The fundamentals behind the gold trade are generally understood on a very superficial level. $3000 gold will have very little to do with inflation. It will have little to do with the economy being “bad”- we have had recessions with collapsing gold prices. In many ways we are talking about something far more menacing. We are talking about capital running for cover. We are talking about unprecedented skepticism towards government. We are talking about the long overdue self-destruction of a system that magnifies the folly of man. In essence, we are talking about a profound paradigm shift.
There are a lot of things in investing that are “obvious”, but for whatever reason, aren’t generally accepted. Just think about the question: “What is the best approach to investing?” As far as I am concerned, there is only one approach that makes sense, and that is the value approach. To consistently make profits, you must buy assets at below intrinsic value. If this isn’t instantly obvious to you, I advise you to stay away from investing.
Investors are led astray not only by emotions, but by theories taught in business school, such as the efficient market theory and the Capital asset pricing model, that I can tell you, no serious investor should believe. These theories fail on a number of levels, but I’ll focus on one aspect. The CAPM assumes that the risk premium in a stock changes in direct portion with beta, or the stock’s relative returns against the market. If you base your investing on this model, you are not mentally prepared to profit from the coming explosion in gold. After all, if gold corrects 30%, CAPM evangelists will tell you to run for cover because gold just became a riskier trade. The smart money believes the exact opposite; they are huge buyers on large corrections. The failure of the larger investment community to recognize such obvious flaws is a big reason why the same people outperform the market over and over again. It is no coincidence.
As an investor, I thrive on panic selling and fear since my mind is always fixed on value. I can’t say the same about gold permabears, who are undoubtedly among the most amusing species on earth. They try to paint a picture of gold bugs as irrational and extreme. The ironic thing is, when arguments get to the level of hard data and facts, its is the gold bears who are exposed as irrational. I have some homework for gold permabers. Over the past 30 years, how does gold’s rise compare to the rise in stocks? How about the national debt? How about the money supply? At the end of the day, gold is a data-driven investment. I don’t care how many people tell me otherwise; they are the ones who are too lazy to test the data for themselves.
Fed Stupidity
Now that a majority of Americans are officially against the Federal Reserve, I don’t feel as motivated to criticize them. But honestly, they are so inept I feel morally inclined to expose their shortcomings. The Fed is myopically focused on maintaining an arbitrary rate of inflation. OK great. But while these geniuses are focused on a manipulated government statistic, Rome is burning around them. Sure core inflation rates are holding steady, but food and energy costs are up, interest rates are flying, the national debt is rising, and gold is shooting to the moon. The supposed cures to our disease are creating even bigger problems. Someone wake they guys up before it’s too late.
Stocks
There is a large contingent of bears that think the stock market is going to collapse. One thing these people miss is that the Fed’s mandate is constantly in flux. The Fed of the 1930′s didn’t go around buying government paper, and it’s sole purpose wasn’t to prop up the stock market. We live in different times- the Fed has much more leeway to collapse the economy with their stupidity. I remember quite clearly when the Fed cut interest rates 75 basis points over a weekend in September of 2008 because of unusual weakness in foreign markets that was creating havoc in the U.S. futures markets. Did they have any idea about what caused the drop in stocks? No. They were simply propping up stocks. If the Fed is that focused on stock prices, then trust me, stock are going higher. Don’t argue with me on this point and instead try to focus on what the unintended consequences of an easy money policy will be.
At this stage in the game debt begets more debt. Lower stock prices beget more liquidity infusions and higher stock prices.
Gold
There are two scenarios I see for gold, both of which can be characterized as “extreme.” One is a steep sell-off to about $1000-$1200, followed by a very healthy rally. The other scenario is a monster rally to about $1600-$1800, followed by a healthy correction. As a proponent of the value approach to investing, take a wild guess as to which of the two aforementioned scenarios I prefer. At $1000, I will be shouting from the rooftops to buy gold.
One of the reasons I believe extreme moves are coming is because gold is an asset where the passions of man are very evident. After all, fluctuations in gold represent perceived changes in the underpinnings of our entire monetary system. When gold truly lifts off into the stratoshpere, it won’t give people the chance to hop on board. Believe it or not, at $1370, we are still in accumulation mode.
No matter how firm I am in telling you the likely events of the future, very few of you will believe, and even fewer of you will take action. My genuine wish is for our leaders to figure things out and stop this crazy Ponzi scheme financing before it’s too late. But until then, I must do what I can to protect myself in an intelligent manner. I hope you are all doing the same.
