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SOVEREIGN MAN

A sign that gold may about to be unleashed

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.

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.

  • Live Richly

    I totally agree that gold is going much higher. It should be over US$2300 just to keep up with inflation! I’m looking for $1450 an ounce later this year.

  • Jack

    Simon, you say that investors in financial markets can’t put all their money into gold. Wouldn’t that depend on the price of gold?

  • Curt

    Sorry but gold is primarily a speculative play. The current prices remind me of the famous tulip-bulb bubble of the 19th century, where the prices kept inflating, but suddenly, someone had an epiphany that tulips, aside from being pretty to look at, were essentially worthless for all practical purpose and prices nose dived. Put simply, gold is not backed by assets and cannot generate income in the most fundamental sense.

    I like the expat/5-flags theme of this blog, but all the gold-bug nonsense makes it a bit less appealing, for me anyway. I really enjoy the country descriptions and real estate investment ideas – although sometimes the author comes across as a bit of a smug chauvinist.

    • Kate N

      Chauvinist? Nonsense? Curt, you must be sitting in traffic to be stewing so mad.

      Simon- do you think this has an implication for the oil market? IF gold can’t handle all the money, will the rest of it be buying OIL?

      • Bill Goode

        What would you do with the oil? You can’t put much oil in a safe box. It’s not a good store of value because it is not easily exchangeable. Precious metals can be stored in physically small amounts relative to their value. Where would you put a barrel of oil? Who would buy it from you? Shell or Chevron? For the average individual, it’s not exchangeable, unless you buy ETFs or some such. If you trust the ETFs, you may as well buy Greek bonds.

        Curt is pretty out to lunch. Gold, silver, platinum & palladium have been producing income for me for the last year and a half as those prices keep going up. For all the sense Curt makes comparing gold to tulip-bulbs, he probably would feel safer investing in Zimbabwe.

    • SNS

      Curt,
      A simple IQ test. Three lexical items – gold, tulips, and staying power. Which two items are a match?

      • Carlos

        Curt, For your benefit, please reevaluate this issue. You’re right that gold will reach nosebleed, Semper Augustus levels, but at what point? Right now gold is only slightly higher than it’s shatdowstats.com inflation adjusted levels. But until your neighbors are talking about their gold stocks and coins (as happened in the late 70s by the way), the bubble has room to inflate. Casey Research has some very good analysis on this issue.

  • Victor

    Simon, great insights; thanks for the great email. Do you have any idea babout timing?

  • saxa

    you speculate with your fiat paper. i will do so with something not created/diluted by the government. we shall see

  • Me

    Curt.

    Mankind has found gold to be a good money for over 5000 years. To liken gold to Tulips is I think wrong. Investment ideas or ideas of any merit should be taken for what they are, not for your interpretation of an individuals personality.

    For example I have found substantial value in reading Soros works and listening to his views on things. I totally disagree with his remedy for problems in way of more regulation and power given to the political class. This does not distract me from what is still a valuable insight.

  • Bill Goode

    How do you feel about the future of silver in relation to gold? Other precious metals such as platinum & palladium? What do you see as the eventual gold / silver ratio? Do you see silver as a better investment as many advisers do?

  • http://hottrainingmaterials.com/offtopic jim

    Uh… the tulip thing happened in the 17th century, and I would say the rest of that particular comment was off by an equal amount.

    In any case, it is interesting to see speculation on gold breaking out of its $ UP / GOLD DOWN syndrome in a “non-financial specific” blog, although it is so clear how sharp you are on money matters Simon (I’ve been reading for a couple of months). Indeed, I have been suspecting we would see a strong(er) $ along with stronger gold values priced to that $ at some point. If you examine the financial Inverse Pyramid seen around here and there (http://fofoa.blogspot.com/2009/03/all-paper-is-still-short-position-on.html) paper currency is near the bottom (tip) of the pyramid… just above gold. The thought is, in times such as ours, capital flows *down* the pyramid, ultimately reaching the bottom. And indeed, it seems logical that for some period of time we will “bifurcate”, to use Simon’s term, into both stores of value. That bifurcation will likely end at some point though…leaving just one place to run…one place to hide (gold AND other tangible assets). 2010 may just end up being known as the year of the $$, and the year pf Precious Metals.

  • Curt

    “mankind has found gold to be a good money for over 5000 years”

    Well, history is always right……until it’s not. (btw, gold has seen big swings in price historically)

    There is no inherent value in gold, except for boutique commodity uses. When you buy gold, you aren’t investing – you’re speculating. That’s fine, but people should be clear and understand what they are doing.

    To use “government control” as a rationale for not holding currencies I think is misguided. If you really have that little trust in government, then you probably should not be purchasing stocks, bonds, real estate or even have a bank account – as laws (i.e. the government) are required to ensure ownership and protect from basic fraud.

    That is not to say that I don’t see any danger in the value of the U.S. dollar long term. If you are taking a strong cash position at the moment (which I think is smart) a safer way to protect your money from devaluation is the traditional way – hold multiple currencies (particularly ones backed by nations with strong macro fundamentals) and hedge them against one another.

  • http://www.provolife.wordpress.com jim Brown

    I too want to jump to gold but I had a hard time selling gold coins back in the 80s. I would now use certificates but hear funny things can happen there too?

    An interesting opportunity is quickly becoming viable here in the Turks and Caicos Islands — below the Bahamas and above the Dominican Republic — we were for several years the Caribbean hot spot for investment – this died in 2008. However, this week the ‘Government’ now under British control, announced it is starting court action against former Ministers and developers that bribed them. Thousands of acres of Crown Land were sold for almost nothing. Most of this land will be ‘taken’ back now. Ex-Ministers will face serious jail time and new honest investment will come here. We will boom I think within the next 2-3 years again big time. We saw appreciation here running between 15% to 100% per year! Prices are down to 2003 levels and great opportunities are available. Check out Providenciales for some great opportunities in real estate.

  • Curt

    Bill writes:

    “If you trust the ETFs, you may as well buy Greek bonds.”

    That’s funny you mentioned that. I just picked up 2 year Greek bonds yesterday – at an 18% yield and I’m sleeping fine.

    • Carlos

      Wow! I guess you missed that business about Russia defaulting on it’s debt in ’98. I admire your contrarian attitude, but you really need to evaluate the fundamentals better. Still, I hope it works out for you.

  • Mark

    Curt: You don’t like gold but you do like Greek bonds. I look forward to seeing how that works out for you in the next year.

    If you really do not see the value in gold…well, I don’t know what to say.

  • http://www.facebook.com/internationalman Matthew Smith

    Wondering why gold keeps pushing upward?

    • http://www.zurichgoldtrader.com Gold Trader

      Because China is quietly replacing its US dollar reserves with gold.

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