Friday, April 19, 2013

Gold Bug Bites, But Fever Stays

When you have been long enough in the game you know you will make good moves and bad moves (both in life and in investing). Also, you learn that you should not look at the charts to determine whether your thesis is working or not. I like a lot this particular Warren Buffett quote (about companies):
“In the short run, the market’s a voting machine and sometimes people vote very non-intelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time.”

Diversification is essential. No matter how much you believe in some individual investment you should not put your eggs in one basket. Not even close to half. Never.

Those who have put "all in" on gold are now really tested. Like the famous John Paulson who won big time betting on subprime collapse and is now 85% invested in gold. He lost almost 1 billion in two days during the recent correction in gold. The Gold Bug has bitten.

For us it's not a "biggie" as we are only 5% "sure" (as in the share allocated out of our portfolion) on the yellow metal. The 1 year chart and the 10 year chart start to look equally bad. Is this the end of the decade long bull market for gold?

I think both our thesis and the one Paulson has is intact although I'm not betting 85% of my assets here like Paulson seems to be (only 5% which in itself is a big bet considering how you "should" allocate your money according to "theory" and all studies to that end).

The thesis is (quote from the Bloomberg story on Paulson):
“Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency for individual and institutional savers and central banks alike.”That really hasn't changed. Look at USA, Europe, Japan. There is no way out other than to let the inflation handle the debt. So it's going to be print - baby - print for a long time.
My first blog post was titled "Gold Fever!" (posted on February 12th, 2010). At the time gold was trading at around $1090 per troy ounce. Now, after the recent collapse, it's trading at $1400. Quite a drop from the peak of over $1900 from September 2011. Still, I maintain also what I said in my first post:
"This is where the barbaric relic comes into play. Even though gold is not used broadly as currency right now, it has been used as such in history and may be used once more. It is the ultimate benchmark for currencies. Or do you think that the central banks are sitting on it just for fun of it?

Since I don’t like to put my eggs in one basket only, I try to avoid getting too much exposure into any currency or gold for that matter. The problem with gold is that it does not yield anything – it is simply a tool to preserve wealth and take part in speculation regarding its value vs. fiat currencies."

What comes to thesis for owning gold miners. Well, that didn't work out and I finally gave up on it in February 2013 when I let go our positions in Newmont Mining (NEM) and Barrick Gold (ABX). Their costs seemed to raise faster than the price of gold year after year so the thesis of using these as leveraged bets for gold simply did not seem to be working. And certainly now it looks even worse. Not going back on that horse very soon although tempted..

Over the years, consumer demand and exchange traded funds offering direct exposure to physical metal have grown to account for large portion of the demand for the barbaric relic. Therefore, it's not a surprise that when it rains it pours. Panic selling those ETFs is e-z.

You might want to check my old article written for Seeking Alpha titled "Riding the Second Gold Bubble" which reviewed (then) the last 110 years of gold price history as well as supply and demand. That kind of gives the ultimate perspective on the matter.
The author was (still) long gold at the time of writing.

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