Decoding What Gold Is Telling Us 48 comments
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Well, gold bugs around the world have been having a good chuckle of late, as the market is re-affirming the often eccentric and practically religious views of gold bugs: gold is up over 11% for the year in US dollars, and up over 4% over just the past five trading days. Which begs the question: why? There are a few possible answers to this question:
1. Deflation. This crisis is global, and everyone is flying to safe stores of wealth. Over the big picture of human history, gold has served as the best store of wealth -- and thus gold is rising. In many ways this is the classic "gold is money" argument, one typically championed by Austrian economists. Robert Blumen has offered an excellent explanation of this argument.
2. Inflation. Gold is typically a hedge against inflation concerns, and as the US federal government continues to aggressively "stimulate" the economy, the rally in gold may be a reflection of increased concerns regarding inflation.
So which one is it?
In my opinion, both. With that said, I view inflation as the larger concern, as I have said many times before. If the environment were truly deflationary, Treasury bonds would be the true recipients of flight to quality, as well as dollar holdings in FDIC insured banks. Instead, 20+ year Treasury bonds have fallen by more than 13% thus far (as measured by TLT). Negative correlation between TLT and precious metals suggests inflation, not deflation. The chart below illustrates.
click to enlarge
Deflationists will point to the fact that the US dollar may be strengthening relative to other fiat currencies -- although this is not necessarily a reflection of deflation, as it could simply be interpreted as weakness of all global currencies, all of which are falling against gold. More relevant may be the rise in PPI and energy prices in January of 2009. While one month alone does not provide sufficient evidence for a substantive reversal in macroeconomic trends, it is not consistent with deflation, and may suggest that the Fed's inflationary actions in the second half of 2008 may be kicking in.
Conclusions for Trading
The recent activity in the market has led me to make the following revisions:
1. The forex market is increasingly a trader's environment, perhaps even a daytrader's environment.
2. Gold and silver may retrace, perhaps even by several hundred dollars, though I would view it as an opportunity to buy on dips. The global economy is getting worse and conditions are being aggravated by the actions of central bankers. As a result, the fundamental case for gold and silver will get stronger.
3. Counterparty risk is rising -- this strengthens the argument for increasing the physical delivery portion of one's precious metals portfolio.
4. Because of inflation concerns, my bias is against short positions in all asset classes. If I were a trader of stocks or commodities, I might look into shorting positions relative to a broader index (i.e. short a particular stock while going long the sector ETF, under the rationale that the stock will do worse than the entire sector).
5. Oil's behavior has been quite peculiar; I've yet to find a convincing explanation for why it's moving the way it is. As it escapes my fundamental analysis, and as I find it less appealing than currencies from a technical analysis perspective, I'll stay away from oil.
6. As gold becomes too expensive for many, silver will grow in appeal. And as silver fell more than gold during the second half of 2008, it may be set for a larger rally.
Disclosure: Long gold and silver.
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This article has 48 comments:
I'm up for the Chicago Tea Party in July. How about you guys?
Excellent thinking--something weird is happening. (We'll know all about it when someone Tells all in five years. (Or maybe not.))
Everytime CNBC get's several on the screen, talking over each other,
I mute or get out.
1) Allow everyone in the country to refinance an existing mortgage at 3%. This would put an enormous amount of cash in everyone's hands.
2) Only those who filed an honest financial statement when they originally applied for thier mortgage would qualify.
3) Push out amortizations to 40 years for those that are underwater.
For god's sake, don't allow judges to redo contracts. If this happens, every honest mortgage applicant in the future will pay a "redo" premium.
Then there's silver. SLW was just upgraded by BMO, which downgraded the stock in November. I made some money by buying more recently at a ridiculous bottom. Silver is a buy, though it's an erratic metal. I just listened to a David Morgan piece. In the Middle Ages silver, adjusted for inflation, was something like $1400 the ounce. I don't think we can expect that right away (or ever excepting the hyperinflation), but silver is nice and silver eagles will be extraordinary in the long run. Morgan, by the way, told people to buy silver when it must have been around $4.50. Nice call.
I like Rick Santelli. My only objection to his rant is that he didn't rant against the thieving Wall Street firms that caused the collapse and have gotten the vast bulk of the money. Why give these irresponsible, criminal rats a pass?
SELL
bad.. look for a much lower dow .. below 4000 in the next two years..
leverage is dead and assets will continue the freefall..real estate
has another 40-50% drop in it... think 1995-1998 prices.
the train is off the track and headed down the mountain.. quickly
All of us need to be very careful for the next few years..
Wall Street is a reflection of a free market system and we wouldn't be in this situation if the US Government did not interfere with the free market system.
Bailing out Chrysler, Bailing out LTCM, Implicit guarantees on Fannie and Freddie, community lending act- this is what has caused things to break down not Wall Street.
I cheer every time I hear a story of rags to riches or riches to more riches -that is what all of us aspire to and the dream is being taken away.
My little kids each now owe $485,000 in US debt and I don't think they should. I may not stick around- Jim Rogers move to Singapore was incredibly timely.
Mark Faber predicted that gold would sell for more than the Dow in the coming years. I think he was wrong about the years part.
On Feb 20 12:41 PM psheridan2 wrote:
> GMiki comment about thieving Wall Street is exactly what is setting
> this Country down the wrong path to socialism.
> Wall Street is a reflection of a free market system and we wouldn't
> be in this situation if the US Government did not interfere with
> the free market system.
> Bailing out Chrysler, Bailing out LTCM, Implicit guarantees on Fannie
> and Freddie, community lending act- this is what has caused things
> to break down not Wall Street.
> I cheer every time I hear a story of rags to riches or riches to
> more riches -that is what all of us aspire to and the dream is being
> taken away.
> My little kids each now owe $485,000 in US debt and I don't think
> they should. I may not stick around- Jim Rogers move to Singapore
> was incredibly timely.
I feel like I have gone back in time and I am sitting on the titanic 5 minutes prior to impact.
How do we keep our country from self destruction from self serving elected officials.
Package and repackage and sell to whomever. "Where are those damn papers?"
Indian Head Park, Burb of Chgo.
Ceres, BOT, before July?
But I got lucky today, screwed up my nerve and doubled up my holdings of BAC PFD Trust Series X. $6.98 a share. Average on this is down to $9, Yield almost 20% annually. If it ever gets called, $25 is the ticket.
Still underwater on the common, but the yield there is 16%, perpetual PFD, also callable at $25 in a few years.
The Trust PFDs get paid before the Gov. PFDs.
On Feb 20 01:31 PM 5142152-337 wrote:
> psheridan2: I agree with most of what you stated, however, GMiki
> is absolutely correct. The Wall Street CROOKS made things worse,
> after the Washington CROOKS initiated the mess. Look, if Barney
> Frank, Harry Reid, and Nancy Pelosi didn't exist, how much trouble
> would this great country be in financially? Some, to be sure, but
> not to the extent they have created this black hole.
The broker here forward will not be recommending to the rest of his clients GLD.
Newmont, Jaguar Mining, Nova Gold, Kinross and Yamana Gold are some of the true and "real" winners in this sector at various price levels, as their balance sheets are good and their mining costs are well under $500/ounce. I even bought some Barrack today, too. Why buy a suspect ETF when right above here are mentioned the legitamate miners? Especially when ETF's, by definition, hold a basket of stocks, and some of them are losers.
One more thing he and I talked about: Deflation is good for gold. Not bad, as so many argue. It's shortsighted to ignore how foriegn curriencies are deflating and gold is at a all time high there. Why? Gold is priced in dollars and the dollar is strong against their currencies.
Gold may quaver around the pyschological $1000 mark for a while. But it will go up. It has to. Someday, inflation's coming in a big way.
On Feb 20 06:30 PM Bad Dog wrote:
> You have amnesia, right? Who ran the SEC these last 8 years and ignored
> charges against Madoff? Chris Cox, conservative Republican. Who helped
> break down the barriers that prevented banks from being run like
> casinos? Phil Gramm, conservative Republican! Who came up with the
> plan to throw hundreds of billions of dollars at Wall Stree but let
> Lehman go under? The BUsh administration - the single most ideologically
> right wing government ever. I guess the only way you can stay a Republican
> these days is to have a particularly convenient amnesia!
On Feb 20 08:32 PM Mayascribe wrote:
> agenaux: I had the same very conversation with my stock broker last
> night. Exactly where does 26 tonnes of 70 lb. bars of bullion come
> from so quickly? He agreed that this is highly suspect, and both
> of us talked about how more likely it's in the paper form of options,
> and, here's the scary part, derivatives of options.
>
> The broker here forward will not be recommending to the rest of his
> clients GLD.
>
> Newmont, Jaguar Mining, Nova Gold, Kinross and Yamana Gold are some
> of the true and "real" winners in this sector at various price levels,
> as their balance sheets are good and their mining costs are well
> under $500/ounce. I even bought some Barrack today, too. Why buy
> a suspect ETF when right above here are mentioned the legitamate
> miners? Especially when ETF's, by definition, hold a basket of stocks,
> and some of them are losers.
>
> One more thing he and I talked about: Deflation is good for gold.
> Not bad, as so many argue. It's shortsighted to ignore how foriegn
> curriencies are deflating and gold is at a all time high there. Why?
> Gold is priced in dollars and the dollar is strong against their
> currencies.
>
> Gold may quaver around the pyschological $1000 mark for a while.
> But it will go up. It has to. Someday, inflation's coming in a big
> way.
Gold is benefiting from a flight impulse with "no where left to run". That plus a concern that the ultimate result of all the Federal deficits will be inflation. So my read of the price signals is: deflation for the next 1 to 2 years, then gradually accelerating inflation.
That Agency Failed to supervise. The Head of that Agency is Now the Head of the SEC.
I would rather have Amnesia, than lack of Knowledge about the Present.
Duh, that's why you should buy BULLION not that paper gold crap from the Banksters. IMHO, of course.
On Feb 20 08:13 PM agneaux wrote:
> Dollarcollapse.com has run several articles about how the ETF, GLD,
> may not be invested fully in physical gold - some, if not most, of
> it may be paper gold promises. How could they otherwise get 30 tons
> of gold in one day? I don't think anyone could supply it in physical
> form. According to their prospectus, they don't even have the ability
> to audit their subcontractors's gold. SLV may be similar. I have
> sold all my GLD as of today. I'll hold onto SLV until it goes up
> a little more...
On Feb 20 08:32 PM Mayascribe wrote:
> Gold may quaver around the pyschological $1000 mark for a while.
> But it will go up. It has to. Someday, inflation's coming in a big
> way.
...uhh, someday, Someday!?
We're not going to have inflation for a long while yet mate.
Comex will default sooner or later !!
100,000 Silver future contracts of 5000 oz each ?? No way !! there is no enough silver to back up those papers !!
JP Morgan is the only player in the short side and will be burned in the process !!
Some countries are buying gold/silver like crazy in a very discrete and silent way !!
On Feb 20 07:59 AM yellowhoard wrote:
> I knew it would happen. CNBC is forcing Rick Santelli to apologise
> for his honesty yesterday morning.
>
> I'm up for the Chicago Tea Party in July. How about you guys?
I agree with you wholeheartedly. I got into AUY near the lows and have substantial profits in it. I did the same with PAAS.
But what bothers me now is the inrush of new money and all the talk that gold is the only trade that is currently working. Silver is of course gold's little brother but seems to have an excellent (low) valuation in relation to gold at this time. I start getting the heebie jeebies when there is such a large public discussion and rush into anything I hold. It smells like a topping process for the intermediate term is stirring.
Oh my! Whether to hold, or sell and buy lower down. Decisions, decisions!
Good luck all.
Why ?? good question !! Indian consume 3000 tons per year !! suspicious ...
Please , dont say anyone i told you so !!
economictimes.indiatim...
On Feb 21 07:31 AM bosun.j wrote:
> You mean to tell me that the Banksters and their hucksters would
> sell you bullshit paper and can't back it up with ANYTHING? Say it
> isn't so!
>
> Duh, that's why you should buy BULLION not that paper gold crap from
> the Banksters. IMHO, of course.
Time to watch for Gold to test its previous high and then short it down to 800. Once it has moved into stronger hands then I would buy - but only physical gold.
On Feb 20 01:31 PM 5142152-337 wrote:
> psheridan2: I agree with most of what you stated, however, GMiki
> is absolutely correct. The Wall Street CROOKS made things worse,
> after the Washington CROOKS initiated the mess. Look, if Barney
> Frank, Harry Reid, and Nancy Pelosi didn't exist, how much trouble
> would this great country be in financially? Some, to be sure, but
> not to the extent they have created this black hole.
BTW, Futures on the Rupee are available.
In the last 3 months, GLD is up 33%, SLV 60%.
For 6 and 12 months, GLD has significantly outperformed SLV.
And Santelli was telling it like it is - that responsible people are tired of paying for the shortcomings of irresponsible people. The people getting the mortgages that they couldn't afford were just as complicit in the fraud as those providing the mortgage they couldn't afford. Now they want us responsible people to bail them out. I agree with Santelli – no way!
On Feb 21 11:26 PM otbricki wrote:
> Let's be real here. Pelosi, Reid and Frank have been members of the
> minority party of the House from 1995 through 2007. Anything coming
> out of that body of the Legislature leading up to this fiasco was
> approved by a Republican majority.
>
> On Feb 20 01:31 PM 5142152-337 wrote: