Friday, March 20, 2009

Unpredictable gold doesn't disappoint

Gold, gold, gold.  It never makes sense, has no fundamentals and cannot be analyzed technically, which are the reasons I choose not to trade it and hate looking at it.  I hold a fixed percentage of GLD and SLV in my long term portfolio as a dollar hedge and currency substitute.  

A couple days ago I presented some charts on GLD and the gold miners.  On Wednesday, I made a little coin shorting ABX in the morning and thankfully got out of the trade before Uncle Ben shot his ICBM down Wall Street and unleashed a gob of liquidity.  All the dollar hedges went crazy including gold and especially silver.  

Bill Seidman on CNBC said that we are no longer living in a market economy, we are in a fed economy.  Certianly monetary policy is dictating much of the market movement as traders and investors react to every buzz from a microphone.

This is deflation and Ben Bernanke is the only man with the tools to correct it.  Naysayers who fear inflation are daft: with the low employment, high inventories, consumer demand destruction, falling asset values (copper at 80 cents!) and home prices, failing banks and absent credit markets, we are in the grips of an unrelenting deflation.  With a D-E, folks.

So why is gold so hot?  I thought gold did well with inflation?  Well, actually, gold does well in both inflation and deflation, and any time of uncertainty.  Some traders bemoan goldbugs as irrational nutjobs who horde canned fish and stack firewood outside their bomb shelter, but I would argue that precious metals have a valid place on any portfolio, especially when stocks are questionable.  You can only put so much of yoru investment in bonds and US dollars; diversification would dictate a little gold, silver and foreign currency.

Sure, GLD produces no dividend and has no inherent value, but so do a lot of things we invest in. Bed Bath and Beyond (BBBY), for instance, is merely a huge repository for wax shit and cinnamon potpourri.  What inherent value is that?  Is there a dividend?  Why is it more valid to buy BBBY than GLD?  The same could be said for any number of publicly traded entities that make useless crap from toys (RGR) to sugar water (KO) to plastic food (KKD).  And don't even get me going on how useless banks are!

Any activity that reflates the economy will act to devalue the US dollar and other sovereign currencies to some degree and a hedge is needed.  If you don't like gold, that's okay, there are other hedges that work almost as well if not better.  Currencies related to export economies such as those involved in natural resources should do fine during the reflation: Australian dollar (FXA), Canadian dollar (FXC) and emerging market currencies.  Also, as the dollar decreases in relative value, oil services (RIG), copper miners (FCX) and other commodities (DBA) will be solid.

But remember, in case anyone asks, we are in the grips of a deflation that needs to be reflated, and that's what Bernanke is doing.

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