Thoughts on Gold

There have been a lot of articles on gold recently, ranging from positive to negative on the technicals (depending on what you see as the start of the underlying trend), and a big range of predictions again on the based on views of the fundamentals (which many investors simply don’t understand for gold).

Today I was planning on throwing some cash into TNH (access to great yields connected with agriculture in this MLP), but ended up buying half as much so i could put the other half into SLW (gold & silver mining) on a great pullback. Both are great positions in my opinion.

The WSJ had two very interesting articles from a gold buying perspective:

One was on the great success of Japan’s new prime minister, with his Liberal Democratic Party taking a large enough lead in the parliament to break gridlock. He’s big on insisting on both expansionary government policy (stimulus) and changes to the central bank including adding a dual mandate similar to the fed and increasing the target inflation rate (printing money). He also wants to change the constitution to allow Japan to build up a significant military and be able to declare war, as well as station federal agents on the unpopulated disputed islands with china.

The other article was on China’s central bank diversifying away from its US holdings (mainly US treasuries). China has been known to be looking for commodity linked investments like oil and minerals, and of course an undisclosed amount of gold. I don’t see anything coming from Washington DC or Ben Bernanke that would reassure China on the dollar.

The Yen for reasons above (and much worse debt & demographic picture than the US) offers little solace and the Euro also seems quite risky for a large chunk of Chinese central bank holdings (also worse debt and demographic picture than the US). Central banks usually go for holdings that are very liquid and safe and keep value in times of crisis, like government debt (usually not too heavily into policy pushes like ultra low interest mortgages, but that’s another story).

Gold fits this picture in the minds of many foreign central bankers and I believe it will continue to be purchased as long as the debt overhang in the developed world is unresolved. Once major world currencies emerge as alternatives (perhaps from China but they’re not close to being there yet), it may be time to rethink gold, but for now I see demand keeping pace. As for supply, there’s a limited amount of gold near the earth’s surface, and Mauldin suggested that known quantities would be mined out in 20 years if the production rate stayed the same. While I’m skeptical considering what happened with “peak gold” predictions, I highly doubt we’ll see dramatic increases in gold production.

That’s something to think about anyways,

John Taylor

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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