The End of Gold, Part Two 62 comments
David Bailey
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As I wrote in my previous posting, I am confident that unless gold can crack the anti-bubble it seems to be in, the 8-year bull run is over and much-lower prices are in store. While the most important dynamic in gold's fall is probably the bursting of the commodities bubble, deflation is the gold-killing fundamental behind the trend.
I have read that the risk of stagflation is greater than deflation. I have also read a lot of reasoning along these lines: “what the government has done already will cause inflation and if deflation gets really strong, the government will do more of it so that will cause inflation.” In other words, even deflation is inflationary?
First, we were in stagflation as recently as this summer and we have fallen through it into deflation. The recession started in the winter of ’07 and in the summer of ’08 oil was $140 a barrel, most commodities were through the roof (including gold) and the dollar was at or near all-time lows against almost all major currencies. Recession plus a bubble in prices equals stagflation.
Second, the Fed's money injections have failed to bring back lending. Most importantly, consumer credit growth is negative, as you can see in the latest Fed data. With consumer spending representing about 70% of GDP and a significant portion of that spending done on credit, the risk of inflationary spending seems remote, considering that, according to influential analyst Meredith Whitney “we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."
And we are unlikely to find ramped-up spending from industry. Consider the following, from the GE conference call as reported here:
Deflation is out there and we’re seeing that in our raw material purchases.
Deflation is accelerating and we’ve got fewer people and less spending.
When we came into the fourth quarter ’08 businesses [were] looking at a little bit of inflation. We’ve been working with the sourcing teams to actually turn that into deflation.
[and]
… Our loss estimate of $10 billion has an average assumption of over 9% unemployment.
9% unemployment? We’ll be lucky if we don’t see 15%. 12% is a mortal lock in my view. And as Ms. Whitney noted in the article I cite above, the credit card is the second key source of consumer liquidity, the first being jobs. And the issue of jobs – unemployment – is the key fundamental in the deflation scenario.
Take a commenter on my last posting. He was objecting to my line: “cowardly business ‘leaders’ throw layoff gasoline on the deflation fire.” Let’s call him “Joe The Businessman”:
Businesses are not laying people off because they have no guts. They are laying people off because they either do so or they fail! Businesses do not want to get rid of trained employees. They have to cut cost! Where do they go? My business is short of cash. I have not been able to get a loan. Production loan has expired. My current choice. Cut cost or fold! What will I do? Guess. I may have no choice.
Joe is not alone in this “no choice” thinking. A friend of mine has been a management consultant with some of America’s top firms, advising some of the biggest corporations in the world. His expertise is finance. When I asked him whether CEOs and managements couldn’t be persuaded to consider the macroeconomic implications of laying off large percentages of their workforce at exactly the same time so many other corporations were doing the same he said: “No. There’s really no mechanism for taking in external considerations like that.” Was there no recognition of the effect of *collective* action? Didn’t businesses understand that deflation is economic mass suicide? He said: “What do you want from me? That’s just the way it is.”
“Have no choice.”
“Just the way it is.”
Does America now have a “can't do” attitude? When American business people – the most powerful economic actors in human history – think themselves powerless, there is a serious problem. Specifically, deflation. More specifically, about 90,000 layoffs at major companies announced just this week. Deflationary behavior has not only set in, it has been firmly embraced by American business. Think of it this way: the financial stuff is the technical, but unemployment is the fundamental valuation metric when it comes to deflation. Our business leaders have already decided we are going to see massive unemployment. As for the American financial community – do I really even have to get into that? Those fraudsters aren’t even trying to do business. They are spending all their time trying to hide from the results of their misdeeds and to drag as much taxpayer money as possible down into the deflationary sinkhole they have dug for us all.
Nobody makes much money in a deflation. It’s that simple and that grim. With a negative mentality firmly in control of the American economy, the only way you make a good profit is to find something to go short that deflation hasn’t hit yet - like gold.
Could gold see a second bubble? Sure. Would I bet on it? No.
What do you want from me? That’s just the way it is.
Disclosure: no positions
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This article has 62 comments:
Perhaps you have not noticed that in just about every currency except the dollar gold is making new all time highs just about every day. And even demonminated in dollar it is seeing a significant rise. Where is the anti-bubble? Relative to just about everything else the gold appears to be doing exceptionally well.
If I search the site will I find you calling a market bottom as well?
Disclosure: no positions
Hey Dave, why don't you put your money where your mouth is?
Both deflation & inflation threats are real. It is economic destruction vs money printing. We are living in a warped world, in which actions of central banks are causing great confusion to our sense of wealth while asset prices are destroyed.
What else would we want to hold if it is not tangible? Gold is tangible. It is real money, pure without stains.
On Feb 01 12:10 PM aw4000 wrote:
> The author needs his head examined!
All statistics show that the money supply growth remains high and is accelerating. Velocity of money has slowed as consumers and business and banks save cash out of fear, but this can quickly change if confidence is lost in banks and/or a currency. Hyperinflation is a potential result
Anyone trying to go long without a gigantic stop loss looses at least part of his position before it moves higher. Weak longs are washed away therefore limiting supply higher up. Since it is hard to make money as a leveraged bet on gold usually this means it is not over yet. I also like the monthly charts.
I do not pretend I know why markets move where they move and will therefore choose not to "analyse" further. KISS (keep it simple stupid) shows it made a brake and has room to the uspide on a daily close above 935.
Gold has a split personality: commodity and currency of last resort. As a simple commodity, people buy gold and make jewelry out of it. Gold has very little industrial utility, especially at these prices.
However, gold is also a "monetary instrument", that is it is a repository of value. This is why most of of it is held in vaults as bullion.
When times are good, gold behaves like the commodity, because the need for a safe haven is not there: paper money is trusted and works just fine. The gold sits in the vaults collecting dust not doing much of anything.
But when times are bad enough that people fear all the paper currencies value, then there is a rush to gold. There is so little gold available for investment purposes, that any significant rush would send the price through the roof. If every body in the world tried to put 5% of their portfolio into gold, that would require many times the gold extant in the world today. Since most of it is held by central banks, there would a many fold shortfall for retail investors. Not to mention existing investors would very little incentive to sell their stake.
At the moment the dollar is enjoying a safe haven status: the world still thinks our paper money is actually worth something. However, the other currencies in the world, sterling euro etc. are falling dramatically. Gold has hit record after record in the last few months denominated in these other currencies. We are surprisingly close to a moment when, if the dollar falters, there is nothing left but gold.
Gold is in what you call an anti-bubble, because the world hasn't given up on paper yet. At the same time many investors need cash, and gold is one of the only things that has gone up in the last 8 years. Desparate investors are selling stakes to fend off creditors, redemptions and to stay liquid.
I hold a lot more dollars than gold, mostly in real estate, so I'm not happy about gold going through the roof.
The article is here:
www.itulip.com/forums/...
I am skeptical that we ALWAYS hear of massive layoffs as a reflexive move by these corporations who have been slowly divesting themselves of employer responsibility. As a business person -perhaps I may have to cut my profit margin, reduce my salry-but to drastically reduce my payroll and contniue to pay myself well- is not good practice in the long term -especially if I wish to build a business.
Given that our world financial system is in ruins, and more real destruction of the main street economy is ahead, I am confused as to why gold hasn't skyrocketed already. I know relative to everything else, gold has retained it's value which is quite an accomplishment in this environment. But if investors know this, why hasn't everyone moved into gold?
I believe that the central banks are keeping the price of gold down to retain the viability of the financial system. After all, if everyone buys physical gold and buries it in their backyard, can you imagine the sucking sound you would hear on Wall Street as investors essentially removed their money to bury it in the back yard?
In a time of crisis, gold may be the best investment for the individual but the worst investment for the economy.
My personal opinion is that one day we will wake up and the banks will be closed for an undetermined amount of time. This will probably be brought on by a huge wave of losses from insurance companies and banks that will trigger more derivative losses, which will create a massive run on the banks. So they will be closed and investors will not have the ability to access their funds.
That's the day I will kick myself for not having stocked up on canned beans and silver coins.
Let's all hope that I am wrong!!
The point of my missive was to emphasize the fact that while inflationary monetary and fiscal policies are being pursued with amazing, record-breaking vigor, a deflationary mindset has nonetheless taken hold.
We are in a battle. Strangely, the usually anti-government goldbugs are betting that the government will succeed in its quest to create inflation. I am not so hopeful. The private sector is a LOT bigger than the public sector and in the private sector, deflationary behavior and tendencies are now the rule.
But in the gold market, this is crunch time. I wrote this exactly because gold is pushing against those "breakout" price levels - exactly because the market is deciding whether these spikes in the gold price are a top or a breakout. The shorts are filled with fear. The longs have all the popular arguments on their side (if not the actual fundamentals). A bubble in gold is a distinct possibility, I just don't think the liquidity is out there to make it happen. All you hear about the gold market comes from perma-bulls, so I think it's important for people to hear another view.
While I would agree that zero interest rates and the massive government spending, lending and huge slush funds for the banks crippled by their own fraudulent lending have put dollar hyperinflation "on the table" as a real-but-extremely-rem... possibility, the idea that gold will somehow replace legal/accounting "fiat" money is, I think, so wrong that it's hard to deal with as a serious idea.
Nevertheless, I will deal with it in my final posting.
Good luck, short and long.
In my view, fiat money is *always* inflationary - and for a very good, sound, economic reason. More on that my next post.
Again, good luck.
Name me one other form of currency/hedge/investm... that has been this well received for over 5,000 years, that is still with us today and has no debt or liability attached to it's A$$
news.yahoo.com/s/ap/20...
As Buffett said ( he lost 40% this year but he is not stupid ) that he don't invest in Gold as it has no utility, it doesn't generate income in the same way as Coca-Cola, Hershey's, Wrigley's or insurance policy, he said that people are crazy who digg it underground in Africa in some dirt then bring it to Europe and US and store it in underground again, I also agree with him, Gold is industrial matal and jewelry, it is same as Steel, Nickel or Lead and it also can crash.
I don't say Gold is not nice, it is very nice and precious when in jewelry but it is not immune from declining 80% same as Nickel or other bubble assets.Everything is good when price is right, I am proud of US and especially COMEX that they allow me to sell it short from Frankfurt in Germany, I havn't even been to USA and don't want to go there ever, but GOD BLESS AMERICAN CAPITALISM for allowing foreigners to sell it short.Same I made few hundred thousans $ selling Dow Jones futures not even holding ever 1 share of any DJIA stock.
I love America, God bless you!
The reason the business community is so negative is that we have the far-left Democrat party running the Executive and Legislative branches. Our President is a clueless empty suit who is ignorant of economics and business. This is a man who favors increasing corporate and individual income taxes, taxing CO2 emissions, windpower and surrender in the war on terror. Hard to believe, but BO is going to be worse than Bubba or Jimmah.
This is why I'm in gold and USD and am looking to establish puts on SPY, at least until the recovery begins, sometime in 2011. Then I'm going into industrial commodities and borrowing as much USD as I can, since I will be able to pay it back in inflation discounted dollars.
1. Hyper gold inflation
Who would turn the world from deflation to inflation? Gold!
vicktorcapitalist.com/.../
2. Hyper gold standard
Peg gold at US$10,000 per ounce - the ultimate solution to this crisis
vicktorcapitalist.com/.../
It may well go higher yet under the current hysteria, but it will surely drop, as it always dose. Gold is seen as a hedge to inflation, yet no asset/investment is inflating!, Every asset other than gold is deflating, if this is not a clue then what is?
On Feb 01 06:05 PM psheridan2 wrote:
> Does it bother anyone that everybody on this site is short treasuries
> and long gold? When was the last time everybody was right?
????
Does that include the one asking you to supersize his fries?
If investors dont buy gold , what are their alternatives?
More t-bonds? real estate? GE ?
Gold buying thrives in an environment of uncertainty.
Heard all the stories of people not even willing to put their money in banks?
That's evidence of uncertainty.
Regardless of the inflation / deflation argument -
Eventually , unavoidable inflation WILL propel gold up to new extremes -
But for now , while still in the "pump-priming" stage ,
That which will cause gold to rise to reasonably higher levels is the uncertainty and fear -
Mainstream investors en masse putting , for the first time , "just a little bit" of their portfolio into gold ,
Coupled with the meager supply available to accomodate that huge cumulative increase in investment demand .
It is true that this article is timely -
Gold is banging against its last downtrendline from last summer's alltime high right now ,
And if it doesn't break above that line quickly, then shorting /long selling at this trendline , coupled with investors waiting on the sidelines for a breakout before entering (wise move) could result in a test of gold's uptrending channel's lower channel line.
If that occurs , THAT is the ultimate entry point (or if it breaks out to the upside now ).
Many tech factors culminate in the mid 800's , so any consideration of gold dropping substantially would be premature unless that area is breached to the downside.
Btw, I really liked the comments that Mr Freddo made and perhaps the best understanding we can obtain from the paradox that gold seems to exist simultaneously in both a bull and a bear market is his comment that "In time of crisis, gold may be the best investment for the individual but the worst investment for the economy".
Personally I don't know what gold is going to do. I sell some puts on gold stocks, if exercised I sell the calls, watch the VIX and technicals, try to make a few bucks both ways. S
On Feb 01 12:26 PM silverwood wrote:
> After reading this drivel I came across the clincher....
>
> Disclosure: no positions
>
> Hey Dave, why don't you put your money where your mouth is?
(1) There is increasing demand for gold in places other than the US; namely, gold is becoming very popular in India and Russia. The problem here is that even if deflation persists in the US, inflation fears are already rampant in other parts of the globe. If people are buying physical gold, prices are going to go up one way or another.
(2) Gold fared well during the Depression despite deflation. This is likely because gold is a "safe haven" investment. As fear sets in, people flock to gold because its tendency to act as a store of value.
(3) The author greatly underestimates the impact of massive Federal spending. TARP was passed not all that terribly long ago and most of the banks haven't increased their lending. All the same, the Feds keep throwing more money into the system. It's not "moving around" so to speak, but it's there. Also consider the "stimulus bill" and additional actions wil likely end up having a pricetag in the trillions. The impact of this will not be felt immediately, but it will be felt eventually.
(4) Statistics suggests that people are saving right now. This means there is money in the system that is simply not moving. Once that money does start moving, watch out!
(5) The author mentions commodities and seems to assign blame for falling prices on deflationary pressures, but completely ignores the boom-bust cycle typical in commodities. To some extent, "deflation" is a result of this cycle. However, as more companies fall by the wayside and supply is lowered, there will be upward pressure on commodity prices.
I'm certainly seeing a lot more gold talk from the mainstream punditry. This is not a coincidence.
When the dollar crashes against other major currencies then Gold will appreciate in dollar terms. Everything will appreciate in dollar terms. You will get inflation because everything you import will be more expensive. It will, however, only turn to hyper-inflation if Americans have the discipline not to compensate for their loss of living standards. Can you I see that happening? ROTFLOL
It will, however, only turn to hyper-inflation if Americans don't have the discipline not to compensate for their loss
of living standards.
On Feb 02 02:29 PM Dave Wrixon wrote:
> Gold is bound to spike in dollar terms because the dollar is about
> to go down the toilet. The so called flight to quality is the biggest
> swarming of lemmings I have ever witnessed.
>
> When the dollar crashes against other major currencies then Gold
> will appreciate in dollar terms. Everything will appreciate in dollar
> terms. You will get inflation because everything you import will
> be more expensive. It will, however, only turn to hyper-inflation
> if Americans have the discipline not to compensate for their loss
> of living standards. Can you I see that happening? ROTFLOL
So just like a tapped out consumer who can no longer support the economy by borrowing and spending more money, small-medium business cannot support the economy by hiring or keeping labor we don't need. We are not 'too big to fail'. When our money runs out we're out of business. "We have no choice."
What a golden opportunity to short gold at these levels. Reading the comments here, the flaming bullish arguments for inflation persist in complete disregard of mountains of evidence to the contrary. Debt is defaulting at an alarming rate, asset prices are trending down, in fact, tanking (except the intentional bubble in Treasuries that won't last) and income is getting trounced. Please remember that massive "printing" money was also done by credit card companies; any major store was a money printing machine. This is over and the government will never be able to keep up with the destruction of insupportable debt through default.
It is also interesting that the great depression saw huge increase in the monetary base; a lot of good that did. They couldn't catch deflation for the same reasons.
There appears to be more confidence in gold than any world currency.
Wake up !
Gold is simply viewed as being worth more then the " SPOT" price and much more safe than any printed currency.
A fool & his gold will soon be parted!!!
Are you kidding?!
Worse comes to worse, the Fed will spike interest rates to compensate (How do 18% interest rates strike you? Paul Volcker broke the back of inflation in 1982 by hiking rates to Civil War-era levels.)
Those of us of a certain age been down this road before.
Last time I checked there is record demand for gold as a currency not a commodity as well as declining production which will keep declining.
There is a serious lack of confidence in paper currencies world wide. This will only get worse as the recession deepens. Protect yourself while you still can at a reasonable price or take this authors advise and prepare to be decimated by what's to come.
1) De-leveraging of commodities.
2) No signals of global inflation, yet.
Both forces are about to disappear, and then the other forces that cause gold prices to skyrocket will dominate the market:
1) Dollar lower vs other currencies
2) Global inflation up
3) Demand up vs supply down
4) Panic short covering
The only thing I haven't figured out is why something is telling me it is better to hold the metal than an electronic memo saying I have the rights to hold the metal. Could it be that the next MADOFF scandal will be in gold, and that folks who thought they were buying gold were actually victims of the biggest PONZI scheme ever, 1000 times bigger than Bernie Madoff? If that happened, talk about panic. You ain't seen nothing yet. Could this be why Bernie has that smirk on his face? What is his connection to gold? Maybe this is the biggest factor in why gold prices have not yet skyrocketted?
I hope I am wrong about the size of the gold PONZI scheme, but even if it is only 2x Bernie, it will cause a panic.
The week by week gold price bounces up and down, but I don't let it worry me. The fundamentals are on my side. I can't say that for fools that buy 10 year Treasury bonds with less than 3% interest.
articles.moneycentral....
He explains globalization's effect on inflation. Globalization is not the trend these days ,protectionism is.
I'm buying gold and gold miners, and will continue dollar-cost-averaging in. For me, it's a crucial hedge against a lot of risks that exist.
Don't tell me otherwise.