Monday, December 15, 2008

I ain't hatin'...

but trust is cyclical just as markets are. Indeed, the P:E ratio and dividend yield are nothing if not about trust and trust is a fragile thing. When a long-term trust cycle ends and people get suspicious (just because you're paranoid don't mean they're not after you, right?), you need real counter-cyclical assets on your side. No, that doesn't mean tech versus foreign bonds versus high-yield blue chip U.S. corporate bonds, that means something like gold versus gold stocks. We're in that kind of anti-trust cycle here.

When the dust settles after all the staggering debt has been purged, a new cycle of trust will emerge. But that's then, and we're in now. The amount of debt deleveraging that needs to take place first will not happen overnight. In addition, there is the guarantee of storm-like conditioned monetary/printing press responses from the central banks around the world.

This whim of monetary printing press action to avoid pain is of course addictive and of course not limitless. You can only carry so much debt based on a finite base of assets before waves of collapse occur as the addict overdoses. When debt turns bad and the over-leveraged are given a margin call but have no equivalent assets to tender in bankruptcy, a cycle turns. In this case, it's a big cycle that started in 1971 when we left the gold standard because the damn French caused a run on Fort Knox.

Currencies like the ones that exist today have a funny long track record of running into trouble. When trouble hits, whether inflationary or deflationary, gold tends to do well if the extreme ends of the spectrum are reached in either direction. We are in a heavily deflationary environment and the Fed is trying out all the zany reflationary schemes written about in academic economic papers authored by people like Bernanke. Did you know Alan Greenspan had a pretty lousy track record as a financial/investment analyst before he became the Maestro? Henry Paulson was a Goldman shark and now he regulates them?! This decade, gold is a better bet than the wisdom and character of bankers and Wall Street partners.

When deflationary market conditions meet a strong monetary inflation attempt by the governments that know better than we, the result, it is claimed, is a sort of Goldilocks scenario. Like the acid cancels out the base and the resulting solution is just a-OK. Gold reminds us that in times like these it is more reliable than Goldilocks. When trust turns positive again, which will begin around the time the Dow-to-Gold ratio gets near 1:1, I'll trade me some gold for a new Goldilocks bull market in general stocks.

I leave you with a one-year daily chart and 10 year weekly chart of Royal Gold (RGLD), a gold stock I hold long term call options on (Jan 2010 LEAPS):

Wikinvest Wire