Enlightening the Gold Bugs 77 comments
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Every once in while, I try to enlighten the gold bugs. It's a process I relish with as much joy as trying to explain to my daughter there is no Santa Claus, after she learns from her classmates she has been duped. The markets by their nature are full of people with less than perfect or imperfect information. And the beauty of this conundrum, we all assume that it's the other party being duped.
This by no means is scientific or deeply analytical, but the most prevalent opinion about the direction of a market is often wrong. But momentum riding is a very profitable trade, as long as you find a greater fool. It has become the single most popular belief that the dollar will decline in value significantly in 2009. It's absolutely mainstream like peak oil, the new technology paradigm, the great BRIC society, and a host of other supertrends. The problem with the dollar argument is the dollar is rising despite the assumed quantitative easing of the federal reserve. The dollar is gaining strength day by day, and gold bugs continue to trumpet the collapse of the fiat.
The gold bugs continue to forecast runaway inflation, but refuse to notice that EVERYTHING we purchase is falling in dollar terms. Where's the $4 a gallon gas? Where's $4 a pound copper? Or what about $2000+ an ounce platinum? What's the price of your home? Do you think the gold bugs can clean there rose colored glasses long enough to see the FACTS? Gold bugs are the clandestine clan of legend, betting the end of the world's financial systems, while ignoring the falling prices of other hard assets. Relative to other hard assets, gold is 30-50% overvalued.
Gold bugs always say look at history, so let's take a look. From 1833-1931 gold sold for 20 bucks an ounce. In 1932 gold fell to $17 an ounce, this was the middle of the Great Depression. Finally, FDR devalued the currency by fixing gold at $35 an ounce. If FDR had not FIXED the price of gold, who knows if the downtrend started in 1932 would have finished. For thirty plus years gold was fixed at roughly $35 an ounce until Bretton Woods. Since then, gold has exploded, at the pace of 30X your money. So price stability in gold has been the norm until the last 35 years. The gold market is indeed manipulate, but contrary to what the bugs assume, the manipulation is causing a bubble in the price of gold. (See the Hunt Brothers.)
The dollar is beginning a multi-decade run, in my opinion, and I promise I'm the only one that will say that publicly. But the truth is the price of the dollar and most commodities (ex gold) is telling is that the smart money has exited the building. Deflation is on a tear, and I mean an absolute tear. And gold bugs have so much faith in the Fed to create inflation, the same Fed that many believe are incapable of finding the opening of a paper bag. Bernanke (aka Helicopter Ben) has stated he is surprised by the fact deflation exists in a fiat system. Did he say surprised? Yes, and I think a lot of people are going to be surprised.
I'll ask a question: What was the inflation rate during the implementation of the New Deal? What was the inflation rate during WW II? Many pundits believe that the Obama administration will be unleashing hyperinflation, but at least wait until prices increase before you trumpet your hyperinflation paranoia. Cash is king .. there's a reason that phrase exists. Deflation is more the norm than inflation, it's just we ALL are experts on inflation, so we talk our book.
I'll ask a simple question: Is it widely believed we have exited the bubble generation? Is it possible that gold is the last bubble to pop? You can believe central bankers won't allow deflation, but do so at your own peril. Or what if deflation is inevitable despite the actions of the Fed? Treasuries are screaming cash is king, and gold is screaming inflation, one of these two markets is wrong. If you look at commodities, gold is the outlier. Anyone want to buy UUP?
Disclosure: Long cash, looking to short GLD or buy puts on GLD, no position UUP.
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"This by no means is scientific or deeply analytical"
=> you got that right
"dollar is beginning a multi-decade run"
=> ROFLMAO
"Relative to other hard assets, gold is 30-50% overvalued"
=> so gold should be between $420 and $600 right now, okaaaay! I guess you'll be shorting it then, hmmmmm
"Is it possible that gold is the last bubble to pop?"
=> In another decade, maybe
Looks ok to me.... that's the bottom line.....
jjd
1) a nuclear armed Iran on is the way,
2) we already have a nuclear armed Pakistan and an angry nuclear India,
3) gold mine production falling in spite of higher prices,
4) gold bullion demand exploding all over the world and smelting operations unable to keep up with demand,
5) the Fed and all other world central banks promising to use all "tools" meaning it will print whatever cash is needed to restart the credit cycle,
In short, either the unprecedented cash printing works, and we get incredible levels of inflation, or it doesn't work, and we get an economy that is falling apart, where so many dollars, euros and pounds have already been printed that they still won't buy much in a depression-era economy. In either scenario, gold will be the best investment.
The author can keep his money in cash. Better that way. It will help keep the price of gold and silver down for now, so that wiser folks can buy for reasonable prices. By the time folks like this author turn away from the rear view mirror, to see what is happening in front of him, he is likely to crash. But, that is his choice, and, apparently, he is very determined to get that result.
The author seems adept at spotting bubbles. I wonder if he would recognize a dollar bubble if he saw one? Is that even possible? Or maybe dollars are one thing we can create in any quantity we want and without consequences. I would suggest a field trip to Zimbabwe. First thing to do would be to look up the price of gold in Zimbabwe Dollars.
Cash is king for now but goes bananas. Banana republic that is.
Gold is holding strong compared to other asset classes, but eventually will un-tie itself from arguable manipulation efforts.
One day, the rush will come and so much more, you'll be begging to convert your (possible) short position into long gold.
Wake up Mark...
Waiter! Another coffee for this Caffee guy please,
brgds.
A lot of these gold bugs think their shiny bits of metal will allow them to barter for food in some post-apocalyptic Mad Max world.
Gold was NEVER $17 per ounce in 1932. Prior to the gold confiscation in 1934 by the Roosevelt administration, the dollar was "good as gold." You could sell your gold to the government, and they would buy as much gold as you offered them, for $20.67 per troy ounce.
From 1929 - 1932, it is a well known historical fact that Americans were contemptuous of the dollar, and stricken with gold fever. They were feverishly turning in dollars for gold, at the rate of $20.67 per troy ounce, and putting the gold into their basements and safe deposit boxes.
The basic problem by 1933 was that the government had printed far more dollars in the 1920s than it had gold. So, the government had lied to the people. The dollar was never "good as gold". There wasn't enough gold in the federal treasury to meet the conversion demands. So, the first thing the government did was declare a moratorium on conversions to gold.
By 1932, the Treasury was begging to buy gold, but no one was selling to them. Everyone, including foreigners, were simply demanding gold for their dollars. To balance the loss of gold against the number of dollars outstanding, the Federal Reserve tried to reduce the dollar money supply from 1929 to 1933 by 1/3rd. That, according to Fed Chairman Ben Bernanke, was what launched a severe recession into a Great Depression.
By 1933, the U.S. Treasury was severely depleted of gold, and by 1934, the government forcibly confiscated the yellow metal from its citizens. People DID NOT voluntarily sell their gold back to the government. In short, there wouldn't have been a run on the U.S. gold reserves, in the early 1930s, if people were happy with the dollar. Yet, deflation was in full swing, and people were still contemptuous, because they no longer trusted the government, or the banks, just like today. They turned to gold, just like now.
There was tremendous demand for gold in 1932, and had the government not fixed the price at $20.67, it probably would have doubled or tripled or more from 1929 to 1934, in spite of the general condition of deflation in all other things. But, one thing is for sure, the revisionist history that is described in this author's commentary, NEVER HAPPENED. Gold never sold for $17.00 per ounce.
What I've learned from the author of the article, NG magazine is that man has just about stripped all of the GOLD from our earth...therefore within the next 20 years he explains, GOLD will deplete.
The writer here is spot on...take heed all goldbugs.
1. The money supply has grown in the last couple of years by leaps & bounds
2. The Fed has taken in toxic assets which it is shrouding in secrecy
3. The fiscal deficit will be close (or even over) $1 trillion
Given these destabilizing facts, I don't think it's imprudent to place one's wealth in something of REAL value. Historically, gold has been the paramount store of value. Accordingly, I don't think it's imprudent to buy gold and move out of the USD. I may be proven incorrect, but I doubt that anyone could argue that getting into gold is somehow negligent.
Look to the manipulators - support the dollar, keeping gold low, so their dollars can be used to buy gold cheap.
Well, duh, that says it all!!!
Supply and demand. 1.4 billion chinese, 1.1 billion Indians and 1 billion middle easterners now moving into the middle class. What's their favored metal for jewels again?
Let's keep adding. Gold is counted in dollars in world reserves. Any other metal do that?
In conclusion, what other item, besides healthcare, is really in such a good position today.