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Thoughts from the Frontline

Central Bank Insurance

December 17, 2012

Choose your language

            “For every complex problem there is an answer that is clear, simple and wrong.”

H. L. Mencken

Possibly, the question I am asked the most is, “What do you think about gold?” While I have written brief bits about the yellow metal, I cannot remember the last time I devoted a full e-letter to the subject of gold. Longtime readers know that I am a steady buyer of gold, but to my mind that is different from being bullish on gold. In this week’s letter we will look at some recent research on gold and try to separate some of the myths surrounding gold from the rationale as to why you might want to own some of the “barbarous relic,” as Keynes called it. My personal reasons for owning gold have evolved over the years. I will tell you the story of my own journey, and you can decide for yourself whether to think about coming along.

I cannot start this letter, however, without a brief but sad note about the tragic events at Newtown. As a parent I cannot imagine the anguish and horror at learning that my child was murdered while sitting in her first-grade classroom. The senseless wasting of so many young lives leaves me profoundly saddened for our country and culture. There is not much that I can say other than to extend my deepest sympathies to the families and friends of the victims – and perhaps to wonder about the wisdom of relegating violence to the level of an arcade game in the movies and games our kids watch and play.

Bitten By the Gold Bug

I wandered as an innocent bystander into the world of investment newsletter publishing in 1981-’82. Back then it was a world inhabited to a great extent by “gold bugs” of one variety or another. The investment newsletter world was in its infancy, and I was something of a direct-mail wizard, brought in to weave my magic with mailing lists and fluid copy. You can’t write effectively about…

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Dec. 27, 2012, 12:47 p.m.

I am always amazed how narrow-minded and silly people are, who should know better, as in many ways, they seem very intelligent and on-the-ball. Here I feel that Mauldin completely misses the point.

Over time, Gold changes it function, depending on the economic climate. It is not always just one thing – like dummies want to think of it as. Sometimes gold is a commodity other times real money (in place of fiat currency).

You never want to just put money into gold (say at age 20 yrs) and leave it there for your whole lifetime. Like everything Gold cycles, from peak to peak it takes about 48years. So if you hold for less than this, you just get two points in one cycle (of the sine wave).  Over many of these cycles you get an average that will just go up with inflation. As Mike Maloney and myself have said, in the long term (> 100yrs) nothing goes up, once you take out inflation. But the value of things do vary up and down, from overvalue to undervalue and back (one cycle is about 48 yrs for gold).

So when gold is ascending in value, it is good to own it. Maybe this is caused by Central Banks and /or Govt’s meddling, that causes high inflation – this is when the Gold retains its purchasing power. This will be the case now with the FED printing 1 Trillion dollars per year. Some say hyperinflation is coming to the US in 2013 / 14. Reports also say that the purchasing power of gold increases in times of both inflation and deflation. When gold is descending in value, it is NOT good to own it, i.e. in the past you would buy in 1966 and then sell in 1980.

Different people.

If you were a billionaire I suppose it may not hurt to put a million dollars into gold and keep that gold for ever. That’s only say 0.1% of your wealth, although still good to buy when gold is undervalue, e.g. last time in year 2000. That amount of gold (only 18kg) would be easy to pick up and flee if things got very bad.

For net worth people of $100k I wouldn’t put 10k (that’s 10% of worth) into gold and keep for whole lifetime. Also if they had a heavy chunky gold necklace given to them why not sell at a peak. What reason to keep? Unless sentimental reasons.

For net worth people of $2M, I wouldn’t put $200k (that’s 10% of worth) into gold and keep for whole lifetime. Maybe 1% is alright ($20k).

Buffett is political, that’s why he say gold is an “ancient relic”, don’t buy that crap – get educated – learn history.

Charts exhibit 2 and 8. As you say “Of course, this assumes you believe official inflation statistics.” If you do believe the official inflation statistics (CPI), you are a Dummy and get what you deserve. Wake up and go to . Gold is nowhere near its price from the peak in 1980. Real inflation adjusted gold peak of $850 in 1980 is $9,530 today.  Real inflation is US is currently just under 10% (Dec 2012).  Gold is very cheap at the moment.

The scarcity of gold is not changing significantly, but the demand is increasing, because the people who are awake know what’s going on and what’s coming. Hyperinflation is coming, which will erode the value of all cash in the bank.  Change your cash to gold now while it is still worth something. Gold is in its ascendancy stage. The blow off top is next. Why do you think China and many of the worlds central banks are now buying gold? Are they all stupid? I don’t think so. Are you smarter than they are?

Gold will continue to go up because there is an open policy to destroy the US Dollar.  It is good to buy gold now, (Silver is better), but you need to know why you’re doing it and when and why you will sell it. Don’t look at it as, “do I want to have 5% of my portfolio in gold ?” – think more as what percent of my wealth do I want to lose by not putting it into gold? I.e. what you don’t put into gold will become worthless, zero, your will lose it. Don’t think of holding the gold to give to your grandkids – that’s missing the whole point. Soon $10,000 will only buy you a third of an ounce of gold.

Don’t hold your gold in bank vaults or safety deposit box or you will lose it.

Dec. 27, 2012, 9:38 a.m.

Like the article, but just think you may have missed a larger piece of the puzzle.

That gold moves in distinct cycles. These cycles coincide with those of most other commodities. Witness the broader commodity bull market, including gold, since 2000.

Surely, supply and demand explains much of this cycle. Central bank stupidity has just added “juice” to the boom.

at Asia Confidential

Mihai Costache

Dec. 19, 2012, 2:22 p.m.

You may be forgiven for not reading the book.
But what about visiting this place:

Brian McMorris 46364174

Dec. 18, 2012, 10:26 a.m.

Another Tolkien fan!  I thought I was the only analytical / financial type who also loves science fiction and fantasy novels.  But I have read the Trilogy only 4 or 5 times, not 13!  That is impressive.  However, I have read the Hobbit 3 or 4 times, so got you there.  Good reading!

Dec. 18, 2012, 5:12 a.m.

Interesting piece but a couple of items to think about.  1) CPI is somewhat misleading up until early 1900’s as gold was money at a fixed price not only in US but much of the world although supply/demand would cause it to fluctuate a bit compared to other items, e.g. GOLD discovery in California.  2) Consider DOW:GOLD ratio. It is somewhat cyclical over 10-20 year periods and has been dropping (favoring GOLD) for past 10+ years and likely to continue for a few more, implying GOLD a good investment compared to stocks.

Dec. 18, 2012, 3:01 a.m.

i think you know very good the metal too.but everyone have diffrent intreses ..and this is good too.GOLD is precise .this is who keep high value..
thank you
enjoy the day we can ..

Dec. 18, 2012, 2:09 a.m.

John, I think you’re engaging in some behavioral finance irregularity when you attempt to distinguish your monthly buying of gold from any other investment decision. Also, I saw, at a Fidelity conference, a chart of gold plotted against the combined central bank balance sheets of the biggies. Plotted logarithmically, it showed something like a 1:1 relationship. Seen it?

ted creedon

Dec. 18, 2012, 1:02 a.m.

As previously commented:

If one pays off the national obligations at $16 trillion and has enough US gold left to back the currency at 50%, gold would be revalued at $108,000/troy oz.

Someone will have to pay for the estimated obligations or endure serious want.

Calculations available on request.

Dec. 18, 2012, 12:50 a.m.


Thank you for taking the time to address the grief of our small town in Connecticut.  Although I work as an accounting professor down at Tulane University in New Orleans, I live up in Newtown, CT because it is such a beautiful, kind place to raise our nine children. We are all stunned and saddened by this surreal event. 

My children all are okay.  But a close friend of mine, 6-year old Emelie Parker, is not.  Just five days before her death, I brought a little hand puppet named Green Grover to share a story with Emelie and some of her friends.  Emelie always loved Green Grover, so I felt a special bond with her.  The topic was the symbols of Christmas.  As Green Grover handed a candy cane to my wife Kristin, Kristin asked if anyone knew the symbolism of a candy cane Many children raised their hands, but Emelie seemed so intent on answering, that Kristin called on her.

Emelie said: “The red represents the blood of Christ.  The white represents purity, for Christ can wash us clean.  The crook represents Christ, who is the Good Shepherd.  And if you turn the candy cane upside down, it makes a J for Jesus.” 

We were all touched when she bore this little testimony of Christ.  Now, we shall never forget it.  Every time we see a candy cane, we will be filled with love for this sweet little girl, and her testimony of Christ will strengthen us.

Emelie and her class are now in the arms of the Good Shepherd whom she loves so much, embraced in his care.

Deen Kemsley

Michael Crofts

Dec. 17, 2012, 11:52 p.m.

John - Keynes didn’t say that. What he said was: ‘In truth, the gold standard is already a barbarous relic.’ [Monetary Reform (1924), p. 172, from Wikipedia].
There’s a huge difference between saying that gold, or the gold standard, are a barbarous relic. The gold standard certainly seems to have caused difficulties for my country, the UK, in the 1930s. I think it is probably better if currencies can fluctuate against each other and against gold. So I agree with Keynes, that the gold standard is a bad thing. But that’s not the same thing as the metal itself which functions usefully as a measure of how a particular government is abusing its currency.
Your quote is the one everyone uses, but it’s just plain wrong.
Very best wishes