Gold: Sell, Hold, or Double Down?

I'll be brief.  Recent market moves, headlines, and commentary have been unsettling to (say the very least)

for investors in precious metals.  But if we can get beyond "What's happening?" and consider "Why is it happening?" the situation can be viewed much differently.  In a recent post, Gordon Gekko dissected the "Why" issue with incredible detail, and basically threw in the "Who" as a bonus.

Spoiler alert!  The title of his post is "Buy PHYSICAL Gold. NOW: The Discount of a Lifetime: Or Why You Must Abandon the Fake Paper Gold Market

"If someone is selling anything, the rational thing to do would be to get the best price possible, right? Would you get the best price if you sell your lot in one go flooding the market? Would you want to overwhelm all the bids and crush the price? Yes, but only if exactly that was your objective – to crush the price. Nobody sells 400 tons (!) of gold in one go if they are trying to get the best possible price. So this wasn’t a case of varied market participants selling their gold holdings having considered the fundamentals for Gold and arrived at the conclusion their long position didn’t make sense anymore. This was a case of concerted selling by one single entity whose sole intention was to drive down the price. Not only that, nobody sells $20 BILLION worth of Gold in ONE GO without some sort of state/CB backing."

So how is the situation different?  Gold is on sale!  Get some now, or right after you finish Gordon's post.

Cyprus Confiscates Gold!

Mark Grant, writing for ZeroHedge, reports on a move that precious metals holders everywhere have long feared.

"Please note that until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn governmental promise has been shown for what it is; a lie. Worse and actually far worse and quite scary in fact is that the European Union and the European Central Bank and the IMF has not just allowed violation of the deposit insurance but demanded it. One thing is certain here; if they can void deposit insurance in Cyprus then they can void it in any country in Europe. Further; if they can void deposit insurance then they can void bond covenants with the scratch of a pen on paper. Nothing now; Nothing is safe!"

What's that   You missed the part about gold confiscation?  So did I, and that's the point.  Cash in a bank is a remarkably easy target for politicians and bureaucrats eager for a fix.  To be clear, so are ETFs purporting to hold gold, and even mining shares.

When things get bad, really bad, the safest counter-party is no counter-party at all.  Parents, it's 10:00.  Do you know where your gold is?

True and False on Gold ETFs

Sometimes the thing we see written in the press are so stunning that they almost defy comprehension.  In this snippet, The Globe and Mail manages to score a perfect 10 in terms of truth, and second perfect 10 in terms of anti-truth in just two sentences.

"Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank.”"

First, the truth.  Gold ETFs have changed the gold market.  There is no denying that at a time when billions are invested in what is considered gold by way of these vehicles.  (I wonder, in fact, if ETFs are responsible for the sometimes lackluster performance of gold stocks.)

I'll admit it.  I own a bit of Sprott's PHYS and PSLV--nervously.

But the anti-truth that follows is astonishing in its audacity.  ". . . the products have become so successful in offering a simple way for investors to buy physical gold."  Really?  Physical gold?  Let me assure you, that while I hold some PHYS, Sprott claims it is 100% backed by gold, that ownership is utterly different than a Maple Leaf, Kruggerand, or Gold Eagle in my control.

Never forget that in the worst case situation, gold is favored because there is no counter-party risk.  Gold ETFs may perform in a similar fashion to gold for a day, a month, or a thousand years.  Still, the counter-party risk will remain.

Is gold in a bubble?

"Tex Norton" writing for Whiskey and Gunpowder has some interesting thoughts on that subject.

Is gold in a bubble? Possibly, but if so, it still has a long way to go before the top is reached. The top will make itself known if you simply watch the market actions. In the meantime, what else can you do, if not invest in gold, to help protect your accumulated wealth?

Indeed, what else can you do?  Shorting stocks might be one reasonable possibility.   It just makes me very nervous.  How high can stocks go when the money supply is potentially unlimited?

Another idea that I'm currently considering is the purchase of 2 or 3 leveraged inverse ETFs.  The idea is appealing.  These ETFs are designed to achieve a return of 2 or 3 times the opposite of the benchmark they are based on.  (FYI, I'm considering small investments in EUO, SRTY, and TBT.)

I really don't like the idea of leverage.  Truth be told, I think these leveraged ETFs are built on the house of cards that is our financial system.  I wonder though, if a person whose investments are largely weighted towards precious metals might be well served to have a small (maybe 10%?) investment in one or more of these.

If you decide to, please be sure to research thoroughly before you invest.  Even the people at Proshares include this warning, among others:

ProShares ETFs may be appropriate if you intend to invest in them as a portion of a portfolio, not as an entire portfolio.

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