As gold hits another high this morning, allow me to reiterate that you are witnessing something historic. This is the kind of move that most people will misplay and learn to regret. The hardest thing to do right now as a gold investor is to hold, so crudely, this is exactly what you should be doing. This may seem a little counter-intuitive, but the higher gold rises, the more likely it is to continue rising in a rocket launch-like move. Yes I understand the concept of mean reversion, but one must realize that gold is rising because of a lack of confidence. This is the kind of price driver that is self-perpetuating.
The market gives you so many valuable lessons if you allow yourself to be taught. For some reason, people think they are special if they lecture about their market outlook and point to a couple of flawed economic indicators to support their thesis. But you know what? Everyone comes to the market with an opinion and the market doesn’t care- it will go where it needs to go in the time frame that it wants to. As an investor, you have a choice: you can either fight the market or befriend it. Let me tell you this much: befriending the market is much more conducive to learning a thing or two about the world around you. I’d much rather objectively and accurately discern markets- and by extension, the world around me- than cling to a market outlook that conveniently agrees with my world-view. The markets are telling you that a crisis is approaching; gold would not be trading at $1370 if the debt crisis was behind us. If you want to stick your head in the sand, be my guest. As for me, I’m preparing for the inevitable crisis.
The smart money is starting to ask questions. If the Fed openly admits they will do anything and everything to jump-start the economy, including direct bond purchases, then the dollar will come under pressure. Weakness in the dollar makes holding bonds a less attractive option. A move out of bonds will directly affect the price of gold and stocks. You must understand that gold is about as neutral of an asset as there is. Currencies are manipulated regularly by domestic governments (see: Bank of Japan Yen intervention) because of political considerations. Any attempts to manipulate the price of gold by the U.S. government will eventually fail due to global demand. If the U.S. government truly wanted to get people to believe in the economic recovery, all they would have to do is bring gold back down to about $500 dollars. Then people like me would be silenced. As it stands, gold is rising in open defiance of reports that the debt crisis is over.
When I give forecasts about the future, a lot of people are in complete agreement until I say that stocks will rise in this debt crisis. Well this seemingly paradoxical thesis is starting to play out. The market is rising whether we get good news or bad news. Not only are you seeing the markets price in another round of quantitative easing, but you are also witnessing a flight to liquidity and private assets. This is a secular theme that I would not fight. Stocks can rise dramatically in a Depression, and the conditions are ripe for stocks to rise again. Remember, we are on a free-floating system that will likely beget much higher nominal asset prices. I would much rather be invested in a company that produces tangible products than in the U.S. government (which is essentially what you are doing when you buy U.S. government bonds).
I have my opinions about the market, but I always allow the market to tell me when to enter and exit trades. Sure I believe government bonds are a huge bubble, but I am still not short. Sure I think stocks will weaken around the 1200 target I pinned months ago, but I am not going short yet. Sure I think gold is due for some kind of correction, but I am not selling. I am letting trades come to me instead of chasing them. Since I know a lot of you are unsure about what to do with your gold holdings, let me just tell you that buying the dips is not only easier, but it is also the more profitable strategy .
Every day that goes by, I get more and more frustrated by the inability of our leaders to take control and tackle our issues instead of ignoring them. There are some obvious solutions to this crisis that our leaders will never implement. Debt for equity arrangements to fund future projects and mitigate debt levels will go a long way to curing our woes. However, this is too much of an intelligent solution for our leaders to implement. They will continue to act based on political expediency rather than fiscal sanity. We will all suffer for this short-term thinking.
I honestly have mixed feelings about this monster push in gold. Although I predicted this move, I also realize that a move of this kind augurs a major crisis. Heck I don’t need a crisis to invest profitably- I can just as easily invest in a time of economic prosperity. The last thing I will do is twist economic events to paint an unrealistically optimistic picture. I am not running for political office here. I am not an economist whose tenure depends on standing by economic orthodoxy. I am not an analyst whose livelihood depends on the unholy alliance between bankers and the government. I am a normal person who refuses to be misled by lies and propaganda. There is a time for games and a time to get serious. Believe me, it’s time to get serious. A major crisis awaits us.