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XMFSinchiruna (26.96)

700 Billion Reasons to Own Some Gold

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October 02, 2008 – Comments (9) | RELATED TICKERS: CEF , AUY , AEM

Given the $34 decline in the price of gold today as continued troubles in Euroland propelled the USDX above the psychologically significant 80-mark, I could hardly have chosen a more dramatic day to publish the attached article on gold.

Surely, those who were already long gold and other commodities will be in need of a pick-me-up today, and so hopefully will find solace in my continued assertion that gold remains the most viable safe-haven asset to countenance financial turmoil of this nature.

Those who eschew gold as a barbarous relic will no doubt point to today's action as evidence that gold is not so safe. To both groups, I say sit back and watch the show. Daily swings amid volatility and panic mean absolutely nothing... we're after the long-term trend here. The lion's share of today's selling came from writhing hedge funds lacking the liquidity to survive and the wisdom to hold. All the remaining deflationists here in CAPS, I urge you to go back to the drawing boards and retest your conclusions based on the reality of the $1.1 trillion the Fed has injected into the system in September alone, the $700 billion about to come, and the untold trillions that will follow. The deleveraging of the $1.2 quadrillion global market for over-the-counter derivatives will be met by our government and its dear Fed with a nearly limitless outlay of USD to counter those losses in an unsuccessful attempt to maintain an orderly financial system. The consequences of their acts will be borne out for generations, with acute hyperinflation characterizing the early stages.

As always, I am wide open to debate, and do not simply cling to my ideas as some sort of predisposed dogma. I am an open-minded individual constantly striving to test my ideas through re-examination and discourse. As always, I appreciate everyone's input, and thank you for examining these important issues with me. This is what makes CAPS the greatest place on the web for investors like us. If you enjoy the article, please don't hesitate to click recommend at the top of the article to increase its circulation through the site. If you've discussed the merits of gold with a friend or family member, my hope is that this article may serve as a useful tool to help being that discussion to the next level.

To those who have precious metal exposure due even in small part to my blogging or past writings, please know I share your pain today. A single-day move like this is very difficult to stomach under any circumstances, but all the more so when the tube is dominated by people declaring that the commodity run is over. I commend you for not giving in to panic and selling into a fall like this. Gold will move higher.

Fool on!

9 Comments – Post Your Own

#1) On October 02, 2008 at 5:04 PM, Terok1313 (30.55) wrote:

My CAPS portfolio closely matches your own and it has definitely been a wild (and painful) ride these past couple months.  But I'm still hanging in there and am hearted to hear you're keeping the faith :)

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#2) On October 02, 2008 at 5:06 PM, TheGarcipian (34.23) wrote:

Good article, Chris (and yes, I rec'd it). Your argument is sound. The only question remaining for me is timing. I can't believe gold will go any lower (then it does!), but I'm seriously moving towards investing a good chunk of change in CEF.

I'm quite ignorant when it comes to metals (precious and otherwise) as well as commodities. So pardon this question: Does the impending rush to gold mean good things for copper-producing companies like Southern Copper (PCU) or do you actually have to own the metal outright (via funds like CEF)?

Thanks for any insight here,
--Gar

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#3) On October 02, 2008 at 5:45 PM, DemonDoug (34.04) wrote:

copper and silver are also monetary metals, so I would say anything involved in it would do well.

Of course, we all know that it is not gold, but rather black gold (oil) that is truly the world's reserve currency.

My CAPS score is getting beyond hammered, and I keep doubling down.  Eep.

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#4) On October 02, 2008 at 5:48 PM, XMFSinchiruna (26.96) wrote:

Terok1313

This ride has made any Six Flags roller coaster look tame. You have my respect for not jumping off while the ride is in motion.

TheGarcipian

Long-term, I still think copper will do well as the USDX really plummets, but until that happens.... i.e. until the USDX drops to a comfortable distance below today's 80-mark, I would stay away from copper in the short-term. I'm not selling any of my copper holdings, but I wouldn't necessarily be a buyer here either... since gold and silver possess that extra degree of safety. PCU was exploring for gold assets, but that's not a good play of you're looking for gold exposure. If you want both copper and gold exposure together, go for Freeport-McMoRan... they were giving that stock away today!

I continue to maintain that gold mining equities will indeed provide positive leverage to the price of the underlying metal once gold breaks out into record territory again. CEF (certainly the best of the bullion proxies IMO) has definitely been a better bet than any of the miners so far this year, and at this stage possible even for the whole bull run overall to date. I think CEF has a rightful place among anyone's total allocation for precious metals exposure, and CEF will remain my largest single equity holding until we surpass $2,000 gold. That being said, after a sell-off of this magnitude, and given the extent to which mining stocks have been hammered down by a range of issues that I've been tracking both here and in my articles, I believe the lower-cost, well capitalized miners will enjoy exponential gains once the gold bull rockets forward once more.

In summary, caution on adding PCU or anything primarily copper here other than FCX. CEF is always the safest bet in paper assets, with SLW drawing a close second IMO. And lastly, the mining equities that were previously the most celebrated and now the most battered offer a range of investing options at this stage. AUY,GRS,IAG,KGC,MVG,NGD,PAAS,SLW. I think it's hard to go wrong with those names here, without making any assurances about short-term moves amid this kind of turmoil. As you'll note, most of those tickers are silver names. As bullish as I am about gold here, my colleagues know full well I'm even more bullish about silver. Today's gold/silver ratio of 77:1 is not just high... it's clear off the chart! In the last 200 years, the ratio has only been this high a handful of times, and it never lasted long. 

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#5) On October 02, 2008 at 6:40 PM, devoish (96.50) wrote:

Gar,

Lessons from the left 

And right

Regards

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#6) On October 02, 2008 at 6:45 PM, abitare (35.13) wrote:

"But eventually the commodity bubble will be popped. The commodity bubble is the last bubble left by the reckless Central Banks monetary inflation and government overspending. When the commodity bubble pops, like the DeathStar explosion, you had better be clear."

abitarecatania (ref: The Upcoming Top Fool Will Be a Commodity BEAR)

20 Recs 20 May 27, 2008 Report this comment
#7) On October 02, 2008 at 7:45 PM, goldminingXpert (29.52) wrote:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=94243&t=01008631960540474609

My response to this article. 

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#8) On October 03, 2008 at 11:42 AM, bostoncelitcs (45.30) wrote:

Euros!...Euros! .....Euros!.........AIG is selling it's American assets and holding onto foreign life insurance policies!!!

Looks like we can see where AIG stands with the American dollar.

 

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#9) On October 03, 2008 at 4:11 PM, goldminingXpert (29.52) wrote:

Well, looking at a bankrupt company for advice is the smart move.

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