We chatted a bit longer and I made some jokes about fool's gold, and he finally told me that he does indeed find gold there, and averages anywhere from 3/4 oz to 1 oz a day. Sometimes, he says he finds a nugget or two and those can increases his haul to 2-4 oz in a day. Not too bad at $930/oz. So what do you do with the gold I ask, sell it? "Hell no!" he said dramatically. "And get what, paper bills worth less and less every day?" He was very emphatic, and there was something serious behind his amusing facial expressions. This old guy was straight out of the old wild west and could have been a character on Bonanza or Gunsmoke.

The second character that I remember well was an 86-year-old man that was camping at one of the campgrounds. He would take a stroll every evening for exercise and one day asked me about my little teardrop trailer. As we began chatting he told me he had been a history professor for 50 years and asked me if I liked history. Sure I said, I find it fascinating, informative, and very much predictive of the future. He asked me what I thought about the United States today in the context of history, and I told him, honestly, I thought the US was in steep decline and that our economic and foreign policies of the last few years would have disastrous consequences for the US middle class. He smiled, and said he was very happy to hear a "young person" say that.

He went on to explain that he had been in WW2 as a young man, was "ignorant" went he went into the service, but thanks to the GI bill was able to go to college on his return to the states. He said he immediately began reading everything he could on Germany in order to understand what led to WW2. He began with post WW1 Germany, and read everything he could get his hands on up to and including the end of WW2. He told me that what concerns him today is that the US appears to be following the path of pre WW2 Germany. I was surprised to hear this and asked him to explain this to me.

He said first, we have industrialists creating government policies (I supposed he is referring to the paid lobbyists). Secondly, you have a minority being used as a scapegoat to take away our freedoms, privacies, and liberties (I supposed he is referring to the "terrorist" threat). Next, you have the taking over of the financial system by the government (obviously what is happening with the Fed takeover of Bear Stearns, the current socialistic nationalization of the US mortgage market, and the recent comments out of the Paulsen and Bernake to rationalize increasing Fed and Treasury control). He also mentioned the increasing militarism of the American government and its policies of external expansion.

Lastly, and most worrisome (to him) was the increasing use of propaganda in American media. I asked him what he meant by that. He said the government is reporting inflation is 4% and his eyes got wide in astonishment as if to say "who on earth would believe that?" He said the commentators on CNBC and Fox were paid off to tell us that the economy was fine and and assure us that everything was ok. He specifically mentioned the term "goldilocks" economy, which was a jab a Larry Kudlow who has been saying this for years while the S&P500 has gone nowhere and is indeed negative for the last 10 years if one takes into account the devaluation of the US currency and the effects of inflation. He talked for two hours, focusing on how current policies never are crafted to keep the middle class strong. Then, abruptly, he said he was very very tired and needed to lay down for a nap. We shook hands, and he slowly strolled away.

These two men, although with very different backgrounds, both had some things in common. They were both old enough to have an historical perspective on today's economy and politics. They both said to buy and hold gold. They also both mentioned the value of having your own garden and growing your own produce. Interesting times, and interesting characters. And Mike Stathis, I think both of these men would have enjoyed your recent Seeking Alpha article tremendously.
 
Disclosure: The author is long gold.