Gold Train: All Aboard

If you ask any of my good friends, they’ll tell you “Don’t get Nick Jones started on gold. He’ll talk your ears off.” 

Unfortunately, my friends are right. Precious metals were the very first market I ever researched. I’m glad that’s where I started, because to understand gold is to understand the U.S. dollar. To understand the U.S. dollar is to understand macroeconomics, housing, credit finance, and energy makets.

After putting in an excessive amount of due diligence into the above mentioned issues, I came to the conclusion that inflation and economic woes were on their way. In fact, I decided that not only were we going to experience serious stagflation, but we were also probably entering a period of time that will probably go down in economic history.

At the time, the imbalances seemed obvious, but it took some time for these theories to gain acceptance. I’m not kidding either. The notion of deflating housing prices was simply impossible for America to grasp. It was like telling people that the world actually isn’t round. The general public could have cared less, because these issues had yet to affect them. They had their 4 bedroom 2 bathroom credit card that just kept appreciating. When gold ran from $250 to $600 in just a few short years, the world yawned. All they cared about was the DOW passing 12k, 13k and eventually touching 14k.

In the mean time, I was screaming economic murder to any who would listen. I would tell people that we are headed for rough waters economically and that a recession was inevitable and depression was possible. I would tell them BUY GOLD, because the Federal Reserve is going to try and prolong decades of inflationary Keynesian based economic policies.

BUY GOLD for Crying Out Loud

Just as I screamed buy gold when it was at $600, I’m screaming BUY GOLD again. In my opinion, it is an absolute steal at current prices. With gold trading 25% off its highs, many investors were shaken out.

We must remember a couple of things. Gold is a liquid asset, than many funds, investment or otherwise, hold. When things get a little shaky the funds will sell their liquid assets. The other item to remember is that funds don’t like selling losing assets. They would rather book positive capital gains. So the managers will be more inclined to sell their winners, like gold.

I would bet my right hand that the U.S. has only a meager percentage of the gold reserves they claim to hold in Fort Knox and otherwise. On the other side of that, I would also be willing to wager that the only reason the dollar index rallied to 78 was because of a synchronized effort by monetary authorities around the world to enter forex market and buy up significant amounts of U.S. dollars. I believe that this was a last ditch effort at either rescuing, or simply prolonging the dollar’s life.

Gold Carry Trade End Game

All in all, these are glaring signs that this is the final tipping point of the gold carry trade and the central banks massive shorts rolling over. 

Translation: The central banks have massive short positions in the futures market. This means they have presold gold. They continue to short sell more and more gold further pushing the price down. In doing so, they buy back their prior shorts at a cheaper price. The game continues to cycle and the shorts are continually rolled over, until market forces finally take hold and prices rise and begin to represent real monetary inflation. At this point, there are two options for the central banks. The shorts can be bought back at a much higher price with massive losses, or the central banks can use their precious metal reserves to make delivery on the contract.

Where’d the Gold Go?

If you don’t agree with me about the pending conclusions of the infamous gold carry trade, all you have to do is call your favorite coin dealer and ask for a 1 oz. gold American Eagle coin. Chances are you will get put on at least a 3 week back log. That compares with the overnight delivery that I would receive when I first started accumulating physical metals. 

The reason for this delay is that the U.S. Mint has suspended both private sales and sales to authorized dealers, and rationing is currently underway. The United States of America either has, or is running out of gold. Listen here, gold is finite and U.S. dollars aren’t. The ratio of gold to U.S. dollars in circulation is absurd and most definitely not represented by gold trading at $800 /oz.

This opportunity will not be around for long. In fact, I am positive that there will be a time in the coming years where you won’t be able to get your hands on physical gold, period. It will be an ultimate shake up of confidence in the U.S. dollar and our fractional banking system. This bull hasn’t fizzled and we all should be buyers of the dips.

Comments

[tvb:]

Yes, there is a finite supply of gold, just as there is a finite supply of dirt -- and the intrinsic value is about the same. OK, gold is a bit shinier and prettier, but dirt is actually probably more useful. Buying gold is just like any other ponzi scheme, you hope that someone else will buy it at a higher price, although there is no means to justify that price. Be careful in jumping on this ponzi scheme now, those who bought gold at the end of 1979 had to wait 26 years for the price to come back to where they bought it (and that's in nominal terms -- in real terms, forget about it). Who knows where the price goes from here (probably no one), but I would prefer to buy assets with real intrinsic value. Warren Buffett best summed up gold: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

2008 Aug 27 07:06 AM

[Alex Stanczyk:]

Internet commentary is so ridiculous.

The difference between climbing Mount Everest, and watching someone else climb it and offering an opinion.

www.rapidtrends.com/bl.../

2008 Aug 27 11:17 AM

[goldis4ever:]

"Those who hold gold make the rules", as the tried and true saying goes. Be forewarned!

2008 Aug 27 11:29 AM

[Kelly Liebe...:]

PAUL&SHARK&MAR...

"I have read 20-25 words of it,maybe you are right.....Most of this dealers are divorced,never married,many homosexuals, the types a I would never make a handshake with. "

Come on already....How do you expect anyone to take your comments seriously?

2008 Aug 27 02:23 PM

[Kelly Liebe...:]

Thank you for removing PAUL&MARK&SHAR... comment! Now I am mad I bothered to quote his rant even if it does expose him for what he is!

2008 Aug 27 02:45 PM

[jt:]

Dear tvb...

We've discussed it as a group and are all agreed that YOU most certainly should buy dirt instead...we have a few other people in mind for this cheap worthless gold, so if you wouldn't mind, please don't buy any of it. And we would encourage you to take very good care of that dirt as we fully intend to revisit this topic in say 3-5 years and relieve you of ALL the dirt you've amassed at that time for a few oz of worthless gold.

Don't get dirty...

2008 Aug 27 06:16 PM

[bearfund:]

tvb, I'm not looking for a "greater fool". What I know about gold is that it is an effective store of value and has proven itself so over a very long period of time. A fair sized chunk of my savings/reserves (capital that I have chosen not to invest at the present time) is held in the form of gold. There is a lower limit to the amount of gold I am willing to hold, but there is no upper limit. I am not waiting around for my gold to "go up" so I can sell it and book a "profit" of some number of dollars. The purpose of owning gold is not to generate paper profits; it's to preserve wealth while waiting for opportunities. I consider the value of my gold to be fixed. You may consider the value of your dollars to be fixed; I could as easily say that by holding dollars instead of gold, you are waiting for a greater fool to come along and buy them from you. The difference is that your asset loses purchasing power while you wait. Mine does not (The dollar has lost 96% of its purchasing power in the last 37 years. Gold has lost none). It's all a matter of perspective.

When do I get rid of gold? When there's something in which I can invest that appears likely to deliver a positive risk-adjusted real return. Gold, recall, delivers zero return at zero risk. So because gold, not the dollar, is my functional unit of value, its price in dollars is no more interesting (and quite often much less so) than its price in shares of GE, Brazilian paper, or Vietnamese shoe factories. The US dollar, like virtually all currencies, is a lousy investment: it has a fairly consistent negative yield punctuated by abrupt random changes in value. Unless I were to believe I'd acquired the ability to predict the direction of its next random move, I would have no incentive to exchange my gold for it. But I might well exchange it for something else. Whether and when I do so will depend on the merits of that investment as priced in gold at that time. A lower dollar makes dollar-denominated investments cheaper, but it also cheapens their returns. So what really matters is investment quality. Everything else is irrelevant noise.

2008 Aug 28 12:03 AM

[tvb:]

I understand the value of holding gold, or other "real assets", as opposed to keeping cash under your mattress, protects you against inflation and resultant currency devaluation. That said, most people hold their dollars in investments (e.g. treasuries or bank CDs) that pay interest rates which typically compensate for this inflation/devaluation plus offering an extra return margin (i.e. TYPICALLY offering real not just nominal returns). Gold, is no sure protection against inflation/currency devaluation. The CPI adjusted gold price for 1979 is c. 2000/once, meaning gold investors have suffered a substantial real loss over the past 29 years. Not, historically, a great/safe investment.

2008 Aug 28 03:20 AM

[Stephanie:]

Tvb, son, you missed a point, which is that the interest rate you think of is actually negative, in which the rate of return is far less than the rate of inflation (which had been running around 12-15%, if you read between the lines). As I've said elsewhere on seekingalpha, there is NOTHING out there for the wage earner who earns less than $3,000/year (after all bills are paid each month) that would have made the returns silver did back in March if you had sold out and waited for the downdraft that happened recently to buy back in (because I only make $23,000 a year, although I'm trying to change this and find something else in the smoking, gutted ruins of this economy).

But for bearfund's reasons, I hold for the long term, because it is a store of value, nothing more. In fact, fiat has created a way of life which is to "invest the money so that it not only preserves capital, but outpaces inflation as far as possible - get rich while other people work for you when you have not worked to deserve that position of earning capacity." Which is what the stock market is, a ponzi scheme, son. I work for a privately-held retail company, which is 70 years old now. We paid off long-term debt about two years ago, and we have no short-term debt. There should not be any substitutes for working hard.

What we used to have centuries ago was the idea that since you had a relatively stable currency as long as it was based on gold or silver, you could work hard and accumulate savings, and expect that the purchasing power would be around more or less in 10-20 years in case you had to use it.

That is what traditional Indian gold consumers do. They are unbanked for the most part, and when they harvest their crops in mid-August, they will take the paper profits and buy gold with it for savings and for the holiday and wedding season (has already started with Raksha Bandhan a few weekends ago, and Ganesha Chaturthi is coming up next week). They do this because they do not trust corrupt government and thieving central bankers. Compared to us in the US, their experience is far more intimate with corrupt bankers creating massive inflation.

2008 Aug 28 09:41 AM

[bearfund:]

tvb, if bank deposits or Treasury bills offered a positive real return, they would be good investment candidates as they are low-risk (not zero risk, however; the dollar can and does drop abruptly in value at times, and it may not be possible to get out of these investments quickly enough to preserve capital in such an event). CDs and Treasury notes and bonds also carry duration and interest rate risk as well; that risk has to be priced into the return. But it turns out that for most of the past decade, these assets have offered large negative real returns. The only upside potential is a sudden large increase in the value of the dollar. This too can and does happen; it has happened twice this year. But these movements are to all appearances random and I do not pretend to the ability to forecast them. Therefore bank deposits, CDs, and Treasuries are not viable investments at the present time.

Long-dated Treasury securities were an excellent investment in November 1981; Volcker was beating the hell out of inflation and coupons were in the 14% range. If one bought 100 oz t worth of such bonds at auction and held them until maturity in 2011, he got about $43,000 in face value. Assuming he did not reinvest any of the coupon payments and that the dollar remains at the same value it is today for the remaining 3 years, he will end up with 490 oz t. Considering the limited downside risks in 1981, that's an excellent real return - about 5.44% annualised on a compound basis. Had he sold out within the dollar's plateau between late 1997 and the end of 2001 and chosen a time when interest rates were especially low, he might have done much better still.

So one should not mistake my hatred of Treasuries for a permanent bias; it is clearly possible to obtain a nice return from them under the right circumstances. However, today's circumstances are not the right ones; nominal yields are paltry, inflation is high, monetary policy is clueless, the public debt is very large by historical measures, and supply is exploding thanks to congressional and public indiscipline. That is why I continue to be short Treasuries. I intend to start covering when yields reach 7% and exit by 10%. If Volcker were back in charge, overnight rates were 15%, and the curve were slightly inverted with the long bond priced at 14%, I would be happy to get long. I might lose anyway, but the risk/reward calculus would be favourable. Today it is not, so gold it is.

2008 Aug 30 12:15 PM