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Holding my breath, shorting a gold producer


For the last several weeks, months really, one of the big items in the news has been gold's run up. I'll admit that at a few times I've been bullish on the metal, and did in fact own Goldcorp when it was trading at $22, and also held IAU during the time that gold ran from 600 to 900 an ounce. I'm not saying that to say I'm a great trader, but to point out that I'm not simply bearish on the metal just to be bearish.

But these days, if feels like gold has detached from anything fundamental about it's value. To hear commentators on CNBC talking about their kids wanting to invest in gold, it strikes me with the same alarm bells I felt when I moved to Florida at the height of the housing boom, where waiters at restaurants would also point out that they were flipping properties on the side.


That said, I recently opened up a short position on Goldcorp (NYSE:GG). I'll possibly start looking for smaller producers to short as well, but overall, i'm still going to maintain the long bias in my portfolio.

People complain about the fiat nature of our currency, and clamour about gold and its "intristic" value. They don't note that gold, for all intents and purposes, is also a "fiat" store of value, only being valuable because people around the world feel that it's valuable (just like dollars).

But stepping back and looking at it more objectively, what use is gold? 12% is used for industrial purposes, and the rest is either made into jewelry or stored in the form of coins and bars, in either bank vaults or personal safes. Unlike other commodities, which you can either wear (cotton), eat (corn, cattle, etc), or get energy from (oil, natural gas), or even other precious metals (silver, for instance, which is used for a plethora of industrial uses), gold is relatively useless, only having value because people expect it to.

I haven't done the math, and perhaps I should, but people point out that a 10 year investment in gold would have outperformed the S&P. That's basically a measure of the market from the peak of the dotcom boom, to a level 50% above the market bottoming off of its recent crash. But i'd like to see the results of an investment in gold since the 70's when the dollar decoupled from it, and from it's previous peak during the 80's. I think the results will be radically different, especially once you account for dividends thrown off by the S&P. It'll be something to revisit.

But in the mean time. I'm probably too early to the party. I'm okay with that, so long as shares of gold producers remain easy to borrow. Being a fan of David Swensen and Warren Buffett, I'll point out that the time to buy things is not when they're at peaks and everyone is ecstatic about them. Again, since gold produces nothing, to me, it seems like it's the same game of hot potato that was played out in dotcoms and housing in the last decade.

I won't proclaim to be the next big investment star. I'm a little guy. But people bashed meredith whitney when she made calls against Citigroup. People bashed David Einhorn when he bet against Lehman Brothers. And John Paulson was decried when he began shorting subprime mortgages.

The short story, I think, is that people are risk adverse, and they've crowded so much into perceived "safe" assets (gold, oil, treasuries), that they've made them incredibly risky. It's not happening yet, but when rates raise, people will find their long term Treasuries plummeting in value. And when the level of fear in the market has tappered down, people will likely be selling their gold in order to jump back into equities. I just can't see this ending well for a lot of things, but gold in particular.

Go ahead, bash away.

Published originally on my Covestor page

Disclaimer: Currently short GG