Friday, September 23, 2011
On Scary Corrections
In the wake of gold's scary 12.5% three week correction from its all-time high (and having to stew in it all weekend), I thought I'd share with you some encouraging comments I found on another website:
Is today *really* a down day for gold?
For $10,609.37 you could have bought the DOW on May 13, 2000. On June 6, 2006 you would have paid $10,706.37 of inflation-riddled dollars for your trouble. Today you'd pay $10,771.48 for that same DOW.
On the other hand, $10,609.37 of gold purchased on May 13, 2000 would have had a dollar value of about $21,660 on June 6, 2006. And today, Sept. 23, 2011, that same gold would have a dollar value of $63,552.
Choose gold. Hold gold. Don't worry. Be happy.
2. Why Gold is falling
I'm annoyed with myself for not factoring it in before but we can easily see the culprit impacting PoG here. Why of course it's Bonds!
How did we miss it? We credited the market with less nuance than it actually has in that it is discounting PaperGold relative to Paper Bonds as a liquid mid-term hold.
Can we still expect a reversal in PoG whilst Bonds drive inexorably higher under the weight of a tanking Stock Market?
YOU BETTER BELIEVE IT!
3. "Do over!"
That reminds me of the comment I made earlier this week with regard to this pricing consolidation. I remarked that, due to gold's rapid run-up, a lot of people have been left on the sidelines with the sentiment that they have missed the boat.
Well, here's one of those happy circumstances where the boat has made a brief unlooked-for return to the dock. Now the question is, how many of these early boat missers will seize upon this second chance?
Some of them will, but mostly it's the well-seasoned gold-buying professionals who are busy "making hay" while the sun still shines.
Love the mixed metaphors.
4. "FIAT is the wrong play, but the masses don't care. When they see crash... they convert to cash."
More than chalking this behavior up to simple stupidity, I think more than anything this is a sign that that masses are hip deep in debt.
The person that on net is in the black -- that is truly a man of wealth instead of debt -- does not share this same bewildering behavior of preference for digits/paper in times of uncertainty or crisis.
Much of the financial system is a towering network of debt and obligations atop other debt and obligation. The man of wealth will use it to his advantage, sure, but only to a point. He does not build his house on a foundation of shifting sands -- of easily defaultable debt/paper.
5. Picking over the battlefield - better than being in the battle
If you look back at the pre-1987 event you will notice similar results. Because of a RAPID run-up in POG it sold off with everything else. You will notice that POG is still up on the year (look at a 10 year chart).
Contrast this with Argentina a few years ago. There was significant local demand for gold by anybody who could get any.
The bull market has not ended, the uptrend and fundamentals are unchanged. We have witnessed a garden variety correction (in ALL commodities) The speculators have been burned a bit. Practically speaking this is no different than the events of 2002 in gold stocks:
fundamentals + momentum players = avalanche.
Some likely are sitting on coins purchased at $X,XXX and over, well, too bad. On the other hand since we are in the 2nd inning of a 9 inning game there is little to worry about unless you played a leveraged game.
The situation has not changed- only the temporarily overbought and temporarily over-exuberant over-extended players have tripped up (with a little push perhaps).
The comments above are from between 6/13 and 6/16 in 2006, with minor editing on my part to disguise the date as well as to update #1. These comments were written in the wake of a very scary 21% four week correction from the recent high of $725 down to $567. Comments #3 and #4 were by Randy Strauss, aka TownCrier, and comment #2 was Sir Topaz. Here's one more by Randy:
TownCrier (6/13/06; 15:04:40MT - usagold.com msg#: 145264)
Thanks for your recent series of good posts over the past week. Hiking up the Trail has given you a good view and a clear head to take it all in.
You've made an astute observation that marking ones tangible gold assets to the market price of PAPERgold is not a good idea. During the reign under which wild and woolly derivatives factor prominently in setting the price for the metal, the physical asset will not appear to demonstrate the steady performance that is expected of it day in and day out -- instead, as reflected in its pricing behavior, it will have the same reckless characteristics of its leveraged derivatives along with the panicky mood swings of the paper pushers. Reserve asset holdings in the form of physical gold (instead of derivative alternatives) would therefore only prove itself uniquely meritorious at such fateful time as the credit and derivative markets collapsed into default.
Valued arbitrarily at just $42/oz, it is apparent that the U.S. Fed/Treasury system holds its 8,000 tonnes expressly as an ultimate mitigation against a final calamity in paper. In the meanwhile, the U.S. rides high around the world on the prevailing illusion that dollars, appearing more stable than derivatives, may be reasonably held by everyone else as an alternative to gold, thereby giving Uncle Sam an unduly large audience to support his ongoing debts via the bond market.
ANOTHER system, of the type on which the ECB-euro system was modeled, recognizes that gold need not sit for its whole tenure underutilized until that final fateful paper/derivatives crisis calls it into action. By simply not using the frozen U.S. price, and instead regularly acknowledging the evolving market price of gold through time, they have established a framework by which the gold among their reserve assets can do some of the heavy financial pulling simply by nature of its steady capital appreciation as expressed in terms of the domestic politically-inflated currency.
We currently exist, however, in a world in which the banks of the mark-to-market model have yet to decisively dethrone or discredit the derivatives-based pricing of their key (politically neutral(!!), confer Russian desire) asset as a means to fully implement the stability benefits of their reserve architecture and the accounting thereof.
Getting back around to answering your question, as an outsider it is not for me to say how close the MTM system now has brought itself to the very brink of where cooperation (with the U.S.-dominated system) ends, being the point where the axe shall fall to bridge the gap for progressive movement forward. As we've severally discussed this with FOA, the rational expectation is for the derivatives market to perhaps initially enjoy a burst of naive exuberance to the upside, but then likely fail in a collapse to the downside as players realize that their paper could only ever be merely exposed as being a faulty means to an unobtainable end. The tangible wealth of physical gold was always the stealthy accumulation of the big players who dictate the terms of the game that everyone else eventually plays, several steps behind.
To be sure, the biggest players use (often SIMULTANEOUSLY) the PAPER markets for shorting (no fear, paper NEVER goes "to the moon") while exercising their longs in the PHYSICAL market to take command of the full benefits of actual ownership, and let the devil take the hindmost.
Could the market in gold derivatives see new highs in the cards? Sure -- there's a lot of naive money just waiting in line for its turn to be sheared, the price to be paid for a lack of insight or wisdom while attending the School of Hard Knocks. The definitive answer, however, I believe comes back to the point about where we have now arrived on the financial landscape with respect to international cooperation. If we are at the brink, gold derivatives will continue an officially preordained meltdown even as unfulfilled buyers chase their bids ever higher for metal on a physical market suddenly bereft of supply.
So, are we still in a cooperative environment? If we are, then us little folks will still have time to seek delivery of metal at derivative prices, and our smalltime success may encourage our neighbors to try to make up for lost time in another ill-advised chase for the derivatives. If cooperation has run its full course, the MTM architecture will be unveiled of its full potential as gold is suddenly revalued according to its physical stature, peerless among its papery reserve bedfellows. We would have to make do with what little metal we already have.
If a person woke up tomorrow morning to a news report announcing COMEX August gold futures down to $200, what would he think?
If he woke up the next morning and the contract was trading at only $30, THEN what would he think?
Throwing "good" money toward the purchase of a bad contract has rarely been a prudent means to increase your wealth, as the low price usually reflects the fact that you can't squeeze blood from a turnip -- you can't get gold from an out-of-favor (unsupported) derivative.
Speaking of neighbors, I have a friend who was almost ready to buy his first gold coins at around the $1,750 level. But by the time he got around to it, it was at $1,850 and kissing $1,900 a couple times. He figured he missed the boat and basically gave up on buying gold. So I just sent him this quote from Jim Sinclair's CIGA Eric today: "Anyone not buying here does not believe in the fundamental story. In my opinion, this will be a huge entry point by 2012."
Am I buying here? No. But only because I finished my buying a few years ago. I didn't buy very well by TA standards in 2008, but even my worst purchase then looks like a total steal today. Here's Randy on timing your entry point, written when gold was $510/oz:
TownCrier (12/7/05; 02:42:21MT - usagold.com msg#: 138878)
I had the pleasure earlier this evening having randomly encountered a friend at a coffee shop. Is seems like we cross paths on average about once every one or two months.
Each time, without fail, he picks my brain about the latest doings of the central banks and more especially about the gold market in general. And in fact, in anticipation of this latter line of questioning, I usually cut to the chase and offer the latest gold price as part of my salutation, such as today, "Hello Antonio! FIVE-ONE-OH."
For the past few years he's always been on the cusp of buying gold, but as the price has always been higher than it was previously, he usually expresses a mixed sense first of wonderment and ultimately of agitation (as though he's missed the last boat). Having taken no action during the lower prices, he almost always consoles himself, speaking his thoughts out loud (almost as if seeking my approval), that "I'll definitely buy on the correction".
Sensing that what he really needed was simply a bit more proactive dialogue than I had customarily provided (my personal conversational style is to merely inform and let people make their own decisions), my response to his "correction" comment finally turned the light on.
I suggested that while he was always sidelined waiting for the next "correction" he ought to give some consideration to the following possibility -- that in light of the various things I've previously talked about, the piddly "correction" that he always seems to be waiting for is of no account compared to THE REAL CORRECTION that he needs to tune into -- that being a relentless march to significantly higher prices as gold corrects for 70+ years of undervaluation by the world's banking system.
What a shame it would be for a would-be gold owner to stay sidelined, waiting for some insignificant degree of price-drop that never materialized. I wonder how many other people have consistently tried to save $20 by waiting for a "correction", only to discover that after a series of $5 intraday dips the price overall has moved $50 higher, again and again.
Nike has a good slogan for occasions like this -- "just do it"
I also have a couple interesting tidbits I wanted to share with you:
1. Remember in my last post I criticized Indonesia for including gold in its consumer price inflation index? Well, yesterday Bloomberg reported that they are now talking about removing gold from the CPI:
Gold’s Price Surge Skews Inflation Numbers Across Asia
In Indonesia, gold jewelry was the biggest contributor to a 0.93 percent increase in consumer prices in August from the previous month, accounting for 0.19 percentage point of the gain, government data show.
The issue doesn’t arise in developed nations including Japan, the U.S. and the U.K., or in Asian economies such as Singapore, Vietnam and Hong Kong where the metal is absent from inflation baskets or jewelry has a limited effect.
In Jakarta, Fauzi Ichsan, an economist at Standard Chartered Plc said that removing gold from Indonesia’s basket of consumer goods, was “theoretically logical.” At the same time, it could lead to speculation that the statisticians were under political pressure, he said. Yunita Rusanti, the head of the consumer-price statistic sub-directorate, declined to comment on whether gold jewelry should be removed from calculations.
2. At the LBMA Precious Metals Conference in Montreal this week, one of the presenters suggested: "The US should make a two-sided gold market at $20,000 per ounce."
It's on the last slide here:
And now, since I'm done buying, it's back to sleep for me. Wake me in October.