Friday, November 6, 2009

Confessions of a Gold Bug

Gold's Last Hurrah?

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.


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.

Clearly this guy doesn't like gold. Right? Au contraire!

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.

I'm a long-term stagflationist but there are just WAY too many people on the precious metal band wagon these days. I've said this time and time again. The price of toilet paper is NOT confirming the price of gold's exponential move higher, any more than the price of toilet paper confirmed the price of real estate's exponential move higher.

That said, the higher the price of gold goes, the more I want to own toilet paper. Why is toilet paper so much safer? It has not quadrupled in price in the last decade. There is no long line of speculators betting on its never ending rise. There is no ETF allowing heavily leveraged bets on its future price. If there's one thing that this new economy should have taught all investors, it is that heavily leveraged bets are things that must be avoided in order to protect one's nest egg. That is especially true once an investment reaches the "sure thing" level.

Deep down, gold bugs know this is true. True gold bugs simply want to own the metal itself and tuck it away for the future. They don't borrow money to buy it. They don't try to leverage up their bets to eek out exponentially higher returns. I very much admire that long-term thinking and this makes what I write especially difficult. In fact, if I thought the market consisted only of gold bugs, I'd still own it even at these prices. Seriously.

Toilet paper bugs and gold bugs are two peas in a pod. There is one key difference though. The only people investing in physical toilet paper are toilet paper bugs. I'm one and financially speaking, I'm very lonely in the investment. The lonelier I am, the safer I feel. My best investments were always made in isolation. That's how it has always been for me. I can still remember what it was like buying gold for the first time in 2004. I was not at all confident that I was doing the right thing. It was a very lonely feeling. The place I bought it from actually tried to talk me out of it. Gold was at the upper end of the trading channel and most felt it was due for a correction. I bought anyway. I believed in the long-term story.

Gold bugs these days are not lonely though. They are sharing their investment with waves of momentum traders. I have absolutely no desire to join them at these prices.

And lastly, from what I see there seems to be three main types of commercials on late night TV these days. This should be a wake-up call.

1. Natural Male Enhancement
2. Debt Consolidation
3. Gold

No-money-down real estate is still coming in at #4, for what that is worth.


Stevie b. said...

I bought gold decades ago and added to it for the first time last year. I have always hoped it would go to zero. Like you, I like to plough a contrarian furrow & so I don't like it when the gold price goes up, but I'd feel naked without it.

For all we know, this breakout is just the start of an ongoing "rise" in early anticipation of the stagflation you (and I) see eventually. There are an awful lot of people in the world who are goldless and an awful lot of countries whose currencies need a competitive boost via devaluation. Seems to me we're nowhere near any sort of global gold euphoria peak, so playing a correction here is IMO a dangerously irresponsible game.

EconomicDisconnect said...

I am not sure what there are more of right now, gold lovers or dollar bulls. Everyone and their grandmother knows gold is going down and the dollar is going to syrocket higher. What this would mean for equities is not good.

All the TV ads I see are ads trying to buy your gold cheap, not sell you gold. If that changes perhaps it would be some kind of indicator.

With the world printing money at an alarming rate, gold continues on as a currency hedge. The GLD ETf holdings ahve not moved up during the latest gold price push and this implies central bank buying, not speculators.

We shall see.

Stagflationary Mark said...

Stevie b.,

Thanks for the comments!

No disrespect intended but am I really being dangerously irresponsible for not wanting to own gold at these prices? There are certainly many other elements from the periodic table to choose from if one is worried about stagflation. For example, aluminum prices tripled in the 1970s (even though aluminum represents roughly 8% of the earth's crust). That said, I can buy aluminum right now at 2004 prices.

Don't get me wrong. I am a hoarder. I just prefer to hoard things other than gold these days.

I would also add that there are other elements from that table I simply cannot live without. Without carbon or oxygen, I cannot eat and breathe. Without gold, I might miss out on the current parabolic rise in net worth. That's about it though. Further, it is the riding of parabolas that is dangerous in my opinion.

That's all it is though, an opinion. I've stated my case many times on this blog. Can gold hit $2000 an ounce. Of course it could. $5000? Sure, why not. However, is it actually a good value right now? Only time will tell. I'm clearly very skeptical but hindsight will clearly show someday if my skepticism was valid. It really doesn't matter which one of us wins the debate in the short-term. The market will tell us in the future.

Keep in mind that I did own gold and silver from 2004 to 2006 and did very well on the investment. It was 1/3rd of my nest egg! I am sympathetic to the gold bug arguments. I'm just not THAT sympathetic these days.

Stagflationary Mark said...


"All the TV ads I see are ads trying to buy your gold cheap, not sell you gold. If that changes perhaps it would be some kind of indicator."

That was EXACTLY what was going on in 1982 though. I remember it distinctly. I was just out of high school and had been given three silver dollars as a graduation gift. Nobody wanted to sell me gold and silver. Dealers were advertising and wanted to BUY my three silver dollars. I did just that in a large hotel in Spokane, WA. They were working out of a hotel room. No joke! They spent a few seconds looking at my coins, promptly paid me $18 each, and tossed them into a large white bucket that was nearly full from previous customers.

At the time I felt like I might actually have been ripped off, but $54 in cold hard cash for three generic silver dollars seemed a pretty good deal to me.

How big was the bubble? Even after the impressive rally in precious metals over the last decade, I can STILL buy those three silver dollars back for roughly the same $54 they gave me then.

I just watched an eBay auction for a 1885 Morgan Silver dollar.

Winning bid: US $19.43

Free shipping! Assuming shipping costs $1.43 then I could indeed buy those coins for the same price.

So why won't I buy those silver coins back?

One should never underestimate the power of the monetary printing press. However, one must never underestimate the power of modern mining equipment either. There isn't just one force at play here.

Production Overcapacity = Deflationary Great Depression
Monetary Overcapacity = Inflationary 1970s

We have both and it is quite possible that the Fed can indeed walk the tightrope between the two. That said, they can't seem to do a darned thing about actual ongoing economic prosperity if the unemployment rate is any indicator.

Stevie b. said...

Mark - yep - dunno whether I'd just woken up or should've been asleep, but scratch the word "irresponsible" and let's just call it plain dangerous.

I'm in a rush right now (in case I say something else a bit dumb), but surely the thing is that the global (wo)man-in-the-street does not buy e.g. aluminum as a store of value to ensure that (s)he and his/her family can continue to eat for a while if currencies fail or his/her job does.

According to Steve Roach, China/India will not be in a position to aid global demand relative to the US for at least 3 to 5 years at best. Can you see the global economy muddling through for that length of time? Given the American (and many others) mind-set of an intolerance of economic pain without attempts at quick fixes, we do not know the point at which such attempts will tip the balance into chaos. Maybe that point is a lot further away than we might think, but for the sake of a few hundred bucks I would not want to be without gold just in case the tipping point is a tad nearer than we think.

Stagflationary Mark said...

Stevie b.,

For what it is worth, I own a LOT of aluminum foil. $300+. No joke. I shouldn't need to buy more in my lifetime in theory. That's true even if I someday make hats out of it. Hahaha!! ;)

I hear what you are saying and I honestly do understand your long-term concerns though. I share them.

That said, I don't think you are giving aluminum foil and toilet paper (and canned goods, and garbage bags, and...) nearly enough credit as barter items if it truly hits the fan though. They are top survivalist items and they are still relatively cheap. If you expect to trade me gold for them at that point you may or may not be out of luck. I didn't buy them primarily as survivalist items though. I'm simply trying to lock in a current standard of living for what we both see coming.

As for timing, I've been very bearish since 2004. That's 5 years so far. The kind of crisis we're talking about can be delayed along time (see Japan's massive mess). I might not feel that way if the rest of the world was in good shape and it was only us with serious problems, but that's not the case.

And lastly, it isn't so much that I am anti-gold. I'm just pro all the things that gold's price is warning about and that have yet to go up in price much. Gold has vastly outperformed the price of toilet paper over the last decade. Even if gold is 100% right and stagflation appears, I still expect toilet paper to be the better store of value from here. The reason is that toilet paper is still cheap. On the other hand, if gold is wrong (like it was in the early 1980s), then I would still expect toilet paper to be the better store of value as gold drops in price. Just opinions though.

Stevie b. said...

Mark - the thing is...compared to e.g. toilet paper, I can store more wealth by putting a lot of gold into a small safe or safety deposit box, (and it wont catch fire....). I can then convert (some of) my gold into devalued currency and buy e.g. toilet paper if I still see the need for it as a relatively-falling-in-price luxury item by that time... Yep, I could end up rich but friendless, unless I found a like-minded group of friends of course....


Stagflationary Mark said...

Stevie b.,

You assume of course that gold will continue to appreciate faster than toilet paper. That has been the case for 10 years but as they say, past performance does not guarantee future results.

Your money is on gold at roughly $1100 an ounce.
My money is on toilet paper at roughly $22 per 45 rolls as seen at Costco (500 2-ply sheets per roll).

We clearly can't know for sure which is the better bargain. Might just as well patiently wait and let hindsight tell us.

In any event, the vast bulk of my nest egg sits in TIPS and I-Bonds. If the bond market has underestimated inflation over the next 10 years then I will do far better than most. Right now it is predicting roughly 2.1% over the next 10 years. That's up from its 0% prediction just last December. It's fairly clear that the bond market isn't all knowing!

Stevie b. said...

re toilet paper "wait and let hindsight tell us."

Quite! (or as I foresee it, one of the other senses perhaps...Oh dear, when it comes to toilet humor I am such an assh*le)

mab said...


Might just as well patiently wait and let hindsight tell us.

In dog sledding circles they say that unless you're the lead dog, the view is always the same. In that sense, for all but the lead dog, foresight and hindsight are the always the same. ;)

Anonymous said...

Something that Stevie b. said:

"Yep, I could end up rich but friendless, unless I found a like-minded group of friends of course...."

Not too long ago I was reading stories about the revolution in Russia and came across one about a man that owned two thousand acres in the Ukraine Valley. He heard rumors about the Revolution and about it moving in his way. He had money and actually had time to leave but couldn't do it. He convinced himself that the Revolution was much farther away and maybe it would never arrive. A month later he found himself in prison. Years after that, in the same prison, he was standing in freezing water up to his waste. Men would be forced to stand this way so long that they would finally succumb and sink into the water. His son, who relayed this story, never saw his father again.

I tell this story because I think that it’s much better to be part of a political force than being isolated with gold or what-have-you. Having power comes from having the backing of a group with power. There isn’t any gold or toilet paper that can’t be seized. Politically involved people have a true survival perspective, I believe. The problem that I see is that many people, myself included, believe survival is possible in isolation. Hoarding is done in isolation. But you don’t want to end up a stranger driving your loaded wagon through unknown territory… never want to end up “rich but friendless”. You’re much better off with a gold-less, no-toilet-paper, stinking group of buddies with guns!

Ed G.

Stagflationary Mark said...

Ed G.,

Great commentary.

You point out why my primary reason for hoarding was not survivalist. I was simply hoarding because I was pretty much forced to buy something due to easy money policies. As a saver, that meant "saving" goods instead of dollars to some extent. The higher the price of gold went, the more toilet paper seemed to be a relative bargain to me.

I would also mention that my hoard would not actually allow me to survive for long. I didn't hoard water. I assume that it will keep coming in through the much more efficient pipes in my walls. If my assumption is wrong, then I'd have much bigger problems anyway. As you say, there would no doubt be many strangers in my life.

Further, when I did own gold in 2004, I also bought a gun. I didn't buy all that much ammo though. In a "rich but friendless" world, it would be irrational to think that I'd need much. I'd already be one of the most legendary gunfighters to ever walk the planet if I could use up several hundred rounds defending my home without getting killed in the process, lol.

That said, I thought it prudent to defend myself if crime did start to pick up based on our economy going to heck in a handbasket (especially at a time when I owned gold and silver). Even with 10% unemployment, I'm not quite there yet though. The gun has yet to make it to my nightstand. It sits secure in the garage on the hopes that it can remain there permanently.

Here's a secret advantage to toilet paper over gold. If a burglar enters my home, I figure there's only so much of it he can take. It would take quite a few trips in a car to carry it all away! I'd also feel no great need to defend it with my life. Let's just say I don't worry about it when I'm not in my house.

I'm reminded of the story of several thieves who used a stolen debit card to withdraw funds from the bank. It worked so they went to the next bank, and so on, and so on. The year was 1995.

"Thieves Hit Costly Jackpot in ATM Spree Crime: Three suspects are arrested in connection with the biggest bank machine fraud case in U.S. history. Culprits made 724 withdrawals in 54 hours."

It was very interesting to see some of the videos from the bank machines. In the beginning, they were elated. By the end of it, they were not only driven to exhaustion but complaining about whose turn it was to get the money.

I think burglars would find my extended pantry somewhat similar! Stealing one gold coin worth $1100 takes the blink of an eye. Taking $400+ worth of toilet paper down a flight of stairs would take some effort and something bigger than a car to haul it away.