Gold fever

Retail investment demand for gold (and silver) has exploded since this summer, even as the exchange price has fallen well off its highs. Coins and small bars have become unavailable for sale anywhere near the spot price. Even Krugerrands, of which 46 million ounces exist, are fetching a $100 premium on Ebay.

The largest bullion coin mints are running flat out to meet demand. The Austrian Mint has more than tripled production of Philharmonics, and the South African, Australian, and the Canadian mints are doing their best to meet demand for Krugers, Kangaroos and Maple Leafs. The Indian postal service has even started selling small coins. How has the US Mint reacted? It has suspended production of Eagles and is rationing other coins. There’s a head-scratcher: an opportunity for huge seignorage profits falls in their lap, and they say, “Eh, why bother… this extra demand is a pain. Let’s take a break.”

Retail investors are suddenly rushing into gold as the severity of the financial crisis becomes common knowledge. It is actually a very encouraging phenomenon. It shows that there are still quite a few people who do not trust banks and governments, and may understand that their leaders are desperately trying to inflate away their savings to prop up a broken banking system.

Resist the urge

All of these reasons for buying gold are good ones, and nobody should be without some right now, but as someone who already has a bit, I am doing my best to resist the urge to load up at these prices. With little old ladies and pensioners withdrawing wads of cash and trotting to coin shops, to buy now would be to join the crowd, and that sends up a big red flag in my contrarian mind.

I am sticking to my guns and holding onto my GLD puts, and only nibbling at bullion on dips. The technicals on gold are just awful right now, with choppy trading on the backside of a nearly vertical peak that took the metal up 300% in six years. All commodities, from oil to base metals to grains, are in a nasty bear market. Also, with central bankers flooding the system with new digital and paper currency and the stock market in a full-on panic, the conventional ‘fundamentals’ could not get any better for gold, yet it remains 20% below its high. If it is struggling to hold $800 now, what will happen when things calm down in a few weeks?

Will demand be the same after stocks have played out the final wave of this crash (not the same thing as the end of the bear market) and the newly nationalized banks start lending to one another again (if not to others)? What about when CPI has showed a couple of months of solidly negative numbers? Won’t the cold, low-velocity reality of deflation set in? When the prices of everything from Wal-Mart sweat shirts to snow blowers to gasoline are significantly lower than last winter, will people be so afraid to hold cash?

The little old ladies are the last into an investment theme and the last out. Wait for them to trudge back to the shops just when the strongest phase of deflation is over and the printing and spending and new lending programs just start to take effect. Then call Brink’s.