Wednesday, March 11, 2009


is what gold functions as in times of stress, uncertainty and paper asset evaporation. Gold can't evaporate. The value of promises can. Yes, it is true that other things like land and oil have some similar properties, but there are storage, liquidity and universality issues. Gold has functioned in its role as money, with some "time out" periods to be sure, for the last few thousand years.

How does money come into existence and from where does it derive its value? These are questions related to the current secular cycle turn that need to be asked and will be by an increasing number of people. During such periods, which recur throughout history, people turn to gold. If you lived in the U.K. and were watching your paper money devalue by 30% or so over a year, and wanted to do some diversification, why would you choose the U.S. Dollar over gold after seeing the events of the past year? I'm damn sure not going to choose the Pound Sterling to store my wealth in, nor the Swiss franc.

You see the way I look at it, I'm already heavily invested in the U.S. Dollar. I get paid in it, pay my bills in it, have saving in the bank in it, and use it to assess costs and value. So, if I need to diversify my cash holdings in a fiat world, why not just switch into the anchor of the monetary system itself?

If gold is not the anchor, why do the central banks and governments of the world hold more of it than anyone and why are many clamoring to buy more gold these days? When trillions of dollars of make believe money can be created and put on someone else's magic tab with no effort (excluding the admittedly tedious effort of bribing enough Congress members to get a bill passed), why show restraint? There apparently are no consequences to spending endless amounts of make believe money because we can. Oh, except for the eventual unavoidable currency devaluation that should be a doozy this time.

Now, the timing is everything, some appropriately argue. Deficits explode, deficits are gone, the clock keeps ticking. Well, I know that gold was in a 20 year bear market from 1980-2000 and I know that it is just now back-testing its old all-time high of $850-$875 in the middle of its secular bull market after blasting thru this old high. I also know the Dow to Gold ratio has a long way to go until it reaches parity (or even less than one). Below, a log chart of the gold price since 1968:

Chart above taken from Approximity and scribbled on. Much respect, mon.

So I do trade the gold bull some via gold miners and try to time my entries and exits when speculating. But for those who are not battle-tested veteran traders, gold is an easy choice to protect capital during a wicked secular general stock bear market, especially since a corresponding gold price bull market is not over by a long-shot. I don't even think the intermediate-term bottom is in yet for general stocks!

Still holding puts on KSS and AZO while getting my face ripped off, as I believe in these trades. Full-in RGLD and did a partial buy on GG near the lows yesterday. Hoping for GG to come back down a little to buy more (23-26 range). Waiting patiently for a lower low in physical gold to buy more.

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