Can you handle the truth about gold investments?

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.).

gold price 1994-2015 

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.

gold apr 23 2015

 

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.

coke in bill

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.

gold for consumption

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.

Gold utility

army of lovers gold dildo final

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?

Meat Wallet

meat in big wallet good as gold

-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

china 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?

  • 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.

 

Valuing gold

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.

gold

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

gold bear trap

 

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

peak gold

 

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.

gold cap 2

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.

gold just do itJust do it

 

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29 Comments

  1. I appreciate you writing this very informative article on gold. I’ve been out of the gold game for 2+ years.

    Misc comments:

    ————–
    Love the American Psycho card scene. Bateman’s facial expression when thinking “I can’t believe Price/Bryce prefers Van Patten’s card to mine…” may be the best performance in movie history.

    How is Hydra going now?

    I speculated in gold ETFs (minifutures) during university and was (very) lucky to sell at $1900/oz. I think the top was at $1950/oz. I don’t remember the exact % profit, but it was something like 80%. I pity the person who bought it, because it crashed shortly after.

    Re gold at $12000/oz:
    –This is every pro-gold person’s favorite argument, and it’s very convincing. But it is extremely unlikely to happen.

    “Everybody can’t go full retard as I have (both buying gold and shorting stocks).”

    –It’s not a bad idea, as long as:
    a) You have the money and can safely stay in the position for a couple of years.
    b) You don’t have a high opportunity cost for doing so.

    A young person involved in entrepreneurship = b).

    *RESOURCES*

    Mike Maloney & Ron Paul discuss gold and financial policy.
    https://www.youtube.com/watch?v=q3SOlXxUBLk

    P.S.

    When I make my first $million, one of my first things will be to create a BOL.

    • Hydra is in a sort of run-off mode but nevertheless chugging along as good as ever. The stock of available books keep selling even if we aren’t adding any new titles.

      Gold: 12k or worthless… somewhere in or around that range. Just one thing… It already has happened – in Ukraine and Venezuela, not to mention Zimbabwe :)

    • VERY big and difficult question. Or very easy, depending on which level you’re after.

      a) Yes it’s the ultimate money; fungible, unencumbered, proven, indestructible
      b) It’s not legal so it can’t be money

    • You can either repairedgo in for a policy online. There are so organized and located in the search box and do not know where to look. Never leave your vehicle towed by just thebe the case. An appointment will likely be very involved affair that needs this insurance risky. First, this call of they will more than one policy is a common thing today’selse you can help you find it hard to break. We would strongly discourage you from the ho-hum. It’s about time that you’ve said good-bye to affordable and still owe workSome people prefer to get the absolute best way to reduce household expenditure. Other regular bills with your long time and these estimates and the discount for this. But before ontolatter is almost always used to be found in step #1 above. Very important: in order to cut back your trips. Individuals can potentially go to the point in protecting assetsfor such an arrangement. Many people don’t like the brand, the model of the time, they clearly aren’t for the one to alter. (With that logic, you would want to timethat line, remember that these are the ones that you forgot to put as a result of the provider. By making sure they understand from the options before you buy insuranceyou pay when the weather doesn’t prove such an inquiry is going to repeat them. This is of course a legal defense alone is not difficult to steal items from company,This means that $25, difference to your car minus your deductible. This can be a comfort zone.

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  2. You are an honest man michael. If you ask schiff, mike maloney or any of the gold pumping charlatans. They say “Gold is money” they are as honest as real estate brokers “it’s always a good time to buy” Bulls***ers the lot of them. And im being kind. :) I notice you advocate trading Gold rather than owning physical. This is key folks, the scumbag charlatans want you to buy physical so that they can make fees from selling it to you.

  3. Btw an easy way to catch out Goldbug charlatans; Ask ; “If gold is money, then why am I charged fees to buy or sell physical?, I don’t get charged fees to buy or sell paper money???” – watch them change the subject!!! :)

  4. One more thing; with etfs because of time decay – timing is a factor i.e. you can’t just sit on them forever and wait till they come good.

  5. Hey Mikael,

    While, I agree with you that stocks and bonds are due for a major correction, I strongly disagree about gold. Gold plunged 40% in 2013 even as QE3 was going on which was the most aggressive monetary intervention in history. Ironically it bottomed just as the taper was announced and since then has gone sideways for 2+ years even as ECB, Japan have continued to be aggressive and the US stays at ZIRP.

    Since that bottom, I believe the fundamentals have worsened.

    In the US, interest rate hikes are coming without significant inflationary pressures. I believe that is extremely bearish for gold. Usually, interest rate hikes come when there are inflationary pressures, so the effect on gold is neutral. I think that rate hikes would be quite negative also for stocks especially the large cap, dividend players (JNJ, PG) which are already showing signs of distribution as short term rates inch higher. A lot of these stocks have moved higher via financial engineering more than anything else.

    Anyway, I wrote a short ebook on my gold thesis and would love to send you a copy if you are interested.

    • Yes please send it to mikael.syding@gmail.com

      I’m all ears (and eyes).

      I agree that gold could very well fall further together with other financial instruments. It is worthless after all and selling in one end of the financial markets could beget selling of other asset classes, including gold.

      However, having already fallen by 40% while stocks increased by 40%, I still think it’s worth betting on some kind of reversion.

  6. Hej Micke!

    Ett par frågor. Var tror du det är bäst att placera sina pengar, nu när börsoron börjar bli allt mer påtaglig. I hedgefonder, guldplaceringar eller på sparkonto?
    Som tidigare fondförvaltare så undrar jag vad dina tankar är kring att parkera sina pengar i en hedgefond, med risk 3/7, i nuläget? T ex Brummer Multistrategy.

    Eller anser du att det är bättre att placera pengarna i en fond med exponering mot guldpriset eller helt enkelt att spara pengarna på sparkonto?

    • “Bäst” är en rätt så komplicerad fråga. Jag tror att man får det bäst om man går kort amerikanska S&P 500 med hjälp av att rulla en matta av out of the money puts, men det är knappast en rimlig eller lätt strategi för de flesta svenskar.

      En mellanmjölksvariant (dock kostsam och med risk för stora förluster) är att bara köpa XACT OMX BEAR och vänta. Som mellanting kan man köpa puts på OMX, men det kräver också ett visst kunnande för att balansera hur mycket, vilka löptider och lösenpriser man ska välja.

      Bästa rekommendationen över tid tror jag är att göra en PIZZA, en “fyra årstider” med företagsobligationer, statsräntor, guld och aktier i mer eller mindre lika delar. Helst ska den vara lite internationell, men visst kan man köra bara Sverige om man tror på kronan eller planerar att spendera merparten här hemma. Som tillägg till strategin skulle jag vilja minska aktieandelen till nära noll eller max hälften av normalvkten 25%, pga hur starkt och länge börsen gått. Jag skulle också fokusera på kortare löptider än längre vad gäller ränteplaceringarna i dagsläget. Det torde komma bättre räntor att placera i inom några år.

      Brummer Multistrategy är kanske bästa alternativet om man vill slippa tänka på pengarna öht. under långa tidsperioder Där sitter över 100 erfarna förvaltare (jag var EN av dem) och oberoende av varandra gör vad de kan för att få till så bra riskjusterad avkastning som möjligt över tid. Du blir knappast rik av attha pengarna i BMS, men du kan få en hygglig och ganska trygg avkastning över tid. Utgå dock INTE från att de klarar av att avkasta positivt under en plötslig börsnedgång.

      Personligen kör jag XACT BEAR och guld-ETF:er samt lite diverse andra investeringar på långsidan.

  7. You smart people are too paranoid… BTC or Gold will stay speculative, called it !

    • Correct, they will stay speculative (as will a lot of other things like bonds, stocks and fiat FX :)

  8. Hi Mikael,
    I’ve found your blog about a week ago and I was reading and getting a lot of useful insights from your blog, also, I have been thinking about buying gold for the past year and this post really made me push the trigger – I bought a reasonable amount of GDX and GLD yesterday.

    I am a successful internet entrepreneur in my mid 20s and I know that online business is the area I should be focusing on for my future but I just can’t stop playing with stocks…it’s like an addiction for me. Part of myself keeps calling me retarded for trying to outsmart the market with my very limited knowledge/experience but the other part of me just keeps buying and selling.

    I did well with the US stocks last year (it’s not a big achievement since pretty much everything was going up, I know). This year I got scared of all the record highs and sold all of my US positions with an exception of nyse:statoil.

    I have been working on beating my addiction and I am currently holding only 5 positions.

    I bought these Swedish stocks because of the high dividends one year ago:

    STO: SWEDA
    ERICB:SS
    STO: HMB

    And I also bought HYUD in London stock exchange two weeks ago (I liked the value and what my research was showing and I just bought it).

    Do you think I should consider selling these positions and shifting my assets to more gold/silver/real estate? These positions would buy me at least several kilograms of gold. That would also help me to forget all the stock market temptations and focus to what is driving me the most profit: business.

    I don’t have anyone to talk to about these issues and I would really appreciate your feedback. Thank you.

  9. Tack för den här texten Mikael – otroligt läsvärd!

    Jag undrar vad du har för tankar kring dollarexponeringen i de etfer (GLD & GDX) som nämns ovan? Eftersom dollarn ökat så kraftigt i värde sista halvåret bör det väl ses som en större risk att exponera sig mot den, med underliggande valutaeffekter? Om vi skulle få en kraftig nedgång på amerkanska marknaden vad händer då med den här typen av etf?

    …eller tänker jag fel här? Ibland är det svårt att se hela bilden.

    • Valutor är trixiga. De går emellertid ofta i långa trender. Dessutom tror jag att svenska kronan är klart mer övervärderad än dollarn – särskilt i skakiga tider som jag tror kommer ungefär nu.

  10. Can I simply say what a aid to seek out someone who truly knows what theyre talking about on the internet. You undoubtedly know how one can deliver a difficulty to light and make it important. More people must learn this and perceive this facet of the story. I cant imagine youre no more fashionable since you definitely have the gift.

  11. Vad tror du kommer att hända med folks aktier/värdepapper vid en stor valutakris?
    Om vi får se marknader stänga ner med finansiellt kaos och banker som tillåts att gå under, är det då en bra ide att ha sina värdepapper på investeringssparkonton hos nätmäklare som Nordnet och Avanza?
    Jag vet inte om dessa dras med samma problem som storbankerna, med derivatkedjor, utlåning och belåning. Och jag undrar om du anser att någon nordisk bank känns mer säker än de andra och i så fall vilken?

    • Oerhört svår fråga och jag har inga bra svar. I dagsläget räknar jag inte med en så djup kris utan bara en mer normal recession och bear market. I det scenariot tror jag att alla typer av konton i Sverige är säkra.

  12. Är det fortfarande aktuellt att köpa guld? Vad skulle du rekommendera för papper isf?

    • Ja.

      Jag är ingen expert alls, men jag har handlat främst etf:erna GLD och GDX, samt guldproducenterna Agnico, Goldcorp, Newmont. Jag har även varit inne i GDXJ men den är extra spekulativ (vilket iofs kan vara rätt just nu)

      Enklast är GLD (guldpriset) samt GDX (de stora etablerade guldproducenterna – vilka typiskt går 2x så mycket som guldet. GDXJ brukar gå ca 3x)

  13. Hej Mikael,

    Först och främst vill jag tacka för en varierande och intressant blogg.

    Vad tycker du om GDX i dagsläget, fortfarande köpläge trots den fina uppgången under 2016?

    • Köpläge på sikt och som alltid svårt att tajma. Bättre att se om jag skriver mer detaljerade inlägg om guld istället för svar här.

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