That’s Gold, Jerry! Gold!
Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
– Alan Greenspan, “Gold and Economic Freedom,” 1966
We used the above quote from Alan Greenspan to kick off our Third Quarter 2007 Broyhill Letter. Amazingly, in 1966, Alan Greenspan “got it.” We wonder when he “lost it” between then and now. In any event, friends and family know well enough that we have been consistent and confident gold bugs since the early part of last decade. The investment thesis has only strengthened today with proliferate government spending no longer limited to our friends in Washington. Despite the yellow metal hitting new highs in the face of a surging dollar (so much for historical correlations), sentiment remains depressed and most investors we speak with have yet to purchase a single ounce of gold. Our Bottom Line outlined in that Q3-07 Broyhill Letter is as relevant today as it was three years ago:
Charles Kindleberger set out three preconditions for a mania where prices overshoot the bounds of rational valuation, in his classic, “Manias, Panics, and Crashes: A History of Financial Crises.” First there must be plenty of liquidity to fuel the asset price rise. This is as true as ever today, given the global tendency toward low real interest rates and strong money growth. Second, there must be a “displacement,” which is defined as a fundamental shift that makes the focus of the mania attractive. In the case of gold, this involves the incentive for competitive devaluations of paper currencies, as well as persistent geopolitical uncertainty. Finally, there must be uncertainty about how the asset in question is properly valued, which allows for “new era thinking” to take hold. Especially true for gold. Valuation and gauging extremes is an art rather than a science as the metal is heavily influenced by hard-to-measure factors such as central bank intentions, political risk, policy irresponsibility, etc. It is easy to argue that proper fair value is substantially higher than today’s levels when one considers the jump from $600 to $700 has not yet spurred much enthusiasm.
Our friends at WJB shared these pictures with us earlier today. We’ve been smiling since. Interestingly, we saw a very similar sentiment set-up in September-October 2009, when we wrote A Gold Mine is a Hole in the Ground with a Liar on Top.
Disclosure: At the time of publication, the author was long Gold and long MarketVectors Gold Miners ETF, although positions may change at any time.