SELL Your Gold Now! Get Out While You Can

Gold 1972-1981

I updated this post:

Lee Munson of Portfolio LLC says “Sell the gold rally“.  (A hilarious video)

The question for investors and speculators alike is if gold has at long last marked the end of a wrenching nearly two-year pullback from the 2011 highs over $1,900. Lee Munson of Portfolio LLC says any rally marks a chance to make a graceful exit from their positions.

“Investors are confusing the fact that [gold] holds its value super long, hundred-year periods of time versus inflation versus making actual growth,” Munson says in the attached video. “It just holds its value. That’s not a reason to hold anything.”

Those who quibble with that analysis, parsing the numbers to maximize the apparent returns of gold versus stocks are missing the point. Gold has worked over shorter periods as a speculative vehicle but the die hard goldbugs have seen minimal returns at best and dramatically underperformed stocks.

Since 1940 adjusted for inflation the only period over which gold has outperformed stocks is 2000 – 2010; and that lead is slipping fast. History suggests gold is extremely volatile in shorter terms but dramatically lags U.S. equities for the truly committed gold enthusiasts.

Munson has simple advice for gold investors enjoying the terrific rally from the recent lows. Sell. “Exit out of the trade. Get serious. Get real.”

Disingenuous or Clueless? (from “Mish”)

I do not profess to know what the price of gold will be at any time, but Munson seems to think he does, so much so that he screams sell after a measly rally.

Munson is certainly clueless about the fundamentals of gold.

If you don’t understand the fundamental driver (and it’s not jewelry or central bank selling) please consider Plague of Gold Bears Now Say “Gold Unsafe at Any Price”; What’s the Real Long-Term Driver for Gold?

Gold outperformed between 2000 and 20010 for a reason. And that reason is global central bank debasement of currency. Gold also outperformed in the late 70s for the same reason, but it did get ahead of itself.

Additional Reading

  1. Ritholtz on Gold and on Making Predictions; How Secular Bull Markets End; Winning vs. Investing
  2. Nouriel Roubini Seriously Misguided on Gold, on Equities, on Economic Growth, on Money
  3. Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse

Cash, Bonds, Equities, or Gold?

You have to put your money somewhere (and somewhere includes cash).

This is not about being a “die hard gold bug”. This is about understanding the case for gold as it exists now.

The fundamentals of gold are strong, yet sentiment is so extreme that bears says “gold is unsafe at ANY price”. Now Munson says this puny rally is a chance to exit.

With sentiment this extreme in the face of strong fundamentals and a rally, I like my chances here.

Mike “Mish” Shedlock

JapanLandPrices    (A GREAT post for financial history buffs)

11 responses to “SELL Your Gold Now! Get Out While You Can

  1. Hi John,

    I have one small request. Could you differentiate in your blog posts – your own writing vs. that of other writers and/or value investors? It doesn’t need to be anything fancy or obtrusive, just something as simple as in italics or some other font.

    The reason I’m asking it’s a bit disconcerting to read something in your blog and thinking, hey this doesn’t sound like John only to find that it’s an extract from another writer.



    Thanks for the heads up! I just bought some gold and immediately sold it.

    On a less serious note, John, what is your portfolio percentage that holds gold stuff?


  3. Big fan of your blog – great resource for us looking to learn more. 75% is a lot though, I’d be a bit careful if I were you. Gold is tough to value, and there’s nothing that says just because we’re at marginal cost of production it can’t go lower. The CPI-adjusted gold price is still high by historical standards, so essentially we’re making a bet that Fed will fail at shrinking its balance sheet and that CPI will one day shoot up? The gold price last few years has been eerily similar to a bubble, Shiller makes a good point. Having said that, I am also long a gold miner, but total exposure now fairly small.

    • No, I am making a bet that the Fed will lead us to a bust, financial chaos and deflation.

      Gold does not track “CPI” inflation.

      Mining production costs of $1,600 doesn’t mean gold can’t go to $100. 95% of the supply of gold still exists so 1% to 2% a year won’t really matter.

      I don’t own much gold but the some miners and streamers.

      I doubt a bubble in gold with it being the most hated asset class of the past two years.

      Where were the shoe-shine boys when gold was $1,900?



    A few questions if I may:

    1. What would lead to the deflation?
    2. Why are miners good to hold at a deflationary environment? Wouldn’t all assets go down? Why is it better than cash or yielding assets like good companies with yields?
    3. Do you see it as a cyclical issue, i.e. once the deflationary period is resolved than things could become “good again”?
    4. Do you have some time frame on it?
    5. Is any of the miners that you have have options with decent liquidity and spreads?
    6. “75%. I wish it could be higher, but I don’t want to sell AAPL, ESGR” Is this consistent? On one side a very clear conviction on the state of things to come on the other side still holding on (value?) stocks?
    7.”Mining production costs of $1,600 doesn’t mean gold can’t go to $100. 95% of the supply of gold still exists so 1% to 2% a year won’t really matter.” Right. so why hold miners?

    Many thanks!

    • 1. I define deflation not as prices declining due to increasing production which is good but debt overwhelming the incomes/cash flow to service that debt. The huge debts of the govts in the US and Europe could lead to inflation or deflation. Gold bugs didn’t get the hyper-inflation they were fearing, but in a credit contraction/debt deflation, gold will outpace other commodities–profit spreads will widen. Note the boom in miners during the depression. Read the Golden Constant by JAstram

      2. Miners are producing money–gold and silver. Miners have been counter-cyclical to the general stock market currently

      3. No, secular. Mal-investments have to be removed.

      4. No.

      5. AEM, ABX, GG

      6. No, based on imbedded taxes and their discount to my estimation of IV, I would need 150% conviction on miners. Mining is a bad business; it is just that these companies are at historic cheapness and by far the cheapest assets in the world today.

      7. Because “EVERYONE” knows that. Bad news is priced in give or take 25% in price.

      I would NOT buy a single miner until you know the 500 year history of gold price and the past 100 years of mining stock cycles plus how to value this sector.

      Most mining companies LOSE money and go under. Speculators are attracted to the lottery ticket nature of these stocks, especially explorers in the gldx.

      I am simply going the opposite of the panic in Miners after a 60% to 95% price decline in them with bad news well-known after 5 years. The industry is changing–more capital return focused and input costs are alleviating.

      Could I be wrong and the bear market continues–GDX goes to $0.00. Yes. Not probable but possible.

      What I would do If I had little knowledge but believe that this was a very depressed sector. I would buy long-dated options 2014 or 2015 deep in the money on GDX or GDXJ so as to avoid too much premium. Or you can do a call spread. Certainly within six to 18 months, you will know if we have made a bottom. This strategy then is about YOUR capital management and position sizing, not your ability to chose the correct miner/valuation. Instead of buying $10,000 in GDX put down $1,000 to control $10,000 for a year, for example. Your risk is 5% to 10% of that $10,0000. You see the mentality.

      If prices go down, then you are either wrong or early. You can re-up or walk away.



        Many thanks for your lengthy reply, as you advised Fritz there will be a follow-up post I shall wait for it before asking more questions…

  5. Why would gold outperform in a credit contraction/debt deflation scenario, and what do you mean with “profit spreads will widen”? Debt deflation means increased demand for cash, so that the value of cash goes up in relation to all other assets?

    Did gold mining stocks perhaps rally in the great depression because FDR put us off the gold standard? The gold price did double in USD terms.

    Agreed, stock prices for many miners are ridiculously low, some near their 20/30-year lows… Not sure if people in general are bearish on the gold price though: looks like gold was in a bubble in 2011-2012 (plenty of news coverage and even a “buy your gold here” counter at my local bank). ETF + Chinese demand after 2008 seem to have been proximate causes. Followed by over-investment in gold mines after the 2009-2010 bull market?

    You’re right that today’s CPI may not mean anything. There has to be a way of valuing gold however. It doesn’t yield anything so there is no value anchor as in farmland or property. How about compounding past prices with M2? Doing that 10 years back at 7% gives a gold price of $900, 20 years back would yield a price above the current. Also interesting to note that gold price drawdowns have rarely been much above 30%.

    Sooner or later, miners will have to rally because 1) gold price goes up 2) supply comes down/demand up 3) deflation in operating costs or capex. Most important factor should be the gold price, and I still don’t get how you can value it, other than saying that over time (30+ years I presume) it always goes up.

  6. Dear Fritz:

    I will use your questions as a post on Friday on how to do your own research/seek out answers to your own questions. Because my opinions doesn’t teach anything. Also, if my thinking and your thinking is flawed and without evidence/theory then you are worse off–you think you know, but you don’t know. We all know what happened to Socrates after he said that……….:)

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