April 28, 2010
St. Michaels, MD, USA
Since I arrived from Santo Domingo on Monday evening, I’ve been enjoying some peace and quiet in this quaint, quiet, wealthy little town on the Maryland shoreline.
St. Michaels is where Porter Stansberry is holding his annual ‘idea conference,’ which he sponsors each year around this time. The goal? He brings together successful people from a variety of backgrounds to discuss their best ideas– investments, business concepts, or anything else of intellectual value.
These events always generate a lot of promising ideas from which everyone can profit; Porter himself tells stories about how a single idea from a past conference generated millions of dollars for his business. I know that I personally will benefit substantially from many of the investment ideas I’ve heard.
While I’m not at liberty to write about everyone else’s ideas in this forum, I can at least tell you what I’m talking about– gold.
As an investment or inflation hedge, gold is nothing new… and to be clear, I am far from a die hard gold bug. But a few months ago, I wrote the following about gold vs. the dollar:
—
“Naturally, the chief reason that Treasuries are considered safe is because they are backed by the full power of the US government’s printing press. Investors are wise to this trick, and smart money will not be fooled into longer term bonds unless there is another financial cataclysm.
As I survey the situation, I’m convinced that gold is nowhere near peaking exactly for this reason. In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.
To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.”
—
Yesterday, we started seeing the first signs of this bifurcation. World markets tanked. The Dow shed over 200 points, silver and copper dropped, oil fell, etc. It was a pretty bad day for bulls.
The dollar, on the other hand, strengthened considerably, especially against it’s ugly European sisters. Accordingly, US Treasuries rallied as worried investors piled into the perceived safety and security of bonds.
Ordinarily when these types of events occur, gold falls right alongside everything else… especially since many gold investors are sitting on large gains, and they’d rather take profits than assume the risk of holding gold during so much uncertainty.
And uncertainty there this… Credit expansion is showing symptoms of a bubble in China. Thailand is having major political challenges. The Eurozone is under intense pressure. Dubai still can’t pay its debts. The British pound is looking like a third-world peso. etc.
Curiously, though, gold rose handily yesterday against the dollar, which itself had risen against nearly every other currency, index, and commodity. This is highly unusual, and I’m considering it a possible sign that the market’s perception of risk may be starting to change.
Specifically, we may have hit the bifurcation point where investors consider gold to be less risky than loaning money to sovereign governments. We’re already seeing this with many corporate bonds that have much higher ratings and lower yields than some first-world sovereign debt.
One of the best ways to play this bifurcation trend for now is to buy gold and short non-dollar currencies. In December, I recommended buying gold at 760 euro. We nailed that one– since then, gold has risen and the euro has tanked… and gold hit a high of 890 euro yesterday. I expect this trend to continue over the medium term.
Will gold go up in a straight line? Absolutely not.
Remember, the value of all the gold ever mined currently amounts to about $5 trillion, only a fraction of world financial market values. Thus, in a cataclysmic financial event when institutional money leaves risky assets for quality, it simply won’t be possible for everyone to pile into gold.
In the longer term, this means that gold will likely have some breakaway runs to higher and higher levels in US dollar terms, similar to how the oil market was behaving in 2007-2008. I think that yesterday’s market reaction foretells this trend.
I would suggest keeping a close eye on the gold/dollar relationship over the next weeks and months as the Greek debacle plays out, and investors start looking at other sick economies like Japan. If the trend holds, it is an extraordinarily bullish sign for gold.
