A Recent Report: Is Gold In A Bull Market

Below is a recent example of a Martenson Report where I explain my views on gold and investing in gold.  I am putting it here so that non-enrolled members can see the type of thinking I routinely offer to enrolled members of this site.

If you are interested in enrolling, I encourage you to consider.  Besides what you see below, there's a very active community of commentary and additional thoughts, links, and other resources posted by community members in response to the reports. 

In these reports I tackle such burning items as what the Deepwater incident means to our future energy supplies and economy, deflation vs. inflation, and the developing sovereign default and future currency crisis.  My goal is to illuminate and to help simplify your decision making in these complicated times.


Is Gold In A Bull Market?

Friday, May 28, 2010

Executive Summary

  • Asking whether gold is in a bubble or a bull/bear market misses the point.
  • Better questions to ask involve fiat money management, government responses, and financial market risk.
  • Gold is not in a bull market; rather, faith in our decision-makers is in a bear market.
  • Trust is hard to come by these days. 
  • As for whether or not to buy gold, there are a number of factors to consider.

I'd like to clarify my views on gold, because I approach this topic from a unique perspective that I think has value.

For most, the idea of investing, or even speculating, is a matter of placing one's money somewhere with the anticipation of getting more money back out at a later date.  Naturally, the footnote to this expectation reads, "...assuming money is worth the same."  In this idea of investing, 'more money' is assumed to be synonymous with 'greater purchasing power,' because devalued money may represent a significant loss.  The shifting target in this story since 1971 has been the untethered value of the currency itself.

For many investors, it has been a useful frame of reference to define various asset classes and markets in terms of being either "bull" or "bear" markets, where prices for investments have risen or fallen over some period of time, respectively.

Sometimes, when a bull market ramps out of control and then crashes, it is said to have been in a "bubble."

Recently, the WSJ asked the question of whether or not gold is in a bubble, which is an important distinction for many investors, because if the answer is "yes," then the next question is, "So when will it crash?"

Is Gold the Next Bubble?

It's been the amazing, runaway boom of the past decade. If you'd put your money into gold at the lows about 10 years ago, you'd have made a nearly 400% return. That's left pretty much everything else—stocks, China, let alone housing—in the dust.

But with gold now trading near record highs, the big $1,200-an-ounce question is obvious.

Is the gold rush over?

A four-hundred-percent return in a decade sounds like a lot, and it is, but does that necessarily cross the line into bubble territory?  Given these returns, should we consider getting out?  And if so, what should we get into instead

To make the case that gold is in a bubble, the illustrators at the WSJ came up with this chart comparing gold to two other recent bubbles, one in Nasdaq stocks and the other in homebuilder stocks:

The conclusion from that chart is that if gold is in a traditional bubble, then it's probably got more room to run, and it may even triple from here before it tops and crashes.  To reinforce the idea that gold is in a bubble, the WSJ goes on to make the point that all good bubbles are driven by stories, not earnings, and that gold fits this definition, because it is all story and no earnings.

But you can't value gold by traditional financial measures, as it generates no cash flow.  So there's plenty of potential to value it by other means.  Eyeballs, anyone?

Hmmmmm.  That's an interesting comparison.  Internet stock analysts had to develop the concept of valuing 'eyeballs,' because there were no actual cash flows or earnings...which turned out to be laughable and wrong.  Continuing on, because gold has no cash flows, it, too, must be the same thing as an Internet stock and an equally laughable concept.

There's a severe logical error in there, but the point is taken.

However, I'd like to flip that chart upside down by suggesting this:  It is not that gold is in a bull market, but that there is a bear market in confidence in paper money, faith in governmental responses to crises, and financial markets themselves.

In my view, gold simply represents the inverse of those markets; it is not an investment that can be compared to others.

People who hold the traditional view that there is one large universe of investments often demonstrate severe confusion about gold, as revealed by statements such as, "It doesn't have a yield," or even the quaint rejoinder, "But you can't eat gold."  For people like myself, who view gold as a financial asset that occupies a parallel universe utterly disconnected from the logic that drives traditional stocks, bonds, and even cash, such proclamations have very little swaying power.

Gold performs and behaves for reasons very different from debt or equity-based paper assets, so asking whether gold is in a bubble or a bull/bear market misses the point.

The right questions to ask are:

Fiat Money Management
  • How much money is being created out of thin air to combat stagnant growth and/or crises?  How does this compare to the amount of gold being produced?
  • If cheaper money is the source of wealth, then where did Zimbabwe go wrong?
Government Responses
  • What is the chance that governments of every stripe will voluntarily select austerity over printing as the response to fiscal and financial crises?
  • Are we confident that politicians understand the true nature of the predicament and will choose wisely?
  • How many politicians truly understand fundamental economic principles?
Financial Market Risk
  • How secure are we in knowing where all the financial risks lie in the financial markets?
  • Do derivatives really cause risk to disappear, or are they more like the chemical dispersants being used in the gulf that keep the oil just out of sight but in a more harmful long-term state?

Does this mean "buy gold?"

This does not mean that I am a strong advocate of buying gold at $1200.  The contrarian in me is uncomfortable at this level.  But at the same time, I cannot think of a single other monetary asset besides gold that is not simultaneously somebody else's liability.  This elevates gold to a special place in my portfolio.

Further, the 'option value' embedded within the possibility that gold may someday be remonetized when various fiat currencies fail is a compelling source of value to me.  Like any option, it may well expire worthless, but it's still in play and has enormous upside should it come to pass.

Currently, all of the trends that I follow, in terms of government responses and central bank actions, have convinced me that we are accelerating down a bobsled track ending in very painful loss of collective faith.  So even as I am uncomfortable buying gold at this point, on many levels, if one has surplus monetary wealth, I do not know of a better action one could take to protect it.

Energy and food remain the key things that people will need, far more than they will need a shiny yellow lump of inert metal.  But the stock markets have been a rigged casino for some time, and more and more people are coming to that conclusion.

Legendary Investor Is More Worried Than Ever

May 22, 2010

Seth Klarman is worth listening to, especially when markets go mad.

Mr. Klarman is president of the Baupost Group, an investment firm in Boston that manages $22 billion. His three private partnerships have returned an annual average of around 19% since inception in 1983—and nearly 17% annually over the past decade, as stocks went nowhere.

To measure Mr. Klarman's importance as an investor, you need only see the value his rivals place upon his words. You could have earned at least a 20% average annual return since 1991—better than twice the performance of the market—merely by buying and holding Mr. Klarman's book, "Margin of Safety": Published that year at a cover price of $25, hard copies now fetch up to $2,400.

But the professorial Mr. Klarman speaks in public about as often as the Himalayan yeti. He made an exception last Tuesday, when I interviewed him in front of a standing-room-only crowd of 1,600 financial analysts at the CFA Institute annual meeting in Boston.

Mr. Klarman specializes in buying securities that nauseate other investors. As the credit crisis exploded, he put more than a third of his assets into high-yield bonds and mortgage-related securities. I asked him what he had meant, in a recent letter to his clients, when he compared the financial markets to a Hostess Twinkie. "There is no nutritional value," he said. "There is nothing natural in the markets. Everything is being manipulated by the government."

If one accepts the fact that markets are rigged in favor of the well-connected and that governments are now manipulating (or influencing) everything, then what sort of assurance can one have that value can be correctly divined or that the rules will not simply be changed to convert one person's gains into somebody else's?

Worse, with risks and losses being hidden and/or simply ignored, it's hard to have confidence that a major financial crash will not simply sweep aside all wealth and gains, no matter how well-protected the portfolio.

Sure, we could invest in energy or food companies (or futures), but we would have to confront the unpleasant prospect that all is not as it seems and that rules will probably be changed in the future.  I fully support the idea that one can be an active trader in these markets, but I am quite skeptical that one can win without putting in a lot of dedicated effort, and am quite certain that placing one's money with an overworked retail broker for placement in stock funds has an extremely unfavorable risk/reward ratio.

In short, trust is hard to come by these days.  I wish that we could dismiss these thoughts as doomerish or cranky thinking, but every one of these concerns has already come to pass.  Rules have been changed, trades have been involuntarily undone after the fact, losses have been simply ignored, trillions have been printed up and spent, lies have been told, and cynicism is displacing optimism and trust.

These are not the sort of actions that support a strong faith in capital markets.


I am not, nor have I ever been, an investor in gold because I think it's in a bull market.  Nor do I worry about it being in a bubble.  Instead, I am a keen observer of monetary policy, fiscal policy, and financial market functioning, and I have a decidedly bearish outlook on each right now.

Gold is not in a bull market; rather, faith in our decision-makers is in a bear market.

Cynicism and gold occupy the same bull market.

There will come a day when I find compelling reasons to exit my gold trade, but it will not come because I glance at a chart one day and decide that gold has 'gone too far,' or because it resembles the chart of Pets.com.

What I am tracking does not chart easily, and that is why the analytical and scouting services I perform have such value.

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-recent-report-is-gold-in-a-bull-market-2/

Super read, thank you!!!
If I hadn’t started back in the $200’s and was starting now I’d still jump in - I’d just dollar cost average away.  The fear I have is with the chart below. If there isn’t a major pullback (JPM is saying 950 - I doubt it) the average person may not be able to afford it if the same thing happens here and now.


The bear market you mention - faith in Fiat and policy makers is pretty much on the rails headed over the cliff. They can:

  1. Cut social welfare programs (hysterical, pigs will fly first)
  2. Produce something (hysterical, Ponzi find a bigger fool to buy than you bubbles is what we've made for the past several decades)
  3. Or inflate and say "Gee we never saw that coming, ouch!".
It is looking more and more each day like the IMF will take over the new reserve currency. Possibly backed by something they can't inflate.

You only have to make one super investment in your entire life to be comfortable.


Last week, my co-worker asked me if I knew the best place to sell gold. She wanted to sell some old gold jewelry and figured she would ask me since I am a gold bug. Anyways, today she asked me what the price of gold was. I checked on CNBS and said to her it was twelve thirty four an ounce. She replied, ok $12 and 34 cents an ounce it is. I said, no it’s 1 thousand 2  hundred and 34 dollars an ounce. She was off to sell her jewelry! Now that is what you call a rounding error! lol
If the average person doesn’t know what the price of gold is, then yes, it is in a bull market and it is safe to buy more.

Thank you, thank you for making this public.

Gold and Silver are heavy duty insurance policies. The Crash Course confirms risk is very high. Invest accordingly, it’s really that simple.



From the chart above it looks like were in January 1921.

From the chart above it looks like were in January 1921
And by November 1923 one ounce of gold will pay off the National Debt.

The insidious invisible hidden inflation tax on gold and silver.
Let’s say that due to inflation gold rises 200% while at the same time the USD is devalued by 50%. $100,000 of gold rises to $200,000, $200,000 -$100,000 = a respectable profit of $100,000.

But gold bullion is considered a collectable and taxed at the short term capital gains rate. With the new Obamanomics tax policy, the rate could go as high as .40%. $100,000 profit x .40% = $40,000 tax. $100,000 - $40,000 = $60,000 profit. Still not too bad.

$100,000 + $60,000 profit = $160,000PV. Now that the USD has lost 50% of its value the $160,000 is now worth $160,000 x .50% = $80,000. This represents a loss of $100,000 - $80,000 = $20,000 in purchasing power or 20.00%.

It gets worse as Inflation rises. At 500% $100,000 goes to $500,000. $500,000 - $100,000 = $400,000 profit. $400,000 x .40% tax = $160,000 tax. $400,000 - $160,000 = $240,000 profit. $100,000 + $240,000 = $340,000PV.

Now for the invisible inflation tax. $340,000 x the now devalued USD at 20% = $64,000. $100,000 - $64,000 = $36,000 loss in purchasing power or $36,000/$100,000 = 36.00%.

This inflation tax is also effects all inflation protected assets including commodities, stocks, bonds, funds, etc.

Would this article also apply to silver? I know that silver is somewhat different, in that it has an industrial component that gold does not, but I like silver, because an average guy like me can more easily scrape up the 20 bucks to buy an ounce of silver rather than the 1200 to buy an oz of gold. 

With respect to inflation eating away at what gold can purchase or some tax on it. The way I look at it is this: It isn’t often where the average investor can wipe out his or her fixed debt (mortgage and any miscellaneous debt) with an investment, and gold or silver will be a better store of value for niceties. The stuff we got purchases more than any dollars we’ve held or the investment paper we sold.
I think silver will do as well, I am concerned since it is used a lot for industry that it could have a substantial pullback before it does what gold will do. But I don’t think 3 digit or more silver is by any means - out of the question.

Just my 2 cents

Well, you all know I am in the deflation camp (although thats a best guess as its crazy out there).  That said, the order flow and the technical pattern in gold is about as perfect for bulls as I have ever seen (I know thats subjective).  Explosive set up here.  This is not advice, just an observation from a guy who usually hates gold (even though I have an insurance position in it).
Welcome back Davos.


Well, you all know I am in the deflation camp (although thats a best guess as its crazy out there).  That said, the order flow and the technical pattern in gold is about as perfect for bulls as I have ever seen (I know thats subjective).  Explosive set up here.  This is not advice, just an observation from a guy who usually hates gold (even though I have an insurance position in it).

Welcome back Davos.


[/quote]Hello Rickets — and for the record I hate gold too. I’d rather be investing in something energy related or permaculture related…but with our deficits and derivatives and HFAT/dark pools I have to realize it is what it is and live with some hate.

Davos said “I have to realize it is what it is and live with some hate.”
wow…thats about the most accurate description of my feelings for all investment options out there!  Sad, yet somehow a bit funny.  Funny I suppose in the sense that freedom is just another word for nothing left to lose!

If the silver is sold back into the market for cash in larger quantities such as 100oz+, it would be subject to the same taxes and inflation loss as gold. But if the silver or gold are utilized to directly purchase products locally for gas, groceries, produce, products, or anything else for that matter, there would be no capital gains tax involved and/or loss due to inflation, all else being equal. Hope that helps.

jhart5 (post 7)

You raised a very good point.  Your facts and figures appear correct as far as I know. However, the current tax rate is 28%.  A higher rate is speculation and could apply to any investment.  If gold rises 28% you are at break even and have preserved your savings.

There is no tax until you sell for a profit.  If you are using gold as a store of value for your savings it is still attractive compared to the alternatives because it should hold value better.  One perspective is that gold isn’t going up, the value of the dollar is going down.  In effect you are paying tax with dollars that have lost value, so counting the number of dollars can be misleading.  It is like being in space.  Without gravity, which way is up?

Even if you have to sell in installments for living expenses, what better alternative do you have. Regarding coins, legally you still owe tax if you sell a few coins to a neighbor.  I don’t know about buying goods, but I’ll bet the IRS sees this as taxable.

It is possible to open a self-directed IRA to hold gold.  It costs money and has restrictions, but it helps with the tax issue. 

Your point is correct and people need to understand the tax issue.  Gold is not a panacea.  It is just less ugly than most alternatives.

I am new to this topic and I welcome anyone’s perspective, information, or corrections.

Sorry about the prior messed up post.

It seems to me that only when 25oz or more in gold coins are traded is it reported to the IRS.  Antything smaller than this has to be accounted as a near-term or long-term investment and stated in one’s tax filings.
It also seems that gold coins may cross borders unlike gold bullion, since they are legal tender of their country of origin.  In this case, their value is the same as their face value and it’s quite possible that this depends on the exit and entry countries.

Some raise the question that the 1933 confiscation of gold, some argue that this is a law still in the books, does not apply to foreign gold coins because of their status as foreign currency, since seizing foreign currency may be regarded as an act of war, as it’s the property of another state.

I’d appreciate comments on these points, please.


The above were hypothetical calculations to demonstrate the detrimental effects of inflation on an investment. 

Although the current tax rate is 28%, the 40% tax rate was used for demonstration purposes and include possible state tax and an across the board 10% federal tax hike that is in the mil for 2011. This may or may not pass.

You’re probably right, as far as the taxes go, the IRS will probably tax, or find a way to tax all gold and silver profits regardless of circumstance.  Check with your CPA.

Anyway gold and silver are probably the best wealth preserving investments around.

Good points evandro.  I doubt it is illegal to ship bullion across most borders.  Why do you think so?

The Canadian customs web site says you can move unlimited gold or cash into or out of Canada, but you have to report it if it is $10,000 CAD or more, and they keep a database on this. Didn’t specify between coins and bullion.  Can’t find a citation right now.

GoldMoney.com will hold bullion for you in a vault in any of three countries.  For a price they will ship it to you, and they didn’t mention any border restrictions.  It could be they leave it to you to know your country’s laws.  http://goldmoney.com/redeem-gold.html

I have read on this site that Canadians have an import tax if the coin is not pure gold, like the American Eagle, but no tax if is pure like the Canadian Maple Leaf.  I couldn’t find a source.  Can anyone cite one?

Since it became legal for Americans to own gold again about 1973, I don’t see how the 1933 gold confiscation law could still be “on the books”.  That is a very interesting point about foreign gold coins.  Any citation?

Here is some good info on gold and taxes.  http://www.zerohedge.com/article/guest-post-give-unto-caesar-what-pay-when-youre-selling

I’ve asked for citations because people say a lot of things about gold, but it is not all accurate.  There are a lot of details it is useful to know.  I haven’t found a definitive gold thread on this site.

I pay my local small-town gold dealer cash for a gold coin once in a while. He doesn’t ask my name. When I go to sell a coin or two, is he legally obliged to ask my name and report it to the Feds? Is that 25 oz amount mentioned an actual Federal law? Obviously, one would just sell in smaller lots and return repeatedly.