Thursday, November 5, 2009

Gold's Last Gasp?

Although we haven't added to our gold position in some months at Investophoria, it's still fun to watch.

Gold Bugs are one-of-a-kind type people.  When they are right, they are right.  When they are wrong, they will be right.  And here's the funny thing.  Although most of the outside investing world goes through periods of scoffing (think late 1990's to early 2000's), to periods where telling someone "gold is going down" gets you looked at like you are some amorphous blob of alien goo that ejected itself from a UFO exhaust, they hold true to their gold-buggery through the high times and the low times.  Gold bugs are one of the rare breed of individual who never lets go.

However, a true bug is even rarer than an "average" gold bug - the actual ranks of gold buggery swell and subside, like the tide of a sunset ocean.  The true gold bug does not care so much about the price of gold as the idea of gold itself.

Gold truly is a remarkable metal.  It is the singular item that above all others has been naturally chosen by the markets to facilitate trade and store value.

Gold bugs understand this, and wait for the day that the wide-spread use of this universal medium returns.  The days where the philosophy of gold and the true economic freedom of gold are recognized by the majority, instead of a small minority.

What is this freedom?  What is this philosophy?  Why the heck do gold bugs get so damned buggish about the yellow metal?

In order to capture the truth of gold, I would need weeks of writing to list its virtues and strengths.  However I do not have weeks to write this article just as you don't have weeks to read it.  So I'll instead refer you to the folks who have paved the way.  Here's a good place for you to start:

Human Action by Ludwig Von Mises -  You can Read it Here for Free!

Gold and Economic Freedom - By Alan Greenspan, before "the fall".

Right now, gold bugs true and "en-vogue" are loudly proclaiming victory as gold has YET AGAIN made a new record high.  At long last they are vindicated!  At long last all those who scoffed at them since the early 1980's are proven wrong!

But the point of the matter is that gold bugs have in fact NOT been proven right, and the scoffers are probably going to get one last chance to scoff.

At least, Not Yet.

Do you remember the post-dot-com-bubble recession?  Hardly, I know - it was merely a blip a notch between two giant waves of economic growth.  Few people remember why the activities of government and Federal Reserve alike were so dangerous, and one of the specific reasons that we saw the greatest credit fueled housing bubble in the history of recorded mankind.

So, why did every average person, every newscaster, every mainstream investment adviser all stampede toward real estate like a a herd of antelope running from a pride of ravenous lions?

It's pretty simple.  So much easy money was injected, such a tidal wave of cheap dollar credit was flooded into the economy at the first signs of recession, that housing starts did not go down at all during the recession.

In fact, they increased.

The significance of this was immense.  This was the first recorded recession in American history where housing starts did not decline.  The first time that house prices didn't suffer.

Never mind the cause, the disease, people looked at the symptoms - the result.  They forgot all past recessions and focused on this singular and momentous even in economic history.  The soon-to-be-mantra, chanted by one and all and a contrarian's ultimate red-flag bubble-warning:  Houses don't go down in value.  They are recession proof.  They are an investment.  You can't lose money in real estate.

And so on

Here we are today.  Even without knowing what I know about price movements, about bubbles, about unwinding long-term false price-signals, the contrarian in me tells me there is some time to go.  Even without knowing that whenever a massive psychological bubble is created, so much malinvestment exists in that bubble that the end result is a LOWER measure of success (price) than before the bubble was created.

Because everyone out there is still calling for "a bottom in real estate."  They have been calling for it since the first "correction" in prices.  Real estate is some ways off from being cheap, folks.  The time to buy a house is when everyone complains that money cannot be made in real estate, and that you are crazy and will lose your shirt if you invest in it.  We are far from that point.  We need the philosophy of real estate to change.

Which brings me back to gold - why gold bugs are going to have to wait some time longer to feel vindicated and victorious.  To feel that the stripes they earned slowly accumulating their real wealth have paid off.

The philosophy of gold is not mainstream.  The fact that it was the best-performing "asset" during the stock market crash, the real estate crash, the bond market crash, the commodity crash, all of it.  The same situation that occurred with real estate in 2002 has occurred with gold.  People don't buy it as money, they don't save and store wealth with it, they are seeking capital gains.

And when the majority is seeking capital gains (just look at paper-holding ETF inflows and Commitment of Traders reports for gold investment to verify what I'm talking about here), not-to-far-away comes the point where they lose.  The nominal value of their investments decline.

Gold just smashed through a record with a breathtaking rally.  It's holding up at $1090.00 as I write this.  Gold bugs are celebrating again.

But they should remember.  When they were buying gold, it was contrarian.  In 2002, at $250 an ounce, when the last Wall Street analyst simply gave up on covering gold, saying "there is nothing good about gold", that was the time to buy.

But now the "never-go-down" psychology of mainstream investors has permeated into gold.  Buying gold is so in right now, that even high-end retailers are selling bars out of their storefronts.  To the contrarian in me, this signals an imminent top.  This is the stage where "hope" has taken over in the place of "worry", which is where real rally build.  I would be remiss to pick an absolute top, but in reading the daily COT report, the maximum extension of gold buyers vs. sellers that has been the theme of the last 4 weeks seems over-extended at best.

Gold's young cousin, silver, has still failed to make a new high with gold.  Far from it.  If this were a true new high, silver should be somewhere about $23-$25 per ounce.  However it is far from it, having failed to even breach the $18 mark today.

Gold is going to suffer a serious correction in dollar terms.  Greater than the one that occurred last fall, as this positive sentiment must be wound out.  Dare I call these new highs in gold "malinvestment" as I would real estate?  I certainly will, though even I cringe as I type the word.  Malinvestment has to do with expectation and intent - those buying gold now have the same expectations of gold they did of real estate in 2006, that it will continue to go up.

But the philosophy has not changed.  No, dear readers, the REAL future move in gold will be one where the everyman and every-woman is awakened to its virtues.  The speculators will have moved on to some other asset class, some other investment.  They will be too "worried" about gold's price to bother trying a second go.  This is where gold will finally see its real glory and climb the long and arduous "wall of worry".  Once the philosophy changes, so shall vindication of gold-bugs be realized.  Gold will quietly cross the $1100, $1200, $1300 and so-on mark while the very few are watching.

Real bull markets do not occur in the spotlight.  Tops do.  And bottoms.

The US dollar is possibly the most hated piece of paper in investor terms on earth today (leaving aside notable exceptions such as Zimbabwe's dollar et al hyperinflationist currencies).  Gold is the most loved metal.  That is why we fly the contrarian flag today.  The deflationist flag. 

But we will be watching our dear metals.  I am no gold-bull, but a gold-bug.  And when gold really IS the best store of value you can bet the farm that I will be a buyer.  Today, though, it is not - too many speculators have sucked the value out of it.  Once they are gone my bull-flag will be back up, and up long-term.

Until then, stay the course and protect your hard-earned savings, dear readers.  The time to be bullish on the metals is not far at hand.  It is just not today.

Happy Investing All.




  1. I disagree as you have NOT considered supply and demand.
    To hedge my bets, I've gone 100% into silver as unlike gold, it has to triple just to reach it's all time high of 1980.
    It is INEXORABLE that silver will hit 100 by late next year and 300 by 2012.

  2. Derek,

    Very thorough analysis. You are right in calling attention to silver's failure to confirm a gold top. But that is entirely positive for both gold and silver. There is no more reliable indicator in the precious metals market than silver's leadership at tops and bottoms. Until silver clearly outperforms gold to the upside, there is a little chance that gold has topped. I personally believe that this will happen immediately. We will see silver challenging $20-$21 before Thanksgiving. If the gold price at the same time begins to stall, as I think it will, we will have the gold-silver relationship that truly, and always, signals a top. If the broad market also begins to lag the PM sector, we will have an important confirmation, that and the fact that it's November, and PM's do love to top in May and November.


  3. I know what you are doing you are trying to det everyone to sell so you can buy cheap! GOOD LUCK! HA!

  4. YOU are right on. The others do not get it.

    Gold/Silver all commodities and indices to crash in 2010. Gold to $640, Silver double bottom of 2008, Indices crash etc. The US index ( dollar ) will go up to 85 and maybe test 95. Then it will crash into 2012.

    The US dollar via the US index low will be in 2012 at 41 cents and this will be tested in 2013/2014 ( 3 times in total) and then the US dollar will take off and reach 112 by 2019.

    I got many other predictions-on all commodities, currencies, indieces, stocks etc and they all will come correct.

    As a trader, practice makes permanent makes perfect.

    The future is known which is a gift given from angels to people who perserve against all odds to find the light and the truth.

    Any Sovereign fund, Hedge Fund, Pension fund, Government fund and rich European/Middle Eastern/Canadian/US citizens etc.
    who want to make money and not lose any $$$ in the next 7 years should NOT listen to WALL STREET and 99% gurus but to me.

    Maybe Prince Al-Waleed who lost $15-18 billion of his wealth in 2008 ( 1 yr is all it took )should stop listening to wrong "tomes" and people should take heed of my 'gift.'

    Email me at

  5. Interesting analysis, but with one proviso.

    Last year when gold was $720 it was nigh on impossible to actually find any. It had nosedived from somewhere around $1000 in a short time but despite the expectation that those in the game for a quick buck would have jumped ship very fast there just wasn't any to be had.

    I was personally in a coin dealer's showroom when he told me he had 7 eagles. That's right, a coin dealer whose total gold inventory was 7 ounces. So I took all 7, and within minutes someone walked through the door asking if he had any gold.

    In theory I'm sitting on a very nice profit now - $300+ per coin, or around 50% in 12 months. Very nice too, except I don't actually realise the profits unless I sell the coins, and if I sell the coins I run the risk of being left out if I can't get my hands on more if/when the price dives again.

    It's also worth considering the implications of the ultimate interference in the gold market. Back in 1933 when FDR confiscated the nation's gold few people suspected what was about to happen. Now if the government attempted such a large scale confiscation it would most likely be resisted or ignored, but what's an otherwise law-abiding investor to do with a stash of gold when it's illegal to buy it or sell it?

    In a truly apocalyptic situation it might be a useful item to trade for food and other supplies (although an ounce at a time would require vast amounts of food) but if currencies collapse and gold truly shines (as most goldbugs are probably expecting at some time) don't think the government will sit idly by and let those with foresight thrive while others rot.

  6. All these writer's are forgeting or just can't get it into their heads that the world's nation's treasuries are all in way over their heads.
    Gold, silver & platinum will become the store house of value and National reserves.
    Look at America, it's in a world class mess and with no way to get out will one day depend on the PM's to get straight!

  7. You write like a scam-artist. Like a paid scammer on the stock-boards. You and your group come out in the gold-bug sites, and bash the bugs or any other gold-investors saying it's, "you gold-bugs are sure a funny lot, you shouldn't waste your money buying gold because gold is in a bubble, so buying gold now is just not wise, but buy later after it falls" You're going to all this time and trouble to "educate" about gold -- at the gold-bug sites! If that's not "funny", I don't know what is. Your the one who smells funny...

  8. It depends if you are a trader or a buy and hold guy for gold. I'm a trader.

    No empire or "great" nation has ever paid their debt in history. The US gov't will be the the debt talk is for the people who like to hear "stupid news.'

    2013 will herald something need to know financial history to get this one.

    So Gold, silver et al is going to crash...for "The sheep must be slaughtered before the feast can begin."

    The Sheep are all the investing folk who take their advice from gurus, Wall Street, financial planners, MBA and newsletter subscriptions.

    They are very few true only find them out from losing your hard earned money....then you get the game and see how really the "painting" unfolds on the canvas.

    So I trade gold and all commodities down and up.