Do you have to be a terrorist to understand gold?

Britain's "best selling financial magazine" MoneyWeek has a piece on the back page called "The Magic of Gold" (10 February issue but I've only just noticed it was available online sooner) by Bill Bonner.

Bill writes for the Daily Reckoning. In a recent piece for the site he covered the gold standard and US politics.

Near the end of it he highlighted a Reuters story  about Sovereign Citizens and the Redemption movement and was unconvinced by FBI fears that there were some extreme criminal terrorist elements to this 'movement'.

Bonner said: "The FBI says these people are “extremists” who believe they have a right to protect themselves from what they see as an overbearing government. The G-men tell us that these extremists can turn violent “at the drop of a hat.”

"How long before they’re rounded up? And maybe they’ll round up “potential domestic terrorists” too, even those who have never committed any crime? And what about gold bugs? They may look harmless, but they give aid and comfort to dangerous elements, don’t they?"

Even so the FBI seem to take the problem pretty seriously: http://www.fbi.gov/stats-services/publications/law-enforcement-bulletin/september-2011/sovereign-citizens.

There is a habit of calling gold bugs terrorists like this spat between analysts at GFMS and GATA (the Gold Anti Trust Action Committee)

It is hard to tell how relevant this stuff is to the UK investor. There's not much evidence of it in the MoneyWeek piece. Instead we get an encouraging sales pitch for gold - which I should probably listen to (more below).

But the question for newbies to gold investing like me is whether there's really some kind of ideology driving the gold ownership of a lot of these gold commentators - not straight forward investment judgement.

There may not be anything wrong with that ideology but it could add a layer of complexity to the gold stories we are told - which is why it is interesting. Anyway, that sort of discussion is beyond me at the moment.

In MoneyWeek Bonner says: "We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects our wealth when paper money gains in value. It protects you when you are right and when you are wrong."

When the value of money diminishes you get inflation. Bonner says that inflation will see the price of gold soar. He thinks Bernanke's aim at moderate inflation will help but suspects he'll overshoot.

The opposite scenario is deflation when money increases in value. Bonner points to the great depression when "the price of gold rose against dollars, even though the prices of food, clothes and other consumer items (as well as the prices of investment assets) were falling in dollar terms."

It sounds like a free lunch and I've always wanted one of those.

So, obviously I should be buying. Why not now? Gold is down a bit today and as the chart shows - and as chart-loving commentators have pointed out -  the price of gold tends to jolt from the $1,600s to the $1,700s - there's no smooth moves here. And its nearing that area now - around $1,715 - because of Greece and the euro... (Reuters)

So although the gold ETFs I do not own are down I'm still hanging on for worse.

Gold price falling on Monday

Some newer negative views: updated Monday 9 January afternoon.


Mineweb including comments from Marc Ground at Standard Bank: "the speculative market remains wary of gold's prospects."
Jim Wykoff remains a gold bull and also believes that it will start behaving like a proper safe haven soon but said the rise of the dollar and "the bulls have more work to do in the near term to suggest an uptrend in prices can be sustained. Prices are still in a two-month-old downtrend on the daily bar chart."

TF Metals sees gold possibly heading back towards $1,565.
John C Burford thinks it may go as high as $1,640 before falling again
Clive Maund expects the price to fall a lot further
Jeff Clark just says the bull case still intact but expect volatility
GM Jenkins on Screwtape files says: I'd be surprised if this is a good week,

Jenkins had some interesting thoughts on conspiracy theory stuff too after signing up to GATA's "Le Metropole Cafe" saying: "I kind of looked forward to hammering them here for talking shit with such confidence, but they turned out to be dead on. Let's see how they do this week."

Where I stand

Should I buy back at least as many physical gold ETF shares I sold on December 16? Am I still waiting for the price to fall?

Is it still a good hedge against the value of my home and the health of the UK economy?

I think the answer to these may still be yes but none of my views are written in stone. This feels like it will be a slow process of building up experience. For now I will try to play safe, just so I can find out if there really is a safe way to play.

I have already lost £250. I don't have a great deal of cash to play around with and I want to survive for as long as possible.

I am also trying to keep my thought process as simple as possible so I can keep track of them.

The temptation is to go with each new idea as it arrives which I do at every opportunity because it diverts me from the reality of what I am doing and the decisions I need to make.

If I reinvested now and the price rose I could make back some of my losses. Even if the price fell a bit I could justify buying now because most analysts still think gold will go above £2000 some time this year.

But I don't feel that this is the safest bet because it would mean buying back my gold and risking more losses.

Why do I see this as riskier than missing out on sudden rise in the value of gold? It's because I think recent price moves show it has been safer to be out of the market than to be in it.

The gold price hit a low of $1,523 on December 29. That wasn't as low as some commentators had  been expecting -  some saw it going as low as $1,200 but more likely $1,400 (see below).

In sterling terms PHGP, the physical gold ETF priced in sterling, fell to a low of 9711.7p. On Friday last week it closed at 10,320.5. That's a 6.2% gain.

I sold my gold ETFs (the dollar version PHAU) on December 16 and was left with £2,809 of an original £3,057 investment (a loss of £248 or 8% since September 22 when I made my first investment.

But I didn't sell at the absolute worst time.

If I had held onto those shares they would now be worth £2,899
(10,320.5 x 28 (the number of shares I originally owned) = £2,889)

That's only a gain of around £80. So if I had held onto them I would only be up 3% on the current position.

But I don't think that is a sensible way for me to look at this.

I sold my shares so my position changed. In my view I am safer.

Now I need to work out what I have done and what to do next. Some of this will involve finding out where I have made mistakes or missed opportunities. But I suspect I don't have the experience to do that usefully yet.

I don't think selling was a mistake because the gold price fell. I just failed to buy back before the prices rose more than 6%.

The question now is whether I see still see that decision not to buy back my shares as a mistake?

Either I still believe the story that the gold price will fall or I need to take a new position. If it is the latter then I need accept my losses and start from scratch again - ie reassess my views on whether the price of gold will rise or fall and whether it is a good hedge against the value of my home and the health of the UK economy.

The fact though is that I don't know if I am continuing an old strategy or starting from scratch.

I don't know how to make that decision because I am still learning and still relying on others for direction, probably too many others.

A lot of different people have put together a lot of different stories about why the price has moved as it has.

Gold price was dropping in early trading.

The original views I followed when I sold.

Scott Redler, chief strategic officer at T3 Capital interviewed on Bloomberg pointed out by Plan B economics, said gold was in an identity crisis adding that it could fall to $1400 or even $1,200.

Jim Sinclair and Eric de Groot think gold will rebound and engage with some of the bearish views like those of Martin Armstrong: "The fundamental mantra about fiat currency is getting old. The market is poised for retest of the 1225-1325 area going into 2012 which is the key support."

Dennis Gartman in Forbes: "He explained when gold collapses or falters into that $1,300 to $,1400 area, and if it shows sign of holding, then he’ll probably get his feet wet again on the long side and be a buyer.