Connor & whomever else it concerns-

Many people have no idea what caused the recession we are in today. While there were MANY contributing factors, it is widely known that subprime mortgages and the investments (CDO's, MBS's, Derivatives etc) in them caused a crisis of credit. The real estate bubble burst, no longer could someone buy a house with 0-5% down and flip it in a year for more money. People defaulted on loans, banks suffered SEVERE losses- preventing the flow of money from one bank to another, or to individuals & corporations in need. Those who invested in these sub-par mortgages (AIG, MS, GS, etc. etc.) also felt the heat from their not-so-great investments. The government was forced to step in (yay!) and SPEND, SPEND, SPEND.

This is an over simplified version – for a full explanation of what happened in 2007-2008 check out this video. It explains the crisis of credit we are (still) in.

http://crisisofcredit.com/

Our current amount of debt is somewhere around $13.3 trillion dollars depending on where you look.

$13,300,000,000,000 = ~$60,100 per working citizen in the US.

Projected deficit for 2010 ~$1.4 trillion. 2011 is about the same.

In 2008, 10% of the government's revenue was spent servicing our debt (interest). Including non-cash interest accrued primarily for Social Security, interest was about $454 billion, 18% of revenue.

Why do we have so much debt you ask? Stimulus package after stimulus package. Couple that with lower salaries due to the recession, less capital gains & dividends, etc. etc. the list goes on and on- bottom line there is less money to go around in times of recession (unless you borrow it! Thanks China & Japan).

Obama has just issued $26 billion for state loans (who are also bankrupt) and $3 billion for home bailouts.

The government is borrowing money to buy back Treasury Bonds it is issuing. We cannot continue to print & borrow money – it is a viscous circle which will eventually catch up to us.

Now – onto gold.

Central banks & the IMF- who were primarily housers and sellers of gold bullion, have begun to purchase it. India's Central Bank purchased 200 TONNES of gold bullion about a year ago. China's Central Bank is actively purchasing gold and has urged its' citizens to purchase bullion as well.

December 2009 holdings

U.S.- 8,133.5 tonnes of gold
Germany – 3,4076. tonnes
IMF- 3005.3 tonnes

2010 Holdings

U.S.- 8,965.6 tonnes of gold
Germany- 3,754.2 tonnes
IMF- 3,311.84 tonnes

1 tonne of gold is approx. $32.15 million, you can do the math.

S&P 500 Jan 3, 2000 1498.5
S&P 500 Aug 12, 2010 1,082.5 -27.76%

Gold August 2000 $255.95
Gold August 2010 $1,214.05 +374.3%

Which would you have invested in?

Now to support my original claims:

1) Sure there has always been economic uncertainty. However; after talking with many experienced traders & investors- it is quite clear to me that the volatility and uncertainty in the market is quite high. This may be attributed to a variety of factors: the new financial regulation bill, conflicting data in the market place (strong earnings, weak economic data), and the fears of a double dip recession (some even note that a depression may be coming). The market CANNOT recover without a recovery in employment & real estate. The stimulus money is running out, as seen with the Fed meetings and the beige book. The economy has been growing at a decreasing rate for the past few quarters (more stimulus needed?!). Many of the positive economic signs were blown up from the fake money injected into the economy.

2) Low supply, there are a total of 165.000 tonnes of gold ever mined in the entire world. Gold cannot be created…. thus creating low supply. The only people buying large amounts of gold right now are central banks and a few hedge funds. If every person in the world bought 1 ounce of gold, it would send the price of gold through the roof. There is moderate demand, as common Joe is not buying gold YET. The stock markets are going to go sideways into 2011 and perhaps beyond. Companies are sitting on cash, they are not putting it to work. Why? See point 1 – UNCERTAINTY.

3) Ha ha ha. No, the federal deficit and debt in the United States is no where near priced into the price of gold bullion. In my eyes, should our debt eventually be priced into the price of gold, bullion would reach $3,000/oz. We cannot borrow money forever, and eventually the dollar will go to hell and be devalued. All commodities are valued in dollars- if the dollar goes down, commodities go up- IF there is not a negative force on the price from technical selling.

4) Would you rather have the title to a car, or the car sitting in your driveway. I would rather have a gold coin sitting in my hand than a certificate that says I own a 'part' of a company via stock. After the crisis that we are in and the coming economic problems, I think many are going to begin to agree with me. Most of the earnings are positive, you can track their cash flow- true. But, have you really checked into their reports? For the past two years companies have somewhat 'fudged' earnings. Cut expenses, profits go up. However, this is not a real indicator of a company in my opinion. You can cut all the expenses you want, lay off more & more people – but you need your top line to increase (revenue). If you have not figured out, companies are designed to portray strength– so you invest in them. There are an obscene amount of accounting tricks that can turn a failing business into a positive one on a piece of paper. Just look at the large banks- showing profits… Are you serious? They have trillions of dollars worth of bad loans- which they move off of their balance sheets when reporting earnings. Google it. Eventually they will have to acknowledge these losses.

5) There are not many ways to rebut this except to say watch.

I have been reading more and more articles on people who say they are 50%, 90%, even wholly invested in gold. If you are seriously interested, read, read, read. You will learn the fundamentals of gold & the reasoning behind its' bull run.

Whether you want to believe it or not, our economy is not in great shape. We are still in a recession. The markets no longer portray the strength of the economy. Gold will continue to increase, all of the fundamentals are in place. Anyone who tells you gold will be down in the next 5-10 years is simply delusional. Jump on the train, or watch it go bye. This is for you to decide.

In 2000, those who said gold would reach and surpass $1,000 were thought of as crazy. Guess what? They're not only basking in their call, but their wealth as well.

My prediction is that gold will push $2,000/oz within 5 years. ETF's to buy: GLD, GDX.

Take it, or leave it. Enjoy.

http://www.kitco.com

Connor-

You can track cash flows all you want- you will see NO returns on your investments in the next 3+ years- perhaps even longer. We are on a long road sideways, with a resistance level of DJIA ~10,000. I can see the Dow reaching 8,000 in the next few years, though. I'd take my chances with precious metals, despite the fact that they aren't a living and breathing company- they are REAL.

U.S. economy showing more signs of slowing:

http://www.cnbc.com/id/38769751

U.S. mortgage rates continue to fall to record lows:

http://www.cnbc.com/id/38770084

Gold reaches highest level since level since July 1 on weak jobs report.

Real estate & employment are in a quasi-depression. There can be no real recovery without a recovery in these sectors as well. Sadly, neither have hit a bottom yet.

Connor- if this site is still running in 3-4 years let's see whose portfolio has outperformed the other… =)

Happy investing.

I like gold but it is at an all time high. The value of silver is very depressed. something like trading at 60% of its value. I am putting 25% of my assests into silver because I predict a large influx to precious metals as currencies are devalued around the world.

Interesting what has happened in less than a year…

What will be more interesting is what unfolds in the next 5 years.

I adhere to my former posts.

This is an interesting topic.

In retrospect, buying silver was a good call. Cheers for
Scully. The SLV has returned about 60% from October with GLD returning 30%
since August. Incredible returns for either decision, congrats to both of you.

While I respect anyone’s interest in owning precious metals,
I’m not willing to aggressively buy these commodities for a large part of my
portfolio. Small positions in precious metals with strong fundamentals make
sense, but large positions could be dangerous.

The first problem for me is that hard commodities are simply
incredibly difficult to understand. There are so many different market forces
that it’s almost impossible to find short-term arbitrage opportunities or just
to grasp the fundamentals and get a foothold in such a wild market.This contrasts to the stocks of the miners for the underlying commodities.

Second, the fact is that most of the gold in the world that
is consumed goes into jewelry. This is why people like gold. This is why it has
any value at all as an investment, is that people like to look at it. It doesn’t
put a smile on a banker’s face thinking about the vault 2000 miles away that
has the gold bars he has a note for. It’s the person wearing jewelry who wants
the gold. The banker smiles when that person drives the price upward. Being a
consumer discretionary product, forecasted demand is volatile. Sure, there is a
growing middle class in China and India and they are buying jewelry, but before
buying gold you must ask yourself if you want to go long emerging markets at a
time when their growth rate is already incredibly high. This is tied to a
bigger question asking, “can the global economic recovery continue to ride on
the shoulders of these emerging economies if developed economies face another
downturn?” This is an important point, because if you want to buy gold based on
the consumer credit crisis and housing downturn, you have to admit that the
fundamental consumer demand for gold is negatively affected by the credit
crisis. Do you need to buy that watch, or do you need to save that money for a
new car that gets good gas mileage and has a few hundred dollars’ worth of platinum
in its catalytic converter?

Third, history. Almost all commodity run-ups in both recent
and far past history which occur in the short period of time that gold has
risen to its current levels have been followed by sharp downturns. What other
commodity in modern history has managed to rise nearly 300% within half a
decade, then continued to appreciate without extreme price swings.  If you look at a 40 or 50 year chart of gold,
you can see the 80’s gold bubble. While the reasons for this bubble weren’t the
same as the reasons for the run-up today, it still shows you how volatile the
demand for a “safe-haven” precious metal can be. As a side note, the silver
market was almost cornered in the 80’s by two Dallas investors, resulting in a
period of extreme price instability. Demand for the metal fell as the prices
rose, which obviously hurt silver buyers.  Also, in the 80’s gold situation, the volatility
in the price of the metal itself was a result of speculation in the futures
markets, not sustainable consumer or industrial demand. This is similar to our
situation today. The price of gold is high because demand is forecast to be
high in the future, so investments are being made on demand by central banks
and consumers in the future. This isn’t a bad thing in itself; it’s the free
market at work. The bad part about this is the downside risk. The guy in China
who just bought himself a piece of gold jewelry isn’t going to race to a gold
exchange to sell his jewelry when it looks like the price might go down within
the next month or year. He’s not going to add to the market’s gold supply
because of the economic outlook. Investors, however, can change their mind in a
short period of time. It just takes one investment bank compiling data from
various models and saying “hey, we need to reduce our exposure to gold” to send
the future demand downward. This can happen very suddenly. Adding to this
problem of increased volatility, particularly to the downside, is the new
ability of investors to buy and sell gold on the stock market through ETFs.
Obviously this is a good thing for the market and for investors, but you must
acknowledge that it changes the volatility of the commodity represented and
adds liquidity to a market that advertises itself as being unique in its “safeness”.

Fourth, the central bank question. It’s difficult to understand
why the situation facing central banks now would push them to continue buying
gold into the future. After all, gold is the highest it’s been in 30 years. In
the US, most investors agree that there will not likely be a QE3, and so the
supply of money made available by monetizing our debt has likely reached its
peak rate of increase. As far as interest rates go, there is a complete lack of
a consensus among investors on what is going to happen. Of course they’re going
to rise… eventually. But hasn’t the market already accounted for this? The
price of gold has spiked to almost 4 times its starting price in the last 6 or
so years. Central banks are in a stalemate with each other. In hopes for
export-led continued recoveries, no central bank wants to be the first one to
get their feet wet and raise interest rates. If you can understand this macro
situation, relate this to central banks and have a prediction for the Fed’s
future moves relative to other central banks, you can relate that to the impact
on the dollar, and at the end of all this you’re still bullish on gold, then
gold might suit you as an investment for a large part of your portfolio.. maybe.
Adding to the confusion is the Chinese inflation story. I think that it is
misunderstood by some investors. Clearly, they could just raise the value of
their currency to something more reasonable and inflation would ease in China.
But in this situation, the increased Chinese consumer interest in gold because of its
drop in yuan-denominated price would be offset by the
easing of inflation. Another non-central bank point to make is that the deleveraging
of the US consumer means that US consumers are going to be paying off their
debt, not buying gold.

Fifth, recent events. If you look at the gold producer index
and compare it with gold, there has been a divergence in the past month or so.
The owners of the miners and producers are most likely changing their outlook
at a faster rate than the owners of gold. This could be an opportunity to buy
the miners, or it could be a signal that some people are forecasting a downturn
in gold and lower profit margins. The usual argument used to answer the
question about gold producers and the gold price not correlating is that the
costs to recover the gold are rising. While this is true, the costs to recover
the gold aren’t rising nearly as fast as the gold itself. Even the most
expensive new projects for gold miners put the recovery cost at around $500 an
ounce. On the extreme, extreme high end, there are some proposed projects that
go near $1000 an ounce. Most mines aren’t anywhere near these numbers, and stay
on the low side of $500, just as they did when gold started its rally early in the last decade. Against my argument, the selloff of the miners could
also be due to the related recent sell of the indices ETFs and other
instruments which contain the miners. During previous pullbacks in the indices,
however, the miners have still kept a tight direct relationship with gold.

Sixth, alternatives. If you’re looking for an investment
that will appreciate during further unforeseen economic turmoil, there are many
different investments both in commodities and precious metals which seem to get
overlooked, although they have the same fundamental tailwinds for appreciation
that gold does, without having already risen incredibly high in the last decade.
To me, growing up in the post-gold standard age, the only reason gold is put in
class of its own within precious metals is its historical use as a currency,
and its advantage of being well known and understood by all levels of
investors. It’s just one of those “sexy” investments. Sure, there are many
psychologically effective arguments such as, “all the gold in the world would
fit in an Olympic sized swimming pool,” but this type of argument holds for
many different precious metals. You could say the same for platinum, which
costs more than gold by the ounce, but is being mined at 1/20^th the
rate of gold. The total amount of palladium ever mined weighs less than all the
gold held by the US government. Unlike gold, however, which has few industrial
uses, platinum and palladium have many different uses. Industrial demand for
gold rose by 21% last year, but for platinum it rose 48%. During this period,
platinum rose moderately, and was handily outpaced by gold. Really though, if
you want a true favorable supply-demand story within precious metals, nothing
compares to plays on the rare earths. They’re constantly being consumed by
advanced electronics, particularly in defense equipment. You can't recycle the rare-earths you use in a missile. Because of a global
supply shortage, China, one of the lead producers of rare-earths, has put
restrictions on exports. As a result, investors have turned to domestic
sources. Molycorp, a publicly traded company which listed somewhat recently, is
developing a mine in the US. Since going public a year ago, the stock is up more than 400%. Rare-earths are so rare there’s no reason for them
to be traded on exchanges. If you want in the market, however, you could always
buy some Neodymium Iron-Boron… haha… or just buy the stock. As far as other
commodity classes, if you’re really dying to protect yourself from a pending
economic downturn, why not invest in soft commodities? The ones you eat, like
soybeans and wheat, probably won’t see demand erosion in a downturn.  

Seventh, gold is in an awkward position. Let’s say that all
the gold in the world is mined, and it is hoarded by investors. Would you
really pay $5,000 an ounce for the gold in your new ring, or would you switch
to another, possibly more exotic, and much cheaper material, and maybe coat
part of it with a few atomic layers of gold? So it sits in the vault… and sits.
I’m not saying that people won’t want gold, I’m just saying that there is
definitely a point in these incredibly high numbers for gold people talk about where
demand destruction becomes an issue. Also, in the long-term, it wouldn’t take
long for these high prices to lead to the gradual acceptance of alternative
products in the consumer and especially in the industrial space. Another type of person who would
hoard gold would be the “end of the world/ (2012/ mayan(?) apocalypse, etc.)”
person. So if society deteriorates, nice job for those investors. I think they’d
be better off buying seeds and guns, but to each their own. Strangely, a large
part of non-institutional investment demand, I believe, is coming from this
kind of investor.  If the world doesn’t
end, however, a lot of that gold will be back in the market. To me, gold sits
in an “awkward position,” because it has somehow caught on with both the apocalypse
crowd and fundamentals crowd. Either side you sit on, you’re waiting for a
speculative event in the next several years, during which you can sell your
gold to be better off. If these events don’t materialize, then what?

Eighth, the technical indicators. Just look at this : http://home.earthlink.net/~int…..dow-au.htm

Ninth, the result of volatility. If you believe any of my
arguments for possible price volatility of gold, you have to realize that some
of the basic arguments to long gold that I've been arguing with disappear. Its “safe” investment potential
pretty much evaporates after you have one sharp price swing, even if this swing
is upward.

The argument that I’m making is this: there are just too
many factors and uncertainties in gold for me to want to own it as a large part
of my portfolio. A small part, maybe, but the potential price volatility down
the road makes it unsuitable as the core of a portfolio.

I actually want to like gold. One of my favorite investors,
a Dallas hedge fund manager who predicted and profited off the mortgage crisis
named Kyle Bass, recently bought one billion dollars of actual gold bullion in
the University of Texas endowment fund. Of course, he has access to resources. For example, he could have someone wake him up with a call at 4:00a.m. if there was a significant drop signaling a burst of the gold bubble, and he could open a short position on a foreign market equal to the amount of the bullion in the vault, and his risk would dissappear. But I digress.. the point is  if I could like gold, I would. Also, I’m
not saying I’m a gold bear, in fact, I think the price of gold could rise. It
could also rise sharply and fall sharply. You could make a lot of money, and I
hope you all do. It could fall to a level attractive to central banks who could have reason to buy it. The problem is that there are so many interdependencies within the
common explanations for why investors should buy gold. Most of my questions for
the typical justifications deal with volatility. This leads me to believe that
gold isn’t as solid a bet as many people think it is. In my opinion, many
people who have relatively large positions in gold within their portfolio are
sometimes unaware of the risks.

Happy investing and best of luck.