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SOVEREIGN MAN

When the gold market tops…

December 21, 2010
Auckland, New Zealand

My friend Doug Casey has frequently written that you’ll know the bull market for gold has peaked when there’s a picture of a golden bull tearing up the dollar or the New York Stock Exchange on the cover of Time Magazine.

I have a similar view, but with a different indicator.

I’m sure you’ve seen those TV commercials, fliers, and billboards that say “WE BUY GOLD”. The business model is simple– they take in whatever gold you can find around the house (a false tooth, granny’s wedding ring, etc.) and trade you for worthless paper money.

If that’s not bad enough, they capitalize on people’s ignorance of the gold market and offer a ridiculously low valuation, sometimes less than 50% of the spot price for gold. People are getting ripped off, and they’re happy about it because they’re able to sell their ‘junk’ for a few extra bucks.

These are the types of things that are common in a rising bull market that has plenty of room to run– the public, largely ignorant about gold, is happy to trade physical wealth for worthless paper.

At the top of the market, we’ll be seeing the exact opposite. The public will have wised up; the vast majority of people walking the streets will know the price of gold and be able to distinguish a Maple Leaf from an American Eagle.

At this point, everyone will want to own gold, and the signs will change from “WE BUY GOLD” to “WE SELL GOLD”… and they’ll be everywhere.

Entrepreneurs, flush with all the bullion they’ve been racking up over the years from false teeth and wedding rings, will start unloading their gold holdings to the very people who supplied them to begin with… all at a handsome profit.

In certain parts of the world, we’re already seeing early signs of this. I’ve seen hoards of Chinese people queuing up to buy small gold bars in Shanghai during their lunch breaks. Same in India.

Gold “ATM” machines are sprouting up in Europe and Asia– you can pop a few hundred euro (or your credit card in some cases) into what looks like a vending machine, and out comes a small, assayed bar of gold.

I’ve been following the spread of these machines with great interest, and I noticed that the first of them arrived to the United States in Boca Raton, Florida a few days ago.

Don’t get me wrong– this one machine doesn’t constitute a top. Not even close. There would have to be thousands of these machines across the country at McDonalds and Starbucks before that happens. If you need extra convincing, ask your neighbor what the price of gold is.

Years from now, though, I’m willing to bet that the sucker who ends up paying the highest price ever for an ounce of gold before the metal starts to decline will probably do so standing in front of one of these machines at a shopping mall somewhere in suburbia.

Another ‘top indicator’ that I look for is the occupancy rates for safety deposit box facilities like The Storage in Hong Kong or Commonwealth Vault right here in Auckland.

When these firms have a long waiting lists, or new facilities are sprouting up, it suggests that public awareness for gold is increasing… and the more that happens, the closer we get to the top.

Again, this is also starting to happen. Singapore’s recent Freeport facility leased out to capacity almost instantly, and you’re hard pressed to find an available safety deposit box at any of Singapore’s banks. Buy hey, that’s Singapore… not exactly representative of the entire world.

Here in Auckland, Commonwealth Vault has plenty of availability, and they charge peanuts.

Bottom line, while some of these ‘top indicators’ are starting to emerge, I think it will be several years before they’re ubiquitous. People are only starting to wake up to the reality that unbacked paper currency is fundamentally flawed, and it will be a long time before this belief becomes widespread once again, just as it was in ancient times.

In the meantime, as long as central banks keep pumping their currencies full of hot air, gold should continue to have strong, long-term growth potential as the ‘anti-currency’.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Mike

    Good stuff Simon. Do you allow your content to be pasted elsewhere if it is linked back here?

  • http://twitter.com/MrJamesLiberty James Liberty

    A question for Simon and others:

    Do you really feel that the We Buy Gold people “capitalize on people’s ignorance”? The free market is comprised of nothing more than voluntary transactions between two or more parties. If Party A says, I would like to buy and Party B says, I would like to sell, then a deal is made. Party A cannot force Party B to sell any more than Party B can force Party A to buy.

    So… are these We Buy Gold people really capitalizing on people’s ignorance? More importantly, do you feel that what they are doing is immoral?

    • CAE

      Not at all. It’s arms length, free decision transaction. As usual, the top will be near when the average retail “investor” decides the be net buyer of gold, rather than a seller. Better yet, many people will use leverage to buy gold…credit cards, loans, margin etc. Really big bubbles need leverage.

  • clickoff

    Simon:
    I was recently in Hong Kong and tried to open an account at The Storage. I was informed that you must have an address in HK to open. (They offered to allow me to open by giving a friend’s address, but I don’t know anyone in HK.) I then checked with several HK banks and they all seem to have this policy.

    Very disappointing indeed.

  • John Lloyd

    Ha…I live in Boca. I’m not surprised that this is the first town to get such a machine, there is so much wealth here you wouldn’t think there was a recession.

  • http://twitter.com/FizzGig3211 Michael Coombes

    on a similar topic, this photo is from the war in Chechnia during the collapse of the Soviet Union. This is one way to stay warm..

  • Caroline268

    If gold goes to $5,000 it probably means the financial system is finished who is going to sell in such circumstances? Perhaps Simon could address this in a future missive.

  • Desertgoldman

    Wow. As an employee of one of the larger gold-buying firms in the USA, I take umbrage at the socialist based criticism Simon Black has dribbled in this article. I feel HE stands as a prime example of many of the ills my country faces in these troubled times, all attributable to fuzzy “thinking”.

    I’m amazed that a college boy who has obviously swallowed most, if not all of the socialist/statist drivel of the publicly funded education system and elitist professors of his ivory tower institute of lower learning would be allowed to contribute an article to a normally conservative newsletter. The Daily Crux should be ashamed.
    May I ask you a few questions, Black? (Sorry – can’t bring myself to call you Mr.) Are the customers at a car dealership guilty of “ripping-off” the dealership by agreeing to pay for a car with “worthless paper money”? Are they guilty of an even more heinous crime when (since they have never saved a dollar in their lives) they further agree to pay for their purchase in monthly installments, at interest, thereby paying over a specified term with even more “worthless paper money”?
    Do you believe the salesperson at the car dealership is immoral because he has more product knowledge than the average customer who decides he needs to buy a car? Is that salesperson immoral for selling a car to someone who wants to trade-in a perfectly good used auto? Shouldn’t, in your way of thinking, that salesperson be required to refuse to sell someone a vehicle, if in his estimation there is nothing wrong with his trade-in. I know!! Let’s have some legislation regarding this “systemic problem” with the free market, Barrack Black!!

    As far as the public “wiseing up”, we can all hope that might happen sooner rather than later. Maybe someone who spends his time writing “articles” ( you don’t accept “worthless paper money” for that service, do you? Careful – you’re getting ripped off!!!

    I can’t speak for all gold buying companies, but our procedures are completely transparent. We determine purity,weigh the merchandise,apply the factor based on the percentage of spot price our company has determined it can pay based on it’s overhead. I asked just the other day if I could be allowed to point a gun at the client as I made our offer and the company would not give me permission. I then asked if I could rig the scale and, dog-gone it, they wouldn’t allow that either.
    Every business has overhead. Our company employs many people across the nation – none of whom, subsequently receive any unemployment compensation. To my knowledge, none of them has ever used force or fraud in a transaction. This is the basis of capitalism. An important axiom of basic economics is “Excess profits breed ruinous competition.” Did you miss class that day? If you’d like to come to my store, you could take a tour of the neighborhood. Within a square mile of this location there are over 40 companies buying precious metals in different forms. I called a few the other day to see if they would quit offering so much, but didn’t find anyone interested. If you think it’s possible, in this highly competitive business to “rip people off”, you must have a secret socialist formula I’ve yet to discover. Stop by sometime and share that formula with me – I’ll be glad to pay you a fair price for the info in “worthless paper dollars” – it happens to be the current method of exchange in all countries. I pray that some day it won’t be, and I vote accordingly.
    Hmmmm… I’m sure those gold vending machines don’t ever charge more than spot at the exact moment of the transaction. Surely they wouldn’t charge a premium and rip the unwisened public off?
    If I see anymore thoughtless, hence socialist diatribes from you, I will assume that you didn’t just have a bad day when you thoughtlessly threw a necessary service industry under the bus.
    Get a grip.

    • PreciousMetalsBuyer

      Right on!! Thank you Desertgoldman! I too am employed as a precious metals buyer and I take pride in my character description (given by repeat customers) as one of integrity, honesty and professionalism. I have no problem explaining to customers that we do not pay spot prices as we are “for profit”. Most intelligent people understand “for profit” as every one of us earn a living by those profits. Grocers do not sell food products for COST, doctors do not provide services at COST, journalist do not write for COST, etc., etc. Every person that works for a living get’s paid with PROFITS made in one way or another. I have many very happy customers. I have a customer survey binder displayed in my store with many comments from customers indicating what a very pleasant experience they had. I believe that most importantly, people be treated with dignity, honesty and respect. If a person that works for a living says someone is being “ripped off” by making a profit, they are most likely a hypocrite as someone is making a profit in order to pay them!

  • Jthompson1057

    it is all relative, of course – and we are not going to have a “1980″ top. Aukland most likely has a better currency than the usd. Hence, Mr. Black has a different perspective. For those of us in the usd, it is hard to imagine trading AU for pulp. Ever. May the times get much more interesting.

    Bonds? Rates – compete with AU? Not likely for long, as these long rates are going to foment accelerated default.

    Boomerangs in our future?

  • al

    Let the MILITARY shack in their boots and take order from the UNderworld.
    Let the POLITICIANS shack in their boots and take order from the UN dEVIL.
    BUT YOU MUST NOT.
    YOU HAVE FREE WILL!

    The stirring lines of Percy Shelley’s “Mask of Anarchy”

    “Rise like lions after slumber
    In unvanquishable number!
    Shake your chains to earth, like dew
    Which in sleep had fall’n on you:
    Ye are many – they are few.”

  • Designershaq

    this is a silly article if gold goes as high as i think it will and goes backwarden like i believe it will there will be no gold for any number of worthless frn. just ask the germens if any gold was available for their worthless currency ask mugabe how many zimbawae dollars you need to buy gold the answer is none its not for sale.

  • farang

    I’d just add that an indicator any sort of bubble or top is being approached would be loans or some sort of credit to purchase physical gold.

    I don’t see any bubble possible without easy credit to obtain the bubbling asset. The average citizen ignorant of the Spot price today? Odds are he couldn’t go purchase 2 ounces if he wanted to..little to no savings and his credit cards already maxed paying off day to day expenses.

    Rather, the idea there is going to be a bubble, or a “top” in conventional economic theory, is dubious at best.

    What you will see is an easing into gold and silver becoming money again, and the Spot price will slowly stabilize as assets are evaluated against gold and silver.

    So no one will be putting their physical gold coins into that machine at some theoretical future “top” to buy physical gold. No vendor will be taking worthless paper for their gold. My crystal ball reading.

    Thanks….good article. Big changes coming….gold and silver still extremely attractive. No fundamentals concerning those assets have changed…in fact, keep getting more favorable towards further buys. In other words…this relatively stagnant gold and silver price the last 2 weeks? Extremely attractive short and long term plays.

  • Steve3

    Dont use Commonwealth as they are bank aligned. Use Security Deposits in Auckland

  • Moriyah

    When the market actually tops it will be too late to recover any asset of value from your investment. Additionally, compared to silver, gold has been a poor investment the last 10 years.

    • Joe

      you call going up 400% a poor investment? what are you smoking?

  • dboy

    When you think about a top in gold, you have to consider the currency you are basing that on. Gold could easily top in Yuan terms, but never in USD terms (for example).

  • Midpath

    I think gold could top about a month or two before QE2 ends, because the markets are forward looking, and the US administration knows they cannot ever do that again. It could end when the president realizes he may lose the next election as the public is starting to realize how much damage was caused. That is now, I think Thursday at $1450 was the end of the bull market in gold. That may be the highest price we see for the next ten years.

  • http://www.nirmanbroking.com Stock Market

    I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.

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