As one who is long gold in a substantial, for me, way, of course I’m scared by what that ancient object of kingly desire has been doing of late and for the last several months. At $1,371.60 the ounce as I write this, gold is down 18% for the year and is so far off its high (I saw and recorded an intra-day high of $1,911.20 on 9/6/11, but the reportage pegs the high lower.) that one with less experience than yours truly might despair (or rejoice, depending on one’s position) of ever seeing that Everestian peak again.
But what am I doing in response to my fears regarding gold? Nothing. I suspect, but can never know, that this would be perhaps the worst time to sell gold; getting in the middle of what looks like a margin call induced unwinding of large leveraged positions is never wise. Further, the underlying reasons yours truly owns gold, the most salient of which is a total lack of faith in the world’s central bankers as a group (See only my latest post on this topic, 4/5/13’s “(BEN BERNAKE) CAN ‘CAUSE HE MIXES IT WITH LOVE AND MAKES THE WORLD TASTE GOOD…”), remain intact.
Of course, I, like anyone else, could be wrong; what we are seeing may be an indication of a worldwide deflation, in which case we, and I, would have far more to worry about than the value of our gold positions. But, at least for now, I am thinking that a lot of people have thrown in the towel on gold and are taking what remain huge long term gains in the metal and its cousins, such as silver and platinum. When I rebalance I will act accordingly; if this swoon continues, or even if the prices of precious metals stabilize, I will probably be adding to my gold and silver positions as a part of the normal rebalancing process, which is a few months off at the earliest.
I do want to point out something that I said in my last defense of my Treasury Inflation Protected Securities (“TIPS”) position on 2/2/13 , YES, I’M STILL HOLDING ONTO MY TIPS, when I was going over, and dismissing, the alternatives to TIPS:
Mr. Arends suggests that those who are buying TIPS for inflation protection go into real estate and commodities. I, and those I advise, have plenty of gold and silver exposure, primarily through the ETFs GLD and SLV. But one has to understand that TIPs and, say, gold, display profoundly different risk profiles and therefore are not ready or obvious substitutions for each other. (Emphasis mine)
Now readers are getting a vibrant and glaring example of what I was talking about; gold and TIPS have radically different risk profiles and, even though TIPS have sometimes been referred to as “paper gold,” gold and TIPS are not ready substitutes for each other.
Speaking of TIPS…
First, they haven’t done all that poorly since my 2/2/13 post. The 10 year TIP yield has gone down from a negative 57 basis points to a negative 73 basis points as I write this. And the ETF TIP has gone up about a point to 122. Yes, TIPS have underperformed conventional treasuries; the inflation assumption implied by the 10 year conventional and TIP yields has gone from 2.58% to 2.44%. And stocks, again with a vastly different risk profile, have done far better. But, on balance, if owning TIPS from the time I advised holding until now is the worst investment you ever make, you are indeed leading a charmed investment life. If you’d held gold as an alternative to TIPS, you would have been licking your wounds.
Second, that TIPS are down slightly today while conventional treasuries are up, gold is down, and gold is getting pummeled lends credence to the deflationary argument. But we are looking at one day’s trading, which is largely meaningless. See, inter alia, today’s other post, SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?
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