Golden Gamble 3

If I had a gun for every ace I have drawn

I could arm a town the size of Abilene

Don't you push me baby

Cause I’m holding low and you know I’m only in it for the gold

All that I am asking is for ten gold dollars

And I could pay you back with one good hand

You can look around about the wide world over

And you'll never find another honest man

                   Cracker 1993

     Tonight I want to finish up my three-part series of blogs about gold. You can read about my decision to invest everything in gold, and some myths about the gold market, here and here. But this is the relevant one, my predictions about gold in the short and long-term.

            As always, I primarily look at the fundamentals.  I try to ignore the hype and momentum players.  If you are taking your advice from guys like that on CNBC, be prepared to be broke.  So the fundamentals of gold going forward are exceptional.  Unique.  Orgasmic. 

The Federal Reserve has now officially stated that they are trying to create inflation, at 2% a year.  My reaction is A) intentionally trying to create inflation is idiotic, and B) they have no chance to keep inflation at this level.  None.  Higher inflation causes everything to rise in value, especially gold.

            Closely tied to this is the value of the dollar.  It is not exactly a state secret that the Federal Reserve and President want a weaker dollar.  Winner, winner, chicken dinner!  Congratulations, you have succeeded.  For the reasons below that will continue.

            The two biggest consumers of gold are China and India, and their citizens are getting wealthier. The appetite for gold in these countries is voracious.  Although Indian demand weakened at the end of 2011, this was due to the record price of gold in the rupee.  Demand there always returns.  For the Indians gold is thought of in ways Americans can’t understand; it's in their blood.  In China the government is now allowing and encouraging their citizens to buy gold.

Central banks are now net buyers of gold.  Some do it overtly and some do it covertly, like the Chinese.  At a minimum this acts as a floor for the price.  I think this has the potential however to be much more than that.  China has relatively small reserves of gold compared to the United States.  If and when they up their percentages just a few points, watch out.

The Federal Reserve continues to keep interest rates at an unnaturally low level, basically zero, in order to stimulate the economy.  This has two major effects that are relevant to the price of gold.  First, nobody can earn a solid return on traditional investments like CDs and Treasuries, so money continues to flock to “risk on” assets such as gold.  Second, these low interest rates weaken the dollar, again to the benefit of gold.

Lastly, there are simply no other safe havens besides gold.  The stock market, relative to gold and adjusted for inflation, has done poorly in the last decade.  Real estate has gotten crushed and will continue to perform poorly in the near future.  All the wealthy countries have tried to weaken their currency. 

Are there any risks?  Only minor ones.  Theoretically it is possible that a Republican could come in, fire Bernanke, tame inflation, reduce our deficit, never print money, and strengthen the dollar.  Yeah, right.  Still, 4 more years of the Obama/Bernanke policies would be the ideal for gold.  Cataclysmic for the overall economy, but great for gold.  Look, I didn’t write the rules.

The only thing that truly scares me is actually a temporary one.  That is the breakup of the European Union, which I think is inevitable.  The majority of pundits think that this would be great for gold, because people would  flock to it as a safe haven.  I think in the short term they're wrong.  Like we saw at the end of last year, people would flock to the dollar first.  I would expect a brutal, quick, beatdown of  gold.  Although in the long run I think the dollar will collapse and gold will be the only safe haven left, in the short term if this happens I might temporarily take my chips off the table.

The final question is, how high will gold go?  The answer is it will go as high as the dollar goes low, so in effect it is unlimited.  Pick whatever number makes you happy.  $2,000 an ounce.  $3,000.  $5,000.  As long as the fundamentals stay the same, it will eventually hit all these numbers.  And you’re going to be shocked at how quickly.

            The bottom line is, I'm still all in gold and expect to stay that way for a while. 

Have a good night everyone.

JR

You may ask yourself, well, how did I get here?

You may find yourself living in a shotgun shack

You may find yourself in another part of the world

You may find yourself behind the wheel of a large automobile

You may find yourself in a beautiful house with a beautiful wife

You may ask yourself, well, how did I get here?

                        Talking Heads 1981

For me, rock bottom hit in 2008.  In a country of over 300 million people, we were left with the inexplicable choice of John McCain or Barack Obama for President.  On the right, McCain was smart in one respect; he realized that he knew virtually nothing about economics and avoided talking about it like it was the plague.  Listening to him talk about economics was both sad and funny at the same time.  On the left, the choice was someone with a skimpy resume; no executive experience, no business experience, and an undistinguished liberal legislative record.  Predictably, Obama has been a major disappointment for a job he was never qualified to do.  Even the Democrats don't get excited about him anymore.

So, as the Talking Heads asked, how did we get here?  In the richest, most powerful country in history, how were these 2 considered the best choices we had?  This was not a fluke; the more important question is why do our Presidential candidates virtually always seem so lacking?

 If you were an alien who showed up in the US for the first time yesterday, you would assume that the most successful country, with over 300 million people, would have an abundance of choices.  You would assume that every election would be like determining who are the five best NBA players or the five toughest Navy SEALS; Everyone's great, it's just a matter of picking the greatest.  But as we know, our system just doesn't produce these type of choices.  Here's what I think is a major reason for that:

 Let's assume you've got it going on.  No, I mean you’re really, really sterling.  You graduated from one of the best schools in the country with honors.  You have an advanced degree from an equally fine school.  You have been a major success in business, and your generous philanthropic giving is well known. Your wife is brilliant and beautiful, and you all have raised well-adjusted, smart children.  Somehow, you’ve even found time to be on the board of directors of multiple local businesses.  Everyone who knows you likes and respects you, except for the people that are jealous that don't count anyway.

So the question is, if you're that guy or gal, why would you run for President?  For starters, every secret and mistake you've ever made in your life will no longer be secret.  Maybe there were short periods of time in your happy marriage that weren't so happy.  Maybe you have a health issue that is no one's damn business, that is now everyone's business.  Maybe back in college you were normal and your morals weren't as evolved as they are today.  Who really wants a lifetime of very human mistakes dug up?

Politically, no matter how smart you are and how good your policies are, immediately 50% of the country is going to dislike you.  Every word that comes out your mouth, and every recorded word that has ever come out of your mouth or pen, will be scrutinized and criticized.  Everything you say will be taken out of context and put in commercials by your opponent, alleging that you are dishonest, unlikable, and like to torture kittens in your spare time.

            In short, I think the smart ones are very comfortable staying right where they are.  No, not every candidate is a tool, but our system clearly discourages the best of the best from running.

Have a good night everyone.

JR