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Hardly a week seems to go by at the moment without Gold being a hot topic here at Q Wealth. But this last week has been an especially rough ride, with gold ‘pulling back’ quite substantially. Is this cause to start crying, or is it an opportunity to stock up on gold?
I thought this week I would briefly discuss some divergent opinions and strategies on gold, and propose a couple of solutions that I believe will put readers into profit.
A reader from California recently wrote me:
“Thank you, Mr. Macfarlane, for accepting my divergent opinion in good spirits….” he begins. Well, everyone is entitled to their opinion and as I always say, I may be wrong! I may be way off track. Maybe Bernanke and Obama will save the world shortly and we’ll all live happily ever after. I doubt it, but anyway I am one of the biggest believers in the world in free speech and liberty of expression.
May I add an additional comment related to gold ownership in ones portfolio?” continues our reader. “When the market price increases from one day to the next, the purveyors of gold advise purchasing the metal for its price is only heading higher. When the price declines from one day to the next, the decline is characterized as a ‘buying opportunity’. One thing is consistent among the purveyors of gold though, they never – repeat, never – issue a “_sell_” recommendation? It’s always buy, buy, buy.
And, least I forget, if one truly believes that the market price of gold is headed higher, why not purchase a gold futures on contract on the Chicago Mercantile Exchange? – which can be rolled over for a distant contract indefinitely. The CME affords the trader enormous leverage on such futures contracts, and there’s no applicable interest charge for the market price that exceed the initial “earnest money” deposit. And the traders’ earnest funds can be in the form of Treasury bills, which are segregated from the funds of the futures merchants account.
Well, I guess we are coming at this equation from polar opposite perspectives. This reader is clearly valuing his gold holdings in US dollars. I do the opposite – my base currency is gold, and dollars are a forex speculation for me, just like euros or yuan or Paraguayan guarani.
My reasoning behind this is that gold is the stronger currency, that has been around infinitely longer than the dollar. The dollar is ‘fiat’ money (see for example these earlier articles) that is created, figuratively speaking, by a printing press currently controlled by Bernanke and partners. The dollar can come and go, but gold won’t. The purchasing power of an ounce of gold has been pretty much constant for generations – whereas the same can certainly not be said for the dollar.
What is the dollar backed by?
One of the better arguments for the backing of the dollar that I’ve heard recently, is that it is backed by the work and entrepreneurialism of the American people. There’s some truth in that. Basically if they keep working hard and handing over the fruits of their labour to the government, there is something of value backing the dollar.
I’m just not sure that those hard-working American people really agreed to have their futures – and that of their sons and daughters and grandchildren – mortgaged in this way by a small subset of politicians and banksters. Maybe it was like the sub-prime mortgage borrowers who didn’t really understand what they were getting into. Cheap and plentiful short term money trumped long term prudence. And we all know how that ended up. Now we are just seeing a much expanded version of it.
I’m far from convinced that investing in the dollar is good business. If it were a case of supporting a stock of a company where the management were borrowing to the hilt for short term fun, while treating stakeholders reprehensibly and not giving a damn about the future, there would also be an ethical argument against getting involved. And I don’t see why governments should be treated any differently than companies. Abuse of the American people is not something I want to get involved in, any more than I would support abuse of cheap labour in Asian shoe factories.
Now I know this may be hard to swallow for people who have valued everything in one reference currency – be it dollars, or pounds or something else – for their entire lives. It is quite a leap of thinking. But it’s totally possible. You need to become a Sovereign Individual, not reliant on any particular country or currency. You need to think in different currencies and look at all currencies, including the one in common circulation in your home country, from the perspective of an outsider. If you were from another country, would you be investing in that currency right now?
Of course, I am not talking about day-to-day expenses. You certainly need some local currency on hand to buy the groceries. Multi-currency credit cards per se don’t exist, but you can easily, for example, obtain a regular credit card billed against a multi-currency bank account. You can sign charges in any currency you like, converting only what you need at that moment. You’ll find information on this, including how to open a foreign multi currency bank account in some of the world’s safest and best offshore banks, in the Practical Offshore Banking Guide 2010
The Dollar Bear Market Continutes
With that in perspective (that I value currencies against gold, not the other way around) let’s get back to the reader’s question. I don’t see so much of a gold bull market right now, as a dollar and euro bear market. My personal view (and there’s no substitute for taking professional advice here) is that this situation will continue as is for the foreseeable future.
Wild swings are caused by day to day speculations, but don’t affect the overall trend. So to turn it around, I believe the price of gold valued in fiat money will continue to rise, and will do so significantly. The more Quantitative Easing that takes place, the less the dollar will be worth. This is what I have written about in the past: stealth devaluation. If there’s more of something, it’s worth less. This logic is hard to argue with.
After all I’ve said above, you can probably figure that US Treasury Bills are the last thing in the world I would want to sink my money into. For me, that would be like buying bonds in a company that I know is about to go bankrupt. Unfortunately, as Ron Holland has explained in the report Are You Ready for the Coming Obama Retiement Trap (available in the Q Wealth Members’ Area) that is exactly what US retirement funds are being encouraged, even forced, to do. This is a seriously scary prospect.
As for buying contracts on the CME, well why not… I’m all in favour of speculation. There are lots of ways you can obtain leverage through brokerage accounts within the system. I keep a large portion of my personal wealth in physical gold, safely outside the financial system. I also keep a ‘play money’ account that I leverage to the hilt and buy financial contracts like this with. It’s doing rather well at the moment. But it’s money I know I might have to lose, for example if a sudden catastrophe hits and the financial markets are closed down. I would put the odds of something like that happening in the foreseeable future at perhaps 15% – 25%. Not a huge risk, but definitely not one I would bet my entire net worth on.
The fact that you can roll over CME contracts indefinitely is part of the problem, of course. It’s extremely likely that the counterparties would be completely unable to fulfill their obligations if everybody wanted to exercise their right to physical gold at once. The whole system relies on punters rolling over.
So, why I don’t like the idea of buying gold futures using T-bonds as earnest money? Because you are using one form of promise to buy another form of promise, when nobody – not even the people involved, I am sure, if you could talk to them and get a straight answer – would really earnestly claim that the promises are backed by anything of value. That is just unsustainable in my view. You might make short term paper profits, yes. Fine… I have nothing against speculation, just as I have nothing against casino gambling – but when I go to casinos I just enjoy the ambience, I don’t gamble.
If you want to use leverage to speculate on the price of gold, here’s what I would do. Get yourself a regular brokerage account that allows you to trade on margin. Get yourself a subscription to Casey’s International Speculator – they even have a 25% discount offer running at the moment. Casey’s International Speculator is one of the longest-running, most respected newsletter services of its kind anywhere, so it’s got a track record. It was founded by Doug Casey, self made international man.I have a subscription and consult it frequently. Then go speculate. That way you’re investing in companies that actually have intrinsic value, rather than pure promises.
At the end of the day, it’s big picture against small picture, short term against long term. We live in interesting times. Enjoy the rest of your weekend!