Friday, October 9, 2009

Still Waiting For Gold to Crash? Better Read Below...

Dow Theory Letters publisher Richard Russell has issued an uncharacteristically bullish statement on gold.  Russell, who is perhaps that most famous and enduring market newsletter publisher, called the bottom of the 1972-1974 bear market.  Russell uses some proprietary indicators to forecast market trends. He's probably been, over the last 50 years, the most consistently accurate market forecaster.  Here's what he says about gold:
“Meanwhile, a great bull market starts, it's a bull market that mirrors the demise of the dollar. Gold is priced in dollars, and as the dollar weakens, it takes an increasing amount of fiat dollars to buy an ounce of gold…Beginning in 1999 gold started up in a primary bull market. In my personal opinion, this is fated to be one of the greatest bull markets in history. It will be a bull market built on not one, but two powerful human emotions -- both greed and fear. The speculative third phase lies ahead. Slowly but surely, the US public will finally realize that the US government is bankrupt both morally and monetarily. People will panic into goldI believe that there will be a world panic to buy gold. This will set off one of the wildest and most explosive bull markets in history.”

There are a several fundamental variables to support Russell's comment.  Let me just say that all these bubblevision "experts," who get on t.v., or pen commentary in the Wall St. Journal, and cite declining jewelry demand or industrial demand as reasons why the price of gold is at a top and going lower, have absolutely no clue what they are talking about - in fact, they look like absolute idiots to those who do (see the recent article by Dave Kansas of the Wall Street Journal. I am in shock the WSJ published such sloppy, incompetent reporting).

I will address all the reasons why gold is going much higher in future blog posts.  But I would like to say that, based on evaluating a lot of evidence that has been brought to my attention from some people who are in a position to know the facts - plus my own recent experiences in dealing with gold and silver deliveries from the Comex - there is a rapidly growing problem with the ability of three or four big banks, who are short Comex and LMBA gold futures contracts in large quantities, to make good on the actual delivery of physical gold.  I am now hearing accounts of some large investors being offered cash settlement of their futures contracts at spot plus substantial premiums over spot.  In other words, there is a condition of "backwardation" in the gold market that is not evident to the casual participant.  This alone, if I am correct, will drive the price of gold substantially higher (and of course, silver will go up even more in percentage terms).


  1. What if I'm just waiting for equities to crash?

  2. Morla, that's a great question. My fund partner and I discuss what will happen in an equity crash to the price of gold/silver/miners almost every day.

    This is my view - and it's an opinion only based on observing how gold has behaved in the past. I think if we get a good 20% or more sell-off in the stock market, that initially everything will get hit to varying degrees. This is because the hedge funds who are leveraged up have to blindly dump everything not nailed down to meet margin calls.

    I think gold will get hit, but not anything like stocks in general. I think silver, just because it's illiquid and volatile and a small market, will get hit hard, but less than the stock market percentage-wise. I think the HUI index will go down as much or more than the stock market in general, again because of the HUI beta vs. the SPX.

    The key is to have cash for this. Most people no idea about this, but the small mining stock index that existed back in 1929 went up over 500% after the crash of '29. People who bought mining stocks after that crash were wealthy by the time 1935 rolled around.

    If you don't have cash deployed in gold, I would take at least half of what you want to invest and buy 1 oz. bullion coins like gold eagles or austrian philharmonics. Make sure that you take delivery of them and safekeep them yourself. NOT IN A BANK SAFE DEPOSIT BOX.

    Then wait for the crash you expect and deploy the rest of your capital for gold PLUS load up on silver and good mining stocks.

    This way, if Bernanke is on a mission to print so much money that he reflates all the old bubbles, especially the stock bubble, at least you will have some money invested. And in this scenario, gold outperforms the SPX by at least 2:1, silver by at least 4:1 and mining stocks by at least 5:1.

    I would say that the way things are looking today, that Bernanke has already begun to hyperinflate everything.

  3. Dave,
    Jesse has some items about gold confiscation up tonight. While i think the possibility is remote, you never know! You mentioned not placing gold in a safety deposit box, and I have always felt that one scary issue about holding gold if you believe (not saying you do!) that in the future the government might seize gold is this:
    Do you declare it in home owners insurance? If you do, there will be a clear on file record of what you hold.

    I have always rolled that one around in my head.

    Love the picture of the gold coins, but I am partial to bars myself!

  4. I would not declare it on home owners insurance. You don't want a paper trail of proof you own it.

    I'd keep it somewhere you know thieves and fire can't get to.

  5. Dave,
    I would agree with you. Great material all week by the way.

  6. Thanks gyc. Likewise on your blog, which has an interesting content "slant."

    I thought we would be tossing more trash at each other before tomorrow's Broncos/Pats game, so here goes: I think Belichick will get schooled by his former pupil tomorrow. In a reverse of Chris Berman's call: Denver 19 NE 14

  7. Dave,
    on paper the Patriots should win. In reality the game is in Denver where the Pats have always had real issues with turnovers and losses. I like the score 19-14 and it could go either way.

    Can the Broncos beat the Chargers? Their whole playoff possibility will require them to beat those guys.

  8. gyc, Chargers may be overrated this year. Either that or they'll do what they did last year - start really slow and then come on strong at the end. They were only 8-8 last year. To me it's amazing the kind of worshipping the Chargers get for a team that hasn't accomplished anything since Shottenheimer was canned.

    LT is one year older, they are a bit light at WR, and Norv Turner has another year of bad influence on the team...

    As for today's game, it will be fun to watch either way.

    I think FLA and 'Bama are the teams to beat in college.

  9. how does football equate with gold futures?

  10. I think you are way off. Gold is in a parabolic top right now. The speculators might be able to push it to $1100 an ounce, but I doubt much higher. Last year I heard the same arguments being made about oil and why the fundamentals pointed to oil going higher even as it was trading above $140 a barrel. Hmm... that didn't work out to well for the oil bulls did it. They were crushed and wiped out in a matter of months. I firmly believe we will see the same thing happen to gold investors. I have nothing against owning gold, I purchased my bullion coins back in 1999 at $272 an ounce when it was truly undervalued. I literally laugh when I hear people say today that gold is cheap and a good buy. Why didn't they say that 10 years ago when no one paid attention to gold? I did and made a nice profit. I believe the money to be made now is to short gold. Purchasing either put options on GLD or purchasing an inverse ETF or ETN. Obviously, timing is difficult in knowing when the decline in gold will begin but I follow sentiment indicators closly and it points to gold falling soon. Beware of advice from investment gurus who issue opinions and don't have the facts to back it up. Oh yeah, by the way, supply of gold is 3 times demand. That is a fact!! Hard to believe the misinformation that exists out there right now on Gold and precious metals.