Paying More Than 3 Times as Much for Gold

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The price of oil remains at $62…the American peso is still trading for peanuts ($1.39 against the euro)…and gold lost about $5 yesterday; it trades this morning near $953.

Do you have your positions in gold, dear reader? We hope so. We advised readers to buy gold when we first began our Daily Reckonings 10 years ago. Back then you could have bought an ounce of gold for less than $300 any day of the week. Today, you’ll have to pay more than 3 times as much…and you could have to wait a few days to find gold coins.

Of course, you remember our “Trade of the Decade”? It was very simple. Buy gold on dips; sell stocks on rallies. We’re almost at the end of the decade. So far, we’ve got a nice profit on the gold side. And a nice profit on the stock side too.

And we’re beginning to wonder what our trade will be for the next decade.

Why do we trade just once a decade? Mostly because it’s hard to figure out a winning trade; we’re too lazy to do it more than once every ten years. But it turns out that frequent trading is a losing proposition anyway. Major trends are the only ones you can spot reliably…and they take time.

In the present case, our Trade of the Decade may turn into the Trade of Two Decades. Because neither the bull market in gold nor the bear market in stocks has fully expressed itself. The price of gold is barely higher, in nominal terms, than it was 29 years ago. Some people will look at that bit of information and conclude that gold is always a losing bet. We conclude that it is sometimes a losing bet. Other times it is a winning bet. For the last ten years, gold has been in the money. Even so, it would have to nearly triple from here in order to beat its price record (in real terms) set a generation ago.

There are good reasons to think it might. Not the least of which is the aforementioned shortage of ready cash to fund the US government’s deficits. As the supply of Treasuries increases, the supply of willing and able Treasury buyers is likely to lag. Into the gap comes the Federal Reserve, checkbook in hand. Rather than allow Treasury yields to increase – which is what happens when there are more borrowers than lenders – the Fed will do the buying itself. It will buy, not with savings but with money of its own making.

As the Fed creates more new green money, the old-fashioned yellow money is likely to look better and better. Perhaps only because it will be harder to find.

There are about $1,600 trillion worth of derivatives in the world…$125 trillion worth of real estate and business assets…$100 trillion worth of stocks and bonds secured by assets…$65 trillion worth of government bonds (rising rapidly)…$4 trillion worth of actual currency…and only between $2 and $4 trillion worth of gold and silver.

We’ll take the gold and silver…at least until the bubble in Treasury debt blows up.

Until tomorrow,

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.
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Comments

  1. Go gold!

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  2. And have your exit strategy in place for when the crash comes!

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  3. Ned, what is a good exit strategy? I am new to this game. Cheers.

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  4. Good article Bill

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  5. Buy gold on dips and sell stocks on rallies…yes Bill this is a slight variation of the old buy stocks when they are low and sell when they are high. Lovely theory but timing my friend is the problem. Why not just sit on something like BHP shares? They have done better than gold over the last 10 years and also pay out a dividend? (I wish I had done that myself!)

    If any of us could time the market we would not be reading DR, we would be enjoying one of those drinks with an umbrella in it on our yacht somewhere warm and sunny :)

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  6. Bill says there are about $1.6t of derivatives. Is there a source for this statistic? Is there a definition? My understanding is that derivatives can be defined broadly (for annual report purposes) to include any contract with a financial clause that can be executed on the basis of one or more conditional events. Alternatively derivatives can be defined more narrowly to include a range of financial products (CDO, CDS, CAR etc.)

    In any case the deleveraging (in relation to the derivatives as narrowly defined) is continuing and the likely outcome frightens me. My gut feeling is that the 25% mark to market for the financial products will become a 50% mark to market by reporting time 2010.

    My other gut feel is that the assumptions which sit under the yield curves and spreads used for valuation by Citi and are based on a relatively short recession (of say 2 years) rather than a long term bear market and slow credit thaw (of 5 years or longer). The assumptions here actually go to the core of whether or not the so called green shots will grow, whither or lay dormant.
    I am happy to be corrected on any of this.

    Coffee Addict
    May 29, 2009
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  7. $1600 Trillion worth of derivatives sit atop J.Exters liquidity pyramid so probably the source there C.A. Im too computer illiterate to create a link (in the time I have to write this) but its out there in google land. Note 800 Trill is described as “shadow derivatives”. I believe the OTC derivatives are hidden away ,maybe behind hedgefund doors.
    Go gold!

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  8. Brian – A good question to which I don’t have a good answer I’m afraid. Not to say there isn’t one – Only that as a “newbie” I don’t know it either. I’ll tell you what suspect I understand and see what others have to add:

    * If you have taken physical possession, the nearest you can get to an exit strategy is watching the price regularly and having some figure in your mind that you will sell at if the price drops below it – Although the bloke you bought it off will roll on the floor laughing if prices are obviously headed down and you ask him to buy at the current price – He’ll have some big discount figure in mind.

    * Be very wary about trading it in an account that uses a different currency to your’s; And especially not if they are going to take a few days to send your “winnings” back to you via bank wire/transfer – The stuff is volatile and if the price is bouncing around a lot, the exchange rates probably are too.

    * It would seem to me that you can set stop losses on gold mining stocks easily enough. But if you’ve bought into a smaller company and no one is buying, a stop loss won’t save you until someone does decide to buy – At whatever price they decide to buy at; Rather than any hoped for stop loss figure you may have set?

    * Ditto for the exchange traded funds I suspect?

    My take at the moment is that a lot of trades are probably being triggered by “trailing stop orders”?

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  9. My father, b. 1922, counselled us that you should ‘set a sell when you set a buy’. Apparently the only time that failed him during his lifetime, was when Metals Ex moved so fast one day that his broker was unable to sell at dad’s nominated price… and Metals Ex sold much, much higher. Yes, some stocks ended up four or five times higher than dad’s ‘set price’ (his simple exit strategy) but he bought quality and held until his assigned sell price was reached.

    Biker Pete
    May 29, 2009
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  10. I did read in a recent paper clipping that B.Obama wants to regulate derivatives. In the same article, current OTC derivatives to the value of $680 Trillion were refered to. To get some idea of total derivatives one would have to add ETD’s (Exchange Traded Derivatives)approx $350 Trillion in 2005. At least theres $1000 Trillion in derivatives to start with.
    In summary, “We’re all freakin doomed”.
    I the meantime….eat,drink, pray and buy gold. And of course for fat fiat profits…. shares in scrumptious juniour gold producers.

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  11. With all those assets/wealth out there, created by Central Bank’s fiat money out of thin air, how could gold be used as a monetary standard? It would have to be $1M per ounce!

    David Colquitt
    May 30, 2009
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  12. Political instability equals high gold prices. The power of an empire is waning. This will cause instability on a great scale and over a long period. In my opinion the price of gold has to go much higher and stay high for a long time.

    Reply

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