Creating Illiquidity in Gold
This morning there was a story in the Milwaukee Journal Sentinel about a police sting on illegal gold trading at one of Milwaukee's pawn shops. Illegal gold trading. Imagine that. Interestingly, this shop really did not have a big interest in gold a few years ago. Today it is big business. Around town, and around the country I saw this summer as I traveled west by road, there are as many signs popping up saying "buy/sell gold here" as there are "for lease" signs.
Back when the mortgage bubble was inflating one thing I noticed, and mentioned to a friend in mortgage finance, was the amount of strip malls with new mortgage brokers. He said, "yeah, they're cracking people left and right." Cracking was a reference to the high fees that generated broker commissions. The FBI had identified a rash of "cracking" all the way back in 2002, but was ignored. I wonder what they have to say about gold trading now. I'm going to look that up.
Today, the "buy/sell gold here" guys are cracking people left and right. The spread on what they are buying and selling is huge. It doesn't matter if they buy it or sell it, they are making a ton of money. This time, unlike the mortgage market, which was bred on greed and desperation to own a home, this gold market is being bred on fear of the end of the world and desperation to pay bills.
I also have a friend who bought $50,000 of the mini-gold bars recently at $1700/oz. This friend is willing to pass the gold onto his kids someday, so it's not a short term investment, which I guess makes it ok since he doesn't need the money probably. Still, at this point I'd rather have dark chocolate bars myself because if the proverbial shizot hits the fan I can trade those. But, I do understand his approach and I'm probably overstating a bit, though dark chocolate is good.
Another guy I know bought a little earlier, buying $100,000 of coins at $1350/oz. He was explaining it to me over a beer one day. His economic analysis didn't make much sense to me, but I'm not that smart so it could have been me. His premise was he'd sell it all around $4000 then retire. I'm not sure who he'd sell it to at that point. It's not like he can press a button to sell gold coins. Even if I had a better explanation at the time, in the condition I was in it wouldn't have mattered as there would have been no explaining it between the beer and the deep, deep emotions.
To note, both paid hefty shipping and handling to get their gold, which is sort of getting cracked.
So what I see is that now we have late investors and people hocking gold involved in the gold market way after the bull market started. Gold is up what? 600% the past decade? Something like that.
I remember a client asking about gold in 2001 or 2002. I didn't know much about it, and since I understood oil we bought that instead. I haven't bothered to look at which has done better, but I suspect it is similar and I am not afraid of oil.
Why am I not afraid of oil? Simply because it has a use. Gold is an emotional investment. Even when it is used for jewelry it is emotional. Guys, you know what I mean.
Back to gold, I was talking to a relative last night who had a seat in Chicago awhile back. He made a comment that the market does the same thing over and over. Blow the market out, scaring out the little guy, buy it a bit at a time causing it to drift up, then sell the pop up when the little guy gets back in. Rinse. Repeat. I can't help think that gold is being soaped up real nice right now.
Back when the mortgage bubble was getting to the point of stretching the rubber too far, credit default swaps were being sold by Gregg Lippman at Duesche Bank, interestingly a bank that had been funding the mortgage credit bubble. I wonder who is today's "gold" Gregg Lippman. Gold is inflating a bubble. I don't know how much the rubber can stretch, but I suspect we are closer to the popping point than many expect. $2000/oz gold? Probably. $3000/oz gold? Maybe. $4000/oz gold? I sure hope so because that would be an easy short even for a nube like me.
Now, back to my buddies. Both are up on their trades. Will they be able to sell a pop if it comes? I doubt it. Who will buy? If gold goes to $3000 but stalls, who will be there. The "buy/sell gold here" guys? No way, they are going to pack up shop the minute they can't crack people. Just like the mortgage brokers who used to be in their strip mall spots. Will Glenn Beck buy it all. No way, he is way too smart of a huckster to buy it after it goes up another 100%. Goldline? Nope.
Now, I admit, I am on board with the "after trying everything else, the United States will do the right thing" thought process. Could equities head lower another 20%. Sure. Could the world end as we know it. Yep. But if it does, who cares. We have a demographic shift going on complicated by a debt rebalancing. It will pass. It might take a few years if Congress can not see we need to jump start things by shifting tax loophole money to infrastructure spending quite yet, but it will happen, the infrastructure needs to be rebuilt and upgraded soon if not now.
If the world does end I'll swap some of my dark chocolate for whatever else I need.