Takeaways: Buy gold now.
Yes, right away. The price is at a 5 year low, after correcting by 40% from its peak in 2011, erasing about half of the run-up over the last decade. That’s a bargain – unless the trend proves broken, which there are good reasons to assume it’s not (China hoarding, production costs, negative interest rates, money printing, flight to safety coming etc.).
Buy an ETF for speculative purposes (GLD for exposure to the gold price, GDX for gold producing mines, GDXJ for smaller, more speculative and exploration oriented mines), and physical gold to hide at your BOL, as insurance against the break down of society (not my preferred choice).
Gold bottoming out? It should be.
There is gold and cocaine all around us
– so close, yet so far
Twelve percent of annual gold production reaches its final destination in minuscule amounts in electronic devices.
That gold is just as inaccessible as the cocaine in money bills. It takes a couple of thousand of dollar bills just to make one single party line. Similarly, refining the micro grams of gold found in cell phones and other electronics just isn’t worth the trouble.
Even if Colombian pesos probably have a higher cocaine content, the smallest bill (1000 pesos) still costs 40 US cents. Even at 5x the cocaine “contamination”, the cost per line would amount to 160 USD. Gold in devices has the same characteristics.
Is that a gram?
Good as gold?
Nota Bene: This is not a comprehensive overview of everything about gold. It’s bits and pieces of my perspective on gold and gold investments. Further, it’s not a recommendation to buy or sell anything. Anything.
Warning: Gold is more or less intrinsically worthless. You can’t eat it, can’t sleep in it or under it, it can’t warm you and it’s almost useless as an industrial metal. You can wear it but be prepared to lose a limb or your life over it.
Okay, so you can eat it, it just doesn’t contain any nutrition
Gold has got ONE thing going for it – it’s eternal
What’s the fuzz about? Gold is eternal and limited. In addition it’s solid, heavy and pretty. It’s malleability makes gold ideal for jewellery (and apparently, clothes and oversize dildos as in this video with Swedish pop group Army Of Lovers).
All gold was made billions of years ago in supernovae and neutron star collisions. It’s practically indestructible as well as impossible to produce artificially.
A fun side story is that the genius behind the group (2) went to the same business school as I did. He has also released a philosophy/psychology book at my publishing company, Hydra. Also fun is that the girl (1) in the picture (and group member) lost to me in court after refusing to pay back a loan I granted her when she wrote another (Russian cook) book at Hydra.
Why gold instead of shells, pearls, qualified work hours, MIPS, BCAA (protein), energy (1 joule, e.g., or 1 kWh), potable water, arable land, dollars or bitcoins?
Even if gold itself is worthless, using it as the base for transactions provides a lasting unit of account that can’t be diluted by producing more or lost due to destruction. If you want more gold, you have to dig it from the ground and refine it, which costs about as much as gold on the market does. The cost of producing gold increases over time due to inflation and increased difficulty in extracting gold.
Pearls and shells are fragile and volatile. Dollars can be printed (even if central bankers promised to neutralize the extra dollar once the crisis is over).
Bitcoins are a bit like gold, but can be destroyed by solar flares or EMPs – and it can’t be used as jewellery or electronic circuits. Bitcoins, unlike gold, face competition from other cryptocurrencies that can be constructed by anyone that so desires. What if Bitcoin is the MySpace, Nokia or Altavista of cryptocurrencies? Where is the Facebook, Apple or Google?
-not very practical
Actually, my own favorite among the alternatives is essential amino acids, due to the undeniable intrinsic value. Their biggest problem is the needed bulk per transaction. Another problem is the volume needed to back the sum of all transactions. There can never be enough protein around for that – just the promise of delivery if needed. Perhaps water is the answer after all. Or energy. Then again, (long term) storage is an issue.
Why buy now?
The price has fallen by 40% in USD, despite mad money printing since the peak in 2011, despite intense hoarding by e.g. the Chinese central bank (albeit not yet disclosed, but probably later this year. My guess is that China has expanded the country’s official reserves by at least 5x) and despite extreme increases in asset prices such as stocks and bonds (and Swedish real estate).
China’s gold hoarding
When should you own gold?
- during inflation
- during or after money printing
- during hyperinflation (caused by falling production due to speculation and malinvestment in the preceding money printing boom)
- in turbulent times – e.g., war
Who should consider owning gold?
— Sprezzaturian (@TureMasing) April 26, 2015
- Billionaires, dynasties: one atom of gold will stay one atom of gold no matter how you hide it. Gold might be the only way for a dynasty to protect its wealth over time. It’s not about returns it’s about stability.
- Central banks, governments: pure fiat money has never worked for long. To prevent a collapse or to restart after the death of money a base is required and the most trusted base since gold was first discovered, 7-10k years ago, is gold
- Doomsdayers: just note it has to be physical gold, hidden from governments, armies, fellow citizens and others
- Speculators: okay, they don’t really need gold, but they are included among buyers at this point. Contrary to dynasties, speculators don’t care about gold per se or its insurance qualities.
- Insurance: As part of a quattro stagione portfolio, as a hedge vs. stocks or consumer prices (cf ratios gold/dow, gold/CPI, gold/oil)
Why not gold now?
Again, gold is inherently worthless.
What is gold actually worth? Ballpark?
Hello! Am I invisible? Nothing!
Okay, here is a stab at gold valuation:
There is about 200 000 tonnes of mined gold in the world. At current prices that’s worth 7.2 trillion dollars or pretty close to the amount of physical money floating around. However, it’s just a tenth of a wider money definition (M3=75tn).
What if all money had to be backed or replaced by gold? Easy, gold would have to be at some 12 000 USD/oz, rather than the current approximately 1200 USD.
In contrast, what’s a dollar worth? Well, the paper isn’t worth much and neither is the 28 ug of cocaine locked in the fibres of an average dollar bill (FYI: 99% of bills in London contain cocaine). The U.S. Fed has some 8000 tonnes of physical gold in its vaults. That’s enough to back less than 10% of the physical currency in the US and around (less than) 1% of its M3. China probably has a similar amount and thus a much better coverage, albeit still negligible as backing for its currency.
However, the power of taxation should mean something… It’s just that that power and value have been diluted by existing debt, as well as promises of pensions etc. that the USD is “backed” by a huge negative net value. Hence, the Bitcoin cryptocurrency is a better bet than the USD, despite having no intrinsic value or backing whatsoever.
Of the main contenders for money, dollars and Bitcoins get disqualified pretty quickly. The only thing Bitcoins have going for them is that they are much better than dollars and other fiat money.
Energy and water sound fine on paper, but there is at least one good reason why gold has won that battle the last 10 000 years. Storage (and stability – water goes bad and energy dissipates. Just as with proteins you only have the promise of delivery left and if you die that goes away, while gold remains).
Another theoretical valuation approach
Gold currently makes up about 1% of investment portfolios. To achieve significant diversification effects that should be at least 5%, and probably rather 10%. Some advocate multiples of that – at 25% (the Quattro Stagione strategy).
Even to just get to a more conservative 5-10% average portfolio weight, either other assets have to plunge dramatically (-80-90%), or gold would have to increase in price by some 500-1000%. Once again the evidence points to 10 000 USD/oz, give or take a few thousand. Well, if it weren’t for the fact that gold is worthless, that is.
Most likely there will be a combination of falling prices for stocks and bonds and a rising price for gold, as the sellers of other assets park their wealth in the safe haven of gold. Thus, even if you want to stay long stocks, you could hedge that position by adding gold. Everybody can’t go full retard as I have (both buying gold and shorting stocks).
Chartist’s view point to 5-6000 USD/oz
My first hand experience with gold is limited but rewarding
Have I put my money where my mouth is? What is my actual experience in investing in gold, except reading about it for my entire career?
I bought a batch of gold ETFs (gold price as well as junor and senior gold mine funds) and single stocks (single senior gold mining stocks) a few years ago, after the post 2011 gold price crash, and sold them at a 25% profit after just a few months.
Then I bought again about a year and a half ago, this time just the senior gold mine ETF and a gold price ETF. The reasons behind buying at that point were:
- The price had fallen by 40% (just as low as when I bought the first time)
- I expected turmoil, and consequently flight to safety (to gold)
- I expected weakening peripheral currencies, e.g. the SEK, due to weaker global trade and not least a weakening Chinese economy
- I expected a stronger USD (flight to safety, US investors selling foreign assets)
- Money printing (fear of inflation, rising asset prices overall, gold/dow ratio coming back)
- Covert central bank hoarding being disclosed (foremost China)
- Diversification, including something benefiting from money printing
- I wanted to be anti fragile (if there was a crash or other problems, I wanted to benefit from it)
- Peak gold production?
- Refill coming at the Fed?
- Gold becoming competitive vs. negative interest rates
So far, I only got the stronger USD part right. Nevertheless I am up by 20% on the second gold trade (thanks to the USD/SEK development), and I obviously expect much more to come. My current gold exposure is about 0.5-1m USD.
Please note that buying gold is pure speculation. It doesn’t produce any return. Actually it runs up a bill just owning it.
I simply hope to offload my paper gold to a bigger fool within a few years.
Since I don’t own any physical gold directly, I have no insurance against real and lasting trouble such as war or severe capital controls. Without returns or insurance qualities, only speculation remains.
Summary: buy gold now
Apocalypse, no? I’m not much for doomsday scenarios, so I’m gonna go with paper gold, for short term (1-5 years) speculative purposes, rather than physical gold buried at my BOL as insurance for when Game Of Thrones becomes reality.
Buy the ETFs GLD (gold price 1:1) and GDX (senior/large gold mines). Make it at least 5-10% of your portfolio, or a full quarter as part of your Quattro Stagione.
Stay away from GDXJ, unless you really like to gamble with your money. I made good returns on my GDXJ the last time round, but I still don’t want them this time. The same goes for single stocks like Goldcorp (GG) and Agnico Eagle Mines (AEM). There is nothing wrong with them, and I bought them and profited from them in the previous round, but I’d rather diversify away the company specific risk. I currently own GLD and GDX.
Why? Winter is coming.
Seriously? China is hoarding gold, stocks and bonds are due for a collapse or at least a serious correction, while gold is due at least a bounce after its 40% correction since 2011. In addition, gold is the ultimate debt-free safe haven in a world of monetary madness and crazy leverage upon leverage.