Analyzing TMFSinchiruna's "700 billion reasons to own gold" article
I have puts on Gold (Via the GLD ETF) and I also am short stock in Goldcorp--I am long Jaguar Mining and Northgate Minerals, however, I am net short gold by a wide margin at present. That being said, Christopher (TMFSinchiruna) has written another interesting article taking the opposite view of mine.
He presents 5 reasons to be buying the shiny metal now. I have no argument with arguments #2, 3, and 4. However, let's take a closer look at arguments #1 and #5.
Here is his article for reference.
First, here is his argument #1.
"Inflation looms ever larger."
He talks about the bailout (which I strongly oppose... and one of my posts on it got 45 recs.) While the bailout is a no good piece of legislation giving your tax money to fat cats, it isn't deeply inflationary. $700 billion is nothing, absolutely nothing, compared with the size of the problem. On Monday, the equity market lost more than $1 trillion dollars in value. In one afternoon, the stock market wiped out more $$$'s than the bailout would inject into the system. Seeing as how the stock market continues to lurch towards its long-term goal of around 8,000 (850 S&P), we will keep seeing money destroyed at an enormous rate.
Secondly, where is that inflation? At least in my life, prices are falling. I am a college student. My tuition went up 3%, my rent dropped 2%, my food costs are down sharply (milk, meat, cheese, eggs, bread--the essentials--are all dropping fast), gas has fallen from $3.80/gallon to $3.30, the cost of my electricity has bumped up slightly, the price of clothes has fallen, and I'm finding more deals to buy stuff from other students used at steep discounts. My life costs me no more, and quite possibly a bit less than last year. The economy is seeing trillions of dollars of credit vanish--a measly little bailout is merely a small drop of water in a shark tank.
And argument #5:
"Insiders agree: gold is going much higher. From Goldcorp (NYSE: GG) founder Rob McEwen, to Fronteer Development Group (AMEX: FRG) CEO Mark O'Dea, mining industry executives are increasingly comfortable spelling out their long-term price targets for gold."
I know little about FRG, but let's talk about Rob McEwen for a minute. I think the guy is a genius. Once he left GG, the company went nuts, paying a king's ransom for Glamis and diluting itself so thinly that, well, um, it makes spandex look thick. Sorry, my mind went wandering, anyway, Sadly though, he has lost his touch, his new projects have been complete catastrophes. US Gold (UXG) has fallen from $7 to $0.95 over the past year as it has studiously avoided finding signifcant economic deposits of gold. McEwan also has a major investment in Rubicon Minerals (RBY) a company that I used to like, and still think is alright, but with the shares barely hovering over a buck, you can't really say that one has performed recently either. I hate to sound mean, but McEwan needs to set a ridiculously high price target on gold to have any hope of saving US Gold from heading to the pink sheets.
Short and sweet, here's the problem for gold bulls. The dollar keeps rising as the US is in better shape the rest of the world. Europe is nationalizing their entire banking system with frightening speed, yet our Congress stepped up and told the Fat Cats no on Monday and appears to be trying to blunt the power of the Senate's bill that comes up tomorrow (a bunch of congressman trying to reduce the package to $250 billion.) The US isn't dead yet (that doesn't come until the boomers retire en masse.) Until then, the debt-laden train wreck Euroland economies will continue to eat our dust (woohoo our GDP growth is going to average -2% while theirs is around -4% for the few years! Go America!)
First we were hearing that gold was a good buy cause the dollar was crashing and that the global economy was strong. Now the global economy is terrible, the dollar is rocketing higher through key technical resistance, and we should still be bullish on gold? No. If you must play commodities, either play them like I am: long speculative gold stocks that are 10-baggers if we hyperinflate: NXG is a $10-15 stock if we hyperinflate, but my GLD puts and GG short won't lose nearly as much as my NXG gains. After finding a speculative stock, short the metal or the big miners... those aren't going to go up nearly as much as the miners should their be real hyperinflation. This way you profit if gold goes down or way up... and your losses are moderate should gold only rise a bit.
The other way to play is to go long a commodity that has no fear trade built in like coal (KOL) and short gold. Gold has an artificial risk premium built in while coal is trading as if I invented cold fusion. I can't see that trade not working. Nat Gas is also too beaten up... people need to heat their homes, and I've never seen anybody putting gold bars in their furnaces.