binve (< 20)

53 Comments – Post Your Own

#1) On June 15, 2009 at 3:24 AM, binve (< 20) wrote:

Money needs to be a medium of exchange. And as such should have reasonable consistency among measures of exchange (e.g., the Dollar or the Euro). So the first part is true. Snickers Bars are consistent with respect to the exchange rate with US Dollars (e.g. the Snickers/USD exchange rate). You can go into any Walmart or convenience store and pick up a medium Snickers Bar for $0.99. So why can’t you exchange a stockpile of Snickers back to a convenience store for say a gallon of gasoline?

Because simply being a medium of exchange is not enough to define money. Money must exhibit other properties: 1) Money must be valued equivalently by all parties in the exchange, 2) Money must have enduring value, 3) The supply of money needs to be regulated, 4) Money must be liquid, 5) Money must be fungible. So lets step through these one-by-one and apply them to our Snickers example

1. Money must be valued equivalently by all parties in the exchange. Lets say Joe and Linda both love Snickers and Joe has 100 Snickers and Linda  has a lawn mower. Joe and Linda decide to make a trade for 90 Snickers. Now Joe needs gas for the lawn mower and Tim has some gas, Joe offers Tim 10 Snickers for a gallon of gas. However, Tim is a diabetic. What good are Snickers to him?

2. Money must have enduring value. Joe has 100 snickers and is about to make the lawn mower deal with Linda. So Joes walks up to Linda, Snickers in hand, and then they start discussing lawn mower maintenance. It is a very sunny day and by the time the trade is ready to happen, Joe finds that all of his Snickers have melted

3. The supply of money needs to be regulated. Lets say that, despite points 1 and 2, Snickers does catch on as money. Well M&M/Mars has just realized it has a way to mint money. So what if it flooded the market with a new supply of Snickers? The market would be come saturated, driving down the price (much more supply vs. demand)

4. Money must be liquid. Let’s face it, carrying around cases of Snickers to buy groceries is a bit insane. Nor could you ever have a “digital” currency based on Snickers (what is the point of eating a digital candy bar, where is the store of value in that).

5. Money must be fungible. This may be a term you are unfamiliar with. Fungibility is the property of a good where the units are capable of mutual substitution. i.e. A single US Dollar is equivalent to every other US Dollar in existence. A pound of 0.9999 Oxygen-Free High-Conductivity (OFHC) Copper is equivalent to every other pound of high-grade OFHC Cu. But unless the Snickers bars are completely pristine they are not fungible (e.g. Is a brand new unopened bar fungible with one that is opened, with a bit missing and past its expiration date?)

So this should scuttle the dreams of any of you scheming up a “Snickers-based economy”. But moreover, it should really call into question what can be used as “money” or as a “monetary asset”. A share of common stock exhibits many of the properties above. But what about a home? Is a house fungible? Is it liquid? What about a Credit Default Swap (CDS) or a Collateralized Debt Obligation (CDO)? I am not trying to tell you what is money and what is not. I have laid out the properties that money and monetary assets should exhibit. You should think about those properties and then think about the assets that are held by your favorite companies or by financial institutions when they make loans or secure debts against those assets.

The US Dollar / Fiat Currencies as Money.

So I think we all agree that the US Dollar is Money. As is the Euro, the Franc, the Yen, etc. It displays all of the properties described above. But the money is not simply the notes that are issued by the governments and Central Banks (which is “token money”). The “money” of a nation is defined as its money supply. The “money” that is defined by the US Dollar is a bit more complicated that you might believe. The Federal Reserve issues (creates of thin-air) what is called base money. Banks (which are legally part of / have access to / and grow the money supply) increase the money supply by taking the deposits of customers and using it to lend to other people. Banks, by Federal rules, are required to keep a fraction of the deposits on their balance sheets as cash and can loan out the rest. This is the basis of fractional reserve banking and is the basis of our entire banking system. But not only the US, all over the modern world.

Okay, that’s all well and good, the Fed has complete control over the base money supply, and banks act as arms of the federal banking system and increase the money supply. But who decides what the “value” of the Dollar is?

The US Dollar / Euro / Yen, etc. are all examples of what is called “fiat currency”. Fiat money is legal tender because the government has decreed this to be the case. Fiat comes from Latin and means “Let it be done”.  The decree of value is a literal one. But the basis for this decree is backed from the fact that the government collects taxes from its citizens. Quite simply, fiat money is a tax credit. The value of the US money supply exists as a claim on the future tax of US citizens. Remember this, we will come back to this one.

Why Gold is Money.

Gold is money because it is a medium of exchange and exhibits all 5 attributes described above. And I can just hear some of you now “Can you go down to Wal-Mart and buy a Snickers bar with gold”. The answer is no, you cannot. The US government no longer recognizes gold as an official currency for all debts public and private. But does that make it any less valid as money? If you said yes, I would first ask you why?. Next I would point out that the Euro cannot be used to settle American debts, but does that invalidate it as a currency? A rebuttal would be, well you can go any Forex counter in the world and for a fee, exchange most major currencies with each other. And I would say: precisely! And in every city in the world, you will find a seller who will exchange gold for local currency.

Before I continue, let me say that before I read TMFSinchiruna’s blog (a couple of years ago, back when he was just Sinchiruna :) ), I thought gold was stupid. I had all of the same preconceptions and misconceptions that people typically have. I was born after the gold convertibility window was closed by Nixon in 1971. I have always lived in a world when gold was not an official currency. I am not a gold bug in any way. But I have gone through the process from being a skeptic to seeing the value in gold.

Gold is a currency, not a commodity. This is not strictly true, it is mostly true. The gold supply feeds three markets mainly: Jewelry (~65%), Investment (~20%) and Industrial (~15%). However, a very large portion of “Jewelry” demand really is investment demand. Indian and Asian cultures in particular use their jewelry as savings, and accounts for a very large portion of the overall jewelry demand.

It is a currency first, and a commodity only in a very distant second. Some of its properties have beneficial industrial uses: it is non-reactive and non-corrosive in many environments which make it good for dental fillings, it is a very good conductor and is used for high grade electrical connectors or contacts, and it has useful thermo-optical properties so is sometimes used as the outer layer in thermal shields for spacecraft, and yes, I would know :). But each of these uses can be filled with more cost-effective alternative that yield similar performance (polymer epoxies for dental fillings, Silver/Copper/or even conductive composites for high-conductivity electrical connections, and First-Surface Aluminized Kapton or Copper Foil for similar thermo-optical properties).

But it is precisely because of gold’s other properties (valued equivalently by all parties in the exchange, has enduring value, supply is to be regulated, is liquid, is fungible.) and the fact that it is NOT as industrially useful as other metals that makes it ideal as a currency. It is rare. New mining supply adds only 0.25-1.5% per year to the above ground supply.

So lets get back to the Treasure of the Sierra Madre quotes.

“Gold in itself ain't good for nothing, except for making jewelry and gold teeth.”

“A thousand men, say, go searchin' for gold. After six months, one of them's lucky: one out of a thousand. His find represents not only his own labor, but that of nine hundred and ninety-nine others to boot. That's six thousand months, five hundred years, scramblin' over a mountain, goin' hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the findin' and the gettin' of it.”

As I just said above, gold is a currency because it is used overwhelming as a store of value, and not as an industrial commodity. It is rare. Rare enough so that it is precious, (much rarer than iron or even copper), but not too rare (such as diamonds), and it is easily made into different sized denominations (unlike diamonds much are much more difficult to subdivide).

Among all of the materials in this world that could be appropriate for monetary uses, gold exhibits the best of all of the desired properties of money. Which is why it has been money for over 2600 years.

Okay, so Gold is Money, The Threats to Our “Money” (the US Dollar and all Fiat Currencies), Why I Made the Statement that Gold is One of the Few Legitimate Bull Markets, and What’s the Upshot?

Gold is money. Based on all of the evidence above, I am making that statement. It is irrelevant to me or to the world at large whether you personally accept this or not. The world has used gold as money for thousands of years, and I have a sneaking suspicion that it will continue to do so long after all of us are dead. It is a rare yellow rock, under nobodys jurisdiction, under nobody liability, sitting there quietly and quiescently preserving value. That is what gold does, it stores value.

Gold does not pay dividends, gold does not multiply, gold does not make the world go round. Gold holds value. That’s it. So gold is not a way to get rich. Let’s be very clear about this point. Gold is a way to be NOT POOR. Like I said, it holds value.

Gold has been a currency since ~600 B.C. 2600 hundred years of history as a currency. But let's not even go there. Lets just stick with the US currency just to compare recent apples to apples. Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt.

Now I said the US Dollar is backed only by debt. Remember above that the US Dollar (or more specifically the US money supply) derives it value from the fact that it is a claim on the future tax of US citizens. This is a finite amount (the maximum of course being 100% tax on all citizens). But the point to realize that this is conceptually finite. On the other hand, the Federal Reserve has no limit as to the amount of fiat dollar it can produce.

Increasing divisions (more fiat dollars created out of thin-air) of a finite resource (the future taxes the US money supply is claiming against) make each division, both old and new, by definition less valuable.

This is the definition of monetary inflation.

Now in order to fully describe all of the issues and to illustrate the full scope of the problem, this blog would go on for another 20 pages. I literally don’t have the time or the energy to talk about it right now. I will have to save it for another post. But what needs to be discussed is:

- The Federal Reserve
- Chairman Bernanke and the “lessons” he learned from studying the Great Depression
- Deflation
- Deflation-Scares
- Stagflation
- Monetary Inflation
- Price Inflation (which is NOT inflation, it is a by-product of monetary inflation)
- True Money Supply (TMS)
- Monetary Inflation and Price Inflation Cycles and Time Lags
- And much, much more! Call now, operators are standing by!

I have talked about all of these issues in one form or another in my binv271828 portfolio and in comments all over Caps. If you want to pursue the topics further (and I highly encourage that you do) please read these blog posts:

- Steve Saville: Market Value, Money and Credit
- Quantitative Easing Explained  
- Steve Saville: Why We are Gold Bulls
- Steve Saville: Money Confusion and Inflation/Deflation
- Zeal: Big Inflation Coming 2

What all of these posts talk about and discuss is what I believe (again, this is all simply my opinion, nobody has a crystal ball on this one) to be the biggest threat to our “money”, and that is inflation.

I believe that every signal that the Fed has given, both in rhetoric and action, is that it will try to spur the economy / avoid economic collapse by monetizing the debt of the Federal Government and all the Financials that made bad mortgage bets. The newest euphemism for this activity is Quantitative Easing. And this will be an unprecedented transfer of private debt to public debt (largest in the history of mankind). Bond rates are already beginning to signal the inflationary hazard of this policy DESPITE the fact the one of the main goals of QE was to put a floor under bond prices (put a cap on bond rates).

An argument that I have heard going around is that the US will be in a relatively stronger position as the currency devaluation wars goes down. The US is not the only economy in trouble. Far from it in fact. Nearly all Central Banks will be engage in a currency devaluation war. The main purpose of which is to make the debt servicing burden easier for all of the interest paid on Treasuries held by foreign governments. Whether the US comes out on “top” in this “strongest among the weak” battle (which I remain skeptical of, considering the size of the US debt the size of the ongoing QE programs) is irrelevant from my point of view.

Because having a currency that is “stronger” than your competitors while you are devaluing your own, still puts your currency in a weaker position relative to a currency that is not being devalued.

And what currency would that be? Gold.

This is the ultimate reason why I believe that gold is one of the few legitimate bull markets. Because I believe the US and most other Central Banks will try to inflate their way out of this mess. The US Dollar will undergo a huge devaluation in both real and nominal terms. And gold utility and true value comes during times of economic crisis (which I believe we will have a lot more of) and during times of weak currency confidence.

There is still a lot of talk about “deflation”. And while I agree that there will be price deflation in a number of assets (housing prices I think are still too high), this in and of itself is not true deflation. Prices in any asset class can rise and fall due to supply/demand considerations. As I said above, both inflation and deflation are monetary phenomena. In fact much of the recent price deflation in assets has been occurring among periods of extremely high growth of the TMS (monetary inflation). And if you read the Steve Saville links I have above, you will learn about the time lag between monetary inflation and price inflation. I would caution you to be very careful and to think very critically about the argument any author makes when they use monetary measurements when talking about deflation. Remember the 5 characteristics above that any monetary asset must exhibit.

Gold is simply a currency that holds its value. That’s it. Nothing more, nothing less. It shines (pun sort of intended) when it becomes obvious that there is a serious crisis with the value of a nations currency.

Moving on to some Technical Analysis of Gold, Silver and GSMs

Remember, as I said in the beginning, I do not trade gold. This will not be very detailed microcount type chart. I am looking at very long term trends and capturing the general direction for gold. As I have said before, Gold is in a legitimate bull market, and I am not interested in shorting or trying to time a legitimate bull market. I am fundamentally engaged and want to be part of the whole rally up.

Gold, The Really Long Count

From above: “Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt. “ (em).

Here is the count associated with these actions.



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Notes on these counts:

This long term action of gold really tells this history of the “falling out of favor” / “government releasing the shackles of economic responsibility” that gold enforces. And because of all of the inflationary policies that have been heaped upon inflationary policies, I believe gold is in a very long term secular bull market.

Again, I do not ask you to believe me. I am sharing my opinion. Nothing more, nothing less.

In the grand scheme, I think we are at the beginning of a very big {3} wave which will last several years. Since the peak in March 2008 to the bottom in Oct 2008, there was a 34% correction (nearly 45% of the entire move from 2000-2008). So the count I show is that the large 2 of {3} correction is over and we are now into 3 of {3}. The recent price action is unclear. We could be in a small correction (2 of 3 of 3 of {3}) or a larger correction (C of 2 of 3 of {3}).

Either way, I don’t care. I welcome any opportunity to buy on a pullback.

Dow-Gold Ratio

Here is another important classic measurement, the Dow-Gold Ratio (DGR).



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The Dow-Gold Ratio is exactly what it sounds like, the Dow priced in ounces of Gold. What is important to note is how unstable the DGR gets starting in 1934 and then even moreso starting in 1971. My personal feelings on the ratio? I believe on this cycle, given the size of the problems and given the governments plans to try to “fix” the problem, the DGR could go to 1, and I wouldn’t be at all surprised if it goes lower than that. So what might that look like? Maybe the Dow reaches 4000 and 4000 $/oz of gold. Or maybe the deflationists are right maybe it 400 and 400 $/oz. But I doubt that will be the case. I think inflation will prevent the price of assets (such as the Dow) from going as low as they would otherwise go, but I expect the price of gold, which is a hedge against inflation and economic shenanigans to go much higher.

Silver

I know I have spent the majority of the post talking about gold. I would like to talk about Silver in more detail, but I am simply running out of steam. Silver is another monetary metal. Silver though has a very wide range of industrial uses. As such it straddles the line between a currency and a commodity. However Silver has some very interesting facts: Silver for a long time was not recycled (unlike gold which has been recycled for a long time in industrial applications). This is not true anymore, it is being recycled much more now. But as such, a large portion of silver is literally sitting in landfills in various chemical states. And because there is still so much industrial demand, the amount of silver sitting in vaults as a monetary metal is lower than the amount of gold. This makes Silver a bit of a conundrum at times. It whipsaws much more than gold. When gold sells off, silver sells off harder. But when gold rises, silver rises much faster.

I believe Silver is in a secular bull market much like gold. And the commodity correction last year gave an excellent entry opportunity. And I think even now is an excellent entry opportunity. Will silver fluctuate? You better believe it. But this is another investment I am fundamentally engaged in.



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Notice how deep the retracement was during the commodity correction. It was nearly 72% of the entire bull move up from 2002. I honestly believe both gold and silver are in bullish continuation phases of their overall secular bull markets.



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The Gold-Silver Ratio (GSR) is still trending down, which is indicative of Silver catching up to gold from relatively more oversold conditions. My $0.02. As much as I would never short gold, I would short silver even less. That’s just me. I am sure there are people who will trade Silver short, and do it successfully. And I wish them luck (I honestly do). But I would never do it with my money.

Gold and Silver Miners (GSMs)

There are several ways to measure the performance of Gold and Silver Miners (GSMs). You can obviously do it on an individual stock basis. I prefer looking at the HUI (the AMEX Gold Bugs Index). The reason I prefer this one is that it is a basket of miners that do not hedge their production. I think it is a better proxy for Gold / Silver / GSM performance than say the GDX or the XAU.

Let me also say there are many other ways to value miners. Including mining and extraction costs, ore grades, Measured Reserves, Indicated Reserves, Total Cost of producing Gold Equivalent Ounces (GEOs), Revenue from Mining By-Products (Copper, Zinc, Lead, etc), Royalty Revenue, etc. But this is beyond the scope of this post. And I would just end up pointing you to TMFSinchiruna’s blog anyways :) He has written several good valuation posts as well as valuation articles that get published on the Fool main page



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The HUI/GOLD ratio is showing that during the commodities correction, GSMs became extremely oversold relative to gold. It this the count of this ratio is showing that GSMs are a very gold value relative to gold at the present time. Aditionally GSMs historically tend to lead the price of gold, both up and down, and the strength that miners have been showing is (to me at least) a very bullish signal.

My Thoughts on Gold / Silver / GSMs

Let me make my position on Gold, Silver and GSMs very very clear. These to me are investments. I have a lot of all three  in my long term investment account. CEF is my biggest holding. I sometimes trade GSMs (from the long side only). I would NEVER short gold or silver. Ever. Period. So when I look at the long term counts and these corrective patterns are unfolding, they could currently still be in a correction and go down. As far as I am concerned, that is great! Because it gives me an opportunity to buy lower.

So if you are looking at my charts and are trying to glean trading advice, I suggest you look somewhere else. Because I am fundamentally engaged in gold and silver. I think they are going much higher. And they will cease to be attractive investment only and not before the US economy transitions from a consumptive based to a productive based one, the dollar devaluation stops or slows dramatically (after the Dollar Index reaches a much lower level) and the FED fiscal responsibility.

Oil

Here are a few charts of Oil, mainly because I said I would. I am too tired to write anything meaningful right now :) But I have written about oil supply in several of my older blogs (see January timeframe). The situation right now is not driven by supply/demand (IMO). Supply reports have been coming in pretty much as expected the last 2 months. What this looks like is a mania again. There is a lot of talk of “green shoots” in the economy and a 2nd half recovery … blah, blah, blah. I call BS on all of that.

Oil is trading as if the recovery was expected, and I am highly dubious. Oil has nearly hit the targets that I set out in January ($77/bbl) which is 38% retrace of the whole drop down, but it has hit them much faster than I thought it would. I think oil will pullback when the rest of the market does.

In the meantime, oil will probably put on one last show before the correction. Oil likes to extend a lot, nor does it like to stay within trendlines. I would just expect the unexpected here :)

As far as a long term investement: I am highly bullish on oil. I think we are in a long term secular bull market with oil just like we are with gold. I believe all commodities will do well as inflation hedges.



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Of course, as always, all of this is just my $0.02 .... :)

Conclusion

Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

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#2) On June 15, 2009 at 4:10 AM, ati2ud (21.58) wrote:

this in an outstanding post.  thank you for sharing your thoughts and information

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#3) On June 15, 2009 at 4:49 AM, kaskoosek (98.23) wrote:

Binve

 

I love the snicker analogy.

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#4) On June 15, 2009 at 5:29 AM, ATH001 (< 20) wrote:

I usually just Rec and keep quiet, so others will not realize what a big fool I am when compared to most of the other people here. I have to tell you that I am very greatful for your massive effort here, Outstanding as #1 above describes it, just begins to express what I think about your selfless effort. Thank you,

 Luis in Africa

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#5) On June 15, 2009 at 7:33 AM, whereaminow (73.77) wrote:

Binve,

It's an excellent post.  I congratulate you.  I also invite you to read, if you haven't already, The Ethics of Money Production by Jorg Hulsmann, available as a free pdf here. It is a full spectrum discussion on the history of money as well as the ethical implications of various forms of money creation.

I'd like to add that the supply of money was regulated by market forces until governments abrogated competition in the supply of money. Governments had to force everyone out of the minting business since governemnt coins were always suspect.  This phenomenon of intentionally cheating the people by debasing the currency is first noted historically in the writings of Nicole Oresme in 1371 (Treatise on the Alterations of Money).  [I find it amazing that a French scholar over 700 years ago writing by candlelight had more knowledge of monetary policies than 99.9% of Americans armed with Internet connections.]  This process was called Inflation.  In fact, up until Keynes, inflation meant expanding the money supply beyond what the market needed.  Price rises were a natural and predicatable result of this manipulation.  Of course, no government wishes to admit that it cheats its people.  Therefore, they now blame "inflation", defined as rising prices suddenly, on wayward Capitalism.  With this knowledge, we start our way down the rabbit hole and end up an Anarchist on the other side.

Again, excellent post.

For more on gold and silver prices, as well as detailed reports on miners and insightful columns, visit 24hGold.

David in Qatar (is my tag line is getting popular or is this coinkydink....)

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#6) On June 15, 2009 at 7:34 AM, PrestonCheek (35.57) wrote:

binve, excellent work brother.

 

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#7) On June 15, 2009 at 8:10 AM, devoish (98.76) wrote:

Binve,

Great post, so thank you and you get a rec from me.

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#8) On June 15, 2009 at 8:11 AM, dudemonkey (57.40) wrote:

+1 Rec.  Thanks for this research. 

My initial reaction is that I do, indeed, disagree with you given the same information.  I don't believe buying gold to be investment because there's no way to really tell what will drive the price.  It's not subject to supply and demand rules because it's not used for much. As far as I can tell, the demand comes largely from fear/speculation/lack of faith in fiat currency.  I suppose one could use that as the demand driver of gold, but I don't see too many ways to measure that (other than the price of gold).

I'd much prefer to buy commodities that are getting more scarce rather than one that is getting less scarce.

 

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#9) On June 15, 2009 at 8:53 AM, portefeuille (99.75) wrote:

spot gold in EUR

(I think it fun to toggle the "in Euro" box and hit "Anzeigen" (Show) and notice how suddenly the weak dollar early 2008 peak appears!)

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#10) On June 15, 2009 at 9:04 AM, Londamania (61.01) wrote:

Great post Binve - as usual :)  Was perusing internet sites a few weeks ago investigating the actual buying of gold and...it's a bit overwhelming...the main choices are gold coins or gold bars...is one generally preferred over the other?  At current prices around $940 is a markup of about $20-$30 the best you can hope to get away with?  Generally interested in any tips on the actual buying of the stuff...looking at an investment of between 10-20 oz of it.  Is buying a gold bar from an internet site say bulliondirect (selling today at $957) good/bad/indifferent in your experience?

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#11) On June 15, 2009 at 9:08 AM, portefeuille (99.75) wrote:

it fun

it is fun

great post! don't worry too much about your dollar ...

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#12) On June 15, 2009 at 9:24 AM, Quantemonics1 (99.70) wrote:

A+ post!

I am printing a hard copy to keep all the information handy.  Lots of interesting charts and ideas, although I have not read it entirely yet.

Gold is a very complicated animal however, and most of the arguments by bulls right now revolve around "long-term" macro-economic, hyperinflation arguments that may not prove correct for another 5-10 years.  How many investors will hold gold through large losses or years of no change?  Not many people I know were willing to own gold in large amounts when it was down in the dumps around $250-$300US an ounce like I did, mirroring today's situation where few are prepared for a steep price drop in the metal.

The biggest problem I have with the long-term charts of gold and oil herein, involve the absent and necessary adjusting for inflation, changes in the U.S. Dollar's value (local currency) and changes in the supply and demand of M-1 or cash in circulation.  Plus, few investors understand the perspective difference of 5-year chart as opposed to a 200-year one.  The picture changes dramatically when accounting for real world wealth changes over different time periods.

Plus, right now there are competing "inflation" hedges that are dirt cheap, that no one wants to own.  Why not invest in them, and actually make money off the coming inflation, vs. just keeping up with it, which the price of gold will probably do over the next 5-10 years?

My bearish view on gold and silver over the next many months is based on simple supply/demand analysis and understanding how investors will react and CHANGE their investment preferences and capital flows near-term, with common sense reasoning.

Without doubt, we can all agree that money creation and the lack of a gold standard WILL LEAD to sharply higher gold and silver prices over time, whether that be 5 years or 20 years.

I choose to own REITs for example that are selling below any credible liquidation, break-up value of the real estate owned TODAY (which is a side-effect of the credit crunch and sky-high fear sentiment right now), much less what their net assets will be worth in 5-10 years; and, I receive a 5%+ annual dividend yield while I wait for the price appreciation generated by inflation.

When viewed through the lens of alternative investment options for my money, gold and silver are very poor short-term and medium-term options from my experience-based vantage point, after trading precious metals assets, general equities and real estate for 25 years.

 -At least that's my perspective, for what it's worth.

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#13) On June 15, 2009 at 9:29 AM, wpr101 (90.08) wrote:

"It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt."

 You mention Nixon, but no mention of FDR or Johnson?  FDR who confisgated gold from ordinary citizens.  Johnson who removed silver from our coins.  You are right about Nixon though, I'm just saying that you shouldn't just mention the one Republican and leave out the two Democrats who made equally egregious attacks on our currency.

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#14) On June 15, 2009 at 9:32 AM, madcowmonkey (< 20) wrote:

Add a rec for the post and the comments by other players. Tigerpack puts up a great contrary view for short and medium term plays right now. It is still a bet at this junctior.

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#15) On June 15, 2009 at 9:56 AM, 4everlost (30.49) wrote:

What an excellent post!  Thanks for the effort.

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#16) On June 15, 2009 at 10:00 AM, devoish (98.76) wrote:

I have done some thinking, and have a question based upon these two points, which I will not dispute. 

As I just said above, gold is a currency because it is used overwhelming as a store of value, and not as an industrial commodity. It is rare. Rare enough so that it is precious, (much rarer than iron or even copper), but not too rare (such as diamonds), and it is easily made into different sized denominations (unlike diamonds much are much more difficult to subdivide).

But it is precisely because of gold’s other properties (valued equivalently by all parties in the exchange, has enduring value, supply is to be regulated, is liquid, is fungible.) and the fact that it is NOT as industrially useful as other metals that makes it ideal as a currency. It is rare. New mining supply adds only 0.25-1.5% per year to the above ground supply.

At what point does gold become diamonds, and to rare to be used as money?

Was it in 1934 when it was hoarded into non-existence, or had it already happened even before then?

If it has not happened yet, how would you identify if/when it does?

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#17) On June 15, 2009 at 10:38 AM, helicopterfool (24.11) wrote:

Wow.  Outstanding post!!!.  A must read for all Fools.

Thank you Binve for all your thoughts, time and efforts.

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#18) On June 15, 2009 at 11:13 AM, Entrepreneur58 (50.97) wrote:

Let's face it, you either put your trust in bankers and politicians or you put your trust in gold and silver.   The choice is yours.

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#19) On June 15, 2009 at 12:40 PM, Wharrgarbl (53.52) wrote:

I think the real question here is when we gonna see TMFBinve???  Excellent post.

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#20) On June 15, 2009 at 12:42 PM, binve (< 20) wrote:

ati2ud, Thanks man!

kaskoosek, Ha Ha, thanks! Who doesn't love Snickers, right? :)

ATH001, Wow, thank you for the kind words and the compliments!

whereaminow, Thanks David! I have read many articles and papers on Mises, but I missed that one, I will check it out!

And I have heard the Oreseme story before. I have been fascintated by the story of gold and the rise and fall of (many) fiat currencies for awhile now. Unfortunately most people do not see the causal connections between inflation and rising prices (becuase of the time lag associated with these cycles). The Fed inflates during "price deflation" (often intentionally mis-labeling it as actual deflation) and then we "seemingly" get rising prices out of "nowhere" a couple of years later. All this has happened before and all will happen again ... :)

Thanks man for your comments!

PrestonCheek, Thanks bro!

devoish, Thanks! I appreciate that!

dudemonkey, Thanks man! No worries, I understand you sentiment. FWIW, I am an investor in gold and commodities. I think commodities are inflation hedges, and gold is an inflation and uncertainty hedge. They both react to the markets differently, and I personally prefer both. But I can't fault you at all for preferring commodities :) Thanks!

portefeuille, Thanks man. Yes, it is very interesting to see golds exchange rate and its strength/weakness against other currencies.

Londamania, Thanks! For actual bullion, I highly recommend Kitco. I have dealt with them in the past several times and have nothing but good things to say about them. If your main concern with making a bullion purchase is the premium over spot, then buy the biggest piece your budget allows (premiums on 10 oz pieces are less than 1oz, which is less than 1/2 oz. etc)

TigerPack, Thanks for the comments man!

While it is true that gold is an inflation hedge, it is primarily an uncertainty hedge: Gold is a very complicated animal however, and most of the arguments by bulls right now revolve around "long-term" macro-economic, hyperinflation arguments that may not prove correct for another 5-10 years.

Actually I highly recommend that you read this article: - Steve Saville: Why We are Gold Bulls . It gives reasoning as to why commodities and gold are different inflation hedges and respond to the market and policy decisions differently.

Regarding your observations on charts, I agree. If I had the time / access / tools I would love to adjust all of my charts for inflation. If you have seen images of the Dow or the SPX, which it sounds like you have, you will agree that that look vastly different than the ones we are used to looking at.

And again I agree with all of your timeframes. My targets for holding gold and silver are 5-20 years. And yes I will be one of those investors who holds gold and silver with big amounts of red in the P/L column (I already have during the commodity correction).

I can certainly see your case for being bearish gold/silver short term. I agree the counts could be interpreted bearishly. But given the massive problems, and the "way" the government is trying to "fix" them, I think gold will respond to these faster than most people expect.

As always, just my $0.02 :) Thanks man!

wpr101, You mention Nixon, but no mention of FDR or Johnson?  FDR who confisgated gold from ordinary citizens.  Johnson who removed silver from our coins.  You are right about Nixon though, I'm just saying that you shouldn't just mention the one Republican and leave out the two Democrats who made equally egregious attacks on our currency.

... I mention Nixon because it was his policy. And you are 100% correct, FDR and Johnson commited acts of the same magnitude. You can see on my gold chart above that I point out the gold confiscation in 1934. Yes, there was no intent to single out republicans by omission of democrats. I am sorry if it was viewed that way.

madcowmonkey, Hey man! Thanks. Yeah I thought TigerPacks comments were great. And yes, I think most anything is a bet and this junction. But I am just listing my thoughts on what I view to be the long term issues and what I am doing about it. Not trying to convince anybody to do anything, just sharing :)

4everlost, Thanks!

devoish, Those are both really good questions that I don't have the answer to. But I will say that in 1934, gold was able to be confiscated because it was still "officially" money. The gold conversion was only partially broken in 1934, it wasn't fully broken until 1971. I honestly believe that the governement will only be able to pull that one off once. Becuase now gold is seen by many (and I agree not by all) as "honest money" in the face of all of these currency devaltions.

helicopterfool, Thanks man!.

Entrepreneur58.

Let's face it, you either put your trust in bankers and politicians or you put your trust in gold and silver.   The choice is yours.

.... :) Couldn't agree more.

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#21) On June 15, 2009 at 12:44 PM, binve (< 20) wrote:

Wharrgarbl, LOL! Thanks. But I am a second-rate hack compared to TMFSinchiruna. But I appreciate the thoughts :)

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#22) On June 15, 2009 at 4:44 PM, JTShideler (88.57) wrote:

Thanks for the hardwork I have diversified my own holdings with some silver for a lot of the reasons you mentioned. 

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#23) On June 15, 2009 at 5:59 PM, cbwang888 (25.84) wrote:

Bravo!

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#24) On June 15, 2009 at 6:27 PM, tonylogan1 (28.64) wrote:

rec 55 from me. Nice post.

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#25) On June 15, 2009 at 7:08 PM, StopLaughing (< 20) wrote:

One thought. A primary reason we are not on a gold standard is that the supply of gold does not grow as fast as the world economy. If gold were the official international currency instead of the $ the economy growth would be constrained. 

As long as the world economy does not deflate there will be an upward bias in the long term smooth price of gold because gold supply is growing slower than the world GDP.

 

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#26) On June 15, 2009 at 8:24 PM, HooDaHeckNose (98.39) wrote:

Thank you for all the work you put into this.

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#27) On June 15, 2009 at 9:57 PM, Lenokis (< 20) wrote:

Hey Binve.. I havent looked at this website in months. I was thinking how you called the recent oil run-up, so I just went on tonight and found this gem... You are one of a kind. Keep it up! If I do check out these blogs it will be to see what you post...

 

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#28) On June 15, 2009 at 10:08 PM, binve (< 20) wrote:

JTShideler, cbwang888, HooDaHeckNose, Thanks! I appreciate that!

tonylogan1, Awesome :) Thanks my man!.

StopLaughing, While you could make a correlation to gold growth and GDP growth, that (IMO) is not the ulimate relationship. The "illusion" of GDP growth, especially since 2000, is due mainly to inflation. Gold responds to monetary inflation and lessesning in the intergrity and confidence of a currency. And I think we will be getting a lot of both in much of the worlds economies in the years to come.

Lenokis. LOL! Thanks man! Yeah, I remember our discussions on my early oil blogs. Thanks for the support man!.

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#29) On June 15, 2009 at 10:32 PM, Tastylunch (29.93) wrote:

$hit binve how long does it take you to put one of these monsters together?

Nice post man. They relaly ought to give you a TMF moniker for the amount of work you do.

I have to agree with TigerPack tho Re: gold's attractiveness

Last week I counted four Cash4Gold trucks on one street in my city.When regular Joes start talking about Gold which many around me are, that makes me nervous.I wouldn't say it's RE 2006, but it does feel like RE 2004-2005.

While I'm not crazy about REITS right now (too many ahnds and weird debts between value and me), I think farmland is the best hedge vs inflation right now. Plus there's less seizure risk, Well assuming eminent domain powers aren't extended even further which is definite possibility.

last I looked farmland had a 0.92 correlation coefficient with inflation and it's cheap due to mortgage affordability issues....

As you I know I'm not convinced  inf vs def, but until I have a more cohesive argument I see little reason to waste anymore of your time there. 

I agree on oil  short and long term and I hold the same view of Copper as well.

I think the next real question to me is what Happens first?

Peak Oil? Peak Coal? or Peak Copper (assuming peak Oil hasn't actually happened)? It may be that we focus so much on Oil/Coal that we as a societies forget to address Copper... If China keeps going tech..... holy cow I hate to think of what could happen to Copper. It's a topic I'm starting to research.

I had an awesome (for me anyway, it's not bivne or Sinchi quality) post in rough draft but now I don't think I need to publsih it. 

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#30) On June 15, 2009 at 11:36 PM, awallejr (80.10) wrote:

 "You can go into any Walmart or convenience store and pick up a medium Snickers Bar for $0.99."

Damn I remember paying a nickel for one of these. While I agree with your view on gold long term, my view is simple, it is a perfectly legitimate hedge play against inflation.  And while there may be times when deflation occurs, inflation is simply the real rule over time, as illustrated by my "damn" comment.

As for silver, I just view it more as the "poorman's gold."  If you are going to play the precious metals, then "go for the gold" imo.

As for oil, you know my view.  Two ways to play it, short term and long term.  I think we are peaking soon short term, which is where I played my calls.  But long term I still play my stocks (really am loving ATPG, for example, and BP for yield).

As usual, another excellent post. 

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#31) On June 16, 2009 at 9:20 AM, binve (< 20) wrote:

Tastylunch, Thanks man! Yeah, this particular post took about 12 hours to complete. As far as TMF, LOL! I don't think that's in the cards. See my reply to Wharrrgarbl in comment #21 above. :)

Hey man, If I actually got full agreement with you on this post, it would have to be because I woke up in an alternate reality :) Yeah, I know this is still something that we don't agree on yet. And for what its worth, I very much see your point. Like we have talked about in the past delation/inflation is not all or nothing. There will always be aspects of both. But based on all my arguments, I think the case for monetary inflation is stronger, and I think the delfationary signs that we are seeing is still driven by supply/demand and not monetary contraction. And I do realize that we have a disagreement on how the credit contraction should be interpreted. And that's okay :)

I also hear you about the gold being in the common vernacular and that is giving you a 'bubble-itis' warning feeling. I have a different interpretation (as I always do :). We were talking about the manipulation of gold and the enormous (and arguably illegal) short positions that GS has. And the only reason why these short positions have worked for so long at allowing golds manipulated price to not reflect inflation is because it has been relatively obsure/scoffed at. 

But now the public has been exposed to the size of the problem. We have had two market crashes and an honest stock panic in the last 10 years. David Walkers piece (which was very well done) that describes the seriousness of the problem with the budget and the economy, gained serious traction on CNN. On top of that, Obama says that we are broke (or its equivalent) in a speech. AND bonds are starting to make front page news in the last 6 months.

I think the public is now waking up to the size of the problem, and the enormously inflationary policies that have been at play and will continue to be at play.

So gold is the safe haven. For gold prices to break out, there needs to be new demand from a new pool of buyers (because golds buyer pool is traditionally very small) so that it can a) break thourgh its resistance on its own or b) the COMEX "market" is unconvered as the scam that it is and the "unoffical" price for gold becomes de-coupled from the COMEX prices. And if you are familiar with how much gold is warehoused at the COMEX, you will see how easy it is to manipulate and how a little more demand changes the equation dramatically.

But all that being said, I still very much agree with where you are coming from. Supply / demand is very sensitive, and there are certainly more straightforward inflation hedges.

I think your idea about Copper is a really good one man, I will be very interested to see what you find!

Thanks man, I am very glad that we both keep eachothers ideas in check :)

awallejr, Thanks man! I am glad we are finding some agreement here too. I know that we have very similar opinions on oil both long term and short term. Thanks!.

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#32) On June 17, 2009 at 11:47 AM, bothisellhigher (29.56) wrote:

Another awesome, thoughtful and useful blog from you! 

 I totally agree with your underlying message, (at least as I perceive it to be)...that if you are going to invest in US equities...it would be most prudent to consider a significant percentage allocation to Gold...and to Energy.

Since my personal holdings are AUY, BP, and LINE (my all-in troika) I am very receptive to what you and TMF have to say.  It is the depth of research and the organization of presentation that is so impressive to me.

Skol to you... once again!

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#33) On June 17, 2009 at 12:38 PM, RootnToot (30.43) wrote:

My hat is off to you once again brother, another incredible job Mr. B! 

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#34) On June 17, 2009 at 1:01 PM, binve (< 20) wrote:

bothisellhigher, Thanks! I appreciate that! Exactly, that is the base message. Most of my long term holdings are very similar to yours (CEF, AUY, SLW, (lots of GSMs), COP, BTE, PWE (lots of producers and CANROYS), etc.) Thanks again!.

RootnToot , Thanks brother!! :).

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#35) On June 17, 2009 at 1:23 PM, anchak (99.84) wrote:

The 72nd rec is mine.

My friend - this post deserves its role in the rosters of the TMF Best posts ever!

Tiger....good points.

Tasty...I am behind - so haven't been able to read your recent one yet ( especially since I need like 10 breaks to go thru Binve's) !~!!!!

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#36) On June 17, 2009 at 1:38 PM, binve (< 20) wrote:

anchak, Thanks my man!

My friend - this post deserves its role in the rosters of the TMF Best posts ever!.

This is one of the best compliments I have ever received. Thank you brother.

I really appreciate that man, you have no idea how much :).

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#37) On June 17, 2009 at 9:41 PM, svande8952 (< 20) wrote:

Any blog that starts out with a quote from a great Bogart movie get a rec from me!

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#38) On June 17, 2009 at 9:48 PM, binve (< 20) wrote:

svande8952, LOL! Thanks man, Yeah that one is a classic!

'Badges? We ain't got no badges. We don't need no badges! I don't have to show you any stinkin' badges!'

I love it!!

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#39) On June 17, 2009 at 9:59 PM, 3okcKrauts (< 20) wrote:

I personally feel anyone who does not diversify their portfolio with some sort of actual physical precious metal is a fool.  I personally prefer silver, most of my holdings are 5gram 3rd Reich minted silver, due to the ease of liquidation/potental for practical currency usage.  In the event of govt. meltdown, I think it would be difficult to buy your groceries w/ gold, unless you are buying for a extremely large family.  I'm sold on metals, and will be sitting on it indefinately.  And I'm very bullish on natural gas!!

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#40) On June 17, 2009 at 10:49 PM, Bays (34.32) wrote:

This is one of those blogs I wish would never get bureid in my "Following" tab.  There really should be a "Favorite Blog" tab.

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#41) On June 18, 2009 at 12:03 AM, binve (< 20) wrote:

3okcKrauts, Thanks for the comment man. Yeah, that was very much the point of this post. I know there are a lot of defalationists out there. But this is an issue where even the smartest people are sharply divided on. So if the smartest people can't agree on an inflation/deflation outcome, as an investor you should weight the probability of occurence for either one as greater than zero.

I think gold, PMs, GMS, and commodities belong in everybodys portfolio. Maybe not as a majority. But I agree, to have no exposure seems like you are actively ignoring the bigger picture or the possibility that your investing thesis does not have a 100% probability of occurence.  Thanks!.

Bays, Wow, thanks man! I really appreciate that! (and that is a very good idea BTW).

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#42) On June 18, 2009 at 9:12 AM, Gingerbreadman55 (32.94) wrote:

binve,

 I'm not sure if you will get a chance to read this comment, but please do reply in some form if you get this.

I would like to quote a majority of your discussion on money, what it needs to be, what it is today, and why gold is money on my blog, if you would allow me. Please let me know if any of it is quoted from somewhere else as well.

I began a discussion on the topic and the way you tied gold into it in this article was waaaaay better than I did.

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#43) On June 18, 2009 at 10:13 AM, binve (< 20) wrote:

Gingerbreadman55, Hey man! Thanks!.

I would like to quote a majority of your discussion on money, what it needs to be, what it is today, and why gold is money on my blog, if you would allow me. Please let me know if any of it is quoted from somewhere else as well.

Not a problem! Please feel free to do so! (Provided you credit me as a source and link back here). :)

Yeah, you have been a favorite of mine for a long time (in both this portfolio binve and my other portfolio binv271828). I appreciate all your work and thoughts. You have some fantastic posts and I would be honored to have a place in part of one. Thanks man!.

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#44) On June 18, 2009 at 11:45 AM, ikkyu2 (99.52) wrote:

Nicely done.  What do you think about natural gas?

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#45) On June 18, 2009 at 4:21 PM, binve (< 20) wrote:

ikkyu2, .Thanks! I like NG a lot long term. Short term, supply is interesting, with no clear direction, and the chart is at an inflection point. I have no advice for a trade. But I like almost all commodities long term.

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#46) On June 19, 2009 at 11:04 AM, biotechmgr (59.39) wrote:

Wow, what a piece! If you could get 2 recs for all of your work, you would. I am trying to sort out my feelings about gold given all the information available and against the Elliott Wave International call for deflation. This is a complex issue, but I think you are correct that any portfolio needs a position in gold.

Nicely done.

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#47) On June 19, 2009 at 11:43 AM, binve (< 20) wrote:

biotechmgr, Whoa, Thanks!. That is a great compliment and I really appreciate it!.

I am not an EWI subscriber, but I have read a lot of Prechter's public work and that of EWI. I can see where they are coming from. And I have read a lot of deflation writers that are good (Mauldin, Prechter, Roubini, Mish, etc.) and they make good point, I just think the monetary inflation (which will beget price inflation later) will be the bigger force / more likely outcome. I also put a big post together on inflation / deflation / US Dollar here. I hope you check it out, I would love to get your thoughts on this!

And at the end of the day, there will be both affects for some period of time: price deflation, and monetary inflation (which more than likely will lead to price inflation eventually). And it will be tough to navigate through. So people should invest in PMs not because inflation is guaranteed (which it isn't) but because impact is very high and its probability of occurence is non-zero. It is just a good hedge against uncertainty/risk.

And as a manager, I know you value risk assessment and mitigation as a tool :)

Seriously, Thank You very much for your comments!.

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#48) On June 21, 2009 at 1:41 PM, BradAllenton (31.74) wrote:

+1 #87 from me.

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#49) On June 22, 2009 at 4:47 AM, uclayoda87 (29.86) wrote:

Peter D. Schiff's Crash Proof (2007) supports your conclusions with similar arguments.  I believe from reading his book that Schiff did predict the changes that we saw in 2008 and 2009, with the exception of the dollar's persistent strength.  But I also believe that Schiff will likely be right about the dollar too, which is why he support moving into gold and other currencies.

Gold in now easy to own via GLD, which may be more pratical than trying to buy a basket of foreign currencies.  Plus, Gold may grow in value without being taxed yearly.

Since I was fortunate to buy mining stocks when the market imploded, I am not interested in buying additional mining stocks or other US stocks at this time.  So, I'm left with building cash in a money market account, which pays no significant interest or buying a non-fiat currency, which is gold or silver.  I know you prefer CEF, which may be safer if the US government gets crazy and tries to confiscate gold again, but the additional silver diversification that CEF offers may not make that much of a difference if the dollar does collapse.  Schiff did recommend both GLD and CEF.

I was looking into Canada for energy and commodity plays.  The two I bought in March were PDS and CNQ.  I felt that these would hold up better and they appeared cheap when I bought them.  The marked rise in their stock price was way above what I had expected.  So now another dilemma, sell at a big short-term profit but lose my long term value holding investments, which would mean having to move more of my investments into gold.

The internal problems in Iran may also be a boost for gold and oil, but this would be more of a short term speculative bet than a long term investment.  Since the news from Iran is taking away coverage from North Korea, I would expect North Korea to do something stupid to get the world's attention again, just like a spoiled child throwing a tantrum or a nuclear missle.  Therefore, if you are interested in buying gold, you might want to do it soon before fear drives gold and oil higher.

 

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#50) On June 22, 2009 at 10:06 PM, binve (< 20) wrote:

BradAllenton, .Thanks Brad, I appreciate that man!

uclayoda87, Hey man. I have not read Crash Proof, but I have read a lot of Peter Schiff's other work. Yeah, the dollar strength is a very uneasy one (and I believe temporary one).

I am definitely in agreement  with you points above. Gold is much more than an inflation hedge, it is an uncertainty hedge. I have arguments with deflationists a lot. And I don't disagree with their claims fundamentally. I happen to think inflation is the the more likely outcome, for all the reasons I enumerate above.

But I say, why not hold gold and cash? Absolutely nobody knows unequivocally the timeframe from deflation or infaltion. Nobody. So as a good risk manager, I hold a certain about of all assets to account for all outcomes based on the probabilities of occurences as I see them.

If one does not hold gold, and says to me that gold is stupid then that person thinks: either deflation has 100% chance of occurence and inflation has 0%, or that any inflationary outcomes will be telegraphed without any 'black-swan' type currency events for the USD.

I think gold has more benefit than these 2 scenarios would suggest, but I think as a good risk manager, investors should have some gold exposure in their portfolio.

Thanks for the thoughts!.

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#51) On July 20, 2009 at 10:27 AM, madcowmonkey (< 20) wrote:

Just coming back and revisiting the blog to decipher so much information and fun charts. Gold is sitting at 953 usd right now and it has been going up the last few weeks. I wouldn't mind for any type of pullback before investing, but who knows if I will ever get the chance. I was wishing to have a small position from back in November and January that I had made some calls on, oh well.

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#52) On November 08, 2010 at 5:01 PM, mikejason (< 20) wrote:

Gold

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#53) On December 10, 2010 at 11:00 AM, akashfool01 (< 20) wrote:

 

 

Buying Gold

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