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XMFSinchiruna (26.56)

Gilded Christmas wishes for my fellow Americans - why gold is different this time around!



December 05, 2007 – Comments (10)

The following is a reply I wrote to a fellow Caps member based upon his recommendation of the gold ETF "IAU"  [his original text appears below as a reply to this post].  What started out as a short response quickly became a sort of thesis statement for my view of the American economy at this time.  I hope my fellow CAPS members will give this topic some thought, as I believe the opportunity to get started now could be our last best opportunity for those not already heavily weighted in gold, silver, energy, etc.:

Ludraman, I fully respect your take on gold since I think it accurately describes what gold has done/meant for investors throughout the past half-century or more.  But, I think the true nature of gold over the next several years will be something we've never seen in the past (or at least not since the Great Depression).  There is a perfect storm developing, a perfect storm of hyperinflation, the reality of which is masked from the markets by the Fed's misleading inflation indicators (they exclude food and energy!), and one which will be more dramatic than previous inflationary cycles because of the extent to which foreign governments have bankrolled our debt. 

There is no support for the dollar, and below a certain level no self-serving foreign nation will continue to finance our uncontrolled spending.  China alone could sink the dollar overnight by cashing in just a portion of its US treasuries.  OPEC actually spoke last session of switching to the Euro for trading oil!  With the dollar already in unchartered territory, any further decline could precipitate this type of snowball effect and land us in a depression overnight.  Add to this mix the incredible mess we made of the housing market by tempting Americans with unsustainable levels of credit, and the lack of global liquidity to cover that deteriorating credit, and there you have the perfect economic storm ahead for the US, and, consequently, a perfect reason to buy and hold gold through all of this as the only true investment of immutable value in the world.

Conventional wisdom would have Joe Investor holding about 5% gold, whereas I would argue that 50% or more is fully prudent today given the circumstances.  Gold is going nowhere but up from here, though the wealthy and powerful elite will cause the media outlets to decry the coming reversal of the gold bull market, that is merely a headfake.  Gold will punch beyond $2,000 before we can even be thinking about a reversal.  Silver has a great story too, as it has been manipulated downward throughout this bull market and so has perhaps an even more meteoric rise ahead as it ultimately catches up with traditional gold/silver price ratios.  Silver will be at $20 before the Spring of '08, and then it's a quick trip to $50!

And so, I urge you to take a fresh look at gold and silver, because though it may seem counter-intuitive to purchase more at these historically high levels, the circumstances at play here are purely unprecedented and collectively create a very compelling case for the prices of gold and silver.  I am concerned for my fellow Americans as we head into this Christmas season.  I think we stand on the verge of a horrible economic collapse, and I worry for those who are not prepared... for those who are mired in debt, or perhaps purchasing homes because they think the housing market couldn't possibly get worse from here, or spending more than they can afford for Christmas just as the rug is about to be swept out from beneath them. 

My Christmas wish?:  that Americans will spend their Christmas budgets on food, water, and other emergency supplies to care for their families when distribution networks are disrupted by the economic tsunami ahead; that they will shift to much greater proportions of energy and precious metals equities within their investment portfolios, and that they will each purchase a small amount of physical gold to hold for all time.  And my New Years' wish?:  that we will all remember to be kind to each other when the chips are down.  I think we will all encounter challenges like we've never before faced (as individuals and as a nation), and I sincerely hope that we can all find that deepest well of humanity within us, and work together as brethren and countrymen through the crisis.  May peace and prosperity abound, but failing that, may humanity and liberty endure forever!

10 Comments – Post Your Own

#1) On December 05, 2007 at 2:17 PM, MRT1212 (20.74) wrote:

wasnt this almsot the same argument for housing?

i mean you have the unprecendented gains that will never go down again because this time it is different. more people buying will increase the price, just be sure you arent the last one on board.

 thank god people can't get easy money to speculate on gold. 

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#2) On December 05, 2007 at 3:22 PM, XMFSinchiruna (26.56) wrote:


Thanks for the comment!  I don't believe the housing and gold markets are comparable in this context, and here's why:  people who were betting that the housing market would never turn were basing that bet on a combination of "irrational exuberance" and past performance, but were not in my opinion basing their bets upon solid macroeconomic analysis.  In fact, if they had been looking at the gold and silver prices during the latter two years of the housing boom (say 2004-2006), they might have sensed that a reversal was afoot.  The first post in my blog has a link to a very cool chart showing the inverse relationship, over a very long time scale, between the price of gold and the average price of a home in the US as priced in gold.  That inverse relationship suggests that people betting their livelihoods on the housing markets should always carefully monitor the prices of gold and silver for hints of macroeconomic shifts.

I expect the average price of a US home as priced in gold and the spot price for gold itself to continue to move in opposite directions, and when they cease to do so, well then I might sell some or all of my gold equities.

 I don't view gold as speculative.  I view the US Dollar as speculative.  :)  I do agree with you though that it's a good thing there's no easy money for people to purchase gold on margin... In my personal opinion borrowing money to invest is never a good idea.

Thanks again for commenting.  I welcome comments from a wide range of viewpoints.  And Merry Christmas!

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#3) On December 05, 2007 at 4:16 PM, leohaas (30.15) wrote:

"Conventional wisdom would have Joe Investor holding about 5% gold, whereas I would argue that 50% or more is fully prudent today given the circumstances."

Assuming that you put your money where your mouth is, you are at least 50% invested in gold. You may want to disclose that in this thread. That gives your readers the opportunity to put your opinion in the right perspective.

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#4) On December 05, 2007 at 5:45 PM, XMFSinchiruna (26.56) wrote:

Hi Leohaas,

Point well taken... I'm not usually comfortable disclosing too much detail about my investment portfolio.... but what the heck... I happened to have run a tally this morning and indeed I have over 50% invested within the metals sector, with the vast majority of that focusing on gold and silver.  I also have a heavy weighting into the energy sector (about 25%), with a combination of oil & gas producers, canadian energy trusts, and alternative energy (especially solar).  The remaining investments include metals-related corrollary plays like Joy Global or Caterpillar... and several international ETFs.  About 95% of my equities have been chosen based upon the investment thesis above... that is they in some way look favorable given the circumstances I predict in the above post... i.e. falling dollar, hyperinflation, rising gold and silver prices, etc.

Thanks for commenting leohaas, and for reading my post.  :)

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#5) On December 05, 2007 at 5:54 PM, XMFSinchiruna (26.56) wrote:

Here's Ludraman1's original pitch for IAU which got this whole thing started.  Hopefully Ludraman won't mind me re-posting it here.  I felt he had touched on it with his final paragraph, but I couldn't help expounding on it... provided here for context:

"Equities SHOULD cover inflation. Most of us agree. But you dont' put all your money in one stock; you don't bet your life savings on one horse (or horse racing in general) or on one lottery ticket.

Gold will drag you down when times are good for shares and it will pull you up when shares are down.

In keeps you sane when at the end of the year, you are looking back at your portfolios success/failure.

Also it is a way to play a few other things e.g. falling dollar, developing economic power in other parts of the world (who want to put their money into something safe that isn't denomited in dollars. "

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#6) On December 06, 2007 at 6:10 AM, ozlizi (< 20) wrote:

Hey Sinchiruna, I love your posts. In these times it's really really nice to read some good macro. Even more so when there's heart in it, with your humane comments. Yes about Gold... And what other "golds" for the future? Living close to a source of potable water?... Learning how to grow your own food?... And...?

From the rainbow region of Australia, 

Thank you.

Wishing you a blissful day


ps: I wonder what your thoughts might be about the Energy + China combination in stocks. Eg, CEO, LDK, ACH. On fundamental trends it would seem like a winner, but these were hit hard when the market dropped last August. I wonder whether this volatility is temporary: When the music stops, would these stocks end up rising because 1) energy is good and 2) the currency will be stronger than USD... or would they end up in the dumps as cash flees the markets.

pps: I wonder if you're a fan of Mr Dines, who has similar views on gold and silver.

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#7) On December 06, 2007 at 12:06 PM, XMFSinchiruna (26.56) wrote:

HI Lizard,

Thanks so much for your comments!  Though I invest nearly full-time and have a lot of fun doing it, I am prepared for much leaner times when the money our society covets turns out to be nothing more than worthless paper.  All the money in the world won't guarantee your survival nor well-being in the chaotic aftermath of an economic collapse of the scale I foresee.  That's why I would say before purchasing an ounce of gold, every family might consider provisioning for a future without supermarkets, tap water, heat, etc.  There's no telling whether we'll ever need those supplies in any particular area of the globe... but somewhere, sometime soon the proverbial %$#&! will start hitting the fan.  I just don't see this confluence of dwindling energy, water and other supplies pitted against increasing demand being resolved without the outbreak of conflict somewhere.  The answer WOULD be to reduce demand, but I don't think people will do that en masse to the extent necessary until forced to by some very real shortages.

So yes, without sounding "preachy", perhaps it couldn't hurt to think about where and how one would get water for one's family if the tap stopped running, or ask yourself if you have the tools or skills necessary to till the soil if we had to... I believe it never hurts to ask oneself these questions, but particularly so in today's "precipice world".

Although I have stockpiled an array of supplies, I still don't feel completely prepared... I guess once you start preparing you never feel it's "enough".  I have a good water filter, but no stored water.  I have some fishing supplies, but very few food stores.

And Lizard, I think you're spot on with your interest in Chinese energy stocks.  I was frankly surprised by the depth of the correction in many of those equities recently, so I was a major buyer of ACH in the low $50s, some CEO under $180, PTR under $200, and even a little FXI (the China iShare) under $185.  China could be very volatile during the American economic crisis, as they hold A LOT of dollars, but the growth story doesn't falter even in the face of those challenges.  Valuations are generally pretty high among the Chinese equities, but I would say that nibbling on the commodity ADRs during each major dip could be a good long term strategy.  If we see Chinese ADRs dip low enough, for example in-step with the early stage declines in the US Indeces, then they could be amazing lifetime buys.  I'm not familiar with LDK.. thanks for the tip.  :)   The fact that I bought this last dip in no way suggests that I saw that as a bottom... just that there was a chance it was a bottom.  I could just as easily see CEO retreat back below $100 in a really bad US Dollar collapse, but then I would be taking a little gold off the table to purchase more.  :)

And finally, on Mr. Dines, I had heard of him but had not visited his website before.  Thanks for recommendation... I'll check him out.


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#8) On December 06, 2007 at 9:11 PM, ozlizi (< 20) wrote:


Hey Sinchiruna, 


Thank you for taking the time and

Thank you for sharing your voice.

I relate to your global outlook, and your thoughts on China help. 

Wishing you a blissful weekend



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#9) On July 13, 2010 at 4:21 PM, silverminer (30.17) wrote:

Looking back, I see that gold traded for $795 on the date of the above post, and silver was about $14.30.

In a couple of years, I'll come back to this post to see whether, indeed, gold and silver were different this time around.

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#10) On April 29, 2011 at 10:33 AM, AlbertaBorn (< 20) wrote:

Still looking pretty prophetic, as QE rolls over and the dollar is on the verge of being dropped as the major foreign reserve standard...

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