Record Gold: The Real Journey Begins

Expected Returns's picture

Those of you who have been following this blog from its humble beginnings know that I have been consistently bullish on the long-term prospects of gold, and consistently bearish on the long-term prospects for the American economy. With gold sitting at $1,232 dollars and sovereign debt concerns entering the system, my thesis is unfolding before our very eyes. This is very unfortunate. I would much rather be wrong and lose money investing than be right when it entails hard times for Americans.

Over the past year or so, gold has erupted to inconceivable levels against a backdrop of a "recovering economy." I have been trying to expose the putrid stench of propaganda pushed by vested public officials. With unemployment pushing 10% two and a half years into this "recession" (Depression), the economic recovery thesis clearly carries no weight. If you still can't read the writing on the wall for our economy, then you are part of the 20% of people who give the truism "fool some of the people all the time" credence.

Gold serves as the canary in the coal mine, period. This is something I've often alluded to in my posts. The rise in gold is evidencing a collapse of confidence in government. Just take a look at the approval ratings of President Obama and Congress; this isn't some highbrow theory without basis- I simply follow the rhythm of history. Confidence in government will ebb and flow cyclically no matter what I say. The wise investor rides the wave; the inexperienced investor fights it.

To a lesser extent, gold is signaling higher inflation and a restructuring of the global currency system. This is very clear to me. A free-floating system with artificial cross-pegs is prone to chaotic upheavals from time to time. In the past, currency crises were relegated to closed regions; in the future, contagions will likely be global. Again, gold is signaling this to me loud and clear.

I believe gold is going to make a multi-month push to test $1,500 dollars. Then it is time to reevaluate. If the printing presses are still running, I will hold my position. Given the tendency of humans to "paper over" problems, this is the most likely scenario. A loss of the AAA-rating of U.S. denominated debt will likely occur in a 3-5 year timeframe. The mass bailout of bankrupt states will also occur in a 3-5 year timeframe. If you think this is dollar bullish, then I invite you to go long the dollar and short gold.

Now these are just probabilities; nothing is guaranteed. If you are worth your salt as an investor, you will hedge your long gold positions with long-dated puts as call options become expensive relative to puts. You will have many, many opportunities to do so between now and $1,500 dollars. I strongly urge people to do so.

Social Implications

Let me just say people won't be skipping down the street if and when gold hits $2,000 dollars. It won't be the end of the world either, although it will appear that way to many people. It is rarely ever that black and white in life.

Leading up to $2,000 dollar gold, you will likely see protests emanating from college campuses as the youth realize Art History degrees just don't offer the security they used to. Regular citizens will start to protest onerous levels of taxation, especially effective tax rates. The most obvious example of rising effective tax rates are property taxes that don't reflect depressed home values.

The American social model isn't meaningfully different from the Greek social model. Pensions are underfunded by trillions of dollars. Phony accounting that pushes fiscal obligations forward are rife. These are just facts, not my opinion. If the government recognized liabilities according to GAAP standards, we would already be bankrupt.

This is nothing more than "extend and pretend." Fundamentals always assert themselves in the long run. Debt levels unheard of in modern history will negatively impact our economy. A revaluation of debt is certain. Trillion dollar obligations will be inflationary. Again, just reading the tea leaves here.

Disbelief Fuels Rallies

If I could give you one tried and true indicator that will predict the extent of this gold rally, it would be the "disbelief" indicator. As long as Joe Six Pack watching TV all day thinks gold is "expensive", we have room to run. Trust me, you will see lines at gold shops when all is said and done.

The smart money (John Paulson, George Soros, David Einhorn, Paul Tudor Jones) is already positioned for what is going to shock the average person. This is a game changer. The arrogance of average people sticking up their nose to gold will turn to fear in a heartbeat. This I guarantee.


Taken from Expected Returns Blog