Saturday, December 11, 2010

Gold Musings

I keep seeing the proponents of gold using the "remember Gold has no counter-party risk so gold is money" 

They should be a little more clear as to what they mean by this.  I think many confuse this and think they can buy in the market these ETFs  and feel comfortable.   Not so, they should emphasize the PHYSICAL possession of gold carries no counter-party risk.  

Hell cocoa has no counter party risk if you have physical possession.  Nor soy beans.  Nor sugar.   So I don't get the hype of the lack of counter-party risk.  There is risk in ANYTHING in which there is no physical possession. 

I think we get confused greatly when looking at fiat currencies, what they represent and any relationship to gold or silver.  There is really no true connection except whatever the current price of the commodity is in relationship to the currency.  The fiat currencies (which is all currencies I am aware of today) are all faith based.  That is, we believe the value is what the governments says it is.  It is re-enforced, when you offer it for goods purchased and it is accepted ..... you get your goods and the seller takes the currency in exchange. 

Gold and silver are just commodities that do or produce nothing.  I know there are industrial and other uses for the metals but based on the amount used in production of some other thing or jewelry that use for now, is rather small.  So, just humor me in that these metals only have value based on their rarity and the fact that in the past they DID represent money.  Governments and central banks hold large reserves to in theory back their good faith but want to keep the price down or at least in some manageable "range" to keep some order and I would assume prevent wild speculation on the "thing" that in theory the currency "might" be based upon. 

So, what's the deal?  The lack or abundance of the metal AND the demand for the metal.  Because the known stores and the known production numbers are generally available for anyone to see how much exists we know that they are basically fairly rare.  So why has the price not continuously gone through the roof making it unobtainable for all but the very wealthy?  I remember when platinum was all the rage 30-40 years ago. If rare is the order of the day why is not platinum $300,000 an ounce?  That number is off the top of my head but compare the price ratios and scarcity.

How is the demand being driven?  There is lots of hype and secrecy being bounced around on the internet, times are uncertain and that always bumps gold a bit but we are talking about gold being at the highest price EVER.  And,  EVER is a long time.  So I just don't get it and frankly smell a rat somewhere. 

If you bought a pile of gold back a $350 or so then good on you.  I would be selling some of it but, that's just me.  Can it go to $5,000 an ounce?  You bet it can but it will be because those dollars are worth LESS,  not that gold has changed in the least.   Look at the stock markets;  They are doing the same thing.   There is no more value in all these companies on the exchange than before.  The dollar just sucks. 

So here's my thing, if you hold gold in any ETF or any of these stock type issues you face risk that the gold even exists physically.  The rules for taking physical possession seem shady to me so, these are no different risk wise than any other stock or investment vehicle. 

Now, if you have been buying the physical, in order to claim the gains you will have to sell it somewhere and at some point in time.  With prices being at all time highs and rising seemingly rapidly, at some point no matter what anyone says it's just gonna run out of steam.  It will reach it's implied value and/or exceed it.  (Personally, I think it is near that point now) when it does it will stop.  Then some will sell.  Then some more, especially those who bought near the top, will get out and mental sell stops will be hit.  Remember we are talking about the physical holdings.  You can NOT sell this metal unless you personally find a physical buyer.  When the dealers who might buy smell blood, the price is going to drop, and drop some more which will add to the panic because some have really stuck their neck out and are going to have to unload large quantities fast in order to not lose their shirt. 

Hey these are just ramblings but they are honest ramblings and I still smell a rat ... sorry. 

Euphoria, irrational delusion and hype are all earmarks of a bubble to me and that's just the way I feel about the gold/silver thing at these levels.  Everybody needs to have a little "get out of town" money and that's fine.  I use to say "The only time you can have too much fuel in your airplane is when you are on fire".   What happens if the gold market burns down?  It is a market you know. 

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