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Who is going to buy gold?
This is the first in a series of what some may consider as “gold bashing” articles. I am not short gold in any shape or form. I have no axe to grind against gold bugs. I am simply presenting the other side of the argument in response to what I deem to be dishonest, gold-pimping commercials (e.g., “If gold prices went up to $5,000 this pile of gold would be worth $300,000”) that we are subjected to all day long on TV. I may be wrong, but I am honest.
Here is a trivia question for you: what country is the seventh largest holder of gold, ahead of China, Japan, and Switzerland? Well, it was a trick question: the seventh largest holder of gold is not a country, it is an exchange-traded fund, GLD. Yes, a fund that is not even five years old is the seventh largest holder of physical gold in the whole world, even ahead of mighty China.
When investors buy GLD, GLD in turn has to go out and buy gold, driving up the price. This raises a little question: who will be buying this gold from GLD when investors decide to sell it? Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash-flow analysis to value it – it has no cash flows. It is an asset where perception and reality are deeply intertwined.
Investors buying the gold ETF (GLD) are influencing the price of gold, which is fair for the most part, as otherwise they’d be buying the real thing. The ease of buying GLD creates a higher, artificial demand – but GLD is still fair game.
The violent selloff in GLD will be caused by factors that are hard to predict today (e.g., hedge-fund liquidations) but that will drive the price of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt, for instance), and the gold price could get cut in half overnight. Suddenly, perception of not being a store of value will create the reality of gold not being a store of value. The gold game will be over.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles by email, click here.
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See the problem with that is it is actually bearish. The public is being encouraged to SELL Gold, not BUY it. A bubble in ANYTHING does not end with the majority people SELLING the asset in question.
Exactly....
Not true, actually. There is a lot of gold pimping in the mainstream media; on radio spots we are inundated every half hour with Glenn Beck as the spokeperson; there are a lot of printed media and internet ads; not quite as much on TV but some.
I posed this question on another Sunday forum; if gold is indeed such a no-brainer, why are the gold holding companies spending such inordinate sums and time to sell it? If they truly believe " the experts predict will double from here", why on earth would they sell it, let alone spend significant marketing dollars doing so?
I think myself 10-15% of ones wealth in gold is very prudent, but I really am baffled by the push to sell.
Having wondered the same, I surmise that the sellers are somehow getting their gold at a lower premium and selling it at a 15% gain. As a conduit, they wouldn't be interested in anything but transaction arbitrage... Otherwise, I agree that their marketting is rather contradictory. I don't think 99% of the voting public see this irony, and it's right in front of them every night. I wonder how much the gold companies keep for their own hedging...
I like gold, but wonder who will buy it next and for how much. The 'nice suit' is about the only labor/materials correlation I've seen that folks can count on over time. A "standard laborer's" weekly paycheck, 1 oz silver for an hour?, 1 oz silver for a gallon of gas? the historic oil correlation is way outta whack, but that's as broken a market as gold right now. any others?
I'd bet on reversion to the mean, but where's the mean these days?... The squid is clever.
(this would be a great gold-bug thread!)
cheers
One of my best friends is director of sales for bullion at the Royal Canadian Mint. He tells me could sell a lot more gold if he could get it; physical supply is tight.
As to why gold companies are selling - no doubt the salesmen and senior executives get a bonus based on sales. Why would they give up this year's bonus for an unguaranteed amount in the future?
Hi Kevin,
If your friend is really director is sales, I have sellers looking to offload, get this please... upwards of 2K Metric Tonnes of Gold.
Can the Canadian mint swallow that?
I'm totally serious.
The true gold picture and the accepted picture of availability/reserves/role etc. are too confounding for ordinary minds to see.
Let me know if he wants, I'll arrange!
Will look for a reply to my reply.
VAC
I agree to a certain extent...however, the Staten Island gum snapper that needs cash to pay bills is digging up her broken chains and shipping them off. These people are also being raped in price.
But, there are just as many commercials for people to buy gold outright--not sell it. Particularly on the Business News channels. The we will buy your broken jewelry are more focused on mainstream channels.
It's a gold confiscation. It's just happening through unemployment and a screwed up economy instead of a law. They got caught on the last gold confiscation. They have to use a different tact. Lies serve but one purpose to avoid setting off conflict. As I said it's all repeat of the same old rule the world tact over and over using various strategies. We don't have 20 percent of the population growing thier own food any more it's easy to confiscate this way to take advantage of the interedependance.
It's weak hands vs strong hands. This is why I hedge my PM portfolio heavily with cash; I expect a pronounced deflationary episode before fiat currencies explode, and it will look like the last big gold selloff when hedge funds liquidated every asset they had that was worth anything (gold will never be worth zero) in a effort to raise cash and stay alive. That is what I expect the public will experience, along with most investors. Precious metals will be shaken loose from weak hands.
Precious metals:
To anyone who says gold's value is irrational, I say this: given the above facts, which is more rational, accepting gold as valuable or accepting fiat as valuable?
When push comes to shove, you'd be better to have more common and useful stashes of rice, batteries, and cigarettes rather than being known to have gold as in when you try to sell it. The paper/cash settlement of the Comex is telling the tale, and as for the physicals, you can't stay up all night. Fred C. Dobbs tried that and well, dust to dust. At some point, people will realize the hard way that they had better be helping by doing something useful for society than figuring out how to collect enough mediums of exchange so they don't need to care about others.
Commodity ETFs are an abomination of nature and a useless hoarding mechanism that will also fail the common sense test in the coming tougher times. No greater example than the tightness in copper in Feb 2008 putting up a $4.25 print. The "little guy" got to "invest" in copper..to that end, the real supply was denied the real users. This is useful Capitalism, or another paper charade at wealth-building? The UNG fiasco is the harbinger of the nasty ETF Spring.
"To anyone who says gold's value is irrational, I say this: given the above facts, which is more rational, accepting gold as valuable or accepting fiat as valuable?"
Buying a lottery ticket or betting in a casino is irrational, buy why do people still spend hundreds of billions on thise activities? Just because your argument for gold is logical and rational doesn't mean everyone will do as you wish. All the bears on this forum should quit trying to bet against the vampire squids, there is just no way this rigged market will be pried lose from Uncle Sam (or Uncle O's) grasp.
I agree with SWRichmond's conclusion to some extent
We have been experiencing a deflationary impulse, but the printing presses have been rolling for at least 12 months (some would say 24 months). The price of gold eventually will reflect the lack of intrinsic value of fit currency. And I'm no gold bug.
Hopefully, those holding the tap in their hand will know exactly the right moment to turn it off, but what are the odds of that.
So, I'm comfortable being very overleveraged in real estate in my real life and heavily cash in my securities life. If deflation triumphs, at least I've got cash; If inflation triumphs and I can't get to a hedge fast enough, at least I've got real estate and the income it generates.
Have been recognized as money for over 6000 years?
I can't take my gold to the store and buy ANYthing. It's not liquid. I have to first sell it for CASH and then use the CASH to purchase what I want. I can't take a gold ingot to the auto dealership and put a down payment on a Vette. Therefore, it is not money.
Money is generally defined as
1) medium of exchange
2) store of value
3) unit of account
Your criticism is directed at function 1. Gold obviously is already performing function 2 (this point cannot really be argued, an ounce of gold still buys a nice suit) , and it is indeed a unit of account (why else would CBs carry it on their balance sheet).
Gold may not be a medium of exchange on the retail level yet, but it is so in Zimbabwe which has suffered an economic collapse. Gold is also a medium of exchange on the international level, where even since 1971 it has still provided a crucial role in clearing, because oil is sold exclusively in dollars and gold can be purchased in dollars via the Western futures systems.
So yes, gold is money, but at the moment only on the international nation-state level and in certain local pockets where the system is in crisis.
As for the dollar, it fills functions 1 (medium of exchange) and 3 (unit of account), but it is debatable whether the dollar will be a reliable store of value for the next 1.5years to 5 years. So if you make the argument that gold is not money (as it does not fulfill all definitions of money completely at the present time), then you can also make the argument that the dollar is not money.
My argument is that presently both are money, but have different strengths depending on the paradigm. Ultimately though, it will be the ancient metal of kings (and its lesser brother silver) which will survive the crisis.
+1
I like your ideas and thoughts. by chat greetigns..
Oh, please. I live in a relatively small town half an hour north of Toronto, and we have two shops on our main street that buy and sell gold bullion, plus a pawn shop that will also accept it. Unless you live in the absolute boonies, you can convert gold into cash easily. It wasn't that long ago that the US and Canada minted silver coins, so you could spend easily spend precious metal in half of my lifetime. My grandfather used to give us silver dollars each year at Christmas, and they were legal tender.
But of course, governments don't like it, because metals show how much their paper money is debased.
wrong...sounds like you live on an island by yourself...
Oh man, this is going to get some comments from the nutjob goldbugs that populate this site. Prepare for a bunch of unhinged comments about massive unfounded overt conspiracies and railings against "paper gold."
The problem is that we know a tremendous amount of debt is about to default. There simply isn't enough money supply appropriated dispersed to service the interest requirements.
We also know that government is trying to diminish somewhat the contraction and inevitable write-offs by issuing their own debt for social services and to backstop the big dominos.
This insolvency on the part of corporate and middle America, the conspiracy to withhold a true accountancy of the scale of the problem, and the profligacy by which the national government is entering into debt sales is making investors very nervous. The uncertainty is making forward looking decision making arduous.
I cannot believe that the US nation or the coalition of nations haven't seen this coming or haven't made provision for it. There is a plan for an end game solution, but what it is, is not public information.
Whether another crisis precipitates a preordained corrective action to force it into this new architecture, or whether all the players are just going to watch as the global financial system is reactively contained is the unknown.
It is making all investors, large and small indecisive. Without clear signals by government and central banks, mankind will flee to gold.
But they will be ruined if the final solution is quickly implemented and the old system stabilized or new system quickly adopted.
It is the unknown that gives gold its allure, and its strong potential to trap wealth and redistribute it to global game players.
Of course it can happen and probably will. In the meantime what should one do.Wait around the drop, buy 5 year T bonds, stocks real estate, foreign currenies, etc.
Gold may be halved but from where? From 2000,3000 or higher.
Gut feeling will give some of us a clue. at that point don't sell you may be wrong, but invest a bit of your profits in gld puts and hope they expire worthless.
Greed is the real enemy..not the market fluctuations.
Of course - gold is just some stupid element on the chart. I think you should short it.
Seems to be as stupid as stocks, real estate and bonds! Gold (and its derivatives mining stocks) which has performed so tremendously the last 8-10 years seems not to be a stupid element! You FIAT money guys should at least be able to pay a decent percentage of interest for your bonds/debts before you call other assets stupid...
Missing such a move and so much money to earn while others have no idea what's going on must be extremely embarrassing...