With the recent collapse of Gold and its corresponding ETF, (NYSEARCA:GLD), I thought I would re-post some of what I have been saying for the last couple years as the gold bubble grew bigger. Since we never predicted an exact timeframe of when I thought the yellow metal crash would happen, most of the fundamental arguments, however correct, fell on deaf ears. I admit that at this point I am not sure if the crash is finally here. But unlike the past, I believe the answer to that question is only days if not hours away.-
As some of you may know from the countless conversations and letters to investors I have been writing regarding the coming gold crash, I have also explained how the crash will look like when it finally takes place, and what's the main reason for it being a crash rather than a "soft landing," like many investors are probably hoping for right about now.
Why A Crash vs. Soft Landing?
As you will see from the chart below, the creation, and thereafter explosion, in popularity of the gold ETF, GLD, has made it very easy and cost effective for major institutions to BUY $50, $500 million or even a billion dollars worth of gold with the click of a button. This also means that when these institutions find a better trade they could SELL it just as easily. There's no need for armored trucks or hard bargain negotiations.
The simplicity and low cost of ownership is why the value of gold increased with precise symmetry to the increased capital invested in the GLD fund, and others like it. Small investors buying 10s of thousands or even 100s of thousands of dollars worth of the shiny metal simply don't equate to the majority of the market, which is why they remain the vulnerable investors that are either the beneficiaries of the rising tide or simply the collateral damage of the crash.
What will the Gold Crash Look Like?
Again, although I don't know [yet] if now is the time of the crash, I do believe that if the violent downward price move we saw on Friday April 12, and overnight on the 14th continues into the 15th and 16th, then this is it, the crash is here. If there's a recovery, expect it to be short-lived and just an opportunity to bail out. At the bare minimum, investors should expect the price of gold to start a new volatility trend of 3%-6% per day moving forward, as the new normal.
Whether this is the crash or not is irrelevant, since neither crash is going to be pretty. When the crash takes place, I believe gold will drop precipitously by as much as 40 to 60 percent inside of 30 days. One bad day will lead to another horrible day as commodities firms and exchanges will increase margin requirements rapidly, which itself will speed up the crash by creating bigger margin call selling that just won't stop until nearly no margin is used by small investors, and very little by large ones. Think Financial markets of 2008, or better yet, the crash of oil (aka Black Gold") shortly after hitting an all-time high just a few years ago.
For the fundamental reasons of why I believe gold will inevitably crash now or soon, please read both of my articles (Part I and Part II). At the very least they are full of information I believe you will find useful whether you are a gold bull or bear. The facts have not changed, so the articles have remained unedited.
Remember this is just my opinions for whatever it's worth to you. Our fund has derivative contracts that stand to benefit if gold declines. My opinion is not going to change whether gold rises or declines. Any investment decision you make should be made based on facts you have at hand and with as limited emotion as possible, and guidance from people you trust have your best interest in mind. I hope individual investors somehow find a way to win in this situation. I truly wish the Best of luck to you all.
As I predicted in PART I of my article, "Is Gold Useless?", more than a few "gold investors" were upset with me for raining on their parade.
Gold is a tangible asset…
Gold has consistently beaten the stock market over the last 10 years…
Just wait two years, you'll see!
We've heard it all.
As silly as some of these may sound, they are some of the responses I've gotten from gold investors and professionals alike who really should know better. (Of course there were many that agreed with me, but that's not as much fun to discuss) Emotional reactions like these create some of the biggest opportunities for gains and disasters in the global markets today. These emotions are what make the "human element" the most valuable asset the global markets still have. More often than any other factor, markets move based on the consensus and confidence (or lack thereof), rather than factual, fundamental results. Projections, Predictions, Estimates, and Forecasts have all become pertinent parts of the Wall Street vocabulary.
Getting back to why I decided to write a part II on this topic, I must first admit that I received some of my new information from a recent visit to the New York Federal Reserve Bank. Conveniently located only a few blocks from my office, the Federal Reserve Bank holds more gold than Fort Knox or any other location in the world (approximately $170 Billion). About 4% of these gold bars are owned by the U.S. government, while the rest is the property of nearly 60 different countries. The U.S. Government's gold is spread out amongst 11 other locations, with Fort Knox being its largest custodian.
I mention my recent trip to the Fed Bank for several reasons. First, it's to confirm that what I discussed in Part I of this article - the elimination of the gold standard - is a fact that the representatives at the Fed confirmed and is not just some "theory" I came up with for some self-serving purpose. I have nothing to gain from these truths, other than to inform and re-educate any curious parties. The second reason, although slightly scarier, is to further explain why having a gold standard in the first place is no longer possible at this point, even if we wanted it.
According to the Fed, there is approximately $170 Billion worth of gold being custodies [free of charge] at the New York building for nearly 60 different countries. Each compartment is identified by a unique numerical value, rather than the name of the country, in order to maintain the anonymity of its owners. Although very rarely done, gold is moved from one compartment to another when countries trade with each other. Our representatives said that they could only recall about 6 trades over the last decade, leading me to believe that this gold deposit is used more for show than the actual trade. But I admit, that could just very well be my own skepticism.
The other interesting/scary fact that has been confirmed, was that the value of all of the gold that the U.S. government owns is only $190 Billion. Taking that point further, the U.S. government has actually been a seller of its own gold in recent years. To put this in perspective, most people that hear a number like $190 Billion immediately think of an astounding, infinite number that can never be broken. Unfortunately, that thought process is only correct if you think about that number on a personal level. "What would you do with $190 Billion?" But, when you factor this number into the global markets, the U.S. GDP, or the amount of money that has been printed since the 2008 crises began, well, suddenly the picture doesn't look quite the same. AIG single-handedly received almost $200 Billion worth of Bailout Money, and even with that "infinite" wealth, it still can't get it right.
It is not my position to imply that bailing out AIG was a mistake or not. But the question now is "Where is this money coming from?" ANSWER-"The full faith and credit of the US government." Granted, if you ever had to base everything on someone's guarantee, the US government is the best you can get. But the point that gold investors MUST know is that there isn't enough gold in the world to back up our own currency, let alone the entire world's. There is no such thing as a gold standard anymore. So if you are buying gold as an inflation protector, quite frankly you are investing with a blindfold over your eyes and plugs in your ears.
Yes, it's true that gold may be a rare, tangible, and physical asset, but did you ever ask yourself, "why is it so valuable in the first place?" For the most part, what can you possibly do with gold other than wear it? Of course it has other uses, such as being a great conductor and medical element, but there isn't enough of it to mass market it as a usable metal. It is so rare that its replacements have become the standard. In so many words, the fact that it is so rare is actually one of the reasons why I believe it not as valuable. This may contradict every supply & demand lesson we have ever learned, but what good is a product you can't sell?To take this point further, why isn't copper more valuable? It runs through almost every component of your house. It may be easier to find, but it's still a "limited natural resource" that we will eventually run out of. I know that this may sound preposterous at first, but if you really consider the facts without any biases, you would at the very least conclude why gold is worth nothing close to its current $1,000 an ounce price. The fact that our own U.S. government is selling it off rapidly should at least indicate that their opinion is, well, not so different from mine.
So to conclude my gold analysis journey, I want to make sure that you understand that although many major gold owners fully comprehend everything that was discussed in both of these articles long before I brought them to your attention, they still chose to invest in the yellow metal because of the emotional value that has been emplaced in it since the beginning of time. My concern is not about those types of investors, but rather the speculators that invested in it and helped the major owners sell their holdings at all- time high prices. More speculative money has been invested in gold in recent years than any other time in history. Despite the facts being discussed here, it doesn't mean that gold won't continue to trade at higher levels of 1100, 1200 or even 1500. But like the oil bubble of 2008 or any other bubble that we so quickly choose to forget about, the inevitable POP is right around the corner. You might not be able to see it, but you know it's coming. And while you and I may not know when, at least now we know why! It is amazing what you can find out by just being a tourist in NYC.
These are the facts and a hell of a lot better than an opinion!
Disclosure: I am short GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Reuven Capital Investments (a hedge fund) is long GLD put options