IN 2008, I was on the losing end of a gold trade—swindled, really.
By my dad.
I had just been laid off after the literary agent I worked for was poached, but was lucky enough to find a job and not have to file for unemployment only days later. In the interim between paychecks, however, I’d be broke.
“Well, you’ve got those coins lying around,” he suggested. About ten years prior, as a bar mitzvah present, a relative gifted me with an ounce of gold in Australian Roo coins. I had two options: I could borrow the money I needed and pay it off, or trade my father the coins to sell (or do whatever he wanted with them) for the best price I could get quoted.
I needed drinking money. I didn’t need Kangaroo Coins. Who the hell did? Not the 23 year-old who responded:
“SAHARA COINS in Vegas off of Sahara and Teneya. $862.89.”
The email came back:
“Consider it sold–Love, Dad.”
On January 14th, 2008—the next day—gold broke $900 for the first time.
In March, it would break $1,000.
A little over three years later, gold has come close to doubling what it was when I sold it for a bunch of cab rides to Brooklyn, a nice dinner or two, a pair of jeans, and some truly awful nights at the Cherry Tavern. On July 23rd, 2011, gold broke $1600. As of this writing, it’s at $1637.50.
Maybe it’s time for Dad to sell.
“GOLD AIN’T LIKE NOTHIN’ ELSE,” Dennis Gartman—famed trader, economist and author of The Gartman Letter—explained over the phone from Suffolk, Virginia.
“Whatever it is, for whatever reason, it is embedded in the DNA of human beings to admire and hold gold. And if you try to ascribe rationality to gold, you’re wrong.”
And what Gartman characterized as irrational human admiration appears to be at an all-time high. Gold prices are rising and may continue to defy the typical physics associated with the success of any asset like it. As long as the market continues to believe in its intrinsic value.
What was simply a Wall Street go-to inflation hedge—or: an investment that theoretically protects against the decreased value of a currency, like the dollar, which has seen better days—has become a pop investing phenomenon. It’s of interest to people who could care less about the goings-on of Wall Street, many of whom can barely distinguish a stock quote from a stock recipe.
And inasmuch as media enthusiasm is a barometer for investment popularity, the headlines have been accumulating faster than a goldbug at the end of a rainbow. A May cover story for the yuppie-centric New York Times Magazine detailed a surveyor: “Gold Mania in the Yukon,” was the headline. On the cover: “The hunt for the world’s most primitive form of wealth starts here.” An April headline from the front page of the Wall Street Journal: “World is Bitten by the Gold Bug.” On Monday, in the Accessories section of Women’s Wear Daily: “New High for Gold Prices.”
Gold even had its own celebrities now, the kind less famous for their investment ideas than they are their mugs. For a period of time, Glenn Beck so relentlessly shilled for the yellow stuff both on his show and in commercials for consumer gold trade-in service Cash 4 Gold that it merited a December 2009 segment on The Daily Show. This was almost a full calendar year after Cash 4 Gold purchased a 30 second ad during—what else?—the Super Bowl.
It was the same month the Journal reported on a woman named Margaret Petrucell, the founder of It’s a Gold Mine Party, LLC. In the great tradition of Tupperware and Mary Kay and Avon, suburban housewives were having parties to sell their gold and walk away with shopping money. The founder, who before starting her business, was laid off by Goldman Sachs’ mortgage division, joked that “What happens at a gold party stays at a gold party.”
But it doesn’t. If anything, gold mania has spread like a contagion.
A few months ago, at a small fete for Sex and the City author Candace Bushnell’s new book, the party’s host, Bright Lights, Big City author and Manhattan gadabout Jay McInerney—swaying about in a white tuxedo jacket—joked to The Observer that he had started his own hedge fund. “I think I’m just going to be a goldbug!” he said.
In the unlikely event Jay McInerney was, in fact, a goldbug, he would have made a small profit in the intervening months. Same with Glenn Beck and Cash 4 Gold, or one of the many multiplying outlets you’ll find to sell off your gold like it, now with brick and mortar locations in strip malls across America. Even in Chinatown, among the district’s famously sketchy wares—the cheap, fake approximation of Prada clutches and rainbow-stamped Louis Vuitton bags—there are signs that note in flashy capital letters WE BUY GOLD. In late May, Utah legislators frustrated over federal economic policy legalized the use of gold and silver as currency. From uptown to Chinatown to Provo and beyond, everyone’s going for the gold. And it seems that anything the economy does could potentially be good for it.
“Everything through the gold window is like a house of mirrors,” said CNBC reporter and NetNet editor John Carney. “If because of the bad economy it looks like we’re headed towards a period of deflation, that should be bad for gold. But it could be good for gold. We’ve been in a period for a while where everything is good for gold. “It’s actually a joke on Twitter,” he continued. “#BuyGold. ‘Rabid squirrel bites girl in town. Buy Gold!’ And literally, if you had followed that advice all along, you would’ve made a lot of money!”
“Gold has proven to be a superman investment. It can leap over buildings and do things that investments aren’t supposed to do. And it’s laughing at us.”
But there are some very un-funny implications. In 2009 at the Davos Economic Summit, Yale Economist Robert Shiller read off a checklist of Bubble Behavior, among which are: soaring beyond the economic and culture saturation point at which other hyper-inflated markets have crashed (check), sharp increases in value (check), envy-inspiring stories of those earning money among those who aren’t (check), and “new era” theories explaining why now is the time to get in (check). Despite all of this, gold has continued to rise.
And as a function of that, some people are still laughing their way to the bank.
Last November, david einhorn—the Greenlight Capital wunderkind who started his fund with less than $1M and who just acquired a stake in The New York Mets (if that isn’t a sign of money to burn, what is?)—revealed in an interview with Wealthtrack that gold was the biggest position in his fund (Mr. Einhorn declined comment for this piece). According to the New York Times, hedge fund all-star John A. Paulson netted $5 billion in 2010 thanks to securities that represent a chunk of gold larger than the holdings of the Australian government or the whole of Bulgaria. Even after billionare George Soros shifted his position on gold this year, Mr. Paulson stayed the course, putting more money into AngloGold Ashanti, the world’s third-largest gold producer. Employee capital reportedly represents 42% of his Paulson Gold Fund, which deals exclusively in gold-related or gold-backed investments.
Even the great state of Texas—ever famously oil money—is bowing before the golden gods: the University of Texas Endowment Fund currently has somewhere under $1 billion of gold bullion stored in a New York City vault.
From Mr. Carney’s vantage point, the value of gold has been driven by the realization of its potential not just as a diversification asset, or an inflation hedge, but the inherent value it holds against shakier propositions.
“Gold isn’t subject to political currents. Even if someone makes a big discovery of gold, the size of the amount of gold in the world, that won’t affect the price, whereas if you take a discovery of something useful—like energy—it could hurt the price of other known sources of natural gas in the world. That doesn’t happen with gold. The price of gold isn’t a price of discovery,” he said, “but the size of demand.”
Which brings us to the unique creature known as the Goldbug—a being consumed by demand and unmistakable even in an already frothy market. That creature for whom there is one answer for light, life, and wealth in the universe: the yellow, shiny one. They move in packs, and can generally be found vehemently defending their sworn protector and source of wealth against anything that stands in its way. They sometimes sound unhinged.
“I am not a goldbug,” Mr. Gartman is careful to emphatically note. “I don’t like the goldbugs. I think they’re wrong. The goldbugs think the world is going to come to an end,” and some of them, he explains, are real “black helicopter folks.” But that hasn’t stopped him from owning gold. He just doesn’t have to be excited about it.
“It doesn’t make me happy to own gold,” he noted, “but the trend is up. Fight that trend at your own peril,” he explained.
Some have.
Warren Buffett, the king of value investors, would rather invest in a good company with solid yields than gold. He didn’t buy the gospel, telling shareholders at the annual Berkshire Hathaway meeting this year in Omaha: “You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything.” (This of course caused Mad Money host Jim Cramer to go typically ballistic, calling Mr. Buffett a “grey-beard” investor, and asking why he wouldn’t “give other people a chance to make some money here”.)
Warren Hatch, a partner and strategist at financial research firm Catalpa Capital Advisor, published a position on gold’s long-term look on July 22, noting that the shiny stuff’s underlying look historically and in this instance isn’t so great. In speaking with The Observer, Mr. Hatch compared it to bubbles of past that should serve as more than obvious cautionary tales: “Gold isn’t going up because of a fundamental reason,” he noted. “Mark Twain once said that history doesn’t repeat itself, but it does rhyme. Five years ago at a cocktail party, people more likely than not would’ve been talking about all the real estate they’re buying.” As for the apocalyptic theories, he conceded that “there are a lot of people who are lobbying more who want to go back to a gold standard, but that argument is completely separate from what gold prices are doing now. For that to even be seriously considered, we would have to be in a far different situation than we are today.” The odds of that happening, he explained, “are miniscule.”
Many of Wall Street’s major institutional investors were still reluctant to get in on it, explained Mr. Carney. “It kills them to think they’ve passed up a profit, but they’re worried that anything that’s gone up 200% over two years could go down 200% over two weeks. It doesn’t make sense that every piece of news is ‘buy gold.’”
Dennis Gartman agreed. “Ask the average Wall Street wiseguy if they’re bullish on gold. They’ll say ‘yeah, you gotta be, we got money problems [with the dollar].’ If you ask them how many hold gold? Very few,” which is where he sees a weakness and potential for an overvalued asset. “It’s a bubble in interest, not in owning. It’s fascinating: everybody’s bullish, but very few are long.”
If they are few, they are prominent, and as convinced of the value of gold as ever. Ben Davies, CEO of London-based investment fund hinde capital which maintains the Hinde Gold Fund—the core investment of which is physical gold in a Swiss bank—sees gold hitting $2,000 in four months, and then some. To him and others like him, it’s not just an inflation hedge, but a way of life you’ll soon be adopting.
“This will go beyond popular culture,” Mr. Davies wrote over email from London. In his writings, he didn’t sound apocalyptic. In fact, he was frighteningly, cuttingly rational in his thinking. The way he saw it, the global economy was in a transitional stage, a maturing phase, the same way one’s voice got deeper as they got older. There were no apocalyptic undertones, but there was a distinct New Age-y feel. “The internet reformation has reconnected individuals with the truism that ‘the desire of gold is not for gold. It is for the means of freedom and knowledge.’ Sounds earnest, doesn’t it? Well,” he wrote. “it’s meant to be—a sound monetary system based on gold is not subject to confidence of the faith and credit of anyone.”
“It cannot be printed or subject to some (mis)interpretation of accounting rules. Neither is it subject to bankruptcy of banks or governments. The physical is not subject to the rules and subversion of exchanges, regulators, ratings agencies or clearing systems … Money is a serious business, and gold is money.”
For all of the mystical intonations, he was simply saying that it’s not a fiat currency. As Mr. Einhorn cracked wise in November, gold is “the one kind of money [Fed chairman Ben] Bernanke can’t print more of.” So where is it going?
For Mr. Davies, nowhere but up. Gold being celebrated at cocktail parties, “whether for the right or wrong reasons, is not signaling an end, but a beginning.”
Mr. Carney is less sanguine. “Pigs get slaughtered,” he said.
And Mr. Hatch even more so. “It’s going to be a textbook example of the Greater Fool theory: when the price of something becomes divorced from its underlying fundamentals, and the reason the price is going up is because you can find someone else who’s willing to pay a higher price for it. What you’re doing is finding a greater fool than you to buy it. And eventually,” he said, “the fools run out.”
At one point in our conversation, Mr. Gartman stopped me. “Write this down,”
He grew quiet.
“Gold will stop going up when it does,” he exhaled. “That’s it. That’s all there is to know.” Okay.
As for Dad, it was unlikely that he was parting with the Roo I sold him anytime soon–but not because he was pursuing a new career in gold speculation. “Your dead cousin gave it to you,” he said. “It’s a keepsake.”
It was as good a reason as any to go long.
fkamer@observer.com |@weareyourfek
