Investing in Gold With a Watchful Eye On Mr. Market


What ho!

The price of gold just keeps going up. It rose $2 again yesterday, to close at $1,310. The Dow fell 22 points.

We’ve been waiting for a sell-off…for a downturn…for a resumption of the “risk off,” fear-driven markets of 2008-2009. It should be coming. People are still unemployed. Stocks still aren’t cheap. And houses are still getting cheaper.

The latest Case-Shiller reading signals renewed weakness in the housing market. Prices are falling again. (More below…) How much farther will they go? Maybe 10% down. Maybe 20%. As we discovered on a recent trip to Florida, you can already get properties discounted 75% off their peaks. How much more is left?

Probably not much on that one. But most houses are down only about 20%. They’ve got a ways to go.

And stocks? We should see them selling at P/Es close to 5…not the 15- 20 that they’re at today. So stocks have a long way to go too.

But Mr. Market always has his tricks. What if he’s preparing a run on the dollar…and a big blow-off in the gold market…BEFORE the sell- off in other assets? We expected stocks to go down…then, gold to go up. What if it happens the other way around?

What if the final stage of the bull market in gold has already begun? What if investors and speculators begin to panic out of the dollar now? What if they sell the rumor of quantitative easing…rather than wait for the real thing? What if they drive the price of gold up to the moon, without giving us another chance to buy more at a lower price?

Anything is possible. Mr. Market is a cagey, son of a gun. He could do anything. We wouldn’t put it past him.

Still, we wouldn’t bet the farm on it either.

Investment pros seem to be turning bullish on gold.

“Gold forecast to hit $1,450 an ounce,” says a headline in The Financial Times.

That’s the consensus view from the precious metals industry.

“It’s hard to be pessimistic about gold in the short term,” said Kevin Crisp, chairman of the London Bullion Market Association. “At worst, you’re neutral.”

We’re seeing more and more bullish forecasts for gold. But so far, actual gold holdings by institutional investors attending the aforementioned LBMA conference are still tiny…less than 5% of their portfolios.

As for individual investors, they’ve scarcely even heard of gold. Few own any at all. When they get on board – it will mean huge new demand for the metal.

And there are the central banks. They have been net sellers of gold for many years. Typically, bankers are the worst investors in the world. They buy high and sell low. Someone should tip them off; that’s not the way it’s done. But they dumped beaucoup gold just as it was hitting all-time lows in 1998-99. And now that it’s 5 times as expensive, they’re beginning to buy again.

When they really start buying, we’ll know the game is over; it’s time to get out of gold. But for the moment, they’ve barely begun.

The biggest buyers will probably be the emerging economies. Why? Because they don’t have much gold. China has only 1.6% of its reserves in gold, for example. And because they’ve got the paper cash to buy it.

China could be a major buyer for 10-20 years…and still have a relatively small percentage of its reserves in gold. So could India. And Brazil. And Russia.

So, maybe Crisp is right. Maybe it is hard to pessimistic. But so many people are so optimistic…we can’t help but wonder: what’s Mr. Market up to? What devious, devilish, infernal brew is he concocting?

We’re not pessimistic on gold. Far from it. We expect the price to go to $3,000…or $5,000 before this is over. But it bothers us that so many others think so too.

It would be just like Mr. Market. Get the Johnny-come-latelies into gold. Whack them hard. Then, take gold much higher.

And more thoughts…

This just in, from The Washington Post:

A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs… Several years after the US foreclosure crisis erupted, the U-Hauls are back.

“I love this house, but I just have to leave,” said Leanna Harris, 27, the owner of a corner unit that used to be the builder’s model, with a stone path in the yard and a gourmet kitchen. “I’m at peace with it now.”

The original owner bought the home for $400,714 in 2006; Harris and her husband, both bartenders, paid what seemed to be a bargain price, $289,000, in 2008. But they have fallen behind on their mortgage payments, in part because her husband was out of work. Now they have a $246,000 offer for the home, and the balance on their mortgage is more than that. They want to accept the offer. All they need is their bank’s okay.

That kind of deal is called a short sale, and it’s sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what’s owed on the mortgage.

Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic. The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.

*** Meanwhile, zombies are on the march. Literally.

We got a news item from Europe. “Thousands of protestors took to the streets in dozens of European cities,” it told us.

What’s their problem? They don’t like cutbacks in government spending.

And now Bloomberg tells us that the feds want to keep track of all money transfers into and out of the US:

Financial institutions have long been required to report all cash transactions, whether domestic or overseas, exceeding $10,000 as well as transactions that they deem to be suspicious. The proposed regulations would expand the requirements so that banks would have to report all cross-border transfers of any size, whether or not cash is involved. (For money-transfer businesses, the threshold would be $1,000 as opposed to that at banks, which would report all amounts.)

If you send $500 to your daughter in London, what business is it of the feds?

Why do you ask, do you have something to hide?

The feds say they are preventing terrorism and money laundering. What they are really doing is gaining power. It can’t be too much longer before you need permission to send money overseas. And then, the “rich” will be fitted with the equivalent of an electronic ankle bracelet…to monitor their financial movements and prevent them from getting away with anything.

But wait. Are we becoming paranoid? Are we having a bad dream? Are we “losing it”?

Maybe. But soon, finances could be a matter of US national security. And transferring money out of the country, unauthorized, could be a crime.

The zombies are counting on your money. They won’t give it up without a fight.


Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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6 years 25 days ago

Gold hit a high of $1320 last night.. Did you look at those share suggestions Lachlan? Aussie dollar strength has limited real term gains of gold.. Still way off a record price for gold in Aussie Dollars… Talk of Gold $1500USD sometime in the next 6 months.. some think even by Christmas.. Our dollar pegs back to average ($0.75USD) would see a nice price for Gold in AUD
Bought 300000 Shares on a speculative play on a copper miner/explorer in NT..
Bought 1250000 shares on a speculative Aussie Gold Miner with a mine overseas..

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