WHEN IS THE TIME TO SELL GOLD?
The latest from Dylan Grice at Societe Generale discusses gold and the most important question that any investor involved in a big bull market seeks the answer to: when is the time to sell? Grice says the time to sell gold will be during the NEXT big government crisis. Not just any event. He says the problems in Dubai and Greece were just appetizers for what is an inevitable tornado in the global credit crisis:
“What causes the political winds to change? A government crisis. In 2008, Ireland came very close to going the way of Iceland. They had their crisis. And historians today still refer to the “inflation fatigue” in Britain by the end of the 1970s. This was our crisis. So what we learn from these experiences and others like them is that a fiscal crisis is required to force a majority acceptance of the implications of an overleveraged government.
But the political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude. And while it’s true that more people are at least talking about it, talk is very cheap and no one is yet close to walking the walk. Such steps remain politically unpopular because we haven’t had our crisis yet. Given the clear unsustainability of government finances and the explosive path government leverage is on, a government funding crisis is both inevitable and necessary. Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.
Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF’s recent recommendation that inflation targets be raised to 4%: IMF Tells Bankers to Rethink Inflation – WSJ). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.”
Sounds a bit doom and gloomish, but he’s probably right. The time to sell gold will be when fear about government debts reaches a crescendo. Grice (incorrectly in my opinion) implies that developed markets are at risk (you can imagine the usual suspects – konichiwa!), but I still think the more likely issues will resurface in Europe where the crisis is far from being resolved and instead merely kicked down the road….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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16 Comments
A geopolitical crisis could drive gold through the roof as well. I am thinking the first use of nuclear weapons in anger since 1945 will cause panic buying of gold. That might also be a good time to sell.
There are no “forever” asset classes, and gold is not an exception. Of course, emotionally we prefer that the Grice scenario would never materialize but rationally we know we’re living on borrowed time. But i think, as Andrew P, that the BIG crisis scenario is not limited to the financial side. There IS NO CULTURE OF RISK MANAGEMENT AT ALL, finance is just one and not the worst. Just 12 months ago it was Fukushima time, 20 months ago the gulf oil spill. Nuclear bombs are everywhere, chemical and bacteriological arsenals are quite easy to develop. Global warming is a reality, many bio scientists are sounding the bell alarm about the excessive usage of antibitics that are helping mother nature in selecting a a new generation of ultra resistant agents. I could continue for hours, not because I enjoy what I’m writing but because I’m rational and well informed while most of the people are living in ignorance and powerful vested interests are doing well in keeping them in the darkness.
Unless God steps into the breach and changes the Periodic Table, Gold will remain a valuable asset class. It is one of the elements, and its value derives from its fixed properties, not something which can be altered.
Of course Gold’s role as money varies with political changes. And its value compared to various other assets will vary, which is a true statement concerning any asset you might choose to consider. But it is always an asset of value.
I’m not sure I completely understand Grice’s point here. He recommends to sell when the SHTF. That’s the moment where your stock of gold will increase in value the most by going ballistic (momentum will keep it in orbit for a while). Perception and societal changes seldom occur in 1 day, imho it will take a period of time before trust can be restored and so prices of gold will remain high because they really represent distrust in the monetary and political system in place.
I cannot imagine our institution will be reformed over the weekend, this will most likely be a slow and painful process.
Off course, top fishing is always a challenge but I don’t believe gold will collapse entirely from one day to next.
I believe his point is to sell the peak. When the SHTF and the value goes ballistic, that is when to sell.
Not when the SHTF. Afterwords, when things have been so bleak for so long, that the “powers that be” such as the Fed, the federal bureaucracy, and the imperial presidency have lost all credibility and then are replaced/reformed.
There is no mention here of the connection between gold and inflation. Is he stating the two are not correlated?
Look at a long term graph. Not consistently so.
One cannot rule out the return on gold in global currency regimes. That will cause it to stabilize in purchasing power (and way above its current value.) Alternatively, think in terms of what better you could do with that money. I am not talking Warren Buffett and his blather, but rather real, undeniable opportunity. You could, for example, buy a building in Germany in the 20′s for an ounce of gold. Real estate speculation starts looking pretty good…although it probably got bombed out later.
Inflation doesn’t matter to gold as much as negative real yields (interest – inflation rate being negative) that propels gold pricing. Sometimes inflation is high and it appears to fuel gold pricing (but the negative real rates are more important). If interest rates are higher then inflation then money will seek ‘safe haven’ bond in place of ‘safe have’ gold. And recently in the low inflation environment gold pricing rose (because real rates were negative and investors were indifferent to bonds and gold as safe investments).
As we know both rose as safe havens recently, as money was seeking safe haven investments and negative real yields became the norm. And now gold and bond fall together (as risk on resumes). This is the “unwind” of safe assets from the Greek debt crisis. The next leg up in gold can be the Dec 2012 Mayan ‘end of the world’ fearmongering as well as more PIIGS debt issues or perhaps even mid-east tension.
Why buy gold if you think the end of the world is coming? I would be partying like it was, well, the end of the world.
Emotional panic buying -
More than the Gold issue, in this excellent piece (read it in full if you can) Grice is rightly remembering us that elected politicians only act on true structural reforms once they’re facing the abyss with no other (populist) choice available.
As a french citizen (soon due to vote for our next president) this renosonates particularly loudly to my ears.
Italy is a case in point : they acted swiftly on reforms (see Montio amazing achievement in less than 6 months in office) once an external force imposed it (the bond market sending their their yields to 6/7%).
In France with OAT yields at record lows, there still is no pressure to act and each candidate (right wing / elft wing alike) is only talking about “moderate budget increase” as if we stil have that luxury with almost 100% debt/gdp, a 5/7% budget deficit and a huge off-balance sheet liability with upcoming baby-boomers pensions
To come back to markets ideas : short OAT has never been so tempting to me. In a 6 to 12 months timeframe I would be surprised if the markets did not wake up to our very concerning macro situation.
Sorry for the french digression but this Grice piece brought me there;)
Hopefully those who read this post are curious about gold.
A few of the comments above are worth considering:
From Mr Grice himself:
‘Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain’.
He assumes that politicians (in the West) can choose which direction the real physical economic world is headed. Wrong. The whole world economic organism will choose. The current powers dictating and abusing the monetary system are in a hopelessly weak position, and so will not be calling the shots when the day of reckoning comes. Countries like China, Saudi Arabia, Brazil and Germany will make the choices, but it will be driven by the real world (i.e. the faith in debt as an asset will disappear entirely). Something to balance the fiat currencies and to settle balance of trade issues will be required. Any guesses what it will be?
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Kobayachi wrote:
‘He recommends to sell when the SHTF. That’s the moment where your stock of gold will increase in value the most by going ballistic (momentum will keep it in orbit for a while).’
Yes, you are right in thinking that the time to sell is not when the SHTF. However, you think at that time the ‘price’ of gold will rise to the moon? No, I think you will be surprised that as the day of reckoning draws very near the ‘price’ of gold will start to fall sharply. Why? The currenct price of gold (POG) is an electronic and paper-based shadow of gold’s true value. There will be a rush into real physical gold, and a rush out of futures, options, ETFs, meaning the POG you see on your screens will fall, but in the real world physical gold will be virtually impossible to get hold of. Some will sell (I’ll be trying to buy that price crash).
You also wrote:
‘Perception and societal changes seldom occur in 1 day, imho it will take a period of time before trust can be restored and so prices of gold will remain high because they really represent distrust in the monetary and political system in place.’
You are thinkinng along the right lines, but actually the truth is that we are headed for a paradigm change, away from the dollar as the world’s reserve, and to a world with more balance, where savings will be held in gold, whilst investments will be in other items. It is known as freegold. The old system will not return, over 100 years of debt bubbles will be wiped out.
Finally, Joe wrote:
‘Why buy gold if you think the end of the world is coming? I would be partying like it was, well, the end of the world.’
True, but we are not faced with the end of the world, just the end of the current monetary paradigm, and the start of a new one, where physical gold will become the international wealth reserve par excellence, maintaining balance and holding its value against fiat.
If anyone is curious, visit FOFOA’s blog, but be prepared to open your mind and think. If you get it, you will sleep easily at night, and not worry about what is to come (oh, and you’ll buy some physical before it heads to its real physical-only value around $60,000 in today’s terms).
Hum. I don’t think the author is assuming “that politicians (in the West) can choose which direction the real physical economic world is headed.” Quite to the contrary. He assumes that the political winds will change against their will and politicians will either change to be consistent with the new direction, or be replaced by those who will.
Sell your gold when the SHTF? Into what currency? I think that the time to “sell” your gold is when a truly credible gold backed currency appears. At that time all the fiat currencies will go poof. Then you won’t sell your gold, you will simply exchange it for that currency.