Softening My Views On Gold

I continue to maintain that the Fed’s unprecedented and extreme current policy stance has already been deceptively inflationary, will likely lead to significant inflation in the medium to long term, and should lead to an accompanying large increase in the price of gold. I also must acknowledge, however, that I fell prey to a false sense of certainty. The combination of the consistency of the gold price rise over the course of a long period of time, my early success in this area and the rationality and logical basis of the investment thesis caused me to make exceptions to rules that I always had followed – rules against excessive concentration and rules preventing me from venturing beyond stocks, my area of expertise and the category of investment that I like best for good reason. I will never make such exceptions again.

I had previously never invested in unproductive assets such as currency-based investments, preferring stocks because they confer ownership stakes in large, profitable companies, no different than owning a small business, rental real estate or a farm in terms of being productive. I made an exception for gold and silver, because I considered them to be the ultimate form of money and likely to perform better than stocks in a highly inflationary environment. Upon further reflection after an unfortunate experience, I have concluded that one must have respect for the current form of money, regardless of whether it is being abused and debased. We live in a dollar-based world, and until gold is reintroduced into the monetary system (the prospects of which are not guaranteed as macroeconomic developments are notoriously difficult to predict), it is really simply a collectible no different than say fine art in that ownership provides no income as it has no cash flows associated with it. Instead the owner is reliant upon another investor or speculator being willing to pay more for it, thus voiding valuation techniques.

With all of that said, it is worth repeating that I do still believe that the price of gold is likely to rise very significantly over time. I expect that my fund will benefit from this insight, but not via physical gold holdings. Instead our focus is on mining stocks, which are productive assets that can be valued on the basis of earnings, dividends and the historical relationship between these stocks and the spot price of gold – all of which does not necessarily require a forecast of the gold price or a very strong view about it. With long-term interest rates rising and reported inflation falling, gold very well may remain under pressure, but even in such an event I believe that the miners are still priced attractively enough to deliver solid returns.

Moving on to my stock market outlook, it remains strongly negative for all of the same reasons that I have been repeating for quite some time. Each month that the market moves higher, conditions continue to become more extreme – namely overvaluation and extremely complacent investor sentiment measures. This long uncorrected and quite mature bull market is also now showing a record high level of margin debt associated with it on an absolute basis, and on a relative basis compared with the size of the economy it is now right around levels that have only been reached twice before – 2000 and 2007, just before the two most recent major bear markets. Increasingly I hear people only tempering their enthusiasm with expectations of a correction, as if a full-blown bear market is out of the question. But when the crowd agrees on something, it is usually wrong. It is vital to remember that markets move in cycles.

On the last trading day of the month, there was a steep late-day sell-off as fears of the Fed tapering its easy monetary policy (unlikely), weak Chinese data, Japanese stock and bond market volatility and now suddenly rising interest rates all came to the fore. Perhaps this is the beginning of what I have been anticipating, or perhaps the final top has still yet to be reached. Either way, my outlook will continue to remain negative until hostile market conditions are cleared. Accordingly, my fund still retains a limited market exposure and a very large cash balance, presently just about half of the portfolio. With so much cash it is important to repeat again that cash that stands ready to be deployed quickly is a weapon, as compared to cash that is allocated as such which over time is guaranteed to lose out to inflation.

Despite such a dismal market outlook, I will always remain a bottom-up investor. While I am concerned about indiscriminate selling, even at times such as this there are still pockets of value (the most prominent example of such right now being the gold miners as discussed above).


Gold Premiums in Vietnam Hit $217 Over Spot In Heavy Demand

I think you have had to experience a collapsing currency first hand in order to truly appreciate the fundamentals of monetary value, and how these things can take on what seems like a force of nature.

I was doing business in Moscow during the 1990′s, and saw the slow motion collapse of the rouble. Or at least it seemed like a slow motion collapse at first, until it gained quite a bit of momentum despite the measures the State took to maintain their ‘official rates.’

Russia had a sovereign currency, right?  And so does Vietnam, and many of the other countries that experienced extraordinary currency depreciation, otherwise known as monetary inflation, since WW II.  Perhaps they just needed some better monetary theorists, or official enforcers with hairier knuckles. Their financial elite seems to have had plenty of false bravado.

But then again, they were not us. We are different. We are unique. We are the masters of all that we survey and purvey, the beauty of the world, the paragon of animals.  London and New York are where the elite meet to eat.

Here is what is happening with gold prices in southeast Asia now.  Ding dong.

This from Goldcore:

The Vietnamese Central Bank sold another 25,700 taels (1 tael = 37.5 grams or 1.2 troy ounces) at a gold bar auction on Friday in order to try and satiate the massive public demand for gold in Vietnam.

The Central Bank hopes that the sale of gold into the market will reduce the very high premiums paid by gold buyers in Vietnam, the largest buyer of gold in Southeast Asia after Thailand and one of the largest physical buyers of gold per capita in the world.

Vietnamese people hold gold as a store of wealth for protection against war, inflation and currency depreciation. In recent months, the bursting of bubbles in the stock market (see chart) and property market and the continuing devaluation of the dong has led to record demand in Vietnam and a surging premium over the spot price of gold.

Today, the premium was close to 5.5 million dong which is the equivalent of a very high premium of $217 per ounce over spot.


Gold Commitments of Traders Report – Update I

Here is the data in chart format. Note, the general public is the LEAST BULLISH ON GOLD since the very beginning of the decade+ long bull move way back in 2001. You will recall that gold was coming off a twenty year bear market back then.

Even during the depths of the credit crisis in the latter part of 2008, the general public, in spite of a sharp crash in the price of  gold, still remained biased towards the bullish side, even though that sentiment took quite a hit during that downdraft.

Fast forward to this past week and you can see how rapidly sentiment towards gold, on the part of the small speculator, has been damaged. All I can say about this is if the Central Planners wanted to discredit gold as an alternative currency to the Dollar, they have certainly managed to do just that. They have gotten the entire speculative camp, hedge funds, other large reportables and the small speculators selling gold while the bullion banks and swap dealers are in the process of buying it.

Keep in mind that this is using the paper Comex markets as the benchmark against which most of the investment world leans when it wants to know what the price of gold is doing. Most people outside of the gold community do not even know what a gold coin dealer shop looks like or where even to find one. Mention the words, “spot price of gold” and you are liable to get someone asking why the metal is spotted.

Let’s keep a close eye on this to see if we can spot any shift in sentiment. Markets that have suffered such brutal maulings need some time to repair the psyche of those who have been on the wrong side of a move of that nature and been devastated as a result.

This is the reason that I am not in the camp with those who believe that we are now going to see an immediate rocket shot higher in gold. I can assure you as a trader that once you are on the wrong side of a trade of this nature, and watched your trading account or investment capital been blasted into the nether regions, you are in no special hurry to plunge right back into that market. You need time to lick your wounds. There are probably people out there who are swearing out loud right now that they will never even look at another ounce of gold, much less plop down money on a gold investment, especially a mining share!

This market will thus need some sort of healing process in my view to convince the skeptics that it is for real.

Those of us who believe in honest money, need to understand that the majority do not look at these things in the same manner in which we do. Thus, the mass exodus out of the Comex gold markets and the gold ETF. If gold can continue to stabilize here and avoid any further sharp downside plunges, that will go a long way to convincing some of the new skeptics that the worst is over and give some the confidence to wade back into the water.

Traders and other investment types will be looking for another retracement lower in price to see where the support emerges. They will be especially interested in seeing where the strong physical offtake begins to fade at these higher price levels.