Wednesday, July 1, 2009
Fads come and go…
Pogs, tech stocks, Rubik’s cubes, flipping residential properties, beanie babies, Barack Obama, Member’s Only jackets, iPods… we can all think of plenty of examples.
And the funny thing about fads is that when they take off, people seriously consider the fad product as an investment. In the case of beanie babies, that funny thing ended up being the reason e-Bay was founded—sort of a Nasdaq for fad trinkets.
Of course, investing in the underlying company would have been the optimal strategy—so long as you got out well before the fad crashed and you found the tech stocks next to the beanie babies in the 99¢ bin.
But imagine, for a moment, one of these fads…let’s say, Member’s Only jackets.
And let’s also say that despite being wildly popular and in demand, the manufacturer is stockpiling in anticipation of higher prices from future high demand.
Who can blame them? They’re simply trying to find the best way to profit from their position…
But let’s further say that the manufacturer owns 80% of the total number of jackets outstanding. The remaining 20% is divided up between literally thousands of small investors.
Clearly, then, the manufacturer is in control of the market…
Say they’re short onf cash and some bills come due, as bills have the tendency to do. To get some cash, the manufacturer has to go to the jacket market…pumping up the supply.
Or, hypothetically speaking, let’s say our manufacturer has a vested interest in keeping the price low. Maybe they own London Fog – a competing outfit – and prefer that product to be more competitive.
In either case, I hope you enjoy wearing those jackets, because they won’t be good for much else at that point.
And Speaking of Points…
The point is, little investors can get squeezed rather easily in a situation where one – or even a few parties – controls the overwhelming supply of a good. It’s just simple economics.
Why’d I explain that in terms of fads?
Because that lesson is one of the prevailing truths in an investment that’s near and dear to all of our hearts. Gold.
Now don’t get me wrong…it’s great to love gold, and it’s definitely here to stay. But like the entrepreneurs who started a beanie-baby-based business, that kind of emotion can sometimes cloud the issue…
In the case of gold, most bullion is controlled by central governments. And a lot of gold bugs don’t seem to take that into account. They’re more concerned about the collapse of fiat currencies (sure, we all know it’ll happen, but it’ll probably happen at a rate best measured in geologic time).
But since most central governments hold gold as a reserve – as they have for centuries – it’s easy for them to raise money or move the market through buying, selling, repo and other arrangements.
Although gold should be part of every investor’s portfolio, it’s the ultimate buy-and-hold asset, and one that shouldn’t exceed a large percentage of a portfolio.
In the long run – the Keynesian long run – the yellow metal’s fundamentals and track record are bar none. And compared to paper money…well, there’s simply no comparison in terms of preserving your purchasing power (see the chart at right.).
But it will be a wild ride as world governments collude to keep the price down through strategic operations in various gold markets.
But nothing lasts forever.
And when the world’s central banks lose their stranglehold on the lion’s share of gold supply, this whole “paper money” fad will likely be nearing its end…and the only kind of paper you’ll want will be gold receipts.
Stay Sovereign,
Andrew Packer, Managing Editor of The Sovereign Individual
P.S. You may not be able to move the gold markets...but they're still a great place to be. And coins are a great way for anyone to start. Rare coin dealer, Nicholas Bruyer, of First Federal Coin Corp has a special offer for A-letter readers..