Saturday, November 1, 2014

Better Buy At $1166: Gold In November 2009 or Gold In November 2014?

In November 2009, after a steady 7 year relentless climb in prices, gold crossed $1100. Each tick higher was a new all time high, and those that began investing in the metal years before were brought on national television and applauded.

I was someone fortunate to begin investing in gold back when it was in the $500's. My last gold purchase was in the high $600 range, although I have purchased gold mining stocks at various times over the past 8 years (I currently have a paper loss for almost every gold company I own).

Back in 2005 - 2007 when I accumulated the majority of my physical precious metals holdings I would discuss it with some of my friends and business associates. I was devouring books at the time on the global economy and the fundamental reasons for purchasing precious metals seemed almost too good to be true.

For the next few years precious metals remained mostly unnoticed, and it was not until gold hit $1000 that I felt, for the first time, other people around the world were beginning to take notice. In the fall of 2009, as gold crossed into the $1100's, friends and former business associates began contacting me to ask if it was too late to make purchases. I told them that although I felt the prices would go much higher in the years ahead I was not personally making additional purchases because I thought the price had risen too far, too fast. While I recommended that gold should be at least a small part of every portfolio due to the fundamentals behind owning it (massive global debt imbalances and future money printing from central banks), I always ended with an overly cautious tone on the near term direction.

That caution looked extremely foolish over the next few years as gold would rise from $1100 up to $1900. By that point, in August of 2011, I was so nervous about the future direction for gold that I put up the full caution flag here on the site (see $1900 Gold).

Just over 3 years later gold has pulled back from $1900 to $1166. It is right around the price point it reached in November 2009, five full years ago.

At exactly the same price, the view toward gold today (after a 40% price decline) is the exact opposite as it was in late 2009 (after a 425% increase in the price). An asset that is rising in price and sitting at all time highs becomes a drug that people want in their portfolio. When that same asset goes on sale, it becomes a toxic poison that no one wants to be near.

Has anything changed fundamentally surrounding the reasons to own gold? Yes, the fundamentals have improved drastically. In late 2009 gold buyers could only speculate that global debt would increase by tens of trillions of dollars, central banks would print over 10 trillion dollars while holding interest rates at 0%, and the global economy would remain stagnant even with the unprecedented stimulus.

Today those conditions, the most fundamentally bullish set up you could ask for surrounding the gold market, are the reality we live in. No structural changes followed the 2008 crash nor have they even been seriously discussed. Europe has been the closest economy to even make an attempt at structural reform and they are widely regarded by policy makers as an example of economic failure under the new global Keynesian regime. The European Union has now essentially thrown in the towel, joining the rest of the world in massive fiscal deficits combined with large scale QE programs.

Back in November 2009, when gold was crossing the $1100 mark for the first time in history, Peter Schiff was brought on mainstream news networks and applauded by the commentators for recommending to clients they hold a portion of their money in metals. He is described entering this segment by the hosts as their "favorite gold bug," and they begin by discussing how he has been wisely recommending gold to clients since it was in the $300 range.



On another November 2009 CNBC segment with Schiff (which you can watch here) the commentators seem to have a full understanding of the fundamentals behind gold's rise.

Fast forward five years later. This past week, after gold's 40% pull back, Schiff was asked to come back on to CNBC where they had a large scale firing range waiting for him.



How low can gold go from here? Much lower. I certainly cannot tell you where it will bottom, however, I can tell you with certainty the fundamental reasons for owning gold are far better in November 2014 at $1166 than they were in September of 2011 at $1900.

I planning on buying physical gold this week for the first time since 2007 (I have been buying physical silver relentlessly over the past year and I have lost money, so far, on every one of those purchases). I like to purchase assets with strong long term fundamentals, in secular bull markets, after major price declines when sentiment is low. Very rarely do the stars align for me in each category. Now is one of those times in the precious metals markets.

For more see:

Total Global Debt Crosses $100 Trillion: QE Programs Will Not Stop The Collapse

6 comments:

  1. Tuna, perhaps the powers that should not be named have been taking notice, reading your blog, and depressing gold and silver prices.

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  2. i agree with your thoughts in general, but why buy now? there is no sign of a change in sentiment, the masses are not interested in gold at all, and the run up was much further than other commodities ...so couldn't it be that precious metals have another 25% to fall?

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    1. They could absolutely fall another 25%. They could fall further. I would remember, however, the most money is usually made purchasing an asset when the sentiment shifts from catastrophic to just bad. The problem with that, of course, is timing. I have no idea when that sentiment shift will occur, I only know that we are definitely in the catastrophic sentiment period now (especially in silver and gold mining stocks). I have the ability to buy and hold so I prefer to buy assets when they are in this sentiment stage. I would certainly not recommend it to everyone because it can be traumatizing psychologically.

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  3. my problem is that your ideal asset acquisition scenario of "strong long term fundamentals, in secular bull markets, after major price declines when sentiment is low" has occurred in the gold market many times in the last 3 years but putting down a big stake at any of those intervals has proven to be a mistake. i'm not trying to find the absolute bottom, but i am trying to avoid sitting on a large paper loss for an extended time. the gold bulls have been hurt but haven't abandoned ship yet. do you have any thoughts as to why you are feeling more confidence at this moment?

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    1. For me personally (the majority of market participants disagree with me based on sentiment figures), $15 silver is more attractive than $30 silver. If it falls to $10 and nothing changes with the long term supply/demand fundamentals it would be more attractive. If it falls to $5 it would be even more attractive. If silver rose to $30 from here it would be 50% less attractive to me than it is at $15. I have no idea where the bottom is and I have no ability to figure out when the bottom will occur. The precious metals are in free fall. I like them more every day the price is lower. I will like them less in 5 years when the price is much higher. I do not recommend this strategy to anyone, it is psychologically traumatizing. It is much easier to chase assets as they are rising and try to catch a trend before it turns down.

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  4. ok, i decided today to take a stake, a 1/3 position in gold and silver via CEF (trading 10% discount) ... nice to get back in after 3 years, thanks for the push Tuna! what i'd really like are other hard assets with strong long term fundamentals ... i don't have confidence in oil because of tech improvements in solar, etc. and the industrial metals look risky due to china slowdown.

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