Investing With Jay Today

January 13, 2009

Holding Gold As Cash

Q: If you want to keep 30% of your portfolio in cash, why not just call gold cash and put most of your paper money in gold? It's always easy to trade, isn't it? I realize that this would mean holding 30-40% of your portfolio in gold, but what makes gold any different or riskier than the USD, CHF (Confoederatio Helvetica Franc (Latin), i.e., Swiss Franc), JPY (Japanese Yen) or AUD (Australian Dollar)?

A: You're on target. I could easily get to the point where I'd hold gold as the majority of my cash, plus the "normal" gold allocation. It's far less risky than USD, FXF, FXY and FXA. 

Q: Gold seems low now. Why wait until later to trade paper currency for gold? Do you think gold might still go down more than the currencies will?

A: Gold is in an intermediate down trend. Look at the two year weekly chart of GLD. Three lower highs and four lower lows. Until that trend is broken, gold could easily go back into the 700s or lower. The problem is not knowing when the deflationary recession (depression) is over. There's nothing wrong with dollar cost averaging into gold. Try to buy the dips. If it starts making new highs on these swings, buy more. Or just switch over if that is your conviction. Some day it will be off and running.

Q:  Thanks. I see what you mean. I guess to buy now would probably mean as much as a 10% loss if the price goes into the 700s. On the other hand, currencies can go down 10% too, but currencies are unlikely to go up 200% in 3 years, since they are all inflated.  From your experience, what news usually causes dips?  Stocks up, dollar strong, interest rates up? 

A: Back to the unknowable and unanswerable questions. If they could be known, they would already be reflected in the price. Any news item could affect any market in any direction at any time, or not affect it at all. Don't forget Dr. Eban Browning's The Doctrine of Complexity. Thirty or so years ago he wrote a paper on this. We really should see if we can dig it up. I heard him speak a couple of times back then - excellent. To my knowledge his best known book is Climate and the Affairs of Men. I may still have it. I'll see if I can find it. It's a fascinating study. But there's no answer to your question. 

Sometimes a news item (which should affect the market) simply doesn't do it. There are seven billion people in the world. Each one can have an effect on many things. There are millions of events occurring every day which can affect things. I guess I'm starting to write a paper on The Doctrine of Complexity.

Sometimes gold goes up with the dollar, sometimes it moves opposite. Same with gold and stocks, gold and interest rates, etc.

No one can forecast markets, therefore the only strategy that makes sense to me is find value, buy it at distress prices ("hated"), sell it when it becomes a bubble, i.e. move opposite to the crowd. Then, your only real challenge is finding value (and you know my method for that). Even this proven strategy can't be applied perfectly by anyone. Your emotions won't let you.

Gold is a good value today. It's first leg (in a five wave secular bull pattern - 3 up, two down) has ended. We're now in wave 2 (down), the correction of wave 1. Wave 2 can correct wave 1 by 1/3 to 2/3, which means as low as 600-650. Wave 3 (almost always the longest wave - up) hasn't started yet. The public isn't in gold yet. When they enter, they will be gripped with "gold fever" and drive it to levels undreamed of. But wave 2 isn't over. That's probably why Rogers has said several times lately, "I'll buy gold if it goes down, and I'll buy gold if it goes up."

I'd rather piddle with it than do anything big (I have a decent allocation but would like to have more based on the money printing now in progress). At 700, I might be able to get CEF at a discount. I would love to do that (buy it and hold it for the unfolding of wave 3 but I have to have cash reserves - and patience- available to do it).

As I close this, do you realize that I could be completely mistaken? That's the reason I don't like to advise people on their investment decisions. You are the captain of your ship. 

One new thought just invaded the grey cells - then why talk about a 5-wave secular bull? Good question. Answer, only because it has been observed many, many times throughout history. Apparently, as the size of the crowd in a given market builds over a period of years, and the emotions of fear and greed affect their decisions, it causes the price structure to unfold in a 5-wave pattern. But if a sizable percent of the crowd came into the market knowing this, it would fail. This whole concept can be discussed in greater detail (what causes waves 1, 3 and 5 to be different from each other? Etc.).

Q: Doesn't this assume that natural market forces are the main influence on price without any manipulation in the futures market?

A: Not at all. Every move in the markets has a cause. My argument is there are so many different causes, it's impossible to know which is responsible for any given move.

Q: If so, does this mean you reject Ted Butler's assertions of manipulation and also the echoed assertions of Bill Murphy, the chairman of GATA? 

A: Certainly not. There may not be absolute proof, but my very strong bias is that the market has been manipulated, but that may not be the only reason silver is at 11, and may not even be the primary one. You cannot know.

Q: Do you think it's possible that the current gold and silver markets are so unusual and so manipulated due to the massive printing of dollars and the unique situation in history where a fiat currency is the world's reserve currency that historic patterns just can't be relied upon? or do you think that any degree of manipulation and quantity of fiat currency will ultimately be overcome by natural market forces?

A: I believe the massive printing of fiat currency will ultimately lead to a big drop in the value of the dollar, but I have no idea of the timing. Manipulation will be one of the forces at work, but we don't know how "successful" it will be.

Q: To what degree do you think the banking cartel can orchestrate/control the collapse of the dollar and the rise of gold and silver?

A: I don't know. I would expect they would want to orchestrate the opposite.

Q: Even if gold goes to $600 (i.e., down 17%), is this any riskier than holding the best fiat currencies, especially if COMEX can default overnight?

A: It can definitely be riskier for a period of time. Don't misinterpret that as saying I like the dollar better than gold. I do not, but I think it makes sense now to be diversified into both. The dollar has been in a bear market against gold for six years. Prior to that, the dollar was in a bull market against gold for 20 years, all during which time the Fed was debasing the dollar and reducing its purchasing power. 

Q: Can you please explain that?

A: My guess is that it had to do with global sentiment and increased leveraging.

Q: Do you think it's also part of the end times deception and preparation for a one-world currency?

A: I really don't know. The so-called "New World Order" has been theorized for fifty years. I don't see anything that makes me think it will become a reality anytime soon. My interpretation of the Tower of Babel predisposes me to think it won't occur, at least not prior to the Tribulation. I think it is likely to occur then. As to a one-world currency, two thoughts. Since all world currencies are now fiat, we already have a de-facto one-world currency. Paper is paper. Second, gold is already a one-world currency, the only one with real value and universal respect. I suspect its role will increase.

BTW, I remembered I read an article in EWR (maybe two years ago) in which Maybury gave the history of the European central bankers calling Volcker to Europe and instructing him to defend the dollar (1979 I believe). My guess is that Maybury is imminently aware of what we refer to as the "central bank cartel."

The contents above were taken from an e-mail exchange between Ted Spaeth and Jay O'Keefe.

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"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

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