ďA gold mine is a hole in the ground with a bunch of liars standing next to it.Ē
I started investing in gold in 2005. Not a bad time, right?
Hereís why I started: I was the ETF trader at Lehman Brothers at the time. A couple of guys came by to talk about this crazy idea they had about a gold ETF. I think one was from the World Gold Council and the other was from State Street. The WGC guy brought along a 10-ounce bar of gold. At the time, it was worth almost $6,000.
The ETF was SPDR Gold Shares (GLD).(* Please see disclosure below)
I ended up buying GLD, because Iím a trader. Trading stocks is what I do, so itís easy for me to buy something with a ticker. I didnít even know you could buy physical gold. It was 2005 or 2006, so Iím not even sure if the online bullion dealers were up and running yet. If you wanted to buy gold, youíd have to be in the know, go to some hole-in-the-wall coin dealer, get your face ripped off.
I have owned GLD since. And along the way, I learned a lot about investing in physical gold, and I bought that, too.
But thatís not the interesting part.
I Loathe Gold Culture
One of the things I figured out as I was starting to invest in precious metals is that a lot of the other guys investing in gold and silver wereÖ not the kind of guys I really wanted to hang out with. Neckbeard McGoldbug. You know the type.
Iím talking about the ridiculous conspiracy theories, the bizarre politics that are so far right, theyíre left. The hatred toward banks. I still donít understand it. These are supposedly right-wing guys who found themselves on the same side of most issues as Matt Taibbi and Elizabeth Warren. The apocalyptic outlook, the relentlessly bearish views, the outright refusal to participate in one of the biggest (and most obvious) stock market rallies ever.
I am allegedly a right-wing guyóand Iíll own itóbut I am not that.
The other thing I discovered about these guys is that itís useless to try to sell newsletters to them. They donít believe in intellectual property.
So part of my gold investing career has been figuring out what I am and what Iím not. I guess you could call me a classical liberal and monetarist who takes a keen interest in gold.
Freeze It, Personalize It, Polarize It
As the gold rally crested and rolled over, the mainstream financial media really started to go after the gold bugs. They were super annoying on the way up, and the (mostly liberal, Keynesian) pundits were crushing them on the way down. Itís gotten to the point where the only people left buying gold areÖ Neckbeard McGoldbug, and theyíve been thoroughly maligned for it.
If you recall, the whole idea was that quantitative easing (printing money) was going to create a lot of inflation. Plus, the budget deficit was about $1.8 trillion at the time, so we would have to monetize the debt. It was a pretty good argument. And it worked for years.
Then it stopped working.
The inflation the gold bugs predicted never happened. It was the biggest hoax perpetuated on investors, ever. So the beatdown from the Keynesians continues to this day, on Twitter, on blogs, in the news.
But maybe the gold bugs werenít wrongójust super early.
Iím Not an Economist, ButÖ
I do remember this from a class I had: the quantity theory of money.
MV = PQ
Iím sure this looks familiar to many of you.
So M, the supply of money, has gone way up:
But V, money velocity, has gone way down:
Given constant Q (quantity of goods), P (price) remains pretty much unchanged.
So we will eventually get our inflationóif money velocity turns around and heads higher.
There arenít any good theories as to why money velocity continues to plummet. At least, I havenít read any. I think we will have a similar inability to predict when it rises.
This is overly simplistic, but Iím a simple guy.
Gold Is/Is Not for the Long Run
There are people who say gold should be x percent of your portfolio in all weather. I get it. It tends to be negatively correlated with other stuff, so it reduces the volatility of a portfolio.
And as long as central banks are doing what theyíre doing, the long-term case for gold is pretty much intact, recent price action notwithstanding.
But let me tell you this. If central banks ever got religion and pulled a Volcker and hiked rates to the moon, it would be a remarkably bad time to hold gold.
On the other hand, throughout history, there have been times where people were very sad that they didnít own gold. I talk about one of them here.
Itís very real, and the history of fiat currencies is also quite sad.
I am the furthest thing from an alarmist. I donít think the dollar, or the euro, or any other currency is going to collapse, at least not imminently.
But I also think the Fed doesnít want to raise interest rates, possibly ever.
The ECB is printing, and you have the prospect of direct monetization.
Japan is just insane.
Even Sweden is printing money.
And I can see a scenario where Canada, Australia, and Norway are all doing it too.
So: if the whole world is printing money, Iím okay with being long gold.
But in 2015, you really shouldnít care about what people think.
*Disclosure: at the time of this writing, Jared Dillian was long GLD, SLV, and physical gold and silver.