Gold ETFs: What Went Wrong With Conventional Wisdom? 12 comments
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"The U.S. economy will take time to rebound from its recession," said Mr. Insert NameHere. Mr. NameHere also suggested that the weakness in the U.S. economy doesn't support a strong U.S. dollar.
The problem with that notion is the assumption that another economy elsewhere in the world is better off. If the fundamentals were better in Europe or the Pacific, for instance, would you really see the CurrencyShares EuroTrust (FXE) or the CurrencyShares Australian Dollar Trust (FXA) dropping like boulders off a cliff?
The yen and the U.S dollar have gained extraordinary ground against world currencies. Recession in U.S., recession in Japan, but investors have still chosen the currencies of Economy #1 and Economy #2. Ironically, it wasn't that many months ago when "The Economist" printed a picture of George Washington on the U.S. dollar... piloting an airplane descending in flames.
Nevertheless, if it is a global recession such that, no economy is fundamentally sound, why hasn't gold broken to record highs? In fact, the best thing one can say about gold in the greatest crisis since the depression era 1930's is that the SPDR Gold Trust (GLD) has held its value. (Not many assets can claim a juicy 0% return in 2008.)
Still, one must beg to differ with conventional wisdom on this one; that is, gold has been a serious disappointment for safe harboring.
Think about it. The first 6 months of 2008 witnessed an extraordinary commodities boom and remarkable U.S. dollar depreciation. Gold went up 20%, then back down near its year-to-date start in that same period. Where was the tremendous hedge against a falling U.S. dollar?
In the commodities bust and worldwide unwind, gold fell 30% from its highs. That might be a little better than other deflating "hard assets," but nothing to feel safe about.
Granted, gold has spiked some 20% off its lows since the credit crisis turned the world's stomach inside out. However, emerging market demand has dropped considerably. The financial crisis itself is likely to ebb. And global recession investing doesn't seem to be favoring the metal.
If I want to protect capital, cash and short-term treasuries seem to do the trick. SPDR Gold Trust (GLD) does not appear to be the best route to safety nor the ideal hedge against the U.S. dollar. Not these days. In fact, gold has climbed alongside the U.S. dollar in September and October.
Perhaps gold's best days are still ahead of us. Most notably, when India and China stabilize, when they start growing like gangbusters again, the demand for gold may be tremendous. Until then, GLD may best be used as a day-trader's delight.
Disclosure Statement: Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above.
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This article has 12 comments:
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Also, please note that just because other countries are printing money like crazy, that doesn't "strengthen" the dollar against anything except those currencies. Go check how many oz of gold things cost today vs before. Be it a house, a gallon of gas, food, you name it.
Thinking in nominal terms of dollars and in the very short term only is how one finds himself poor in retirement.
Gold has several factors temporarily holding down its value, but my bet is that they are only temporary. For starters, the economy has to adjust to a lower standard of living, which means selling cars, homes, and other non-essentials at fire-sale prices, which dampens inflation numbers. If we could simply print $1,000,000 into every American's pocket to solve our problems we'd have already done it. But at some point this money creation will show up in price inflation. EVEN homes. But by the time that happens a loaf of bread will be $10.
The hard part is knowing exactly when this will occur. That's why I bought in at $675-$910 and am holding my gold.
Jim Rogers pointed out in an inteview how commodities have seen several vicious corrections on the way up for years now, but the trend has always been up.
Here, multiple tonnes of gold are loaned daily by central banks which artificially show up as supply via bullion banks via the London bullion market -- while on the same day other central banks have paperwork showing that they own the gold that's listed for sale (simultaneously). This is not transparent - and IMF is supposed to be going public the end of the year. Getting this trickery out in the public is part of the $2000/oz that goldbugs are hedging on.
Anyone buying commodities right now deserves to get burned. Eventually I hope it will turn around, but now is not the time.
Regarding `manipulation`, if something is so illiquid that its price can be manipulated, then obviously there isn`t enough demand for it to go up in the face of people that want it to go lower. The real manipulation was springing that finance deal the day before options expired, crushing all those put positions with no warning. Very mean, but that`s how the big boys play. Always watch your back, They will steal your lunch. Actually that`s the whole point of the game isn`t it?
Write in alan jacquemotte for President to show your support for ending the Fed`s monopoly on money. Look up `colonial scrip` on wiki for more info.
Supply of cash from banks has dried up (credit freeze), and as someone pointed out, demand for it has only gone up since the stocks are in the gutter. So the price goes up.
In the past few years, dollar was purposefully allowed to depreciate in order to keep the economy going, as the current regime was working on otherwise wrecking the economy (borrowing, wars, tax cuts, deregulation, plundering...) This made other currencies (mainly Euro) become dangerously overvalued in comparison. When the world financial system started to collapse, Euro is now catching up, and that's what's keeping the dollar from falling further (relativelly). For the time being.
As someone else also pointed out, the various bailouts (is anyone keeping count?) have or will pump trillion of dollars of cash into the system. Which is not showing up because, well, it hasn't really been injected yet, they just say it is, it takes a bit to print 10 billion one hundred dollar bills and distribute them, and also the banks are still sitting on their cash. Once the banks relax and start moving their cash again, well, then we'll have too much money out there. Which will cause inflation.
You will know that is happening, if not sooner, when you see the Fed raising rates dramatically, and making banks keep more in reserve. That's when Gold will go up.
If you think about the timing, think about the economy as a tanker. The captain fell asleep at the wheel... and is now trying to change direction. It's going to take a while for some of these bailouts to work -- for the tanker to actually start going in a different direction. Right now it's just SLOWING DOWN going in the wrong direction, but it's still going in that direction still (as we saw last night).
A number of people talked about the recovery happening in Q2 2009 or so. I think that's about right.
I don't think anything exciting will happen with gold in 2008 (maybe sucker rallies?)
Someone mentioned gold price manipulation, and unfortunately there appears to be some of that as well, but the price can only be manipulated for so long. Once the pressure from the economy comes, though, there'll be no manipulation possible from stopping the price going up.
To buy gold now or not? It's a fairly safe investment, assuming you don't buy into some sucker's rally. On the other hand, it's unlikely it will go up to $2000. The Fed does have tools to soak up the extra cash, and keep inflation in check. Assuming they don't fall asleep at the switch.
McCain said he would fire the SEC chief. I agree. I would also replace Bernanke. It's time for him to go.
Conventional wisdom would say that the massive 'bailouts' by the U.S. and most of the rest of the world would be highly inflationary. I think the reason that gold isn't responding to this is because of two reasons; first, it takes time, many months, before newly 'printed money' is reflected in the economy. Second, it looks to me like no matter how much governments introduce 'liquidity' into the economy, it is done through the banks, and they aren't lending it. Therefore, there is none (or very little) of these new dollars that is making it into the larger economy. Until that money makes it way into the larger economy, is won't create inflation.
Actually, we are right now in an historic fight between inflation and deflation, and so far it seems deflation is winning. Look at how much the stock market has deflated in the past few months. Consider how the real estate segment of the economy is being deflated. One could say that energy is also in an historic time of deflation from its highs.
If the economy is being deflated, gold will go down in price. However, once everything washes out, gold should find it historic value in relation to the rest of the economy. So, don't be too dejected if your hold holdings go down in price. If you hold them until the economy stabilized, you will probably own relatively the same portion of the economy, the same value, as you did when gold was much higher in price.
the best I can articulate the problem I have with the current 'deflation' perspective isn't in the existence, but rather the transience of "value-drop" based deflation. This in contrast to the very permanent injection of massive money into our financial system. So, for me the inflation question therefore becomes one of "when", not "if".
We all read that 700Billion is a huge influx of cash and the dollar is "toast". 700Billion is in the *noise* in this game, but the real background dollar prop-ups that are going on in the trillions are not. That real (albeit devalued) money is being pumped in, to replace the flow that is 'lost' during this confidence-based 'sell-off'. Once put in the system, it won't (can't?) be pulled back out.
In contrast, while the lost value in stocks, home-value, bonds, etc. is *very* real to anyone being forced to liquidate or retire *today*, I believe the better part of that value *will* return with the return of confidence in the market.
Of course it will take longer to return than it took to drop, and all indications are that it will take years this time rather than months. But here's the rub for me: when that 'deflated' value returns, and the current FED trillions don't go away... inflation - by any definition.
My personal basis for this thinking is the fact that I have cash, and am waiting to buy. Not before the bottom, but just after it... (crystal ball anyone?)
Even if I miss it, my confidence based re-insertion into the market will be joined by many others, and the market will hobble back upward.
Housing is the same. My associates in Real-Estate say they have buyers in the wings, waiting to be sure they don't buy "too soon". As soon as that curve is felt to have switched, those buyers will jump in, hoping not to miss the window.
Warren Buffet says now. I guess he can afford to lose more :^)
I don't know how to resolve the losses that were created by layers of leverage that has collapsed, which seems like vaporized value, but my bet is that all that cash we're sitting on will go back into the rising numbers when we think it will be safe. One value stock at a time.
Years or months - that's my question. watching watching watching.
best of luck out there!
--ikk
You are probably right, Gold etfs are no doubt a day traders delight,
at least for the present, but later probably not. I don't want to bludgeon you as some other sharp investors knowledgeable about the naked short selling and behind the scenes repression of the precious metals have already done. So I'll leave you to reflect on these commentaries by yourself!
"Am I not merciful?" Emperor Commidus
EDT
Chicago, Illinois