Gold Bugs

Last week I thought the dollar was bottoming and I stand by that as it’s an important time to stay flexible and take those BS long profits off the table before the market takes it for you!

Those who were too clever by half and traded out of the yellow metal early are now trying to buy it back on any dip, driving it relentlessly higher. The gold industry is in a supply/demand sweet spot now, as supplies have been ex-growth for a decade in the face of a rising tide of demand. Peak gold is upon us, and unexploited deposits are getting farther and fewer between. (INIVX), (AEM), (KGC), (GOLD).

Yesterday, with a modest dose of sarcasm, we pointed out the latest salvo by the fiat regime against gold, in the form of one Op-Ed by Edwin Truman, who very seriously suggested that America should sell all of its gold to plus less then 3% of its massive (and growing) debt hole. Returning the favor of "all seriousness" we said that this is "dumbest idea we have ever heard." Today, Jim Rickards, shares his view on this modest proposal in a far more politically correct manner, via a King World News exclusive. Here are Rickards' follow up thoughts on this most ridiculous suggestion we have heard in all of 2010.

As Morgan Stanley pointed out earlier, the entire market now revolves around the insanity of one man. Just one man. That insanity has just taken the 2 Year UST to a fresh all time low of 0.4066%, and gold to an all time high of $1,320. Once the record divergence between stocks and bonds collapses, it will be one for the generations. Too bad not many may be left. At least gold "bugs" will have the last laugh over the paper bugs before it all blows up.

Recently, there has been much euphoria to define all those who believe that gold will outperform as goldbugs. We in turn are fairly confident that pretty soon all those who have faith that the central banks will somehow get it right this time, instead of causing all out war again, will be labeled as "paper bugs." What however, surprises us is that all the so called "gold bugs" continue to be invested in the best performing asset class over the past day, 5 days, 1 month, 6 months, 5 years, and 10 years: on a relative basis gold has outperformed stocks in all these time categories, yet it continues to be more hated than even Ben Bernanke, whose stealthy destruction of middle class purchasing power is in fact cheered by the "paper bugs" - we will not bore you with the chart that shows how the dollar has lost almost 100% of its purchasing power since the creation of the Fed. Anyway, here is David Rosenberg, who several months ago joined the gold bandwagon, and presents one of the better defenses to all those who blame gold bugs for not catching the "bungee jump" in the most manipulated stock market in history. "We continue to field criticism that we “missed the call” on the equity market. Well, no doubt we did not see the 1930-style bungee jump last year, but: (i) it’s over, and (ii) there were many other asset classes we liked that did very well: what has done better than gold, which is up more than 30% in the last 12 months." We obviously agree both now, and about 50% back, at the time of the creation of this blog, when we said that the only natural response to Fed insanity is the otherwise useless shiny metal.

The topic of hyperinflation vs deflation has gotten much prominent attention in the fringe media in recent weeks (and judging by the surge in gold, this attention is shifting to the broader population). Below we provide another perspective on what the phenomenon of "hyperinflation" signifies. The conclusion is not all that surprising to the Zero Hedge community: "As long as our politicians and the federal reserve continue on their quest to debase our currency, the threat of a hyper-depression remains. I personally do not believe this will happen, as there would eventually be enough opposition to quantitative easing to cease it, due to fear that it may result in destroying the savings or our baby boomer population and the financially prudent (the people who are actually important towards having a healthy and sustainable economy). However, we may very well be in a situation where Fed officials don’t realize what they’re doing until it’s too late."

Bill Buckler, publisher of The Privateer Report, has released one of the most scathing critiques of paper money we have read to date: "Before it can be exchanged, wealth must be created. Wealth cannot be created out of thin air. By definition, an economic good is “scarce”. If it were not, there would be no such thing as economics or exchange. Neither would be necessary because no effort or choice in the face of alternatives would be required in order to provide the GOODS which further our lives. Before we can talk about money and the VITAL role it performs, we must stress this point. Money is NOT wealth, it is the means by which wealth is exchanged amongst those who produce it. Paper money is not suited to this function." So what is the only rational investment in times in which money's role is so often confused by pretty much everyone? "Ninety-seven percent of all existing Treasury debt has been created since August 15, 1971! Ninety-three percent of it has been created since Mr Volcker “saved” the paper Dollar in late 1979! Please note that the gain in Treasuries and the loss in the US Dollar almost exactly cancel out. Please note also that even the biggest gain in these paper markets fades into insignificance against Gold’s rise."And here is the answer all the "gold bugs" have been waiting for: "The paper money “price” of Gold will last as long as the attempt to make paper money “work” lasts. In the end, Gold will no longer have a “price” because it has reverted to its role as MONEY. Whenever and wherever that happens, that nation can return to the production of wealth - rather than “money”."

An historically hard currency culture suddenly has money to spend. To get China’s gold investment up to American levels on a GDP basis, it needs to buy 25 million ounces worth $31 billion. That amounts to 34% of the 2009 global annual production of $110 billion. The Chinese aren’t going to provide the next spike in gold prices, but they are building a floor higher than anyone expects.

More insights from "smart money"....

Deflation talk has the markets spooked during these last couple weeks. Since Bullard's comments (preparing the ground for QE2) and Bernanke's promises to combat deflation through treasury purchases, even the CNBC talking heads are discussing it. Editor's Contrarian note: Probably time to consider unwinding your bond longs if T.V.'s equivalent of your shoe shine boy is telling you deflation is coming. In deflation, Gold should be the tallest pygmy. Even If it drops 40% in a deflationary depression, it will still stand tall among the financial wreckage that is defaulted debt and worthless equity. But, if the Fed succeeds in combating this event (preemptively or after the fact), Hyperinflation becomes a high risk and we know what that portends for fiat currency.

Several weeks ago, a spoof xtranormal cartoon went viral, in which the purchasing sequence of an iPhone (as compared to an HTC Evo) was hyperbolized, and which ruthlessly mocked the brainwashing practices of the Apple Borg collective. It was only a matter of time, before the brain trust behind the lampoon decided to focus its attention on the next group that has been ridiculed since time immemorial: the long-suffering gold bugs. Sure enough, the sequel is now out, and the process of purchasing an iPhone is now downright boring compared to the purported thought process behind buying gold. Of course, the cartoon is quite hilarious, but for all the wrong reasons, as in trying to mock those who believe that on a short/medium enough timeline, the survival rate for paper drops to zero, the video, which is sure to go just as viral, in fact proves all the concerns not just of the faceless "goldbug" collective, but of all those others who believe gold is headed much, much higher, which also includes the richest and most prominent money managers, financiers, and politicians in the world.

The first thing that needs to be said is that IF we have another systemic meltdown like that of Autumn 2008, Gold will likely go down along with everything else. There are simply too many big players (hedge funds, investment banks, etc) with heavy exposure to Gold who would be forced to liquidate their positions during a systemic collapse. I know this is not what the Gold bugs want to hear, but during systemic Crises, just about every investment on the planet plunges while the US Dollar and Treasuries rally.

Is gold really worth $5,000, $10,000, or even $50,000 an ounce?

On Tuesday, gold dropped to its lowest level in 6 weeks as investors explore riskier assets. China’s statement that it has no plans to start allocating more gold to its reserves (percentage wise), isn’t giving bulls much to work with this morning. Gold opened at $1212.2 per 100 troy ounces, and dropped to 1195.1 by closing time.

This is a major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics. This is Part 1.