Tuesday, June 8, 2010

PM Update

Anon wrote: Just a question on gold. Perhaps you can point to the right post if already answered this.Why are you expecting a big correction in gold in...

I've addressed PMs quite a lot throughout the blog. My basic position hasn't changed since I went long gold in the early 00's, then jumped off the bandwagon too early in late 2007, still bagging a 300% gain. Yes, I've given back 20% on that position, still on paper, but I'm not worried at all about it morphing into another huge gain. The reason I phased in long in '03 is the same reason I'm short now:

PM prices are driven purely by liquidity.

That's why PM prices act like paper stocks, usually with less volatility. Any genuine change in supply and demand has been dwarfed by an 80+ year sea change of inflating cash liquidity. Since prices deflated to major lows in 1932, the Dow (which in no way reflects individual stock prices) has increased from 40 to 10,000. Gold only inflated from $20 to $1235. Paper stock indexes are a much better inflation hedge than gold.

The quantity of counterfeit cash printed by commercial banks (contrary to popular belief, the US government cannot and does not print money), then laundered into borrowers' names has been plunging since it peaked in late 2007. There are NO signs of that letting up. To the contrary, prices ushered in by The Great Recession still dwell near all time highs. Our Depression hasn't even started rolling, it is in its infancy.

As liquidity dries up, precious metals, nothing but dead metal to reflect the amount of paper in circulation, get priced lower. The outcome is as certain as prices rising during inflation of the cash supply. The timing of the macro price decline is more difficult, as this event big is far bigger than our lifetimes, thus, day-to-day price movements are anyone's guess. But with W3 down maturing, my goodness, you have to LOVE the opportunity to short any asset still clinging to all-time price highs.

So I think gold presents a unique opportunity to capture 100% of the coming depression price declines, the single place you can still jump into an empty bandwagon. Although silver is almost 70% lower than its all-time highs, I think its emerging duality as a precious/industrial metal makes it an even more attractive short, as industry tanks hard.


  1. I often try to think what would of happened to gold in the 1930-40's depression if the govt had not controlled the price.

    My guess, in the panic of the early part, gold would skyrocketed to some crazy number, then in mid to later stages it would have dropped dramatically.

    Like the free market moves of the 80's.

    If we are still in the infancy stage of this depression, gold can go much higher in my view.

    Perhaps take a short position, but be careful. Always leave room to add to your position.

  2. FDR

    Thank you for this post. Events are unfolding just like you predicted.

    You really nailed the move on the dollar!

  3. FDR I wonder if gold is not where oil was in the popular consciousness, two years ago next month? From my read, the attachment to precious metals has become religion. Oil never reached this level of adulation so I would have to agree that from an emotionally detached and objective "investment" perspective it presents a remarkable shorting opportunity. Hell, even some of its great and seemingly more rational admirers are now cautioning of the possibility of a deep "correction."

    How long can the commercial traders of this world be wrong? I think we will know the answer to that question soon enough.

  4. When the titanic sank....

    First, the mass of people were in a craze to get out their beds.

    Then, the mass of people were in a craze to get out of their rooms.

    Then, the mass of people were in a craze to get on deck.

    Then, the mass of people were in a craze to get in lifeboats.

    Let us say that people think gold is their financial lifeboat. There was only a brief period time when the lifeboat's value skyrocketed.

    I wonder what someone would have paid to to get on one of those lifeboats?

    What was that lifeboat boat worth 24hrs after the titanic sank?

  5. Oh yeah, I left out one important part in the beginning of the titanic analogy.

    The mass of people were in a craze to get on the titanic.

    How silly of me.


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