Gold

I look at the big picture and here's what I see: Real inflation at between 8% to 12%, Government literally giving people money off the printing presses (rebate checks), and Government bailing out FNM / FRE to the tune of $100's of Billions. Furthermore, we have a Federal Funds rate of only 2%.

We also have active hostilities in the middle east, and a pending armed conflict with Iran. We're also on the edge of reigniting the cold war with Russia. Finally, we have a billion people in India that are moving towards the middle class, and have a fondness for 18K and 22K gold.

I think to simply look at how gold has performed in the past and ignore governmental tampering, rampant inflation, and world-wide influences is a failure to understand what could potentially drive the price of gold higher. I believe the #1 factor here is the government's printing of money and the potential devaluation of the dollar. Yes, it's had a nice rally. When the real inflation element of these policies kick, I believe we could see $2000 gold.

I'm in agreement with dirty. Gold is being manipulated right now, along with treasuries. It can't last forever, and I believe gold's pricing behavior is more like a coiling spring. Consistent with that, I'd also be short the long end of the curve because treasuries do not reflect the realities that dirtyharry cites: high inflation, expansion of the money supply, devaluation of the dollar, and the inability of the fed to raise rates for some time.

One more comment on this -

When people start talking about "the time has passed for gold as an investment" they are literally going against thousands of years of human history. They are saying that right now, this generation, something is different. So different that we can now forget about how humans, as a species, have treated gold for eons.

This kind of talk reminds me of a decade ago.....a prelude to the tech bubble. It was the "new economy" where current earnings didn't matter anymore. You bought companies based on hypothetical earnings way down the road on that had great sounding names - but you didn't understand what they even did. We all know how that turned out. There was no "new economy" and in the end, earnings and proper valuations mattered.

I don't have a logical reason why people are attracted to the shiny yellow metal - but they are - and they have been since the dawn of time. People hold this metal in high regard and treat it as a store of wealth. We may argue that it's foolish, but it doesn't change the facts.

Also, I don't like using the word "investment" when talking about gold anyway. To me, gold is a hedge play. Historically it holds its value throughout time, with positive and negative fluctuations. My idea for "investing" in gold to purchase it when conditions are ripe for it to rise - especially due to a falling fiat currency. When that's over, cash out. Holding it until the end of time will probably yield disappointing results. My guess is that it would simply produce no real return, but instead just stick close to real inflation in the long run.

Agreed with you DH. Gold is not a growth investment like you noted, it's a no-BS store of value. Move into it when humanity is misbehaving or when the common stores of value start behaving weirdly.

The time of gold is over? Hah! Yes, our markets are clearly showing they they don't need discipline. And that's gold is -- discipline. You can't fake it, you can't make it, and there is no other alternative.

Now we are left with the question (and I'm asking all of you), why is GLD and SLV getting the s--t kicked out of it? Theories (and as always, disagree as much you can reasonably do):

- Deleveraging is causing enormous liquidation. Markets sometimes behave paradoxically. All these over leveraged bets are going bad and any "real" holdings like GLD/SLV are being liquidated to try and meet obligations. Retail investors like us don't mean squat to the market, its possible there isn't sufficient free-flowing capital to counter the deleveraging / margin calls.

- Deflation is feared. Billions of dollars in currency are being *deleted* from existence as banks write down holdings. Mark to market, mark to model, whatever they are doing, holdings valued at, hypothetically, $10 billion are now being declared at $7 billion. Where'd that $3 billion go? In a deflationary scenario, all commodities would lose value.

- Gold is indeed being viewed as an antiquated investment.

"[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
- Warren Buffett

If only we didn't need gold, Warren. If only. Too bad there are horrifying graphs all over the place like this one:



We don't need gold but for our own greed and folly. The more the CBs tweak the system in ways like allowing bank sweeps, reduced reserve ratios, etc, the more we will be vulnerable to explosions like that which we are seeing.

I am still mulling all of the above. SLV has now retraced FIFTY percent from its high. Insane. I'm averaging down with it but it's getting old. At the same time, market volatility will work in both directions.

The other big reality we must not lose sight of is that all this FNM/FRE cataclysmic blow-up of the markets is going to have very real ramifications down the road. The US Gov't just decided to back most of the mortgage market. There may be a deflationary spasm now but my gut tells me inflation is in the offing.

Gurus, please speak.

Fascinating discussion gentlemen, but I can't say i agree:
If doom and gloom is your strategy, and it's a valid strategy - then take 5% of what you would invest in gold and buy wild options against the market. Parking money in gold will get you nowhere.
Harry,
I think there are better ways to beat inflation with the advantage of instant liquidity if necessary. IEF invests in high quality bonds and will fare the storm well. I disagree that eons of craving gold has any part in our future. If you consider how far the economy has gone in the last century gold is just a novalty in the sense it being any kind of protection, if currencies are wiped out, I would recomend buying a couple of AK47's as a safty, not gold ;)
Arawak,
I think the reason for this drop in silver and gold is linked to the recent sentiment for all raw materials. Raw material value has grown based on projections of future consumption, especially India and China.. but these projections are way too high. They are based on a 12-13% growth rate in Indo-China and it's becoming quite obvious that they won't keep up that pace. If China goes to 8% growth, which is fantastic in it's own right - raw materials will crash more.
Sorry guys, but I think the best bet is... energy... yep.
Oil will go back to $140, coal and natural gas will be sold for decades to come and energy is the one thing no country can do without.
I still like CHK for gas, PWE for oil, FDG for coal

rebuttal to guliamo:

Wild options against the market is risky. Huge inflation will push the dollar figure of many stocks up in the long run. Some sectors will do well regardless.
Additionally, many companies are so international now that earnings are substantially foreign (INTC, as an example).

If gold is a novelty, so are diamonds and emeralds to an extent. Ron Paul might not be a lead contender, but a main position of his is the return to gold backing. People are sick of a dollar being of indeterminate value. I know I am.

And gold is not a raw material. You can make that argument against silver, but not gold. Gold is going down for a different reason; one or some combination of those I listed or maybe something entirely different.

Agreed on energy. ABB, ATW being steals right now. Both have YEARS of backlog / orders on fixed contracts.

Hi guys. I am getting spanked just like the rest...except those of you that got short at the right time. I have large postions in CEF (gold) and SLW (silver). I am not sure I trust that i understand what is going on enough to buy more...but I will certainly not sell. That said, I agree with guliamo...energy right now is on a fire sale. Pretty much any energy play (i hate that word..this is real money) that you buy now and hold for 5 years is going to give you a nice return. Remember...in order to buy low and sell high, you've got to act when you think the market is behaving irrationally.

I personally believe you should invest in any hard asset. I'm an internet retailer and that's what I'm doing. My stock has appreciated 40% (if u want to know what real inflation is that's about it) over the last year as MSRP has risen. Sales are slower but still good enough. The extra profit I make from the inflating retail MSRP on items stocked before the inflation surge ios as good as gold, widening my profit margin.

Dirty (& others)-

Exactly, when the dollar rises it's time to cash out and my indicators were that the dollar was rising again. With the interplay of little rises and falls in the dollar though, it's too hard to know for sure when it's truly the turning point.

So sure, a hedge play, and now you got me thinking about gold (or possibly silver). The obvious way to invest in this is mining and I'd want some good value, so what are my options?

GDX, FCX (+copper), DGP, NG, and probably the one I'm leaning toward AUY. Do you guys own any of these? Do you have any thoughts on them as mining investments?

I forgot to mention these mining investments: SLW (silver), GLD, ABX, SLV (silver), FDG (coal)