Yesterday we got to hear Doug Kass recite Howard Marks' most recent views on gold by memory (badly) and come up with the conclusion that gold may drop 25%, something not even Marks was foolish enough to suggest. Today, we present a contrary view, that of the extremely original and always provocative Simon Black, aka Sovereign Man. Writing from Auckland, New Zealand, the activist who has previously openly defended expatriation as a means of "revolting" against the collapse of US economics and society, turns his attention to gold and shares his thoughts on what to look for "when the market tops." As always Black, who has encountered more cultures in the past few months than most do in their entire lifetime, gives an unorthodox view on the metal's prospects, which if nothing else, are based on a much broader sampling of data, than merely the (biased) read of the opinion of just one other person. His conclusion is not that surprising for someone who has a worldview that is wider than just the FDR through the West Side Highway: "People are only starting to wake up to the reality that unbacked paper currency is fundamentally flawed, and it will be a long time before this belief becomes widespread once again, just as it was in ancient times."
From Sovereign Man:
When the Gold Market Tops
Date: December 21, 2010
Reporting From: Auckland, New Zealand
My friend Doug Casey has frequently written that you'll know the bull market for gold has peaked when there's a picture of a golden bull tearing up the dollar or the New York Stock Exchange on the cover of Time Magazine.
I have a similar view, but with a different indicator.
I'm sure you've seen those TV commercials, fliers, and billboards that say "WE BUY GOLD". The business model is simple-- they take in whatever gold you can find around the house (a false tooth, granny's wedding ring, etc.) and trade you for worthless paper money.
If that's not bad enough, they capitalize on people's ignorance of the gold market and offer a ridiculously low valuation, sometimes less than 50% of the spot price for gold. People are getting ripped off, and they're happy about it because they're able to sell their 'junk' for a few extra bucks.
These are the types of things that are common in a rising bull market that has plenty of room to run-- the public, largely ignorant about gold, is happy to trade physical wealth for worthless paper.
At the top of the market, we'll be seeing the exact opposite. The public will have wised up; the vast majority of people walking the streets will know the price of gold and be able to distinguish a Maple Leaf from an American Eagle.
At this point, everyone will want to own gold, and the signs will change from "WE BUY GOLD" to "WE SELL GOLD"... and they'll be everywhere.
Entrepreneurs, flush with all the bullion they've been racking up over the years from false teeth and wedding rings, will start unloading their gold holdings to the very people who supplied them to begin with... all at a handsome profit.
In certain parts of the world, we're already seeing early signs of this. I've seen hoards of Chinese people queuing up to buy small gold bars in Shanghai during their lunch breaks. Same in India.
Gold "ATM" machines are sprouting up in Europe and Asia-- you can pop a few hundred euro (or your credit card in some cases) into what looks like a vending machine, and out comes a small, assayed bar of gold.
I've been following the spread of these machines with great interest, and I noticed that the first of them arrived to the United States in Boca Raton, Florida a few days ago.
Don't get me wrong-- this one machine doesn't constitute a top. Not even close. There would have to be thousands of these machines across the country at McDonalds and Starbucks before that happens. If you need extra convincing, ask your neighbor what the price of gold is.
Years from now, though, I'm willing to bet that the sucker who ends up paying the highest price ever for an ounce of gold before the metal starts to decline will probably do so standing in front of one of these machines at a shopping mall somewhere in suburbia.
Another 'top indicator' that I look for is the occupancy rates for safety deposit box facilities like The Storage in Hong Kong or Commonwealth Vault right here in Auckland.
When these firms have a long waiting lists, or new facilities are sprouting up, it suggests that public awareness for gold is increasing... and the more that happens, the closer we get to the top.
Again, this is also starting to happen. Singapore's recent Freeport facility leased out to capacity almost instantly, and you're hard pressed to find an available safety deposit box at any of Singapore's banks. Buy hey, that's Singapore... not exactly representative of the entire world.
Here in Auckland, Commonwealth Vault has plenty of availability, and they charge peanuts.
Bottom line, while some of these 'top indicators' are starting to emerge, I think it will be several years before they're ubiquitous. People are only starting to wake up to the reality that unbacked paper currency is fundamentally flawed, and it will be a long time before this belief becomes widespread once again, just as it was in ancient times.
In the meantime, as long as central banks keep pumping their currencies full of hot air, gold should continue to have strong, long-term growth potential as the 'anti-currency'.