10 Reasons gold bugs lost their shirts
DrBuster
Posts: 5,393 ✭✭✭✭✭
Nice op/ed article on bloomberg today. linkadoodle
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This gold run has been an extremely helpful insight to investing psychology. Its a case study for anyone interested in markets and investing.
Knowledge is the enemy of fear
The biggest problem with gold in the last 2 years is
simple: the Fed QE did not and likely will not result in inflation.
From 2008 to 2011 gold was in a perfect world. Interest rates
(opportunity cost) were very low and expectations of future inflation
were very high.
Based on some postings on this forum, many of the symptoms described are evident.
Of course, denial of the symptoms is, itself, one of the most prevalent symptoms.
Attempts to refute the points made in the article are expected forthwith...
Liberty: Parent of Science & Industry
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It has been quite the ride for gold: from under $500 an ounce a decade ago, to above $1,900 in 2011, gold gained more than 400 percent. Since its peak of ~$1,921.15 on Sept. 6, 2011, however, the shine is off the yellow metal. Gold plummeted 38 percent, recently breaking below $1,200. Yesterday’s close is within 5 percent of the lows, at $1,241.
If a 20 percent drop is described as a bear market, and a 30 percent fall is called a crash -- what do we call gold’s almost 40 percent plummet?
This column is not an “I told-you-so” or an exercise in “Goldenfreude” (describing a “delight in gold bugs’ collective pain”). Rather, it is an attempt to learn some investing lessons from the epic rise and horrific fall of gold.
As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade -- such as the 2010s. There have also been decades when it does nothing, earning no return, generating no income, essentially dead weight to a portfolio, as in the 1980s and 1990s.
Source: Bloomberg
In 2013, for the first time in 13 years, gold was negative on the calendar year. It began 2011 at ~$1,405 and ended at ~$1,540. In between, it peaked above ~$1,900, giving back most of the year’s gains. It closed 8.7 percent higher than where it began 2011, after rallying nearly 35 percent earlier in the year. Unless something radically changes in the near future, that may very well be the peak for this secular cycle.
Source: Bloomberg
Not very long ago, metal analysts were tripping over one another to put ever-higher price targets on gold, with forecasts of $2,500, then $5,000 and even $10,000 an ounce. Individual investors, institutions and foundations were buying the metal as fast as they could, regardless of price.
What a difference two years make. The mania for gold, like all manias, is ending badly. Some gold fans may argue that the cycle is not over yet, and they may be correct. However, any asset class that loses almost 40 percent of its value in two years is worthy of further study, a teachable moment of what not to do in a trade.
Source: Quartz
I jump on any chance I get to take courses in the School of Real World Investing -- especially when someone else is paying the tuition. What lessons can investors take from this debacle? Some of the following relate specifically to gold, but the bigger concepts are applicable to any investment.
Let’s get busy:
1. Beware the Narrative: Humans love a neat tale with heroes and villains and conflicts that need resolution.
On Wall Street, storytelling is a big part of the sales process, and gold was no different. Even though it had broken out in 2005, the Great Recession and bank bailouts of 2007-08 created a fertile environment for the Gold Narrative. It was a perfect combination of factors: Huge government intervention, a move away from true “free markets,” coordinated central bank actions, unprecedented quantitative easing and zero interest rate policies would inevitably cause a huge debasing of currency and hyperinflation, or so the story went. Gold is a haven in times of stress and a hedge against inflation when economies accelerate. It was underowned and yet an attractive alternative to assets with low real returns. Based on the amount of total outstanding fiat currency, gold would hit those $10,000 price targets.
The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found. If anything, deflation was the greater risk.
The problem with storytelling is that it makes an investor feel good, even as the data show the opposite and the position goes against him.
2. Take Note of New Investment Products: One of the fundamental changes in this gold cycle has been the creation of a variety of new gold-related products. The mac daddy has to be the gold exchange traded fund (GLD). Called the “innovation that opened gold investing to the masses,” it allowed people to invest in gold without opening futures accounts.
The World Gold Council is an organization created by global mining companies for the purpose of promoting the sale of gold. The gold ETF was their brainchild. Following “two decades of depressed prices and a growing glut of the yellow metal,” they faced the possibility of having their funding withdrawn. So in November 2004 they threw a Hail Mary called the SPDR Gold Shares exchange-traded fund. It was a game-saving touchdown.
Anyone with an ordinary brokerage firm could now be a gold investor. By some estimates GLD has added $150 an ounce to the price of the metal. Nomura Securities analysts noted that “big shifts in gold ETF holdings” were highly correlated with “rises in the gold prices" Lipper called GLD the “fastest-growing major investment fund ever.” During its bull run, the fund was buying $30 million of gold daily. In 2012, the biggest single equity holding in self-directed 401(k) plans was Apple ... followed by the SPDR Gold Trust.
A slew of other gold ETFs soon followed. The Market Vectors Junior Gold Mine (GDXJ) came out at $100, rallied to $160, then collapsed to $30. Other exotic offerings were rolled out: UBS introduced the E-TRACS S&P 500 Gold Hedged (SPGH) -- half S&P 500, half gold. It was perfectly hedged against making any money, as the soaring U.S. equity markets were offset by the collapsing precious metals.
Perhaps the most paranoid new products were the physical “gold only trusts.” There was the iShares Gold Trust (IAU), along with a numerous regional physical gold shares from ETFS in Switzerland and Singapore (Swiss, SGOL; Asia AGOL). Theses owned physical gold and only physical gold. Theoretically redeemable by owners in gold in case of a financial emergency, these were designed to appeal to those who lacked trust in the financial system. The underwriters were apparently oblivious to the irony of offering the products through that self-same financial system.
You could even take the other side of the gold trade -- though few did. Direxion’s Daily Gold Miners Bear 3X (DUST) is a triple-leveraged bet against gold. Despite being up 165.69 percent in 2013, it barely has $100 million in assets.
Salesmen always need something to sell. In GLD, they found the found a perfect vehicle to pull in the masses.
3. Ignore History at Your Own Peril (or, Everything Eventually Becomes a Trade):
You cannot be in the market very long and grow attached to anything, as everything will eventually disappoint you. I call this my universal entropy theorem of investing, and it's why everything -- from Microsoft to the 10-year bond, from Apple to gold -- eventually goes to hell. (Just look at the stocks tossed from the Dow Industrials for more evidence).
Gold has run up only be to trounced in repeated massive selloffs: 1915-20, 1941, 1947, 1951-66, 1974-76, 1981, 1983-85, 1987-2000 and 2008.
4. Leverage is Always Dangerous: History teaches us that any investment purchased via credit always runs the risk of margin calls. Whether it's dot-com stocks, no-money-down houses or subprime collateralized debt obligations, leverage eventually leads to liquidation.
Precious metals are no different.
Like all commodities, gold is purchased via futures contracts. The leverage involved is typically 15 or so to 1. Most of the time, the real world imposes a limit on how high an industrial metal, energy or agricultural product can run before its largest buyers cut back or switch to an alternative. For example, carbon fiber can keep aluminum prices in check; natural gas is a cheaper (and cleaner) alternative to home heating oil. Chicken is a substitute for beef.
Gold has no real alternative. Platinum is much rarer -- we mine only 6 percent as much of the stuff each year. Silver is much cheaper, trading at 1/60th the price of gold.
This cycle brought many new gold enthusiasts into the futures market. Their inexperience with big leverage -- stocks and bond purchased in brokerage accounts are limited to 2-to-1 margin -- led to surprising wipeouts. Leverage of 15-to-1 requires only a 7 percent downdraft to create a total loss of the initial investment.
The CME group, created in the 2007 merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, is the world's largest commodities exchange. As gold headed toward $1,000 in 2008, CME officials began to adjust margin requirements accordingly. They stand as the counterparty of last resort, so raising margin requirements was a prudent risk-management move on their part.
Gold rallied faster than CME could raise margin requirements, however. The next two years saw a huge move, along with a spike in volatility. In September 2011, gold was swinging wildly as it made its ultimate high. Following what was the most volatile week in years, CME Group raised margin requirements by 21 percent.
And that was pretty much the end of the run.
5. Maintain Situational Awareness: The concept of situational awareness comes from military theory, particularly aviation, representing the idea that a pilot needs to be fully cognizant of all the elements occurring in three-dimensional space, as well as those about to occur in the near future. For the investor, situational awareness means not getting too caught up in the moment, and understanding the continuum of time. Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video. Doing so forces the investor to think of the big picture, the 30,000 foot view.
As John Updike wrote, “The beauty of gold is, it loves bad news.” ("Rabbit is Rich," p.247). Quite a few gold investors came to believe that the bad economic news had become permanent. But all cycles eventually turn; even the Great Depression ended. So, too, did this recession.
6. The Danger of One-Way Trades: What would make you reverse your biggest present holding? What facts or situations would force you to change your views and sell? If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.
One of the more fascinating lessons to be gleaned from conversations over the years with various gold enthusiasts is that exact concept of an “irreversible market position.” It is based on a simple thought experiment that many portfolio managers and traders engage in when establishing a position.
Ask yourself, “What would make me reverse this position? What would make me sell this long or cover this short?” There is usually a long list of technical and fundamental answers. They may include break in support, a violation of a trendline, a decline in earnings, a slowing of growth, etc. Often, a simple modest price decrease is sufficient to get traders to cut their losses.
Yet many of the gold bugs I have spoken with over the past five years had no pain point. “I'll Stick With Gold” was a common refrain. There was no conceivable set of circumstances that could either reduce their ardor or their holdings in the metal.
This is a dangerous mindset toward any investment, but an especially money-losing attitude when holding a commodity. The takeaway is that every position, no matter how compelling the underlying story, should have an exit strategy. Indeed, it is especially important with a "loved" holding -- one that has a huge emotional investment and an unhealthy reliance on narrative.
7. What’s In the Price Already?: One of the differences between professional and amateur traders is recognizing what’s in the price. By the time most rumors, whisper stories and headlines reach the average investor, the impact of the news is already reflected in the market. The expectation that well-known news might somehow be a price catalyst always surprised me.
What’s that you say, the India wedding season was going to drive prices? Only if you believe this tradition dating back thousands of years is unknown to the gold market. Wait, China’s central bank’s gold reserves are growing rapidly? Who exactly is surprised by that?
Genuine surprises that are unknown to the market can move prices. Most of the narratives (See e.g. this or this) do not.
8. What Are the 'Fundamentals' of Gold, Anyway?: Gold has no fundamentals. What is traditionally called fundamental analysis involves determining a company’s cash flow, revenue and earnings. Commodities have none of these things.
What some people call fundamentals are really more akin to broad macro debates. Determining the state of the economy, interest rates, gross domestic product, corporate earnings, debt, unemployment, inflation and the U.S. dollar -- then deriving their impact on gold -- amounts to little more than guesswork. Forecasting what all of these parts of the economy are doing in advance is a near impossible task, at least with any sort of accuracy on a consistent basis.
The simple truth is that all tradable assets are worth whatever the next guy is willing to pay for them. With commodities, this is even more true, as they lack an objective measure of cheap or dear.
9. End-of-World Tales, Conspiracy Theories and Other Such Nonsense: More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse. Every potential problem gets blown up into a coming apocalypse. Fiat currency leads to worldwide collapse, as the dollar falters and hyperinflation appears. All paper money is going to be worthless, so you better have some gold if you want to feed your family.
Except that the fear-mongering is always backward looking. The dollar had already collapsed by 41 percent from 2001-2008; we had very strong inflation in the 2000s, and much more moderate inflation after the financial crisis.
Then there are the theories of anti-gold conspiracies: Central banks are manipulating prices; the Bureau of Labor Statistics is hiding data showing how much worse inflation really is.
Gold is marketed through a combination of fear and dishonesty. (As opposed to various equity products, which are marketed through a combination of hope and dishonesty).
10. Attacking the Skeptics: The response to rational argument is often a revealing tell. Over the gold cycle, attacks on anyone with the temerity to challenge the gold narrative became ad hominem. Accusations of “selling out,” being “in the Fed’s pocket” and a “patsy for the administration” were just some of the personal attacks I witnessed. Challenge anyone’s belief on gold, and instead of having empirical, data-driven counterarguments made, the zealots responded with venom. Have a read of the comment stream of ZeroHedge.com for some true gems of the genre. They reveal an investment gone awry combined with a lack of idea as to what to do about it.
***
The rise and fall of gold reflected all of the usual errors that emotional investors make. An honest postmortem will allow you to identify the mistakes that were made, and maybe even learn something from them.
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Too many positive BST transactions with too many members to list.
Natural forces of supply and demand are the best regulators on earth.
That's where the shirts were lost, IMHO.
<< <i>FED winning the current battle, will lose the war. I continue to convert profits from inverse paper bets into real metal. In 13 years gold from $500 to $1900 and back to $1200. I like the odds - always have since year 2003. >>
Cool...
congrats
2003 would have been a very good year to begin.
A quick ? is it the consensus that the FED will lose the war (but eventually doesn't) that is continuing your profits? This may sound simpleminded or irrelevant, but that's me at times.
And yes, you are correct, late entry speculators lost their shirt and it was their panic that drove prices low. They shot themselves in the foot as they do in any market they rush out of. The speculator's greatest fear is not exiting soon enough and that fear helps feed even lower prices. Unfortunately, late entry stackers who got caught up in the panic became casualties as well. This is my short term analysis and only time, and not anti-gold rhetoric, will determine its accuracy. Speculators will continue to return and exit the metal market. What is important to the stacker is the new highs (or lows) that these speculators help to create.
The stacker does not allow the "trees" to block his view of the forest:
Six reasons why the 10 reasons will not matter.
While we measure gold in dollars, many investors and stackers fail to realize the yardstick itself is not a constant variable. It is the ongoing destruction of the dollar and it's declining value when measured by most everything else that gives us the key to the future long term price of gold.
Natural forces of supply and demand are the best regulators on earth.
<< <i>Nice op/ed article on bloomberg today. linkadoodle >>
I made it to the 2nd paragraph and found so many errors and b.s. that I had to stop reading. WGC is a gold “promotor?” What planet has this guy been on for the past 20 years? Give me a break. Next thing he'll be saying is that GFMS-Reuters is also a gold "positive" group too. "Demotivator" is probably closer to reality. GATA and ICTA are the only 2 entities that I’m aware of that promote the PM’s. Gold was well on its way up in 2004 when GLD was created. GLD didn't "push" the market up at that time. What GLD did do for the boyz was give them control of the gold accelerator and brake pedals. I look at GLD’s arrival in 2004 as much the same as giving the public ownership of gold in Dec 1974. In both cases the initial arrival was a brake on market action for about 1218 months. The gold and silver ETF's where the brainchild of the miners? And then "they" put JPM in charge of SLV and HSBC in charge of GLD? Now I've heard everything.
Insightful article? And only a couple years late? I bet he wrote an article similar to this every year from 2004 to 2011 with Jon Nadler (ex-Kitco) as his right arm. Did he mention anything aboutgold's hit from $1560 to $1180 during April to June was done in basically 5-10 days? What about the 4 US bullion banks going from heavily short gold in early 2013 to heavily long gold by early July? Those guys are currently carrying 5X more longs than shorts.
They give speculators instant access into and out of the market. This includes anyone large enough to purposely "control" price.
and, they create a new centralized "vault" of physical metal. Have those holdings been "loaned out?"
There are pros and cons as to their affect on metal price.
Interesting that while silver prices tanked over the last year, SLV physical holdings actually increased.
Natural forces of supply and demand are the best regulators on earth.
Knowledge is the enemy of fear
Call the 10 and raise you 13 more.
Natural forces of supply and demand are the best regulators on earth.
<< <i>Its more than just a river in Egypt. >>
E Gypt.
In the gold market it's either "He Gypped" or "You Gypped." Similar to what Harvey Keitel says to Ben Gates/Nicholas Cage in National Treasure: "Ben, someone's got to get gypped."
If the Comex ever needs to be moved again......... I vote for Egypped.
Natural forces of supply and demand are the best regulators on earth.
<< <i>anything concerning metals is worth a read. >>
Agreed. Public sentiment has such a huge factor on most markets, it would be silly to ignore what is being written about a sphere one is interested in. That being said, I kinda like the fact that the metals are getting a bad name from the stock gurus. More time to buy while it is on sale. I am seeing quite strong demand for physical (especially silver) locally.
<< <i>At least the article was trying to be objective moreso than the usual fluffed call report pieces. The journalist in me thought so anyway. I try to read all the stuff that show up on the bloom/cnn regarding PMs to see what is being spoon fed, no offense....thought this one was somewhat worthy of a read. >>
Based on what I read in the second paragraph, it was far from objective and spoke the usual media-approved view on gold. The author may have had impartial/good intentions. One has to consider the sources though.
There are very few impartial gold sources. And to get both sides accurately, you'd probably have to spend years immersed in the market.
From paragraphs 3 and 4 these are mistruths or errors:
Gold has run up only be to trounced in repeated massive selloffs: 1915-20, 1941, 1947, 1951-66, 1974-76, 1981, 1983-85, 1987-2000 and 2008.
Where did the author get those dates from? Half of them are bogus. Doesn't he know that the gold prices was essentially fixed up until 1974? I never heard about massive sell offs of gold from 1915-1919 which was
basically an inflationary period where the world left the gold standard to fund WW1. Wasn't the US CB accumulating gold during that period? 1951-1966? Silver was in a bull market during that period. And gold was depressed
and selling off at that same time? Uh huh. What happened to 1980? That was a real sell off. Gold rallied for several years in 1993-1996....also 1987-1990. If anything I'd call the 1983-1998 period as basically flat. Why no
mention of gold's returns during the 1929-1935 stock market crash/depression? Gold miners returned 6X from 1929 to 1935. Why not mention that it took 25 years for stocks to reach their 1929 highs following that crash?
No doubt gold was very volatile in 2008. In Sept 2008 gold was back to $900 following the Lehman bust. And a month later it was at $681. But on the good side, it recovered all of the 2008 drop in only 4 months by February
2009. 2008 shouldn't even be specific to gold. Anyone buying gold from 1966 to 1973 would have hardly cared about the dip in 1974-1976...considering that gold would rise 8X following August 1976. Much the same way
2008 was a blip on the way from 2001-2011. Only treasuries and the USDollar prospered. An investment "being trounced periodically" applies to all investments....so why is this even here? It is not gold specific.
Leverage is Always Dangerous: History teaches us that any investment purchased via credit always runs the risk of margin calls. Whether it's dot-com stocks, no-money-down houses or subprime collateralized debt obligations, leverage eventually leads to liquidation.
Again, not gold specific. You could be talking about Oil or S&P mini-futures here.
Like all commodities, gold is purchased via futures contracts. The leverage involved is typically 15 or so to 1. Most of the time, the real world imposes a limit on how high an industrial metal, energy or agricultural product can run before its largest buyers cut back or switch to an alternative. For example, carbon fiber can keep aluminum prices in check; natural gas is a cheaper (and cleaner) alternative to home heating oil. Chicken is a substitute for beef.
Gold is purchased lots of way other than futures contracts. 15-1 leverage? He might want to check that again. Gold is not an industrial metal. So how high it goes is more dependent on market factors outside industrial
supply and demand. Gold is not corn or butter. Is there an gold alternative the CB's can switch to? NOPE. You can try silver or platinum but their supplies are far more difficult to manage vs. gold. There's not enough
Platinum and Silver is very bulky. You need 60X the vault space. I don't think you could even put together $1.4 TRILL in CB silver to replace gold. That's 74 BILL ounces of the stuff. Probably 3X to 10X what is held above
ground across the planet. Scratch off silver. Only 50 BILL ounces of silver was ever mined in history. Even that wouldn't be enough. So why is this guy even bringing up "substitutional" effects for gold? There are none.
They can always put beef, chicken, or dog food in their gold vaults if they want. $3/lb vs. $15,000/lb for gold? Better increase those vaults by 5,000X.
This cycle brought many new gold enthusiasts into the futures market. Their inexperience with big leverage -- stocks and bond purchased in brokerage accounts are limited to 2-to-1 margin -- led to surprising wipeouts. Leverage of 15-to-1 requires only a 7 percent downdraft to create a total loss of the initial investment.
Is this guy for real. What about buying physical gold at 1-1? Or how about GLD, PHYS, CEF, GTU....all 1-1. What about GDX, GDXJ, SLV, SIL, or the individual miners? The typical guy playing with gold is probably doing it w/o
margin or leverage. And those used to the stock market probably use the 2X or 3X ETFs (UGLD, USLV, AGQ, NUGT, etc.). I've been playing in the gold market since 2002. I've NEVER traded a future or option. But, I've done
all the other things above. Where's my 15-1 leverage? What about someone playing with S&P futures in October 2007? How'd they do by March 2009? Wiped out is what they did. Go out and find me the all the
inexperienced "enthusiasts" that were trading gold at 15-1 leverage. The guy's trading with that leverage were JPM, GS, Citi, BofA, and MS who were using otc gold and silver derivatives at 15-1 to 30-1 leverage. We know
what happened to the Bear Stearn's "enthusiast." Or how about the Lehman and AIG "enthusiasts" that went belly up on 30-1 leverage??? Real world gold demand is coming from everywhere except North America. In Asia,
which is probably the bulk of world physical gold demand, they buy it 1-1 in real form. No paper, no leverage, no ETF's. You can't even equate western paper gold demand with eastern physical gold demand. If this guy is
going to analyze the gold market, he should look at the other 90% of the demand.
Gold rallied faster than CME could raise margin requirements, however. The next two years saw a huge move, along with a spike in volatility. In September 2011, gold was swinging wildly as it made its ultimate high. Following what was the most volatile week in years, CME Group raised margin requirements by 21 percent.
Gold rallied faster than the CEM could handle? Pure BS. Gold rose quite steadily from Oct 2008 to June 2011. They had ample time to slowly raise margins. They didn't. The only time gold got out of hand was in August 2011....one month of time. And they did raise margins something like 8X in that period with 5 of them coming in about 2-3 week window. They would have raised margins 20X if it was needed to kill the rally. But, it only took 8 raises. August 2011 had nothing in common with the 33 months that had preceded it. Again, what is this guy smoking? What are his sources for this crap?
Ok. I'm not reading any more paragraphs of this guy's fantasy tales. Poorly researched. Numerous errors. An apparent lack of market understanding. I'm offering a reward for the first J6P you can find that was leveraged
15-1 on gold and lost big time in the crash. This article was not worth a read imo.
<< <i>It's a good article for getting you to counterpoint it so vehemently. my observation of value discussion with it anyway, rr. >>
I don't like to see BS parading around as analysis. And especially when everyone buys into it as being "pretty good" or "pretty factual." From Bloomberg, I expected nothing better than what they provided. Same old, same old.
Analyzing market psychology is one thing. That has nothing to do with gold. But using a bunch of mistruths and errors to support that analysis? Why not write a similar article for the S&P500 based on the growing wedge of the
last 13 years. Gold already ended badly. Can't change that. But Barry can certainly do something about the people who will get smoked when this 13 year wedge decides to fracture. With about 30 min of editing, he can "create"
a piece on the S&P.
My Adolph A. Weinman signature
<< <i>The gold price is not manipulated. There must be some other reason why the U.S. gold reserves have not been audited in decades, why the U.S. is repatriating German gold at a snail's pace, and why "sellers" regularly appear out of the blue to dump tons of gold into thinly traded markets. >>
You could include the formidable gold carry trade/strong dollar policy of Rubin/Summers from 1995-2001. They even had the major gold producers playing the gold carry trade.
The London Gold Pool of 1961-1968 and Gordon Brown's Bottom from 1999-2001. Arthur Burns' and Paul Volcker's major regret from the 1970's was not working a lot harder to manipulate gold down.
The author of this Bloomberg bash article says gold has no fundamentals, or at least nothing than anyone can analyze accurately. Guess that's why he, Jon Nadler, Prechter, and Dave Ramsey were greatly puzzled by gold's
rise from 2001-2011. There you have it. Gold's behavior from 1966-1980, 1980-2001, 2001-2011, 2011-2014 was nothing more than tossing the dice. "No one" had a clue what it was doing or why during any of those
periods.
Let's be real here. The gold story is far from over. Talk about "gold bugs"? The ultimate gold bug is the Chinese government, which wants nothing less than for its currency to unseat the U.S. dollar and to become the world's premium currency. Gold is one major means of establishing credibility and backing. They have been buying gold hand over fist, and one day in the next few years we'll wake up to the announcement that the Chinese have accumulated 10,000 tons of gold or more... enough to knock the U.S. and its 8,000 ton hoard (assuming it's still there) off its pedestal.
Are the Chinese dumb? Doubt it. Are we dumb for doing the same as them?
What else? A lot of people expected QE (money printing) to cause inflation. It hasn't, not in any big way, at least not yet. That's part of the reason gold fizzled - the inflation story hasn't happened. But the real likelihood is that it will happen. All that money has to go somewhere. It won't sit on banks' balance sheets forever. And when it does - watch out.
I note also that governments in the US and Europe (Germany, France, Italy, etc.) keep holding a tremendous percentage of their foreign reserves in gold. 70% plus in most cases. Funny you never read an article saying how dumb it is for central banks to hold so much gold. By this logic the U.S. Treasury is the ultimate gold bug. Yet when individuals do so, somehow it's crazy. Figure that one out.
Paper can outperform gold in the short term, but never in the long run. I always think back to a story I heard from cousin's husband. He's a guy who demolishes old homes in the Chicago area. On one site of an abandoned property he found an old wallet behind a stove. In it were two $100 bills dating back to 1934. Common type, unfortunately, not worth much over $100 each. Think back to the 1930s and if the owner of that wallet had instead put aside ten $20 gold pieces. You'd be sitting on $12,000 just in bullion value. Paper? No thanks.
<< <i>De Nile works both ways.
Call the 10 and raise you 13 more. >>
Werent those the same reasons a few years ago? What happened?
I know, manipulation and conspiracy. I cant believe ive been denying the obvious for so long.
Knowledge is the enemy of fear
The first thing you must understand is that the arguments you present are the same ones you hashed 3 years ago. And really not just you, but all the bulls, with the same stories about fundamentals, inflation, manipulation, Helicopter Ben, China/India, ect, we've heard all these before. And what happened, the price still dropped 35% and is at the same level as 3 years ago. Its time to realize that while "some" of these arguments have "some" merit, they are not what drives intermediate pricing.
And the bigger problem is that by nature those that believe in conspiracy or manipulation are very close minded. Even when presented with overwhelming evidence they will content the evidence is tainted. If people would just take a few steps back and look objectively, rationally and logically, investing can be quite easy, even fun.
Gold went up 600% over 12 years and the "odds"--as some like to call this gambling--were for a break in the trend. It doesnt matter what the reasons we may conject, for they would all "prove" the correction. What happened is very simple. Gold got overbought. Its high price was the cure for its high price. Gold had underperformed other assets TERRIBLY for nearly 2 decades, but now it has caught up, and during that catch up phase investors got a bit overzealous and prices went too high. Now it is time for gold to base, for investors to regroup and catch their breath, for it to become a relative value vs other assets.
People try to make gold more glamorous than it is and thats a problem as glamour begets attraction which begets love. Keep the emotion out of this and it all becomes very clear. Tone down the rhetoric and your arguments will be more easily heard.
Knowledge is the enemy of fear
I fully agree that 12 consecutive years of higher highs begs a correction. And until April 12th 2013 what was happening made a lot of sense. That was a 19 month correction. Whatever occurred after that was
a concerted push over the cliff by the usual suspects. But, all is fair in love, war, and gold trading. I understand that. This Barry guy, didn't make any sense by making his article gold-centric and screwing up all his "facts."
CB's still like gold - too bad the US could only return 37.5 tons of repoured gold to Germany in 2013
<< <i>CB's still like gold - too bad the US could only return 37.5 tons of repoured gold to Germany in 2013 >>
Thank you for posting that link. Interesting developments in that saga, for sure. The bit about the Soviet Union's gold which they sold back in 1990 was rather interesting.
Gold was underpriced 10 years ago & few talked about it,
Gold was overpriced at $1900 when the major sales point was "it's going to $3000 & beyond"
I haven't lost any market value on my better date choice to gem 19th century gold.
AU58-AU63 10's pre 33 look interesting to me at this time.
It's still a good idea to follow your gut when buying gold or ANYTHING else. As dear old dad used to say-"if he's so smart, how come he's not rich?"
So salutations to the stackers. That said, I would say the same to those who acquire real estate without being leveraged and buy and hold savers of stocks. The choice of savings vehicle is a personal one and while I have always advocated for a balanced portfolio, including metals, I still salute the resolute gold bugs who keep stacking.
The key to long term success is the avoidance of debt and continual long terms savings. This is a hard thing to do, particularly for the young in our consumption driven society.
<<It was a perfect combination of factors: Huge government intervention, a move away from true “free markets,” coordinated central bank actions, unprecedented quantitative easing and zero interest rate policies would inevitably cause a huge debasing of currency and hyperinflation, or so the story went.>>
Just because some writer named Barry wants to characterize these facts as "a story", it doesn't mean they aren't relevant.
<<Ignore History at Your Own Peril (or, Everything Eventually Becomes a Trade):
You cannot be in the market very long and grow attached to anything, as everything will eventually disappoint you. I call this my universal entropy theorem of investing>>
Barry gets to cherrypick his time frame and call it history. A common mistake. There is other "history" that is more compelling, history that he chooses to ignore in his article. He also fails to warn against churning the account, which will eat up principal faster than most market action.
<<Maintain Situational Awareness>> <<Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video. Doing so forces the investor to think of the big picture, the 30,000 foot view.>>
Situational awareness and big picture thinking. Lol, he's saying one thing and doing another. He implies that this particular 2 or 3 year window is everything. Not. None of the systemic problems have even been faintly recognized by our policymakers. He's living off of QE, (which makes him smarter than precious metals investors - when he's the one living on leverage, contrary to his own advice).
<<Ask yourself, “What would make me reverse this position? What would make me sell this long or cover this short?” There is usually a long list of technical and fundamental answers. They may include break in support, a violation of a trendline, a decline in earnings, a slowing of growth, etc. Often, a simple modest price decrease is sufficient to get traders to cut their losses.
Yet many of the gold bugs I have spoken with over the past five years had no pain point. “I'll Stick With Gold” was a common refrain. There was no conceivable set of circumstances that could either reduce their ardor or their holdings in the metal.
This is a dangerous mindset toward any investment, but an especially money-losing attitude when holding a commodity. The takeaway is that every position, no matter how compelling the underlying story, should have an exit strategy.>>
Barry takes a lot for granted when talking about other people's rationale. My exit strategy is to sell 50% after the peak, and not before. I know what a peak looks like, and we haven't seen it yet. In the meantime, I'm hedging against what I see as an inevitability that the currency is headed for a train wreck. Simple, eh? Barry's a financial guy, with vested interests himself. Let's be clear about that.
Fundamentals? Gold has no fundamentals? Actually, gold has about 5,000 years of "fundamentals". As opposed to Twitter and Facebook which also have no earnings.
<<Gold is marketed through a combination of fear and dishonesty. (As opposed to various equity products, which are marketed through a combination of hope and dishonesty).>>
Barry's attempt to sound like a knowledgeable insider. Not impressed.
<<Attacking the Skeptics: The response to rational argument is often a revealing tell. Over the gold cycle, attacks on anyone with the temerity to challenge the gold narrative became ad hominem. >>
Pot, Kettle, Black. The article is designed to elicit emotional responses without providing hard data. I see no analytical work in the article. None. Sheesh. A big part of the problem is that hard data is unavailable on gold and central banking in the first place.
I knew it would happen.
The pre-'33 $5's from branch mints and all of the $10 are often overlooked by the go go types. A sweet little niche for those that have the gold bug affliction, like to stack and a have a bit of a little numismatist bent. I like the 58's because they have been in someone's pocket in the 1800's. Maybe they were paid out at Ford for wages when they were starting the model T's and passed around the business community in exchanges for goods and services in the early teens and 20's. Maybe you can get a 63 for a very modest premium and have a shiny treasure to stack away. The best thing is that they are gold, can be had for very little premium, there are lots of them, and they are numismatic items.
And from DeepCoin...
"So salutations to the stackers. That said, I would say the same to those who acquire real estate without being leveraged and buy and hold savers of stocks. The choice of savings vehicle is a personal one and while I have always advocated for a balanced portfolio, including metals, I still salute the resolute gold bugs who keep stacking."
And the stackers return the salute!
Is it simple? leaving aside "inevitability" for the moment, what exactly is meant by "train wreck"?
I agree that "lost their shirts" is a really bad headline.. a better one would be, "10 reasons to reconsider a strategy that bets the whole bankroll on gold, in the expectation (hope) that America and the Dollar will die and Gold will skyrocket in value, because you could be in for a really, really long wait (possibly longer than your life expectancy) and in the meantime, the world and America and the dollar will continue on their merry way, and lots of folks will get rich the old fashioned way by deploying more of their capital to the traditional ways people get rich: Real estate, stocks, and starting your own business, endevours that have their own risks, to be sure, but have an even longer history of success in growing and preserving wealth than gold does"
but that's kind of a long headline
Liberty: Parent of Science & Industry
My expectation is a protracted worldwide selloff of the dollar (not really a crash), coupled with (much) more domestic "money printing" (even though it's not really printing in the traditional way). Whether or not this type of train wreck results in hyperinflation is a moot question. The debt and entitlement problems can't be dealt with any other way.
Not everyone lost money in the Great Depression. Some stockholders made a lot of money, and bondholders made a lot of money if they bought them right, and at the right time. This time is different in that we are dealing with electronic transfers and lots of opaque processes that we don't get to know about. I do think we'll see a new currency at some point. If you think that's conspiracy talk, ignore it.
I note that I've been wrong before. I've also been right before. This is just my opinion on what's going down.
I knew it would happen.
These gold bugs that lost their shirts , they sound like paper traders not stackers. 40% down hurts stackers but they might want to ride it out. I don't think that is an option if you are leveraged 15 to 1.
The whole financial industry wants high velocity money because they leech off every trade. Everywhere you look middlemen and parasites . Articles to push cattle from one asset class to another , pro gold , anti gold, pro real estate , anti real estate .
100 years ago average people didn't need to invest in anything, they just saved and things got cheaper. What's changed?
Gold is my own "tier 1" asset to raise money to buy distressed merchandise.
To me it represents a store of my past labor much better than the dollar and I have to warn myself not to let it creep past 20% of my worth.
It's a store of value, instant collateral , insurance, quiet-all in one form. I luv it that china and India are fixated on it. Just more people to sell to.
By chance is he hawking a newsletter?
Much?
Natural forces of supply and demand are the best regulators on earth.
<< <i>These gold bugs that lost their shirts , they sound like paper traders not stackers. 40% down hurts stackers but they might want to ride it out. I don't think that is an option if you are leveraged 15 to 1.
The whole financial industry wants high velocity money because they leech off every trade. Everywhere you look middlemen and parasites . Articles to push cattle from one asset class to another , pro gold , anti gold, pro real estate , anti real estate .
100 years ago average people didn't need to invest in anything, they just saved and things got cheaper. What's changed? >>
Lets take 1913 as example and you do the math.
$100 in 1913, you would need over $2,000 today.
$5 would have purchased in 1913: 15 pounds of potatoes, 10 pounds of flour, 5 pounds of sugar, 5 pounds of chuck roast, 3 pounds of round steak, 3 pounds of rice, 2 pounds each of cheese and bacon, and a pound each of butter and coffee; that money would also get you two loaves of bread, 4 quarts of milk and a dozen eggs. How much $ would you have left over if any, using today's dollars (20 x $5..$100), when purchasing the same items today?
<< <i>
<< <i>These gold bugs that lost their shirts , they sound like paper traders not stackers. 40% down hurts stackers but they might want to ride it out. I don't think that is an option if you are leveraged 15 to 1.
The whole financial industry wants high velocity money because they leech off every trade. Everywhere you look middlemen and parasites . Articles to push cattle from one asset class to another , pro gold , anti gold, pro real estate , anti real estate .
100 years ago average people didn't need to invest in anything, they just saved and things got cheaper. What's changed? >>
Lets take 1913 as example and you do the math.
$100 in 1913, you would need over $2,000 today.
$5 would have purchased in 1913: 15 pounds of potatoes, 10 pounds of flour, 5 pounds of sugar, 5 pounds of chuck roast, 3 pounds of round steak, 3 pounds of rice, 2 pounds each of cheese and bacon, and a pound each of butter and coffee; that money would also get you two loaves of bread, 4 quarts of milk and a dozen eggs. How much $ would you have left over if any, using today's dollars (20 x $5..$100), when purchasing the same items today? >>
Plus it was all organically grown in 1913, so double the price!
Prior to 1913 wasn't the price environment basically deflationary? If I put away $20 in gold coin in 1900 in 1910 I could probably buy more with that $20 than in 1900.
The act of saving money was incentivized by deflation , in a gently deflationary environment you don't need to invest riskily ,generally working and saving was enough for most.
The Fed has created and continues to create inflation on purpose but why?
example
Liberty: Parent of Science & Industry
Whats wrong with earning between $10 and $30 a week if you can go out to eat for under a dollar?
<< <i>Prior to 1913 wasn't the price environment basically deflationary? If I put away $20 in gold coin in 1900 in 1910 I could probably buy more with that $20 than in 1900.
The act of saving money was incentivized by deflation , in a gently deflationary environment you don't need to invest riskily ,generally working and saving was enough for most.
The Fed has created and continues to create inflation on purpose but why? >>
More a function of the monetizing of deficit spending. Also to bail out the member banks from bad loans by pumping up asset prices. Of course they lie to the common schmuck and tell him that inflation is dead, so he will be ok with his 6% negative return on his bank deposit.
In the late 1920's a person could have Sears deliver a prefab Craftsman home on your lot in Pasadena for less than 3k.
<< <i>According to my mom who was born in 1915, around the turn of the century a typical factory worker would earn about $15/wk. His pay envelope would have 2 $5 bills and a $5 gold coin. If he saved his gold coins for several years, he could buy a home.
In the late 1920's a person could have Sears deliver a prefab Craftsman home on your lot in Pasadena for less than 3k. >>
They had to put a stop to that sort of thing. They couldn't have the proles just passively saving their way to the American dream. The Financial services sector doesn't pile up any bonuses that way.
Natural forces of supply and demand are the best regulators on earth.
For a hundred years or more, young people have left small town America to move to the "Big City".
Get that bigtime college education. First people left the farm to work in factories. Then the kids wanted MBA's in the 60's to the 90's. The Financial sector was the way to riches-shuffling papers and selling you "product". I always snicker when financial people refer to a service as product. When I escaped Berkeley 40 years ago, just about every member of my pledge class went on to med school(half), or law school or got an MBA.
I go back to my fraternity reunion every couple of years. The guys want no part of med, law or biz school. They are stunned when I relate the incomes of SKILLED trades people in California. $100,000-250,000/yr.
I see people pursuing skills, I see the need for industry to return and I see people purchasing working farms(for different reasons).
The next 30 years are going to be dramatically different than the last 30. The profound damage that some in the financial sector have caused in this country through their unmitigated greed is going is to cause that sector to have a diminishing role in our GDP.