The "Sovereign Man" On What To Look For "When The Gold Market Tops"

Tyler Durden's picture

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'.

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MsCreant's picture

Seems common sense.

LowProfile's picture

Except that when the scenario above plays out, gold will be floating freely, and there will be no need to 'sell at the top', because the top will be the new baseline.

Arius's picture


another indicator would be America best (richest) investor W. Buffet turns to gold...surely we are long way off, from people in the street being bulls...

Jasper M's picture

I predict Warren will turn to dust before he turns to gold. 

Arius's picture

My bet is Buffet will turn to gold in 2012.

Buffet will lead to gold the other less privileged americans...come to think of the blind leading the blind.

Imagine the headlines and comments on CNBS: Buffet recommends gold!

traderjoe's picture

Buffet is one of the biggest beneficiaries of the fiat system. He will never publicly buy gold. If he does it, it will be on the sly and in smaller quantities. CNBS will continue to call gold a 'commodity' (and not an alternative money) until they shut the station down for lack of ratings. 

Arius's picture

agreed on all points - what i am saying is by 2012 the GAME IS OVER...even Warren could see it.

we will be on the verge of the New World and new currency most likely w/ gold backing...

The Chartmeister's picture

Us "old guys" remember when Buffett was buying silver in the late 90's.

barkster's picture

betcha jpm had something to do with his quick exit from silver...

Arius's picture

yup - i think he is collateral damage...did he sell when silver was smt like $5 or $6 not sure

and he goes bailout GS - they got his number all right...LOL

dogbreath's picture

buffet was out of silver by the time of the first silver spike to 8.30.  his physical was used to crush some early silver specs.

jeff montanye's picture

silver's cool.  have some stocks.  like majestic.  

fofoa gave me second thoughts though.  he's so persuasive.

speaking of gold, did anyone notice jesse's gold chart with a target of 1375?  pretty pretty.  next stop 1455.

LowProfile's picture

Most people who are bullish on gold (including those here), and bearish on everything else, even to the point of thinking there will be a hyperinflationary crack-up, still think there will be somewhere to hide in the paper markets.

They will be wrong.

Ultimately, you will only 'own' what you can physically control.

Silver is very cool, but when it starts getting too hot to handle, you need to swap it for you-know-what.  Scale out as the GSR plunges.  IMO.

RockyRacoon's picture

Would anyone buy silver at $30 an ounce with an instant hedge of $20 an ounce guaranteed?  Buy $20 face value silver coins for $30 each.  Is that a better deal than U. S. silver Eagles with a face value of only $1?  Good question, eh?  Here's how to hedge that $30 purchase, and these are available all day long:

Money Squid's picture

RC, them coins are selling $399 + $24 shipping to Amerika, so...let me see that's $42.30 an ounce, not $30. Plus, how do I know its good for $20 if its just an Olympic coin ?

RockyRacoon's picture

They are averaging a bit over $300 per set and you'll pay shipping with anything you buy so that's moot.   The coins are legal tender with a face value of $20.  You can pull them out of the capsules and spend them at your local grocery store (after convincing the clerk that you are not a total nut-job).

Here are closed auctions on those particular coin sets:

Lord Koos's picture

I guess you aren't keeping track... 90% silver coins are presently selling on ebay for around 20 times face value as long as silver hovers in the $29-30 price range.  The face value of .999 silver in 1 oz coins is meaningless.

RockyRacoon's picture

 The face value of .999 silver in 1 oz coins is meaningless.

No, it's not meaningless.  The face value of a Mercury (Winged Liberty) dime is 10 cents so that's your downside.  The face value of a Silver Eagle is $1 so that's your downside.  The face value of the Canadian Olympic commemorative is $20.  See where I'm going with this?  The face value of your legal tender coin is always a hedge against the price of the metal in the coin.  Any bank should exchange your coin for fiat if you must have paper money for a transaction in the retail market.  The U.S. Mint (Treasury) were no fools when they gave the silver a face of $1, and the gold Eagles at $5, $10, $25, and $50 for the 1 ounce coins.  They were never meant to circulate (Gresham's Law doncha know).  What were the Canadians thinking!?

romanko's picture

If you're bent on hedging using the legal tender face value, just buy boxes of US nickels. Their 75%copper/25%nickel composition has current metal value of 6.6cents, an instant 32% gain, and their "downside" face value is 5 cents each.

RockyRacoon's picture

True! Same holds true for cents pre-1983.  Cents were 95% copper.

If one is unafraid of prosecution for melting them into ingots, go for it. 

Recent changes in the law for these coins (cents and nickels) were not for the fun of it.

Jendrzejczyk's picture

Just a guess, but a good portion of his real estate holdings could be sitting on gold producing soil. Stealthy, without admitting anything.

shano's picture

Except Warren has "bought" gold, by investing in Richline  and Bel-Oro and Aurafin, gold jewelry suppliers, and Helzberg Diamonds, a retail jewelry chain.  The best way to make money on gold is to sell it because then you can make money whether it goes up or down.

akak's picture

I suspect that you are exactly correct, LowProfile, and that all those who are simplistically calling for gold to eventually enter some faux, manipulated-market bubble like equities in 2000 or 2007, or real estate in the middle 2000s, are just not appreciative of the fact that the "bull market" in gold in the last 9 years is NOT in fact just another market fad, but represents a fundamental realignment (still in its early stages) of the world financial and monetary systems.  As long as the dollar continues to depreciate, the price of gold can only continue to go higher, especially as the overt manipulations of world monetary authorities to attack it and hold it back are increasingly becoming widely recognized, and are therefore increasingly failing.

Al Gorerhythm's picture

when gold starts paying an income, it will be in a bubble.

FreedomGuy's picture

Its not just the dollar. It's virtually every currency in the world as they race to the bottom to try and favor exports over imports. Pegged currencies like China and S. Korea have to follow the leaders down the hole. PM's are the alternative to all currencies and even the poor schlub in the article that buys at the top will find that over time he will still do OK. That schlub whether or not he realizes it just bought an insurance policy against hyperinflation, too. That's the extra benefit of PM's. It's not just the value aspect. It's also the insurance aspect. Like the insurance you buy on your house, car and life, you are likely never going to need it, but if you do, you are soooo glad you have it and it becomes a bargain.

akak's picture

Its not just the dollar. It's virtually every currency in the world as they race to the bottom to try and favor exports over imports.

You are correct, and I was negligent and/or sloppy in not more explicitly stating "fiat currencies" when I said "the dollar".  Yes, of course, all fiat currencies are roughly as corrupt and unsustainable as all the others, and once one major one begins to truly crumble, it is very likely that ALL of them will very shortly follow. 

All those who believe, due to their narrow and faulty focus on the contrived and artificial US Dollar Index, that if the Euro should radically fall or collapse, that the US Dollar will therefore automatically "rise", are living in mainstream propaganda-fed fantasy world.

Billy Shears's picture

Yeah, what he said...Mother F***in' GOLD BITCHEZ!!!

masterinchancery's picture

The question is, at the top what paper currency will be desirable enough to accept in exchange for gold?  Not the unbacked US dollar I think. What would make sense, as happened after the Civil War, would be to exchange gold for gold-backed notes, at a slight premium.  But most gold will never be exchanged for paper.

Long Strange Trip's picture

At the top you wouldn't exchange your gold for fiat paper but instead exchange it for Real Estate (which should have finally cratered by then), equity in businesses, capital equipment, - any real tangible asset...

waterdog's picture

It sure does- has anyone heard about what the premium is to purchase from an ATM?


RockyRacoon's picture

It was reported on (drum roll, please) CNBC, that the premium is about 5% over spot and that the machines are linked to input that updates the prices every 10 minutes.  Considering the source I'd be suspect of the numbers...

Eally Ucked's picture

Yes, it is, the only fault in that thinking is that, that it is based on outdated perception of the economic order, first old USD must be replaced with something new and then his points will be valid.

gwar5's picture

Gotta have some gold for the 21st Century.

Arius's picture

yeah, but to quote one of TBTF geniuses "as long as music plays you got to dance"

Methink Buy some Google (cramer recommended) and Neflix.


RockyRacoon's picture

While the music is playing, and the fools are dancing, we're sawing the legs off the chairs.

Al Gorerhythm's picture

You forgot; Johnny Bravo will be seen standing at the head of the buy line.

Andy_Jackson_Jihad's picture

Robo will have an avatar with small tit-tays too.

NotApplicable's picture

Safety deposit boxes will empty out in an instant once they start being seized in earnest. I would never, ever use one.

JonNadler's picture

you can store your gold at our vault and we'll give you a nice certificate for it. We'll keep it reaaaaal safe for ya

MsCreant's picture

Maybe method acting classes with Konstantin Stanislavsky. I dunno, you're just not hateable enough. The upside down robo photo is a plus. You need to tap into your greedy, seedy, inner salesman, desperate, scared, bitch and really let it rip. Remember, you are in denial, you must get folks to stop buying the stuff, or Jaime will make fun of you and make you a playground reject. You must have his approval, you are desperate for it, you will do anything. You are nothing without him. You'd suck the smeg.... Never mind, you get the idea. 

Make us hate you if you really want to be a righteous effigy troll. Or is your heart just not into it? How does Johnny Bravo do it?

DoChenRollingBearing's picture

JonNadler, looks like MsCreant turned down your offer at Jamie's place...


Remember, as the great Johnny Bravo taught us:

1)  You can't eat it!

2)  It is in a Rising Wedge!

Au to $0.02!

Ag to $0.01!

I miss Chumba...  When are you coming back, bud?


EDIT: Guess you are stuck with Blythe now,  JonNadler...  Bummer!

traderjoe's picture

Honestly, I don't think Bravo was a troll like Harry or Toothis are. I think he was what he said he was - a college student learning how to trade. He had a perspective - but it was 'immature/uninformed' (he thought of gold as a commodity and didn't have the perspective to understand why gold was going up). He made a bet about the direction of gold, lost, and seems to have followed up on leaving. Unless he's now under a new avatar which is entirely possible. I think, personally, one of the reasons he was not liked was because he kept saying the same stuff over and over (and over) again - like how he didn't understand paying a premium over spot for coins. Over and over again. Did I say over and over again?

I don't know why I felt like defending him just then, but we've seen an increase in trolls lately, and for some reason he just didn't strike me as a troll (i.e. someone being intentionally difficult just to get a rise out of people). Just someone that had a different opinion - which I do like to hear now and again.  

MsCreant's picture

You gotta give it to him, he could really draw fire. If he was a clown at the rodeo, he got all the gold bulls to go after him very effectively!

RockyRacoon's picture

He was so obnoxious and wrong to the point of being clownish -- and intransigent.

That's about the best compliments I can pay him.


Miss Expectations's picture

You probably realize that the reason the bulls are jumping and gyrating is because they have a cinch around their hindquarters that tightly squeezes their testicles.  If the clown would attend to getting the cinch off, us gold bulls would look less crazy.

Village Idiot's picture

Johnny wasn't a troll.  Johnny forced "opinion" out of people.  Personally, I like fact-checking opinion.  And Johnny didn't come off as an asshole, Johnny was a nice boy.

Speaking of nice boys, NORAD has a website for tracking Santa.  The kids seem to enjoy it -