Sentiment in each of these markets is as lopsided as it ever gets, with over 20 gold bulls for every bear and that many euro bears for every bull. Levels have remained extreme for 2-3 weeks now with no relief, so be on the lookout for violent reversals.
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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.
Markets move in whatever way induces the maximum pain on the maximum number of participants. Those players who mock “mainstream” opinion, if experiencing more success than the crowd, are bound to get overconfident and to see their ranks swell at just the wrong time. Then they themselves are the mainstream, and true contrarians are to be found on the other side of their trades.
Here are ten pillars of what I consider the “mainstream contrarian” movement that just ate a big slice of humble pie:
#1 The dollar is toast, and will keep falling until hyperinflation sets in.
#2 Gold and silver’s rise cannot be stopped until the US trade and budget deficits are brought under control and the debt is reduced–that is, never.
#3 Global oil production has peaked, so oil will continue ever upwards. Oh, and we’ll bomb Iran any day now.
#4 China and India’s growth will continue unabated, and with it, their demand for commodities at any price.
#5 Financial stocks will fall without bounces. Long live SKF!
#6 CPI vastly understates inflation. Just look at M3 or shadowstats.
#7 We are experiencing a return to 1970s style stagflation.
#8 US Treasury bonds are toast.
#9 Deflation cannot happen in a fiat money regime. Bernanke told us he wouldn’t allow it.
#10 When the depression comes and the dollar becomes worthless, the sheeple will awake to the truth about their government and demand their republic back, with Ron Paul as their leader and gold as money.
Here’s a tip for frustrated contrarians: Join the deflationists. We’re a super-exclusive club of curmudgeons and equal opportunity shorts. We are gold bugs, but just made some righteous dough shorting gold. We know that oil has peaked, but we shorted it anyway! We know China will rule us all, but we shorted commodities. We know the US is bankrupt, but we aren’t afraid to go long the 30-year.
In a few years, we’ll be pretty popular, but then I think most of us will have moved on, maybe to the hyperinflation camp. If recent history is any guide, the ones who make the most noise (ahem, Peter Schiff) will find it hardest to make the necessary corrections and self-contradictions before the next big pivot.
