Avoid gold scammers

[grapejelly]

Re: Avoid gold scammers

If the US treasury wants your gold, they'll get it. All they have to so is serve papers on BullionVault. A company like that can't afford to buck governmental authority. Thinking that the different storage facilities will help you is wishful thinking. It is just so hard to cave in against the US Government and the UK government will be backing them up all the way.

I don't think general confiscation is likely. I think taxation and attachment of your gold is more likely -- taxation at punitive "windfall profits" rates, and attachment in order to enforce against you.

If you are not a US citizen and not in the US, then this doesn't affect you of course.

[raja]

Re: Avoid gold scammers

As I see it, there are 2 reasons to have gold:

1. For a global financial catastrophe, during which fiat currencies would be worthless.
2. To sell for a profit.

In scenario #1, physical gold and silver will be useful, along with a shotgun and lots of seeds. ETFs, BullionVault, and any other paper gold will be worthless.

Personally, I think this scenario has a very low probability. While investment in some physical gold may be desirable for a “black day”, in my portfolio it will comprise a small portion, appropriate to the low probability I assign this scenario.

In scenario #2, the goal is to profit from a gold bubble. Whether the dollar collapses, and/or there is a global financial crisis, the price of gold will rise dramatically. However, it’s a bubble and will collapse at some point. Profit will only made if one gets out in time . . . .

My concern is that, if the bubble rises and falls rapidly, physical gold may be very difficult to sell. I can’t see how the infrastructure for buying and selling physical gold will be able to handle the huge increase in transactions. Coin dealers would be swamped, and internet-traded gold storage companies like Bullion Vault have a limited client base (customers only trade with customers), which may make it difficult to trade.

Granted, if the bubble is slow to rise and fall, selling physical gold should not be a problem, but who can predict bubble behavior in a time of internet trading and instantaneous global communications. By owning paper gold, there is no risk of not being able to sell. With physical gold there is some risk . . . .

One thing I wonder about . . . . What circumstances would have to exist for paper gold to default? If one accepts the Ka-Poom theory, then there is going to be a bubble. With millions pouring into gold investments during a bubble this seems like an unlikely time for paper gold to default. If one’s strategy is to sell near the top of the bubble, what risk is there in owning paper gold?

I read James Turk’s concerns about GLD (http://www.financialsense.com/editorials/turk/2007/0305.html), but he doesn’t present a scenario in which there could be a default . . . and I can't think of one. Any ideas about this?

[jk]

Re: Avoid gold scammers

raja, when i read this i thought of you, and your concerns about a sharp peak:

Gold is Ready to Break Important Records

Gold's record high was reached when it popped above $850 in January 1980. That fact is well known. What is less well known is that gold traded at that price for only a few seconds and that a sharp price drop occurred after this peak, which clearly marks the January 1980 high to be a classic 'blow-off' top.
The day it reached that record price, gold actually closed far below at $825.50, which is its all-time closing high. The next day gold literally collapsed, closing at $682.
In fact, gold has closed above $800 on only 3 days - the day of the blow-off peak and the 2 days before. In its entire history, gold has closed in the $700s on only 12 days, of which 3 were in May 2006.
It is even more startling to look at gold's weekly closes. In its entire history, only once has gold closed the end of a week above $800. What's even more surprising is that only once has gold had a weekly close in the $700s, and that one occurred in May 2006.

http://goldmoney.com/en/commentary.php

[EJ]

Re: Avoid gold scammers

raja, when i read this i thought of you, and your concerns about a sharp peak:

[b]



http://goldmoney.com/en/commentary.php

To me, a discussion of recent gold prices in the context of 1980 nominal average and peak prices is unconstructive.

I mention in my 2001 piece on gold, that the gold bubble peaked "at $870 ($1937) on January 21, 1980..." and that the gold price "averaged $612 ($1,363) in 1980."

The numbers in parenthasis throughout the article inflation-adjust gold prices to 2001 dollars, the year the piece was written. The 1980 peak gold price is well over $2,000 current dollars, and averaged over $1,500 in current dollars.

Likely the next gold bubble–if there is one–will produce a blow-off phase followed by a crash typical of all bubbles. This is the speculative play. We are not even close to a top of a bubble process, assuming we are at the early stages of one. I base this assessment on the fact that the price is still less than 1/3 of its previous inflation-adjusted peak price, lack of promotion by the investment banking industry, and still limited investor breadth. The gold bugs are bullish, as they always are. Some non-traditional early adopters have entered the market over the past few years, attracted by rapid price increases. The retail brokerage firm/mutual fund/401K investor community is more aware of gold now than five years ago, but few are participating. Only a couple of my sentiment markers have jumped in. (When my laggard (Moore's Curve) markers finally get in, I'll think about getting out.)

The two questions are: 1) if a new US gold bubble is allowed to develop (that is, if the government doesn't kill it with taxes and other restrictions), what will the new peak price be? Since 2001, I've been saying a new peak is likely in the area of US$2,500 - US$3,000. I explore this at a free seminar americasbubbleeconomy that co-author Bob Wiedemer and I are giving in at the free Hard Assets Conference in NYC, May 14 - 15.

See the announcement here.

[grapejelly]

Re: Avoid gold scammers

Gold shares as reflected in the XAU and HUI did their best when the overall stock market was in its post-tech Crash bear. Gold of course didn't do badly either.

I can see precious metals becoming a bubble when the stock market is a bear. But as we have observed before, it is arguable that the stock market already is a bear, when you price stocks in other currencies, houses or precious metals.

A bear market meanders all over but over a period of years, in nominal terms, it doesn't go anywhere. It often doesn't crash and it keeps hope and optimism bubbly so that it does the most damage in the long run.

I can see that we are already in a bear quite clearly and the market has hardly gone anywhere in seven years (March 2000 seems to me the peak and the various broad US market indices are either below or not far above the peak then.) So I would expect gold and gold stocks to continue upwards.

It requires broad public particpation to become a bubble. Will this happen? Impossible to know. But I think it is likely to happen regardless of what the US government does. The US government/Fed hates gold because it is anti-fiat and shows reveals the true picture of how bad inflation really is. But what can they do about it?

I say a precious metal bubble is very likely and that it is unlikely the US government can stop it. It will be a worldwide phenomenon. Coincident with the start of the real bubble will be a huge jump in credit spreads from their present all-time lows, and the insolvency of one or more "too big to fail" financial institutions. Maybe one of the US GSEs which after all only have $70 billion in capital (if I remember correctly -- maybe this is just Freddie but it isn't much in any event) versus several trillion in mortgages.

The promotion by the investment industry will be forthcoming as soon as public perceptions change. That might be as soon as later this year, as food prices are set to heat up, and imputed rent for some reason that I forget is supposed to increase CPI due to how it is calculated.

Steve Saville in his superb (paid but a bargain) newsetter www.speculative-investor.com recently said that the Fed will probably raise interest rates as they *must* posture themselves as fighing inflation, and a major gold price increase, telegraphing high inflation as it does, will force them to act in order to maintain their credibility. And this interest rate increase will of course drive gold and gold stocks down.

Regardless of the odds of this (I think the odds are low), the present global boom can go on for *years*. Commodity prices and oil prices have a long way upwards to go. Developing BRIC countries have an enormous amount of headroom in terms of growth. And the US stock market can continue fooling US buy-and-hold citizens for years (it is fooling 99% of the experts already.)

If anything, the US government/Fed will want to lower interest rates in order to prop up the stock market. That's their best bubble bet right now. But the money that is created will flow where it flows, out of the control of anybody. And that is probably good for gold and will be part of what triggers the gold bubble if anything does.

[raja]

Re: Avoid gold scammers

jk,

Thanks for posting that.

Seems to give some support to my idea that there will be a need for speed when the gettin' is good, and physical gold may not provide that . . . .

[grapejelly]

Re: Avoid gold scammers

jk,

Thanks for posting that.

Seems to give some support to my idea that there will be a need for speed when the gettin' is good, and physical gold may not provide that . . . .

you're no different than I am. I have a religious conviction about precious metals. You have one about TIPS. I marvel at how we can both find supporting logic, rationale and opinion for our positions even though they are poles apart and we are both intelligent (at least I know you are, can't speak for myself )!

[Finster]

Re: Avoid gold scammers

... The US government/Fed hates gold because it is anti-fiat and shows reveals the true picture of how bad inflation really is. But what can they do about it?

I say a precious metal bubble is very likely and that it is unlikely the US government can stop it. It will be a worldwide phenomenon...

I agree the next bubble will be a hard money bubble. It's already building. And yes, it is unlikely the US government will be able to do anything about it. The problem it faces is that all the actions necessary and sufficient for its emergence are already water under the bridge. The phenomenal production of US dollars from 1995, which underwrote the development of a stock market bubble, and the next great wave of dollar creation earlier this decade, which did the same for the mortgage bubble, can't be undone without creating a deep consumption-led recession. And if history is any guide, that will not occur until the inflation is so obvious in people's daily lives that it becomes the crisis du jour.

The last hard money bubble was borne out of unbridled dollar production and it eventually forced dollar devaluation, and the collapse of Bretton Woods and the Gold Pool. Foreign nations had been supporting the US dollar through much of the 1960s. In 1969, Germany allowed it to fall against the mark. In 1970, Canada let it fall to par with its dollar. In 1971, Germany, Belgium, the Netherlands, Switzerland, and Austria let their currencies float. A few months later, the US closed the gold window to prevent loss of the remaining US gold reserve. Within a few more years, the hard money bubble was unstoppable.

Now we don't have a fixed exchange rate system any more ... with the very notable exception of China. What happens when China finally stops supporting the dollar?

What if Asian exporting nations tire of accepting depreciating paper and want real assets? What if OPEC wants real money? Would the US government be able to buck the entire rest of the world when the rest of the world produces everything the US wants?

[raja]

Re: Avoid gold scammers

To me, a discussion of recent gold prices in the context of 1980 nominal average and peak prices is unconstructive.

EJ,

I had posted previously about the possibility of the gold bubble falling so fast that it might be hard to sell physical gold in time, therefore investing in paper gold might be more desirable.

jk read an article about how fast the bubble collapsed in 1980. It was an example of a gold bubble falling rapidly, and in the context of what had been written previously, I found it very pertinent.

Your post did not seem to address this issue of physical vs. paper gold, and the desirability of owning one versus the other when the bubble bursts . . . but it did contain several points that I found very valuable . . . .

When my laggard (Moore's Curve) markers finally get in, I'll think about getting out.

I googled Moore's Curve and came up with the chart below. Is this what you're referring to?

Judging from this chart, would waiting for the laggards be too late . . . assuming that the "Relative % of customers" would represent gold buying customers in an analagous situation?

[raja]

Re: Avoid gold scammers

I have a religious conviction about precious metals. You have one about TIPS. I marvel at how we can both find supporting logic, rationale and opinion for our positions even though they are poles apart and we are both intelligent (at least I know you are, can't speak for myself )!

grapejelley,

I think we agree on these things:

1. Gold will probably go up dramatically in the near future.

2. In the face of real inflation (as opposed to the CPI) , TIPS lose money. (I calculated this at around 13% loss over 5 years.)

3. When/if gold goes up, people who have purchased it over the past few years will make a big profit.

I think our main difference is that I am hedging with TIPS against other possible futures in which gold, for whatever reason, does not go up.

Regards intelligence, I'd say that intelligence, knowledge and financial experience are necessary to play this game successfully, and I'm sadly lacking in the latter two . . . which is why I'm hanging around iTulip . . . to learn from the guys who have all three.

[grapejelly]

Re: Avoid gold scammers

grapejelley,

I think we agree on these things:

1. Gold will probably go up dramatically in the near future.

2. In the face of real inflation (as opposed to the CPI) , TIPS lose money. (I calculated this at around 13% loss over 5 years.)

3. When/if gold goes up, people who have purchased it over the past few years will make a big profit.

I think our main difference is that I am hedging with TIPS against other possible futures in which gold, for whatever reason, does not go up.
.

I think it's prudent to have some US treasurys also. But I am primarily invested in precious metals. I think EJ's point about perhaps buying some zeros as a hedge is interesting. But 13 week bills are okay.

One thing that I think is a good possibility -- and that is that inflation goes up and long interest rates go up and the boom lasts a lot longer than anybody anticipates. But we can't know what will happen so we have to consider that there *may* be a time when having near-cash is important and having gold and precious metal stocks may not be so good. Right now I can't see that but it is possible so I have to account for it in my investment planning.

[jk]

Re: Avoid gold scammers

you're no different than I am. I have a religious conviction about precious metals. You have one about TIPS. I marvel at how we can both find supporting logic, rationale and opinion for our positions even though they are poles apart and we are both intelligent (at least I know you are, can't speak for myself )!

you are each advocating different assets which represent only a piece of each of your portfolios. you are emotional about them because they represent fears which, for some reason, are especially salient for each of you. now i would like you each to state your asset allocations in the asset allocation thread [if you haven't already] and we'll see what these passionate advocacies really mean.

[Finster]

Re: Avoid gold scammers

you are each advocating different assets which represent only a piece of each of your portfolios. you are emotional about them because they represent fears which, for some reason, are especially salient for each of you. now i would like you each to state your asset allocations in the asset allocation thread [if you haven't already] and we'll see what these passionate advocacies really mean.

It's hard to overstate the importance of looking at a portfolio as a whole. Many investors overlook that, buying individual assets based only on the conviction that they "will go up", and wind up putting together an ad hoc collection of investments that give them a lot of risk without enhancing the prospects for return. But the way your investments work together is vital.

Some investors turn up their noses at the word "diversification", on the belief that it assures mediocrity. That’s true up to a point. There is, however, a sort of "sweet spot" in the curve that as you approach it, you can actually improve your returns as well as reduce your risk. It’s hard to explain without going into length, but just as an example suppose you bought nothing but gold mining stocks, with a view towards holding them long term. Obviously, you are prepared to take on some volatility, and can expect portfolio dips as deep as 50% or more on your way to the promised land.

Next suppose another investor does something similar, except also includes a position in another asset class that, while he expects it to provide merely fair-to-middling returns over that same "long term", tends to move over the shorter term independently of or counter to gold mining stocks. Not only can he moderate the extreme swings in his portfolio, but he can even outperform the first investor. This is because when the first class (gold mining stocks) does its thing and goes into the tank, he has some dry powder with which to take advantage of the fire-sale prices. The guy that was 100% in mining stock to begin with has his hands tied, because he has nothing "high" which to sell and buy "low" with.

Now clearly this presupposes some degree of investor attention, so it’s not quite a free lunch. But if managed with even a modicum of skill, can shift the whole risk/return curve and give you more of the latter even as it delivers less of the former.

[EJ]

Re: Avoid gold scammers

EJ,

I had posted previously about the possibility of the gold bubble falling so fast that it might be hard to sell physical gold in time, therefore investing in paper gold might be more desirable.

jk read an article about how fast the bubble collapsed in 1980. It was an example of a gold bubble falling rapidly, and in the context of what had been written previously, I found it very pertinent.

Your post did not seem to address this issue of physical vs. paper gold, and the desirability of owning one versus the other when the bubble bursts . . . but it did contain several points that I found very valuable . . . .


I googled Moore's Curve and came up with the chart below. Is this what you're referring to?

Judging from this chart, would waiting for the laggards be too late . . . assuming that the "Relative % of customers" would represent gold buying customers in an analagous situation?

That's the one.

First question to ask yourself is: which are you? Are you risk-philic (early adopter) or risk-phobic (laggard)?

Why are you in the market?

Don't ask as an investor. Ask as an analyst.

Abstract the market. Abstract youself. You are a fly on the wall... even if you have a dog in the race.

Is your sense that there are few skeptics and mostly early adopters in the market? If that is the case, then ask yourself: Why?

Is there a lot of speculative money in the market? See NASDAQ Bubble. Not yet? Or maybe never?

You are riding their money. If there's no they, there's no money.

These will help you understand where the market stands.

We watch the next bubble form together. Maybe in gold, or in something else.