Friday, December 15

If They Don’t Own Gold, Don’t Trust Their Opinion on Gold

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As I write this note to you on Friday, fingers flying over keys like the flickering quotes on my screens, Pink Floyd’s “Learning to Fly” is playing on my speakers.

It’s an appropriate tune, because gold is once again “learning to fly” now. After one or two scrapped take-off attempts, the yellow precious metal has broken out to fresh all-time highs. (Well… nominal highs at least. To break inflation-adjusted highs – which will happen sooner or later – gold will have to trade above $2,000 per ounce.)

Your humble editor has spilled a fair amount of ink (pixels?) on gold these past few years. Here are a few examples:

The argument for gold is nuanced, powerful and compelling. You will find various elements of it in the archives above (should you care to look).

At heart, though, the case for gold is simple. After a quarter-century of fiscal irresponsibility, we have spent all we have… and spent yet more on top of that. Now the credit lines are nearly tapped out.

Against such a backdrop, in which debt levels remain high and growth remains stubbornly low, there is little for desperate politicians to do but print, print, print… and the only “neutral currency” not subject to the ravages of a printing press is gold.

If you’ve been a Taipan reader for any length of time, you already have a fair grasp of the facts. You have probably also realized how far we are from the financial mainstream. Taipan Daily is willing to put things bluntly when others will not… to “tell it like it is,” or at least tell it like we see it (with you being the final judge). That said, if you’re not a subscriber, sign up for Taipan Daily for free, right here.

And so, with that in mind, a quiet suggestion: If they don’t own gold, don’t trust their opinion on gold.

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Pomp and Nonsense

Why does this need to be said? Because gold is an emotional precious metal. As an asset class, it stirs the passions. Some folks love gold, and others irrationally despise it. Either way, investing and trading decisions tinged with emotion are not to be trusted.

As gold has marched steadily higher, an amazing amount of hand-waving and pooh-poohing has taken place… most of it from individuals who have never owned gold in their lives and likely never will.

(If gold is too high priced for these dismissive souls now, at a measly twelve hundred bucks and change, how on earth will they bring themselves to buy in at $2,000… or $4,000… or higher still?)

In many ways, gold is despised because its ascendancy is an affront to an established way of life. A rising gold price means the system is not working. It means the old “buy the dips” mentality, in which the same old fiscal fixes continue to work, has gone by the wayside. Relentlessly rising gold means the easy way of life established these past 25 years – a “simpler time” that many money managers wish they could return to – has gone the way of the dodo.

So we hear over and over how gold is a “barbarous relic.” (Funny – no one calls the Federal Reserve system a relic, though they’ve been consistently screwing things up since 1913.)

We also hear from sour-grapes types and knee-jerk attention seekers that gold is just a fad… that the infatuation will die down any time now.

But these viewpoints are rooted in emotion, not facts. The newspaper columnist who turns his nose up at gold is not merely dismissing an asset class. He is expressing discomfort at the pressing onset of a strange reality he does not understand.

Meanwhile, the market “contrarians” who bellow about gold going lower – even as it marches ever higher on daily, weekly and monthly charts – are merely grasping for straws of attention, trying to restore old guru glories lost.

A Cheap Insurance Policy

There is something else important the naysayers and doubters fail to understand: Gold is a low-cost insurance policy.

Ask yourself the following. How much faith do you have in the Federal Reserve? How about the Bank of England (BOE), the European Central Bank (ECB), or the Bank of Japan (BOJ)?

Our financial and political leaders have not just performed poorly in a time of serious crisis, they have performed spectacularly badly. These past few years have been the fiscal version of the BP oil spill. Who is to say the powers that be won’t bungle things worse – much, much worse – when the full-blown “Act II” of the global financial crisis hits with full force?

Against the backdrop of breathtaking financial, social and geopolitical risks the whole world faces now, the truly crazy stance (in your humble editor’s opinion) is not owning gold. Those who blithely assume everything will work out are like Florida beachfront property owners, happy to forego insurance as the hurricane bears down.

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Last Train

The other open question in respect to gold is one of supply and demand. Some feel there is more than enough gold to go round at current levels. How can gold be worth such an exorbitant price, these critics whine, when all it does is sit there?

Others, like credit and debt strategist David P. Goldman, take a different view:

What’s the price of the last ticket on the last train out of Paris on the night the Germans march in? Whoever is carrying the most cash will get it, and that will be the price.

…Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production.

What’s the price elasticity on that sort of thing? How badly do you need that ticket out of Paris?

Speaking of central banks… “Last year, foreign central banks were net buyers of gold for the first time since 1997,” CNN reports. “India, China and Russia have been the biggest buyers. And more recently, the Philippines and Kazakhstan jumped into the fray with big purchases of the precious metal during the first quarter…”

There are at least three different motives for owning gold – as speculation, as investment and as long-term insurance policy. Speculation is the motive most sensitive to price changes, insurance the least.

Whatever your motives and methods, your humble editor would advise considering gold not just as a standalone asset, but in the context of other potentially risky assets you own… like the fiat currency-denominated cash in your portfolio, for example.

And when seeking opinions on what gold means and where gold is going, be wary of those who don’t own it (and who never will).

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