Gold - The Greater-Fool’s Theory [Archive]

raja

08-17-07, 06:03 AM

An interesting take on gold from Jack Crooks, iTulip's current guest columnist (Black Swan) http://crooksblog.sovereignsociety.com/

He says that gold has historically been a poor performer.
But my feeling is that, while this may be true, gold has it's big ups and downs, and the current economic situation is one of those times that gold will do very well . . . for awhile.

I'd be interested in what others think about his comments as they relate to the Ka-Poom theory . . . .
And of course, those at the conference were also STRIDENT bullish on gold.

The leader of the conference articulated this stridence with perfection. (P.S. the leader still articulates the same theme no matter that one would be getting their portfolios smashed in the interim. But when it comes to investing, the guru crowd rarely lets the facts get in the way of a good story.)

Okay…after seeing such strident views, a few things popped into my head:

• Sentiment extreme!
• Great contrarian indicator!
• No one left to sell dollar!
• No one left to buy gold!
• Total and complete close minded speculators who were about to get hammered!

Of course, this is about the time the US dollar decided it was time to get off the canvas. And it has. And of course this was the time for all to see that gold was “not just another asset class” as it was articulated at the conference. No, it is so much more. You already know what I think it is—the greater-fool’s theory. If gold is in an uptrend, buy it. If it’s in a downtrend, sell it. It’s that simple.

Gold pays nothing. You can’t eat it (technically not true, but let’s say its not very filling). And as a friend says, “You can’t just slice off a piece of your gold bar that you carry around in your pocket and pay for movie tickets.”

I know…Armageddon is coming! That’s of course a good reason to buy gold. Because then you can melt it down and make something really useful—bullets!

And to wrap up my little tirade against this view that gold is all things wonderful in the world and the dollar all things ugly, I leave you with this, which comes from an economic research firm named GaveKal. They are independent thinkers and very smart people.

“Indeed, despite two or three world wars (whether one counts the cold war), a supposed massive debasement of our currencies (as the gold bugs like to say), hyper inflation, and the recent Gold rally, Gold has returned a princely -9% in real terms in 111 years! We have also rarely seen four consecutive years of gains (1930s, early 1970s, late 1970, 2002-2006). Meanwhile, the Dow Jones (without dividends reinvested!) has put in a far more honorable performance. [Up 1,126% in real terms over those same 111 years]

c1ue

08-17-07, 08:05 AM

Raja,

This is a somewhat extreme version of my view of gold.

However, I do believe we could easily be in a late 70's style period with 2002-2005 being the early 70s equivalent.

It is also wrong to believe the numbers tossed around by the analysts in your quote:

1) Gold was price fixed by the government at $35 until 1935, then de facto fixed by Bretton Woods until 1971 (when Nixon broke it)
2) US was taken off the gold standard in 1943, additionally private ownership of bullion gold was made illegal (Franklin D Roosevelt)

A more fair comparison would be to look at gold performance since 1971 - after the last gold price fixing was ended.

The absolute performance is still not the best, but the key is whether gold outperforms when the stock/bond markets are underperforming.

Remember the really good confidence men include some truth or distort the truth in what they say (applies to everyone)

raja

08-19-07, 08:56 PM

c1ue,

Thanks for your response and sharing your perspective.

I have some further thoughts, which may support Crook's opinion that gold is The Greater Fool's Theory.

Gold is thought of by many gold bugs as a "safe haven". They expect that when the economy starts to go seriously down, people will invest their money in gold, and its price will soar. I wonder . . . .

I don't view gold as a safe haven.
Looking at how it dropped after the sharp rise in the 1980s, and stayed down for 20 years, that doesn't seem too safe to me.
I view Treasury bills as a safe haven.

Yes, I believe the government tweaks the CPI, so T-bills don't really preserve wealth completely. But they preserve it for the most part.
I compared the average CPI with average T-Bill rates from 1978 to 2006, which comes out to 4.34% and 6.07%, respectively.
Inflation went as high as 13.6%, but T-Bills were right up there (almost) at 13.16%.

If that historical pattern continues, and we experience very high inflation rates as predicted by the KaPoom theory, then owners of T-Bills should preserve most of their wealth during this volatile period. After things return to "normal", other more lucrative investments can be found to increase wealth.

So, in my mind, investing in T-Bills is the safe bet, and I wonder how many other people will view things the same way when the economy starts to tank.
Will Treasuries be seen as the safe haven, and not gold?
Will the gold bubble fail to form, to the disappointment of the gold bugs?
It's true that gold has historically been seen as a storehouse of value, but times have changed. Gold performed very badly for the two decades before 2001. How many jumped on the bandwagon in 1980, only to be disappointed? That memory is more fresh than the days when gold was actually used for money.

Right now, I look at gold in two ways:

First, as a security against the unlikely but possible scenario of societal breakdown . . . you know, Mad Max and all that.
Since I view this as a small probability, and because I think a small amount of gold will go far if we have a truly Black Day in our futures, I have a small supply of gold coins in my safe deposit box -- ready to be pulled out quickly if I ever thought the banks would fail.

Second, I look at gold as a speculative investment to play the gold bubble, should it develop.
But I'm a little uncomfortable with this.
If gold will not be viewed as a safe haven, and if people sell it off as they would other assets, then gold is going to go down . . . maybe a lot.

Any thoughts you have on this would be appreciated.

Thanks

c1ue

08-20-07, 04:45 AM

I don't view gold as a safe haven.
Looking at how it dropped after the sharp rise in the 1980s, and stayed down for 20 years, that doesn't seem too safe to me.
I view Treasury bills as a safe haven.

There is no such thing as an absolute safe haven.

There are only relative save havens; at any given time there are safe havens, but these change with circumstances constantly and unpredictably.

Yes, I believe the government tweaks the CPI, so T-bills don't really preserve wealth completely. But they preserve it for the most part.
I compared the average CPI with average T-Bill rates from 1978 to 2006, which comes out to 4.34% and 6.07%, respectively.
Inflation went as high as 13.6%, but T-Bills were right up there (almost) at 13.16%.

If that historical pattern continues, and we experience very high inflation rates as predicted by the KaPoom theory, then owners of T-Bills should preserve most of their wealth during this volatile period. After things return to "normal", other more lucrative investments can be found to increase wealth.

You are not incorrect, but the devil is in the details.

T-bill rates are lagging indicators; by the time you bought the T-bill, inflation will already have had first crack at you. Dollars may be dollars, but you are constantly spending money to survive.

Secondly, you should note that while the T-bill rates more or less kept up with inflation on a yearly basis, you still would have had to time the T-bill purchase correctly to preserve your capital. Buying a long T-bill too early would lose you money (both absolute and relative), buying a long T-bill too late would do the same.

Nor are shorter duration Tbills better; you don't lose as much when you screw up but simultaneously don't win as much when you do get it right.

Lastly here are my key indicators:

1) In the 70's and even 80's, the US was still net positive in investment income. Even trade balance was positive until 1971.

2) US was a net creditor nation in the 70's and 80's

While the dollar suffered in the 70's and 80's, it is very possible that what happened then will be a love tap compared to a dollar plunge today as both 1) and 2) are very different now.

Even the anti-inflation capability for gold is not very well tested.

In Russia, Argentina, and a number of more recent examples – gold did not become the replacement for a debased existing currency – it was the dollar.

Thus I actually am not convinced that gold is time tested as an inflation hedge; unlike many other PMs it has zero use except decoratively - the only argument is finite supply.

But I could say the same for uranium; it actually has continuously decreasing supply as uranium is rare and also spontaneously decays.

As I mentioned before, gold really has not had free play until recently, even the jump in the 70's/80's could be ascribed to 100+ years of being price regulated.

Don't know if this helps - just letting out my personal views on Au.

FRED

08-20-07, 05:30 AM

The iTulip position on gold going back to 2001 (http://www.itulip.com/gold.htm) is that gold was only ever money because governments said it was and that the only reason it makes sense to hold it today is for the same reason central banks still do, to insure against the disruption of the current out-of-date global monetary when it eventually transitions to a new system after a crisis. It's a fall-back, a hedge.

DemonD

08-20-07, 10:17 PM

clue, excellent analysis. In fact, a coworker of mine who is a nurse bought a huge property in Argentina for $5000 (US).

got any suggestions on what currency would replace the dollar in a pinch? (I'm guessing a combo of canadian dollars, british pounds, and euros).

I've also considered this too, instead of gold as a safe haven, what currency would be the "safest" haven of all of them. Unfortunately I don't hold enough cash to spread around 10k in pounds, aussie dollars, euros, loonies, etc. at everbank.

zoog

08-20-07, 11:37 PM

Unfortunately I don't hold enough cash to spread around 10k in pounds, aussie dollars, euros, loonies, etc. at everbank.

The currency exchange rates/fees would probably eat you alive anyway, as noted here (http://www.itulip.com/forums/showthread.php?p=12515#post12515).

Lukester

08-21-07, 12:14 AM

Somebody needs to get Grapejelly over here ... put in his two cents worth. :rolleyes:

grapejelly

08-21-07, 06:44 AM

(Someone mentioned my name? :eek: )

My view is simple. Gold is anti-paper.

Gold does well during certain periods of history when paper does poorly.

Paper eventually always does poorly. That is the argument for owning gold.

In the long boom from 1982 - 2000, paper was doing extraordinarily well. Why would you want to own gold?

Now, since 2000 or so, paper is losing value. There is just so much of it.

There may be a hiccup like today, when paper rises in value sharply because there is so much debt that must be paid back with paper.

But look at the facts. Government prints unlimited paper because it is the greatest debtor and so the paper will always, always drop to no value over the long run.

Governments then will institute some other paper currency and hopefully start the cycle all over again.

During this later period when paper is falling in value, gold will rise. Gold will rise to first maintain buying power. It will rise even further as fear sets in. Then, gold will increase in buying power relative to everything else. That is what happened in the late seventies and it will happen soon again.

Once things really blow up, it will be time to sell all your gold and silver and buy paper. Stocks in sound companies would be my choice. It isn't my choice right now because we are in the "paper losing value" phase intermediate and long term, which is very bullish for gold.

raja

08-22-07, 12:54 PM

My view is simple. Gold is anti-paper.
Gold does well during certain periods of history when paper does poorly.
Paper eventually always does poorly. That is the argument for owning gold.

A novice question here: If the government has been continuously printing money, why did gold stay down in price for 20 years?
My opinion is that it became "out of fashion" as an investment, i.e., psychological reasons, primarily because of its sharp rise and fall in 1980.

Could gold get stuck again, even though the supply of fiat currency continues to grow? Crooks has this to say:
Everyone knows the dollar is in a multi-year bear market. And most have been riding it down and benefiting from it. And the more they’ve benefited the more in love they become with their own stories.
Making money does that. It validates rationales no matter if the underlying rationale is the key driver of a price trend. And if you are riding the price trend, it matters not if your rationale is right. Thus, a feedback loop is created. And it’s why people who have played this game long enough truly believe it when they say, “It’s better to be lucky than good.” The judgment of “good” only comes in hindsight.
Okay, that being said, here’s a story the consensus finds very palatable. The US dollar will again turn tail and run off the cliff because once the dust settles the US economy is heading straight into recession. In short, for any of you who might believe there’s a chance the dollar could rebound, do not pass Go, and do not collect $2 billion.
After all, the Fed will be cutting rates so the dollar will lose both its yield and growth appeal relative to its major competitors and the current account bogey man lingers in the background.
Here are the implicit assumptions supporting this view and some of our commentary and thoughts to counter as an example:
The US will decouple from the rest of the world. It means the rest of the world will still be humming along just fine if the US goes into recession. Europe, China, and Japan will take over the wagon pulling. They have plenty of growth momentum.
This idea has joyfully lingered in the financial press and the minds of others trying to support their own stories for some time. After all, international equities have to be sold to American investors in all kinds of ingenious ways. If we learned anything from the latest subprime debacle, global financial markets are as tightly linked as ever—maybe even more so thanks to the daisy-chain of derivatives. Until proven otherwise, stay open to the adage that has stood the test of time: If the US sneezes, the whole world catches a cold.
So the next time you see a “global investing expert” on CNBC or Bloomberg TV telling (really preaching) you to get out of the everything in the US, it’s going to hell in a hand basket—think about how much more money he may be making if you follow his advice. These are usually the same kind of guys who love gold, hate the dollar, and think the current account is the devil reincarnated. They have a biblical zeal to their arguments. This doesn’t mean they are wrong, a broken clock is right at least twice a day, but it should be yet another one of those DANGER WILL ROBINSON moments for you as an investor—especially as a currency investor.
I'm invested some in gold, and hoping to profit off a future bubble, but when I read stuff like the above, it makes me concerned that I might not be making the best move.

08-22-07, 02:57 PM

I'm invested some in gold, and hoping to profit off a future bubble, but when I read stuff like the above, it makes me concerned that I might not be making the best move.
there is no certain "best" move in a probabilistic game. you can play towards what you think is the single most likely scenario, or you can deploy your investments in proportion to the likelihood of the scenarios under which each would flourish. i recommend the latter approach. it fends off delusions of certainty.

raja

08-22-07, 05:14 PM

there is no certain "best" move in a probabilistic game. you can play towards what you think is the single most likely scenario, or you can deploy your investments in proportion to the likelihood of the scenarios under which each would flourish. i recommend the latter approach. it fends off delusions of certainty.
Agreed.

Jack Crooks' take on gold seems at odds with that of most people on this forum, and I was hoping to drum up a little discussion on why he might be wrong . . . or right . . . the end goal being to increase my ability to assess the probabilities in regards to gold's future.

Thus, my question above: A novice question here: If the government has been continuously printing money, why did gold stay down in price for 20 years?
My opinion is that it became "out of fashion" as an investment, i.e., psychological reasons, primarily because of its sharp rise and fall in 1980.

Could gold get stuck again, even though the supply of fiat currency continues to grow?

08-22-07, 07:10 PM

raja

08-23-07, 04:46 PM

i haven't thought about gold's price history that much, but i have the impression that gold responds to the second derivative of the value of money. that is, a steady inflation doesn't push up gold as much as the perception that inflation is accelerating.

the other factor was high interest rates. gold pays no dividends and the opportunity cost or the cost of carry is high when rates are high. the high rates of the early 80's killed the gold market, or at least paralyzed it for a good long time.

Sounds right to me.

So what's happening now . . . .
There is no fear of inflation, and interest rates are not very high.
Not good for gold.

Maybe gold's rise since 2001 is due to so much money sloshing around.
When money gets tight, like now, perhaps demand for gold will drop.

Also, gold has been going down when then stock market goes down.
Why? I've read it's because people are selling assets to cover risky bets, and gold is one of those assets.
If the stock market plunges . . . which looks probable, gold will probably tank, too, for this reason.

People are only going to invest in gold if they think it's a safe haven.
Right now, I think most people are thinking treasury securities are the safe haven.
Why would they invest in gold if it's going down?

Now there is one argument I can see for investing in gold now, but I don't find it so convincing.
If inflation soars, gold could be seen a storehouse of wealth against the falling dollar. (I say "could be", because with gold it's all a matter of what people think -- not like oil, for which there is a "real" need.)
EJ says invest in gold now, because otherwise one could miss gold's ride to the heights when inflation starts its climb.
But I've never understood this . . . .

Let's say gold goes down to 550 or 450, as some have suggested. Say, that's the bottom.
Suppose I miss the bottom, and gold starts to rise.
Perhaps in a few days or weeks it goes back up to 600.
Why not just buy it at that point? Or at 650 or 700?

Can somebody -- maybe EJ -- explain why it's going to be so hard to buy into gold at some point during the beginning of the price rise?
Is the expectation that gold will surge from 400 to 1000 in a week, or something?

I'd really like some feedback on this, because I just think I talked myself into sell my GLD, and I don't want to do something stupid.

Thanks . . . .

08-23-07, 05:51 PM

raja

08-23-07, 06:59 PM

the argument for owning gold now is that it could move very quickly. look at how quickly tbill rates were cut in half. then you'd be waiting for a pullback to buy, and maybe not get one. not a prediction, just a scenario.

I can understand how in a global credit crunch T-bill rates could change dramatically.
T-bills are a very secure investment, and safe place to park money in times of panic.
Pretty much of a no-brainer . . . .

Unlike T-bills, however, gold is speculative.
If gold had recently plummeted from 650 to 450-550, I think people would have some hesitancy in jumping quickly on the gold bandwagon.
Thus, the upswing might move slowly.

Just how quickly will gold move? Of course, no one knows.
But judging from the 1980 gold bubble (see chart below), there would certainly be time for the aware investor to get on board, don't you think?

And, yes, there is the danger of waiting too long to get in. But there's a huge profit potential between 450-550 and 650. Seems worth the gamble to me, even if one missed the bottom by $75/per share.

http://www.bullnotbull.com/images/graphics/gold-1980-2.gif

Mega

08-24-07, 01:56 PM

Christ!
I wish you guys would make up yor minds!
Am sitting £50 K trying to decied IF to buy Gold!

Mega

08-24-07, 02:14 PM

zoog

08-24-07, 03:19 PM

here's a relevant quote from ej in the bernanke-dove/hawk thread

As to your rate of change question, recent events in the credit markets remind me of why I first conceived of Poom as a sudden process. As we saw over the past few weeks, imbalances build for long periods of time and then change is very sudden when the basis of confidence in market forces supporting the imbalance suddenly evaporates. Prices that no one thought could change so rapidly, such as in the yields on short term treasury bonds and munis, moved in ways that not even the most creative out-side-the-box thinkers imagined. The guys on the Goldman call this Wed were clearly dumbfounded, and not in the manner of comments coming from managers of failed hedge funds whose "How could we have known?" statements are earning the derision of commentators now (http://www.slate.com/id/2172224/fr/flyout). They just couldn't believe what they were seeing.

Similarly, when the Poom part of the process does happen it will be sudden and create extreme market dislocations.

Depending on how one invests in gold (bullionvault, gold ETFs, coins, etc), one can go from cash to holding the investment in anywhere from a few minutes for the electronic options to, say, two weeks for physically holding coins in your hand (guessing on the latter).

I'm having a hard time believing gold would, say, double in value in only a couple days, given the relative sideways movement in the past year. The 1979-80 bubble took about two months to double.:confused:

raja

08-24-07, 07:52 PM

Mega, here some more to think about regards your gold quandary . . . .

In an earlier essay, EJ had this to say,
. . . question of timing (Ka-Poom) . . . . It's tough to get it right. I also mention that in addition to the difficulty of timing Ka-Poom, trading Ka-Poom involves transaction costs and the risk of a Random Exogenous Event that leaves you on the wrong side of the trade. . . . paying 28% capital gains taxes on profits from sales of "collectables" is unappealing, and that apparently applies to gold and silver ETFs as well as physical gold. Throw in the 2% premium on both sides of the trade when you buy and sell physical and it's not hard to calculate the trade-off.Regards timing, I'm with zoog -- there will probably be adequate time to catch the gold upswing for the investor who's paying attention.

Regards the Random Exogenous Event, it's hard to believe that the effects of such an event would cause more than a $100 or $200 rise in price in just a few days. Even so, if we're talking about gold going up to $2000 or $3000 per ounce, what's a couple of hundred $ going to matter. Those paying attention should be able to jump in when gold is significantly down.

However . . . it's important to have the right form of gold.

I'm all for keeping some gold coins on hand for a Black Day, but for anything short of that, a gold ETF is the way to go. You avoid the 2% premium each way that EJ mentions, plus you can make the trade instantaneously on the computer without worrying about the coin dealers getting swamped with orders during a panic.

I don't get EJ's capital gains argument.
The idea is to be in gold when it starts to go up, and sell it at the top. I don't see any difference in tax consequences whether one gets in now, or gets in 6 months from now.
Maybe I'm missing something and someone can explain this (I'm no tax expert, for sure).

I sold all my gold ETF today . . . and GLD promptly went up $6 a share . . . sigh.
But I'm keeping in mind the $100 or $200 drop that EJs predicting -- that's when I'll buy back in.
I've noticed that gold has gone down with every large stock drop over the last 6 months, and I expect that pattern to continue when/if the big crash comes.
Assuming Ka-Poom becomes a reality, why buy gold now, when you can buy it far cheaper later?

Lukester

08-24-07, 08:52 PM

Mega -

You can wait until Bernanke caves in and makes another 50 basis point reduction in the interest rate - and then, presuming you were on your coffee break from work when the news hit the wires, you'd call your bullion dealer and lock a buy to catch 50% of the resulting up-move. Good luck with that.

Or you can listen carefully to what you really want to do when the price action is weak instead. If you still feel reasonably good about allocating to gold and silver when the market is uncertain, because you think in 5 years currencies will have a lot less buying power, then you have found your level of comfort regarding that investment.

This seems one of the 'best times to buy' because prices are down around the 200 day averages on both metals. Every big move has started from there. The up-move confirmaton for Gold seems around $675 (we're close). For silver, the upmove confirmation seems $12 - $12.50 (we're close there too).

We are right at the tail end of the 'summer doldrums'. Based on my own observation buying profitably every year in July / August, and what bullion dealers with 30 years in the business tell me, don't count on price weakness in Gold and Silver persisting even as far as October. Your interest in this investment will be a lot livelier in November than it is now, but so will everyone else's.

If you have doubts, just start with a smaller position. No harm in that. You can scale in gradually and gain your comfort level as you go.

08-25-07, 07:27 AM

Jim Nickerson

08-25-07, 07:38 AM

re taxes and gold- my understanding is that the gold etf is treated like actual gold, as a collectible and not subject to the capital gains tax preference. that is, any gains are taxed as ordinary income, not as capital gains. thus gld is best held in tax sheltered accounts. this difference in tax treatment is the reason that cef, the closed end fund that holds gold and silver, trades at a premium to gld and slv. as a managed fund, cef is subject to the capital gains preference.

Whatever is the outfit that runs CEF, it also runs GTU, which just holds gold. GTU I believe is treated just as CEF for tax purposes, yet it sells at a discount--currently ~-2%, and that was ~-5% recently. GTU is very thinly traded.

Andreuccio

08-27-07, 10:55 AM

I don't get EJ's capital gains argument.
The idea is to be in gold when it starts to go up, and sell it at the top. I don't see any difference in tax consequences whether one gets in now, or gets in 6 months from now.
Maybe I'm missing something and someone can explain this (I'm no tax expert, for sure).

It's been a couple of weeks since I read the essay this refers to, but my understanding was that EJ was discussing whether to sell gold now, during Ka, and then rebuy just before Poom. One of the arguements against it is the 28% tax on any profits. If, for example, you had bought at $250 and sold at $650, you'd have to pay $112 in tax if you were in the 28% bracket. Thus gold would have to drop to $538 ($650 -$112) before you'd be even.

bart

08-27-07, 01:33 PM

The very long term cycles on gold and soft vs. hard assets. We're early in the cycle... and also haven't had any poom-like corrections like '73-74 yet

http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

The very long term picture on gold as a store of value after inflation (CPI & CPI+lies adjusted).

http://www.nowandfutures.com/images/gold_cpi_lies1900-current.png

Same picture except against fiat currencies adjusted with the GDP deflator.

http://www.nowandfutures.com/download/gold_vs_currencies_ppp1900-2005_from_AEIR_report_rr11_pdf.png

bart

08-27-07, 01:46 PM

This seems one of the 'best times to buy' because prices are down around the 200 day averages on both metals. Every big move has started from there.

That's true since 2000, and was true from 1971 to early 1975... and then gold corrected almost 50% and didn't bottom until early 1977.
It also failed significantly in 1983, 1988, 1991, 1996 and 2000.

My only point is that the 200 dma is not historically reliable.

raja

08-27-07, 03:33 PM

It's been a couple of weeks since I read the essay this refers to, but my understanding was that EJ was discussing whether to sell gold now, during Ka, and then rebuy just before Poom. One of the arguements against it is the 28% tax on any profits. If, for example, you had bought at $250 and sold at $650, you'd have to pay $112 in tax if you were in the 28% bracket. Thus gold would have to drop to $538 ($650 -$112) before you'd be even.
Agreed.
If you bought gold at $250, it wouldn't be good to sell it, pay 28% tax, then rebuy later . . . unless gold went below $538 (using your figures). EJ says "my best guess is that it (gold) is likely to fall below $500 and perhaps even test $400." So if his prediction pans out and you can buy near the bottom, the sell-now-buy-later strategy would be profitable.

And then, there's those of us who aren't sitting on a pile of $250-purchase-price gold, but instead, maybe bought gold at 600 or 639 . . . or those who are looking to get into gold for the first time (like Mega with his 50K) . . . or those who want to add to their gold position now. For these people I don't see that the capital gains argument has any relevance. It's better to wait to buy . . . .

08-27-07, 04:04 PM

for myself, i reduced my pm holdings to what i consider a core position. if gold gets down to 550 i plan to add to my holdings.

raja

08-27-07, 06:31 PM

for myself, i reduced my pm holdings to what i consider a core position. if gold gets down to 550 i plan to add to my holdings.
Of course, it's going to be impossible to know where the bottom is. I haven't picked a target buy price yet. I figure I'll play it by ear. There will probably be a lot of discussion here and elsewhere, which should help in making the decision.

Theoretically, what goes into your determination of the amount allocated to your "core position", if I may ask?

For me, I've got 5 future scenarios, with the worst one being a Black Day in which physical gold is essential. However, I give that scenario a very low probability, and thus have not allocated much to that. I guess I would call that my "core position". The rest is speculation money, with which I hope to buy gold ETFs low, and hopefully sell at near the bubble top.

08-27-07, 06:39 PM

Theoretically, what goes into your determination of the amount allocated to your "core position", if I may ask?

i've had pm positions as high as 30% and as low as 18% over the last few years. i'm now at about 21%. there's no theory behind it. i should add, however, that i have about 2.5% in puts with a nominal exposure, were they all to go into the money, of 28%. those puts are hedging my pms and a 7.5% position in canadian income [mostly energy] trusts. i wouldn't be as comfortable with the pms if i didn't have the puts. as it is, i found myself wondering a few minutes ago whether i should trim it back a bit more.

Lukester

08-27-07, 07:33 PM

You're absolutely correct Bart. Bears very careful consideration this year.

Jim Nickerson

08-27-07, 07:43 PM

That's true since 2000, and was true from 1971 to early 1975... and then gold corrected almost 50% and didn't bottom until early 1977.
It also failed significantly in 1983, 1988, 1991, 1996 and 2000.

My only point is that the 200 dma is not historically reliable.

I believe 325 DMA works better, according to the Aden sisters.

bart

08-27-07, 08:04 PM

You're absolutely correct Bart. Bears very careful consideration this year.

Stop loss orders are a goodness. :D

By the way, my own prediction work on gold actually agrees with you here. I'm looking to go long within a week or so.

http://www.nowandfutures.com/images/predict_gold.png

bart

08-27-07, 08:19 PM

I believe 325 DMA works better, according to the Aden sisters.

Yes it does, but still has some misses too.

In my opinion, one needs to use multiple tools, including TA, to do timing. And moving averages always lag, by definition.

Lukester

08-27-07, 08:52 PM

bart

08-27-07, 09:44 PM

Bart -

On the topic of a deflationary correction in precious metals going into 2008 - it's possibly worth noting that gold's mid-bull correction in the 1970's was after gold had risen about 600% (from 1969 to 1975).

Our current bull run in gold seems in the 'infant' stages comparatively, with a rise of under 250%. Also gold's relative run-up since 2000 compared to the entire commodity complex seems notably small.

Together with the remarkable precedents for looseness being set by central banks in efforts to underpin debt and equities markets suggests the next 12 months are not a high probability bet for the start of a serious retrenchment (yet).

Stocks might seem a likelier candidate for a big takedown in the next 12 months.

Thanks for your chart.

True on the 600% but a large part of that period was before Bretton Woods II in 1971 and free floating currencies and gold, and central banks etc. also weren't as aware of how to manipulate the gold price, etc.
It was closer to a 400% rise from Aug 1971 - Dec 1974, and our current rise to the peak last year was close to 290%.

There's also a lot poorer general economic education extant, and a lot higher leveraged and credit encumbered populace today.

Then there is:
"History doesn't repeat itself, but it does rhyme."
-- Mark Twain

Then there's the issue of current central bank looseness. Do recall that virtually all of those hundreds of billions injected by the ECB and Fed were basically temporary loans with terms of 1-3 days.

We also in my opinion are in a recession now... and precious metal performance in a recession is pretty dismal historically.

In other words, I'm not hugely disagreeing with you but rather urging very high caution.
I'm a gold bull, not a gold bug.

Lukester

08-28-07, 09:49 AM

bart

08-28-07, 09:55 AM

Bart -

<< Then there's the issue of current central bank looseness. Do recall that virtually all of those hundreds of billions injected by the ECB and Fed were basically temporary loans with terms of 1-3 days. >>

Absolutely right - I stand corrected. This is (a small part) of what Flow5 was trying to impress upon my foggy wits. :D

*hug* ;)

It truly can be quite tough to cut through all the noise and false and partial data etc. being promulgated by media, spin by the Fed etc.

I wish I could say I've never been fooled or misled... :(

dbarberic

08-28-07, 11:10 AM

Can somebody -- maybe EJ -- explain why it's going to be so hard to buy into gold at some point during the beginning of the price rise?

Gold's behavior when it rises is very quick, sometimes too quick to even catch. If you do not already have your position, you can miss out on sometimes the best gains of the year. Gold is not as liquid as a market as other commodities and securities, consequently small changes in buying behavior can set off significant changes in the price unpredictably and quickly.

Gold is also very volatile to the downside. I’ve heard that a 30% correction in a typical year in the gold market is not uncommon.

You need to determine what you believe the long term trend is and then pick your approach to enter the market.

grapejelly

08-28-07, 12:12 PM

Do you find it interesting that...

1. the US$ is still low in terms of the dollar index and

2. gold hasn't fallen very much, even though

3. there is huge demand for liquidity?

I think the downside risk for gold is very low right now. I expect the US$ to rally against the Euro, fall against the Yen, and, crucially, fall against gold :)

Lukester

08-28-07, 01:51 PM

I'm following Grapejelly's cues.

c1ue

08-31-07, 04:10 PM

Folks,

The key to keep in mind regarding gold price (and presumably therefore CEF/GTU/GLD price) fluctuation is this:

the price of gold is a function of sentiment.

Check out this link:

http://www.kitco.com/ind/watson/aug282007.html

I rarely take stock on the specific numbers on publicly posted data, but the trend is itself interesting.

Note that the supply vs. demand of gold can be heavily skewed by investment demand - which itself is absolutely a function of sentiment.

If the scenarios unfold where the US dollar collapses - either via a mass worldwide selling of dollars triggered by one of the large present stakeholders dumping or via some REALLY bad policy decision in the US, maybe both - this sentiment could switch extremely quickly.

In this case I very much doubt your ability to jump on the bandwagon in time.

If on the other hand there is a slow pinhole in the Dollar Reserve Currency balloon, there will be plenty of time to do whatever.

But your buy signal is going to be very faint and hard to distinguish vs. the head fakes.

This is usually why I never consider investments in terms of lowest price to achieve highest gain, but rather minimum acceptable return on investment vs. maximum likely possible return given a specified time frame.

The actual buy decision is then clearly spelled out in ranges which then I act on tactically - in range and trending more beneficial, wait and see. In range and treading water, evaluate short term market factors. In range and trending higher, BANG!