The Bugs were right
Posted by Ray on May 12, 2010 under Main | 
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Much is being made over the price of gold over the past few days and questions are being raised. The main question is; why is gold going up while the dollar is gaining strength? To me it is fairly obvious, there is no faith in any of the currencies of the world at the moment. It is not as if gold is making highs in only Euros or dollars, but it is making highs in most currencies at this point. Again, it is because of a complete lack of confidence of currencies rather than, but not completely devoid of, inflationary fears.
In short, the gold bugs were right and the jokes that many made are suddenly not so funny any longer. What we are witnessing is nothing short of spectacular and one should not underestimate the importance of what is going on either locally or on the other side of the world. It is not very often that we see developed world economies default or come to the edge of default which should make everyone extremely nervous. This is not Ecuador defaulting or the Congo, but we are talking about Greece, which is no surprise in itself, Portugal, Spain and Italy who are or were on the verge of default. It does not end there though, even though they are the countries grabbing the headlines, because if they go France, Germany and the UK could all go as well, this is serious.
This has all the making, as I have said before, of a currency crisis and contagion that can and will more than likely grip the whole world, ending in the U.S. at some point in the near future. To many this is news to them as they fell into the “that cannot happen here” crowd, but the gold bugs, like myself, have been saying for years that at some point the markets will tell you that you have borrowed too much and they will cut you off. When that happens the currency becomes worthless and inflation will inevitably set in making life miserable for the inhabitants of said countries. This is why gold bugs accumulate gold for years because they see it coming and this is why we are witnessing Europeans scramble to buy bullion now. Rumors are that European mints are almost out of bullion, both gold and silver, which may be one reason why prices are spiking. The rumors are not verified, but it would not surprise me one bit as the Euro continues its slide and I do not believe we have seen anything yet in terms of the decline in the Euro or the price of precious metals.
Many wonder why people run to gold for safety during times of stress and the answer is simple, it is a well known store of wealth with a 5,000 year history. It is recognizable, rare, relatively speaking, it cannot be diluted, it is inversely correlated to currencies and you can usually tell if it is fake or not as well as it is portable. All of those reasons make it attractive as an alternative to currencies during times of stress and why people are buying it now. The common reason people present, lately, for not buying gold is that it is not a safe haven because it got crushed in 2008 with everything else. That is true, but the world was in liquidation and seeking dollars to try and settle trades, dollars were tough to find remember, which is why everything went down, except for treasuries. Others claim that other commodities are better, like food, that is true, but food goes bad, you would need a lot of it, it is not as rare and people always need a medium of exchange, currency, to trade with which is exactly what gold is. I am not saying it is perfect or it will work, but I would rather own it than not own it at this stage of the game.
What does have me concerned is the fact that while the jokes about gold bugs have stopped the talk about gold has escalated dramatically lately as we are pushing new nominal highs. I am bullish long-term on gold, I mean, come on, the Fed by its very nature devalues the dollar by about 3% a year by design which makes gold a no brainer for the long-term, but shorter term when everyone is bullish I get bearish, kind of. I believe this time is different as we are facing, literally, a confidence issue if a major currency which is bullish for gold, but I am concerned that the price might get ahead of itself in the near-term. This happened the last time we got in this area and all the chatter stopped when it broke its winning streak, which I was happy about, and the same thing might happen again. However, the situation is different and unlikely to resolve itself.
What amazes me is that while all the talk is about gold no one is talking about silver. We are pushing almost $20/oz on silver right now, which is close to a breakout, and conditions are right for silver to really take off. With JPM making headlines about price manipulation, a currency issue, tight and dwindling supply, high demand, a metal no one recycles, a metal that is in everything we use makes silver, in my opinion, the trade of the century. I can see silver trading much higher than it is currently based on figures I have seen which estimates all the above ground silver consumed within the next 5 or 6 years. If that happens, $20/oz silver is a steal.
Regardless, metals make sense right now and while one should wait for a better entry point the idea is to be looking for that entry point to begin with. This is not rocket science as metals have fixed extraction costs and then it is supply demand after that. With the world’s population growing precious metals make complete sense especially since the vast majority of the world’s population considers precious metals the ideal investments. That in itself should make you think of adding some to your portfolio since the emerging markets population dwarfs the developed markets by a long shot and I would rather be selling it to them at a profit rather than trying to buy it from them at inflated prices.
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