An Investor’s Journey

As a follow-up to yesterday’s post entitled I Like Gold Stocks , here are some personal and  historic comments.

I have not liked the stock market since the early 2000s. That does not mean I did not participate as an investor. I did, up until about five years ago, when I became very concerned with obvious troubling trends in the country. At that time I began to shift away from long-term investing towards speculation. I viewed that move as one less of choice than one of necessity. This shift was not the typical, or necessarily a recommended, path for someone my age.

In short, I concluded that the “buy and hold” strategy that I had used for years could become injurious to one’s wealth.

I am not a gold bug, or at least never was.  My interest in gold began as a means to make money. I became interested in gold stocks about 11 years ago, only because they were out of favor and had been for a while.  Expectations of long-term inflation suggested that precious metal mining stocks might be a good contrarian opportunity. Rydex, Vanguard Precious Metals and Tocqueville Gold mutual funds were used. These investments began small and were made with a long-term intent.

About four or five years ago, I basically gave up on the stock market as a long-term investment. By then my portfolio was heavily oriented toward precious metals and other inflation hedges. I no longer invested in traditional stock mutual funds.

GLD and SLV eventually provided convenient vehicles to trade the underlying metals. I used each as trading vehicles, rather than places to store wealth. Later options trades were made available on both ETFs.

Both ETFs have the potential for “Madoff” or “Enron” events.  These metal funds would seem especially vulnerable in that they claim to hold physical metal to back their value. To my knowledge, there is no evidence of impropriety; I am just cautious by nature.

Along this decade-long path, I acquired some physical metal which I expect never to sell. That I use for my “store of value.”

It was not hard to like gold. It was easy to become more deeply involved. After all, if something works you don’t abandon it. To appreciate how well the orientation worked, the following chart of the gold price from 2001 through yesterday is useful:

Each bar in the chart represents a month.Gold increased from roughly $250 an ounce to yesterday’s close at just under $1800.

The upward ride looked easy in retrospect, but there were some terrifying moves along the way that appear muted above. In hindsight, the decision to go to gold appears brilliant. In reality, a lot of it was due to dumb luck and a complete and total faith in government to exercise no self-control and to make the future worse than the past.

As this graph played out over time, I know I did not produce the returns that a buy and hold strategy would have. But I took an overweighted approach (little diversification), which meant to manage risk only a small part of the portfolio could be “permanent” and downside protections had to be in place for the excess.

The dot-com bust around 2000 marked the end of normal economic growth in this country. It should have been the warning signal that our economy had become a hollow shell, manipulated by government stimulus and Federal Reserve easings. Most of what has been reported as “growth” since that time has been nothing but debt-induced — borrowing from the future to make the present look and feel better.

The performance of the Dow-Jones is shown in the following graph:

In nominal dollars, the Dow-Jones is virtually exactly where it was ten years ago. It has been dead money. In real terms, purchasing power has been lost.

The bottom half of the chart shows the Dow as if it were priced in Gold instead of dollars. Ten years ago, the Dow was worth 40 “Golds.” Yesterday, it was worth less than 6 “Golds.”

Government doubled and tripled-down on efforts to create phony growth. They achieved it along with several bubbles that have broken or are still in the process of deflating. The housing bubble was seen as the biggest and it burst, although there is still residual air to be released in the form of lower housing prices to come.

Consumers are forced to reduce spending in order to get personal balance sheets healthy. Much of this adjustment is yet to be felt. The value of the dollar and Treasury bonds are bubbles that still must deflate.

The two biggest bubbles have yet to have been resolved. One is the debt problem and the other is the size of government itself. Both are unsustainable at current levels. Both are going to burst.

The point of recounting much of this is to warn that the worst is still likely ahead.