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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RobotTrader's picture

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


Cookie's picture

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

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


aurum's picture

Metals food guns ammo equals peace of mind.

sweet ebony diamond's picture

i don't mean to be a party pooper.

i don't understand gold.

i can't eat it.


Hulk's picture

Go long sugar, in that case

Cookie's picture

I hope you enjoy greenbacks with ketchup

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.


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?

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. 


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.


Dr. Richard Head's picture

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

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!

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.

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....



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.

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..



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

PierreLegrand's picture

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

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.

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!

swamp's picture

When was the last time you ate a dollar bill?

Al Gorerhythm's picture

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

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 … :)

Hulk's picture

Bernanke is Australian???

Cookie's picture

Hey, that's an insult to Australia!!

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.

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. :)

Hulk's picture

I am putting that line to memory

DoChenRollingBearing's picture

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

Internet Tough Guy's picture

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

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 ,


A Nanny Moose's picture


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.

WaterWings's picture

Don't feed the clowns fellow ZHers.

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....



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.


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

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.

THE DORK OF CORK's picture

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

lsbumblebee's picture

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

Postal's picture

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

Bigdaddydvo's picture

Great read, thanks.

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.

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. :(

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

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.

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.

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--