Short Gold?

March 3, 2009

I am rebutting (responding) to this article:

Here is my logic:

Thanks for your thought provoking article.

But consider that the 30 million oz in GLD is only $30 billion. Figure there are maybe 100 million global investors with access, so $300 each on average. Is that saturation in a "death of financial system" scenario? They've got $trillions in net worth in fiat.

Short-term correction yes. Secular bubble for gold, no. The move up has been a little too fast, correction to give time to build up more participants from the next wave of fear and the eventual run from long-dated Treasuries once inflation heats up. And that means other investments may have more upside than gold which just peaked at all time highs in most currencies, specifically silver which is still way off it's recent highs even in other currencies.

Of course there may be better shorter term speculations than gold (e.g. shorting long-dated treasuries if you know what you doing, picking small caps, etc), because gold's role is to be a smooth interpolation of the transformation of the current global financial system. Other things are priced relative to gold, and thus will have more price action, including fiat itself.

But long term, gold is the currency, always has been, always will be. And if you want a play on that with more leverage, then silver leaves the monetary world periodically but always comes back with a vengeance.

It depends on your investment goals. For me, I need my savings to represent stored labor, not extract more labor from me, chasing investments 24 x 7.

In my current thinking, the simplest play right now, is buy silver and sit back. It is coming back to play it's historical role as money, as it always does.

Why? Because the financial system is a Ponzi System in extremis.

I make my living programming software, not as an investor. And I want it to remain that way. I want to protect my stored past labor. And equities have not out performed generally over time.

I set out to start some preliminary research on whether this theory is true or not. I know Warren Buffet has mentioned Coca-Cola (NYSE:KO) as one of those type of companies he likes to buy and hold (forever is his preferred holding time). Yahoo Finance reports the share price was 1.98 on January 2, 1962. I plugged this into the Inflation Calculator (using the SGS adjustments for correctness), I see the inflation adjusted price as of Sept, 2008 is $41.25 ($14.44 for incorrect BLS inflation). I see the share price today hit $41.50.

So all the price gains in Coca-Cola stock since 1962 have been due to inflation. No stockholder has made a real inflation-adjusted penny in equity in Coca-Cola in 46 years. I have read that Coca-Cola pays a dividend of about 2 - 4% per year, which I bet just about has kept up with world population growth since 1920. The point being that the investment would take about 25 years to double, adjusted to inflation.

Gold since it was un-pegged from a government mandated price in 1971 of $40.80, has a inflation adjust price as of Sept. 2008 of $640, yet recently gold has been between $750 to $950. However, a 3% inflation adjusted annual yield would be $1911. So clearly gold is under performing Coca-Cola thus far.

Thus clearly Coca-Cola has thus far been a superior investment than gold, yet Coca-Cola still has not been a fabulous investment so far during my lifetime. But physical gold in my hands, has less risk than Coca-Cola, because it can't nationalized, frozen, nor debased with hyperinflation. I pay for this lowered risk, by expecting gold not to yield anything but keep pace with inflation, which it has done.

The following comment from the above linked article is thought-provoking:

"...On gold, I said it would rise, as it has. I had the timing accurate. I said EVERYONE will be talking, and buying, gold. Then it will drop, bottoming in June 2010…a higher bottom. Around $550 to $650. Then will begin an erratic rise, that will become steeper and accelerated from 2011 till peaking in 2013. That will be the point of global depression, marked by inflation here, and deflation abroad…the opposite of the Great Depression. In 2013 will be the start of a 3 year world war. Again…all these were said in 1999. Also, I stated that people that are jumping into gold en-masse would lose their shorts. And when it becomes time to really take the plunge; no one will listen. Much like in 1976, June, when I said that gold would go to $300 to $400 for certain, maybe even $500 to $600. It was $120 at that time, and 20 major publications came out saying that gold was dead..."

Especially if viewed in context of this commentary.

And the scenario that could possibly make gold top temporarily, would be rising long-dated treasury interest rates (as gold performs better under negative real interest rates, although an exodus from Treasuries has to go some where and gold is next lower on Exter's Pyramid), as people abandon them in hyperinflation for either higher returns in equities and dividends (and possibly commodities) and/or safety of short-term 0% interest treasuries (you can hold them to maturity so no capital loss). So maybe shorting long-dated Treasuries is a good diversification right now. But keep in mind that is speculative because short-term depends on the velocity of money, and leverage cuts both ways wit some options having potential to go to 0. We do know Paul Volcker is in there, and he raised interest rates in 1980s and has said the biggest mistake made in 1970s was not capping the gold price. But what will long-dated Treasury interest rate rises do to the financial system? Massive defaults or does that get the credit moving again because there is enough return on risk? Seems that fits into the game plan of forcing the masses to a socialized economy. This could also send the dollar up (appears to be nearing a break up or down at 88 resistance) as EU has to cut interest rates to stop disintegration of their union. Many questions that I don't have time to develop scientifically thorough answers to. I like silver on any dip below $12. The worst downside is probably $9, and the upside is tremendous, especially if holding to 2010 when any dip in gold will be finished.

Please consult your own professional advisor, and do not hold me responsible for anything you do after reading my personal opinions above.


March 3, 2009

The world’s gold supply increases by 2,600 tons per year versus the U.S. steel production of 11,000 tons per hour.

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