Friday, May 28, 2010

Surprising, Good Contrarian News on Gold

A blogger who runs the interesting Trader's Narrative blog ( has opened the veil and revealed a surprising bias against gold and gold investors.
From his piece today, Riding The Gold Bubble To $3,000:

My visceral aversion to gold stems from the same logic as Grantham’s. Unlike the gold bugs, I don’t see gold as having any intrinsic value. Well, like any commodity it has a functional demand for its use in industrial production of electronics, etc. But I don’t feel any emotional pull towards gold as “real money”.

The only way it will go up is if buyers are more aggressive than sellers - just like any other commodity. As Arends explains in his most recent gold article, the price of gold is higher because people are accumulating it. There is no shortage of gold. In fact, for the past 8 years aggregate supply has exceeded demand by a healthy margin.

If there is a second wind that will take gold up to the $3000 level, the catalyst will be crossing the tipping point of a virtuous cycle. That is, price will go up enough to attract new people to buy in the hopes of selling it to the next sucker, I mean buyer, for a higher price. And so on until we have a bona fide bubble on our charts.

Well, regardless of short term trading positions, yours truly was an on and off gold investor ever since 9/11/2001, as it immediately was obvious the Fed and the Feds were going to go easy to pump up the economy for the War on Terror, and the dollar was way too strong against the euro and yen in any case.

Following all the money printing in 2008, belief in ongoing fiscal irresponsibility and corruption became even clearer and the idea took hold in many minds that gold was the only offset to monetary debasement. So I also have no emotional pull toward gold. But I own a lot of it in various forms. That is because gold is a form of money. The IMF and the Federal government say it is. The people of the world say it is. Does Trader's Narrative have an emotional attachment to Federal Reserve notes? I hope not; but he undoubtedly likes having as many of them as he can.

The blogger argues that gold has almost no intrinsic value. What about Federal Reserve notes, that he receives when he sells something of value, such as lumber? What is the value?

When I see a blogger of this quality talk this way, calling a buyer of gold a "sucker", I am reminded that gold investing remains at base a contrarian activity. Reassuring. I was beginning to think gold investing had truly gone mainstream.

Nonetheless, one of the commenters on that blog post wrote as follows:

Again the quite reliable german magazine cover indicator (the well-known “dumb german money” is prone to buy at major tops, and sells at major lows.). Both major investment magazines (Focus Money and Der Aktionaer) are pushing gold aggressively in their recent issue. Der Aktionaer is especially aggressive: “Gold!!!! Last Chance to buy!!!”

Understood the euro could rise 20% against gold and gold could in fact be toppy in euros but be a yawner or rise further against dollars in that scenario, but as was the above commenter, yours truly also remains suspicious that at some point in the next year or two, we will see another fall 2008-type selling panic in all assets including gold. I would not be surprised to see that happen this fall. This would be the traditional time for a stock market bottom: the third quarter of the second year of a new president's term. So I'm more in cash than I have been in many months. Lots of gold vehicles, lots of cash, no long-term Treasuries; Ginnie Maes with short-ish duration; and highly-rated munis. Time will tell.

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