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Dylan Grice Discusses When To Take Profits On Gold: Hint - Not For A Long While

Tyler Durden's picture




 

In the most recent stellar analysis by Dylan Grice, the SocGen analyst discusses the reasons for not only owning gold (and there really isn't a more profound one than taking a trip to the Marriner Eccles building and checking out what goes on in the first subbasement) but, more importantly to many, selling it. His summary view on owning Au79: "The reason I own gold is because I'm worried about the long-term solvency of developed market governments." We all know developed markets are now insolvent and merely exist due to the continued debasement of fiat paper. Period. As to when to sell: "Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK . Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold." Courtesy of universal denial of our current predicament, we still have a long, long time before acceptance sets in.

Digging in.

Some would say the time to sell is now. Gold just isn?'t the misunderstood, widely shunned asset it was a few years ago. Isn?t the gold bull market now long in the tooth, with better opportunities to be found elsewhere? I can understand this view. Had you bought stocks at the bottom of the bear market in 1974 and held them for ten years you?d have seen them go from being hated to being loved. And as the number of mutual funds exploded you could have plausibly argued that since stocks were no longer the deeply contrarian plays they?d been, they should be sold. But you?d have missed spectacular gains over the next 15 years because the social contrarian indicators said nothing as to how favourable underlying conditions were for risk assets.

And even as insolvency is now a universal fact of life, the outcome, as Ebullio found out the hard way, is still either/or - with both hyperinflation and deflation likely (with a dash of stagflation thrown in for good measure).

Though developed market governments are insolvent by any reasonable definition, it?s far from inevitable that this insolvency will precipitate an extreme inflationary event ? it?s just that it might ... And although I've wondered aloud if Ben Bernanke is in fact the reincarnation of Rudolf von Havenstein ? the tragic president of the German Reichsbank who presided over the Weimar Hyperinflation (speculative evidence presented below) ? I don't think he actually is ... it?s just that he, and other central bankers, might be closer than they think ...

Gold, like all other commodities, is inherently speculative. Unlike well chosen stocks which you buy to hold to take advantage of their wealth-compounding properties, you only ever buy commodities to sell later. With this in mind, when should you sell gold?

The age old question - is gold a currency.

Willem Buiter called "?Gold - ?a 6000 year bubble?" -? ft.com. The late and great Peter Bernstein subtitled his book about gold “the History of an Obsession”. But much as I admire these two great minds, such loaded phraseology implies there to be something irrational about owning gold and I think that?s just plain wrong. The fact is that there is a fundamental need for a medium of exchange. Early civilisations used pebbles or shells. Prisoners have used cigarettes.

Having a medium of exchange makes life easier than under barter economy and societies have always organised themselves around the best monetary standard they could find. Until industrialisation of the paper printing process, that happened to be gold, which is small, malleable, portable and with no tendency to tarnish. Crucially, it's also relatively  finite and this particular characteristic (in combination with the others) can be very useful in environments characterised by monetary mischief.

I view it primarily as insurance against such environments. It?s a lump of metal with no cash flows and no earnings power. In a very real sense it's not intrinsically worth anything. If you buy it, you're forgoing dividend or interest income and the gradual accumulation over time of intrinsic value since a lump of cold, industrially useless metal can offer none of these things. That forgone accumulation of wealth is like the insurance premium paid for a policy which will pay out in the event of an extreme inflation event.

Is there anything else which will do that? Some argue that equities hedge against inflation because they are a claim on real assets, but most of the great bear market troughs of the 20th century occurred during inflationary periods. A more obvious inflation hedge is inflation linked bonds, but governments can default on these too. More exotic insurance products like sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve volatility all have their intuitive merits. But they all come with counterparty risk. Physical gold doesn?t. Indeed, during the “6000 year gold bubble” no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to.

There is nothing mystical about gold and I don't consider myself a gold bug. In fact, I'm not sure I'd even classify gold as an ?investment? in the strictest sense of the word. Well chosen equities (not indices) will act as wealth-compounding machines and are likely to make many times the initial outlay in real terms over time. These are ?investments? because so long as the economics of each business remain firm, you don?t want to sell. As they say in the textbooks, you ?buy to hold.? But gold isn't like that. Like all commodities, it's intrinsically speculative because you only buy it to sell it in the future.

There has never been a more appropriate time to be long gold than now, when every developed country is either insolvent or on the brink, and applying band aid measure to mask the facts.

The reason I own gold is because I'm worried about the long-term solvency of developed market governments. I know that Milton Friedman popularised the idea that inflation is ?always and everywhere a monetary phenomenon? but if you look back through time at inflationary crises ? from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany ? you'll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). It?s all very well for economists to point out that the cure for runaway inflation is simply a contraction of the money supply. It’s just that when you look at inflationary episodes you find that such monetary contractions haven't been politically viable courses of action.

Economists, we find, generally don?t understand this because economists look down on disciplines which might teach them it, such as history, because they aren?t mathematical enough. True, historians don?t use maths (primarily because they don?t have physics envy) but what they do use is common sense, and an understanding that while the economic laws might hold in the long run, in the short run the political beast must be fed.

I wrote about the Weimar Hyperinflation a few weeks ago and showed, for example, that Rudolf von Havenstein (Reichsbank president) was terrified of pursuing such a monetary contraction because he was so fearful of the social consequences rising unemployment and falling output would elicit. But the agonizing dilemma he faced, identical in principle if not in magnitude to that faced by policy makers today, is as old as money itself.

In the 3rd century AD, as the Roman Empire became too large and unwieldy, its borders were consolidated and the great imperial expansion halted. Though necessary, this consolidation posed problems. While the Empire was in growth mode, driven by military conquest which strengthened public finances, the army paid for itself. It was an asset on the national balance sheet. But when that territorial growth was halted, a hole was created in the budget as while the army was still needed to defend the borders, it was no longer self-funding because there was no territorial expansion.

Roman emperors discovered that contracting expenditure to fit with new lower revenues was a difficult feat to pull off. So rather than contract military spending, public works or public entertainment ? long-term necessities which were painful in the short run ? they opted to buy time using successive currency debasements. Ultimately, this culminated in what would become the world?s first of many fiscally driven inflation crises (see charts below).

What the declining Roman empire was doing then is precisely what Ben Bernanke and all central bankers are doing now.

Two thousand years ago, the fiscal sobriety so clearly needed in the long run was subordinated to the short-run requirement to buy time. Hence the age-old short-term temptation to debase the currency and hope no one notices. Paring overstretched government balance sheets has never been easy. As the Romans should have done in the third century, developed market governments today will have to come clean to their citizens that since keeping the welfare promises they?ve made over the years will bankrupt them, those promises are going to have to be ?restructured? and government expenditure substantially tightened.

Alas, the sugar substitute of denial, especially when faced with mid-term elections, is easier to swallow than the bitter pill of acceptance.

But governments aren?t ready to take that step at the moment (the chart above shows just how painful the required measures could be). Indeed, the pressing fear among policy makers today remains that stimulus might be removed too soon. In the UK, policy makers refused to ?risk the recovery we've fought so hard for” to quote PM Gordon Brown  ?fought so hard for?!). In the US, lawmakers have just expanded the most inefficient health care system on the planet (according to Peter Peterson ?- ft.com there are five times as many CT scans per head in the US as there are in Germany, and five times as many coronary bypasses as in France). It has been promised that the increase will be deficit-neutral (which I doubt) but even if it is, current period deficits aren?t the correct way to look at health and pension obligations which should be examined on an actuarial basis (and if expanding the program is so difficult, wait until they try contracting it!)

But they will face up to these problems one day, because they must. And the good news is that there are precedents for policy makers adopting the policy of short-term pain for longterm gain. In the UK in the 1970s, for example, the country tired of lurching from one crisis to the next, of militant trade unions and of high inflation. Eventually, they elected Margaret Thatcher who promised to control inflation and smash the unions even if the short-term pain would be severe. She did, and it was. But the rest (despite 364 economists petitioning her that such drastic measures threatened social stability ?- How 364 economists got it totally wrong - Telegraph) is history. The key point to bear in mind is that she was elected with a mandate for short-term pain which hadn’t existed five years earlier. The political winds had changed.

Ireland swallowing bitter fiscal medicine today offers a similar example. I?ve been over there a couple of times in the last few months and it?s heartbreaking. Its economy has contracted by nearly 10% since the peak of the credit bubble and my friends in Dublin tell me that, unofficially, house prices are down 60-70% from their peak. Unemployment has spiked to around 15%. The striking thing about being there, though, is that while no one is happy about them, and there have been strikes in protest at the distribution of the pain (which, in passing seems to be a feature of the political climate during such crises) on the whole there seems to be an understanding that such measures are unavoidable. These draconian fiscal policies wouldn’t have been possible five years ago. But the political winds have changed.

The reason why gold has been so popular lately is the combination of all the factors that make the mixture explosive, with just the ignition catalyst missing. That catalyst - government crises. And look no further than Europe to see what happens when an entire continent is on the verge of collapse as a flawed monetary and socio-economic experiment not only disintegrates, but takes down the bulk of the constituent countries down with it.

What causes the political winds to change? A government crisis. In 2008, Ireland came very close to going the way of Iceland. They had their crisis. And historians today still refer to the ?inflation fatigue? in Britain by the end of the 1970s. This was our crisis. So what we learn from these experiences and others like them is that a fiscal crisis is required to force a majority acceptance of the implications of an overleveraged government.

But the political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude. And while it?s true that more people are at least talking about it, talk is very cheap and no one is yet close to walking the walk. Such steps remain politically unpopular because we haven?t had our crisis yet. Given the clear unsustainability of government finances and the explosive path government leverage is on, a government funding crisis is both inevitable and necessary. Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.

Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF?s recent recommendation that inflation targets be raised to 4%: IMF Tells Bankers to Rethink Inflation -? WSJ). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

In closing, we would like to add that one should also not ignore the technical pressures on the gold market, with price suppression by the Fed and JP Morgan proven beyond a doubt. Should a full blown government crisis develop and price supression mechanisms be removed, watch what happens when the rush to cover massive shorts ensues. Indeed, the time to sell gold is not now, nor any time in the future. The time to buy, however, will depend on fluctuating levels. A push by the central banks to break gold support and slide back into triple digit range will be as sure a buy signal asy.

 

 

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Tue, 03/23/2010 - 09:47 | 273110 RobotTrader
RobotTrader's picture

Saks upgraded by JP Morgan, stock has 43% of its float sold short, now the stock is up 6%...

LOL.....

Tue, 03/23/2010 - 09:52 | 273114 Cookie
Cookie's picture

'The age old question - is gold a currency.'

Spend any appreciable time in Asia and you know this question is irrelevant


 


Tue, 03/23/2010 - 10:07 | 273121 aurum
aurum's picture

Metals food guns ammo equals peace of mind.

Tue, 03/23/2010 - 10:15 | 273127 sweet ebony diamond
sweet ebony diamond's picture

i don't mean to be a party pooper.

i don't understand gold.

i can't eat it.

 

Tue, 03/23/2010 - 10:22 | 273133 Hulk
Hulk's picture

Go long sugar, in that case

Tue, 03/23/2010 - 10:24 | 273134 Cookie
Cookie's picture

I hope you enjoy greenbacks with ketchup

Tue, 03/23/2010 - 10:32 | 273147 ED
ED's picture

with tobacco?

Tue, 03/23/2010 - 10:43 | 273161 Dr. Richard Head
Dr. Richard Head's picture

Actually, I am growing my own tobacco here in Ohio.  It's a good medium of exchange with the local farmer's markets. 

And regarding not being able to eat gold, I would suggest that equities go very well with a nice Great Lakes wine.  The fruity taste of a Ferrante ice wine compliment the fruity action behind the scam of equities.  Mmmmm delicious.

 

Tue, 03/23/2010 - 10:47 | 273169 Hulk
Hulk's picture

I am planting tobacco this year for the very first time.(Va)

When do you plant and how do you deal with the very small seeds?

Tue, 03/23/2010 - 11:01 | 273184 Dr. Richard Head
Dr. Richard Head's picture

depending on where you live, seeds should be germinating in a small hot house right about now or very soon.  They take about 4 weeks to germinate and grow and can get big pretty quickly. Once the last frost makes it way through your area, acclimate them to the outdoors without the top of the hot house.  Plant after acclimated and fertilize with ash from a good fire (Federal Reserve Note work great, but I use the ashes from burnt decorative grasses as they are rich in Nitrogen).  Water regularly and the leaves are ready to pick when they start to yellow late in the fall. 

The seeds were a pain in the ass and I haven't found a good way to sow them without dumping dozens.  Make sure you sow your seeds on top of the soil and mist to water until they establish after growing. 

If all else fails, google "growing my own tobacco" and there should be loads of info. The smoke is a shitton better than this garbage they sell in pre-packaged cartons too. 

 

Tue, 03/23/2010 - 11:08 | 273194 Hulk
Hulk's picture

I'll be rolling cigars, so will be planting Connecticut shade too.

Watched plenty of harvesting and drying as a kid, just never experienced planting those small seeds.

Thanks.

Tue, 03/23/2010 - 11:15 | 273209 Dr. Richard Head
Dr. Richard Head's picture

No problem. Not only am I addicted to tobaccy, but this forum must have nicotine in it as well. 

Tue, 03/23/2010 - 11:52 | 273247 Hulk
Hulk's picture

The forum is addicting. Can't wait to try "organic" tobacco.

BTW, found a novel way to grow tomato plants from seed, which has always been my bugaboo. I just feed the chickens  tomatoes or mix the seed in with their feed, and then plant the chicken shit.

Fastest, healthiest tomato plants I have ever seen. The warm (108 degree) and moist interior of a chicken is perfect to sprout those seeds....self fertilizing too...no shit!

Tue, 03/23/2010 - 11:59 | 273254 Dr. Richard Head
Dr. Richard Head's picture

That is freaking awesome.  I wonder if there are hundreds of tips like this that have been washed away from our collective consciousness due to the fact that we Americans don't have to make much of anything other than fat and dead brain cells. 

Your tip just brightened the shit our of my day.  I have to tell me buddy who raises chickens about this.

Tue, 03/23/2010 - 12:18 | 273277 Hulk
Hulk's picture

Humankind has lost a ton of knowledge. Archimedes discovered and worked out integral calculus in 225 BC.He understood limits (as they apply to calculus). This knowledge was erased and replaced by religious writings and recovered by a project at Stanford.Had this knowledge of Integral Calculus not been erased, we would be living in an entirely different world, because the discovery of derivatives would be soon to follow.

Burning of the Library at Alexandria another big loss.

The chicken shit planting method was just an accidental discovery on my part. It made my day too! I will put a few tobacco seeds through a chicken and see how that goes....

 

 

Tue, 03/23/2010 - 13:42 | 273392 swmnguy
swmnguy's picture

Wow!  Planting chicken shit.  That's unbelievably awesome.  That rocks like a crazy rocking thing that rocks.  I love discoveries like this; it's what makes humans different from non-humans.  I need to figure out how to try this.  They're loosening chicken-raising rules in my area due to increased interest.  I've never gotten decent tomato plants from seed; this will be great.  Wait until Monsanto patents the digestive tract of a chicken; then we're screwed.

Tue, 03/23/2010 - 14:39 | 273452 Hulk
Hulk's picture

LOL, Monsanto is the devil, LOL

I could never get a tomato plant from seed, ever....

Greenest, thickest tomato plant leaves I have ever seen

Happy fucking chickens too...

Great garden fresh tomatoes

An all around winner...

Only downside is you will need to thin out the plants a bit..

 

 

Tue, 03/23/2010 - 16:25 | 273632 Hulk
Hulk's picture

Thanks, will read. you may enjoy:

Logsdon, living at nature's pace and contrary farmer

Anything from Joel Salatin

Malabar Farm by Louis Bromfield

The unsettling of America by Wendell Berry

The Good life by Helen and Scott Nearing

Amish living type books:

Better off: flipping the switch on Technology by Brende

   (brende, being a MIT grad, has an interesting perspective

    on Amish techniques)

Great possessions by David Klein

 

All most excellent books. Enjoy

Tue, 03/23/2010 - 10:37 | 273155 PierreLegrand
PierreLegrand's picture

It preserves your buying power. That is all. And thank goodness for that.

Tue, 03/23/2010 - 10:39 | 273158 Cognitive Dissonance
Cognitive Dissonance's picture

Then why do you understand greenbacks/FRNs?

They are both mediums of exchange and supposedly stores of value. One requires a huge effort to mine, refine and mint. The other is created by keystrokes on a computer. One is easy to debase, the other can't be debased without it being easily discerned. One has no intrinsic value other than the cost of paper/ink/keystrokes and the other contains the value of the labor needed to free it from the earth.

Tue, 03/23/2010 - 15:27 | 273509 nikku
nikku's picture

And you eat Federal Reserve Notes?  Or do you exchange them for things of value to you?... Just like gold?  Let me see, gold--6,000 years as a proven store of value or federal reseve notes--40 years since we totally left the gold standard, hmmm... which is a more dependable stor of value?  I guess maybe you need a higher degree of education, it is a very tough question.  Good news: That education's coming!

Tue, 03/23/2010 - 16:43 | 273675 swamp
swamp's picture

When was the last time you ate a dollar bill?

Tue, 03/23/2010 - 22:50 | 274022 Al Gorerhythm
Al Gorerhythm's picture

It all a dream Sweetness. Yawn, scratch you nether regions and go back to sleep

Tue, 03/23/2010 - 10:22 | 273132 Alex Lionson
Alex Lionson's picture

Guys you probably have noticed it long time ago, however I have realized it just right now – so FUNNY, take a closer look at Big Ben Shalom’s picture on the Time Magazine Cover – the letter “M” behind his head looks like two little horns :) He looks like he came from down under … :)

Tue, 03/23/2010 - 10:25 | 273136 Hulk
Hulk's picture

Bernanke is Australian???

Tue, 03/23/2010 - 10:26 | 273139 Alex Lionson
Alex Lionson's picture

Yeah, from Hell :)

Tue, 03/23/2010 - 10:25 | 273138 Cookie
Cookie's picture

Hey, that's an insult to Australia!!

Tue, 03/23/2010 - 10:24 | 273135 SWRichmond
SWRichmond's picture

"The reason I own gold is because I'm worried about the long-term solvency of developed market governments."

I really wish I could learn to be this succinct.

Tue, 03/23/2010 - 10:28 | 273141 Postal
Postal's picture

I really wish I could learn to be this succinct.

Indeed. Good thing I get paid this week: Need to buy more stuff. :)

Tue, 03/23/2010 - 10:43 | 273162 Hulk
Hulk's picture

I am putting that line to memory

Tue, 03/23/2010 - 11:35 | 273234 DoChenRollingBearing
DoChenRollingBearing's picture

Indeed SWR.  I should just memorize the sentence so that next time someone asks me why I like gold.

Tue, 03/23/2010 - 10:29 | 273143 sweet ebony diamond
sweet ebony diamond's picture

better find a good hiding place for it.

http://en.wikipedia.org/wiki/Executive_Order_6102

Tue, 03/23/2010 - 10:34 | 273149 Internet Tough Guy
Internet Tough Guy's picture

Mine was lost in a boating accident, along with my guns.

Tue, 03/23/2010 - 10:34 | 273151 dumpster
dumpster's picture

bull buskets .. twice your mouth opens,   each time the quality of brain cells goes down .

why dont the gold bashers know any thing but something they learned in a 3rd grade economics sing about ,

http://www.usagold.com/gildedopinion/alf_field.html

Tue, 03/23/2010 - 12:53 | 273345 A Nanny Moose
A Nanny Moose's picture

meh.

Anyone dumb enough to hand their gold over to the Fed. The govt did not come looking for it. People "voluntarily" complied.

In any case, there was always silver.

Tue, 03/23/2010 - 15:54 | 273557 WaterWings
WaterWings's picture

Don't feed the clowns fellow ZHers.

Tue, 03/23/2010 - 10:35 | 273152 Jim in MN
Jim in MN's picture

 

Ohhh, ohhh, history trivia!  I got one:

Thatcher's demise and the near-complete destruction of the Conservative Party can be traced to:

1. Busting the coal unions

2. The Falklands War

3. The Poll Tax Riots

chee-zee muzak plays....toes tap.... and the winner is....

http://news.bbc.co.uk/onthisday/hi/dates/stories/march/31/newsid_2530000/2530763.stm

 

Tue, 03/23/2010 - 10:54 | 273153 THE DORK OF CORK
THE DORK OF CORK's picture

Glad to be at the top of the class for once -

Remaining on a positive note, the Irish trade surplus is setting record levels chiefly because of a huge decline of imports which fed unnecessary consumption - also our exports while down are still in demand as they chiefly consist of goods that do not rely so heavily on consumer credit.

www.independent.ie/.../irish/plummeting-imports-lead-to-record-trade-surplus-in-2009-2078599.html

  P.s. - We may be Green Austrians now but we still rely on the rest of the world to be nice Keynesians and Friedmanites

Tue, 03/23/2010 - 12:55 | 273347 trav7777
trav7777's picture

The Irish experience is like the Great Famine.

Britain and the BOE ran that ponzi and now it's like "take your medicine, fuckers."

Meanwhile, the larger UK gets a nice dose of QE and the City gets bailed out.

Tue, 03/23/2010 - 14:48 | 273458 THE DORK OF CORK
THE DORK OF CORK's picture

Yea if the potato crop fails this summer we will be truly fucked

Tue, 03/23/2010 - 10:37 | 273154 lsbumblebee
lsbumblebee's picture

Mr. Grice you're gonna piss a lot of people off when you use common sense like this.

Tue, 03/23/2010 - 10:59 | 273180 Postal
Postal's picture

I did that on anther site last week. Got meself banned for it, too. :)

Tue, 03/23/2010 - 10:38 | 273157 Bigdaddydvo
Bigdaddydvo's picture

Great read, thanks.

Tue, 03/23/2010 - 10:44 | 273163 Invisible Hand
Invisible Hand's picture

Excellent article with many points to ponder.  I think that the US leadership will act more like the Weimar Republic than Ireland (or England under Thatcher).  For one thing, our current administration is a wholly owned subsidiary of Big Labor.

However, at the risk of coming across as Cato the Elder, I will repeat often raised point about owning gold (although I own some, secondhand, through mining stocks) is that by the time precious metals become the best asset class, ownership will become illegal.  It happened during the Great Depression.  It will happen even quicker under our current government.  The politics of envy are more prevalent than in the 30's and the concept of individual liberty is greatly eroded.

Buy gold if it makes you feel more secure but it will not protect you in the country I see us inhabiting in the near future.  It will only make you a target of theft from our government, or of thieves (sorry, I repeat myself).

Just as in Rome, this system will only change through collapse.  We are too big and too dysfunctional to reverse course (even temporarily) as Great Britain did under Thatcher.

Still, excellent article.  Thanks, ZH, for bringing it to my attention.

Tue, 03/23/2010 - 11:01 | 273183 Postal
Postal's picture

Not only is the current system too big, but--as you pointed out--any resistance to needed change will be accompanied with the force of law. :(

Tue, 03/23/2010 - 11:53 | 273250 Arm
Arm's picture

Exactly.  There is also an additional consideration.  When faced with extreme economic distress, societies become unwieldy.  Thus having gold is not the same thing as being able to consume it or keep it.

Since we are looking at Romans, a good example can be seen in the silver hordes unearthed in Britain.  Roman culture continued in Britain for more than a century afte ther departure of the legions.  However, Viking raids and general strife slowly engulfed the province (then kingdoms).  Rich merchants buried their silver and gold hordes thinking they would recover them when times calmed down.  They never retrieved them; obviously they died.

This is what survivalists do not understand.  Forget about government expropriation which would come much before this.  You simply cannot live in a bunker all your life.  Society has to be stable to enjoy your wealth

Tue, 03/23/2010 - 14:11 | 273423 tmosley
tmosley's picture

SOME of them were never retrieved, and you don't know how those people lost their lives.  It's just as likely that they died of plague, an infection, or they were killed in some other way.

Also, the Vikings didn't invade the British Isles until the 800s.  The Romans pulled out in 410AD.  That's a 400 year gap.

Tue, 03/23/2010 - 12:58 | 273351 trav7777
trav7777's picture

You can carry gold to another country.

May surprise people, but the legal status of various articles does not arbitrate their value.

Or are hookers and coke worthless?

The GD illegalization was to coin that traded in competition with the FRN.  There is no such article now.  And if ownership of bullion were illegal, you will see a sudden resurgence in the popularity of being Mr. T.

But gold won't be "worth" more than its equivalent in oil or land or anything else people want.  It's not special to rob it anymore than it was 1000 years ago.  Jesus, people steal cattle and chickens too, as well as vegetables.  Hell, they may cart off your daughters.

Tue, 03/23/2010 - 10:46 | 273167 jimmyjames
jimmyjames's picture

Should a full blown government crisis develop and price supression mechanisms be removed, watch what happens when the rush to cover massive shorts ensues.

******************************

The short squeeze will be triggered by the world's Central Banks-as they buy in a panic-trying to stabalize collapsing currency's--

That's who will be paying the big prices to gold holders-

So what will the little guys do-when gold is so expensive?

They'll buy silver-which will outperform gold in terms of % gains--

 

 

Tue, 03/23/2010 - 10:50 | 273171 dumpster
dumpster's picture

nice read about gold,

any one with a scintilla of smarts ,, should have figured out the reason for gold by now,,

gold was 260,, the sleeping zit faced no assets to save crowd,, asleep ,

now with gold pushing 1120,, they stare in the direction of pavlov's dog,, look at the gruel bowl in their hand ,, and bend on down to scarf it up,

Tue, 03/23/2010 - 10:59 | 273179 sweet ebony diamond
sweet ebony diamond's picture

are you stalking me, dumpster?

Tue, 03/23/2010 - 13:14 | 273365 dumpster
dumpster's picture

nope ..  just brushing some lint off my sleeve

Tue, 03/23/2010 - 15:55 | 273560 WaterWings
WaterWings's picture

Typical clowns like this are the lint of history.

Tue, 03/23/2010 - 10:51 | 273172 Chopshop
Chopshop's picture

great piece and agree with just about everything said.  thanks for the post, TD.

the issue though, whether it be for trading or tactical allocation (not whether to hold xy% of net worth in physical) is where / when are the most prudent buy / sell points.

if you bought the DJ low the first week of '74, great. congrats. but did you enjoy holding for 4 years to get a failed new low? did those who bought bottoms in late feb '78 and mid april '80 enjoy holding til 'anything' happened the 2nd / 3rd weeks of august '82 ... while commods ripped in the interim? 

dust off schwager's market wizards and note how many hedge fund head honchos of the 80's / 90's made their start by taking $5K from daddy or $2K cash from their AMEX cards to arb the crush or simply pyramid soybeans in 1978.  those 4 years spent in a prime moving market (while most large cap stockholders waited patiently til 82) made many of 'their' stakes for the ensuing bull of all bulls before the equity mania culture even developed.

we 'all ought have' xy % of net worth in physical ... debating that is a kindergarten question, but discussing how / what / when to accumulate prudently is where technical / psychological debate can (i firmly believe does) help.

bottom line: gold's going a lot higher in the long-term, we all 'know' this, but when the move actually happens is another thing; i think that we can get a period of stagnation so to speak for gold, which allows it to digest a 400% run over the past decade so as to build a proper base to take its next leap higher.  over the course of a year or two, Au can easily take a $350 John Edwards-style haircut to kiss a long-term trendline at $760 (overshoot a bit to scare us all) and then resume its long-term trend higher across all G-8 currencies.

only the hard right edge (the next bar on any chart) 'knows' what's coming next ... my point is that technical and psychological analysis can help determine how / what / when to accumulate for that next leg higher.  right now, i just don't see it and remain a short/ intermediate (months) gold bear and a raging dollar bull with initial targets of 81 (check) and 84 (from 12/3).  that said: would be happy to diagnose a continuation of the bull for gold and trade it with long side bias again, if / when such materializes.

Tue, 03/23/2010 - 11:22 | 273224 Hulk
Hulk's picture

Market Wizards was a great book, one guy even sold his household

furniture to get started.MW is where I met Jimmy Rogers and I have

followed him ever since.

PM for me is the only buy and hold investment I have ever done.

Otherwise, running back and forth to the coin dealer every time the

Au market goes against you is even better than averaging down as

far as loosing your ass goes.

 

Tue, 03/23/2010 - 15:03 | 273481 nuinut
nuinut's picture

Trying to time an exact bottom is a fools game. Splitting hairs.

Buy low, sell high is a relative concept not a technical thesis.

This is one trade with too much potential for the big move to be quick and unexpected, IMHO.

I don't even regard it as a trade, in the strictest sense. I will never be selling my entire holding of physical. It is a wealth asset. The fact that it is completely useless for anything else is what gives it its value. That and the lack of counterparty risk. Not available elsewhere. This is too simple for most conditioned minds I'm sure.

Everyone should have some physical at this point, regardless of possible near term weakness.

If oil or a large CB was to bid for gold, the window would be nailed shut, instantly, for all but the giants. I'm pretty sure there are no giants on this discussion board.

 

Be long or be wrong.

Tue, 03/23/2010 - 15:05 | 273484 AnonymousAnarchist
AnonymousAnarchist's picture

Turn your brain and emotions off. Football players follow the ball and respond to where it goes. Hockey players follow the puck and respond. Professional gold traders follow the price and respond. Buy weakness and sell strength in line with your investment capital. Try and predict where the ball, puck or gold price will be and you stand a good chance of being juked out of your capital. The banksters love volatility and so should you. They know that to make money in the market they have to take it from somebody else and it's easy to take money from the emotional. I was a seller at $1140 and am a buyer now. I'll be a bigger buyer if we go lower and am prepared to buy all the way to zero. You should be able to deal with gold $700 or gold $1400 without a mental breakdown. The idea that gold will fall to $860 and you'll pinpoint it as the bottom (or that it will rise to $2200 and you'll pinpoint it as the top) is fantasy. The gold community will shout that the banksters are hitting gold when all they are really doing is giving the snowball a push to start it moving. The banksters aren't part of the snowball. The funds and the emotional gold community are the ones pushing price lower. The banksters are on the buy as price falls. So, when some emotional gold trader bails in terror on a $45 price drop, the banksters (and me) are there to buy it up. You should be too.

I have a feeling there will be a lot of people kicking themselves for not buying this weakness (same goes to a lesser extent for NG). It's profit-taking time on the dollar and it won't be long before granny is on the gold buy.

Tue, 03/23/2010 - 10:53 | 273175 iinthesky
iinthesky's picture

Just curious-- Where is the Marriner Eccles building and what goes on in the first subbasement? Beuller?

Tue, 03/23/2010 - 11:21 | 273218 Cognitive Dissonance
Cognitive Dissonance's picture

Mapquest will help you with the directions (I get the humor) but more importantly, I suspect high crimes and misdemeanors are occurring in the first sub-basement, along with sexual humiliation, torture and other evil arts of the elite and powerful kind. In fact, I'm sure they're torturing the dollar as we speak.

Or maybe the Greek drachma is on the rack this morning. Let me pull up the March schedule. (Yes I know it was replaced in 2001.)

:>)

Tue, 03/23/2010 - 10:55 | 273177 dumpster
dumpster's picture

silver next.. well yes,, silver will be the real go to for the average ,, yet the alseep zits here ,, will find a reason to not like the taste lol

but wait ,, these same folks probably could not come up with a grand to buy a few, oz,,,

so they wait for the food stamps ,, which are inedible ... but so what,, they have learned robot like wot walk on down to the grocery store and exchange said ,, for beer and crackers

some folks look in a boot to find some pizz,, then pour it out,

Tue, 03/23/2010 - 11:25 | 273228 Hulk
Hulk's picture

"the asleep zits here" LOL, you are killing me dumpster!

Tue, 03/23/2010 - 10:56 | 273178 Pladizow
Pladizow's picture

The best speaker/author I have found on this subject is James Dines - he just released a 3rd book, GOLDBUG!

He has been putting out a news letter called "The Dines Letter" since the early '60's'.

Here is a link to an awsome interview with him:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/2/20_James_Dines.html

 

Tue, 03/23/2010 - 11:04 | 273188 jimmyjames
jimmyjames's picture

by Invisible Hand
on Tue, 03/23/2010 - 08:44
#273163

However, at the risk of coming across as Cato the Elder, I will repeat often raised point about owning gold (although I own some, secondhand, through mining stocks) is that by the time precious metals become the best asset class, ownership will become illegal.  It happened during the Great Depression.

***********************************

In the depression--Gold was locked to the dollar-meaning--

People still knew what gold was-so they "had some"

Today--99% of the people-even on an economics blog-like this-don't know what gold is or any history-or what makes it tick--

Most here still still think gold is bought for an inflation hedge-so-more to your confiscation theory--i say BS--there is such a tiny amount of gold-in the publics hands-not to mention the fact-that if CB's want to hold it again-the last thing they'll want to do-is drive it underground--so-the idea of confiscation doesn't fly-even though-non gold holders drool at the thought--

Tue, 03/23/2010 - 11:35 | 273235 Hulk
Hulk's picture

+ you can get around the confiscation problem with duel citizenship and splitting storage locations to different countries....

All of the big boys have duel citizenship.

Other ways to get around confiscation too..

Tue, 03/23/2010 - 16:33 | 273652 trav7777
trav7777's picture

Their dual-cits are all with Israel, just like the Russian oligarchs' were, Pre-Putin

Tue, 03/23/2010 - 15:52 | 273554 WaterWings
WaterWings's picture

99% of America will turn gladly turn in its gold and guns once the food supply nodes are cut off from shipments. Get food, then guns (and accoutrements), then gold/silver (80/20 respective ratio).

Control the food supply and you control everything.

Tue, 03/23/2010 - 11:04 | 273189 Pladizow
Pladizow's picture

The exit strategy for gold ownership is when the dow to gold ratio approaches 3:1.

Start selling then and be completely out at 1:1.

Until then, ignore all the noise!

Tue, 03/23/2010 - 11:46 | 273242 boatman
boatman's picture

 

 

the person above is NOT one of the asleep zits...

Tue, 03/23/2010 - 16:34 | 273654 trav7777
trav7777's picture

You guys still think the "growth" is coming back, eh?

LOL..rude awakening coming methinks

Tue, 03/23/2010 - 11:08 | 273192 nedwardkelly
nedwardkelly's picture

" Like all commodities, it's intrinsically speculative because you only buy it to sell it in the future."

Huh? I can eat wheat, rice, pork bellies (!), run my car on oil (derivatives) etc. Not sure I'd say gold is 'like all commodities.

Gold has it's uses, but it's current 'value' is mainly just because people see it as having value. His comment is fair that people have perceived this value for 6,000 years, so they'll probably keep seeing it as having some inherent value for a while yet.

Tue, 03/23/2010 - 11:15 | 273211 sweet ebony diamond
sweet ebony diamond's picture

great.

i just built one of these.

http://www.ornl.gov/info/ridgelines/mercury.htm

Tue, 03/23/2010 - 11:21 | 273221 jimmyjames
jimmyjames's picture
by Pladizow
on Tue, 03/23/2010 - 09:04
#273189

 

The exit strategy for gold ownership is when the dow to gold ratio approaches 3:1.

Start selling then and be completely out at 1:1.

Until then, ignore all the noise!

**********************************

I would sell a "bit" at those ratios--but--i think gold could overshoot 1-1--

I think in a buying frenzy--it's even possible to go as negative as 0.25-1 at DOW 1000-meaning $4000/oz--

But--the price isn't the important part--

At 4K and dow 1K --people will come to understand-the ancient phrase--

"The power of gold"

Tue, 03/23/2010 - 11:50 | 273232 boatman
boatman's picture

its coming i do declare.........where's goldbitchez?

Tue, 03/23/2010 - 11:43 | 273239 caconhma
caconhma's picture

The present worldwide financial crisis is not about sub-prime mortgages, derivatives, etc., No. The real source of the present crisis  is in FIAT currencies and corresponding mentality about creating "values" out of thin air by just printing money. There is no anymore financial or political discipline.

The present worldwide government are behaving not much different from the infamous Wiemar Republic. All this theoretical discussions about  first  flooding markets/economies with money and later draining some of this money out of the system will somehow save/cure corrupt and otherwise not-viable (due to basic fundamentals) economies is just a sick dream and/or propaganda. This dream is not any different from long-term "successes" of central-planning systems.

Consequently, the present crisis will not be solved until currencies in circulations will be pegged to something of real values (commodities, precious metals, etc.,). 

Tue, 03/23/2010 - 12:05 | 273266 Missing_Link
Missing_Link's picture

I agree with the author about the long-term.  In the near term, though, stocks are still being manipulated upward and gold is still being manipulated downward whenever it gets too uppity  ...  and we're not experiencing significant inflation yet.

I'll move my money from stocks to gold when the market rally runs out of steam and inflationary pressures start to matter.

Tue, 03/23/2010 - 12:08 | 273270 Madcow
Madcow's picture

Careful gold bulls ... 

 

take a look at M3.  The money supply is set to decline - perhaps dramatically - for years and years. 

 

http://www.nowandfutures.com/key_stats.html

 

Tue, 03/23/2010 - 13:29 | 273286 Hulk
Hulk's picture

Been watching that. Essentially holding for systemic risk at this point. Thanks for the M3 link and info

Tue, 03/23/2010 - 13:10 | 273359 Anton LaVey
Anton LaVey's picture

Gold and Cash.

Cash and Gold.

Gold is insurance.

Cash is just stuffing the piggy bank. Just in case.

Tue, 03/23/2010 - 12:18 | 273276 10044
10044's picture

He's got one thing totally upside down; gold has value in inflation AND deflation, specially after devaluation, whereby its price (in paper money) has to go up just to stay even

Tue, 03/23/2010 - 12:32 | 273305 augmister
augmister's picture

Good read.  Sitting on silver coins bought in the 80's but no gold yet.  Waiting for a push down under $1K which we will see soon.  Patience, patience, patience.  What I loved was reading all the "new aggie boys" and the realization that what comes out of the ground will be of great value in "the new normal."   Grow food, tobacco, tomatoes, yes mary jane .... these will take on new meaning and value.  Planning on my own greenhouse this year.

Tue, 03/23/2010 - 12:42 | 273330 Hulk
Hulk's picture

Check out F.W. Owens site at

http://userpages.bright.net/~fwo/

Cheap greenhouse plans somewhere on that site

Tue, 03/23/2010 - 14:38 | 273451 tmosley
tmosley's picture

Good luck getting gold below $1000.  You should have bought it back then.  With the weight of the Chinese and Indians buying on dips, the likelihood of seeing gold below $1000 again is pretty close to nil.

You might be able to get paper for that price, but by then, the premiums on the real thing will be so high that you'll be priced out, along with a lot of other people.

Tue, 03/23/2010 - 12:42 | 273333 jimmyjames
jimmyjames's picture

by Missing_Link
on Tue, 03/23/2010 - 10:05
#273266

I'll move my money from stocks to gold when the market rally runs out of steam and inflationary pressures start to matter.

********************************

Inflationary pressures--I have to say it will be years-before there is any inflationary pressures--

Money has to circulate in the economy-to become inflationary--

People without jobs-do not spend-businesses that cannot sell their wares-do not borrow and expand-

Sentiment has shifted-from borrow and spend-to-save and wait--

This shift has fundamentally changed our futures and will last for years and when/if we ever go back into inflation--sell gold and buy assets--

Money is king in deflation and we are "in" deflation and the form of money I like to hold is in bullion--

Hyper-inflation-with two types of money--cash and credit--one contracting at warp speed-the other doing squat-other then devaluing in coordination with all others-in a floating currency environment-is almost impossible-to hyper-inflate--

In order to hyper-inflate-you would have to peg your currency to another and then defend that peg-by over-inflating it--we're not doing any of that--

We print-the euros print-the chinese print-it's all coordinated-all realitive-of course they lose value-but now-with no credit money/now debt money in the system-cash money is acually percieved to have even more value-and that's all it takes-to be money--

Would never rule out hyper-inflation-but i'm betting-we never see it-

Deflation and a currency crises?

Sure--all it will take is one-major to start collapsing and the rush into gold is on--

 

Tue, 03/23/2010 - 16:53 | 273700 huggy_in_london
huggy_in_london's picture

people don't seem to understand that QE is only inflationary if it actually works... and given the state of the US, UK, japanese economies it's not clear that its worked.  Hence why you could be risking a lot by purchasing gold at these prices.

Wed, 03/24/2010 - 08:18 | 274225 boatman
boatman's picture

 

 

wrong.....i guess u don't really get the gold/currency devaluation thing.

 

gold will do better than currency in coming deflation....alredy holding its own as dollar rises due to this temporary bank bailout money driven DOW....whose days are numbered.

Tue, 03/23/2010 - 13:01 | 273352 Jim B
Jim B's picture

+1

Completely agree...  The pain will come eventually!

Tue, 03/23/2010 - 13:02 | 273355 sweet ebony diamond
sweet ebony diamond's picture

i hereby assume copyright for all posts by dumpster

new world order shit.

you wouldn't understand.

Tue, 03/23/2010 - 13:21 | 273374 Jim in MN
Jim in MN's picture

I prefer simplicity. 

I assume the Dow/Gold 1:1 will be at 5K. 

The Dow was at 5,000 (under Rubin and Summers) in 1995; Gold was about $400 then. 

The only question is will it take another fifteen years?

I say yes.  Again, simplicity. 

But, melt-ups happen. 

Got Gold?

 

Tue, 03/23/2010 - 13:28 | 273381 dumpster
dumpster's picture

who doesnt understand new world order shit lol

its edible , comes in many sizes , and finally is a most sought relaxation at the end of the day.  

and best of all.. even zits do it.. they are just beyond the diaper age

Tue, 03/23/2010 - 16:10 | 273601 jimmyjames
jimmyjames's picture
by Madcow
on Tue, 03/23/2010 - 10:08
#273270

Careful gold bulls

 

M3 consists of M2, institutional money market mutual funds, time deposits in amounts of $100,000 or more, repurchase agreement liabilities of depository institutions (in denominations of $100,000 or more) on U.S. government and federal agency securities, and Eurodollars

******************************

M3 is a poor in fact a horrible mesure of money supply--

As you can see in the make up of M3--it contains MMMF's--

Are the funds--actuall money?

i don't think so-mainly because this "so called money" has no known function--

is it "acting" like money-is it circulating in the economy? No--And it's not readily redeemable on demand-

The M3-draw down has been money actually coming out of "so called"safe funds and going into risk-ie-stocks and commodities-etc--

M3 will signal recessions-but not real money supply--

Your MZM weighting will point the chart down-as money comes out of saftey/MMMF's and into risk/stocks-vise versa the other way--

i like the Austrian measurment-because things like time deposits/mmmf's/traveler checks/ are eliminated and only real ready for use money is counted--remember--dollars in MMMF"s can come out negative--we seen this a year ago--so they are an at best-poor measurement--

TMS

http://3.bp.blogspot.com/_nSTO-vZpSgc/S6MHTctEvnI/AAAAAAAAIDM/inUqR1N-Eg...

 

Tue, 03/23/2010 - 16:51 | 273690 huggy_in_london
huggy_in_london's picture

Pffff ... and when oil was $140 it was going to $200 wasn't it?

Don't waste your money holding that rubbish.  Do you get a free cheese grater every time you buy some gold (to shave off a little gold from your gold bars everytime you go shopping obviously!)?

 

Wed, 03/24/2010 - 08:25 | 274227 boatman
boatman's picture

 

 

its easier than trying to use mutual funds

 

looked at pound sterling values lately?............  don't

Tue, 03/23/2010 - 19:25 | 273875 lawrence1
lawrence1's picture

Good luck to those who think they are going to be able to time their entry into gold or silver. Ignore totally the dollar price. Buy as many ounces as you can... it wont matter if you might have been able to buy 10 to even 20 percent more if you had had spectacular success in timing. Do you time your insurance purchases? Are you going to gamble preserving your any part of your wealth?

Sat, 04/03/2010 - 23:02 | 285507 Partsman
Partsman's picture

The question is what will be of trade value. Perhaps, it will be much like the gold rush .... the tool salesman proved to be a wise man. As to the gentleman wanting to plant small seeds (seed salesmen may be another wise person)he should visit a greenhouse/nursury and look at the way they handle seeds. They use a vacuum plate to hold a single seed until released into a peat growing container. The plate holds enough seeds to plant a tray at a time.

Wed, 04/14/2010 - 07:24 | 299642 mark456
mark456's picture

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