Think It's Time To Get Back Into Gold? Think Again

By: Adam Fischbaum of Street Authority

I love James Bond flicks, preferably from the Sean Connery era. "Goldfinger" is one of my favorites. I am often reminded by the classic scene in which a captive James Bond is seconds away from being charred by a laser.

James Bond: "Do you expect me to talk?"

Goldfinger: "No, Mr. Bond -- I expect you to die!"

Quintessential 007: Ridiculous stunts and jams, sports cars, beautiful women and a dastardly, almost clownish villain -- in this case, one whose plan was to poison the U.S. gold supply at Fort Knox to create global financial chaos. His endgame? Simply to drive up the value of his own gold holdings.

Frankly, it sounds like walking around the block to get across the street. But hey, it's a James Bond movie.

Since the financial crisis of 2008, the global villain that seemed destined to wreak havoc wasn't a fat guy who liked to cheat at golf. The perceived villain was hard-core, runaway, Weimar/Zimbabwe-style global hyperinflation caused by central bank quantitative easing programs.

However, that scary train hasn't arrived at the station yet in the U.S. based on the continued tepid economic and employment growth. There are modest signs of recovery. The country is doing better than it was four years ago, but things aren't exactly galloping.

Back in February, I gave a bear case for gold. Since then, gold has been beaten like the proverbial rented mule.

Shares of the SPDR Gold Trust ETF (NYSE: GLD) have plunged more than 20% and are off nearly 30% from their 52-week high. A buying opportunity? Hardly. I'm sticking with my bearish stance.

In fact, the price of gold will probably fall further before it goes back up.

The End Of The World Has Been Postponed
When it comes to investing, fear is often a primary driver. Most individual gold investors are driven by fear. Most institutional gold investors use it purely as exposure to an asset class. But the man on the street buying shares of GLD or South African Krugerrands is frightened of something: runaway inflation, currency devaluation, government overreach and societal collapse. It's always good to think about survival, but it's a terrible investing theme.

Domestically, things are improving. The unemployment rate is shrinking slowly. It currently sits at 7.6%, down from 10% at the deepest part of the crisis recession. Is it great? No. But it's a considerable improvement. One positive consequence: The slower that businesses are to hire new workers, the slower the money will flow. Inflation will remain tame.

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But what about the dollar being devalued? Again, the dollar is stronger than the panicky masses think. The U.S. Dollar Index (DXY), which measures the strength of the dollar versus other benchmark currencies, is up nearly 14% since 2011, despite the Federal Reserve's QE.

Goldbugs believe the shiny yellow metal serves as a proxy currency to replace weak fiat money. If market forces dictate the rise of gold prices as the dollar falls, then the inverse -- gold prices falling as the dollar rises -- is inevitable.

The Fed has also hinted that it may begin slowing down or "tapering" its bond purchases. This indicates an eventual end to QE and the debased currency. If you think gold prices have a downward bias now, wait till tapering really begins!

Physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.).
You're Still Not Getting Paid
As I said in my earlier article, my biggest beef with owning gold is that, unlike dividend stocks, it pays you zilch.

Think about the classic goldbug argument: Invest in gold as an inflation hedge. I just can't see the logic in this outside of protecting a portion of your wealth. The simple explanation of inflation is that it takes more money to buy less.

In an inflationary environment, the value of your gold may be going up. Good for you. But don't you need more money to buy things? If that's the case, shouldn't you own assets that give you better cash flow?

Since physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.), assets with growing cash flow make more sense, especially those tied to hard assets.

Energy pipeline master limited partnerships (MLPs) have always been one of my favorite tools to accomplish this. Oil mover Buckeye Partners (NYSE: BPL) is a good name to use, as is Boardwalk Pipeline Partners (NYSE: BWP) in the natural gas space.

Risks to consider: Again, I could be completely wrong. Any major events in the Persian Gulf, Europe or the Korean Peninsula could send gold soaring on the fear trade. Global economies could erupt into chaos, and QE could go on forever, which means that we'd eventually use paper currency as bathroom tissue. It's always a possibility, but realistically, the chances are probably slim. U.S. GDP growth, while not stellar, has improved dramatically, surging from negative 8.9% during the 2009 recession to a positive 1.8% currently.

Action to take -- As the U.S. economy continues to improve steadily, the Federal Reserve prepares to dial back its QE policy, and investors continue to rotate into stocks, the price of gold is poised to fall further. Look for another down leg in the range of $1,000 to $900 an ounce. That's another 20% to 25% loss.

In my previous article, I compared buying GLD to buying Apple (Nasdaq: AAPL) near its topped-out price of more than $700 a share. But I've changed my opinion -- Apple may be worth a look. Shares are off nearly 40% from that bloated price. Thanks to that correction, the stock's dividend yield now sits at an attractive 2.9%. That's nearly 300% more than what gold is paying you right now -- or ever -- for that much.

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16 thoughts on “Think It's Time To Get Back Into Gold? Think Again

  1. Got a sure-fire money-making idea to share with everyone. And that is, all the futures and commodities "supply and demand" inventory information, while it is correct, does NOT represent profit opportunity for small investors because any and all information out there in the public domain has already been picked-over by the insiders who disseminate that information.

    So that, when you broker calls you and tells you the supply of corn is tight because of some weather-related phenomenon - like drought or flooding, and recommends you go long = that is exactly the time for you to take a short position. What your broker is advising you to do is invest (go long) at the TOP of the market. Playing the stooge on your broker's little chit-chat call is the fastest way to throw away your money. "Time for the little guy to buy" = the Big Boys are selling, and so should you. Remember that.

  2. The tip-off/giveaway that this is an agenda-driven column is the - right out of the old Louis Rukeyser playbook - reference to "Gold Bugs." Also the multiple stock buying "recommendations." How much more agenda-driven can you get, than someone trying to sell you something by trashing something else he is not selling?

    Interesting to note how Roosevelt expropriated the people's gold, in 1933, in exchange for inflatable paper Monopoly money, than forgot to give the people the option of exchanging their fiat dollars for gold when the "crisis" ended with the advent of WW2.

    It never ends, this trashing of (and sometimes expropriating) real stores of value to sell the public a pig in a poke. Listen, they collectively say "sell" is the perfect time to buy. They say "buy," it means the Big Boys are on the sidelines and have already taken their profits out of the arena. So smarten up, it's all about manipulation, not about their "helping" the little guy who really is the fatted calf, in this manipulative financial world.

  3. Every indicator says gold bottomed a couple of weeks ago. This is the bottom. Very few mines can produce below $1200/oz. The supply is drying up quickly. China and central banks are buying like, well, like paper is worthless.

    All metrics are pointing to the recession that we are still in. The only way out is to reinvent the currency, after deflation and stagnation of fixed asset values (ending soon) and hyperinflation of consumables and energy.

    Gold is the safest bet at these prices. And silver. Solar panel silver. Where are they going to get all that silver for the solar panel green agenda they want to be the next bubble to get us out of this mess?

    Gold and silver may not have an interest rate, but unlike real estate or 401(k) accounts, there are no taxes on it either. You don't really own it if someone holds it for you, or taxes you or owning it. And they can change the rules any time they don't like losing the game.

    BTW is calling someone a "crazy ass cracker" racist? The leadership in the black community continues to enslave their own people, just like the ones that sold them to the Dutch and English in the first place to ship to America. The black man sold the black man into slavery first. And the black man keeps the black man in slavery by telling him he is enslaved- for their own gain of wealth and power (Al and Jesse and Eric and Barry et al)

    Nothing changes. History repeats itself. Gold and Silver will always be money.

    We are at the bottom. Buy buy buy!

    1. Silver may be better than gold for working people, simply because what can you receive, privately, for a gold coin worth anywhere from $1000 to perhaps $3000 sometime in this decade? At least with silver you can barter on a level others can relate to, for groceries, gasoline, clothing, energy sources such as chopped wood, etc.

  4. this is pure disinformation.
    the real unemployment rate is about 23%, not "7%".
    the economy is going completely and totally to hell.
    gold is going to the moon, but SILVER is going to
    got silver?
    roger in wilmington, nc

    1. Thank you Roger. You speak more truth in one paragraph, than the huckster writing the column speaks on a full page.

  5. It's time fr GOLD to go up, up and away.
    Runaway inflation started in 2008 when the USA Government Began illegally stealing away 800 Billion per 'Year' from the people's Treasury in Washington, we've heard.

    This Inflation is now running ut-of-control. Give us a break 'only 2% inflation' per year is INCORRECT!

    1. Soybeans - UP
    2. Oil - UP
    3. Cotton - UP
    4. Metals- UP
    5. Commodities - UP
    6. Cocoa - UP
    7. Cattle, pork bellies, butter, milk, sugar, - UP big
    8. Lumber - UP
    9. Stocks - UP
    10. Housing - UP
    INFINITY of - UP


    Wwlcome to the end,

  6. "As I said in my earlier article, my biggest beef with owning gold is that, unlike dividend stocks, it pays you zilch."
    Of all the knocks on gold, this is the most pathetic. GLD buyers are free to write fairly lucrative covered calls against their position (however, I am opposed to ETF's). Perhaps a better analogy is the fire extinguisher- only a fool would lease his out because it wasn't paying any dividends

  7. All of you bring up good points, however: The market does not care. It's like trying to go to the seashore, cupping your hands to stop a wave. Good luck. So do you want to be "right" or do you want to make money, obviously market legends decided on the latter. If you make money even though your hard core idealogy might be offended, just think of how much more good you can do and how much more insurance you can by with the ill gotten gains. If you don't have objectivity and keep your losses small, that's on you. Playing the victim is simply another "No one cares." For all you counting on sure things, it's not like you are the first. You don't live for centuries, you are not invincible, there is only a short time to produce results for yourself and your families. Adopting a super hard core almost Soviet style "I am right, I don't care if I lost it all" is again, a matter of personal responsibility. No one else cares. That said, of COURSE the CPI is phony and of course the debt shall never be repayed. Good luck however, cupping that wave back with your hands.

  8. Are you kidding me? The title of the piece is "Think It's Time To Get Back Into Gold? Think Again" and in the middle of this factless tirade against investing in Gold is the question, "Could You Really Collect $55,000 a Year in Retirement?"

    The writer of this piece obvious has an agenda and it is not your financial well being. If you want more proof of this then just click on the link provided and then try using your browsers back button. Anyone who is afraid to let you leave the page their speal is on is someone you should not put your trust in.

  9. Well, maybe, and yes!

    That's thinking twice about a possible double bottom, the second yet to be realized has until current kool-aid saturated market sentiment becomes more reality based. Maybe, if one's portfolio has no metallic ring to it. Yes, consider the prospect of a double if one's position already prudently reflects light.

    Reality includes never ending Fed propping of banks whose balance sheets are predicated on eternally subsidized negative real rates. There's only one alternative and that was rejected 5 years ago.

    Ponzi's always play out in the same fashion, and relentless support of the mother of all of them is all that's allowing absurd 'confidence' in valuations in a real world of accelerating diminished returns.

    That said, our prospects for surviving the larger fall from things yet clearly seen isn't very inspiring. But, good luck to all.

  10. actually, the great financial reset, AKA debt/credit/entitlement bubble pop, has not been postponed.

    the hedge funds have just grown impatient.........and the hangover of august 2011's 33% jump in seven weeks is not over yet. are you going to buy the most hated asset class or the DOW at a junkie's alltime high in a no growth west+japan world.

    believing the constructed CPI and employment figures works til it doesn't.

    manipulated?..........what market is not manipulated?

  11. I find it curious that you and all the talking heads on CNBC say the the economy is getting better. You point to the improving jobs but have you really looked at those numbers? Most of the jobs created in the last six months are part time in low paying areas. If the labor partition rate were the same as it was during the deepest part of the recession than the unemployment rate today would be just as high today as it was then. Every time the FED hints at stopping QE the stock market cries. Tell me there is no addiction to QE. I am becoming very skeptical of any numbers that are put out and the spin that is put on them. Please expain why with all the QE and the low interest rates and the lack of inflation has the 10 year bond gone up so much and so fast. With all the central banks printing money they need to be careful they don't lose control of their currency. This is a FED sponsored market. Corporations are buying back stock to improve their earnings. They are reducing staff to improve costs. I don't see any real growth.

  12. Two points:

    1) QE "should" have inflated the US$. It hasn't for another two reasons: a) two $trillion of the three $trillion QE that has been injected into the US "economy" has gone directly onto the central banks balance sheets. Central banks are just sitting on it (see ZeroHedge). This has kept the rate of inflation way down suppressing the price of gold. b) Foreign currency central banks have also been easing which has propped up the dollar and its index and again, suppressing the price of gold.

    2) Gold has undoubtedly been manipulated over the last 4 months (since April). There is no way to beat the Fed's central bank partners when it comes to playing funny money with gold. Gold WILL go back up, but only after the central banks have pressured it as low as they think it will go without triggering scandal.

  13. Unemployment, last reported by the gov was over 24 pct. The debt/gdp is bad, the fed loaned
    $16 trillion at zero pct interest between 2007 & 2010 to the financial community & when do U think
    That will be paid back? European debt is worse & debt to gdp is near 100 pct in most countries
    There & unemploymet is over 25 pct, the US can't deliver the gold to at least three countries
    That requested delivery. Almost all the mined silver, over 90 pct, has been used and the US mint
    Cannot keep up with demand to print silver eagles. The US has to borrow over47 cents of every dollar is
    Spends and we give BILLIONS to many cou tries that are muslim controlled and not our
    Friends a d you say we are improving! HA.

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