Contrarian Play: Buying CEF or buying gold and silver bullion at a discount
Li Lu’s Four Basic Principles of Value Investing
Li Lu is undoubtedly one of the most under-appreciated investors. The founder and Chairman of Himalaya Capital Management established his firm in 1997 based on the principles laid out by Benjamin Graham. Lu is a close friend of Charlie Munger and was once thought to be in-line to succeed Warren Buffett as the chief investment Read More
CEF is a closed-end fund that holds gold and silver bullion--currently trading at a 1.5% to 2% discount. Back in 2011, CEF traded at a 6% premium. The present discount is a function of HISTORICAL and UNPRECEDENTED bearishness by small speculators who are currently net short! If ever there was contrarian signal, this is one. Oh, I forgot one, Noureil Roubini, an economist, says that gold will go to $1,000 because the world is in recovery. See below:
http://www.cefconnect.com/Details/Summary.aspx?ticker=CEF. Now, you may not wish to own gold as a way to hold/store a portion of your savings, but if you are looking for a way to buy bullion, this might be an intelligent way. This writer’s understanding is that gold is money (all else is credit–J.P. Morgan)–if it wasn’t, then gold’s U.S. dollar price would probably be 50% to 95% lower. Gold is not a currency due to our fiat currency laws (coercion), and gold is NOT an investment. Gold does not create wealth, but it represents wealth/savings. Finally, extreme bearishness may be a contrarian buy signal, but–as in all things pertaining to human action–prices may decline further for a while. No one knows future prices definitively.
However, with high bearishness among small specs in the leveraged paper market with strong commercial traders on the other side of the trade after a two-year decline of 30% to 50% in gold and silver prices, which side do you want to be on? The theory of contrary opinion aims at avoiding Crowd opinions. That is a broad generality but the reason for avoiding the crowd in most matters is that the crowd is often wrong. A crowd is swayed by emotion and fear rather than by ruminating and reasoning.
Now, why own some gold? Gold is non-printed, non-government created money. If you believe that our current fiat currency/debt laden system is sustainable or that the Fed can “taper” and “exit,” with precision, perfect foresight, and without consequences then just hold paper dollars. If you do own CEF, pray that bullion declines in price because then the rest of your portfolio is probably prospering. Gold is not an investment but simply another form of money.