Why Speculators Might Want to Sell Their Gold Now
by Alexander Green, Investment U’s Chief Investment Strategist
Friday, January 07, 2011: Issue #1423
Speculators should sell their gold.
I know most readers will disagree. But that’s okay. I’ve been down this road before…
- In 2000, we called investors’ love affair with Internet and technology shares “perhaps the greatest investment mania of all time.” Readers wrote in that we “just didn’t get it.” That we didn’t understand the New Era. And indeed, it made no sense to me.
- Six years ago, when I warned of the dangers of the housing bubble, readers chimed in again, telling me that real estate always goes up. (They said that even though it had fallen for 14 consecutive years in Japan.)
So my opening line will only tee off the majority again.
But gold – now priced at more than $1,365 an ounce – is trading in La-La Land. And if you’re piling into it now, you’re taking a very poor risk…
Are These Gold Investments in Your Portfolio?
Don’t get me wrong… high-quality gold shares should be part of any well-diversified portfolio.
Unlike the metal itself, blue-chip gold stocks have delivered an average annual compounded return of about 12% over the past 50 years. And they’re not correlated with the broad market, which gives your portfolio higher returns with less volatility.
That’s why we own the Vanguard Precious Metals and Mining Fund (VGPMX) in The Oxford Club’s Gone Fishin’ Portfolio and AngloGold Ashanti (NYSE: AU) in our Oxford Trading Portfolio.
But gold has more than tripled in the past five years and quintupled over the past 10 years. Gold bugs say it will go much higher, but there are good reasons to be skeptical…
The Runaway Gold Train
Gold is a wonderful hedge against inflation and economic calamity. And since we recently experienced a full-blown financial crisis, it’s natural that gold prices spiked.
But why is it still climbing? Things are getting better, not worse. The risk of a catastrophic meltdown has lessened considerably over the past year and a half.
And inflation? The CPI has dropped from 2.7% at the end of 2009 to 1.2% at the end of 2010. Inflation is not a near-term threat.
“Expect that to change,” the gold bulls insist. They predict that higher inflation is just ahead because commodity prices are rising, the Fed is printing money and Congress is spreading it around with a fire hose.
But there are significant disinflationary forces at work right now, too…
The Factors That Could Stall Gold’s Price Rise
- The real estate meltdown, which is far from over: Most Americans’ biggest asset is their home and as values continue to slide, it will make homeowners even more reluctant to spend.
- High Unemployment: Traditionally, inflation moves higher during periods of higher wages and benefits. But with one in 10 workers on the sidelines, that’s not a significant threat.
- The Fed: Despite how often you’ve heard it, the Fed is not “printing money.” This is a myth. The amount of currency in circulation isn’t changing. The money supply hasn’t changed in any significant way. The Fed is buying Treasury securities to lower long-term interest rates and stimulate the economy. I believe this policy is unwise and unnecessary, but it hasn’t proved inflationary – and it could be revoked at any time.
- Gold Price Projections: The way that some gold bulls forecast future prices is ridiculous. Under the best of circumstances, gold is tough to value. It doesn’t pay interest like bonds. It has no earnings or dividends like stocks. It can’t house you or provide rental income like real estate. So how do you project where gold should be trading?
That’s the $6 million-dollar question…
The Problem With Predicting the Price of Gold
For example, I hear bulls talking about record deficits and the problems in the eurozone and so forth. Indeed, these are serious issues. But they may prove deflationary instead of inflationary. How the heck does it tell you what the price of gold should be?
If gold were currently trading at $3,000 an ounce and these same problems existed, would that mean gold should be trading at $4,000, or $5,000, or $10,000? Who can say? After all, the world’s economic problems are no secret and the markets have had plenty of time to absorb the news.
Some analysts point out that gold was trading for $850 an ounce in 1980 and if you just adjust for inflation, the price should be around $2,300 today. But that’s just guesswork gussied up with charts.
Gold has often underperformed inflation for decades, as it did between 1980 and 2000 when it rather spectacularly lost 70% of its value. How can you be sure that won’t happen again?
I’m not saying it will happen. But I am saying that – while the next move in a bubble is anyone’s guess – looking back five or 10 years from now, this is likely to be viewed as yet another investment mania. (Bear in mind that in 2005, investors made up 16% of the demand for gold. Today, it’s more than 40%.)
If you pile into the barbarous relic at these prices, you may get the same shellacking that Internet investors and real estate speculators got a few years ago.
My advice? Keep 5% to 10% of your portfolio in high-quality gold shares as a hedge against inflation and potential economic calamity.
But if you own gold purely for speculative purposes, do yourself a favor. Take profits now.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
37 Responses to “Why Speculators Might Want to Sell Their Gold Now”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Alex, Can you give us a bit more detail about the Fed not printing money? My understanding was that the Fed is buying those treasury securities with new dollars that they’ve just printed. If that’s not the case, where’s the money coming from with which they’re doing the buying?
Thanks for the education!
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Alex,
I have a question about your selling speculative gold article, and year-end rebalancing. How much do we ‘weight’ a fund like Vanguard’s VGPMX as a precious metals holding?
Karl
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Telling speculators to sell gold, without looking at the international demand situation, is like talking about apples and oranges. This is tunnel vision at its worst. Gold is a global commodity and not a North American or even European commodity; in addition, it is a replacement for fiat paper money.
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Good on you! Gold has not even started its dramtic ascent. Global currency devaluation will skyrocket Gold, especially when China bails out of the dollar with Russia and India. The markets are manipulated by the international banking cartel. They have been supressing gold and silver for a very long time. DO NOT SELL YOUR GOLD OR SILVER!! HANG ON TIGHT!
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Great advice to hang on to it… it’s up over 100 dollars an ounce since this article was published.
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Hey Alex,
Why don’t you debate Jim Sinclair on the subject? You’re beginning to sound like one of the talking heads. But, maybe your right about what you say. If your convictions are strong, you should go up against maybe Martin Armstrong’s track record as well. (yeah, I know, he’s rotting in a federal prison right now, but for what?). Even for what I’ve said, you have a great record and I’ve followed a lot of what you’ve said in the past, but your gold forecasting leaves much to be desired. IMHO.
Andy
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I have to say I never thought to read such valid comments as those of Alexander Green in today’s advice for gold speculators to sell while they can. Mr. Green is absolutely “spot on” about the coming deflationary environment. Gold ain’t dippin’, its divin’. For most of us, this will be our last look at the Grand Canyon from the rim for a very long time to come. The mule ride to the bottom is going to be something else! Regards, Ron Crider
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Gold price at the time of this article: $1,365 an ounce
Gold price as of this response: $1,399 an ounce
Six weeks later and still no sign of “Gold dippin’ n divin’”
Doh! Don’t hold your breath.
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If running huge deficits and printing the money to pay for them does not cause inflation,then what is the cost ? There surely has to be one,otherwise the Federal Reserve and other central banks would be able to simply create real wealth out of thin air.What could that drawback be other than inflation?
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It appears that the price will be borne by the government bond holders who are expecting to get paid back, amidst the rising risk that they won’t be paid back. The increasing risk of bond defaults is driving up interest rates, making gold less attractive.
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Alex
You ask “But why is it still climbing? Things are getting better, not worse. The risk of a catastrophic meltdown has lessened considerably over the past year and a half.
And inflation? The CPI has dropped from 2.7% at the end of 2009 to 1.2% at the end of 2010. Inflation is not a near-term threat.”
Things are getting better? Really? And you believe the CPI? How about the tooth fairie?
Here are just a few counter points I would like to make.
1. Real inflation is running about 8+% and may go higher. What do you thing the effect of $4 or $5 gasoline will do.
2. Gold and Silver are due a correction but not a beat down. This will be buying opportunity. Gold would have to drop below $1200 before it would no longer be in a bull market.
3. Just like the oil in Mexico, supplies of gold and silver from production mines are in an overall decline globally. And demand? Increasing steadily in the larger emerging countries of China and India.
4. Your prediction would have been true after years 3, 4, 5, 6, 7, 8, 9, the same as after the 10th year we have just had. Shouldn’t this breakdown already have occurred? What happened to “the trend is your friend” or “don’t fight the tape?”.
So while you hedged your article nicely by saying “I’m not sure it WILL happen”. Looking at the graph it has taken 10 years to get to this point. Not exactly a Mania approach.
5. You think that the housing bust and the high unemployment are going to affect demand? I do not see how since virtually none of those affected own any volume of gold or silver and are not the ones driving the currrent demand to begin with.
The mania has not hit yet but it will sometime over the next 3-4 years. The goal is get out in that phase before it busts.
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Regarding the gold article:
Do you really believe that CPI inflation information? Try buying now what you bought a few years ago. Walk into any food store and compare prices and then tell me that there is no inflation. You apparently espouse the government propaganda used, to save costs and promote their agenda. This includes the index as used during the Bush years.
Has the price of gold fallen as far as home values that you use in your analysis?
Do you really believe that higher employment causes inflation?? I do not! It is well know that both the quantity of money supply and its’ speed of use, that determines inflation. Tell me that what I learned in school is wrong and how your reasoning can possibly suggest that inflation is the result of high employment.
You follow the usual ridiculous argument that the Fed does not “print”, money. They “direct” it to be printed, but the result is the same, more money into the economy, equals inflation, whether it be put into treasuries or otherwise injected into the overall economy. In what school did you learn that putting it into treasuries does not increase the quantity of money in our economy?
You call the investment in gold, in hopes of it’s increase in value, ridiculous. Then you automatically put your reasoning above that of China preferring it to our treasuries, (hmmm, a great investment scheme by Mr. Bernanke for our money, ah yes, less than 1 percent on the two year), You automatically put yourself above other world leaders as in Russia, and all of the other nations that prefer it, to our bonds. Might you be missing something here?
I hold no gold myself so I am not a gold bull, but I do know object to failure to be truthful.
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Some thoughts:
I am surprised that Alex has any trust in the CPI figures.
Why not use a 25% stop loss for gold.
Are you encouraging China and India to start unloading?
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The Fed is printing money like there is no tomorrow. How else are they paying for the Treasury bonds they are buying? It may be an electronic entry on Government Sachs books, not an actual paper bill, but the effect is the same. Gold is the safety net for when the world realizes the US is a worse credit risk than Greece (and then there will be no tomorrow for the dollar).
The CPI is low because the government is ignoring food and energy, large parts of anyone’s expenses, not because inflation is low. Real inflation is many times the CPI reported.
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Alex – The point you are missing is the value of gold as a hedge against the decline in value of the dollar, i.e., gold as money, a point I know you Wall Street guys like to ignore. Your point of view that it is a “myth” the Fed is printing money is unique, to put as nice a face on it as I can. Are you denying that the Fed’s policy is to create inflation at all costs? What has happened to the value of the dollar since 1913? Is this a myth, too? Your article reminds me of Lou Basenese’s bullheaded insistence last year that gold would go down to $700 before it hit $1000. He was wrong, and you will eventually see that you are wrong, too.
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How rare a bit of commen sense, practical, and balanced analysis. Nice to see someone not fall in line with the usual gold hype.
Right or wrong at least you have the gunption to not follow the “the world is coming to an end” crowd.
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Alex,
Can you explain your comment that “the Fed is not printng money” and the amount of currency in circulation is not changing.
BK
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This is why investors get confused and why my dad’s advise is that we know just as much as you guys. One of your colleagues recently put out a video that kept me up till 1am about the soon to be collapse of the u.s. dollar b/c of printing money and deficits. He’s saying pile on the silver and gold. Who’s advise should I take! I really like your spiritual wealth collumn which led me to take a chance on investment u. but I do hate all these special reports that go on forever and then try to get money out of my pocket everyday to get their true advise. Sounds like a strategy for investment u to get rich and us poor saps to stay poor!
Sincerely,
confused
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I have to take issue with point 3 re the Fed NOT printing money. OK, so the Fed has no printing presses. It DOES have computers and uses them quite efficiently to create CREDIT out of Ben’s as** … er, thin air. Unless Big Ben has better foresight on this subject than he did on the housing bubble in the first place, that credit WILL find it’s way into the general economy eventually and there will be Zimbabwie all over again in NYC. Maybe you have that kind of faith but I surely do not.
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I was a member of the oxford club when the market crashed.You surely didn’t predict a market crash. You were still picking stocks and told people to double down on your gone fishing portfolio and Berkshire lost a lot of money. I’ll take gold and silver over stocks going nowhere for 10 years as this federal reserve lines the banks pockets.
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Hello,
you are writing, “..The Fed is buying Treasury securities to lower long-term interest rates and stimulate the economy.”, and that is one of the Fed’s intentions with QE2. However, Mr market seems to have lost their confidence in the Fed’s ability to cope with current financial situation. Interest rates have been going up since the announcement of QE2, from 3 month treasury to 30 years treasury. This can’t be good! See example below.
http://finance.yahoo.com/echarts?s=^TYX
I say the real problem is not with the price of gold, it is with currencies! With the possession of gold and silver IOU Nothing, and I can exchange it for currency whenever I need to.
“Things are getting better, not worse. The risk of a catastrophic meltdown has lessened considerably over the past year and a half.” -It is not getting better the situation is getting worse. The number of countries that require bailout is growing from being the PIIGS-countries to what is now B IGPIS (Belgium added) and soon France and the UK will be added. Add F and UK to the above and you get BIGF..PIS.
ps. I’ll keep my gold and buy the dips;) /ds
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“The CPI has dropped from 2.7% at the end of 2009 to 1.2% at the end of 2010. Inflation is not a near-term threat.” Do you ever shop for groceries? Do you personally ever go fill up your gas tank in your car?? Do you heat with fuel oil??? HOW can you repeat such claptrap as the CPI when it doesn’t include most everyday items that people need to buy to live? I will probably be unsubscribing on this one, thought you guys were smarter than that!
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Green should wake up to reality …The US government Is faced with further increasing the debt ceiling ….in MARCH ….The hole will continue to deepen…I do hope that millions of investors will buy the poppycock propounded by this dude Green ….please scare the price down so that those of us with a clear understanding of the situation can buy some more AU at a discount
The American debt load is intrinsically unpayable …It will be ” monetized” with a growing avalanche of fiat currency…The almighty US republic is a consumers’ anarchy which produces little of value on world markets ….and is on a roller coaster to hell.
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BWAAAAAAAAAAAAAA HA HA HA!
You said:
“But why is it still climbing? Things are getting better, not worse. The risk of a catastrophic meltdown has lessened considerably over the past year and a half.
And inflation? The CPI has dropped from 2.7% at the end of 2009 to 1.2% at the end of 2010. Inflation is not a near-term threat.
“Expect that to change,” the gold bulls insist. They predict that higher inflation is just ahead because commodity prices are rising, the Fed is printing money and Congress is spreading it around with a fire hose.”
We’ll welcome you back to Planet Earth when you arrive!! OMG! And you’re not an apologist for whom?
LOL!
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You have given a very simple and straightfoward argument about a probable bubble market developing in gold. Even adjusted for inflation $2K Gold per oz. does not mean its going to happen just because it did in 1980. An entirely different scenario. Stronger inflation and I believe higher interest rates than we have now. I am concerened, like the FED, that deflation is more of a greater risk. I also like how you support holding gold as part of your portfolio. Rather it is 5% on up to 25% as Harry Browne promoted, as he also suggested, you have to rebalance back to your original target. Doing so keeps you in balance and allows you to avoid chasing a bubble. One day soon or who knows when or why but the bubble will burst and the price of gold will drop. Just like any other asset. Know your target allocations and rebalance when necessary. K.I.S.S.
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Sorry Alexander i find your comments above somewhat puzzling.
Is the value of an article(commodity) not what another person is prepared to pay for it?
And is it also not under pinned by its replacement value??
If times are good it will go above its replacement value and if times are bad it will drop below that value.
Now of the 300 million or so Americans, there are, may be 290 million that are not in the financial industry and most of them would be very careful as to where they might put their savings.But there are at least 2 billion people who are trying to get a better living and who actually understand the word ‘saving’ and as Banks and Governments (Politicians) are notoriously unreliable,when they are short of money these people have learned that a bit of gold or silver in their pockets might not be such a bad idea.
Best regards
Ernie
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I think you are missing the point on gold. The price is not so much linked to inflation: rather to the serious problems with USD, EUR, JPY and GBP. That is why central banks have been net gold buyers in 2009 and 2010 after being sellers for the previous decade.
When the US finally takes the necessary steps to cure its unsustainable fiscal incontinence (assuming this comes prior to a complete Dollar meltdown) then will be the time to sell gold.
I would also question how you can opine that gold “is trading in La-La Land” and then advocate holding gold mining stocks. If you expect gold to crash, surely the miners will follow?
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“Speculators” may want to sell. “Investors” should NOT Sell!! Number 1 reason I WILL NOT sell my gold … is the debt of this country is beyond being payable!! America is broke, bankrupt, insolvent and will default one way or another on the debt! America will not pay the debt and will continue to create more!!! This will eventually cause higher interest rates, probably leading to an inflationary depreciation … if not Hyperinflation. We DO already have much higher inflation than what our gov’t is reporting! This coming higher inflation, possibly hyperinflation, will not be due to whether the economy is better or not, or whether we are fully employed or not… The inflation will be a monetary issue not an economic one! Bottom line!! The moronic monetary policies of our government will lead to higher interest rates, higher inflation, thus much higher gold and silver prices and most other commodities and real assets of value!
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Yep I’m all for you advising others to sell their gold – with enough people taking this foolish advice I can get more of it at a lower price!
This article by Green would have to be the most ludicrous I’ve read so far. I can’t believe he honestly thinks the CPI is so low, and that the US economy is somehow getting better.
For those 17% of people who think the economy is in recovery and the other 33% who believe it will happen soon, I point you to the latest statement from current Treasury Secretary Timothy Geithner, who outlines the severity of the problem in a January 6, 2011 letter to Congress writes:
“I am writing in response to your request for an estimate by the Treasury Department of when the statutory debt limit will be reached, and for a description of the consequences of default by the United States.
Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades…”
The Treasury Secretary of The United States of America said that if it doesn’t get another $1 trillion or so dollars by March of this year then the US will begin to default on its debt obligations. These remarks are extremely serious and should be understood for what they are.
Just how much debt can the Feds endure? By printing more money? This of course devalues the dollar even further, driving up costs. I’d be interested to know where My Green got his CPI figures from…
Come May 2011 we’ll see who’s right. I still believe that Bernanke introduced QE2 far too early and that it won’t surprise me if a QE3 emerges from the soon-to-be ashes of QE2.
In the meantime I’ll hoard as much gold (and silver – a lot of upside potential there) as I can get to protect my wealth!
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Well stated!
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Chinese calling for end of dollar as world currency. Unemployment high, 2nd round of mortgage foreclosures worse than the first, commercial loan defaults coming, credit card debt high as all signs point to more bank failures and bailouts. The dollar is falling in value against major world currencies. The cost of food, health care, energy, gas and insurance all on the rise. Got Gold or Silver?
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I believe your comments that gold is a bubble is without merit, and that gold has no debt and if the price moves up , based on what an individual wants to pay for it, so be it. So gold has tripled in ten years, is that not normal. Stocks are nothing more than a Ponzi scheme, where brokers are selling worthless paper. Are you aware that the 700 billion dollar bailout of the banks and wall street with fiat money is a drop in the bucket as to what the Fed really printed. They printed in access of twelve trillion dollars which congress did not know about to banks all over the world. They did not have to print any gold. The only way we can prevent this misuse by the Fed is to back money with gold and prevent this rapid inflation and the destruction of our country. Nobody will want our fiat money if we just print it to pay our bills. Make your own assumption.
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‘Crowding out’ of Government bonds and rising long term interest rates only hurt bondholders if they are accompanied by inflation.If they are not,then the bondholders can hold their bonds to maturity to receive their return.In any case,Bernanke could choose to buy back long-dated bonds if high long-term interest rates bothered him.This would only fail to work if there was inflation.That’s why I believe that money creation must cause inflation – if it didn’t,the Fed could simply create wealth.
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The ratio of bulls to bears in the comments section of any gold article anywhere tell you all you need to know.
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Gold has reached the stage in this bull market where even seasonality – which is normally a big factor in the pricing and negative this time of year – is being overwhelmed by bullishness. It’s becoming more evident the US Dollar is worth less each day. And since it’s priced in dollar – there’s almost no limit to where it could head.
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This is a FAIL ARTICLE by an author who understands NOTHING about inflation.
Dollar inflation is REQUIRED by the banking cartels/Fed/Bernanke/Obama administration. For two reasons:
1) it makes all of our debt (and the US is in LOTS of debt) cheaper to pay back
2) they, like this author, believe they are STIMULATING the economy. LOL that is unfortunately for them the wrong kool-aid and the only bubble that is bursting is the dollar
4/12/2011 (a day when precious metals are down)
gold supported @ $1450
silver supported @ $40
They might both go down a few percent tomorrow, but I am betting that since the dollar support just got broken yesterday, we are going to see higher precious metals prices (particularly silver) in 2011.
Good luck to you all.
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Look at an M2 (money supply) chart if you want to know what inflation is doing.
If you trust that I have just looked at this M2 chart, I can tell you that it is going up and that this devalues the dollar because there are a LOT more of them.
http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply.svg
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