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  • gold bubble or not and precious metals trading. what is the future of gold. 8 comments
    Nov 8, 2011 7:03 AM | about stocks: GLD, SLV
    I should make it clear from the start that I firmly believe that there is no gold bubble. In fact, gold is fundamentally undervalued and likely to go much higher. I believe that next year we are likely to see 2500 price and longer term we are going to go to 5000 and higher.
    Let's discuss why gold is not a bubble. To be a bubble, you need massive buying, just like we saw in housing and tech shares. Only 0.7% of global assets are invested in gold. This is hardly a bubble. I would argue that against the backdrop of negative real yields, money printing and currency debasement, a minimum of 5% investment in gold and silver should be a part of any portfolio. Gold has preserved its purchasing power for thousands of years and this is not likely to change.
    Gold is called a barbarous relic and a thing of the past by various economics Ph.D.'s with little understanding of the nature of gold. I guess that this implies that paper money is a very modern and advanced invention. This is hardly the case. In fact, paper money has existed for a long time. It is a Chinese invention from the 10th century during the Song dynasty and saw widespread use by the Ming and Yuan dynasties. The currency changed over time as overprinting always resulted in hyperinflation and a new currency had to be printed. Eventually the use of paper money (also called flying money in China) was abandoned in the 15th century in favor of the more robust metal based currencies.
    I will give three market reasons why gold is a good buy:
    1. Central Bank buying. This is a big change in the market from the selling that we saw until only a few years ago. The European CB's unloaded a large part of their holdings losing billions in the process. The biggest seller (and also loser) is the SNB but the UK, Netherlands and  several other Western banks also sold. This has now stopped and the Western banks are not selling (unless you believe the rumors that they sell from time to time to suppress the price). New players have come to the market and they are all buying. CB's from the newly richer EM countries are sitting on a lot of cash and are buying. China, Russia, Mexico, Korea and others are buying. Check this link for the record September purchases by China http://www.cnbc.com/id/45198734 - this is private and official buying. Emerging market countries didn't use to have large reserves and having accumulated such paper reserves are now looking to diversify. They hardly have any gold and will be buyers for many years.
    2. Inflation and currency debasement. There is a great debate between the economists calling for inflation and the ones calling for deflation. There has been huge money printing going on everywhere and this currency debasement has pushed gold prices much higher. The focus has been on the FED with its money printing programs called QE1 and QE2 (you understand that MP1 and MP2 meaning money printing 1 and 2 would not sound as good). The fact is that the rest of the world's CB's are just as aggressive in their money printing efforts. The BOE just started a new money printing program. China, India and Russia increase their money supply more that 20% per year, every year. More recently we saw large protests in Israel against the extremely high inflation in the country, inflation caused by its irresponsible Central Bank.
    There is an argument that money printing will not cause inflation due to the collapse of lending and weak demand. While weak demand is likely to keep a lid on prices, I prefer to look at history. History in countries as diverse as the Roman Empire, China in the Middle Ages, Germany in the 1920's and the UK in the 1970's shows that money printing always leads to inflation. There has been absolutely no exception to the rule and the fact that monetary policies are now controlled by professors doesn't change this basic principle. Inflation is a funny animal and you never know when and how it rears its ugly head. Now we see it in food, medical and educational costs while housing in the US has gone down. We don't know where it will strike tomorrow but you can rest assured that CB's fighting the ghost of deflation will make sure that this ghost never shows up.
    3. Debt levels in the developed world. We are overwhelmed by news on Greece and now Italy and their debt problems but the fact remains that the US, Germany, France and Japan are also in trouble. In 2010-2011 fiscal year the US ran a larger budget deficit, as a percentage of GDP, than Greece. With the developed economies sitting on something like 100% DEBT/GDP, the future is clear: more money printing is in place. Notice that this 100% number is actually low as ''clever'' accounting allows governments not to recognize much of the debt that they are responsible for. For example, FNMA, the failed housing agency, is supported by the state but its huge debts are not on the balance sheet of the country (the US still pays though). There are many other examples like that and the picture of the actual debt out there is actually much worse than reported. Further to that, one has to look at the unfunded liabilities of the various governments. In the US this includes Medicare, Social Security and others. If you include the future costs of these programs, the DEBT/GDP is higher than 600% and some economists believe that it is higher than 1000%. Given that the potential tax receipts of the government are about 20% of GDP, this is totally unsustainable. Not owning any gold means that you put your faith in governments to manage their finances responsibly and preserve the value of their currencies. I don't see even a remote chance of this happening.
    I will finish by a short comment on current gold prices. Gold doesn't look cheap at 1790 per ounce and may see volatility and better entry points. With higher prices the market will become more volatile. The risk remains that we see a big move up due to an escalation of the usual debt problems out there. On the downside the risk is that demand from China and India comes down. China is very clever about its gold buying and they alternate buying in size with periods of low demand to push prices down and buy again. My view is that the huge amount of debt in the world, money printing and fiscal irresponsibility will push gold prices much higher over time. Of course, financial commentators will continue to talk about the gold bubble. After all, they mostly work for governments (directly and indirectly) and higher gold prices clearly show how good a job these self-serving politicians are doing.
    I am long gold.
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Comments (8)
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  • jsIRA
    , contributor
    Comments (2438) | Send Message
     
    after four years, gold is still at under 2,000 far from 2,500 your one year target.
    1 Oct 2012, 10:48 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    Author’s reply » Yes, it is ... not sure for how long it will be below my target but it looks like it will get there. Timing is of course a really hard call but the basic idea is still the same.
    2 Oct 2012, 10:36 AM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    @winningtrader you will accomplish your target in 2013-14.
    5 Dec 2012, 04:11 AM Reply Like
  • jsIRA
    , contributor
    Comments (2438) | Send Message
     
    I will be very happy if I can see 2,300 next year.
    2 Oct 2012, 11:43 AM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    Author’s reply » I think that my target was correct and $2500 gold price is a fair price right now. I believe that we are far away from that due to massive interventions and market manipulations by Central Banks (including the FED), BIS, JP Morgan and a few other players. I am personally not too worried about that because all it means is that when gold finally goes up, the move will be even more violent.
    2 Oct 2012, 12:12 PM Reply Like
  • jsIRA
    , contributor
    Comments (2438) | Send Message
     
    Will buy gold at the end of October. Gold will be down this month after topped.
    2 Oct 2012, 02:41 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    Author’s reply » Can happen. I personally don't believe that it is possible to predict very short term moves but I think that if prices come down a bit, we'll see a huge amount of buying. The only thing that points towards a drop in October, in my view, is the November presidential elections. The administration may try to push prices down for political reasons. Looks like Obama will win but even if he loses, I wouldn't worry too much about gold. Romney will be very gold friendly and I doubt that he will do much about the deficit.
    2 Oct 2012, 04:51 PM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    @winningtrader if you want extreme accuracy you should follow Ray Merriman and his book on gold and its geocosmic correlations.
    5 Dec 2012, 04:14 AM Reply Like
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