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XMFSinchiruna (27.97)

Gold Shines Brilliantly as the Ultimate Safe Haven

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August 09, 2011 – Comments (37)

My fellow Fools, Gold, as we speak is "deciding its new and elevated role in international finance".

http://www.fool.com/investing/general/2011/08/09/gold-shines-brilliantly-as-the-ultimate-safe-haven.aspx

Thank you for reading and reccing the article at the source (linked above). 

And in responding to a fellow Fool's reference to "gold bugs" in a comment below the article, I came across this gem from late-2009 that seemed especially timely:

http://www.fool.com/investing/general/2009/12/30/the-best-stocks-for-2010-silver-wheaton.aspx

Speaking of lunacy, and in the interest of intelligent discourse, could we consider burying the term "gold bug" once and for all as we approach the new year? I refute the label largely because of the illogical and derogatory associations that it conjures. From my background in anthropology, I know that prevailing attitudes are fluid over time, and my calls for $2,000 gold and $50 silver are no longer met with the same degree of dismissive incredulity as they were when I issued the very same projections back in 2007.

37 Comments – Post Your Own

#1) On August 09, 2011 at 5:35 PM, imobillc (< 20) wrote:


Safe heaven, that says it all!

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#2) On August 09, 2011 at 5:55 PM, ethwc (53.50) wrote:

Soon the history of hyper boom/bust will go from tulips to gold rather than to housing.  There is absolutely nothing innate in gold to justify the hyperinflation of its cost in recent months.  Watch out below!!!!!

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#3) On August 09, 2011 at 6:18 PM, Mega (99.95) wrote:

Refute means to disprove something with facts.  You are rejecting the term "gold bug", not refuting it.

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#4) On August 09, 2011 at 7:44 PM, XMFSinchiruna (27.97) wrote:

MegaShort

I refute your attempted correction.  :)

http://www.merriam-webster.com/dictionary/refute

See meaning #2: to deny the truth or ACCURACY of

And see synonyms: disallow, reject, repudiate.

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#5) On August 09, 2011 at 7:48 PM, richthegeek (< 20) wrote:

ethwc:

I'm not sure I see your reasoning. An ounce of gold still buys pretty much the same thing as it used to. The rise in the cost of gold is due to the fact that the dollar is loosing it's purchasing power. We've had well more than a decade of excess - living on credit and buying more than we can really afford. Now the bills are due and our nation is trying to print its way out.

Gold will certainly have its ups and downs, but I think the general trajectory will be up since I see no way the dollar can go but down.

My view is similar relative to the dollar - watch out below!

 Rich

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#6) On August 09, 2011 at 8:08 PM, pscholte (< 20) wrote:

I would like to propose a rule set for those wishing to make a comment:  (1)  you have to actually KNOW WHAT YOU ARE TALKING ABOUT (no, I am not shouting); (2)  if you are going to diss somebody about word meanings you have to KNOW WHAT YOU ARE TALKING ABOUT.  Sheesh!

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#7) On August 09, 2011 at 8:27 PM, XMFSinchiruna (27.97) wrote:

ethwc

I've seen warnings like yours ad nauseum over the years. The tulip parable was all the rage among those averse to gold back when gold first peaked above $700 in 2006 and then corrected into the $500s, and made the rounds again after gold surpassed $1,000 before correcting violently. Among other anecdotal drive-by assaults against gold, is forms part of an unimpressive arsenal employed by folks who generally do not wish to consider the topic in depth.

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#8) On August 09, 2011 at 9:01 PM, Bays (30.76) wrote:

Sinch, been buying anything lately?

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#9) On August 09, 2011 at 9:07 PM, XMFSinchiruna (27.97) wrote:

Bays,

Sure, but I'll also be quick to rebuild cash allocation into strength to defend against a potential correction. I know it's hard to imagine the equities going any lower, but if gold should initiate a sharp correction here shortly the would feel further pain. I'm not declaring there will be a correction, though actually I am hoping there will be one to restore more orderly dynamics to the bull market move.

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#10) On August 09, 2011 at 10:08 PM, Mega (99.95) wrote:

That's a solid piece of evidence, but I still disagree on the best usage of the word.

http://dictionary.reference.com/browse/refute 

 

“Meaning "prove wrong" dates from 1545. Since c.1964 linguists have frowned on the subtle shift in meaning towards "to deny," as it is used in connection with allegation.”

 

If you mean reject or deny, why not write those words instead?  Claiming to refute something sounds rather overblown compared to a more appropriate word.

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#11) On August 09, 2011 at 10:41 PM, Frankydontfailme (27.20) wrote:

Yawn Megashort.

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#12) On August 09, 2011 at 11:25 PM, ETFsRule (99.94) wrote:

Whenever the topic of gold comes up, people always talk about "inflation" and "printing money"... but these discussions usually don't evolve into anything other than sound bytes and political bickering. It seems obvious to this Fool that the correct approach is to conduct quantitative analysis, where the price of gold is compared to the US money supply. Unless you actually look at the numbers, you have no way of knowing whether gold has risen too much, too little, or just the right amount.

Luckily for us, Paul van Eeden has already done this analysis. Van Eeden is unbiased and politically disinterested: when he finds that gold is undervalued, he buys it. When it becomes overvalued, he sells it.

His analysis finds that gold was undervalued until some time around 2006. But since then, gold's parabolic rise has caused it to increase at a much faster rate than the money supply... and as a result, gold is clearly overvalued at the present time (it's approximately 33% overvalued right now, if I'm not mistaken).

The truth is on his site:

http://www.paulvaneeden.com/Gold

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#13) On August 10, 2011 at 6:46 AM, djemonk (< 20) wrote:

You don't stop being a gold bug because you're right.  You stop being a gold bug when you consider that our species doesn't have a need for this metal as money any more.  Money is a means of making the exchange of goods and services more fluid, and "money" is a darwinian type thing where a more useful form of money displaces an older, less useful type of money.

Gold is not the most useful way of transacting business, no one accepts it as payment for much of anything, ergo gold is not money.  QED.

Your call on the price of gold as a financial asset was prescient and your reasoning is spot-on, and does not make you a gold bug.  It makes you a savvy investor with specialized knowledge at a time when that knowledge is especially profitable.  Congrats on that, by the way, you were right.  But your continued insistence that gold is money makes you a gold bug and people will happily, and correctly, label you as such. 

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#14) On August 10, 2011 at 7:19 AM, outoffocus (23.59) wrote:

TMFSinchiruna and MegaShort 

You are refudiating the term. 

But I agree with you. Investing in gold makes you as much of a goldbug as investing in real estate makes you a housingbug and investing in stocks makes you a stockbug.  I'm no gold bug. I'm a gold investor.  Due to my youth and relative lack of wealth I missed out completely on some of the largest bull markets (and bubbles) in history.  I even missed out on buying gold at $300 simply because I didnt have any money to invest in it.  Now I've found something to make money in and a great expert that can give me insight into the industry and we have to be labled as "gold bugs".  I'm not a gold bug.  I'm more of a money bug because I like to make money.  And I would venture to bet that a majority of us here just want to make money too.

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#15) On August 10, 2011 at 7:23 AM, outoffocus (23.59) wrote:

His analysis finds that gold was undervalued until some time around 2006. But since then, gold's parabolic rise has caused it to increase at a much faster rate than the money supply... and as a result, gold is clearly overvalued at the present time (it's approximately 33% overvalued right now, if I'm not mistaken).

Is this analysis based on the US money supply or the global money supply?  I only ask because the majority of gold's rise is not from domestic demand.  Its mostly from global demand.  People are buying gold in Europe because of the debt crisis and people are buying gold in China and India because the US dollar is losing value and they are trying to protect their wealth.  So if the analyst is only basing the price of gold on domestic demand I'm afraid he's missing the big picture. 

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#16) On August 10, 2011 at 10:09 AM, XMFSinchiruna (27.97) wrote:

ETFsRule

A long time back you had asked me to take a look at his research, and so today I finally toook a peak.

I have to admit I found some of his commentary about gold very interesting.

But he runs afoul early in the presentation of his quantitative methodology: "Two factors always influence the relative value of gold in any currency. The first is the increase in the amount of currency (inflation of dollars) and the second is the increase in the amount of gold (inflation of gold)." While it may seem very very appropriate on the surface to restrict notions of value to the relative supply of respective currencies, that would ignore entirely the role of demand in determining value through its interactions with supply. Right now we have a world that effectively abandoned gold, and gradually more and more folks are realizing they might have been rather hasty in that divestment. No matter what happens to the supply of USD in a given year, some number of folks are going to initiate exposure to gold because cracks are showing up in the entire fiat system. A supply-side model like his may suffice very well over the VERY, very long-term ... like on the order of decades and centuries, but for navigating a particular bull market as an investor I find it completely inadequate.

Also, this portion of his methodology is highly problematic and subjective: "But for this to work we need to establish a time at which gold was priced correctly. This means we have to go back to the Gold Standard and work forward from there."

There are other problems:

what happens when the all-in cost of gold production exceeds his model's calculation of theoretical value, as it is incredibly close to doing?

As with Alex Dumortier's attempts to tackle the topic from a purely quantitative stance, what of all the relevant factors and developments that are ignored by the approach? So U.S. debt has no bearing on the price of gold except as reflected in its impacts on M3? A meltdown in Europe has no bearing on the "value" of gold as priced in USD? I think in order to make quantitative methods look neat and tidy, practitioners routinely opt to ignore entire swaths of meaningful and relevant information. I will say, however, that VanEeden's methodology is preferable to Dumortier's reversion to the mean thesis, which ignores everything in the world except historical prices. But I will continue to stick with my own hybrid methodology for navigating the ongoing bull market, relying firest and foremost upon keen observation of macroeconomic developments in real time and the oncoming scenarios prescribed thereby, careful observation of supply and demand dynamics, vigilance of all relevant data, and a smattering of technical analysis as appropriate.

If adhering to a quantitative model means I would have had to divest my gold exposure in 2006 at $700, then all I would have today would be a mountain of regret for having missed the investment opportunity of a lifetime. Ultimately, that places the final nail in the model's coffin from my perspective. But thanks for bringing him to my attention. I will go back and read his commentary more fully, as I enjoyed what I did read in a couple of his background articles.

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#17) On August 10, 2011 at 10:17 AM, XMFSinchiruna (27.97) wrote:

MegaShort

This definitely is not worth my time, but I did not employ the word to invoke the meaning "to deny" as an allegation. From that same original 16th century derivation you cite, I employed the original meaning: to "beat back" or "strike down". It's a powerful word, and it was precisely the correct choice to convey my meaning. I don't mind being corrected when it's warranted, but do be prepared to be right. One can look pretty foolish when they lose a countering challenge as you just have.

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#18) On August 10, 2011 at 10:52 AM, adprofessor (95.06) wrote:

Primero releases second quarter results. Conference Call in a few minutes at 11 EST. Details below.

Up as I am writing, but still not trading at 1.5 NXG. From the release, Primero still sounds positive about the merger.

http://tmx.quotemedia.com/article.php?newsid=43737470&qm_symbol=P 

Conference Call and Webcast Details

A conference call will be held on Wednesday, August 10, 2011 at 11:00 a.m. Eastern Time to discuss the second quarter operating and financial results.

Participants may join the call by dialing North America toll free 1-866-946-0484, or 1-646-216-4773 for calls outside Canada and the U.S., and entering the participant passcode 9664030#.

 

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#19) On August 10, 2011 at 11:14 AM, Mega (99.95) wrote:

The 16th century usage is archaic, which is why 'beat back' or 'strike down' is not listed as a current meaning in Merriam Webster or Dictionary.com.  It is only listed as part of the etymology from refutare.

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#20) On August 10, 2011 at 11:22 AM, Frankydontfailme (27.20) wrote:

Sorry for newbie question, how does the merger work in terms of holders for primero versus holders of nxg? I thought it was only nxg holders now....

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#21) On August 10, 2011 at 11:27 AM, XMFSinchiruna (27.97) wrote:

MegaShort,

give it up ... Merriam Webster supplies an ample list of synonyms from which I am perfectly justified in selecting my intended meaning, particularly where such usage is fully supported by the etymological record. You may not "approve" of the usage, but that's purely your own problem.

Show some respect ... my time is valuable.

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#22) On August 10, 2011 at 11:29 AM, XMFSinchiruna (27.97) wrote:

Franky,

The two stocks will continue to trade independently until the deal closes. At the close, every share of P will be exchanged for 1.5 shares of NXG.

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#23) On August 10, 2011 at 11:35 AM, Frankydontfailme (27.20) wrote:

Thanks ( I didn't realize the merger was incomplete).

Unrelated, as low silver can bring gold price down, shouldn't elevated gold bring silver up? Or is it a chicken/egg thing that should mostly be ignored in the short term? I'm leaning towards the who knows, but am buying some silver at these cheap prices.

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#24) On August 10, 2011 at 11:49 AM, XMFSinchiruna (27.97) wrote:

Yes, continued strength in gold will stretch the slingshot, and engage upward pressure on the silver price.

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#25) On August 10, 2011 at 12:00 PM, outoffocus (23.59) wrote:

Dang I thought I solved the conflict. lol  So much for trying to be a peacemaker lol.

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#26) On August 10, 2011 at 12:23 PM, fndr489 (81.38) wrote:

Sinch,

I thought you would find this article interesting.  There is no bubble here in Lubbock when everyone is selling their gold while it is still rising:

 http://www.kcbd.com/story/15239797/locals

From a ''Lubbockite'' fan,

Justin

(does the "-ite" make me a mineral?/sarc)

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#27) On August 10, 2011 at 12:31 PM, ETFsRule (99.94) wrote:

outoffocus (27.83) wrote:

Is this analysis based on the US money supply or the global money supply?

Yes. And because gold is priced in dollars, this 1:1 comparision works just fine.

People are buying gold in Europe because of the debt crisis and people are buying gold in China and India because the US dollar is losing value and they are trying to protect their wealth.

This is an interesting point. Now, I'm sure it's true that some people overseas are moving out of dollars and into gold. Each time someone sells US dollars to buy gold, this should cause the price of gold to increase, along with a corresponding decrease in the dollar index. However, this isn't what is happening. The dollar's purchasing power has only dropped a relatively small amount since 2006, while the price of gold has skyrocketed. The historical correlation between the two has broken down recently.

TMFSinchiruna (99.47) wrote:

"Also, this portion of his methodology is highly problematic and subjective:"

But Chris, your methods are completely subjective!

"what happens when the all-in cost of gold production exceeds his model's calculation of theoretical value, as it is incredibly close to doing? "

Then it would not be profitable for miners to keep digging up more gold.

"So U.S. debt has no bearing on the price of gold except as reflected in its impacts on M3?"

Maybe indirectly. If you know of a way to translate the national debt into a "fair" price for gold, I would love to hear it.

"If adhering to a quantitative model means I would have had to divest my gold exposure in 2006 at $700, then all I would have today would be a mountain of regret for having missed the investment opportunity of a lifetime."

This is a very overconfident statement, to say the least. You could have made the same types of claims at the peak of any bubble. To paraphrase: "gold has risen astronomically over the past 5 years... therefore it can't be in a bubble!". This is not very convincing if you ask me.

Lastly, the problem with your macroeconomic approach is that you haven't provided yourself a way of identifying a peak in the price of gold. To illustrate this, just look at what happened in 1980. At that time, gold was clearly overvalued according to van Eeden's model. And, as he would have predicted, it took quite a beating as it fell from that peak.

Now, which macroeconomic figures would you have used to identify the 1980 peak? Did we suddenly balance the budget and start paying off the national debt in the early 1980's?

Of course not.

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#28) On August 10, 2011 at 12:57 PM, silverminer (31.38) wrote:

ETFs: As I have stated repeatedly over the years, there is no way I would have stared Volcker's interest rate campaign squarely in the face without taking something off the table on the way up. I can only speak in hypotheticals here, but I'd like to think I would have had insight to leave little to nothing on the table as those interest rates approached 20%!

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#29) On August 10, 2011 at 1:01 PM, silverminer (31.38) wrote:

ETFs,

You missed the poinbt about mining costs. I refer to the all-in cost exceeding his model's theoretical price, not the spot price. Mining gold remains incredibly lucrative, even as all-in costs threaten to surpass the guy's theoretical "right" price for gold. If all-in costs trend above his model, it will add further evidence that his model does not reliably predict a "right" price for gold, because you can not have a "right" price remaining beneath the cost of production.

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#30) On August 10, 2011 at 1:13 PM, silverminer (31.38) wrote:

ETFs,

Maybe indirectly. If you know of a way to translate the national debt into a "fair" price for gold, I would love to hear it.

I'm not the one offering up a quantitative model and claiming it has real-world bearing on where gold prices would be if markets were perfectly efficient. The point is, condensing the gold price down to a simple formula requires an oversimplification of inputs, even ignoring monumental inputs like sovereign debt.

As for identifying a peak in the price of gold, I am not laying claim to a magical ability to call the ultimate top. But I think it has become abundantly clear that my $2,000 price target was adequately conservative to bring us through the less frothy portion of the bull market. I will adjust my investment strategy appropriately as the trend matures, and will share those adjustments with the community.

Your paraphrasing above is not an accurate representation of my message, and therefore I will skip that point.

The bottom line remains: I have enjoyed tremendous success navigating the past 6 years of this bull market by utilizing my hybrid analytical methodology; none of which would have been possibly had I shaped my actions around Mr. VanEeden's model. If you prefer to rely on that model to continue to avoid gold as it advances year after year; be my guest. But please do not disparage my methdology until you have some indication that it has not resulted in a successful navigation of the bull market trend.

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#31) On August 10, 2011 at 1:49 PM, golfer121501 (< 20) wrote:

Thank you Sinch for all of your hard work and the tremendous knowledge you freely distribute to this community.  It is beyond me  why others argue over your methodologies when yours work exceedingly well!  Thanks again.

golfer

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#32) On August 10, 2011 at 6:37 PM, SN3165 (< 20) wrote:

So, Sinch.... whatcha buying ? :-)

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#33) On August 11, 2011 at 12:00 AM, MGDG (36.49) wrote:

In #15 outoffocus questions whether Van Eeden's analysis was based on U.S. or global money supply. In #27 ETFsRule responds that it was U.S. money supply because Gold is priced in U.S. dollars. Gold should be bought and sold in the local currency of the country in which the transaction took place, thereby making use of the global money supply more useful.

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#34) On August 11, 2011 at 12:18 PM, ETFsRule (99.94) wrote:

MGDG (95.82):

Van Eeden writes:

"Conclusion
We have shown that the gold price is dependant on the currency in which it is quoted."

and:

"The gold price as quoted in US dollars depends heavily on the US dollar exchange rate against other currencies. This is logical and obvious, but often overlooked."

Basically, other countries can print as much money as they want, but this would essentially have no effect on the price of gold (as denominated in US dollars). And that's the only issue we are talking about here - whether or not gold is fairly priced, in terms of USD/oz of gold.

If you bring these other issues into it, then what you are really asking, is whether or not the dollar's exchange rate is accurate in terms of dollars per Japanese yen, or whatever. But that's a different issue, and I don't think we need to question the efficiency of global currency markets.

If you want the longer explanation, he goes into a very long and very detailed explanation of these very issues in some of his older articles. Please take a look at these if you are interested:

http://www.paulvaneeden.com/Understanding.the.gold.price

http://www.paulvaneeden.com/Making.Sense.of.the.Gold.Price

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#35) On August 24, 2011 at 6:50 PM, ethwc (53.50) wrote:

Rich,

You say that gold now buys about what it always has.  However, it took about 18 ounces of gold to "buy the Dow" a few years ago and now takes about 8 ounces.  I will start to buy gold when it drops to about 900 or so.  That should be later this year.

 

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#36) On August 24, 2011 at 6:55 PM, kdakota630 (29.81) wrote:

ethwc

I will start to buy gold when it drops to about 900 or so.  That should be later this year.

Best of luck with your prediction.  My prediction is that if you're actually waiting for gold to hit $900/oz (and I mean ever, not just in the next 4 months), then you will have badly missed the boat on gold.

Let's see who's more accurate on January 1, 2012.

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#37) On June 28, 2013 at 4:37 PM, ethwc (53.50) wrote:

Well, if the present trend continues, my prediction of $900 an ounce will come to fruition; granted a couple years later. I am holding onto some cash just in case it makes that level as it would then seem to be of worth. On the other hand, gold remains of relatively little intrinsic worth since its commercial uses are very limited making it a questionable commodity. As an investment tool, one is faced with a material that continues to increase in available amounts (mined ounces are in the tons a year) and whose primary value comes from a perception of scarcity. If I buy, I will watch very closely rather than buying an holding for a long long time as I do with companies that continue to produce new value.

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