A Golden Hedge Against the Dreaded Dollar

The U.S. dollar doesn't have a lot of fans. In fact, outside of short-term traders, it's nearly impossible to find an analyst with a positive thing to say about the greenback.

The negative prognosis is not without good reason. When the world's economic output is expanding, currencies of other nations have strengthened against the U.S. dollar. And when the world's economies are sputtering, leaders have questioned the dollar's status as a viable reserve currency.

Yet most investors seemed ill-prepared for one of the only investments that yielded a positive return in 2008; that is, while the S&P 500 dropped -38% in value, PowerShares DB U.S. Dollar Bullish (UUP) garnered 4.2%.

Indeed, the downward trend for the greenback has resumed in 2009. For the time being, PowerShares DB U.S. Dollar Bullish (UUP) is below its shorter-term 50-day moving average as well as its longer-term 200-day moving average.

Yet, by the same token, it's down only -2.5% on the year. That's actually better than U.S. stocks in the S&P 500, currently off about -2.7% as I type.

In complete contrast to the outspoken hatred for the U.S. dollar, there's a hard asset love affair with gold. The yellow metal wins universal praise for its historical ability to fend off inflation and dollar devaluation, while simultaneously earning high marks for pure desirability. About the only thing that gold isn't credited with (so far) is a capacity for curing cancer.

You don't have to look far for fans of gold, often referred to as "gold bugs." Buy gold via SPDR Gold Shares (GLD) because China is rapidly acquiring resources across the commodity board. Buy GLD for its technical strength above moving averages. Buy GLD because worldwide flows into gold funds continue to break records. Buy GLD as a hedge against hyperinflation. And, of course, buy GLD because the U.S. dollar is doomed.

In truth, GLD does appear to be a venerable contender for a portion of a well-diversified portfolio. Yet in a "black swan/perfect storm catastrophe" like the 3 month, systemic breakdown of 2008 (September through November), GLD dropped an astonishing -30%. PowerShares DB U.S. Dollar Bullish (UUP) soared 20%.

If economies are going to sputter for a longer period than many had hoped, as many in the G-8 are now suggesting, inflation may take its sweet time before rearing its ugly head. What's more, gold hasn't shown a definitive ability to break the psychological $1000 per ounce value, let alone approach inflation-adjusted highs of $2000 per ounce. And remember, nearly all commodities hit inflation-adjusted highs in July 2008 except for gold.

GLD is indeed a strong hedge against the dollar's UUP. Yet what if you were looking to reduce the risk of owning one versus the other? Could you achieve a better risk-reward outcome by owning both?

Indeed, many portfolio constructionists endeavor to hold assets with a slight negative correlation of -0.40%. That's the 1-year relationship in directionality between PowerShares DB U.S. Dollar Bullish (UUP) and SPDR Gold Shares (GLD). So what if you had actually held both during the course of the bear market that began October, 2007?

Granted, if you held GLD all by itself from bear market inception through the present day, a 22% total return could have been yours. Yet that would not have come without enormous volatility of a top-to-bottom decline of 30%, with little more than faith in the metal during its steep decline.

In contrast, hedging gold's potential volatility with a low-volatility, negatively correlated investment produced a sleep-better-at-night 11% aggregate return. It may not be as crazy as it sounds to hold the beloved gold and the dreaded U.S. dollar together... to reduce overall risk, to hedge against a black swan event and to account for the small possibility that the U.S. dollar actually strengthens.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Doug "Digge...:]

You wrote;

"In truth, GLD does appear to be a venerable contender for a portion of a well-diversified portfolio. Yet in a "black swan/perfect storm catastrophe" like the 3 month, systemic breakdown of 2008 (September through November), GLD dropped an astonishing -30%. PowerShares DB U.S. Dollar Bullish (UUP) soared 20%."

It's easy to pick a short time-frame and criticize gold's performance relative to the dollar (they are typically inverse of each other). But why don't you do your analysis from when G.W. Bush took office to today?

Most people own way too much dollar based assets when compared to the "insurance" that gold offers against it.

The typical recommendation by financial advisor's (I just did a blog piece on this subject) is 70% stocks (including about 10% - 20% foreign), 25% bonds and 5% cash, depending on whether one is conservative, moderate or aggressive).

What this means is that an investor has 80% to 90% of their portfolio subject to the whims of the U.S. Dollar decline or rise. The trend for the dollar, as you know, has been down for quite sometime (especially since 1971 when the Dollar backing was decoupled from gold). From 1971 to 2000, there wasn't too much competition to the U.S. Dollar or to the U.S. as a Superpower and innovator. Times have changed. Portfolio's need to change with it.

So not only has the investor lost the value of their portfolio due to the stock market decline, but they have also lost purchasing power of what's left due to the dollar decline. It's the double whammy that no one on Wall Street dares speak about.

You said; "Yet what if you were looking to reduce the risk of owning one versus the other? Could you achieve a better risk-reward outcome by owning both?"

I would rather have more insurance with gold, which you do admit, "GLD does appear to be a venerable contender for a portion of a well-diversified portfolio," for my portfolio to counteract the U.S. Dollar centric risk of it.

The volatility of gold means nothing to a long term "gold bug" as most of them are in physical gold, not GLD. The last 8 years one would be hard pressed to find a better performing asset. They care not that gold falls to $700 on its way to $2,000 or higher.

Still, they, meaning CNBC and those who are brainwashed by our financial advisor educational system, laugh at those who dare say be long gold.

Time will tell who gets the last laugh. But they probably won't be laughing out loud. Gold bugs are quiet about what they do. They don't want the neighbors to come knocking down their door.

Jul 09 11:38 AM

[djj420:]

Doug Digger 1, Author 0

Jul 09 12:05 PM

[Adam855:]

Over the long haul, gold and the dollar will tend to move in opposite directions (competition lately for "safe havens", monetary inflation, etc). The current argument of deflation vs. inflation is the key. Those who expect deflation in the US economy believe that the Fed's quantitative easing will have no inflationary consequences since the private market will not put the created money into actual use, or that the economy will improve and the Fed will "sop up" excess credit before it creates massive inflation. Those who expect inflation believe that the economy will improve enough for the QE funds to come into play, which would create classic monetary inflation.
Due to the fact that the US is so debt laden and therefore must follow an unstated inflationary path, therefore devaluing the dollar, I think over the medium to long haul inflation will win out.

Hedging, along with any kind of fence sitting, may limit your losses, but I think in this argument you need to eventually pick a side.

Jul 09 05:04 PM

[AuGod!:]

I hold gold bullion and intend to increase my position. My currency is the Canadian dollar. When I first bought gold, the American dollar and the Canadian dollar were at parity. Now they are not. My gold is still above the C$1000 per ounce level. Most fiat monetarist Keynesian trained advisors have laughed at me in the past for buying the metal but now many of them are seeking new employment. Looking at gold bullion exclusively in terms of the US$ is natural because the SPOT price is in that currency but each investor should keep abreast of their own currency vis the US$ and their "local" price of gold bullion. Much can be learned from this. Much can be lost if they don't because as we all know the US$'s buying power has slipped exponentially since 1913 and steeply since 2001. As for daily volatility in gold "bid and ask" I watch but lose no sleep if the SPOT price gives up a few percent or even dips below support levels as in a slide. I consider such dips to represent buying opportunities. The sell price will matter less than the metal's liquidity because I will sell only when I need to. I consider gold bullion to be a fine little asset, which has made a big difference to those who have it when the chip stacks are down. I know that is anathema to some investment advisors but it is a life lesson I won't forget and urge others to set aside some gold bullion at a level comfortable for them, for emergencies. If more had done so when the good times rolled, these perilous times would be more manageable. It really is as simple (and complex) as that.

Jul 10 12:22 PM

[long roh:]

This article is nothing more than a useless observation that gold and UUP are moderately negatively correlated. If the author is proposing that one should construct a portfolio exclusively of UUP and gold, well, that idea stinks.

First, that leaves out commodities, equities and foreign currencies (UUP actually amounts to a short on foreign currencies), and there is no explanation of why one would want to avoid those asset classes (other than perhaps the implied argument based on past performance over a random 20 month period that coincides with perhaps the biggest market dislocation since the Great Depression). Second, if one reasonably assumes that some inflation will occur in the future (perhaps not near term, but over a longer period of say, two or three years), then this strategy is definitively sunk. Gold is a form of money. While the tried and true wisdom is that gold is a hedge against dollar inflation, it is also true that gold still loses purchasing power during periods of significant inflation (because it is money). In other words, you might not lose as much purchasing power if you shift some dollar holdings to gold, you still can't buy as much gas or food with your gold as you would have been able to buy before the inflation. And, of course, UUP offers no protection against inflation; it just bets against fx risk.

In sum, "I award you no points, and may God have mercy on your soul."

Jul 10 01:47 PM

[pier0188:]

Not sure why everybody parrots the "gold is an inflation hedge" hyperbole. Gold's relationship to inflation, M3, the USD Index, is very weak, at best.

The last time gold was at these prices was in the early 1980s and every shoe-shine boy in the street was parroting the same advice. When you see that you know to run away from gold.

Jul 12 03:27 AM

[American in...:]

I think you're being silly. Gold is driven by supply and demand. It is just one more commodity among others and doesn't deserve any special importance in a diversified outside of fanciful hyperinflation scenarios.

Compare gold with American stocks over the last hundred years. Compute the rate of return. Bottom line. The data does not suggest gold is a good long term investment.


On Jul 09 11:38 AM Doug wrote:

> You wrote;
>
> "In truth, GLD does appear to be a venerable contender for a portion
> of a well-diversified portfolio. Yet in a "black swan/perfect storm
> catastrophe" like the 3 month, systemic breakdown of 2008 (September
> through November), GLD dropped an astonishing -30%. PowerShares DB
> U.S. Dollar Bullish (seekingalpha.com/symbo...) soared 20%."
>
>
> It's easy to pick a short time-frame and criticize gold's performance
> relative to the dollar (they are typically inverse of each other).
> But why don't you do your analysis from when G.W. Bush took office
> to today?
>
> Most people own way too much dollar based assets when compared to
> the "insurance" that gold offers against it.
>
> The typical recommendation by financial advisor's (I just did a blog
> piece on this subject) is 70% stocks (including about 10% - 20% foreign),
> 25% bonds and 5% cash, depending on whether one is conservative,
> moderate or aggressive).
>
> What this means is that an investor has 80% to 90% of their portfolio
> subject to the whims of the U.S. Dollar decline or rise. The trend
> for the dollar, as you know, has been down for quite sometime (especially
> since 1971 when the Dollar backing was decoupled from gold). From
> 1971 to 2000, there wasn't too much competition to the U.S. Dollar
> or to the U.S. as a Superpower and innovator. Times have changed.
> Portfolio's need to change with it.
>
> So not only has the investor lost the value of their portfolio due
> to the stock market decline, but they have also lost purchasing power
> of what's left due to the dollar decline. It's the double whammy
> that no one on Wall Street dares speak about.
>
> You said; "Yet what if you were looking to reduce the risk of owning
> one versus the other? Could you achieve a better risk-reward outcome
> by owning both?"
>
> I would rather have more insurance with gold, which you do admit,
> "GLD does appear to be a venerable contender for a portion of a well-diversified
> portfolio," for my portfolio to counteract the U.S. Dollar centric
> risk of it.
>
> The volatility of gold means nothing to a long term "gold bug" as
> most of them are in physical gold, not GLD. The last 8 years one
> would be hard pressed to find a better performing asset. They care
> not that gold falls to $700 on its way to $2,000 or higher.
>
> Still, they, meaning CNBC and those who are brainwashed by our financial
> advisor educational system, laugh at those who dare say be long gold.
>
>
> Time will tell who gets the last laugh. But they probably won't
> be laughing out loud. Gold bugs are quiet about what they do. They
> don't want the neighbors to come knocking down their door.

Jul 12 09:35 AM

[Doug "Digge...:]

The price of gold goes up when there is demand sure. Simple economics. I'm not denying that.

But what you call "silly" would have hedged investors portfolios over the last 10 years. If the stock market goes up 10% and the dollar falls 10%, how much wealth have you created? Zero!

Look, the dollar has 38 short years without gold backing. What in investor's portfolio can counteract the fall of the dollar outside of possibly foreign stocks? Most financial advisor's are not addressing this issue, and you call those that don't address by hedging, "silly?"

Gold has a history as a store of value. To not include it in a properly diversified portfolio is silly.

I don't have to go back 100 years as the dollar was "backed by gold" most of that time. The dollar also didn't have any competition really until the Euro was introduced. What has the U.S. dollar price of gold done since the Euro was introduced? It's gone up every year since the first. You don't see a pattern here?

Now the almighty dollar has trillions of debt backing it and the U.S. government isn't doing anything to "change" that pattern.

To not plan for the coming inflation as a result of this spending is "silly." Times have certainly changed and you don't have to be a gold bug to understand this. Look at the economics as I have. What really backs the dollar today? Read my article I wrote to find out: fedupbook.com/blog/eco.../




On Jul 12 09:35 AM American in Paris wrote:

> I think you're being silly. Gold is driven by supply and demand.
> It is just one more commodity among others and doesn't deserve any
> special importance in a diversified outside of fanciful hyperinflation
> scenarios.
>
> Compare gold with American stocks over the last hundred years. Compute
> the rate of return. Bottom line. The data does not suggest gold is
> a good long term investment.

Jul 12 05:52 PM

[Doug "Digge...:]

Things have changed since 2000. Read my reply to American in Paris above.

The real point is that inflation is on the horizon because of the government spending that is occurring. How is this spending going to be accounted for when our government doesn't live within its taxable means? Answer: Inflation and/or higher taxes. We're getting both in the years to come. But higher taxes doesn't get a politician elected (think Mondale here). So inflation is the only viable solution and the price of gold will rise with it.

On Jul 12 03:27 AM pier0188 wrote:

> Not sure why everybody parrots the "gold is an inflation hedge" hyperbole.
> Gold's relationship to inflation, M3, the USD Index, is very weak,
> at best.
>
> The last time gold was at these prices was in the early 1980s and
> every shoe-shine boy in the street was parroting the same advice.
> When you see that you know to run away from gold.

Jul 12 05:56 PM

[pier0188:]

That's great and all, but it still doesn't answer the question why you think gold is a good inflation hedge. It simply isn't statistically speaking. You ignore the data and make up all sorts of drivel in return, it is actually pretty amusing. Show me ACTUAL numbers that shows how gold has increased with inflation and is a good "hedge". You can't because there simply is no data to back up your assertion.

Then you go on to counter with increased government spending. Wow, good analysis, what 4th grader hasn't gone that far?

Why don't you finish the equation rather than leaving it half built?

The increased government spending is countered by the trillions of dollars in assets that have been written off. It is countered by the immense amount of RE "wealth" that has vanished. It is countered by the fact that R/CMBS bonds are valued far less, as are many securitized assets. Those assets "vanishing" is a counter to your inflationary vision, as is most other assets depreciating.


So, in summary, you parrot the same old gold-bug shtick that was parroted back in the early 80s. Why don't you look at stocks from there compared to gold and the dollar? Which one wins? Certainly not gold.

Gold mania is a bubble driven by financial innovation (double leveraged future funds), just like tulip bulbs, tech stocks, and RE.


On Jul 12 05:56 PM Doug wrote:

>
> Things have changed since 2000. Read my reply to American in Paris
> above.
>
> The real point is that inflation is on the horizon because of the
> government spending that is occurring. How is this spending going
> to be accounted for when our government doesn't live within its taxable
> means? Answer: Inflation and/or higher taxes. We're getting both
> in the years to come. But higher taxes doesn't get a politician
> elected (think Mondale here). So inflation is the only viable solution
> and the price of gold will rise with it.
>
> On Jul 12 03:27 AM pier0188 wrote:

Jul 12 08:17 PM

[Doug "Digge...:]

Look, before 1971 the price of gold was fixed by the U.S. government. When Nixon took us off the gold "backed" standard in August of that year, the price of gold averaged $43.71 an ounce. Subsequently, Americans could start purchasing more than $100 an ounce in 1975.

So gold was $43.71 (avg) on August 15th, 1971.
Gold is $914.00 bid as we speak.
The S&P 500 was 98.76 on August 15th, 1971.
S&P last close was 879.13.

Gold has outperformed stocks. Now to the dollar and inflation...

$1 in 1971 would require the purchasing power of $5.31 utilizing the government's CPI data that you know has changed over the years.

Gold is higher because it is a true indication of inflation.

There is at present a decoupling of gold from the dollar. I wrote an article on this here: fedupbook.com/blog/inf.../

I'll disregard your comment about what I wrote as "drivel" now.

All I'm professing is a diversification into gold as a hedge against the falling dollar. Naturally, anyone who has studied the facts would agree.

Comparing gold to Tulip Mania isn't realistic. Gold was never mentioned in the book, "Extraordinary Popular Delusions and the Madness of Crowds," but John Law's "paper money" was.

Ludwig Von Mises wrote about what is happening today in 1981: “The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig von Mises, Human Action p. 572.

Sound familiar?

See you on the other side of what our Government has done and is doing to our money.

Jul 12 10:03 PM

[Doug "Digge...:]

The above was in reply to the post below:


On Jul 12 08:17 PM pier0188 wrote:

> That's great and all, but it still doesn't answer the question why
> you think gold is a good inflation hedge. It simply isn't statistically
> speaking. You ignore the data and make up all sorts of drivel in
> return, it is actually pretty amusing. Show me ACTUAL numbers that
> shows how gold has increased with inflation and is a good "hedge".
> You can't because there simply is no data to back up your assertion.
>
>
> Then you go on to counter with increased government spending. Wow,
> good analysis, what 4th grader hasn't gone that far?
>
> Why don't you finish the equation rather than leaving it half built?
>
>
> The increased government spending is countered by the trillions of
> dollars in assets that have been written off. It is countered by
> the immense amount of RE "wealth" that has vanished. It is countered
> by the fact that R/CMBS bonds are valued far less, as are many securitized
> assets. Those assets "vanishing" is a counter to your inflationary
> vision, as is most other assets depreciating.
>
>
> So, in summary, you parrot the same old gold-bug shtick that was
> parroted back in the early 80s. Why don't you look at stocks from
> there compared to gold and the dollar? Which one wins? Certainly
> not gold.
>
> Gold mania is a bubble driven by financial innovation (double leveraged
> future funds), just like tulip bulbs, tech stocks, and RE.

Jul 12 10:14 PM

[pier0188:]

LOL. Now you're getting even more delusional.


1. Comparing gold to the S&P 500 omits one very important fact, dividends. When was the last time gold paid dividends?

2. Gold isn't higher because inflation, gold is higher because of risk. Comparing common measurements of volatility (such as VIX) yields a much higher correlation coefficient than gold to inflation (which has a -.28 correlation, which is very weak).

This, overall, is the key to what you're missing. You can keep diverting to tangential topics and hyperbole, referring to Von Mises, but the base fact is, the numbers *COMPLETELY* disagree with you.

You have yet to show one piece of evidence that ties gold to inflation. Heck, even Mish did a piece on Gold not equating to inflation, and he's one of the biggest anti-Fed people out there.

The problem is, you gold-bugs focus on singular pieces of the equation rather than considering the whole of the equation. You focus on the "evil" Fed, but you miss the "evil" people (the wrong is not in the tool, but in the wielder of the tool). Furthermore, you thing that eliminating the Fed and going to strict gold currency would be a panacea, yet you forget that debts can be had with or without a gold backed currency, you just simply change how much the currency is worth relative to gold.

Furthermore, you ignore the fact that we were in debt far worse in the past than now.

Taking a look at your blog, you seem like an intelligent fellow, if a bit mislead, and one that misses the very obvious. The data.

Jul 12 10:26 PM

[pier0188:]

I missed the reply to your "decoupling" idea. There is a decoupling of gold to every major currency. Why? Because gold is a measurement of risk, not of inflation.


On Jul 12 10:26 PM pier0188 wrote:

> LOL. Now you're getting even more delusional.
>
>
> 1. Comparing gold to the S&P 500 omits one very important fact,
> dividends. When was the last time gold paid dividends?
>
> 2. Gold isn't higher because inflation, gold is higher because of
> risk. Comparing common measurements of volatility (such as VIX)
> yields a much higher correlation coefficient than gold to inflation
> (which has a -.28 correlation, which is very weak).
>
> This, overall, is the key to what you're missing. You can keep diverting
> to tangential topics and hyperbole, referring to Von Mises, but the
> base fact is, the numbers *COMPLETELY* disagree with you.
>
> You have yet to show one piece of evidence that ties gold to inflation.
> Heck, even Mish did a piece on Gold not equating to inflation, and
> he's one of the biggest anti-Fed people out there.
>
> The problem is, you gold-bugs focus on singular pieces of the equation
> rather than considering the whole of the equation. You focus on
> the "evil" Fed, but you miss the "evil" people (the wrong is not
> in the tool, but in the wielder of the tool). Furthermore, you thing
> that eliminating the Fed and going to strict gold currency would
> be a panacea, yet you forget that debts can be had with or without
> a gold backed currency, you just simply change how much the currency
> is worth relative to gold.
>
> Furthermore, you ignore the fact that we were in debt far worse
> in the past than now.
>
> Taking a look at your blog, you seem like an intelligent fellow,
> if a bit mislead, and one that misses the very obvious. The data.

Jul 12 10:27 PM

[pier0188:]

Derr...forgot to address one final subject.

"
Comparing gold to Tulip Mania isn't realistic. Gold was never mentioned in the book, "Extraordinary Popular Delusions and the Madness of Crowds," but John Law's "paper money" was. "

So, because it was mentioned in a book you happen to agree with, that means that it is actually applicable? Wow, great one. Why not pick and choose all sources, excluding the remainder of knowledge. That's a great way to diversify your intellect and avoid tunnel vision, which is obviously what you suffer from.

I do like how you don't even address my points, point by point. Such as, why would government spending cause inflation if the amount of wealth (and currency) eliminated form the system offsets such spending?

Jul 12 10:29 PM

[Doug "Digge...:]

pier,

Try to have a discussion with me and forget the personal attacks calling me "delusional," "obviously what you suffer from," and my words "drivel" as it does nothing for your character and I just won't reply to it any longer.

Point by point (added to the points above that I have answered):

Dividends on the S&P have been averaging 1.7% of late and are being cut even more by companies: economictimes.indiatim...

The rest of what you bicker about is related to inflation. My definition of inflation is "an increase in the money supply via fiat printing and credit."

As the government prints and produces more money, it devalues the dollar (you know...that thing that gold is priced in).

To explain; If all the goods in the world cost 1 million dollars and you doubled (inflated) the money supply to 2 million dollars, then it would now cost twice as much money (dollars) to purchase all the goods in the world. This is what's occurring since the Reagan administration.

Gold is priced in dollars and thus will have the same price increase in dollars when the money supply is doubled (again, despite the Fed, U.S. Treasury, Central Banks, etc. who try and discourage people to invest in gold rather than dollars) - yes there are supply and demand issues to. Unlike U.S. dollars though, the supply of gold is limited (by the way, you keep addressing other issues that aren't related to the issue we are discussing, but I must point out your misunderstanding of what a true gold standard its. It's not a "gold backed" currency.

Your comment that gold is a measurement of risk is right. Risk of holding U.S. dollars, the more of which are created results in (my definition of) inflation.

I like Mish. I read him to get some good perspective on things. I also like Gary North. I enjoy the back and forth between Mish, Schiff and North.

As I pointed out in my blog piece, this is just the beginning of the decoupling and it will get worse. I'm presently doing my own research on the inflation/deflation and will post it in the near future. I can see valid points in both sides of the debate and that's why I am doing the research myself.

To your last question though....which kind of hints at my research...

You said; "I do like how you don't even address my points, point by point. Such as, why would government spending cause inflation if the amount of wealth (and currency) eliminated form the system offsets such spending?"

So, I answered your questions to the history of gold, inflation and the dollar since 1971 and proved my point, but I see you are stuck on analyzing recent wealth destruction. I'll make a comment and end the discussion till I have completed my analysis, but this will give you a hint.

You are commenting on "asset deflation" which can occur at the same time as "monetary inflation."

Bernanke is on record in his 2002 speech that he will utilize Friedman's helicopter if he has to in battling (asset) deflation. Naturally you'll agree this is what is occurring in record figures with the stimulus, bailouts etc. that are happening. As I have mentioned, one needs to add to this all of the other issues of the day that are occurring (healthcare expenditures, cap trade, other environmental mandates, pension guaranty assoc. close to needing a bailout, FDIC already inquiring about funds, future obligations to Fannie and Freddie, result of the 2nd round of ARMS expiring, the coming Insurance company crisis with bad real commercial real estate, state (California) funds needed, infrastructure crisis fedupbook.com/blog/bud.../ etc etc., and that's just what we know of today. And did I mention the military needs? Lastly, future obligations to medicare and social security.

So that is what is on the horizon.

But I ask you...and I got this from an article I came across in my research written by a CFA:

Where is that example of “a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?

If actual history is what matters to you rather than theoretical discussions, unfortunately, we have a long history of what happens with nations in severe economic distress, when they have a symbolic, independent currency (not explicitly tied to another currency). That history isn’t one of those fiat currencies soaring in purchasing power, despite the best efforts of the economically wounded nation to keep that from happening. No, the very well established pattern is that the currency collapses in value (price inflation), even as the purchasing power of assets is collapsing (asset deflation), much like what is happening with Iceland today."

Just so happens I wrote an article comparing the U.S. Economic numbers to that of Iceland before Iceland's blow up last year: fedupbook.com/blog/bud.../

Lastly, you have not offered any statistics at all in your replies.

Somehow I don't expect you to change in your responses though. People like you try to draw people like me into the game of trash talking. I wrote to Mish and told him he shouldn't have gone after Schiff the way he did as in the end, we all like the study of Austrian economics and are bullish on gold long term (Mish whether it is inflation or deflation and Schiff and North because of inflation, including me). He didn't agree. I won't go to the level of personal attacks and don't care to continue this conversation with you.


On Jul 12 10:29 PM pier0188 wrote:

> Derr...forgot to address one final subject.
>
> "
> Comparing gold to Tulip Mania isn't realistic. Gold was never mentioned
> in the book, "Extraordinary Popular Delusions and the Madness of
> Crowds," but John Law's "paper money" was. "
>
> So, because it was mentioned in a book you happen to agree with,
> that means that it is actually applicable? Wow, great one. Why
> not pick and choose all sources, excluding the remainder of knowledge.
> That's a great way to diversify your intellect and avoid tunnel vision,
> which is obviously what you suffer from.
>
> I do like how you don't even address my points, point by point.
> Such as, why would government spending cause inflation if the amount
> of wealth (and currency) eliminated form the system offsets such
> spending?

Jul 13 12:27 AM

[pier0188:]

>
>
> Dividends on the S&P have been averaging 1.7% of late and are
> being cut even more by companies: economictimes.indiatim...

But historically they are far higher, the div yield only needs to be ~3.2% to equal gold's current (and very inflated) performance. In fact, historical div yields are about this number.



> The rest of what you bicker about is related to inflation. My definition
> of inflation is "an increase in the money supply via fiat printing
> and credit."

Great, that is *YOUR* definition. YOUR definition excludes increases due to wages (decreases due to productivity), increases due to other imput variables (such as oil, remember when people said the raise in oil was solely because of the dollar?), what about destruction of wealth? Less dollars on the market.

You see, YOUR definition of inflation, just like your definition of gold vs inflation, is limited.


> As the government prints and produces more money, it devalues the
> dollar (you know...that thing that gold is priced in).

That isn't completely the case. If there is the same amount of money in circulation AND they add more money AND the goods generated (economic growth) represented by such money hasn't increased, THEN you have monetary inflation. However, when you have wealth destroyed through asset destruction (RE bust), you have fewer dollars out the same amount of basic goods.

> To explain; If all the goods in the world cost 1 million dollars
> and you doubled (inflated) the money supply to 2 million dollars,
> then it would now cost twice as much money (dollars) to purchase
> all the goods in the world. This is what's occurring since the Reagan
> administration.

Yes, but what if the goods increased? What if then they suddenly decreased and the leverage decreased accordingly?


> Gold is priced in dollars and thus will have the same price increase
> in dollars when the money supply is doubled (again, despite the Fed,
> U.S. Treasury, Central Banks, etc. who try and discourage people
> to invest in gold rather than dollars) - yes there are supply and
> demand issues to. Unlike U.S. dollars though, the supply of gold
> is limited (by the way, you keep addressing other issues that aren't
> related to the issue we are discussing, but I must point out your
> misunderstanding of what a true gold standard its. It's not a "gold
> backed" currency.

Again, you make claims that there is such a strong relationship between the value of the dollar, or inflation, and gold. You have yet to provide ONE SINGLE SOURCE for this claim. Yet, you can simply go to google, put in "correlation between gold and inflation", and you find the same magic number, -0.28. Refute it or stop parroting it.

> Your comment that gold is a measurement of risk is right. Risk of
> holding U.S. dollars, the more of which are created results in (my
> definition of) inflation.

No, gold is a flight to safety when ALL other assets aren't attractively priced and/or perceived risky. Not just the dollar or governemnt debentures. If you correlated the VIX to gold, you get a stronger correlation than inflation to gold.

> I like Mish. I read him to get some good perspective on things. I
> also like Gary North. I enjoy the back and forth between Mish, Schiff
> and North.
>
> As I pointed out in my blog piece, this is just the beginning of
> the decoupling and it will get worse. I'm presently doing my own
> research on the inflation/deflation and will post it in the near
> future. I can see valid points in both sides of the debate and that's
> why I am doing the research myself.

Great, you think it's a decoupling. Yes, it is a decoupling, but your reasons for the decoupling are wrong. Temporary decoupling of the dollar to gold have occured many times in the past, mainly because of flight to safety vs all other asset classes. The data backs that up.


> You said; "I do like how you don't even address my points, point
> by point. Such as, why would government spending cause inflation
> if the amount of wealth (and currency) eliminated form the system
> offsets such spending?"
> So, I answered your questions to the history of gold, inflation and
> the dollar since 1971 and proved my point, but I see you are stuck
> on analyzing recent wealth destruction. I'll make a comment and end
> the discussion till I have completed my analysis, but this will give
> you a hint.
>
> You are commenting on "asset deflation" which can occur at the same
> time as "monetary inflation."
>
> Bernanke is on record in his 2002 speech that he will utilize Friedman's
> helicopter if he has to in battling (asset) deflation. Naturally
> you'll agree this is what is occurring in record figures with the
> stimulus, bailouts etc. that are happening. As I have mentioned,
> one needs to add to this all of the other issues of the day that
> are occurring (healthcare expenditures, cap trade, other environmental
> mandates, pension guaranty assoc. close to needing a bailout, FDIC
> already inquiring about funds, future obligations to Fannie and Freddie,
> result of the 2nd round of ARMS expiring, the coming Insurance company
> crisis with bad real commercial real estate, state (California) funds
> needed, infrastructure crisis fedupbook.com/blog/bud.../
> etc etc., and that's just what we know of today. And did I mention
> the military needs? Lastly, future obligations to medicare and social
> security.
>
> So that is what is on the horizon.
>
> But I ask you...and I got this from an article I came across in my
> research written by a CFA:
>
> Where is that example of “a modern, major nation where the domestic
> purchasing power (as measured by CPI) of its purely symbolic &
> independent currency uncontrollably grew in value at a rapid rate
> over a sustained period, despite the best efforts of the nation to
> stop this rapid deflation?
>
> If actual history is what matters to you rather than theoretical
> discussions, unfortunately, we have a long history of what happens
> with nations in severe economic distress, when they have a symbolic,
> independent currency (not explicitly tied to another currency). That
> history isn’t one of those fiat currencies soaring in purchasing
> power, despite the best efforts of the economically wounded nation
> to keep that from happening. No, the very well established pattern
> is that the currency collapses in value (price inflation), even as
> the purchasing power of assets is collapsing (asset deflation), much
> like what is happening with Iceland today."

Comparing Iceland or Zimbabwe, or South America to the US is simply ridiculous. They are hyperbolic cheerleading headlines intended to get people scared, but in reality, there are massive differences between our current situation and those situations. First off, we still have the world's largest economy and, as a ratio of total leverage to GDP, we are far better off than almost any major economy in the world. Second, there was nothing to Iceland, Iceland WAS the banks. This is quite different than the US since we also have manufacturing, Ag, IT, Drugs, and a plethora of other industries.

You can compare numbers all you want (garbage in, garbage out), but without rudementary contextual inputs, your conclusions will be wrong.
>
> Just so happens I wrote an article comparing the U.S. Economic numbers
> to that of Iceland before Iceland's blow up last year: fedupbook.com/blog/bud.../
>
>
> Lastly, you have not offered any statistics at all in your replies.
>
>
> Somehow I don't expect you to change in your responses though. People
> like you try to draw people like me into the game of trash talking.
> I wrote to Mish and told him he shouldn't have gone after Schiff
> the way he did as in the end, we all like the study of Austrian economics
> and are bullish on gold long term (Mish whether it is inflation or
> deflation and Schiff and North because of inflation, including me).
> He didn't agree. I won't go to the level of personal attacks and
> don't care to continue this conversation with you.

Mish was right on about Schiff, who happens to be yet another person who talks a big talk about US economy decoupling, dollar crashes, and gold skyrocketing. However, when it came to actual application of his "knowledge", he fell flat on his face and should be called out. While I don't agree with Mish on a lot, I happen to think that if more so-called "brokers" and "investment advisors" were called out, publicly, and very harshly, we'd avoid this type of economic trap.

Jul 13 10:52 AM

[Doug "Digge...:]

Pier,

> But historically they are far higher, the div yield only needs > to be ~3.2% to equal gold's current (and very inflated)
> performance. In fact, historical div yields are about this
> number.

Yes, I realize this. But in this case, history is one thing, but the recent trend is lower dividends as I pointed out. Until stocks return to their 6% historic rate, investment advisor's should stop saying that "stocks return 10% on average in the long run," that most still spout. Most of that 10% return came from dividends and it's just not happening as to obtain that 10% return it has to come from capital growth, of which there isn't much to speak of today.

> Great, that is *YOUR* definition. YOUR definition
> excludes increases due to wages (decreases due to
> productivity), increases due to other imput variables (such
> as oil, remember when people said the raise in oil was
> solely because of the dollar?), what about destruction of
> wealth? Less dollars on the market.

Well this is where we differ. The definition of inflation I gave you is from the Austrian School of thought and not printed in any college textbook (or CFP study materials which I have the entire collection).

Oil priced in gold you never saw any inflation. Oil priced in U.S. dollars you did.

"Destruction of wealth?"

If I own a home and it goes up $500k in value and then loses that value, have I really lost wealth that I didn't possess to begin with? The mistake is in not recognizing the opportunity to take advantage of the aberration in housing prices by selling and locking in that wealth (same could be said for some stocks). There was asset inflation and now asset deflation.

The problem lies in the fact that many Americans took some of that newly created "wealth" and spent it on depreciating assets like home improvement, vacations or even the stock market (which at first rose and now is seeing the effects of lower demand and closer to real value, but not yet).

> Yes, but what if the goods increased? What if then they > suddenly decreased and the leverage decreased
> accordingly?

"What if?" is the appropriate question. As explained above, if the goods aren't sold to lock in wealth, and all of a sudden the demand decreases and the wealth that once was there is lost, it's just a matter of reigning in the boom caused by Fed intervention in the free market. As Mises says, the "bust" is upon us. Those who saw this coming, and understood ABCT (Austrian Business Cycle Theory) invested or dis-invested accordingly.

Those of us who posted frequently on the Richard Russell bulletin board (Dow Theory Letters) saw this coming a mile away. It's not rocket science.

We do find ourselves in a crossroads of waiting to see who is right. Time will take care of this and as I said, I am still doing my own research on the deflation/inflation issue. Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, has thrown his hat into the ring today on the Mish/North discussion: mises.org/story/3541

Bottom line; the jury's still out. As I said, I can definitely see validity in both camps, but you never answered the question relating to examples in history of deflation winning out and the currency getting stronger when the monetary system is being flooded with more money. There is none.

> Again, you make claims that there is such a strong
> relationship between the value of the dollar, or inflation,
> and gold. You have yet to provide ONE SINGLE
> SOURCE for this claim. Yet, you can simply go to
> google, put in "correlation between gold and inflation",
> and you find the same magic number, -0.28. Refute it or > stop parroting it.

I gave you an answer right away to which you did not comment but repeat the same request for proof in subsequent posts. I'm not sure what else you want from me, but I do expanded on this below. Here is what I wrote:

Jul 12 10:03 PM (PST) I said the following:

"...before 1971 the price of gold was fixed by the U.S. government. When Nixon took us off the gold "backed" standard in August of that year, the price of gold averaged $43.71 an ounce. Subsequently, Americans could start purchasing more than $100 an ounce in 1975.

So gold was $43.71 (avg) on August 15th, 1971.
Gold is $914.00 bid as we speak.
The S&P 500 was 98.76 on August 15th, 1971.
S&P last close was 879.13.

Gold has outperformed stocks. Now to the dollar and inflation...

$1 in 1971 would require the purchasing power of $5.31 utilizing the government's CPI data that you know has changed over the years.

Gold is higher because it is a true indication of inflation.

There is at present a decoupling of gold from the dollar. I wrote an article on this here: fedupbook.com/blog/inf... "

Further proof:

First, know that I am only analyzing things after the decoupling as that is when the rules changed, as well as the introduction of the Euro giving the world an alternative to the dollar....

What were the cost of goods after Nixon took us off the gold (backed) standard? What are the costs of goods of those items today? Why are they more expensive? Have the prices increased relative to the price of gold? Why haven't they?

In a world where the medium of exchange is constant, prices should deflate because of innovation and technological advancements. Wages would not need to rise as the individual's purchasing power goods would increase due to falling prices.

This simply is not the case today. So gold rises in "U.S. dollar price" because the dollar, the medium of exchange, increases thus making the goods, more expensive. How else can the producer of the goods maintain the same wealth if they don't increase prices? They're not going to keep prices low and stay in business.

Having a sound medium of exchange would resolve this issue.

I'd really like for you to tell me how the trillions of dollars of future needs of our country, that I outlined in a previous post are going to be paid for. Furthermore, if most of the wealth destruction has already occurred, then that resolution can be discredited. But I do think there is more wealth destruction to come in real estate and the stock market and of course, the dollar (and gold will benefit from this).

And yes, it is true that gold also acts as a safe haven investment. It has dual benefits as such, a U.S. dollar hedge and a fear hedge. But we're not in "Tulip" territory by a long shot. We're still in the elongated 2nd stage of the gold bull.

As to your ratios, I see now where you are getting them from...Mish: globaleconomicanalysis...

First off, I'd like to see Mish update this to today's numbers. Second, he utilizes, via the authors who he quoted, Roy Jastram's work from the Golden Constant which I analyzed in a post here on Seeking Alpha, interestingly enough titled: "Inflation with Gary North or Deflation with Mish?" you can read here:
seekingalpha.com/artic...

As I said, I'm more interested in the numbers from 1971 forward, and especially since 1999.

> Great, you think it's a decoupling. Yes, it is a decoupling, > but your reasons for the decoupling are wrong.
> Temporary decoupling of the dollar to gold have occured > many times in the past, mainly because of flight to safety > vs all other asset classes. The data backs that up.

Only once has decoupling occurred since 1971 when there was no real competition to the U.S. dollar. Now there is plenty of competition and the world knows this.

> Comparing Iceland or Zimbabwe, or South America to
> the US is simply ridiculous. They are hyperbolic
> cheerleading headlines intended to get people scared,
> but in reality, there are massive differences between our > current situation and those situations. First off, we still
> have the world's largest economy and, as a ratio of total > leverage to GDP, we are far better off than almost any
> major economy in the world. Second, there was nothing > to Iceland, Iceland WAS the banks. This is quite different > than the US since we also have manufacturing, Ag, IT,
> Drugs, and a plethora of other industries.

> You can compare numbers all you want (garbage in,
> garbage out), but without rudementary contextual inputs, > your conclusions will be wrong.

Didn't compare to Zimbabwe as that would be foolish. I chose Iceland as it was a current example(2008) and yes, I realize it's not a perfect apples to apples comparison, but what is? Iceland did however have better economic numbers than the U.S.

But Iceland didn't have a Fed that could bailout their banks (and other entities) before the crisis hit. In the end, they did get IMF funds that also helped the Argentina get out of their mess.

There is no entity besides the Fed that can help the U.S. situation and instead of cutting back on spending, our government spends even more. Meanwhile, the 53rd bank failed this year. Don't hear too much press about that.

I'm still waiting to see the insurance companies accounting for this commercial real estate debacle that is occurring. No one is writing on that yet.

But I agree. We're not Iceland. I didn't imply that, just giving an example of the economic numbers behind the two countries.

Our GDP though is primarily government spending these days. How long can that last? You can read my analysis of GDP here: fedupbook.com/blog/eco.../

>Mish was right on about Schiff, who happens to be yet >another person who talks a big talk about US economy >decoupling, dollar crashes, and gold skyrocketing. >However, when it came to actual application of his >"knowledge", he fell flat on his face and should be called >out. While I don't agree with Mish on a lot, I happen to >think that if more so-called "brokers" and "investment >advisors" were called out, publicly, and very harshly, we'd >avoid this type of economic trap.

IMO, Schiff's mistake is in his buy and hold mentality, which I personally am not a believer in, unless it is physical gold (for obvious reasons I have outlined above). I had an exchange with Mish on this about Peter. My complaint with him was the public attacks on what would be considered a timing issue for Schiff's clients. Those that got in early with Schiff would have done fine, but those who got in say in late 2007 and early 2008, got burned. They have since recovered some and are now probably losing again. Of course most financial advisor's in the United States had their clients losing money with the most recent stock market crash from it's highs in November of 2007, so Schiff is not alone as others deserve criticism as well. It is this buy and hold mentality I have a problem with. I think Mish even did a recent article on it, so we are in agreement there.

Mish did tell me that Peter had clients take equity from their homes and use it to put it in the market. I don't know the truth of the matter as he didn't give me a url to look at of the allegations, but that is something that makes no sense, especially in a declining real estate market.

As I said, I read them all...and then do my own analysis. My crystal ball hasn't let me down too much. But how many investors have their own crystal ball? How many even go as far as you and I have in this exchange in analyzing things? Not many eh?

Appreciate the toned down conversation. I don't claim to have all the answers, but we can agree to disagree about the inflation scenario relating to gold. I'll be putting my money where my brain takes me though.

I'll let you have the last word as I have to get on to research and writing....

Jul 13 01:04 PM