What’s up with gold?

[powayseller]

Even the experts are baffled. The longs are not willing to sell, so the price keeps rising.

The experts don’t know why more people are buying gold, so they make guesses. Fear of war, fear of inflation, fear of the dollar collapsing, speculators piling on a wave of momentum.

Who is right? How far can it go before it pulls back?

Those who said it was due for a correction have been proven wrong. It kept rising. I bought some GLD at $600, and I made 5% in less than a week. Would ChrisJ be proud of me?

Should I hold on, buy more, or sell?

I’ll definitely buy more on a huge dip. That should occur in August, right?

Besides speculator/investor demand, the price of gold rises in the spring due to demand for jewelry in India. But it has kept rising.

What concerns me is that no one can explain why it’s rising. If I don’t understand what makes it rise, I cannot decide whether to sell, hold, or buy more.

Any thoughts?

[Gone to Colorado]

Funny, I also bought GLD, on April 11th to be exact, and am scratching my head wondering why it went up so much. But it behaved as I suspected it would. The question now is: how long to hang on.

A previous post said that the price of gold is a reflection of the value of the dollar. If this is the case, why isn’t the dollar falling proportionally to the Euro, Yen and Pound?

I am at a loss for an explanation but propose the following theory: The price of gold may be a reflection of percieved government printing press activity.

To tie this back into real estate, which is the theme of this outstanding web site, those who are able to make money in gold over the next several years (assuming it goes up) may be in a position to pay cash for a house in San Diego.

[powayseller]

That makes sense. Why hasn’t there been more profit taking? I read yesterday that the longs have not been willing to sell. At what point will they take their profits? What if they don’t, and it just keeps going up? Gold goes by rules of its own, doesn’t it?

[4plexowner]

Commodities Bull Market

See my post by the same title under the “Housing Burst Will Cause National Recession” forum – I shared a letter that I wrote to my parents about the current bull market in commodities (including silver and gold).

Silver will be $80/ounce before the current bull market is over and gold will be $1650/ounce. Many people think these numbers are too conservative.

Throughout 5000 years of recorded history, human beings have favored silver and gold as money.

I believe we are seeing once again that people are choosing real money (silver and gold) over the paper trash that is being forced on us by governments. This movement is just getting started (and I mean just!).

Yes, there will be corrections along the way but keep the final numbers in mind: silver $80 / gold $1650 – allocate your long-term and shorter-term investment money appropriately.

[sakina96]

What is the best way to go about investing in gold. Is it better to invest in mutual funds which invest in gold and gold-related industry or just go out and buy gold itself. If so, how does one go about doing that?

[powayseller]

If you buy ticker symbol GLD, you have shares of real gold kept in a vault. It’s a pure play on gold.

If you buy mining companies, you are subjected to the benefits and problems of owning any company: management, tax, labor, legal, currency exchange and other issues. If they don’t mine enough gold, your shares go down. If they need to replace equipment and have high capital expenditures, your shares go down. Thus, when you want to invest in commodities, your best bet is to buy just the commodity, without the extra baggage of the company. If you want to buy mining companies, then that’s more of a stock play.

Some people prefer to buy physical gold. Then you have to pay a little extra for delivery, I think about 5%. You also have to pay for storage, perhaps a safe at your home or at the bank. I don’t know where to get physical gold at a good price. The transaction costs are high, so I have not done that. I think it’s bought by a more radical thinking group, who things our financial markets will collapse, and they won’t be able to redeem their GLD shares, and feel comfortable only with physical possession. These folks also believe that the USD will become worthless, and they will need gold on hand to make their purchases. I have a hard time seeing how we will pay our landlord, cashier, and utility company in gold, but maybe someday we will…For now, I am still buying shares and not taking possession.

[4plexowner]

Why is gold rising? Consider these factors:

> the age of cheap energy is over – whether we are at ‘peak oil’ or not, the day of $40/barrel oil is clearly over – prices for everything we use will be rising across the board as this reality sinks in
> the new prescription drug benefit for Medicare is unfunded to the tune of at least $700B over the next ten years
> minimum payments on credit cards doubled in early 2006 (part of bankruptcy changes in 2005) – average American has $8000 in credit card debt – the effect of this change may be appearing in rising bankruptcy rates
> as much as $2T (yes, that’s ‘trillion’, with a ‘T’) in ARMs will reset in 2006/7 – average reset will be +2%
> harder to declare bankruptcy after changes in 2005
> in 2008 the leading edge of the baby boomers will be eligible for early social security retirement
> in April 2005, in a speech given at Univ of Western Virginia, president Bush acknowledged that the social security trust fund is full of empty promises (unfunded IOUs from the government) while trying to sell his “privatize social security” idea
> empty social security trust fund means $$$ for boomer retirement comes off printing presses or boomers get stiffed on their expected bennies
> ongoing exportation of US jobs and declining real wages (personal belief: we are headed towards a global wage level of $10/hour or less – this means significant downside in Ameriacan living standards from here)
> competitive currency devaluations – fiat currencies are currently being expanded at about a 10% rate anually – there are no non-fiat currencies on planet Earth right now
> US government chooses to hide economic data from its citizens – as of Mar 2006 the M-3 money aggregates will no longer be published – no other country’s central bank chooses to hide this information
> US government chooses to hide real inflation data from its citizens – data is massaged for ‘hedonics’ (this year’s car costs less than last year’s because it has more horsepower and a finer grade of leather interior – even though the price tag is higher than last year’s model) and the ‘substitution effect’ (which says that grandma will choose to eat dog food instead of steak as the price of steak rises but her cost of living won’t change (ergo, no inflation))
> In 2010 the leading edge of the baby boomers will be eligible for full social security retirement as well as medicare and the prescription drug benefit (all of these programs are unfunded but we have a technology called a printing press …)
> The ‘economic recovery’ since 2001 is the weakest on record – nearly 4 dollars of new debt has been required to create 1 dollar of GDP (ie, the cost of supporting the existing debt is becoming more and more burdensome)
> Average 401K account has $50K – about 33% of all 401K accounts have less than $35K (ie, boomers don’t have 401K money to retire on – this could indicate that they are relying on their (paper) real estate equity for retirement)

Got gold?

[Anonymous]

Poway

Nice Trade – get out of it now, LOL. There is huge divergence on my proprietary measure of insider buying and selling and the commercials have gotten short. A decline is imminent. Both of these are shorter term things so they do not mean Gold is going to $400. However, I am looking for a short entry right here. I am going to be trying to dial this in a bit better as seasonally prices are typically flat here, so this is not a loaded trade.

We are riding a momentum move here so no telling how far it goes, as it is not based on fundamentals at this point. I will probably wait for a trendline break of some sort so as not too just fade the spike as that is a guess. But due to what I said above, the insiders have gotten out of their longs recently.

This is the beginning of a setup for it to go the other way. I need to look at sentiment and a few of my patterns to see if there is a good play here. If I short it I will let you know, but no way would I go long right here, NOOOOOOOOOO WAYYYYYYYYYYYYYY!

[powayseller]

It sounds like I should sell now, but wait for a good buying opportunity to get and hold for the long term. I’m going to stay away from shorting. I have lots of good ideas, but not the expertise to play against the big boys.

What do you think of the other commodities, not just precious metals, but also sugar, coffee, lead, cotton, lumber, etc.

[4plexowner]

China and Gold

Let’s start with some assumptions:
1. the world’s leading power usually has the reserve currency (Brittain and the pound – America and the dollar)
2. America currently has the world’s reserve currency because of the depth and breadth of her financial markets (it certainly isn’t because of the inherent strength of the fiat US dollar)
3. the Euro is just another fiat currency with the same problems that the US dollar has (unfunded welfare state that will be funded via monetary debasement)
4. China would like to be the next leading power in the world

Now let’s explore how China could provide the world with a reserve currency.

China doesn’t have the depth and breadth in its financial markets to provide a reserve fiat currency for the world. The world doesn’t trust China’s markets enough yet and there are still questions about the health of China’s banking system and about obsolete and useless state-owned industries being kept alive by the government(as the USSR did before its collapse).

So what could China do to quickly provide the next reserve currency for the world?

Back the yuan with gold both internally and internationally.

I believe that backing the Chinese yuan with gold would catapult the yuan to reserve status almost overnight. It would be the only non-fiat currency in the world and lots of smart money would start moving into the yuan and yuan-backed assets.

China will need LOTS of gold to back her currency. I have read analysts who maintain that China couldn’t obtain enough gold off the open market without causing gold to go to thousands of dollars an ounce. I understand that argument but I’m not willing to write off the Chinese that glibly – they are long-term thinkers and inscrutable business people. Underestimating them is probably a less-than-intelligent thing to do. (I also see occasional references to LARGE amounts of gold that got ‘lost’ during WWII – could this gold show up in China or some other country as backing for their currency?)

Are there any signs that China is moving towards a gold backed currency?

Not directly although the Chinese government is encouraging its people to buy silver and gold.

The government has been opening up the gold markets for the last few years making it easier for people to buy. Some of the Chinese banks are now able to sell gold to their clients and there are a few markets for trading gold.

Widespread ownership of gold by its citizens will provide another layer of depth and trust to a Chinese currency that is backed by gold. Remember that Americans had silver and gold money in their pockets when the US dollar was backed by those metals.

Summary: at this point it is just speculation that China will back her currency with silver and gold but it makes strategic sense to me that she will at some point – If China was angry at the US (because we bombed Iran where China has completed several MAJOR petroleum contracts perhaps?) she could take a multi-pronged economic attack on America:
1. start dumping the $800B in US treasury bonds that they hold as part of their currency reserves
2. stop buying additional US treasury bonds (the US needs $2B per day to fund its bloated society and a big chunk of this money has been coming from China)
3. announce to the world that the Chinese yuan will be backed by silver and gold on an international level

This type of action, I believe, would put the final nails in the coffin of the US fiat dollar and would probably hasten the collapse of the US empire.

China doesn’t want to lose the American consumer as a customer until internal demand from her own citizens (or from an Asian trade bloc) can replace us Americans. When that occurs Americans should be very afraid …

[4plexowner]

Who’s buying gold?

Some facts:
> smart money has been moving into silver and gold – Bill Gates owns over 10% of Pan American Silver (likely to be the largest primary silver miner in the world) – Warren Buffett bought 120 million ounces of silver in 1997
> Russia has announced that it is increasing its reserve holdings of gold
> articles have been published in China suggesting that the 600 ton gold reserve be increased to 2500 tons in the short term and 3000 tons in the long term (Chinese media is still state controlled)
> significant amounts of gold are purchased by Indians for dowrys and wealth preservation (they haven’t been fooled by the fiat currency BS) – and the Indians have been becoming increasingly wealthy in recent years as they have replaced the US work force – Indians also buy and hold silver for wealth preservation
> Chinese citizens are buying gold for wealth preservation – the state-run department stores are selling more and more small golden ornaments and statuettes as the Chinese people become more wealthy (bullion markets in China are still limitted)

Some speculation:
> huge profits in oil are moving into silver and gold – oil countries have HUGE profits over the last two years (and that’s ‘HUGE’ with all capital letters!)
> Iran knows it is about to be bombed so it is re-arranging its finances for war conditions
> people with connections (power circles in politics and business that currently run the western world) know the US dollar is at the end of its lifespan and are moving into silver and gold before the collapse (which is likely to be quick when it happens) – why have six reserve bank presidents resigned in the past two years? these are prestige jobs that bankers strive for their whole careers and all of the sudden six of them retire? makes me go ‘hmm, interesting’
> people with connections have been told that the US is about to bomb Iran so they are re-arranging their finances for war conditions
> people like me are putting 2 and 2 together and realizing that it adds up to 4 – and 4 means protect any assets you have and the best protection is silver and gold (as it has been for at least the past 5000 years)

[Anonymous]

I need to see if I can figure out how to import a chart into a post to show you the gold picture. I am not sure it can be done, other than via links.

I am setting up a web site right now where I will be posting things like this in the future. Once it is done I will give you the address so you can check it out.

Lumber and lead are very thin markets, avoid those. Coffee is a notorious big swinger. I have had some big wins there in the past, but I do not trade it presently. I focus mostly on S&P and Bonds. However, since Gold and the CRB, and Oil have relationships to those markets, I also study them very closely.

You do seem like a very bright person, and let’s be honest you just made 5% in Gold that I didn’t. So it is Poway 5% CJ 0 so you have me on the scoreboard there!

Sugar looks nuetral to me here the ideal seasonal low is 4 or 5 months away and commercials are in the middle here. Coffee is potentially setting up a long trade in a month or two, but nothing here to me.

You have to keep in mind that I only trade when I think I have a 90% likelihood of being correct. This only happens when many things line up at once. In these two markets they are both lacking the high % setup at this point. Gold is close to having it on the short side, which is why I am watching it here. Also, anecdotally, I love to fade the herd, and the herd is running into that market here.

Most of my profits come from short term bond and S&P trading though, so I am no expert in these other markets. Hope this is of some value.

[North County Jim]

…unfunded welfare state that will be funded via monetary debasement.

I couldn’t agree more that the welfare state combined with low fertility rates is the Achilles’ Heel of western civilization (Mark Steyn describes it as deathbed demographics).

With regard to China, what happens when the consequences of their one-child policy come home to roost in their labor force? How will they pay for that?

[powayseller]

Thanks, Chris, and don’t put me on a scoreboard. I was purely lucky. I only take credit when I made an investment based on conviction, like selling my house in 2005, or in 1999/2000, buying Vanguard small cap and emerging market and overseas index funds while everyone was piling into tech mutual funds. The GLD thing was pure luck, and I would have lost it all if the market had shorted last week.

[powayseller]

OK, so I shouldn’t sell gold, because there will be no dips, just up, up, and away?

[Author]

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