Gold a No-Default Asset
Precious metals perfect insurance in this economy.
The AgAu Global Producer Fund's imminent launch, which was put on the back burner last year after my father's stroke, is occupying most of my time. That now seems somewhat prescient.
The recent sharp decline in precious metal prices has prompted me to throw my two cents into the mix of commentary and pontification. Longtime Minyans may recognize my reasoning: Paper metal is very different from physical metal.
The last great precious metal bull run (from $35 to $850 over 8 years, beginning in 1972), had 3 retracements of more than 50%. This current nasty move, while painful, is just a bump in the road - an opportunity to take out some insurance, in case all the pundits and talking heads are wrong, and we haven't yet "seen the worst."
I contend the "worst" is still a fair way off.
Fast, scared money is usually irrational, as evidenced by some of the gold equity prices of today. Half-price equities on a 20% underlying physical gold price move is insane. Some equities are priced lower now than they were when gold was $500. So who's right?
Unlike any other financial instrument, precious metals are a physical, deliverable asset - a simple fact many overlook. They're a physical asset that will inevitably and resolutely dictate the price to the "paper" market. Eventually.
The US economic story's no better -- in fact, it's clearly deteriorated -- and yet China can receive a quarter more gold for their "dollar assets." They have dollars coming out their asset managers, growing monthly at horrific rates. These "give-away" prices will be impossible for them to ignore. Russia will be buying right next to them.
The physical metal market is very small, and a quiet hundred billion here or there will soak up more gold than almost anyone could imagine. There's a floor to the gold price (and we're very close to it at $800), whereby the huge dollar asset holders will "diversify" to the financial asset that cannot ever default.
Did Mr Bernanke bother to attend Central Banking 101 - as per the central bank of Zimbabwe? And even if he had, he faced the unenviable choice between printing and dying the death of a thousand cuts, or killing the economy in one fell swoop. No wonder that he chose to print willy-nilly, though that's never ended well.
Either way, undoing the financial excesses of the past 15 years is going to be very painful.
A rising tide floats all boats, so picking almost any unhedged gold producer will be a winner move over time - but astute judges will return multiples over the next 3 to 5 years. Gold producers are not created equal, no matter how similar they may appear. Stock selection is paramount.
The precious metals have been hit hard following this "re-allocation," due to typical Pavlovian fund response and mob mentality. There's no justification for the dollar rally - nor is there for the Euro's strength!
Insurance is usually expensive. This financial insurance isn't: $800 for gold will appear very cheap in a couple of years.
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