Selling Gold First

Posted: Feb 16, 2013 12:01 AM

Gold is the place to be, or so they say. 

Yes, I’ve heard the well-stated arguments and they all come right from Economics 101.  It’s simple, really. 

If the world is awash in liquidity, it will ultimately be inflationary and then hyper-inflationary with too much money chasing too few goods (the traditional but inaccurate definition of inflation.) 

Therefore, fiat currency will lose its purchasing power while precious metals retain their purchasing power, a straightforward argument perhaps? 

The other side of the debate involves a technical analysis perspective. 

In 2011, gold made a parabolic move from $1,500 to $1,900 in a few short months and keep in mind that parabolic moves always end badly, regardless of the asset or the asset class. 

In addition, since that time, gold has achieved a triple-top around $1,800 (a lot of technical jargon.) 

Let me muddy the waters even further by introducing a third factor in the debate over gold.  Since the gold price pinnacle in 2011, the U.S. Federal Reserve has instituted the most aggressive money creating strategy in history. 

Over the past two years, Brazil has embarked on a very similar path.  In addition, Venezuela has devalued by 46%, Japan has rekindled its inflation strategy, and regarding the European Union, well, Mario Draghi said he would do virtually anything. 

The world is definitely awash in a currency war (firefight?), yet gold continues to decline.  Conceivably, those holding gold are starting to realize that in a world of devaluation, lifestyles are dramatically reduced. 

They also recognize that in order to maintain a certain standard of living, assets need to be liquidated since personal indebtedness has long since been exhausted. 

The selling starts with things like retirement accounts, stocks and bonds, real estate, artwork, collectables, heirlooms, and finally precious metals. 

Ultimately, everything gets sold.  Sometimes, however, the liquidation order may change as those assets with the best demand are sold not last, but first. 

Counterpoint: gold is money.  Point: theoretically yes, but on a day-to-day transactional basis, no.  Just try buying gas at Walmart with a Krugerrand. 

Counterpoint: but I can convert it to dollars.  Point: yes, but at a considerably lower price than two years ago. 

In certain parts of the world, people are in survival mode but in the United States the prevailing attitude is concern bordering on anxiety, which will quickly turn into fear and panic, thus the world will all be one. 

At that juncture, everything will be for sale including the “bugs” (gold). 

Consequently, the old expression “ye who sells first sells best” can definitely be applied to gold today.