Perhaps Those People Lining Up to Sell Gold Know Something, from Gary Rogan

August 23, 2011 |

People are lining up in Wesport, CT to sell gold coins, according to a report on Seeking Alpha .

Has anyone ever reliably made profits from bubbles? If so, their existence can be prospectively determined, if not there is no clear answer. It's true that there may be people who know a bubble with 100% certainty, but they don't know where they are in the cycle so they are too worried about shorting them. This is pretty morally equivalent to having no idea about the existence of a bubble, although not quite. I'd say if someone can reliably predict that within a "reasonable" time the bubble will deflate below the current level, and are willing to bet on that, they "know" the bubble exists.

Jeff Watson writes:

Look at the 1980s Hunt Brothers silver debacle. Despite the big move in silver, I never knew anyone that made a boatload of money off of that huge move. I heard lots of tales of people getting rich off the silver market, pyramiding $5,000 into millions, but those people were always friends of friends twice removed, and nobody in my clearing firm, none of my buddies ever nailed silver. I suspect those people who got rich off of the silver market are as elusive or mythical as the Yeti. I also suspect that if you were long that silver market with a $5,000 account that you would have stood a better than even chance going bust.

Rocky Humbert comments:

The Hunt Brothers episode was a corner in an overleveraged market. I'd argue that the gold story today is totally different. Importantly, it's not a leverage-fed, euphoric or happy bull market. It's a funereal bull market. Because if gold is right, and it keeps going and going and going (?5,000? ?10,000 ?20,000 +++) all of one's paper assets will be worth what they are printed on, and the Chair will find out exactly what 2008/09 would have looked like without massive central bank liquidity infusions. (And being short stocks won't help either, since there won't be anyone left to pay you back.)

Hey Gary — for someone who thought total financial collapse was the "ONLY" outcome, how can you NOT be massively long gold??? That's not a bubble! Or is it? As I've been writing for two years now, gold's ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law; etc. The CME can raise margin requirements all they want; but there needs to be a change in the underlying fundamentals (and/or perception of the fundamentals) to end this period. What will that change look like? Shouldn't that be the question on the table ….

Gary asks, "Can anyone reliably make profits from a bubble?" Hmmmm. Warren Buffett keeps a sealed envelope in his desk drawer with the name of his successor. In contrast, I keep a sealed envelope in my desk drawer with the EXACT high price in gold. Neither of us allow any peeking (or peaking.)

Note to Anatoly: You recently wrote that you think gold won't go all the way back down. If you believe that this is a genuine bubble, then you'll have been wrong on the way up. And on the way down. See Jeremy Gratham's extensive work on bubbles — and his observation that they retrace >100% of the parabolic extension.

Stefan Jovanovich says:

The U.S. Treasury had enough gold to be able to promise to redeem the customer balances of every member bank of the Federal Reserve in the United States in 1930; had that step been taken, the U.S. would not have suffered the extraordinary collapse in demand that created the death spiral of world trade

Tyler McClellan asks:

Stefan,

Just for fun, how would you have lowered real interest rates in the US, without dramatically widening the gold points, or say just abandon them all together.

Stefan Jovanovich replies:

Why would I want to administer interest rates at all? The problem with the Federal Reserve system is that its underlying premise is that the government should do so. Nothing can prevent speculation from having a component of folly and ruin — like all of life. The idea that the government — which is itself an interest group of the employees and beneficiaries of government borrowing and spending — can somehow avoid the same folly and ruin in its speculations seems to me to be the funniest of all the lunar illusions. Remove the notion that somehow banking is a special kind of business that requires absolute government guarantee (which, as we have seen, the government cannot afford any more than anyone else) and a great deal of the folly and ruin disappears because the truth — that everyone in commerce works without a net — is transparent. As someone once said, the illusion of safety is the most dangerous of all ideas.

Comments

5 Comments so far

Anatoly Veltman on August 23, 2011 4:55 pm
My opinion is that someone deciding to Short gold is not necessarily sure he’s shorting bubble; he is just a part of the “value-seeking” camp. Currently, the accelerated move from $1500 to $1900 creates such shorting value - but certainly no screaming bubble is obvious.

I don’t think bubble is necessary for any bull market to reverse into bear. My opinion (that Gold will probably not fall much below $800 in its bear) is based strictly on the devalued price scale. When next gold bottom occurs, $253 of 1999 will be worth $753 - that’s all I’m saying
Andrew Statezny on August 24, 2011 12:26 am
If its high then you might as well sell gold if you have it.
Nick Pribus on August 24, 2011 11:19 am
Watched my share of post apocalyptic Armageddon type movies in my day, there are plenty, the common theme among survivors is not a pocket full of gold, but liberal amounts of common sense.

What shall happen in the collapse of fiat currency worldwide, when paper currency has no value? Will I trade my brokerage statement with claim on ETF gold for bread in the market? Or can I exchange that paper for physical gold and carve off a gram at the local BP when I fill up the tank? Will those retail outlet’s continue to exist on the gold standard, will the counterparties come through and deliver my gold against my paper, or do I simply sit hungry at home on my gold bars until Death knocks at the door and while eagerly offering up my gold for my life, he salaciously takes both.
Tom on August 24, 2011 1:23 pm
“I’d say if someone can reliably predict that within a “reasonable” time the bubble will deflate below the current level, and are willing to bet on that, they “know” the bubble exists.”

I think that perhaps the money is made in bubbles by being slightly long before the public spot it and patient about timing your exit - holding on for those periods where “it can’t possibly go higher” and selling out after it does. Personally, I liquidated on Thursday, and got rid of my physical towards the end of last month. I see at least a three month correction and a significant possibility of a longer term top. No point in being greedy, and it looks like the papers are already printing $2,000 as if it is a done deal. Recall how we made a significant high at $1,000 a few years back, and if memory serves we came off by at least 30%. However, I don’t have a clue if this is the top and therefore did not go short for anything except a quick daytrade.

Who really knows what 2008/9 would have looked like without these “liquidity infusions”? Whenever I hear people talk in these terms I suspect that they do not really know either, but support the policy and are appealing to fear. All I see is state intervention where it isn’t desired and a transfer of wealth to those who have the correct “pull”.

Yes, bubble deflation is usually significant - both in magnitude and speed of descent. I think this reason alone attracts shorts into the market to pick tops in bubbles hoping for the “big score”. There is an interesting point made by Jeff Watson above, and perhaps “the big score” in the markets is just another myth kept alive as there are some elements of the public who will pin their hopes on it and use it to justify reckless, foolish, or plain incorrect participation in the markets. It is quite possible that even very good traders do not predict the full magnitude of bubbles in advance, correctly pyramid, and get the top exactly. Don’t let this get in the way of the public’s hope and greed however.
Rogue on August 30, 2011 11:00 am
If the public’s-a-sellin’, then I’m-a-buyin’.

Recent Posts

List of Authors

Aug

23