Why Oil and Gold Are Headed Much Higher 142 comments
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Analysts led by Francisco Blanch at Merrill Lynch & Co. Inc. wrote in a research report that gold could reach $1,500 an ounce. They also predicted that oil would reach $150 a barrel.
In the research note released earlier this week, the analysts said “the unintended consequence of the ongoing financial bailout will be inflationary pressures to the commodity markets.”
The analysts provided no timetable for their predictions.
The $700 billion U.S. bailout—plus the billions of dollars in capital infusions that have been put in place by governments and central banks all over the world—will be highly inflationary, analysts say. Historically, this type of move has been very bad for the U.S. dollar and highly bullish for oil prices.
“This is a very interesting projection,” said Money Morning Investment Director Keith Fitz-Gerald. “I have no idea what they’re basing their numbers on. But I certainly wouldn’t dismiss it based on everything I know about global trends, and my own proprietary calculations—which continue to suggest far higher prices for oil and hard assets than even Merrill is predicting.”
While Fitz-Gerald said that doesn’t mean there won’t be a continued near-term drop in gold and oil prices, he continues to believe the long-term outlook is for much-higher prices.
Currently, Fitz-Gerald has a multi-year target price of $225 a barrel for oil prices.
Typically, Fitz-Gerald says analysts put a more-specific timetable on such predictions. But the unprecedented worldwide capital infusions that are part and parcel of the central banks’ bailout plans are dramatically skewing what are normally relatively predictable calculations, he said.
Since peaking at an all-time record of $1,032 an ounce on St. Patrick’s Day, gold has seen its price skid about 19 percent. Gold futures tumbled more than 4 percent Thursday to their lowest level in a month, as nervous investors sold futures contracts to raise cash, Marketwatch reported. Gold for December delivery fell $34.50, or 4.1 percent, to end at $804.50 an ounce on the Comex division of the New York Mercantile Exchange, the lowest closing level since Sept. 17. Earlier, it had fallen more than 5 percent to $791 an ounce.
Some hedge funds were forced to liquidate their positions to cover losses in stocks and other markets, economists at research firm Action Economics told MarketWatch.
"For the moment, the weight of the deep funk felt in the global markets is keeping gold on the defensive, while would-be buyers...find more comfort sitting on the piles of cash," Jon Nadler, a senior analyst at Kitco Bullion Dealers, told the financial news service.
Crude oil fell below $70 a barrel, reaching its lowest level since June 2007, and gasoline prices tumbled after a U.S. Department of Energy report showed that stockpiles advanced twice as much as forecast, Bloomberg News reported.
Crude oil for November delivery fell $4.37 a barrel, or 5.9 percent, to reach $70.17 a barrel, at midday Thursday on the NYMEX. The “black gold” fell as low as $68.57 a barrel, the lowest since June 27 of last year. Prices are down 20 percent from a year ago. Crude oil peaked at $147.27 on July 11.
Oil prices also dropped on doubts that the bank rescue plan will bolster global economic growth—and with it, fuel use. The Organization of the Petroleum Exporting Countries (OPEC) moved the meeting it had planned for November up to Oct. 24 after the oil-price decline.
“The DOE numbers just added to the downward pressure on the oil market,” Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, K.Y., told Bloomberg. “The weak economy is translating into rising inventories because nobody wants to burn the stuff.”
Money Morning Contributing Editor Martin Hutchinson—who last October correctly predicted that gold would make a run for record highs—said this spring that gold could reach $1,500 an ounce. At the time, Hutchinson listed three factors, one of which—related to the bailout plans—has moved front and center:
- Monetary policy: More than for any other investment, gold’s price depends primarily on the world’s monetary policy. When monetary policy is loose, as it was in the 1970s, gold prices soar. When it is tight, as in the 1980s, prices decline sharply. With the global bailout in place, monetary policy is about as loose as it’s ever been.
- Global Supply and Demand: For most commodities, price rises have an effect on supply and demand; a higher price increases supply and reduces demand, as in "price elasticity." With oil, for example, a 10 percent rise in price reduces demand by about 1 percent to 1.5 percent, meaning that oil has a price elasticity of 0.1 to 0.15. But oil is priced in dollars, and when the dollar drops, OPEC tends to boost oil prices to keep its revenue steady. The flood of dollars the global bailout plans are going to send washing through the financial system won’t be good for the greenback, meaning the dollar-based price of oil can only go higher. That will more than offset any decline in demand in the near term; in the long run, growing economies in such markets as China, India and other emergent markets will create millions of new consumers who will demand luxuries ranging from jewelry to automobiles.
The upshot: Global demand for oil and gold will escalate—as will their prices.
- Comparison with past peaks: If gold had increased in price since 1997 by the same percentage as world dollar reserves, it would currently be trading at around $1,280 per ounce, Hutchinson says. And the current speculative appeal of gold, compared to its inactivity 10 years ago, suggests it could go higher than this: The 1980 gold price peak of $875 per ounce intraday is equivalent to more than $2,200 per ounce when inflation is taken into account.
Commenting on Merrill Lynch’s gold-and-oil predictions, Dividend.com analysts Tom Reese and Paul Rubillo, last week wrote that “we think the Merrill call is based on solid reasoning, but we’ll wait and see if the market agrees. So far during the meltdown, gold has shown flashes of running but has not broken out.”
They said that the “obvious trade on paper [which isn’t] so obvious to the market at this point” is Newmont Mining Corp. (NEM), which is “sitting just above a 52-week low.” Newmont’s shares, which closed Thursday at $28.85 each, have traded between $27.25 and $57.55 in the last 12 months.
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This article has 142 comments.
I am holding my position – will accumulate if it falls further.
Gold is a relic and has no place in an investment portfilio (contrary to the talking heads touting gold ad nauseum) .Look at gold stocks which are at their lows ...Proof positive !
Commodities yes, oil drilling services yes, FCX yes, MMR yes, NOV yes, PBR yes, COP yes, ACI, BTU yes yes yes...Gold: never happen to any lasting, meaningful degree...
Real inflation over the last 25 years is likely 2-3 times higher, based on shadowstats.com, and global monetary growth.
Thus, by my back of the envelope calculations, gold has quite a bit of catch up to do, and in real inflation terms, (not bogus government data) the price should be headed to north of $3500 per ounce.
Moreover, gold is perhaps the single most manipulated commodity by governments worldwide.
It is always in the interests of the gov. to encourage gold leasing, gold paper contracts short sales, and falsifying government reserve holdings.
Considerable evidence has been published to show this is exactly what is happening.
As the world comes to a new era of the unwinding of the great credit bubble of 1983 to 2008--metals and commodities will be primary beneficiaries.
In the short term, (two years) gold and other commodities may fall another 20%--but the bull market is intact for commodities, and gold.
Full disclosure: I don't own a concrete bunker, nor so I stockpile bottled water, ammunition, and old Soldiers of Fortune magazines.
40 years ago, gold was $35 / oz. It is now $800 / oz (average of 8% / year gain). Perhaps you've been hearing about the gold price having boundless upward potential because it actually has boundless potential. In reality of coarse, it is just the dollar that has boundless debasement potential.
Oil's headed up too. You have got to balance demand destruction with peak oil. The Iran premium has completely dissipated in this latest purge. Boy! Those Straits of Hormuz are pretty narrow!!
No paper for me just a 100toz or Comex 1000toz bar only - Thank You Very Much. When the ones on here that read this do not own any of either are crying I really, really do not want to hear you complain or even whine. You had a chance now before it just blows up like a bomb to get some and then you will just be wondering how to buy groceries and pay for bills. I on the other hand will be able to take a vacation away from all the ones that are asking if I can spare a Silver dime....
Good Luck and remember for over 2000 years gold and silver was money what has changed - Only the printing of paper money that has NEVER lated in those same 2000+ years.
Good To All..
(Got Gold/Silver?)
They were bubbles, they've burst, they aren't coming back. No amount of spin can revive them.
That being said, what is New in this article?
I dont get it when people just take flights of fantasy.
Wow. Sounds just like every other bubble blowhard. If I had a double eagle for every time I heard a realtor tell me "buy now or be priced out forever!!!" The problem with being an extremist is you end up looking just like your enemies. I'm sure you're one of those who was beating up on real estate bubble cheerleaders, but you failed to see the pom poms you're shaking.
--"I on the other hand will be able to take a vacation away from all the ones that are asking if I can spare a Silver dime...."--
Good luck with that strategy. Even if you're right you're going to find out quite rudely why your precious metals are spendable in a Mad Max economy exactly once. Once and only once. After that, everyone will know you've got it, and trust me, guys like you and I who post on SeekingAlpha are not going to be the sort who can hold onto their gold against the sorts of Alpha-males who'll be running the show in your fanciful all-gold, barter economy.
1) Massive increase in money supply
+
2) Lowered interest rates
=
3) Increased inflationary pressures.
= investors running to gold and oil as a safe haven.
Of course gold is going to $2,000 because the ability of the powers that be to inflate is virtually endless. That means US$ debasement. This recession will be unlike any other..President Obama will see we feel no pain...and WHATEVER number of programs or handouts it takes will materialize faster than you can say "Nancy Pelosi" three times.
For those of you who don't get out much there is something called "Peak oil" lurking..and you are about to be bit. Below $70-80 NO NEW OIL gets produced..that is..explored for..developed..and drilled.
Oil will be $125 before June of 2009...and recession or not they'll be killing for it..literally.
Remember this summer - everyone was predicting $200 oil. Now you hear predictions for $30 or $50 oil. Who can you believe? Not anyone calling themselves an 'analyst'.
Oil will be back up before you know it, so now's the time to get in on some cheap oil stocks. I personally jumped all over Suncor at $19 the other day. FIRE SALE!!!!! 3 year hold on that should work out pretty good...
outcomes. Late events showed the futility of such endeavors, but still,
we simply can't help it. We have to carry on predicting for ever.
Gold is due to 30%+ correction. We will see.
The big commodities says they are going up eventually.
jimrogers-investments....
1) Massive increase in money supply
+
2) Lowered interest rates
=
3) Increased inflationary pressures.
= investors running to gold and oil as a safe haven.
**********************...
You're forgetting the other side of the equation:
A. We're facing massive de-leveraging of investments and credit destruction:
When someone borrows $100 and spends it, that $100 is no different that if someone earns $100 and spends it. Now if both exists in the economy, then we have $200 in the economy. Now we're running the credit cycle in reverse, (above story: think -$100 as its either paid back or lost from someone's capital) as the credit crisis unwinds -- *SO MONEY IS BEING DESTROYED*
Just to re-emphasize how big the leverage is, it's not just the obvious capital ratios of banks or investor's margins, but the hidden leverage in mortgages (currently imploding), derivatives (up to 54 trillion CDS nominal value, 600 trillion nominal if you include all derivatives). These are already on-course to vaporize trillions of capital and credit in future.
B. Printing money recklessly (or outright monetizing debt, or other unsterilized Fed activity) is actually: DEFLATIONARY in the current environment! No doubt we have a lot of defaults on our hand, but don't forget we also have a huge mountain of performing-debts being serviced!! If you print money recklessly, even people/companies who could currently service their debt will find their interest rate going through the roof and cause a new wave of defaults-- now you've magnified the deflation effect multiple times!
C. We're losing jobs! Earning power of people are going down! This is very deflationary and there's less money in the economy as a result.
So your (1+2+3) have to compare to my (A+B+C) and then we'll know who wins.
Couple of food for thought:
1. Japan, an economic superpower, couldn't inflate itself out of a deflationary spiral lasting 14 years (and counting).
2. If governments could regulate their way out of deflation, then histories would never have deflations. See 1830, 1870, 1930, examples in France, China, etc.
3. This is a massive collision of two awesome powers of the world:
Government on one side, and mountains of debt on the other. (many times the world's GDP). It's like a battle of Superman vs XMen. Don't rule out either side until the end. I wouldn't be so sure to place my bets if I were you. The swings and dislocations will be huge as this unravels.
People who're "SURE" about hyperinflation, please be aware of these counterpoints before you take a position. As always, take extreme caution in this environment.
OMFG. You lost me right there dude. After that, if you told me 2+2=4 I'd check it myself.
The two groups with the most massive debt that cannot be repaid is the US taxpayer, for his personal account, and the US taxpayer, for what the US government owes. Default or inflation, what does it matter? Both destroy the currency.
But you go ahead and keep right on borrowing and spending that $100 just like you earned it and see where it gets you. See how much capital you have left after a few decades of that behavior.
OK, whichever one of you TURDS from NUWIRE that wrote this article made one intentionally HUGE OMISSION: We are deleveraging - MONEY IS BEING DESTROYED FASTER THAN IS IT BEING PRINTED - READ DEFLATION. The price of everything is going down - people are holding dollars. GOLD IS THE ABSOLUTE LAST PLACE TO BE IN DEFLATION.
In your next article explain how money being destroyed faster than it can be printed or loaned out creates inflation? Why did Japan have the same situation 19 years ago with the NEIKEI was at 40K and is now at 9000? They dumped more money into their economy than we ever will and they got ummmm, uhhhhh, let's see, well, UH............Scratch my head.............uh...... freakin years of deflation!
Can someone explain this? How does OPECs revenue remain steady with increased oil prices? If this is true, this means that if dollar falls significantly, oil will rise even more sharply!
Clearly the record oil prices driven by the speculative elements (hedge funds)have contibuted to an inflationary perceptiion ,driving all of the commodity prices to record highs.
The price spiral that had followed ,especially in the energy and the food complex had obliterared the disposable income and had collapsed the final demand.
The sequential events that had followd nearly derailed the economy and almost imploded the financial system.
The unprecedented "rescue " that followed will not be repeated again as it would bankrupt key economic zones.
The point is that the governments and the Central Banks will not allow for the oil prices to head towards 150 dollars per barrel .
No doubt in the future ,the exchanges such as NYMEX will be compelled to impose 100% margins .As the past history reflects ,such an action will implode the commodity prices.
So much for the future inflation.
Gold at 1500 hundred dollars ,not likely.Any negative impact on the future global liquidity will only enhance the massive flows into the dollar and the dollar denominated assets.
Somehow ,I can't visualize kilobars being exchanged for consumer goods.
So it will take something more than in the 1980's for gold to really take off and what amerticans are buying in expetation of increase. "What do you feel will be the catilist"--- that will really set off the fire under gold's price?
I KNOW IT WAS $1030.00 IN EARLY 2008 BUT THINGS HAVE CHANGED.
"OMFG. You lost me right there dude. After that, if you told me 2+2=4 I'd check it myself."
Looks like I have to explain the economic effect of borrowed money.
The two sources of money, whether borrowed or earned, does not matter to the retailers, and ultimately, both acts "like cash" in the real economy.
(Scenario 1)
Person A borrows $100, spends it at Walmart.
Person earns $100, spends it at Walmart.
Walmart as a result have income of $200, which makes it happy and employs $180 worth of people/jobs. It's stocks make $10, and Govt taxes make $10. This is why economy will end up with $200 worth of "money effect".
Notice the essence of story stays the same if I change the story this way:
(Scenario 2)
Person A borrows $100, pays person C (to do some work). Person C earned $100.
Person B still earns $100 (lets say from completely non-borrowed sources; say he/she is a local farmer and grew food on farms he already own 100% with no borrowed capital).
Walmart would still get the $200 income in the end.
Now lets focus on credit destruction cycle:
Scenario 1:
A year passed,
Person A loses ability to borrow the next $100 this year.
Person B still earns $100 (lets assume this, in the real world, in a recession, Person B's earning may be impacted)
For no fault of it's own management or marketing or sales team, Walmart will find that it earns $100 compared to $200 last year. (50% decline) It's horrified, but is now forced to lay off it's employees. Probably from $180 worth of jobs to like $90 range. Government taxes go down to $5; Stocks earnings down to $5.
This is why credit destruction causes actually destroys money in the economy. Another way of thinking the same thing, is that the $200 dollar year is actually borrowing demand/income from the future, but that still doesn't change the fact that *now we're in this future*, there's less money in the system!
This is why, with less money, how can we support a commodity bubble? Answer is only temporarily: As long as rate of increase fear in is > than rate of decrease of money. If at any time we've maxxed out fear, or the decrease of money is high enough, even PM must go down.
Also, I don't buy the argument that COMEX isn't accurate. Buying something at retail is always more expensive (sometimes significantly so, esp for something that needs expensive security to tow/store) than buying something at bulk. And if it's so lucrative as you say, you can always hold a COMEX contract to maturity and receive the actual delivery; the big boys can MAKE money off it if what you say is true.
What's likely happening is that the real PM price is indeed declining at the wholesale level, and retail is just behind (using stocks bought when the price was high).
As for oil, I still think too many people are overlooking what impact oil has had on the turmoil that we are in today. We are just now beginning to feel the pain of what $4+/ gallon has had on consumer spending. If you are already on a tight budget, and then your fuel costs go up 100$ -$200/ month, no wonder people with subprime loans were having trouble paying their bills. Not that I am taking any attention off of the bad loans, but am just observing that these are the people that are stretched so far thin to begin with and any added expenses send them down the drain. Oil at $148 was ridiculous, and there was no justification for it, I dont care what anyone says. I could understand a healthy move to the upside, but going from $50 to $150 is obsurd and I hope that we do not have to see it again any time soon.
I don't think an economy can run long term on credit; I think a capitalist economy runs on capital. I think capital comes from savings, otherwise known as deferred consumption. I think that borrowing to fund excess consumption destroys capital, while borrowing to build productive capacity can in fact produce productivity gains which can (should) result in increased general wealth and in turn increased savings.
To a certain extent, borrowing to consume can be a productivity gain. For example, if someone needs a car to get to work, he can borrow and buy the car. If he buys basic transportation then there is a chance that this act will be net positive, since his productivity is enhanced by his ability to get to work. But if he borrows excess and buys a Hummer, while there may be a short-term boost in the economy due to demand for Hummers, in the long term this act destroys capital by consuming it.
This is exactly what USA has been doing for decades: borrowing to fund excess consumption, while aggravating the situation by exporting productive capacity overseas. We blew a credit bubble with "financial services", the most destructive, phony, illicit, and idiotic ponzi scheme ever foisted upon man by man. Credit was used as the basis for creating more credit. CREDIT IS NOT MONEY, as we are finding out now. Credit is PHONY money that functions like real money, temporarily. Bad money displaces good money.
In its purest form, money is a representation of value that will be accepted in exchange for something else of value. Genuine value cannot be printed or created out of thin air, but credit can, and this is a critical distinction. Ultimately, credit money must be redeemable for something of value. But credit money is too easy to create and too tempting to abuse. That abuse has a name: Fractional Reserve Banking, where $12 of credit are created out of thin air for each $1 of deposits. Is it any wonder that housing, college, etc costs are as high as they are?
As the markets discover, belatedly, that credit is NOT money, asset values plummet. In response, Central Banking and government authorities ignore the truth and seek to reignite credit: "Let's save the drowning man by creating more water and pouring it on him." What does this do to the drowning man? What does it do to the value of the water?
Where does one hide his stored value when this is happening right before one's eyes?
You are correct to point out that our currency doesn't suck as bad as anyone else's currency right now. But the fact remains that all currencies must ultimately be usable buy something real. And all currencies are being debased at alarming rates, right now. So here are the scenarios as I see them:
1. Reinflation succeeds. Economies recover. Money stocks have been approximately doubled, or worse. All these extra dollars start chasing the same pool of real resources and goods. Yikes!
2. Reinflation fails. Economies crumble. Looming sovereign debts go unpaid. Nations adopt "every man for himself" policies. Currencies collapse as national defaults ripple. (sound extreme? Trichet has already issued a call for a new Bretton Woods)
I never said we can run long on credit or that credit spending is a good thing for USA. I just wanted to assert the matter of fact that we're in a deflationary period because credit destruction = money destruction as far as the economy is concerned.
Thus, it's not entirely a sure bet that we're going to face hyperinflation or deflation. It depends if mountain of debt wins this economic battle, or the govt's massive inflation/bailout.
On the chance that this coin toss actually lands on the EDGE OF THE COIN, we may get a smooth recovery without either case; but I've pretty much dismissed that at this point. It'll take someone with almost prescient knowledge to achieve that, and we don't have someone with that much intelligence leading.
On the question of "Where does one hide his stored value when this is happening right before one's eyes?"
My bet is, a well diversified portfolio. Not the ones a stock analyst will recommend you, but the kind that looks like this:
1. Some farmland/seeds, even small farm animals
2. Some way of being off the grid, electrically, water wise and sewer wise
3. Some gold and guns, ammunition
4. Some stocks in companies that are deflation resistant: have no debt, ideally pharma or utilities.
5. Some stocks in companies that will benefit if hyperinflation occurs: companies that have a front-of-the-economy-t... EPS, low ideally-fixed-cost structure and a high long term debt load that's not maturing soon: Oil and Gas, Google, etc.
5. A little of each major currency or diff countries govt bonds
6. Go into training/certification to maintain your job competitiveness or switch industry.
But these will only work if you already have a significant sum of wealth to preserve; otherwise you're better off just staying "moderate" and not take extreme positions and ride out the whole thing.
He gave a great video interview available at:
jimrogers-investments....
Consider this: $800billion in fiscal stimulus (give or take) vs. 1.75trillion and counting in household balance sheet destruction, via the housing & equity market ...
The money being pumped into the system is having not the SLIGHTEST inflationary impact. Meanwhile the output gap is growing, producer pricing power decreasing, Oil & Commod prices dropping ..
Look, no one is going to spend any money!!!! Look at yourself... yr friends & family ... is there anyone who plans a non-essential purchase? hardly ...
Gold is going to get KILLED ....
Do any of you doubt this?
Do any of you doubt that they will move the decimal point if they have to?
You guys need to stop thinking inside the box. The box has been shredded. There is no box. Maybe Paulson and Bernanke and Trichet think they can inflate just enough to fight the deflation without causing rampant inflation; that certainly looks like the plan, but they are obviously making it up as they go. An inflationary plan to allow deflation to occur in a controlled and incremental manner.
Do any of you have confidence that they can do this? Do any of you believe that economies can be "managed" in such a manner, or successfully in any manner at all? Is anyone smart enough to consider all the potential downsides to all the actions that are being taken, and adequately account for them on-the-fly? Given the unprecedented scope of government actions, and the absolutely horrid economic fundamentals, can't you see where this ends?
"They are clearly indicating their intentions to do whatever it takes to zombify the banks and prevent insolvency from being declared. Suspending mark-to-market is another in-your-face telltale sign."
I would be more than happy if they're able to inflate us out of the problem, but I seriously doubt they can.
Now the other reason why you'll want to horde gold, beyond inflation, is a complete collapse of something big: Governments, Currency itself, Civilizations (I would question whether owning gold helps here) or the world banks.
Based on your assertion (that I agree) that it's very obvious that the world's government will not let it end where we'll have no banks (coordinated bailout, guarantees, sometimes even at the risk of the country's GDP itself) or no currency (coordinated interest lowering, coordinated money swaps, continued support for some kind of stable currency system); *PLUS* the result that we're looking at massive cutbacks/budget crunch/job reduction; i.e. all forms of deflation. I question WHY you think Gold will go up.
Unless your assertion fails, that the govt cannot maintain banks, currency or governments -- but the path to government failure isn't instant, it is paved with drastic steps like massive selling of all govt gold (happening now), outlawing PM trading and confiscation BEFORE the government will fail. What makes you think Gold ownership will survive that?
Plus, if the government ultimately fails, then police, military and law fails. The word "own" in the term "owning gold" may need to be enforced by your own private army. Who's going to respect your property rights?
I will ask you to consider the flaws in a true gold-based economy as well.
It's too inflexible. If everything has to have a fixed basis on a finite resource, it forces an "order of wealth" on nations and economies; and forces old ideas/economic-structu... to be cemented in place and be unable to change. It also encourages war (economic as well as physical) as opposed to economic cooperation.
Take an example, in a gold-backed world, if a nation owns 90% of the world's gold supply, what incentive does it have to lend or cooperate with the rest of the world who has 10%? The gain/loss risk is simply too great. It'll be best to sit around in their own 90% of gold and not budge in any economic discussion/negotiation...
In the real world, economic activity is too often a non-linear and non-associative activity. You don't always have gain/loss, you can often have gain/gain or sometimes loss/loss. Fixed-asset currencies instantly discount these other outcomes and everything is a gain/loss in that lens.
Also gold-backed economy isn't immune from the flaws of fiat either: What happens if we discover a rich gold vein? What happens if a space shuttle discover one of our planet's moon is full of gold and is mine-able? You're right back to fiat now, plus with a significant portion of global effort directed to gold mining activity (which is wasteful and doesn't help feed anyone)
I call it progress to go to fiat. Does it have flaws? Of course, as goldbugs will tell you what they are, but it's flexibility is also real.
In a fiat world, savings is not absolute (not cast in gold/weighed in gold); But think about it, so is the real world. I cannot claim my savings is sacred no matter what happens to the world's production capacity and economic situation. The ultimate indicator of my savings and wealth has to be balanced against what the rest of the world can produce/do and what resource we have.
In the scenario where I'm the nation with 90% savings ownership, you bet I am still incentivized to help my fellow nations because my savings can disappear due to default or inflation if my fellow 10% gets desperate enough. In this view, the rich is scared of the poor, and the poor is scared of the rich -- exactly how an economic cycle should be.
One can absolutely spend too much, but one can also save too much! The flexibility with fiat is to be able to adjust the system so that the it benefits savers or spenders AT THE RIGHT TIME and encourage the correct behavior for the good of the economy.
If we have too much savings, or if we have too much production; then we need to punish hoarding of money by debasing interest rate.
Alternatively, if we have too little savings, or if we have too little production, then we need to punish non-important expenditures by raising interest rate.
The system itself isn't broken; the important thing is who's at the helm.
After the world's economy recovers (and it will recover), we'll be studying the reason why our system is so flexible in schools in years to come.
I did not assert that. My assertion is that they will try to save the system. I happen to believe that they will fail, due to currency destruction. In fact I am convinced that, if they continue to pursue the dangerous path they are on, that there will be a "tipping point" event where the US dollar breaks down. I write about it elsewhere as "The Treasury Bond Apocalypse".
"If we have too much savings, or if we have too much production; then we need to punish hoarding of money by debasing interest rate.
Alternatively, if we have too little savings, or if we have too little production, then we need to punish non-important expenditures by raising interest rate.
The system itself isn't broken; the important thing is who's at the helm."
Wow. Who is "we"? Right now, the guys at the helm (the "we") is Goldman Sachs and JPMorgan and their cronies at the Fed (and overseas). Are you happy?
The problem with your system is that the "we" are totally corrupt; such power is to great to be left in the hands of any man or group of men. The bubble that is bursting now is the product of decades of abuse by the guys at the helm of your system. How can anyone make long-term investment decisions when there are a few people who can turn the economy on its ear with their power? How can you build a factory, contract for materials, hire and train crews, launch a marketing campaign? The risk isn't just market risk, it's also "regulatory risk" and "economic climate risk" that can come down on you like a sledgehammer, at a moment's notice and totally at the whim of some "guy at the helm". Screw that. No one either deserves or is capable of handling that kind of power.
If any nation much or most of the gold, that nation will still need to trade with other nations and honor convertibility. Other nations can still innovate and attract investment, so the 90% holder cannot simply rest on its gold stack.
The system itself IS broken; it is corrupted beyond repair. It is in the hands of the liars, cheats, and thieves who also bribe the government (former GS execs) to look the other way, and to use force to pillage the taxpayer to makeup their losses. This system must not be allowed to continue as it is, or in the hands of these people or people like them. "Financial Services" cannot exist as a business under a gold standard, as the money lends itself poorly to manipulation.
That will greatly increase commodity demand, and it is going to have to start soon. The Chinese will soon be buying what they can to 'sterilise' their US$ holdings while they are worth something.
Gold is being driven down to give the illusion the US$ is a safe place to park your wealth.
The banks are recapitalising by storing the 'bailout' funds and not trying to lend it to risky humans. At some point that cash will hit the streets. Look out !!!!
regards
The price went up during the deflation of the 30's, and the price will go up in the future for one reason. Gold is a store of value, and has been for thousands of years. Gold looks attractive relative to currencies and equities, due to massive fraud, manipulations, and various market interventions which confuse the markets.
I hope you don't believe that the dollar will continue getting stronger in the years to come! How will we service our trillions in debt? When we default, you would do well to own some gold!
Own some equities(some great deals out there now!), some cash, and some gold. You don't need to be able to exchange gold for goods directly. Someone will always be willing to pay cash for gold. The appeal lies in the idea that an ounce of gold will buy roughly the same amount of goods at any point in time, while the amount of cash needed varies greatly. And with a few small hiccups, the amount of cash needed to buy goods and services has always gone up.
You can't count on the dollar, you can't count on the markets, you can't count on your government, but gold will always be worth something.
If and only if banks start lending again (why would they when they can live off the interest of those government loan?) then would I even begin to worry about hyperinflation.
Conclusion: No lessons learnt. Wall Street is still full of talking heads. The sell-side is not worth a cup of coffee.
stockcharts.com/def/se...
It seems to be as ridiculous as every other, yes, even the ones you like. Given enough time, Wall Street would find a way to screw up gravity itself, just to prove they could.
Look back to Carter being elected in 1976. A democrat promoting 'change'. 7% 30-yr fixed mortgages when he was elected that were near 18% within just a few years. We inflated the living crud out of our economy, and despite HUGE interest rates, most real estate doubled in 4 years. Then again, so did everything else that was a commodity. I think we're on the verge of another similar era where we'll see another Democrat elected with the promise of 'change', and within the next two years inflation will be UNBELIEVABLE. I'm not promoting gold, but you can bet that it, along with oil and real estate and any other hard assets, will skyrocket.
All the mattress money out there will start hitting the system at some point. Look out.
1. People will be poor.
2. No place to go, nothing to buy, no work.
3. A can of tuna will be worth twice as much as gold.
4. The U.S. will adopt the canned Spam standard,
If all were experts, you'd be too busy spending your $$ to be posting opinions on here...and if u got $$ to pay for internet, get off for a couple months and invest in the "for sure thing". I'm off for something I can enjoy in ANY economy...a nice, cold beer! Cheers!!!!
Lawrence Sikarskie
Not true... I have seen offensive comments removed before. I have an undergraduate degree in Economics form UCLA, my graduate degree is in engineering, When I post things here they are my honest opinion about the plight of the global economy.
One only needs to hear or read the First Inaugural Address of FDR to understand very quickly that everything that is being done to the economies right now are doomed to failure.
Shilling markets and shoring up banks does not bring about renewed wealth, it places a yoke on the population for generations to come and the economies will still collapse.
I meant what I said... If you are hungry or thirsty a can of tuna is more valuable than gold and a bottle of water worth a million barrels of oil.
The fact is, some people do feel that gold and oil will increase, and I think they are correct. When? That's the only real question...
I heard that before. Circa 2004. Real estate: buy now or be priced out forever. Give me a break.
Do you guys even realize that you're just wishing and begging for yet another bubble? You disguise yourself in language of economic reformers, but in truth you just want the bubbles-R-us economy to rage on. You're just jealous you missed the last one and want the next to be in something you own.
The rest of us are for no more bubbles. Period.
Billions and billions are poured into these wars every day. So far, not helping America one bit.
What helped from WW2 was a lot of GI's coming home ready to make families, buy cars, dinette sets, lawn mowers, go to the movies, etc. The money spent for destructive purposes (beyond wages) really didn't do much for the economy. Like the pallets of money flown to Iraq. How will that help America?
In my opinion, what is happening to the commodity play is that hedge funds are facing big redemptions and are liquidating, but this will not go on forever. And what is the main tool that the US gov't has when it wants to get the country out of recession: lowering interest rates and printing money. They did it in the 70s and they will do it again.
You may be right that there will never be the industrial demand for commodities again that there was in the middle of this decade, but then again, think about this. Over time, populations increase, people all over the world demand more and more housing, transportation vehicles, electronic devices, food, etc etc. How is it that commodities like silver, copper, and oil will stay at current depressed levels?
don't hold your breath...
Who's to say that these levels are depressed considering we're still significantly higher than we were just a few years ago - keeping in mind the increases that have been made in efficiency in the past few years. If we can double energy efficiency, demand would have to more than double in order to justify higher prices.
As for the coin shortage, retail investors are buying them up like crazy, that's why there's a shortage. Retail investors were also buying up dotcoms at the height of that bubble. The only difference is that here the shortage is noticeable because its a physical asset. There is more than enough gold to make the coins, just coin production cannot keep up with the retail investors irrational exuberance. The fact that the U.S mint is advertising a lot now should also keep the conspiracy theorists busy. Is the government trying to dump their gold at high prices before it crashes and then buy it back cheaper?
So what else has happened in terms of big changes in energy? Nothing tangible. No new mega-oil discoveries like the North Sea discoveries of the late 1970's or the Saudi fields that came on line during the early 1980's. The only big fields that have been discovered are the Tupi ones in Brazil, and those are miles deep and 10 years into the future for development. They have also been cut off in their infancy by the price drop. There are the tar sands, but they will soon be shut down as well, because of the price drop.
Finally, there will be no incentive to create efficiencies in the current environment. Now you have stupid economists, who know next to nothing about energy, saying that Peak Oil was all a conspiracy by speculators. There will be no new investment in this critical industry, I fear, until it is too late.
Your comment about gold is also laughable. I have been using this period to increase some positions in major oil companies, and don't own any gold stocks or paper gold, but if anyone thinks gold is going to stay at its current depressed level in an environment when the Fed prints money and cuts rates, to infinitum, is fooling themselves. The Great Depression is not a good precedent for what is occuring now, since the dollar at the time was tied to the Gold standard, and that limited inflation and also limited growth as well. A better comparison is the 70s. Where we are right now in terms of the 70s is right at Carter, who caused the first huge devaluation of the dollar, and caused the huge rise in commodities prices that followed. In 1981, inflation was 13.5 percent. What cured that was Volker ramping up the fed rate to 20 percent, etc. Does anyone think that any Fed chairman today is going to take such drastic measures? Do you know how many people were put out of work when Volcker did that? And finally, how do you expect us to realistically pay off the national debt, unless the dollar is tremendously devalued in relation to other currencies?
That assumption is not credible on its face. At least one trillion more dollars need to be injected into the world financial system to replace lost capital. Another $5-$10 trillion in credit is being permanently withdrawn from world credit markets as de-leveraging continues -- and will do so for the foreseeable future. This absorption of liquidity to replace lost capital and the reduction in leverage will reduce the velocity of money to the point the current and potential future injections by the Fed and Treasury will not be inflationary.
Also, once the credit markets stabilize, all interest rates on T bills, short and long term, will rise, possibly dramatically, strengthening the dollar.
Bottom line: you can print as much money as you want and if it does not circulate, there is no inflationary impact and no impact on the dollar. And the capital injected into markets to date and the next trillion will simply replace lost capital and not go into circulation.
More importantly, it is not in the bank's interests not to circulate that money-- that is the way they make money-- by lending, and they cannot simply pay out dividends and interest payments forever, without generating income. If what the last poster said is true, namely that all of the dollars that have been generated by the stock sell offs and the printers going into overdrive, does not get circulated, then we are in for one doosy of a depression. THat said, what I am considering is only hypothetical. It defies basic economic principles for banks to withhold lending forever. It would be a suicide pact.
If they keep this up, I will tell you one industry that is going to have some bankruptcies, namely higher education. If students cannot get loans, and pretty quick, we are going to see the first time in American history since the Great Depression when a large number of private universities and colleges go out of business. Most people, for example, don't realize tha extremely well-known names like Notre Dame and Rutgers (which was private at the time) almost went bankrupt during the Great Depression and during the war that followed (when young men preferred to join the armed forces than go to ND). That was a time when students did not take out loans to go to college, but rather worked their way through or got financial help from the colleges themselves. If banks don't loosen up with the money for students, it won't be very long that the only private colleges left are the 3% that have enormous endowments. Those that rely on tuition are going to be toast.
thecomingdepression.bl...
The fact is, who cares what happens to the money being injected? This academic argument about "you can't make the banks lend" and "you can't make people borrow" can, might, and probably will be rendered academic by the ongoing printing. How?
The fact remains that you can't print capital. Trying to print capital debases all the real capital that currently remains. This fact remains true even if you are just trying to print new capital to replace capital that was recently lost to destruction. Understanding this fundamental fact is critical here. Printing new capital is the same as counterfeiting: it's not real money, doesn't represent anything real, and directly threatens the value of existing "good" money. Ultimately, the markets will recognize it as counterfeit and reject it.
The Fed can sanitize all it wants to. Newly printed capital isn't real. If it was, we could just print our way to prosperity. Need a new bridge? Just print up the money and buy materials and labor. Need to pay war reparations? Just print up the money and pay pay pay. What happens when the people you're buying materials from, or paying war reparations to, realize that the money you're paying them is just paper and isn't backed by anything? Or, if it is backed by your promise, when they realize you're a liar?
Keynesians don't respect money and that is why they imagine they can fake it. "Recapitalizing banks" with printed money is doomed to fail. It might seem to succeed for a time if done in a globally coordinated manner, but it is a setup for an even bigger collapse than we're facing now, if that's possible. Think about it in the extreme: if we can print our way to prosperity, why don't we just print money and give it away? We'll all be rich!
IT'S NOT REAL.
I really don't think most want to know.
Have you factored in that we have been played for a fool? We have been touted gold for over a year now constantly while the big hedgies empty their holdings or flat out short it.
Btw, on the physical delivery of gold. WHAT do you need it for? Seriously what would you do with a big ingot of gold sitting on your desk? What possible use is gold other thatn a hedge that already has taken a trimming. When you are done reading about all the late night infomercials selling you on Gold, just remember one thing, "Set it and forget it". Another famous infomercial that sold a ton of product.
As for oil, when market get out of whack as we have seen with softs, metals, energy, etc... Eventually everything gets rained in. When Forex sees action and volumes it never saw in its history, especially when dealing with commodities that were really not that hot to begin with, and blow them up to all time proportions, there will be a reversal. This is the bursting of a commodity bubble.
in reference to the analysts read the single sentence at the beginning of the article "The analysts provided no timetable for their predictions." They will eventually be right. I guarantee you, EVENTUALLY
You speak of inflation, and monetary policy (weak dollar)
Inflation? What inflation? Inflation is largely a product of tight labor markets. The global availability of cheap labor, coupled with the requisite job losses of recession; and 'jobless recovery' period make inflation a non issue.
Although the U.S. is burdened with enormous piles of debt that would theoretically precipitate a plunging dollar; investors have clung to dollar denominated assets amidst this panic. The U.S. dollar will continue to experience a renewed vigor.
Not to mention that the supply-demand equation is out of whack, further pressuring prices with over supply and falling demand.
The commodity boom is over, my friend.
'in reference to the analysts read the single sentence at the beginning of the article "The analysts provided no timetable for their predictions." They will eventually be right. I guarantee you, EVENTUALLY'
www.stockresearchporta...-greenspan’s-failure-t...
Banksters continue to spew their Extremist-Capitalist lies in earnest while diligently fleecing those they hold in utter contempt.
Anything that is paper is worthless. Comex paper is worthless. Federal Reserve Notes are worthless. Anyone who thinks otherwise is guilty of faith based economics.
No matter your opinion we will soon learn the truth. Meanwhile, remember well Kenny Boy Lay and his lies.
“Since mid-summer, Fed credit appears to have ballooned greatly, and that’s behind the upward pressure in the consumer price index. The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices. But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided. Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity. They’re not even considering inflation.”
This is the story:
If the Fed can print money fast enough and have it reach the pockets of main street at the same rate that money is vaporizing from the economy due to debt collision, then we have equilibrium and nothing happens.
If printing money to reach pockets is slower than evaporation, we get depression; how much less determines how deep depression.
If printing money to reach pockets is somehow greater than evaporation, we get inflation; how much inflation determine how hyper it is.
IMHO, too many unknowns for anyone to make a reliable prediction. Plus, the whole situation is dynamic and not static: we can reach depression side for a few months, the reach inflation side for a few months, then equilibrium and back to depression, etc.
To predict HYPERINFLATION or GD is to know in advance whether the force of debt is greater than the force of printing press and cash distribution network.
Also remember, it is possible that we get neither GD or HYPER.
If the conveyor belt wins, we go backward towards deflation.
If the wheel wins but with too much momentum, we fly forward towards hyperinflation.
If the wheel just barely balances out the conveyor, we'll get equilibrium or slow growth.
Rah rah rah, sis boom bah! We're number one, we're number one, we're number one, go team go!
Many people are in fact going about their daily lives.
One of those said recently that there is nothing she can do about it either way so why should she worry. I'm confident I'll be getting a call from her when it finally does collapse. I will give her and her family refuge when the time comes IF they are able to get out.
Imagine that, a socialist like myself giving refuge to an acolyte of Extremist-Capitalist dogma!
What is the world coming to?
"If the Fed can print money fast enough and have it reach the pockets of main street at the same rate that money is vaporizing from the economy due to debt collision, then we have equilibrium and nothing happens."
This is a ridiculous statement that totally ignores the way money and leverage work. It completely ignores the realities of what capital is; money can be printed, but capital cannot. Trying to print capital debases all the money that currently exists and dilutes capital.
You are the one who posted this gem earlier in this thread: "When someone borrows $100 and spends it, that $100 is no different that if someone earns $100 and spends it."
Maybe you should get a job at the Federal Reserve where they have the same understanding of money that you do.
To me, unless there's some missing variable (or twenty), it's not *if* inflation, but when. Could be a long time before we see these massive losses 're-appear' as market recovery, but didn't the S&P pick up a large amount of it's previous high within a year of the 2002 dump?
comments encouraged
--ikk
The real price of oil lies somewhere around $80-85 dollars and that should be the centre of oscillation for some time. The price ballooned to $147 when pension funds and other institutional investors - hungry for diversification and higher returns - started pumping money into commodity markets since 2006-07. The price is around $65 now as much of this money has been pulled out. I personally think too much speculation in essential commodites such as oil should not be allowed.
Regarding fundamentals, the price of drilling oil is around $55 and price of exploration is around $65-70. There is no reason for the prices to be significantly higher than these levels. ie why price of $80-85 seems right to me.
All this research by failed banks and brokers is motivated by vested interests. It is high time that we stopped paying attention to these research guys and do some of our own thinking. These guys are a joke - could not even manage their own house and are producing dubious quality research. I would love to see what numbers these guys use to explain $225 per barrel figure.
Having said all of the above, the opinion does not take into account the imminent and drastic fall in dollar which will almost surely happen at some point in the future. So for example if the dollar devalues to half, I would not be surprised at a $150 a barrel price. Even without the fall in Dollar, excessive speculation may again drive the prices up. However, without the support of a weak dollar, that price will be unstable and short lived.
Some people do deserve a job at the Fed.
I bet Bush and his advisors have similar understnading.
Printing money to increase capital. This comment made my day.
"when the sideline cash jumps back into these markets (houses/stocks) become valuable again, won't the printed money still be out there?"
The answer is maybe.
Currently, there are a lot of bad debt on the books of pretty much everybody; banks, companies, funds. Think of these as negative money, or anti-money. You may ask how did we get these negative money: the answer is that these are money already spent in the last 5 yrs. Already used to build something or purchase something. That thing is probably some home or car or merchandise. So the money is already spent, but the debt are unpayable and is acting as a drag on the economy.
When the fed is pumping cash into the system, what they're doing is trying to reset the equation, so that these bad debts don't end up clogging the system. Another way of thinking about the same thing, is that the Fed is assuming the debt on behalf of these bad books, not all of it, but enough of it that the system itself still works.
In that perspective, it's not like there's a lot of extra cash sitting around, printed by the Fed. Instead, the books were negative to begin with, so we're adding enough so that they're not so negative anymore.
Don't forget, there is a LOT of debt out there, far greater than what the Fed can reasonable do, but what they're trying to achieve is to prevent the complete seizure of the system, not total destruction of the debts.
Thus, only if they did overshoot it, would there really be extra cash to cause inflation. There's a time lag effect, as well as a market psychology effect too, so it is possible to overshoot it, but to claim that we'll DEFINITELY go into hyper mode ignores the fact of the real size of the debt mountain, as well as the Fed's eventual reversal of it's monetary policy into tightening mode.
Another way to think about the same thing:
Pretend we *DON'T* have a crisis. Everything is net "neutral" in terms of economy. Now pretend the fed is doing exactly what it is doing now.
Of course we'll put in so much money into the system, that inflation will go through the roof, market interest rates will fly.
Then the Fed will be forced to "rein in" the crazy rates/inflation and raise Fed interest rate. The net effect is to drain the money from the economy.
Now imagine the two steps are done in reverse. (A)Draining money first, then (B) pumping money later... In that scenario:
You can't claim that the pumping of the money in step (B) itself is inflationary. The bigger picture is that the pumping of money is merely offsetting the over-drain in step A. Precisely because there's a time-delay depending on how things act, it is possible for B to catch up and cancel out the deflation before it has a chance to make a lasting effect on the economy. In a perfect scenario, the world would know no better and only experience minute fluctuations, but that never happens.
Now imagine what's "draining" the money from the economy was a prior interest-rate mistake, but actually what's happening today, where huge mountains of debts are being destroyed due to a different factor. Thus, you get into today's scenario.
So to claim that there will be a mountain of cash sitting around to inflate Gold/etc again, is not understanding how much bad debt we actually are dealing with that in the first place.
Japan tried to print like crazy, *WAYYY MORE* than what the Fed is doing today, several *TIMES* their GDP, and they weren't able to stop deflation that is still occurring 18 years into their deflation.
"This is a ridiculous statement that totally ignores the way money and leverage work. It completely ignores the realities of what capital is; money can be printed, but capital cannot. Trying to print capital debases all the money that currently exists and dilutes capital."
The Fed's goal is price stability, not stability of the value of savings or the value of capital.
You need to understand that these action is merely to help the market get over it's extreme movements.
Fed's action today is NOT the cause of the mess we're in right now, the inconsiderate buildup of debt was the cause, not Fed's action today. The Fed is fighting it.
If you're angry because what the Fed is doing will erode the value of capital or the value of savings, I got news for you: Your "value of capital" was already toast anyway when the world went into over-spending mode the last decade.
You think your savings means anything when it has already been lent out, spent, and is now sitting around as a bad debt on some books?
If the banks are forced to *RECOGNIZE* everything instantly, say good bye to your so called "capital" and "savings". You/your company/your paycheck will go to a bank and get NOTHING out. If this point hasn't hit home with you with so many bank failures, fund failures and emergency withdrawals, queues at banks, etc -- NOTHING WILL.
Besides, what the Fed is doing is minuscule compared to what's happening in real life with the debt mountains. Picture putting out a fire with a cup. It has very limited leverage.
The danger/anger/fear shouldn't be that we'll get massive inflation, it should be that the Fed will lose this fight and we get massive DEFLATION.
The money's that seems to be "pumped" into the system cannot be viewed independently. It would seem huge. But looked collectively at the debts we're talking about, then it would seem small/minuscule.
I would be too happy if the Fed can actually trigger inflation, that would actually signal they're winning, but all their kitchen-sink action only revealed how much bigger the fires are and the market still go down.
Dow was 14000 in beginning of the year, it's now 8000 -- and the crisis wasn't a DOW over valuation to begin with, it was houses.
Another way of saying this in case you didn't understand:
"Trying to print capital debases all the money that currently exists and dilutes capital."
Capital was already destroyed during the bubble years. Money is in the process of vanishing because the debts have to be settled/recognized.
Fed did not destroy these. It's trying to spread out the pain so that it's not acutely on a few companies and instantaneous. It will not be able to remove all pain, but if it can spread it out over years, and leave a system in pain but still functioning, then we have hope of recovering eventually.
The alternative is systemic failure and say bye bye to all your precious capital anyway.
"You are the one who posted this gem earlier in this thread: "When someone borrows $100 and spends it, that $100 is no different that if someone earns $100 and spends it.""
As far as the economy is concerned, it doesn't care. How much of the salary that was paid to you borrowed? Did you know? Does it even matter to you? How much of Walmart's INCOME is due to borrowed sources? Does it even matter at checkout cashier to Walmart?
Debts and leverage affect FUTURE money availability, not when they're being created.
"Now imagine what's "draining" the money from the economy *WASN'T* a prior interest-rate mistake, but actually what's happening today"
in my reply to Iknoknot.