Investing Caffeine

Shiny Metal Shopping with Schiff, Rogers, and Faber

September 30, 2009 at 2:00 am 5 comments

There I am, strolling through Costco (COST) with a pallet full of toilet paper, Diet Coke, and a garbage bag-sized bag of tortilla chips on my flat orange cart. As I roll into the cash register, I feel a cold panic grab me, only to realize I forgot my 25 pound gold brick in my car trunk as a method of payment for my necessities. Sound far-fetched? Probably not, if you are a part of the hyper-inflationary “Three Musketeers”: Peter Schiff, Jimmy Rogers, and Marc Faber.

Here is what some of the “world-is-ending” crowd is saying:

Peter Schiff (President of Euro Pacific Capital – Connecticut Senator Candidate):  He sees the market potentially going much higher, but “it doesn’t matter how much money we have because we’re not going to be able to buy anything with it.”

Marc Faber (a.k.a.,“Dr Doom”, creator of  the Gloom Boom & Doom Report): When asked by faux frog boiler and Fox News reporter Glenn Beck if he believes “it is 100% guaranteed that we are going to have hyper-inflation like Zimbabwe,” Faber’s short and to-the-point response was simply, “Yes, that’s correct.”

Jimmy Rogers (Chairman of Rogers Holdings): “I’m afraid they’re printing so much money that stocks could go to 20,000 or 30,000,” Rogers said. “Of course it would be in worthless money, but it could happen and you could lose a lot of money being short,” he adds. Mr. Rogers likes gold too: “I own gold, I’m not selling it.”

PRICING IN GOLD

One consistent theme heard from these three economic bears is that the Dow and other market indexes should be measured on a gold adjusted basis. Since Peter Schiff’s Dow 10,000 to 3,000 forecast never came to fruition (See Schiff’s other questionable predictions), he rationalizes it this way, “So if you price the 2002 Dow in gold, the Dow is at 3,000 now.” Marc Faber makes a similar argument by saying the Dow could double from today, but with gold tripling your worth will be down. That’s funny, because if I price the Dow based on 2002 lumber prices (rather than gold), the Dow would actually be up to about 20,000 (more than 2x its value today)! If prices should truly be measured in gold, then why doesn’t Goldman Sachs’ (GS) and others provide inflation adjusted price targets on their research reports? If gold is the true measure of value, then why can’t I pay off my American Express (AXP) bill by mailing in my gold necklace?

GOLD FEVER

With the effective quadrupling of gold prices in the last seven years (~$250/oz to ~$1,000/oz), gold bugs are more confidently pounding their chests and throwing out multi-thousand, frothy price targets. For example, Peter Schiff predicted $2,000 per ounce by 2009 (who knows, maybe he’ll be right and gold will be up another 100% in the ne next 90 days…cough, cough). Not only are you hearing the strategists and investors bang their drums more loudly, but gold advertisements are plastered all over the radio, television, and internet. Here are a few excerpts*:

• “Watch your gold investments be “on the money” every 9 out of 10 times.”
• “Gold prices could reach $2,300 an ounce or more before it’s over. Buyers of gold bullion at $900 an ounce could earn a return of +155%. That’s very good. But there’s an even BETTER WAY!”
• “Discover Our Little Known “Gold Price Predictor” That Has Been Spot On Every Single Time… Since 1901..!”
• “Turn EVERY $1 Of GOLD Into $10…Or MORE!”

Sources: streetauthority.com and soverignsociety.com

ALTERNATIVE SCENARIO

Another scenario to consider is a complete collapse in gold prices (and surge in the dollar) like we saw in the early 1980s We experienced about a -65% drop in gold prices (~$800/oz. to $300/oz.) from 1980-1982 and saw ZERO price appreciation for about a 25 year period. When did this abysmal period for gold begin? Right about the same time that Paul Volcker raised interest rates to fight inflation.  Hmmm, I wonder what next direction of interest rates will be, especially with the Federal Funds rate currently at effectively 0%? Could we see a repeat of the early ‘80s? Seems like a possibility to me. Certainly if you fall into the Marshal Law, civil unrest, soup kitchen, and bread line camp, like the “Three Musketeers,” then burying tons of gold in your homemade bunker may indeed be an appropriate strategy.

Another head scratcher is all the talk revolving around an inflation driven market rebound. If inflation is truly the worry, then shouldn’t the “Three Musketeers” be massively short and be concerned about declining PE (Price/Earnings) multiples, like the single digit PE levels we saw in the late-1970s and early-1980s (when we were experiencing double-digit inflation)?

As I have chronicled, there can be some mixed interpretations regarding the direction of future gold prices. If you think a repeat of Volcker driven gold price collapse of the early ‘80s is possible, then establishing a heavy short position may be the ticket for you. If on the other hand, you are in the gold $4,000 camp, then it might be best to carry a few extra gold bars in the trunk for your next Costco trip.

DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct long or short positions in COST, GS, AXP or gold positions. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Commodities. Tags: COST, Costco, Dr. Doom, GLD, gold, inflation, Jimmy Rogers, Marc Faber, Peter Schiff, Three Musketeers.