May 28, 2010
Worried About Wiluna
June 8, 2010

Got Gold?


Got Gold? I’m in Invercargill, the southern tip of South Island, New Zealand. I have one week to go before finally heading home. I want to see as much as I can. I’m supposed to be escaping the next data point. However, I cannot escape the fact that there’s a tempest brewing and it’s about to make landfall.

The Euro is imploding. Despite protests to the contrary, the ECB is about to embark on an aggressive debt monetization plan. They have no choice—otherwise the whole charade will collapse. Britain may be in even worse shape. On Friday, we learned that Hungary may be in trouble as well. The difference is that Hungary has no adult supervision. They can just print money. At least, at the ECB, they pretend to be prudent. Hungary is threatening to print or default or something else of that nature. They really don’t know what they are going to do. All they are sure of is that they have a problem. They have too much debt.

In the States, we are blissfully ignorant of our own out of control fiscal issues. Are bonds actually rallying? Did no one learn anything from the housing bubble? You cannot loan money to people who do not have the ability or desire to pay you back. While Europe pretends to implement austerity measures, in the US, our politicians are trying to find creative ways to piss away money they don’t have. Free health care anyone? We’re only a year behind Europe in this rolling crisis. With dismal employment statistics and an election in November, no politician worth his campaign contributions will sit by idly. Get ready for Bailout Round II—Bigger! Bader!! More Corrupt!!! How to pay for it? What choice will our government have but to print more money as well?

For me, this has all been obvious for quite some time. You could see the crisis building. You could position yourself. I feel that most people are unsure what to do. You can see it in the trading action. It’s erratic, with huge swings as people try and react to the various political posturing. I see it in the emails that I get from friends. People don’t know what to do. They feel we are in uncertain times, and they don’t know what asset class to own. Equities will be impacted by inflation, regulation and weak growth ahead. Real estate is still going down—there’s inventory everywhere. You can’t own cash because you know it will be debased. The Pavlovian response to fear has been to buy bonds. To me, those are just as bad as owning cash. I think that, with a jolt, the whole planet is about to discover gold—or rediscover it, actually.

For millennia, gold was money. It was the no risk way to store wealth. Over the last few generations, the Western World has allowed governments to decide what constitutes money. They were never good stewards of the currencies they created. However, a slow and creeping depreciation is easy to ignore. What governments of the world are contemplating now cannot be ignored. The US expects trillion dollar deficits for the next decade. Are they on glue? Does anyone think they can even hit those deficit targets? Europe doesn’t even really have a plan. They are making it up as they go. Greece set the precedent. They spent themselves broke and asked for a bailout. What reason does Spain have to even try and balance the budget—they want the Greece treatment. Poor Ireland—they actually went down the austerity road. They tried to do the right thing. Now, they’ve been called upon to bail out the Greeks who didn’t even make an effort. Will politicians ever again risk re-election in the name of austerity? Or will the new rallying cry be to spend the money before the Greeks do? We now know the ECB stands for European Commission for Bailouts. They’ve shown their hand.

For the past decade, gold has slowly crept higher. One by one, people have awoken to its charms. It’s not really an investment per se—It’s an escape from government imprudence. You don’t own gold because you expect it to do remarkable things—you own it because you are scared of your government doing remarkable things. Think of gold like the credit rating of world governments. It’s the CDS you buy if you don’t trust the politicians and their stewardship of the currency.

What is unique about the current crisis is that it is so global. When Argentina imploded last time, it didn’t impact me. If I were Argentine, I had a hundred currencies to swap into. Almost all of them were better than the Peso. We are now witnessing a world-wide currency death spiral. Clearly some are circling the drain at a slower rate—but why try to guess which is least bad. For the past decade, shrewd investors have hop-scotched from Dollars to Dinars, from Krona to Lira and back again. Now they own gold. When you read through the list of outspoken gold owners, you realize that you are staring at an All Star Team of investors. Every day, gold attracts new adherents amongst the brightest of investors. Get ready for the remora.

For most of the last three decades, gold has been a shunned asset. If you mentioned it at an investment committee meeting, you got strange looks. Potentially you got fired. Career risk is a very powerful investment deterrent. With the All Stars heavily invested in gold, you can at least talk about it. If you look at past investment trends, the asset in question slowly crept higher as the smart guys got positioned. Then, there is this cathartic moment. A few brave fund consultants mentioned it. A few funds bought, then a few more. There’s safety in numbers. Soon endowments and pension funds are tripping over each other to pile into an asset class they do not really understand. From technology to forestry to infrastructure to CDOs cubed. Gold will be no different in this regard.

Gold will be very different in two significant ways. First, retail investors will play along. You can just feel them joining in. The daily swings are wider now. The volume is up. Now the chart is starting to look strong. They never buy the first breakout. They buy after it’s been in motion for a while. This could get wild. The world produces 80 million ounces of gold a year. That number is dwarfed by the number of investment accounts in the US. If retail investors get involved in a big way, there just isn’t enough supply to go around.

Even more significantly, you could sit out the technology bubble—I mostly did. You cannot sit out the  coming gold bubble. If you do, you could lose everything. Fear is a very powerful motivator. Gold is still seen as an investment class. Soon it will be seen as an antidote to fear. If your government is defaulting, do you want to buy puts, or actual protection? Think of gold as a fear gauge. In just a month, fear of sovereign defaults launched the VIX from the mid teens to the high 40’s. You can’t really capture VIX—you can own gold.

This has all been a long time coming. Suddenly, I think it matters. I talk to people all day. People, who derided me for talking about gold last year, now want to know more. The chart increasingly looks pretty. A move over $1250 could be explosive. I cut back my gold exposure before going on vacation. I felt naked without it. I recently bought it back and then some. I paid up a few dollars. That’s fine. I’m using a stop on what I rebought—just in case. I think the big move is imminent. Got gold?


See Victory For Gold if you want more background on the fundamentals for gold.

Categories: Current Investments
Positions Mentioned: none

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