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Minyan Mailbag: No Tarnish for Gold


Yellow metal unlikely to fall from current price.

Professor Lewis,

For the past 2 months, I've been building meaningful positions in gold (GLD) and miners (GDX) as a hedge against serious currency dislocation issues and inflationary pressures on the distant horizon. I can find plenty of evidence for said theses.

What I'm looking for are some thoughts about the other side of the trade. What could go wrong? What could cause gold to crater for a long time? I'm not too worried about being early, since I think getting in before the door slams shut is going to be hard to time.

Minyan Paul


What could cause gold to "crater for a long time" (I assume you mean in terms of its dollar denomination)?

1. DuPont could finally discover the secret of alchemy and make gold essentially worthless.

2. An asteroid could hit the planet and split the Earth into a thousand pieces, which would make gold irrelevant.

3. The entire planet could pledge their allegiance to the dollar "because it's pretty" and become willing slaves to the US because it's in their best interests.

4. Last, and my personal favorite, gold could blow off to $1 million per troy ounce, which would then most definitely set it up to potentially "crater" from that price for quite some time - probably.
There may be others, but those are the first things that come to mind.

There are only 2 choices for the US: Default or debase. Given those 2 choices, I honestly don't see a realistic scenario where gold could fall dramatically from its current price.

If asset liquidiation continues and inflation doesn't resume, then tax receipts will collapse and the US government wont' be able to service its debt. Government default would be inevitable, which would trigger a collapse in the dollar (very much like what we saw with Iceland a few months ago), and gold would soar.

On the other hand, should the Fed and other central banks continue to "print" and simply debase their currencies through inflating (which is the direction I believe we are going), then gold still soars. It's a "win, win" situation for gold bulls at this point in my opinion, just as it always has been if one was willing to take the long-term view and ignore the short-term volatility and noise.

Most may not realize it (because they're so focused on newspaper headlines about "deflation"), but even now, gold is just a few dollars away from going positive on the year, just as it already is positive by a wide margin in most other fiat currencies (gold even made a new high in British pounds just this week).

There aren't many assets that can say that they're even up YTD in 2008, let alone making new highs, as gold currently is many foreign currencies. Even US bonds were down on the year (in terms of dollars) up until a few weeks ago when the Fed indicated it might start monetizing the long end, which then precipitated a short squeeze.

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Positions in gold and gold stocks.

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