Gold strategy in the current economy

[Charlie The Tramp Returns]

Thanks again. I really don't need to add much as you condemn yourself quite well without my help.

Remind me again, why are you bothering to post?

Simply, for fools like you, condemn myself you have not a clue, another blinded by having a few bob in Gold and acting as a rich Gold millionaire.

[Errol]

Another Fool living in a Fool`s Paradise. The mind boggles. So young and the colour Gold blinds you.

Just to get one thing clear, when you say we are blinded or living in a fool's paradise, are you including people like Jim Sinclair, Jim Rogers and Peter Schiff (to name a few) in this or not? Are they all deluded as well?

Is James Rickards (35 yrs experience of Wall Street and capital markets etc), author of 'Currency Wars' - http://en.wikipedia.org/wiki/James_G._Rickards - who sees gold going to anywhere between $5,000 and $10,000 an ounce deluded? Is Detlev Schlichter deluded?

If so, I'd like to see your trading/investment record stretching back 30-40 yrs so we can compare/contrast. And what is your alternative thesis?

Edited November 22, 2011 by Errol

[R K]

Just to get one thing clear, when you say we are blinded or living in a fool's paradise, are you including people like Jim Sinclair, Jim Rogers and Peter Schiff (to name a few) in this or not? Are they all deluded as well?

Is James Rickards (35 yrs experience of Wall Street and capital markets etc), author of 'Currency Wars' - http://en.wikipedia....mes_G._Rickards - who sees gold going to anywhere between $5,000 and $10,000 an ounce deluded? Is Detlev Schlichter deluded?

If so, I'd like to see your trading/investment record stretching back 30-40 yrs so we can compare/contrast. And what is your alternative thesis?

Sinclair - Banking dynasty and life long miner

Rogers - Up to his neck in gold/mining/resources

Schiff - ditto

These are not impartial people. They are completely biased and partial. One may as well take advice from John Hunt on whether buying houses from Foxtons before the crash was a good idea.

Rickards - ditto. Completely wrong about the gold standard. His ridiculous claim that the Great Depression wasn't caused by the gold standard but by the price of gold set for the standard. He argues that if one changed the price it wouldn't have been a problem, which is exactly the same as saying that the Gold standard WAS the problem and that not having a gold standard and devaluing was the solution. Which of course is the case.

If one takes the time to research the history of gold standards one will see that Govts. consistently go on, come off, change the rate, have gluts and shortages causing them to revalue etc. It causes depressions, inflations, clipping, wars, poverty and worse. The history of gold standards/links is clear and demonstrable. You don't need to read people like Rickards, just google it.

If so, I'd like to see your trading/investment record stretching back 30-40 yrs so we can compare/contrast. And what is your alternative thesis?

Gold has taken 30 years to not even reclaim it's real 1980 value.

It is therefore impossible for anyone holding gold in 1980 to have made any money from the simple process of holding gold. Thus these people (if they have any money at all, who knows) can only have made that money from selling their services. In precisely the same way that Fred Goodwin is a multimillionare despite having bankrupted his business. It demonstrates precisely nothing.

It's almost impossible to buy physical gold or silver today and hold it for say 5 years and make a real return. I doubt it's possible even on a 3 year or perhaps shorter basis. I'm sure even these fellas know that, but they're not going to tell you for reasons which will become obvious in due course.

Edited November 22, 2011 by Red Knight

[giantbat]

Sinclair - Banking dynasty and life long miner

Rogers - Up to his neck in gold/mining/resources

Schiff - ditto

These are not impartial people. They are completely biased and partial. One may as well take advice from John Hunt on whether buying houses from Foxtons before the crash was a good idea.

Rickards - ditto. Completely wrong about the gold standard. His ridiculous claim that the Great Depression wasn't caused by the gold standard but by the price of gold set for the standard. He argues that if one changed the price it wouldn't have been a problem, which is exactly the same as saying that the Gold standard WAS the problem and that not having a gold standard and devaluing was the solution. Which of course is the case.

If one takes the time to research the history of gold standards one will see that Govts. consistently go on, come off, change the rate, have gluts and shortages causing them to revalue etc. It causes depressions, inflations, clipping, wars, poverty and worse. The history of gold standards/links is clear and demonstrable. You don't need to read people like Rickards, just google it.

Gold has taken 30 years to not even reclaim it's real 1980 value.

It is therefore impossible for anyone holding gold in 1980 to have made any money from the simple process of holding gold. Thus these people (if they have any money at all, who knows) can only have made that money from selling their services. In precisely the same way that Fred Goodwin is a multimillionare despite having bankrupted his business. It demonstrates precisely nothing.

It's almost impossible to buy physical gold or silver today and hold it for say 5 years and make a real return. I doubt it's possible even on a 3 year or perhaps shorter basis. I'm sure even these fellas know that, but they're not going to tell you for reasons which will become obvious in due course.

I thought this thread is to discuss gold 'strategy' in the current economy. You don't seem to own any. Are you shorting the barbarous relic or just here baiting actual bullion holders? : )

Just a little curious about your intentions as your comments are thought provoking yet you only seem to appear when metals are suffering weakness!

GB.

[Vagabond]

It's almost impossible to buy physical gold or silver today and hold it for say 5 years and make a real return. I doubt it's possible even on a 3 year or perhaps shorter basis. I'm sure even these fellas know that, but they're not going to tell you for reasons which will become obvious in due course.

Could you explain this bit please. Its impossible to hold physical gold/silver and get a return over any period of time as they pay no dividends, to see the return you would have to sell.

Do you mean its impossible to hold for a 'X' year period, then sell and see any returns. (This would see rather foolish). Or did you mean it would be impossible to buy today and hold for 'X' amount of years and see a return?

[Injin]

Sinclair - Banking dynasty and life long miner

Rogers - Up to his neck in gold/mining/resources

Schiff - ditto

These are not impartial people. They are completely biased and partial. One may as well take advice from John Hunt on whether buying houses from Foxtons before the crash was a good idea.

Rickards - ditto. Completely wrong about the gold standard. His ridiculous claim that the Great Depression wasn't caused by the gold standard but by the price of gold set for the standard. He argues that if one changed the price it wouldn't have been a problem, which is exactly the same as saying that the Gold standard WAS the problem and that not having a gold standard and devaluing was the solution. Which of course is the case.

If one takes the time to research the history of gold standards one will see that Govts. consistently go on, come off, change the rate, have gluts and shortages causing them to revalue etc. It causes depressions, inflations, clipping, wars, poverty and worse. The history of gold standards/links is clear and demonstrable. You don't need to read people like Rickards, just google it.

Gold has taken 30 years to not even reclaim it's real 1980 value.

It is therefore impossible for anyone holding gold in 1980 to have made any money from the simple process of holding gold. Thus these people (if they have any money at all, who knows) can only have made that money from selling their services. In precisely the same way that Fred Goodwin is a multimillionare despite having bankrupted his business. It demonstrates precisely nothing.

It's almost impossible to buy physical gold or silver today and hold it for say 5 years and make a real return. I doubt it's possible even on a 3 year or perhaps shorter basis. I'm sure even these fellas know that, but they're not going to tell you for reasons which will become obvious in due course.

+1

Buying gold in the hope that some ultra right wing government with policies a la 1876 is going to loft in and reset the standard making you a trillionaire overnight is fecking mental. Buy some on the off chance, and do fully realise that everyone who matters in political life loves PC number style fiat money as it lets them spend everyone elses resources without any argument. If they did reset the statdard, the first thing they'd do is make your gold illegal anyway.

oh and gold can never, ever make you any richer objectively. The only way gold goes up is if the economy goes down in general, which means you can buy more from less output. Who wants to buy a towerblock for a sovereign (a la the famous story in Berlin) when there are people starving in the streets outside it? That's not being wealthy by any stretch of the imagination.

GHold strategy is always the same. Buy some, store it safely, forget about it, hope to ****** you lose money on it.

[abroad]

What are the alternatives to Bullionvault ?

[JohnLennon]

+1

Buying gold in the hope that some ultra right wing government with policies a la 1876 is going to loft in and reset the standard making you a trillionaire overnight is fecking mental. Buy some on the off chance, and do fully realise that everyone who matters in political life loves PC number style fiat money as it lets them spend everyone elses resources without any argument. If they did reset the statdard, the first thing they'd do is make your gold illegal anyway.

oh and gold can never, ever make you any richer objectively. The only way gold goes up is if the economy goes down in general, which means you can buy more from less output. Who wants to buy a towerblock for a sovereign (a la the famous story in Berlin) when there are people starving in the streets outside it? That's not being wealthy by any stretch of the imagination.

GHold strategy is always the same. Buy some, store it safely, forget about it, hope to ****** you lose money on it.

I thought you were a gold bug Injin? The first one on here infact! You sold up?

[Injin]

I thought you were a gold bug Injin? The first one on here infact! You sold up?

Never, ever been a gold bug.

[Errol]

Some interesting gold/economy charts. Provided as is - not trying to start an argument. Make of them what you will (I like the last 3 in particular).

Taken from http://www.zerohedge.com/news/guest-post-gold-still-answer-investors

[JohnLennon]

It seems silly to even compare the 1980's temporary peak in these graphs

Wasn't it sparked by shock at the Soviet Invasion of Afghanistan?

Good graphs but 1980s value is irrelevant

[RUSARTNET]

oh and gold can never, ever make you any richer objectively.

That is true. But everything else will make you poorer if you buy and hold it. And at least it is metal, which has more practial uses than paper (use to start a fire? toilet paper? wallpaper?). Gold can never be entirely worthless - unlike, for example, UK banking shares.

[Errol]

Not gold, but will sneak it into this thread anyway ...

Sprott files to buy $1.5 bn of silver

ONTARIO(Commodity Online): Canadian billionaire Eric Sprott has filed for the purchase of $1.5billion in Silver bullion for covering an expected demand in his Sprott Asset Management's silver ETF- PSLV. A $1.5 billion in purchase will require about 45 million oz of silver.

http://www.commodityonline.com/news/As-Sprott-files-to-buy-$15-bn-of-silver-a-surge-imminent-43932-3-1.html

- Should add -- clearly another deluded individual etc etc.

Edited November 23, 2011 by Errol

[FaTB]

Not gold, but will sneak it into this thread anyway ...

Sprott files to buy $1.5 bn of silver

ONTARIO(Commodity Online): Canadian billionaire Eric Sprott has filed for the purchase of $1.5billion in Silver bullion for covering an expected demand in his Sprott Asset Management's silver ETF- PSLV. A $1.5 billion in purchase will require about 45 million oz of silver.

http://www.commodityonline.com/news/As-Sprott-files-to-buy-$15-bn-of-silver-a-surge-imminent-43932-3-1.html

- Should add -- clearly another deluded individual etc etc.

WOW.......this could really get Silver moving.

It says last time bought approx $0.5bn of Silver it moved the price by about 175% !!!

[_w_]

A lot of discussions revolve around gold's long term returns vs. other asset classes. This is not about gold but it fits in quite well with the topic.

http://www.zerohedge.com/contributed/bond-bull-sees-more-deflation-ahead

I was prompted to write this comment by the fact that, through Q3 of this year, the total return performance of long-term Treasury bonds has exceeded the performance of the stock market for the trailing 30-year period that began in 1981. I began my career as an “Account Executive” at Merrill Lynch in 1977 when brokers were leaving the business to drive taxicabs. It is a bit startling to think that the “benchmark risk-free long term asset” has won the race for practically the whole time.

...

More at the link

[Guest_ringledman_*]

A lot of discussions revolve around gold's long term returns vs. other asset classes. This is not about gold but it fits in quite well with the topic.

http://www.zerohedge.com/contributed/bond-bull-sees-more-deflation-ahead

I was prompted to write this comment by the fact that, through Q3 of this year, the total return performance of long-term Treasury bonds has exceeded the performance of the stock market for the trailing 30-year period that began in 1981. I began my career as an “Account Executive” at Merrill Lynch in 1977 when brokers were leaving the business to drive taxicabs. It is a bit startling to think that the “benchmark risk-free long term asset” has won the race for practically the whole time.

...

More at the link

The very fact that government bonds have been the best performing asset class over the last 30 years is the very reason to avoid them like the plague.

All secular bull markets eventually end. We are in the blow off top for government bonds, the time of maximum euphoria for that asset class.

A secular bear will return to the bond market very soon. Buying such hugely overvalued assets 30 years after the bull larket started is a recipe for disaster.

Secular bull markets in bonds rarely exceed 25-30 years. Secular bears follow.

Gold remains within one third or half way through its secular bull market, hence a lot safer than treasuries which are edging towards the final euphoric collapse stage.

Edited November 24, 2011 by ringledman

[_w_]

The very fact that government bonds have been the best performing asset class over the last 30 years is the very reason to avoid them like the plague.

Thinking this is the mistake I made immediately upon reading the piece.

Basing your view of the situation on duration of a bull/bear market and current price is very tempting but wrong. Sometimes price doesn't matter, exogenous events only cause trend changes. I'm beginning to think that this might apply all the time.

[Guest_ringledman_*]

Thinking this is the mistake I made immediately upon reading the piece.

Basing your view of the situation on duration of a bull/bear market and current price is very tempting but wrong. Sometimes price doesn't matter, exogenous events only cause trend changes. I'm beginning to think that this might apply all the time.

'its different this time'.

The most dangerous words in investment. Classic blow off top talk.

I dont know when the bond secular bear will end. I do know its way past its empirical life. I do know that the fundamentals are so out of what with reality (2% yield, 5.5% RPI, 7% real inflation).

As such government bonds are high risk. Low upside potential. Huge downside potential. Risk / reward greatly out of whack with reality.

When fundamentals become so abstract from the present irrational herd mentality, be very nervous indeed.

Edited November 24, 2011 by ringledman

[_w_]

'its different this time'.

Quite the opposite. Some bull and bear markets have lasted for eons.

The emprical data you refer to is mostly non existant IMO, usually the result of people trying to identify patterns in seemingly chaotic data (we are wired to find patterns and will always find some, it's an evolutionary trait). The mistake is trying to find endogenous factors for price behaviour when those factors are perhaps always exogenous. A one hundred year war will give you a one hundred year commodity bull market, a four year war a four year bull market, that is empirical data, not identified patterns on charts.

Some deflationary phases in middle age Europe or at the time of the Roman Empire lasted for centuries. Bonds or their equivalent were a very good investment for the duration, possibly the longest bull market in history. To assume there is fixed time span or preset price range for trends is ignoring real world factors and in my limited experience, it is always a costly mistake.

Anyway, I am not supporting bonds as an investment, you've got the wrong idea. I find the article interesting because of the nature of the analysis and the duration of the investments covered. I didn't post it to suggest people should invest in bonds, that's the last thing I'd do: too risky for me and I generally don't like investments that guarantee a non return _of_ capital after inflation.

[Realistbear]

Is the direction of gold being determined by the fate of the Euro and a possible flight to the US $ as the safety play?

GOLD 11/25/2011 05:23 1678.70 -16.10

[Errol]

Could still see lower prices ($1300-1400). Unfortunately it's still not dropping in Sterling much which is a bit annoying.

Edited November 25, 2011 by Errol

[Realistbear]

Could still see lower prices ($1300-1400). Unfortunately it's still not dropping in Sterling much which is a bit annoying.

Its a BH in the US which may explain why the drops are moderate.

At the moment I think many are wonderng when the € is going to go into freefall or whether it is too big to fail and will bring the rest down at the same rate in which case the staus quo remains as it has been for the last few months or years. China wont allow a 20%-50% crash in the $, £ and the € wihtout devaluing the Yuan by like amount. Globalism has put the brake on FOREX to a degree (at least for the majors) but the same may not hold true for commodities of whatever persuasion. The markets can afford a gold crash but not a € collapse.

[Errol]

Currency Wars - Russia Officially Adds 19.5 Tonnes of Gold Reserves in October Alone

Russia bought 19.5 metric tons of gold in October bringing their total gold reserves to 871.1 tons according to IMF data released today.

http://www.zerohedge.com/news/currency-wars-russia-officially-adds-195-tonnes-gold-reserves-october-alone

[_w_]

Currency Wars - Russia Officially Adds 19.5 Tonnes of Gold Reserves in October Alone

Russia bought 19.5 metric tons of gold in October bringing their total gold reserves to 871.1 tons according to IMF data released today.

http://www.zerohedge...s-october-alone

They're back, and this time they mean it!

[_w_]

A decent case for gold mining shares, September.

What I am wondering is, since gold prices went up 8 times in ten years and gold miners are 'practically minting money' and for ever about to generate enormous profits as I've read many time ...

where are all the fabulous dividends?

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/15_Special_John_Hathaway_Report_-_Gold,_Opportunity_of_a_Lifetime.html

A Golden Mulligan

By John Hathaway, Tocqueville Asset Management L.P.

September 15 (King World News)

Few would dispute that the twelve year (and still counting) bull market in gold has been the

opportunity of this investment lifetime. Even fewer have participated. From its 20 year bear

market low in August of 1999, bullion has appreciated more than seven fold. That works out to a

$US compound return of 18.0% compared to 0.7% for the S&P 500. There is a paltry $2 trillion

of investment gold, approximately 1% of global financial assets. It is not main stream. It is not

widely held. The rationale for investing is antithetical to mainstream thinking. The opportunity

has been missed by almost every conceivable category of investor including pension funds,

endowments, mutual funds, and central banks, all of whom could be safely described as

underweight the metal, overweight dicey financial assets. Despite the headlines, gold remains

under owned.

To regard the lengthy bull market in gold as an isolated fact would be simplistic and superficial.

The media and most of the financial community are captivated by daily price action, but see

nothing more. To most, it is a speculation, probably an overcrowded trade, and maybe a bubble.

It is seen in the narrowest of terms, as an odd curiosity that will at some point just go away.

Gold's advance is but one aspect of a much bigger picture. The collapse of the dot com and

housing bubbles, the 2008 credit collapse, the eleven year bear market in stocks, sovereign debt

woes in Europe, zero interest rates, intractable sovereign fiscal deficits, and, yes, the steady rise of

gold in all currencies are rooted in the breakdown of confidence in paper currencies linked only to

political agendas.

Since the demotion of gold to non-monetary status by the Nixon administration in 1970, fiat

money and credit based upon it have been a fundamental source of global wealth generation.

What is the value in real terms of the $200 trillion of wealth denominated in currency if nobody

wants the paper?

In golf parlance, a "mulligan" is a second chance to make good on a bad tee shot. Mulligans are

routinely granted and gratefully accepted by every golfer at the beginning of a friendly match,

after a bad first shot. In the world of investing, second chances, or "do overs" are not routine.

Sideline huggers who have missed the bull market of a lifetime must "pay up" if they wish to

participate in a long-established trend. Late to the party entry points are inherently more risky, as

the sharp correction in bullion during the last week of August in bullion illustrates.

What follows is a table thumping, categorical, endorsement of gold and precious metal mining

stocks. It is addressed not only to impatient and possibly dispirited holders of precious metals

mining equities, but also to the bystanders and spectators of the past twelve years. Gold mining

equities represent the closest thing to an investment mulligan as we have seen—a rational way to

participate in what appears to be the end game for paper currencies on an attractive risk adjusted

basis. Gold bullion is popular. Gold stocks are not. Gold bullion has become volatile. Gold

stocks remain somnolent. The two have diverged widely over the past eight months, with gold

rising 29.2% while the stocks (basis XAU) have declined 2.7%. Since the 1999 bear market low

in bullion, the XAU has underperformed the metal by 331% or 13% per year. Based on Lipper

data, precious metals mutual fund outflows during the first half of 2011 were the largest in five

years:

Reasons for Underperformance

Over the past ten years, the miners, as measured by the XAU, have barely kept pace with the

metal itself. Since early December 2010, gold stocks have lagged the metal substantially. The

ratio of the XAU (Philadelphia Stock Exchange index of Gold and Silver stocks) to the metal

price stands near an all- time low (see Chart 2). The same can be said of the shorter lived HUI.

The basket of senior mining equities monitored by our research team to the NPV (net present

value) shows a similar result. This universe implies a gold price of $1372/oz, a discount of 27%

to spot (as of 9/6/11), vs. a five year average of -4%.

The chart below, another measure of the unpopularity of gold stocks, tracks the discount to spot

prices implied by the trading level of our index of senior gold mining equities:

There are four possible explanations for the recent underperformance of the mining stocks:

Gold ETFs

In November 2004, the World Gold Council launched a gold ETF (GLD) which now has a market

cap of $72 billion. GLD is backed by physical gold and has tracked the gold price accurately.

Other gold ETFs have been launched and today the aggregate market cap is $130 billion,

compared to an estimated market cap for gold mining equities of $500 billion. Chart 2 shows that

the valuation of the XAU relative to the bullion price began to trend lower in the years following

the launch of GLD and other gold ETFs.

It appears that the gold ETFs have been a mixed blessing for gold mining stocks. On the one

hand, by making gold more user friendly, ETFs facilitated capital flows into the metal. By

making gold available to mainstream investors, they democratized what was previously an

obscure asset known only to central bankers, commodity traders, and coin dealers. The ETFs

have had a positive, but difficult to measure, impact on the gold price. In all likelihood, and with

20-20 hindsight, this impact was probably marginal. Who is to say that given the macro-

economic tail winds for gold, that the price would be any different today in the absence of the

gold ETFs? On the other hand, gold ETFs have created competition for gold mining stocks, and

this seems to be reflected in Chart 2. Prior to 2004, the miners held a monopoly for equity market

investors wishing to bet on a decline in the value of paper currency. This monopoly translated

into an extremely low cost of capital for the gold mining industry. Unfortunately this advantage

was dissipated by industry management during the 1990's and through 2007 by way of excessive

share issuance, unwise capital allocations, and risky hedging practices which ultimately resulted

in the destruction of shareholder capital.

Relative to gold mining equities, investment in the metal is straightforward and clear cut. There

is no business risk. Investing in the business of mining gold demands more complex and

specialized analysis. Given the flight to safety in capital markets, it is not surprising that

investors flock first to bullion.

Doubts on Gold Price

The hesitancy in gold stocks year to date reflects the reluctance of investors to incorporate higher

gold prices into earnings and dividend expectations. The steep acceleration in the slope of gold

prices over the past 90 days and related volatility is a near term negative because the natural

expectation is for the metal price to correct. A correction in the metal price might give equity

investors the confidence to project and normalize new and previously unexpected fundamentals.

The steep discount to the current spot price of $1872 (-27%) (Chart 4) indicates a level of

skepticism not seen since 2008.

The rationale for investing in mining stocks is purely and simply a bullish view of the gold price.

However, the fundamental that drives earnings is not the spot price but the average price over a

period of time. As the chart below shows, the average annual gold price is in a steadily rising and

bullish trend. This trend is a more reliable gauge of industry profitability than spot prices. Since

the average price received is well below (-26%) the spot price, and the moving average is still

climbing, we expect the best is yet to come for gold mining earnings.

We also expect the price behavior of gold to become ever more astonishing. As long as favorable

macro- economic conditions prevail, especially negative real interest rates, marginal capital flows

into the metal will have an outsized impact on the metal price. The reason is that the available

supply of investment gold increases slowly while the quantity of paper currencies and sovereign

debt proliferates at comparative warp speed. The addition to the above ground gold stock of

170,000 metric tonnes from annual mine production is only 2,698 metric tonnes or 2%. $100

swings in the daily price are likely to become routine. Those who view the metal's price as a

vehicle for trading profits will in all likelihood fail to capture the full return from the substantial

and permanent devaluation of paper currencies against it. The record of the high profile pundits

in calling short term tops and lows in the price action is abysmal. We graciously do not

reproduce any of their inaccurate calls as evidence. It raises the question of why anyone would

want to trade in the midst of a tectonic shift in global monetary arrangements.

...

More at the link

Edited November 25, 2011 by _w_