Rocky never provides investment advice. But for once he’ll violate this rule and offer some advice to Congressman Ron Paul.
Members of Congress must file financial disclosure forms which show all of their assets and investments. Rocky studied Rep. Paul’s portfolio from 2003 to the present. http://www.legistorm.com/memberdisclosure/413/Rep_Ron_Paul_TX.html
Ron Paul’s portfolio violates every principle of sound money management. It is not prudent. It is not sensible. It is volatile. It is speculative. And it may give a window into Ron Paul’s perspective on the economy and free enterprise.
From 2003 to the present, Ron Paul’s stock portfolio owned only gold stocks. He owned some real estate. He had some cash. And he owned mutual funds that make money ONLY WHEN the stock market declines. He did not own any gold bullion. And more recently, he purchased more gold mining stocks and added to his bearish bets on the stock market using leveraged bearish funds.
In 2003, the value of his portfolio was between $860,000 and $2,300,00. (The disclosure form only provides a range of values.) In 2010, his portfolio grew to $2.4 million and $5.5 million. (Gold stocks have declined between 15% and 30% in 2011, so his portfolio has declined commensurately. He will declare that loss next year.)
So, over an an 8-year period his portfolio has appreciated by about 12%/year. (And after this year’s losses for gold mining stocks, it will be a bit less than that.)
Not so bad, eh?
If, instead of being such a wiseguy, he had instead just purchased gold bullion, his return would have been 55% better — returning an impressive 18.5% per year! (It’s very strange that Ron Paul doesn’t own any bullion. And a skeptic might wonder whether he owns bullion, but failed to disclose it.)
[Disclosure: If one extrapolates the profile of his portfolio, one must conclude that he either nailed the bottom of the gold market, or he has really lousy long term performance. Remember that (even after this 10 year old rally) gold has appreciated at only about 5% for the past 30 years, while stocks have returned about 11%, and long bonds have returned high single digits. More troubling, however, is the notion that a President of the United States would personally profit from a DECLINING stock market and a declining economy! Even Barack Obama's assets include some S&P Index Funds....]
Knowing that he’s been a gold bull for years, Rocky’s friends keep asking: “What you do think of gold, NOW?” (These people actually think that Rocky and certain other TV commentators can predict the future.)
Rocky’s answer: “I have no idea, and have NEVER had any idea about what the price of gold will do tomorrow.”
But does he still own gold?
“Yes, and I also own some stocks. And I own some real estate. And I own some bonds. And I own a copy of last week’s People Magazine. And I have no idea what the price of these will do tomorrow either. My experience has been that pundits who claim perfect knowledge of the future are generally either liars or idiots. (Whoopi Goldberg is the exception to this rule.) What I’m doing is called diversification.”
But when will he sell gold?
“The PRICE of gold is irrelevant. As I’ve written on this blog, I will sell gold when the gold story (or more accurately, the market’s perception of the gold story) changes! 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. Can gold drop $100 tomorrow? Sure it can! Can gold drop $300 next week? Sure it can! Can gold drop $1000 next year? Sure it can! But so long as these FUNDAMENTAL factors remain in place, the underpinnings and demand for hard assets that are beyond the reach of governments will remain.”
“Almost all of my really smart friends are very bearish right now. They all think this move is idiotic. Many think this is a bubble. And eventually they will be right. But eventually could be a really really long time. And it could include a trip to unimaginably higher prices first. Their skepticism is not predictive of anything. And importantly, they are not betting that gold will decline either. All it tells you is that they aren’t long gold and missed this move. I’ll admit that I get nervous when prices rise quickly. And historically, buying after a sharp rally isn’t a good idea. But why should any of this market chatter affect my long-term porfolio construction/diversification? After all, I’m not afraid to admit that I have absolutely no idea what prices will do tomorrow.”
[Disclosure: Rocky NEVER gives investment advice. He's owned gold for a long time. And he owns some hedges that will protect him if gold drops sharply while he's asleep. And some day, he will sell his gold. But whether it's at $2,000/oz or $10,000/oz is out of his control. It's in the control of millions of other investors around the world, and how they react to the policies of their central banks and governments.]
Rocky noticed that his friends see bubbles in bonds, in gold, in stocks, in cotton, sugar and grain prices. In fact, his friends see bubbles EVERYWHERE!
It appears that there may be a bubble in bubbles. And a look at “Google Trends” confirms this bubble. However, this bubble-in-bubbles popped early in 2010 — on the 50th Anniversary of Bubble Wrap!
[Disclosure: Rocky never gives investment advice. When asked if or when the current "bubbles" will burst, he started foaming at the mouth.]
Rocky found some fool’s gold buried in today’s Producer Price Index data.
The year-over-year change in “Karat Gold Jewelry Prices” was 12.1% Whereas the year-over-year change in “Costume Jewelry Prices” was a modest 0.9%.
According to Wikipedia, “Costume jewelry (also called fashion jewelry, junk jewelry, fake jewelry, or fallalery) is jewelry manufactured as ornamentation to complement a particular fashionable costume or garment.”
Since the Government sees fit to include the “all important” costume jewelry price in the PPI, Rocky smells an arbitrage for an upcoming Trophy Wife birthday present.
Rocky currently owns gold in his investment portfolio, but this price discrepancy suggests that he should consider a “short gold / long fake gold” swap for Trophy Wife’s jewelry box portfolio.
[Disclosure: As they say on TV: "We're trained professionals. Don't try this yourselves at home!]
As regular readers know, Rocky has held a bullish speculative position in gold for many months. If today’s behavior continues for a few more days, Rocky believes that gold may be finally entering the Manic Parabolic Blow-Off Phase “MPBOP.”
The MPBOP is the most profitable phase of any bull market, and despite what experts on CNBC say, it’s impossible to know how long it will last — nor how high prices can go during the terminal stages of a MPBOP. Rocky speaks from experience having been on the wrong side of the internet MPBOP. (He was an avowed hater of the Pets.Com puppet, but he got revenge when the stock eventually went to zero.) This experience means Rocky wouldn’t scoff at $1500/oz or even $1800/oz gold by year-end.
Sadly, after the parabolic blow-off phase comes the “gravity still exists” phase, where people re-discover that gold is just a shiny piece of metal that makes an excellent dental crown. Which means prices will decline. By a lot.
Many people party on New Year’s Eve without worrying about how they feel on New Year’s Day. But not Rocky! Rocky remains long gold, but he’s beginning to think about his ultimate exit strategy. Parachutes? Ejection seats? Hari Kari? Here’s his latest thinking (posted on the blog Daily Speculations): http://www.dailyspeculations.com/wordpress/?p=5344
[Disclosures: Rocky really has no clue what gold prices will do tomorrow or the days after tomorrow and his ruminations are not investment advice. He does, however, believe in the Laws of Gravity and the First Law of Rocky: In every “macro market” (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. Additionally, while Rocky currently remains long gold, he also owns hedges against the proven risk that he's more-than-occasionally wrong.]
The Central Bank of India announced this morning that they purchased 200 metric tonnes of gold from the International Monetary Fund. See: http://www.imf.org/external/np/sec/pr/2009/pr09381.htm
This is ostensibly bullish for the price of gold. But is it bullish for Blue Nile stock? (NILE)
Rocky does the math:
1 Tonne = 32,151 Troy Ounces
1 Troy Ounce = 31.10 Grams
This fashionable Blue Nile wedding ring contains 1.6 grams of gold:
Rocky’s X-22 computer calculates that the Indian Central Bank just bought enough gold for “only” 125 MILLION wedding bands. Since the population of India is 1.1 BILLION, the Indian Central Bank is sensibly planning ahead.
[Disclosure: Rocky has been, is, and may continue to be, long gold bullion. But he may change his mind if he reads that scientists have finally succeeded in turning lead into gold.]
Over at Jeff Watson’s excellent blog, he’s been debating whether gold is going up or going down. Rocky asks a slightly different question, “At $1,000 per ounce, is gold expensive?”
The following graph shows the behavior of gold and the behavior of the US Consumer Price Index going back to 1947. While examining this chart, it’s important to remember that:
1. It was illegal for US citizens (anywhere in the world) to own gold from 1933 until 1974.
2. In 1944, the “Bretton Woods” agreement fixed the price of gold at $35 per ounce.
3. In 1971, President Nixon unilaterally took the USA off a gold standard, and from then to the present the value of gold (and the US Dollar) were allowed to float freely.
So, the question remains, is gold expensive at $1000 per ounce? As those annoying math textbooks like to say, “the answer is left as an exercise for the reader.”
The black line is the CPI Index. The yellow line is the price of gold. Both values were normalized to make the visual relationship easier to see.
Moments later, Rocky looks out his window to see melting snow and a half-dozen white-tailed deer. Rocky utters (with Buffett-esque solemnity,) “It’s only after the snow melts that you see all the deer poop on your lawn.”
Buffett’s letter makes interesting reading, and one paragraph catches Rocky’s eye: “The [likely consequence] of once-unthinkable dosages [of massive government action] is an onslaught of inflation.”
Rocky already owns some TIPS (Inflation-Protected Bonds), gold and other tangible assets. He wants something BIGGER, BETTER and TAX-FREE. Especially with savings accounts yielding a cool 0.0%.
Rocky drives to the post office and buys a massive speculative long position in “Forever” Postage Stamps. (The post office clerk must have thought that Rocky was laundering cash. But he was too polite to ask questions.)
Forever stamps are valid first-class postage regardless of the nominal price. Assuming that postage continues to keep pace (or exceed) inflation, this investment will compound tax-free (unlike the TIPS), and can be lawfully sold at premium to original cost.
If inflation really gets out of control, it’s likely the Post Office will cease issuance of the Forever stamps, the stamps will become priceless “collector’s items,” and Rocky will have scored a home run. Rocky’s stop-loss: becoming a junk mail distributor.
Rocky just found another reason to explain the strong bull market in gold: Tax Evasion.
Last week, UBS (Switzerland’s largest bank) agreed to pay a $780 million fine, and provide a limited list of American tax evaders to the IRS. The next day, the Justice Department sued UBS to provide an additional 52,000 names of Americans with secret bank accounts.
The eponymous U.S. District Judge Alan Gold, presides over the case — which may end decades of Swiss bank secrecy, a country where tax evasion is not a crime.
Rocky speculates that tax evaders from around the world are descending onto the Gnomes of Zurich, and hastily withdrawing cash ahead of Judge Gold’s verdict. He posits that these unsavory un-Americans are buying gold with the proceeds — a fungible store of wealth that cannot be traced.
[Disclosure: Rocky complains about taxes, but he always pays his legally required minimum. He also remains long gold, but his view may change at any time.]