Gold Bulls Beware, the Jibba Jabba stops here!

The Gold bug has obviously bitten people around the world, from East Village bar owners to high on the totem pole hedge fund managers, everybody wants a piece of it.

it’ll hit $2000 an ounce in a few years, John Paulson went even more by saying it may go all the way up to $4000. Well, sorry guys but a significant authority on gold has weighed in, and his rating on it? SELL.

Resplendent in his mohawked awesomeness, Mr. T was on Bloomberg’s Taking Stock and shared some of his valuable insights on the precious metal to Pimm Fox. Having worn the leprechaun’s obsession for decades, T, as I assume he’d like to be called, is quite familiar with the metal and pulled an Einhorn by stating:

"It was something special. You know, the Incas or the Mayans, they said gold was the sweat from the sun, or the tears, you know? ... Gold was special. Gold was the gift the three wise men brought to Jesus! Frankincense and myrrh and gold." And now? "I'm about to tell other people it's time to sell."

Anyway, here’s the vid.


Fascinating. But in all seriousness I know that most of us here agree with him. Well, to an extent at least. Gold has been breaking new highs almost every day and currency wars notwithstanding, might be in bubble territory already.

My question is, how long do you think will this go on until it pops?

I’m giving this until Q3 of 2011, but I’ve been wrong before.

You?

Bonus animation of why gold’s in a bubble, from Taiwan.


Can’t wait to see a dancing Granny at the brokers.

 
Best Response

Jorge,

I think T brings up a valid piont, however I think that the gold bulls are seperated into two very seperate and distinct bulls. There are the paper bulls and the physical bulls. The physical bull market will definitely force gold prices higher. As long as people are willing to buy and accept physical delivery of gold, the market will go through the roof. The only issue with this is that physical gold needs to be provided for, which may create a major gap between the paper market and the physical market. Given our fractional gold system and the limited outstanding supply of physical gold that is still traded in the market, if that happens, expect to see physical delivery starting at 10 times the current spot price of gold.

Unless you're holding ~10,000 Shares, or whatever the exact figure stated by the prospectus, of GLD or whatever gold backed security you own, you are holding worthless paper. If you are a paper gold bull, I would highly advise starting to look for an exit point, most likely around November, just after the mid-term elections.

 
eyelikecheese:
I pity the fool that is bullish on gold

Kinda surprised it took an hour and 18 minutes for someone to pull out the I pity the fool line. haha nice dude

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

haha point taken, I was hoping the title of the thread would be that iconic phrase but the insights on GLD were definitely much appreciated

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

What about gold mining companies, whose expenses to pull gold out of the ground havent gone up but their product sells for so many times more than it did previously. Even if gold does drop mining companies wont have a hard time showing profits.

Would it be a good idea to buy mutual funds that specialize in gold companies and mining companies.

 

@happy, I was trying for "I pity the bull" or something but got lazy

@Frieds, as usual you are on it man but why November? True, the elections could spark a fall but the way I see it it would be just a correction and not a real decline. I simply don't see the fundamental (if you can say that) drivers of it's price to be fixed that soon.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
 

@Happy,

Thanks. Might as well know what your investing in, right?

@Kambo,

How much sector knowledge do you really have? If you want to play that game, start researching companies that are Jr. Exploration companies (the really small ones) as that is a higher risk/reward play, but a much more volitle one at that. I don't know much about the exploration sector myself, so I'm not a good person to ask.

Most mutual funds are stacked in the same names, just with different weightings. That provides no exposure to the sector as a whole, but I don't see it being a particularly great play. If I had the time, I would look into the exploration companies.

@Jorge,

Not elections, but Fed Action. What they do in November dictates what happens to gold in my humble opinion.

 

Shoeless,

Sorry for the delay. I didn't mean to keep this response for so long, but I've finally had time to draft something reasonable.

As to your question, fractional gold has to do with how we handle our banking reserves, as banks treat gold the same way they do money, as something that should be lent out in it's entirety. As an aside, this definitely puts Eddie's idea of how to kill the banks into perspective, as what I am about to explain is tantatmount to understanding why it's more than possible to create a run on the banks given today's banking system.

Pick any commercial bank you want (Think about any bank ranging from big names JP Morgan Chase Bank, Wells Fargo, Bank of America, TD Bank, PNC Bank and Citizens Bank to smaller, lesser known banks, like The Bank of the West) and lets seperate it from the rest of the business areas it may be involved in. To make things easy, for our example, lets use JP Morgan. Before the repeal of Glass-Stegal, there were two seperate entities, JP Morgan Chase Bank, a full service retail bank that accepted deposits and loans, and JP Morgan Securities, the Investment Bank. After Glass-Stegal was repealed due to the Gramm-Leach-Bliley Act, they were merged into one parent entitiy that encompassed all of JP Morgan. We are only concerned about JP Morgan Chase Bank, as they are the retail consumer banking arm for JP Morgan. We're going to simpfly this even further, as the abstraction can make it a bit messy, and assume that JP Morgan Chase Bank only has 1 branch at which it does business. JP Morgan Chase Bank has a total of $1,000,000 in deposits recorded in the book. Of that 1MM USD, the Fed requires that they keep a reserve on hand. For simplicity sake, lets call it 10%. JP Morgan chase can lend out 900K and must keep 100K on hand for daily withdrawl and use. That's how a bank normally opperates. If in the event that there is a bank run, the capital reserves held on hand will not be enough to keep everyone solvent when they go to withdraw their funds out.

This is essentially how gold works as well, with a few noticable differences. Unlike regular banks, Central Banks and major depositories like JP Morgan and HSBC are the biggest holders of gold, particularly in countries with a fiat currency. Outside of jewelry and electronics, any gold held in the US is either owned by the government or someone that has a small collection (Coins) or has opted to take physical delivery on gold they purchased. The private owners are an extremely small portion of the total gold held in the US.

The Central Banks and Depositories lend their gold out since they have the quantity to do so without impeding too much on their own stockpile similar to how a regular bank would lend out a large percentage of its deposits in order to earn income on it. There is only exchange in the world that handles this. Unlike a regular bank, which uses capital provided by its depositors to fund loans and other investments across a broad spectrum of markets, Gold is traded via one source and one source alone, the LBM (London Bullion Market). It's governing body, the LBMA (London Bullion Market Association), handles all of the accounting and trade reporting. They account for ~90% of the OTC gold market. To make things more interesting, this is where all the all the spot and forward trading happens. Futures contracts are traded through a different exchange. Futures contracts do not have much bearing on traditional gold trading.

When you decide to buy gold, it's held one of two ways, on a fungible basis and on a non-fungible basis. If you buy gold, you want to hold it on a non-fungible basis, as it means you are allocated what gold you hold. The bulk of the gold traded is held in a fungible basis, as it's unallocated, meaning you do not have any direct claim to the gold you supposedly hold. When you hold gold on a non-fungible basis, it's similar to, but not akin to, hold physical gold, as you are actually holding the supposed asset in your name.

Looking at turnover, we have the biggest issue, in that the reported unallocated gold turnover ratio is upwards of 15% of the outstanding gold traded. This is bad. No... this is extremely fucking bad. You do the math on that one buddy. It's not a good thing. 15% daily turnover in an unallocated account means that if everyone demanded physical delivery there would be a run on the gold bank. By the way, every person that demands physical delivery slowly erodes the unallocated basis, meaning the turnover ratio becomes higher. So, we're talking major problems if the world decides to demand physical delivery. this is a huge difference, because unlike lending with a fiat currency, the more you lend out and the higher the turnover, the less you can actually pay out assuming everyone comes to collect. This is the biggest reason why gold is considered a fractional currency.

Now, going back to what I said above, as the price of gold keep rising, we will see the biggest divergence between the price of accepting physical gold and the price of paper gold, that is gold held in an unallocated account because of the fact that only a small portion of gold is held in comparison to what is actually traded.

Any questions?

 

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