With so many people beginning to reawaken to the importance of gold, the noise level was bound to increase. People who hated gold a couple years ago are becoming big fans all of a sudden. They don’t know why they are fans except that the price is going up. They are just jumping on the band wagon and so they are dangerous people to listen to about anything. One way to cut through the noise is to look into the past writings of people who turned out to be correct on the subject and who were telling their story when others were laughing at them. Peter Schiff is one such individual. Like any analyst, Peter isn’t always right about everything but like any good analyst he’s right a lot more than he is wrong. Also, when he is wrong it is generally a matter of timing, not faulty logic or being an agenda-driven con man. Also, Peter provides sound reasoning to back his views and there is a lot of good old fashioned common sense to be found there.
So here is an article he wrote in 2006 regarding 10 tongue-in-cheek signs to look for so that you can determine if gold is in a bubble. Of course, the real signs to look for are informally given before the actual top 10 list and the list itself is really just a way to say that metals must again go main steam before there is any chance they can be a bubble. Note that this was written during a time that he was (correctly) saying both the stock market and real estate markets were bubbles in progress. It’s not often that you find an analyst whose overarching view of the economy doesn’t affect his view of each of the smaller markets therein.
Gold will have pullbacks during its ascension but I don’t think it is anywhere near a speculative peak simply because I don’t think the dollar is anywhere near its full debasement. Most people simply have no idea about all the risk factors in our super leveraged global economy that could come crashing down. And even if it doesn’t crash suddenly, there is zero doubt that the leverage is being systematically and structurally dismantled.
Take the $300 trillion in derivatives contracts that our government estimates exists. Other informed estimates have come in as much as 4x higher than this government number but, hey, who really knows because it’s all completely unregulated! All we do know is that the numbers are beyond huge. Using the US government numbers, if just 4% of those contracts (they are really a type of insurance policy) go bad (i.e. have to be paid) in aggregate, it represents a wealth loss equivalent to the national debt. Where is the money going to come from to pay this when government steps in to take on the loss in order to “save our system” at all costs?
The economic crisis is finally making government wake up to this threat and so they are putting regulations in place to regulate (and thus greatly reduce) these transactions. Of course, doing so is deflationary. A derivative is a (Wimpy) promise to pay should contractually defined conditions occur and thus it has to be viewed as a form of conditional credit (this definition assumes that there is not enough cash on hand to pay the promises as was certainly the case for AIG). However, the real deflationary aspect of reducing them is that they are primarily used as hedging mechanisms for risk taking activities that directly increase the credit supply (and thus the money supply). In other words, leveraged gamblers buy lots of stocks and other financial assets on credit and use the derivatives to reduce their downside risk in the event that they gambled wrong. If these insurance contracts are reduced then there must be a corresponding reduction in the risky economic activity which they were designed to support. That is not conditionally deflationary, it’s directly deflationary.
Deflationary activities reduce the money supply and thus slow the economy down. In response the government will have to debase the currency in order to re-flate everything lest the banking system crash due to housing price reductions that will need to be marked in their books (thus rendering them insolvent). In other words, the status quo government at this point has little choice but to betray those who thought they could safely save for their long term retirement needs using dollars. Someone will have to pay for this mess and inflation has always been the easiest way to steal from people. On the positive side (if you can call it that), inflation steals from everyone, not just US citizens and US taxpayers. Anyone who holds the currency is a victim so we will spread the pain around. Of course, the net effect is to make everyone in the world more interested in buying metals for their long term savings given that fiat currencies around the world are being exposed as fraudulent scams.
My current outlook for gold:
- Short term: wait and see. The chart could be forming a pattern that would signify a short term peak with the possibility of a significant pullback but it has not been confirmed technically yet. In opposition, silver just broke out to a new high thus confirming gold’s long standing breakout. Time is needed to get a better view here.
- Long term: gold is very cheap even at current levels given the unfixable structural problems with all fiat currencies globally. Unlike real estate, gold does not have any carrying costs such as maintenance and property taxes. Gold is by far the best asset one can have for building up long term retirement savings. It places your retirement out of reach of government’s greedy reach. Ideally it should not be viewed as an investment or a way to make money. It should be viewed as another type of universally fungible money which cannot be debased by corrupt government politicians. It is a way to keep what you already earned, nothing more. Dollar cost averaging into gold is going to be a winning strategy for years to come IMVHO.
