Wednesday, June 8, 2011

Gold Prophets

June 9, 2011
It’s not too late to profit from gold

GOLD is not the bubble that many fear.

This implies a few things.

1. There will be a time when it is too late, just like there was in the late 1970s. They won't ring the bell at the top though. Had I been a gold investor in the late 1970s I would have been fairly convinced that I was doing the right thing. Inflation was out of control.

2. Unlike 5000+ years of history, gold is no longer just an inflation hedge? It now generates profits? This time it is different?

3. "GOLD" is an emotional investment. How else can one explain that each letter in the metal's name is capitalized? For what it is worth, all caps is generally considered to be screaming. "To scream is to utter a loud, piercing cry, especially of pain, fear, anger, or excitement." Note the word "fear" in scream's definition.

4. When I bought gold and silver in 2004 (and later sold in 2006), nobody feared the gold bubble. In fact, the owner of the mint tried to talk me out of buying gold. I kid you not. In hindsight, it was a great time to buy.

5. Nobody fears a toilet paper bubble. You won't "profit from" toilet paper, but it is definitely not too late to buy. I own over an acre of it. No joke. At today's prices (Costco) you too can own an acre of it for roughly 1/5th of an ounce of gold. In all seriousness, which would you prefer to own if the @#$% really does hit the fan?

This post is mostly intended for those who would buy gold at these prices without at least considering the purchase of basic necessities first. For gold's current price to make any sense long-term, then toilet paper prices must rise and rise substantially. Of course it is also possible that gold's current price doesn't make any sense long-term. It is well above its long-term inflation adjusted price (just as housing was in its bubble). If that is true, then you'd be far better off hoarding toilet paper (and other basic necessities) than gold right now. As an added bonus, you won't require a greater fool to buy them from you nor will you need to pay any tax on the inflationary gains. You can simply use the products until they are gone.

Just opinions of course. I have no idea what people will ultimately pay for gold. I can put a value on toilet paper though, because I know pretty much what it is worth to me. I can say with 100% conviction that I prefer to own an acre of toilet paper than a 0.2 ounce gold coin.


Mr Slippery said...

I can say with 100% conviction that I prefer to own an acre of toilet paper than a 0.2 ounce gold coin.

I agree with that sentiment. Food, water, and basic supplies first.

Then, if there is wealth left over to preserve and you don't already have any, I would consider some GOLD.

I think the only disagreement I might have with your view, Stag Mark, is in comparison with the 1970s. I think the system was in trouble, but it was fixable then. I don't think it is fixable now for various political and balance of payment reasons.

I think the money system is broken. It's like a car with a hole in the radiator, but instead of fixing the radiator, the Fed pours water in every few miles. That keeps the car sputtering until the water stops, or another major part fails, then it breaks down again.

With all of that said, one of these days, you are going to talk me into selling. I just know it.

Wisdom Seeker said...

A good education, practical skills and a healthy body are the best assets for when TSHTF.

A stockpile of toilet paper and other essentials are also high on the list. However, the value density in T.P. is a bit low; unless you've got a lot of storage space the usefulness-per-square-foot would be better in, say, shampoo. There are a lot of ways to substitute for T.P. in a real economic disaster, but folks will pay up to stay clean!

On a serious note - A small fixed percentage allocation to gold (and silver) in a diversified portfolio can be profitable just from the volatility. When the emotional folks go nuts and the prices shoot up, you're forced to sell back to your target allocation. When prices collapse again, you're forced to buy back to your target allocation. There's profit in the swings, even if the price goes nowhere for 20 years. In a low interest rate, low-growth environment, that profit probably exceeds the opportunity cost of the funds used.

As an example, see PRPFX. Based on a quick comparison with VIPSX, it appears PRPFX has been outperforming the all-TIPS portfolio, despite having no TIPS and an expense ratio in the 0.7-1.0% range, in large part because of a 20% gold, 5% silver allocation.

Food for thought, anyway.

Stagflationary Mark said...

Great comments!

Mr Slippery,

My main point here is that gold is very expensive relative to basic necessities no matter what happens to our monetary system. If I am right to think this way, then gold is not a good long-term basic necessities hedge at these prices. I might be wrong to think this way of course. It isn't like I'd be willing to short gold.

Wisdom Seeker,

I have a lot of shampoo (if you consider $15 worth of Suave a lot, lol). Unfortunately, you can buy too much. Soap eventually breaks down. Aluminum foil has good value density and excellent long-term corrosion resistance though, as does my top hoarded performer: oil based garbage bags.

I also have a great deal of clothing (t-shirts, socks, underwear) stored away as inflation hedges. If imported clothing prices don't rise (even with our massive trade deficit implying that they someday will), then we probably won't have an inflation problem.

I agree that people are limited by the free space they have. This might compel people to hoard higher density materials even if they are overpriced. I'm not sure it's a great plan long-term though. The markets care little about what small investors have in the way of free space as long as the big investors have access to warehouses (which they do).

Mr Slippery said...

The permanent portfolio is an intriguing idea because it is supposed to perform in inflation, deflation, and growth economies without having to worry about it.

But if you have any belief in the K-wave, the cycles are pretty long and it is usually pretty clear what phase you are in. You are giving up 25% of your portfolio to almost guaranteed losses. It might during transitions where the phase is less clear. Right now, in winter, bonds and gold should be the top allocations. We'll see if that holds another few years.

Stagflationary Mark said...

Mr Slippery,

As you know, TIPS and I-Bonds have become my permanent portfolio. If we default through hyperinflation or we refuse to print dollars to pay our debts then I will regret that decision.

I can say that I have been very pleased with the results so far though.

Not only have my 3.4% I-Bonds very nearly doubled in value since 2000, but if they could be sold on the secondary market I'm thinking investors would be willing to pay me a seriously large premium over I-Bonds paying just 0.0%. I would guess that they might even be willing to pay me about double. There's still 19 years left on them to grow.

1.034^19 = 1.89

There's a gold analogy here I think. I don't expect much out of 0.0% I-Bonds. The easy I-Bond pickings were made in 2000. Similarly, I would not expect much out of gold at these prices. The easy gold pickings were also in 2000.

That said, I'm still buying 0.0% I-Bonds and investors are still buying gold.

The difference is that I know that the future performance of 0.0% I-Bonds stinks. I have extremely low expectations because that's what the math shows. I will not profit off of 0.0% I-Bonds. It is virtually impossible. When I read gold articles about "profits" that is a red flag to me.

I actually think everything stinks at these prices (stocks, real estate, bonds, and gold).

I've thought all along that the era of making money off of money was winding down. It is possible to lose no matter what we do, if only due to taxation on inflationary gains in a zero growth world. I think that's why I really like toilet paper (and other basic necessities) as an investment idea. If nothing else, I doubt I will ever regret that decision.

dearieme said...

Jam jars. We have a huge stock of empty jam jars. We can store them out in the garage as long as we keep the lids indoors in a warmer, drier climate.

Wisdom Seeker said...

"I actually think everything stinks at these prices (stocks, real estate, bonds, and gold)."

I agree with that! Thanks for the reminder about aluminum foil, too.

Of course, "everything is too pricey" sort of implies that it's time to hoard cash (or stuff), which implies near-term deflation in those financial assets (relative to real stuff).

Personally I don't think I'd pick clothing as my hoard of choice. I think the U.S. could be competitive at making clothes at prices only slightly higher than what we have now, particularly with automated equipment. And most people need a far less clothing than they have, so demand is very elastic.

Stagflationary Mark said...


We did something similar with small 3 cup rectangular pyrex storage containers. They make great TV dinner equivalents for our own frozen food.

We bought about 40 of them and the prices have really gone up (at Wal-Mart anyway) since we did.

Stagflationary Mark said...

Wisdom Seeker,

I don't buy expensive clothes so the t-shirts and socks should be a relatively good cotton hedge if nothing else.

I backed up the truck on t-shirts during the "Great Recession" during sales at a local outlet mall (Eddie Bauer). I figured $10 for a custom size (large tall) was plenty good enough for me long-term. I doubt we'd be hyperinflating if they drop down to $5. Let's put it that way.

As for the socks, that worked out amazingly well. I prefer Gold Toe socks. My Wal-Mart was selling them dirt cheap. They stopped carrying them though (but not before I hoarded about 90 pairs!).

As for shoes, Costco continues to sell the sneakers for $14.99. Not so much as a penny of inflation there so far.

In any event, I don't require much in the way of clothes going forward. I'm not exactly what one would call fashion conscious though. I wore t-shirts growing up. I still do.

EconomicDisconnect said...

Do you have one of those HYPER-Color T-shirts? Those were so cool.

Stagflationary Mark said...


I don't. If they come out with chameleon t-shirts someday I'm going to be bummed that I hoarded what I did though.

I figure they would be especially handy when the black helicopters arrive at my house someday for what I write on my blog, lol.

Charles Kiting said...

Couldn't you just make a historical chart of the ounce-price of gold to the acre-price of toilet paper?

I suspect it will be slightly hilly but with a flat trend line.

The hard part of course will be finding the historical price of toilet paper. If only there was a futures market. I suppose any futures market would have to price in the expectation of people becoming either more or less full of shit. Maybe the trend line isn't flat after all!

Stagflationary Mark said...

Charles Kiting,


I sure have tried to find the historical price of toilet paper and there is some (scattered) data out there.

This is probably the closest I have found.

Toilet Paper Economics