The zombies are buying gold

Sep 27, 2010

Baltimore, Maryland

Last week it was looked like the feds' efforts to reflate the US economy might be working. Gold was hitting one new high after another. Stocks were going up too.

The Dow rose nearly 200 points on Friday. Gold hit $1,300...but couldn't close at that level. When trading came to an end gold was $2 short of the $1,300 mark.

------------------------------ Don't Miss ------------------------------
We are delighted to offer you our latest publication - The Definitive Guide To Derivatives.
This guide will empower you with all the necessary knowledge you need to take your first steps to investing profitably in derivatives.
The best part, dear reader, is that this guide is Absolutely Free Of Any Charge. try our free-for-life daily newsletter - The 5 Minute WrapUp - for a week! Click here Right away!

What's up? It's hard to know. If gold is going up, analysts reasoned, it must mean something. What? The obvious explanation is that inflation is coming.

So the advisors told their clients to buy gold. The economy must be improving they said. The recession ended more than a year ago. The recovery hasn't been as strong as anyone wanted. But there must be a recovery underway...and it must mean that inflation and gold will go up.

We're sitting in a JetBlue airplane as we write...heading back up to Baltimore. Each seat has a TV screen on the back of it. A few years ago, you could get away from TV by getting on an airplane. Now, there it is right in front to you...

...which is all part of the creeping zombification of the US. Music plays all the time. It's in cars. It's in shopping malls. Some people even listen to it when they work. It's like prison...or the Orwellian future...where noise is blared out 24 hours a day, so you never have a chance to think.

And now there are all the Blackberries, I-Phones, say nothing of regular cellphones and portable computers.

And then, there's TV. You go to a bar. In addition to the music, there's often a TV screen.

With all these sources of distraction people don't have any time to think. Who has time to wonder how why the dollar has any value at all? Who worries that those pieces of paper could go the way of all the dump? Who thinks about it at all? Not many people...

Instead, most people go through the day like zombies watching TV...listening to someone else's music...surfing the internet...chatting...
schmoozing...distracting themselves...

The passengers on the plane act like zombies...watching other zombies on TV...listening to music...reading airport novels....

Then, on the screen in front of us, there's a fellow! He's the second one we've seen. "Should you own gold," is the caption on the screen. A man named Scott Carter is advising customers to buy the yellow metal. Apparently, his company has been in the business for 50 years...

Hmmm...this is something new. The last time we saw gold on TV was an ad for a fellow who was BUYING gold. "Got gold? You can get CASH" was last year's ad. The advertiser told viewers that they should take advantage of high gold prices to get rid of their unwanted jewelry...exchanging it for cold, hard cash.

Only the cash wasn't all that hard, after all. That was about a year ago. And today, the cash is worth about 20% less than the gold.

But who cares? We're talking zombies here. Who cares what happens to them?

When the zombies start buying gold, though, the bull market enters its last stage. Ordinary people do not own gold now. They do not understand that the financial system is in jeopardy. And they cannot imagine that the dollar is not a safe place for their wealth.

As for inflation, they're for it. They have mortgages to pay. And for many of them, those mortgages are higher than the value of their houses. They'd like to see their debts reduced, by inflation.

They'd like to see their assets lifted up by inflation too. And their earnings.

Okay...inflationary increases are not "real". The real value of the assets doesn't increase, just because nominal prices go up. But the zombies don't know that.

*** We had a good time in Florida. We never really cared for the Sunshine State before. Too flat. Too hot. Too many old people. Too many people on vacation.

But we found it appealing this time. There weren't too many people out and about. And there were plenty of restaurants to choose from.

Besides, your author finds that people in Florida are getting younger. They're often younger than he is. That's just what happens. If you live long enough, old people become young. You become old.

What a thrill it must have been to come down to Florida in the 1920s. Taking the train down from New York in mid-winter, visitors must have felt as thought they had discovered paradise. Warm breezes coming off the ocean. Waves breaking as they hit the beach. That old Florida style...with broad porches and shutters. And most of the state was territory for developers and retirees.

It's not virgin territory any more. Far from it. Now, it has a different feel altogether...a little like an old resort...a little past its prime...but still putting on airs.

We had a condo right on the beach, on the 6th floor of a building was put up in the '60s. There is a lot of glass...and views up and down the coast. Storm clouds grew up out over the water...and then came into shore. Much more interesting than TV.

We were working...but we still had time for breakfast together at one of the local restaurants...and dinner outside on the sidewalk. It was like a vacation...

*** The bear market in real estate has knocked loose some bargains. We mentioned a house that sold for $295,000 in 2006 which changed hands again last week for $75,000. The new owners figure they'll make good money renting it out for $900 a month.

We saw other deals too. Some condo complexes are just about empty. You have to be careful, because you could get stuck in 'dead' buildings or abandoned subdivisions...with the cracks in the pool and weeds in the parking lot.

But there are deals available...if you know what you're doing.

"I've been buying for the last 12 months," said a friend. "You've got to know what you're doing. But if you're careful, you can get a decent house with decent rental income.

"It's a funny business though. For some reason, I've run into these situations where the banks don't want or can't -- sell to me. They've got some restriction, probably designed to help the owner-occupier buy a house. Trouble is, the individual homeowners don't have cash to buy these houses. They need financing. And you can't get the best deals if you need financing. You have to have cash. So, I provide financing to my own real estate business. I get a better return on the financing than I can get anywhere else. And I get a good return on the properties too. I've already bought about a dozen houses. I'm aiming to get 40 of them. It will be a nice portfolio of houses...about the right scale for my kind of management and maintenance team."

"Since I provide the financing, I don't have to worry about prices going down another 10% to 20% -- which they probably will. I just have to be sure I've got the cash-flow from rentals that I projected. So far, no problem. People still need places to live. And I can provide housing about as cheaply as anyone."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "The zombies are buying gold". Click here!