Freddie's Loss is Gold's Gain

Sometimes people are so caught up in short-term action that we don't look at the long-term picture.

I have said it before: gold goes up not because of inflation (defined as money supply growth), but because of a loss of confidence in the paper money system. Loss of confidence can occur for several reasons, from creeping up cost of living, rising commodity prices (aside from gold), or feelings that the integrity of the money system is compromised.

I have seen how people refuse to acknowledge the demise of GSEs when it was written on the wall in 2007 (see my Nov 2007 article "Freddie's insolvency.").

For those holding Freddie (FRE) since Oct 2007, their stupidity has cost them 95% of their money as the stock has gone from $65 in Oct 2007 to $2.60 today.

I believe the same thing is happening now regarding gold, but in the opposite direction. People are refusing to believe that the dollar has lost its status. Furthermore, they think the Euro is the new reserve currency and that gold is expensive at $800. All those beliefs will be turned upside-down in 2009. When lending giants like Fannie (FNM) and Freddie go down, and the government having to guarantee trillions of dollars of their collateralized debts at par which are currently selling at steep discounts, there are moral hazards to the extreme. I wrote extensively about this topic last November in an article titled "Subprime Mortgages Lead to Subprime Currency."

Technically, gold ran ahead of itself in late 2007 as it raced from $650 to over $1000 in late 2007. This was panic buying from smart money that understood the problem with the dollar and GSEs. Gold needs to climb above $850 to start the next wave. When is it going to happen? It could be September, later this year or not until next year. I have ceased trying to time the market. The smart money investors have already positioned themselves in gold. And when gold rises again over $850 and above the 200 DMA (red line), this will signal the start of the retail wave and it will be panic buying from the stupid money who buy gold because everyone else is. The way Freddie went down with a sudden rush could easily be the way gold goes up in a phase of manic buying.

 

Comments

[Dr. Duru:]

Good stuff. I am with you on this one. I just bought more gold on the latest dip given I could get prices from the beginning of this year again. According to the long-term picture, it seems we have to brace for the potential of a further drop to $700 or $650 before the next up-phase begins?

2008 Aug 24 09:47 AM

[Kelly Liebe...:]

Once you realize the basic fundamentals, your position on metals doesn't change. Buy on dips, accumulate and hold. End of story until the story changes.
Unfortunately, this story of the unraveling of our currency is far from over.

2008 Aug 24 11:44 AM

[Jimbo:]

It's not just a loss of faith in the integrity of the currency. It is also a loss of faith in the integrity of all political parties and all who would be elected politicians. Politicians use demagoguery because it works with the average voter.

2008 Aug 24 12:08 PM

[beabaggage:]

Another great posting, matches what Louise Yamada has been saying, long-term up trend in tact, normal pullback so far. Playing this personally via safe-country NA/CN/AUS Juniors like Northgate (NXG) with no debt and good assets/track records that have been beaten down and as Kelly L. says above averaging in with NXG's recent decline. Similar positions/view personally on other metals again via juniors like SWC, PAL, CDE. Stores cannot keep enough raw bullion in them and public buying on the dips too, witnessed by recent Reuters article on sell out of American Eagle Golds.

2008 Aug 24 01:02 PM

[buyitcheap:]

I agree - if there was ever an investment for which you needed a trading plan GLD is it. 2 years from now we'll be very pleased with a 75-82 average entry point. A few years after that, we'll sell our gold to the panicky last to the party investors and clip coupons at 15%.

2008 Aug 24 10:39 PM

[jt:]

The most sound way to look at "buying" gold and silver is to think of it as trading in worthless paper for REAL money, while you still can for next to nothing.* Though silver and gold could very well become the investment of a lifetime over the next 5 years (?+), the reason to buy it now is that regardless of when the mob decides to leave the burning building that is the house of fiat currencies, or who is the last out, the dollar (and with it the fiat currency system) is burning itself down AS HAS ALWAYS HAPPENED IN ALL MODERN HISTORY with fiat currency "experiments." But it will be worse this time, not b/c this is the first time a govt has pulled this fraud on its people, but b/c this time almost ALL (if not all) of the largest (and even the smaller) industrialized countries' govts have done this to their people ALL AT THE SAME TIME!!

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*Some have gone thru the math and come up with a number >$50,000/oz just to back up the number of FRNs out there with gold, but that doesn't even begin to monetize all the derivative debt out there that is turning into real debt faster than the Fed and our Treasury can give our great grandkid's money away to their bankster. Looking at silver...with an historical ratio of silver:gold of ~1:15-20...at a ratio of now >1:60...we already need silver to triple compared to gold. Then consider that 80% of all silver mined is consumed in industry, that all known above ground hoards, including the govt's, have already been sold into the market, the numbers say silver is rapidly approaching the scarcity of gold (and remember, gold for the most part is not destroyed in use, as the majority of silver is...in industry, the amounts used are too small to warrant salvage, but billions upon billions of tiny amts are constantly used up in electronics et al, for example).
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The dollar, the euro, and the yen will all collapse. And then?...what will take its place? Same thing that always does...when the impostor is run out of the kingdom, the REAL king is given back his scepter and a new era begins...with King Gold on the throne once again, with silver as prince. What's it gonna look like?...hard to know, but likely there will be a gold standard with paper certificates backed by gold with price of gold set at so many of those certificates per oz, or said the other way around, fractional oz of gold per varying certificates. Same with silver.

As far as "elected politicians"...they've been bought and sold a long time ago. Thru trickery and deceit and lame-session timing and the lack of cajones of our elected officials in 1913, the Fed (against which the Founding Fathers had warned in no uncertain terms) and thus the banking houses of Europe weaseled their way in until they finally completely took over control of the money supply of this country, and thus of the government of this country. Elected officials no longer make the important decisions...just as Nathan Mayer (Bauer) Rothschild (and his father and grandfather before him) said, and I paraphrase, "I care not who sits on the throne of England. He who controls the money supply controls the throne, and I control the money supply."

And so it is today. This election is a joke...we are given the choice by the powers that be (TPTB) the choice of two unacceptable candidates, and if we vote, it will be for the one we believe to be the lesser of two evils, not someone who has ANY plan whatsoever to stop this destruction of our economy and country, clean up the mess, and set us on a solid footing...all of which would have to begin with shutting down and cutting of the Fed's powers and taking back the power held by TPTB, the Shadow Govt, and giving them back to the people and their representatives (after kicking out the fatcat paid off aristocratic wimpy "representatives" currently feasting on our dollar in DC). jt

2008 Aug 24 10:53 PM

[User 150453:]

Heard the government is going to recall gold to pay off some of te debts.Give comments

2008 Aug 25 12:56 AM

[MARK&SHARK:]

I have read 1-3 words of it,maybe you are right.
The charts you give have no correlation,their beta is similar as Freddie,Fannie and Gold all crashed.
Regarding volume,better check the volume when GCwas at 1030$ looks same as FNM,FRE.If this stocks crashed why everybody thinks GC can not crash after it's 1030$ euphoria.It can crash so low that you can't imagine,just wait and see.Gold miners already are selling at 600-700$ an ounce gold.

2008 Aug 25 11:02 AM

[Alex Stanczyk:]

Its a chain reaction: Inflation = loss of confidence in Fiat = rise in golds valuation.

Nothing new under the sun!

www.rapidtrends.com/bl.../

2008 Aug 25 02:46 PM