The Ultra Bull Argument for Gold

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we are seeing is only to beginning of a 30 fold rise in prices similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.

So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using (click here for the chart at http://www.madhedgefundtrader.com/july-13-2010.html   ). To match the 1936 peak, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp like by comparison.

The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg to unload my own Krugerrands in 1979, was triggered by a number of one off events that will never be repeated.

Some 40 years of demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

Comments

[jdrose1985]

I enjoyed reading your comment.
thing I notice most about gold buyers is lack of creativity. Yes I am a gold holder but I have much more than I know what to do with(which doesn't have to be much if ya think about it). Having shiny rocks laying around is not a very productive endeavor imho.

Is your stream big enough to hold any decent sized fish? I'm an avid stream fisherman.

[bingocat]

Thanks. It wasn't creative. It was my weekend.

I view gold as just another asset to trade. I know what to do with it when the time comes. Sell it.

I happen to think art is probably a better investment over time. When push comes to shove, and registered financial assets (money, funds, stocks, bonds, real estate) or hard assets (commodities) become more highly taxed (financial assets would be more highly taxed on the income produced, commodities more highly taxed because consumption would be more highly taxed (and profits from commodities would be taxed as income)), those with wealth will have to become better at finding somewhat portable assets which are widely deemed to have a huge amount of premium value vs the intrinsic functionality of the item, and be of reasonably widely-recognized value so that others can buy it from them.

I expect really good art, recognized as such, will continue to have good "value" whether denominated in dollars, yen, gold, soft/wet commodities, etc. Over VERY long stretches of time it appreciates faster than real estate or financial markets do. And best, in the future which has "higher taxes" written all over it, art is one "asset" which can be purchased "off the books", held "off the books", and then sold "off the books" relatively easily. If one is 'honest' and self-declares all taxes properly, in most cases the gain can be treated as a long-term capital gain.

I would tend to put classic cars and some antiques in the same category. People could learn from Nasser Khalili's collections (and methods of collecting). I would personally be long best of class of classic design from recognized periods, trying to either buy under-appreciated best of class (like Japanese arts and crafts of the the last 200 years), or up-and-coming asset categories where a large body of art is out-of-country and will be repatriated when the local booming economies' wealthy decide that it is a good thing not to buy Picassos but to return classic art/antiquities to their own country. When they do this, they pay through the odds, and prices do not seem to matter much any more. Chinese art is already seeing this boom. I expect India, Indonesia, and Vietnam to be particularly good gainers over the next couple of decades because the demographics are so supportive of long-term growth in wealth and gradual build-up of savings. So the time to accumulate is now (I think for these countries, very high-end textiles could be excellent investments (for at least Indonesia and India - for Vietnam, I'm still working on it)). I expect central Africa could be good at some point as well as oil and real estate wealth pile up. I have yet to figure out what the investable asset is for central Africans other than tribal art - and I hesitate there because tribal art is clearly heritage-based, but it has potential socio-political overtones which make it have potential risk of not being able to bubble (though, Africans will eventually pay through the odds for excellent pieces - mark my words). In any case, I expect portability will be important because the political/fiscal situation is far from stable still in many places. 

My particular stream is tiny. The one on the other side of the rice paddies is quite a bit stronger, but the fish are small. Upstream, above the dam, they are slightly bigger. Downstream, where it flows into a wide, shallow river (never more than a few feet deep), they are also bigger. The stream has sweetfish in summer, a number of different fish most of the year, and salmon up to 10lbs during the salmon run (mid-Nov to end-Dec). Sweetfish slow-grilled over natural wood charcoal is among the best things going.