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TMFSinchiruna (50.02)

Can You Afford Not to Own Gold?

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September 29, 2011 – Comments (25) | RELATED TICKERS: CEF , PPP , GG

Well ... can you?

http://www.fool.com/investing/general/2011/09/29/can-you-afford-not-to-own-gold.aspx

Higher stakes and elusive returns
If there is one point of clarity amid this macroeconomic landscape, it is that reactive fiscal and monetary intervention has been (and will continue to be) used by sovereign states and their central banks to combat this global crisis. A political imperative exists, compelling them to action. Because it is hard to imagine that austerity measures can stem the tide of the broader debt crisis -- particularly given the results of previous interventions -- the opposite approach is selected by default. Some version of a printing press will remain the sole weapon within their arsenals. European leaders may be resistant to the proposed scale and structure of its bailout fund -- but just you watch, the untold billions will flow toward the continent's most toxic assets just as they have in the United States.

And so, for those who place their faith in the masterminds of aggressive intervention like Ben Bernanke, Tim Geithner, and their counterparts overseas, I have a few questions.

While you can effectively argue that years of reactive intervention have prolonged the status quo and forestalled a calamitous crash, can any well-informed and reasonable individual say with confidence that another stage of the global financial crisis -- one that could make Lehman Brothers look like a walk in the park -- is not still a viable threat?

Given that aggressive intervention in U.S. has failed to result in the economic recovery so repeatedly promised, why should investors believe that further intervention will yield a different result?

And finally, here is the $100 trillion question: What if the entire economic paradigm behind the questionable strategy of addressing a debt crisis with ever-increasing debt was a misguided approach from the start? What if the deleveraging mountain of toxic derivatives was always too giant a beast to slay and that increasing sovereign debt simply raises the stakes in a futile game?

If I have bummed you out, I'm sorry. But I believe folks have been spoon-fed sugar-coated visions of our financial condition for far too long and that a touch of harsh realism may be what's needed to encourage investors to take action to protect their hard-earned capital.

25 Comments – Post Your Own

#1) On September 29, 2011 at 12:03 PM, wolfman225 (75.71) wrote:

I hear ya Chris.  But, what's a regular working guy like me to do?  At current Income levels, I could (maybe) manage a purchase of 4oz of gold per year.  If that's all I bought for investment.  Not even you recommend being 99% in gold.  If I kept my gold exposure to a reasonable amount (as a percentage of my overall portfolio), I would buy 0.5 to 1oz. 

Those small amounts would do little or nothing to protect myself if we get the crash some are speculating, much less the worst case scenario of the USD losing it's place as the major reserve currency and the rest of the world ceasing to buy our debt.

Keeping it under the mattress, so to speak, simply means that my purchasing power will quickly get destroyed by inflation.  So, what's a guy to do?  It seems to me that if I don't already have a net worth north of $1M to protect, gold would not be the play for me to take, and that I'd be better off to take the extremely long and optimistic view that the US economy WILL recover (eventually) and that building a broad base in the stock market will provide the greatest opportunity for future security.

What am I not getting?

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#2) On September 29, 2011 at 12:18 PM, TMFSinchiruna (50.02) wrote:

wolfman, for those who presently have assets invested in the stock market, moving some portion of that into pm stocks -- even if only a minor portion -- is likely to provide an effective defense against some of the more unwelcome scenarios presently threatening.

Any amount of gold exposure, even if it's just a single one-ounce bar, is in my opinion better than no gold exposure. Silver, meanwhile, is likely to see even greater percentage gains.

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#3) On September 29, 2011 at 12:50 PM, Jbay76 (< 20) wrote:

well written post Chris!

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#4) On September 29, 2011 at 1:12 PM, wolfman225 (75.71) wrote:

Any amount of gold exposure, even if it's just a single one-ounce bar, is in my opinion better than no gold exposure. Silver, meanwhile, is likely to see even greater percentage gains

I hadn't considered silver.  I had read in other places that the silver market was/is even more manipulated than gold by governments and other big players.

Silver may be a better play for those of us with more modest cash flows, with it's lower initial costs and greater potential.  Thanks.

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#5) On September 29, 2011 at 1:15 PM, traderbach (21.62) wrote:

wolfman225

Thanks for that question!  You really laid out a similar situation that I and countless others find ourselves in, and we're the ones who are lucky enough to have work at this juncture.  Thanks for the post Sinch.  I follow your posts all the time as you may remember and like to invest in the miners but it's always nagging at me that if the tragic scenario of another, perhaps worse, crash plays out I really don't see how the value of these miners' shares will hold up and won't crash just as far with the rest of them.  Also, as you yourself have alluded to, the smaller miners may not be able to obtain enough financing for them to get through at all.  I also got Hyperinflation's take on this & he tends to agree that the smaller miners, even Tyhee & Alexandria, are vulnerable.  So should we be in the intermediate to large miners? Or, if we can't get into physical PMs, should we be in miners at all rather than e.g. behemoth companies that will survive a savage downturn or large cap food stocks or ETFs which seem to me to be something that will always be required?

I'm sure many are thinking this and would like some expert discussion to facilitate their decisions.

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#6) On September 29, 2011 at 1:37 PM, smartmuffin (< 20) wrote:

wolfman,

I'm in a similar situation as you.  I've found that it helps to invision gold not as an "investment" necessarily but more as a "substitute for cash."

Stocks are good for investment and growth of capital.  Gold is good for protection against a worst-case economic scenario.  I wouldn't necessarily take your "investment" money out of stocks and put it into gold.  Rather, consider taking some of your cash savings and putting it into gold.  The people who would really be hurt the most by a devastating hyperinflation scenario are the ones who have a lot of cash reserves.

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#7) On September 29, 2011 at 2:02 PM, wolfman225 (75.71) wrote:

^I wouldn't necessarily take your "investment" money out of stocks and put it into gold.  Rather, consider taking some of your cash savings and putting it into gold.

Hi, smartmuffin.  While I don't want to touch the cash reserves I have (6-9 months expenses), I had considered one possible way to get some exposure to pm's.  That would be to take my tax return and move most of that into gold/silver on an annual basis, as opposed to trying to figure how much I can take out of my after-tax, -401K,-ROTH earnings on either a weekly or monthly basis.  My question to Chris was prompted mainly by my wondering whether it was worth it to buy "protection" in such small amounts.

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#8) On September 29, 2011 at 2:12 PM, leohaas (98.74) wrote:

OK, I'll shoot from the hip trying to answer the 3 questions asked in this post:

"While you can effectively argue that years of reactive intervention have prolonged the status quo and forestalled a calamitous crash, can any well-informed and reasonable individual say with confidence that another stage of the global financial crisis -- one that could make Lehman Brothers look like a walk in the park -- is not still a viable threat?"

Nobody can argue that there will not be a next crisis, or if you prefer, another stage in the current crisis. I don't think anyone does. But in the main stream, such an event is usually called a Black Swan: unlikely, but of major proportions if and when it happens.

"Given that aggressive intervention in U.S. has failed to result in the economic recovery so repeatedly promised, why should investors believe that further intervention will yield a different result?"

They should not. Granted, many economists, politicians, and pundits have repeatedly promised recovery. That was wrong. All they should have promised, considering the depth of the crisis, was that the aggressive intervention would be able to prevent a 2nd Great Depression. Recovery is, and will continue to be, very slow. And if you lost your job and have no marketable skills, it may look to you as if there is no recovery at all.

"And finally, here is the $100 trillion question: What if the entire economic paradigm behind the questionable strategy of addressing a debt crisis with ever-increasing debt was a misguided approach from the start? What if the deleveraging mountain of toxic derivatives was always too giant a beast to slay and that increasing sovereign debt simply raises the stakes in a futile game?"

Again, it could be that you are correct about this.

To answer your What If: that means the end of the world as we know it. Nation states will collapse. Society will return to the stone age. Your gold will not do you any good in this scenario, because someone with bigger guns than you will kill you and take it from you.

But more to the point: if it weren't for TARP, ultra-low interest rates, stimulus, QE, QE2, Twist, and all the other actions you classify as "agressive intervention", we would already be there!

 

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#9) On September 29, 2011 at 2:35 PM, reflector (< 20) wrote:

wolfman,

 you're quite correct, silver is a smaller and more easily manipulated market, and is indeed heavily manipulated by JPM, who currently has a massive position short in silver futures, which they are trying to get out of.

but, just as silver is more easily manipulated to the downside, which is why it is now floundering along at these cheap prices, it can also move to the upside quite explosively, and will do so once one of these events happens:

1) in october the CFTC may impose position limits on JPM's silver position, to comply with Dodd-Frank act, which would require a massive buy-to-cover action for JPM. while this is what the law requires, it seems the CFTC may be in the pocket of JPM and may likely continue to "postpone" enforcing the law to do further feasibility studies. but it remains a possibility, especially if pressure on the CFTC builds. TF has a good writeup on the situaion here:

http://www.tfmetalsreport.com/blog/2525/crime-scene-evidence

2) wave of sovereign debt defaults in europe may cause europe to switch to the gold standard, and even if not, the financial tsunami from such a default will swamp america's financial system. i think this even is inevitable at this point, it's just a question of how much longer gemany is willing to keep propping up greece. the bond market has priced in greek default within the next year, the market is saying this is a forgone conclusion.

3) if equities in the US decline much further, maybe dow below 10,000, there is a strong possibility of further QE by bernanke, which will cause commodities to spike substantially as they did before in QE2.

 

i'm convinced that in the current climate in the US, the debt and deficit will not be able to be managed, and the US financial system will collapse under a mountain of debt, it's a question of when, not if.

the dollar will be worthless and we will return to a system of honest money, backed by gold and/or silver.

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#10) On September 29, 2011 at 2:37 PM, silverminer (99.57) wrote:

leohaas,

Thanks for your comments.

"But in the main stream, such an event is usually called a Black Swan: unlikely, but of major proportions if and when it happens."

I believe the mainstream has it entirely wrong. I think Faber is on the right track.

"But more to the point: if it weren't for TARP, ultra-low interest rates, stimulus, QE, QE2, Twist, and all the other actions you classify as "agressive intervention", we would already be there!"

True, we would be in a dark depression (not the end of the world), but we'd have spent the last 3 years beginning to build our way out of the hole rather than making the hole bigger. However frightful it may have appeared, I maintain that letting the deleveraging take its course would have given the world a chance at a far more orderly unwinding of toxic assets than that which is still extremely likely to occur despite all the reactionary largesse.

Yes, it would have led us into a Great Depression with horrific consequences for all of us, but I just don't see where that has been taken off the table. To the contrary, I believe the risks are far greater today given sovereign debts. Banks would have gone down like dominoes, and with them most of those engaged in leveraged exposure to derivatives. That is the (incredibly frightening) cleansing event that would have ultimately yielded a healthier financial system on the other end.

Today, far from having cleansed and cleared those assets from the global balance sheet, they remain as legacy assets of the Fed, the agencies, and banks like BAC that contionue to threaten our financial system with the width of the disconnect between their supposed book value and its mark-to-market counterpart. Likewise, Greece needs to default. To seek to prevent its default is to perpetuate a state of insolvency through leveraged financial engineering backed by states with increasingly questionable outlooks of their own.

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#11) On September 29, 2011 at 3:00 PM, Frankydontfailme (25.29) wrote:

Leohass, I dont get :

"To answer your What If: that means the end of the world as we know it. Nation states will collapse. Society will return to the stone age. Your gold will not do you any good in this scenario, because someone with bigger guns than you will kill you and take it from you."

Ok, madmax is possible. But an epic deleveraging cycle is nothing new. Happened in the 1930. Probably happened dozens of times in the Roman Empite, no cdo or whatever but debt is debt. The 1930's weren't madmax... a world war happened yeah but it could be avoided if....

Nations get together and responsibly selectively default on debts that never can be repaid in full. We go back to honest free markets where the governments stop screwing everything up.

More likely, we have a brutal world war for resources because these sociopaths will never admit that they are the problem. Still not mad max though. World War 2, despite its horrors, was not end of the world. Gold had value in the 1940's no matter where you were (except for maybe a foxhole).

Anyways, the whole 'world is ending' thing gets on my nerves. Yeah it's bad. We default and go to a gold standard and allow slower world growth so we don't consume all of resources and humans will do a-oh-k.

 

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#12) On September 29, 2011 at 3:01 PM, Frankydontfailme (25.29) wrote:

I mean... gold can go up (A LOT) without the world ending... see 2001-2007.

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#13) On September 29, 2011 at 4:00 PM, Valyooo (99.91) wrote:

Hey Chris,

I have been out of the market for a few months since I just started my first full time job.  I am thinking of buying some silver bullion and some SLW.

1) Is the recent drop strictly due to futures markets shenanigans on margin calls and selling to cover losses on stocks and cme regulations, or a change in demand, or just overbought?

2) If greece defaults, although it will cause a currency shock, it will be deflationary.  Thats bad for silver righT?  Or do you think they will just inflate themselves out of this?

3) What is the next catalyst to move silver higher?

4) Silver is consolidating below support that it held in April...is it as bad as it looks to me?

 

I don't need a ton of detail I know you are busy, just a quick couple of sentences for each question will suffice.  Thank you for your time.

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#14) On September 29, 2011 at 4:20 PM, FleaBagger (98.27) wrote:

wolfman - that's the question that a lot of people were thinking, and not a lot of people were saying aloud/posting. I don't even have a job (partly my own fault), so I cannot even do what is being suggested for you. My approach has been to tell my loved ones to buy gold and silver. Most haven't listened to me, but my dad has, and has been accumulating Krugerrands and 1964 Kennedy halves, accelerating his purchases as the prices have fallen off the cliff lately. This from a guy who used to hand his money to a financial advisor and ignore it for years (despite losing half of his savings that way in 2000-01). I'm really proud of him. 

I need to try harder to get a job so that I can participate in the rally, but in case I don't, at least I'll have helped my dad.

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#15) On September 29, 2011 at 4:24 PM, leohaas (98.74) wrote:

Chris,

Unfortunately, we don't have access to the parallel universe in which the financial crisis happened, but governments and central banks worldwide did not interfere. So "to interfere or not to interfere" will always remain the question.

I might be wrong about the severity of the problems if things go really wrong, and about the chances that things will go really wrong. As a matter of fact, I sincerely hope I am wrong about the first one, but not the second one!

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#16) On September 29, 2011 at 9:06 PM, DarthMaul09 (83.55) wrote:

Gold and especially Silver helps fight the infection caused by the central banks.  With the gold to silver ratio at 52, I believe that silver is a better value.  And unless you have billions to invest, silver is also a more practical metal to buy.

Included is an interesting video that was sent to me by GATA:

Fiat Money

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#17) On September 30, 2011 at 10:49 AM, Bkeepr100 (< 20) wrote:

The suppies of physical silver are streached tight on the street.  I just visited the local retailer to pick up some more bullion on the dip and they don't have any on hand. I could have him send in an order and get it in several weeks.

Heck I can order some silver bullion direct from one of my silver mining stocks, First Majestic in the same timeframe.  I may just do that instead.

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#18) On September 30, 2011 at 12:19 PM, richthegeek (< 20) wrote:

My concern is exactly what Traderbach mentioned:

"but it's always nagging at me that if the tragic scenario of another, perhaps worse, crash plays out I really don't see how the value of these miners' shares will hold up and won't crash just as far with the rest of them."

I increasingly wonder if I haven't taken on too much risk with miner equities as it seems if (or rather when) the market crashes and gold/silver values rise, the money moving toward those stocks will be more than offset by the money exiting the market in general. I'd love to hear other's perspectives on this.

 Wolfman - it seems from your questions that you already are taking steps to protect yourself as best you can. The fact that you are looking at saving rather than taking on additional debt is better than most. Keep that up. While holding the physical metal is certainly the safest, there are some ways to get close to that in the market such as CEF - a stock whose performance closely tracks gold and silver. Beware of some of the ETFs, though, as they seem highly leveraged on the amount of physical that they have.

Nobody knows how severe the approaching storm will be, nor exactly when it will hit, but it certainly looks like the clouds are gathering. At some point, they will pass, though. Take heart - it doesn't rain forever (even in Seattle we do see the sun sometimes).

Rich

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#19) On September 30, 2011 at 2:02 PM, Frankydontfailme (25.29) wrote:

Bkeeper I think it's more that the local coin stores aren't buying or stocking up until the price settles. Volatility can kill them. At least that's what my coin guy implied.

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#20) On September 30, 2011 at 2:24 PM, TMFSinchiruna (50.02) wrote:

richthegeeek,

That is always a risk. No stock is safe in the initial stages of a full-blown market exodus. But there is a greater understanding of gold and silver today than we had in 2008, and I happen to believe that their safe haven characteristics will attract capital as investors realize how few viable safe havens exist.

But yes, in a severe market downturn, cash is king, and it allows one the ability to cost-average with incredible results.

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#21) On September 30, 2011 at 2:37 PM, TMFSinchiruna (50.02) wrote:

rich,

P.S. Value ultimately prevails in the wake of a market panic. If you continue to hold a bullish long-term outlook for gold and silver prices, particularly given the likelihood that another severe market event will trigger further easing ans/or stimulus, then it becomes easy to maintain perspective in the midst of a sell-off. I didn't lose a dime in the 2008 correction, because I never sold shares into weakness.

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#22) On September 30, 2011 at 2:38 PM, TMFSinchiruna (50.02) wrote:

Cool 10-minute video here:

http://www.clinemining.com

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#23) On September 30, 2011 at 2:58 PM, richthegeek (< 20) wrote:

Thanks Sinch. I do hold a bullish long-term outlook on gold and silver for exactly the reasons you stated in the article. And as long as the company remains in business, the value of the shares only has meaning when they are sold, so they can bounce around all they want until then. Your point about value prevailing is a good one.

Thanks, as always, for your thoughts and hard work.

Rich

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#24) On October 02, 2011 at 7:23 AM, skypilot2005 (< 20) wrote:

Sinch wrote:

“Given that aggressive intervention in U.S. has failed to result in the economic recovery so repeatedly promised, why should investors believe that further intervention will yield a different result?”

They shouldn’t.  It’s a common myth that government-fueled increases in aggregate demand ended the Great Depression.  Productivity growth is the primary reason we exited the Great Depression.

Sky Pilot

Your official Web Link Assistant

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#25) On October 04, 2011 at 2:23 PM, rfaramir (97.17) wrote:

Valyooo: "If greece defaults, although it will cause a currency shock, it will be deflationary"

I think that is exactly backwards. If I (acting like Greece) take out a loan from a bank (or central bank), the bank doesn't loan out its own money, it creates "fiduciary media" (stuff identical to money) in a bank deposit account for me to spend. I.e., it inflates the money supply for me by an amount equal to my future liability to pay it back to them (plus real interest). If all goes well, someday that fake money and real interest money goes back to the bank, and the fake stuff disappears with the disappearance of my debt to them. The hopeful result is that I create real wealth in the world through debt-financing and kick some of it back to the bank.

But if I default, instead, I essentially say, "I'm absconding with this money you printed for me, your 'asset', i.e., my loan I owed you, is now worthless, ha ha." If I'm a turnip you can't squeeze blood out of, all the people I've spent the loan on keep the newly created cash, the bank loses an imaginary asset, the world suffers from an increase in the money supply which is true inflation and will eventually be felt by consumers as price inflation.

The bank may go out of business, depending on how bad it needed me to pay it back, but the money it created doesn't go away. In fact, it can multiply about 10X as the people I spent it on put it into their banks who then fractionally-reserve lend it out again.

Correct me if I'm wrong, but this shows that defaults are inflationary in terms of base money supply. They may seem deflationary in terms of hurting the credit supply, but especially if it is a central bank who got caught holding the bad loan, it can't go out of business or run out of fiat money, so that view doesn't really apply.

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