Friday, March 13, 2009

When times get REALLY tough

remember the end game. Central banks and governments hold gold. Many hold lots of gold. If the U.S. and/or other major country decided to re-value the value of gold relative to the value of their currency, which I think will happen once times get really tough, would the other countries who hold a lot of gold really be that pissed? By the time things get that bad (and they probably will, if history is any guide), people won't trust paper promises anyway.

California is already testing the waters. Outtakes from the linked article:

"Could marijuana be the answer to the economic misery facing California? Democratic state assemblyman Tom Ammiano... introduced legislation last month that would legalize pot and allow the state to regulate and tax its sale... Pot is, after all, California's biggest cash crop, responsible for $14 billion a year in sales, dwarfing the state's second largest agricultural commodity - milk and cream - which brings in $7.3 billion a year... tax collectors estimate the bill would bring in about $1.3 billion a year...

...With any revenue ideas, people say you have to think outside the box, you have to be creative, and I feel that the issue of the decriminalization, regulation and taxation of marijuana fits that bill...

Let me re-write the book when gold insurance is needed and can pay off:

"We have to re-value our currency to stay competitive in the global marketplace. By re-valuing our currency lower relative to gold, we actually benefit tremendously as a country. You see, gold is America's biggest cash crop. We have been selling it to the Chinese as they are no longer willing to buy our bonds. Besides, we need the tax revenue to pay for education, health care, jobs, stimulation, bailouts, social security, pensions, banks, auto companies, senatorial bribes (uh, "earmarks"), insurance companies, Wall Street, homeowners, state governments, offense (umm, "defense"), currency support, interest rate swaps, education, abortion, reproductive rights, stem cell bans, stem cell research, drug companies (I mean Medicare part "D" or was it "F"?), baseball steroid investigations, market stability, energy stability, farm subsidies, alternative energy subsidies, bridges to nowhere, home builder subsidies, Affordable Housing, the War on Terror, the War on Savings, blow job investigations, etc., etc."

This California thing is just a glimpse. Sentiment turns. The Drug War becomes the Drug Tax. Paper promises devalue. Gold retains value. When trust is high, the gold premium is low. Now flip the location of the words "high" and "low" in the previous sentence and you have our current situation. People who believe that things don't stay bearish forever are right. That's why when the Dow to Gold ratio hits 1, I'll be looking to turn my gold back into paper or perhaps harder assets like real estate. No biggie - it's just a long-term trade. I'm not a gold bug just for the sake of being a gold bug, although I understand people who are. I'd hoard cardboard if it were likely to be a better investment.

The advantage of realizing the secular turns in the market are simple: you know what not to do! I know to stay away from real estate (other than as a shorting opportunity now or before), stay out of the bullish general equities camp (other than as a swing trade to ride a bear market rally), and hold cash equivalents and gold miners as the bulk of my portfolio. This should easily be a 3 year cyclical bull market in gold miners and it just started with the fall 2008 lows.

Forget inflation. Think instead, how do gold miners make money? When gold is any price (though preferably rising), if costs (e.g., oil, labor) are dropping relative to the gold price, profit margins increase. Costs for digging money out of the ground have decreased, thus there's more money left over after paying expenses. Excuse me for stating the obvious, but when a corporation's profits increase, dividends and the stock price usually follow suit. Gold has been holding up better than other commodities because it has resorted to its role as a currency. The hardest currency known. Old school, barbarous-ass type hard money.

Corporations, whole governments and currencies are evaporating. The value of gold won't evaporate. Thus, gold will become the winner by default.

As an aside, but in a related topic, the 10 year weekly chart of gold royalty company Royal Gold (ticker: RGLD) is a work of art to me:

Wikinvest Wire