Gold in free fall: Don’t buy yet
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Gold is not an investment. It pays no dividend and actually costs quite a lot to store. Over long periods it maintains value, but never increases it. Stocks and even stodgy bonds are serious candidates for investment, which by its nature is a long-term proposition. Gold is not.
Gold is a trade, and it’s an increasingly attractive trade. As a store of value, gold beats currencies, which as James Grant notes are “faith-based.” The soaring budget deficits of the United States, especially combined with the bloated public spending promised by health-care “reform” and climatalogical alchemy, presage considerable inflation in the years to come. Gold, foremost among the commodities, will protect against that.
But meanwhile gold is the proverbial falling knife you are wise not to try to catch. Since Nov. 27, when gold was trading for $1,180 an ounce and I warned that it was certain to fall, it has indeed fallen, to $1,120 at midday Dec. 9. The investible form of the metal, SPDR Gold Shares (GLD), was trading Dec. 9 for $109.97, well below its long- and short-term moving average.Back in that Nov. 27 post, I said that global uncertainty was likely to shake up financial markets globally.
The dollar could have an extended rally, eroding profits from bonds as well as stocks in Europe. That would deflate the rally in gold, which is up 35% this year.
So while I’m a long-term dollar bear, I’m a bull for at least the weeks immediately ahead. A strong dollar also means zero concern about inflation, which is strictly a currency condition. In short, the fallout from Dubai could create an opportunity to buy gold for the long term at a much better price than you can get now, and make other inflation hedges, like other commodities, more affordable as well.
Meanwhile, there is something akin to panic going on in the gold market. On Dec. 8, GLD suffered net redemptions of 13 metric tonnes of gold, one of the biggest non-central bank transactions in gold in modern history. This exchange-traded fund owns 1,116 tonnes of bullion, as of Dec. 8, more than all but a handful of central banks.
About half of all ETF shares are owned by institutions, notably hedge funds, and the other half by individual investors, according to BlackRock’s iShares, the largest issuer. Neither group is noted for its patience. A sliding price in gold could become a rout.
So my recommendation is to keep an eye on gold, because it will be worth owning in the next decade as inflation ignites. But I would keep a close eye, and not jump in until this free-fall has found some kind of bottom. That could come soon, just below $1,100. But the U.S. dollar is showing surprising signs of strength, and that could panic hedge funds and other speculators, and the bottom could be lower. Stay tuned.
(Disclosure: I have about 3% of my retirement assets in GLD, and plan to increase that to between 5% and 10% at a favorable price.)
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Gold bugs make all sorts of horrendous mistakes about gold.
1. Gold is money. It isn’t. Try to pay your rent or brokerage margin calls with gold. You can’t
2. Gold is a hedge against the fiat currency. Maybe – if the world turns into Mad Max Beyond Thunderdome. Otherwise, if you’re looking to make a profit off gold then the very moment you need to sell the “precious” metal is the very moment when the so-called scrip you’ve been disdaining is worth its least. If you’ve invested in the safety of gold then why would you dump it for paper cash? Which means you can never dump gold. You have to be buries with it.
3. Gold is limited in supply. So are tree leaves. The truth is that a LOT of gold bugs are over extended in their holdings of gold and when times turn tough they’re forced to dump their holdings. Especially unemotional holders like mutual funds who may be holding 5% of their stakes in the yellow metal and need to get cash fast to save other positions.
4. Gold is rare. Not really. There’s less silver bullion available now than gold. It’s volume barely shrinks in usage but always grows. IGNORE the prophesies of doom from gold mining companies about gold running out. They lie. For their own profit. I know of hundreds of thousands of sq. km. in W. Australia alone where you can stumble over a gold nugget as big as a golf ball (as my friend did) that haven’t even been scratched yet.
5. Gold is real but paper isn’t. The ruse here is not the material but the belief in it. Gold fever and its associated speculation is a sickness far more unstable than the credibility of the fiat currency.
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http://raphaelkahan.blogspot.com/2009/12/gold-is-this-bubble-yet.html
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http://runningofthebulls.typepad.com/toros_running_of_the_bull/2009/12/gold-v-stocks-1971-to-present.html
[...] Timothy Middleton, “Gold is not an investment. It pays no dividend and actually costs quite a lot to store. Over long periods it maintains value, but never increases it.” (Investor’s Eye) [...]