Tuesday, August 23, 2011

A gold rant (from IKN120)

By request, here below is the rant on gold that appeared in the intro section of The IKN Weekly issue 120, out last Sunday. When not one but three readers of the Weekly write in and suggest that it go on the blog, I bow to their collective desires. Thanks people

A gold rant (feel free to roll your eyes and move to the next segment)
Seems to me that so much serious money is now taking some sort of QE3-type stimulus from the Fed as its baseline that it’s not going to make much of a splash if (sorry, when) a formal program is announced and implemented. In fact, it might just let some of the air out of the speculative b___le (hah! You nearly caught me using the B word, didn’t you) currently around gold. On that subject, here’s a muse on the current action in gold. Many months back when gold was flirting around the $1100/oz to $1200/oz level, I took time in one of the Weeklies to ask two questions and then just ploughed forward and answered them. Paraphrased somewhat, those two questions were:
1) Is gold in a bubble? Answer at that time, I don’t know
2) Even if it’s in a bubble, is the bubble about to burst? Answer at that time, NO.
That was then and looking back all 20/20 and that, I’m happy enough with that call. But this is now and here we go with the same questions, but this time answers that pertain to IKN120, dated today August 21st 2011.
1) Is gold in a bubble? Answer: YES
2) Even if it’s in a bubble, is the bubble about to burst? Answer: I don’t know.
So a couple of thoughts on those two Q&As, starting with 1). This below is the 12 month chart for GLD, the gold ETF, and before we continue you’ll hopefully note that I’m not pulling down one of those veeeeery long term gold charts that offers up a price line acceleration in the last year or so to rival the North face of the Eiger. That’s not the point, we’re basically all friends of gold here and I for one will state right now that I have absolutely zip squat nada zero intention of selling any type of bullion position (gold, silver, you name it).
With that hopefully clear, if you can look at that chart and tell me you don’t see speculative interest moving into GLD with the greatest of respect I’d suggest a trip to the optician’s. Up to perhaps end of June the price rise was healthy, with its small corrections along the way but a clear and undeniable trend-is-your-friend. But then in July things started to accelerate and now in August they’re flying.
I don’t want this kind of speculative mania in gold, for reasons that should be apparent to anyone holding the underperforming junior silver producers a few months ago when Ag the metal shot to $50/oz and then dropped. But that nice Mr. Market doesn’t give two hoots for my personal preferences (and rightly so) and today’s action in gold does indeed show signs of doing the same thing as silver did a few weeks back. And hey, let’s be clear about the potential consequences starting with how we’re all going to have to be prepared for the noise from the told-ya-so brigade that has been 100% wrong for a decade and just can’t wait to be right, if only for a few weeks. They’d be insufferable...for a short while least.
However, before we get ahead of ourselves and start predicting the end of the gold run around Tuesday lunchtime (between main course and dessert), let’s consider Q&A 2). I say that yes, gold is in a bubble right now but then again, gold can keep on keeping on in a bubble for quite a while yet. Not only that, but if we are at an end, this is the late stage of a chapter in the spec moves and we’re closing in on a parabolic blow-off top, there’s still nothing to stop gold the metal from going a lot higher in a very short space of time before the blow-off arrives. Truly, $2000/oz by the end of next week would be pretty spectacular from a market watcher’s point of view but I wouldn’t be astounded and dumbfoundedly amazed by such action either.
And now, finally, the real thing I want to say here. All the above is pretty typical “what’s gold gonna do?” type chatter and in its own way entertaining. However, gold shouldn’t be part of your financial life for the amount of dollars you make from it from one day to the next. Gold isn’t about a nominal price in US Dollars. It’s not about seeking alpha against the market (or at least it damned well shouldn’t be, which is another good reason to suppose that rampant speculation taken hold in the last two months or so). It’s not about demand, nor supply, nor anything else that affects a commodity. That’s because:
  • Gold is not a commodity, it’s an asset class. Gold isn’t silver, or a PGM, or copper, or zinc or yttrium. Gold is gold and financially speaking unlike any other metal.

  • To quote Gary Tanashian on this (because he nails it down well), gold isn’t about price, it’s about value.

  • Gold isn’t something that makes you rich, it’s something that stops you from becoming poor.

Et cetera (and at this point feel free to remember your own fave line about gold or perhaps a JP Morgan or Rob McEwen quote). Measuring the price of gold against dollars is fun, but it’s not the true measure of the stuff. To get the real handle on gold, measure it against life.