The Smart Money

From the inception of this blog, I have been trying to explain to you the psychology of the so-called “smart money.” Now the smart money is not the same as the big money. Pension funds are about as big as they get, but they are slow, behind the curve, and on the brink of entering crisis-mode. The smart money was the smart money first, then they became the big money. David Einhorn started with $1 million- now he is managing billions. John Paulson started with roughly $1 million- now he is managing billions.  Michael Burry started with roughly $1 million- now I suspect that this is equivalent to his monthly cash flow from his investments. You see my point. The government can infuse AIG with hundreds of billions in capital, but guess what?  They are still the dumb money.

Do I think it is a coincidence that the aforementioned fund managers are long gold? Nope. Am I surprised that 9 out of 10 people I talk to about gold say it is “expensive” according to their infallible ” gut feel” metric? Nope. They are the dumb money. They have been around since the beginning of time; they will be around until the end of time.

I’m not playing games here. This isn’t some intellectual project for me. I’m not guessing. If I am wrong about gold, I am losing a lot more than a couple of nights out on the town. If my price targets are right, I will reach a level of financial security before the age of 30 that most never achieve. So you can see why I want to view markets from a position of strength. You can understand why I read more books in a year than most people do in a lifetime. Once this crisis is over, I will probably do something more constructive with my time than making money off of other people’s ignorance. But for now, I am having the time of my life exposing stupidity in all forms. This is just one of those strange times in history when lies crumble under the intense scrutiny of truth. In terms of economics and markets, I am about as honest as you can get.  I’m not the government. I don’t have an agenda. I will tell it like it is and not apologize to anyone for my views.

From my perspective, the inability to foresee crises before they develop is an indictment on our school system in America. People don’t know how to think critically. I didn’t realize how brainwashed people were until I tried to talk  logically with them about gold. I would literally talk for an hour citing historical precedent, price action, economic theory, and bullish fundamentals. Then I would get a blank stare and a response along the lines of “But I read an article in the WSJ that said gold was a bubble.” So yea, this is a lot easier than you think. When it comes to the realm of investing, people are morons.

Understanding Price Targets

I think $2500-$3000 is a very reasonable price target for gold. Now does this mean I will be advising people to buy at $2000? Nope. I won’t be unless events deteriorate significantly. Opening up positions at the upper range of price targets is just not wise. You should have been buying at sub-$1000 prices. You should have been buying at $1160 when I was publicly buying into the the panic. You should be buying on the next pullback. But chase at $2000? Don’t do it. That’s not how the smart money invests. Now how many supposed “gold bugs” will tell you to withhold from buying? I’m not here to win some kind of gold evangelist award- I’m just showing you how to maximize profits.

For your reference, here are a couple of nice charts from David Rosenberg over at Gluskin Sheff.

I must admit, I am a little quirky. I was always curious to know how people thought.  I was always interested in understanding social dynamics. I was always somewhat of a history buff as well. Luckily for me, human psychology and history are very relevant in the market.

People generally look to others for clues as to how to act in unclear situations. This is called social proof. Now tell me what is more unclear than the markets? Anyway, social proof is obviously an efficient tool for distilling information most of the time. But social proof is also often wrong. In the context of bull markets, social proof always operates on the disbelief end of the spectrum. It is disbelief, not belief, that spurs bull markets to new heights. Think about this a second. I don’t care about buying pressure- buyers will flock to value eventually. I care that people are still skeptical since this ensures future purchases at the margin.

Think of the market as a reflection of the collective actions of all participants. The smart money is positioned in a bull market- they’re going nowhere. Speculative money will always come in to chase a rising market. And the skeptics? Well they have to cover their shorts (buy back their positions)- over and over again. This phenomenon of panic buying from short-coverers and chasers is visible in any bull market. The smart money is buying on pullbacks, so you will see downward momentum wane as the bull market shifts to high gear. We haven’t even seen the runaway move in gold that is the hallmark of bull markets. What I am trying to say is that this move in gold so far is very mundane. For some proof, here’s another great chart from David Rosenberg.

There is not a day that goes by that I don’t hope to see an  hour-long special about the gold bubble. I want to see lines of people selling their gold at $500 a troy ounce and celebrating as if they won the lottery. This is the type of nonsense, ignorance, and stupidity that gives me the conviction to back up the truck and buy. This bull market in gold is far from over. Our government still has huge reserves of stupidity that it is ready to unleash once the public starts panicking. I suspect many of you won’t believe me, but there will be a major collapse in public confidence. The smart money sees it coming and is positioning themselves in gold. What about you?

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  • http://www.facebook.com/profile.php?id=5411088 Steven Levinson

    Moses-

    What are your best guesses when the next pullback will be? I don’t see it, I don’t think we see a pullback until 1,500.

    • http://www.expectedreturnsblog.com Moses

      I am actually expecting a mini pullback pretty soon. A $50 correction or so is healthy and constructive. But as an investor who like everyone else can’t predict every turn in the market, I am planning to add on weakness.

  • fubsy_cooter

    Moses,

    I ask this b/c I wonder about the end game. How do you foresee cashing in on your Gold holdings when the public buying mania takes place? I imagine the dollar could be gone. Do you suppose there will be another paper currency to trade Gold into? Land? Grains? 1957 Les Paul Customs? I guess the question I ponder is what will gold be traded for at the height of the mania that will allow the holder to maintain the wealth that was built during the gold bull, the end of which we agree will be at a height of public fear that may be unprecedented in this country, and may possibly mark the end of America as we think f it today.

    Mitch

    • http://www.expectedreturnsblog.com Moses

      Hey Fubsy,

      I actually own a Les Paul myself! But this is actually a good point. Tangible assets will rise in value as the dollar devalues. I foresee a new currency arrangement out of this. There will probably be a new global currency that is regulated by some kind of global central bank.

      I believe you will have ample opportunities to unload on the public between $2,000-$3,000. The ironic thing is it will be the hardest to sell near the top.

  • Wheeler

    Moses,

    Thank you for your insightful commentary. My employer offers limited choices in how I invest my 401k money. It’s pretty much either bonds or mutual funds (small cap, mid cap, large cap, and foreign). This means I can’t get on the gold bull with my 401k, and I’m worried that no matter what I pick it is going to get wiped out in the coming storms. One of my options is VIPIX, namely inflation-protected treasuries. When commentators like you say that bonds are headed for the toilet, does this include the inflation-protected versions? I’d love to get your take on this.

    • http://www.expectedreturnsblog.com Moses

      I am assuming the inflation protected treasuries use the CPI to calculate inflation. I’m not really a fan of that since the government obviously manipulates the CPI through various means, such as hedonics and substitution. I would just buy physical gold.

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