Why Gold, If Deflation Is the Threat? 69 comments
-
Font Size:
-
Print
- TweetThis
Alice Schroeder wrote a great column for Bloomberg yesterday that I’m just getting to. The best stuff comes at the end, where she describes why some people are buying gold even though inflation doesn’t seem to be a big risk. (Apologies in advance for block-quoting lots of stuff in this post, but I think it’s worth it…)
[Gold bugs] aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation.
In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.
Schroeder is describing, in much simpler terms, what economist William Buiter has called a “sudden stop” event. (I’m having trouble logging on to FT to find the right link, but the guys at Baseline Scenario have a good one here.) Let’s take a quick detour to Buiter then, writing early this year:
But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics – I expect that US sovereign bond yields will begin to reflect expected inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia….
The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely….
The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors. . . . But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.
Most economists, using their conventional models, are looking at things like “output gaps” to rationalize additional borrowing to stimulate the economy. So long as people and capital are unemployed, cost-push inflation isn’t seen as a threat so stimulus is believed to be cost-free. The risk, of course, is that we can’t borrow to infinity. At a certain point — tough to say when — we’ll tap out the national credit line. Where economists get in trouble, IMHO, is they envision this nebulous period in the “medium term” when the economy will be growing again and debt can be paid back. As I argued in my column yesterday, this ignores the fact that growth, which is to say growth in spending, is no longer possible without incremental borrowing. We’ve gotten ourselves into a cycle of perpetual borrowing to, in Schroeder’s words, “pump the economy back to a high-water mark that was phony to begin with.”
To Schroeder’s conclusion:
As in any bubble, those who recognize this need to act well in advance. Historically, governments have taken action to prevent currency flight when the owners of a severely overvalued medium of exchange start selling so much that it adds to the pressure on its price. They make private purchases of gold illegal, or tax the exchange of currency.
Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance.
The bolded section is why I haven’t touched stocks in two years and don’t plan to for some time: The U.S. economy is underwater. The value of our obligations is greater than the value of our assets, which is to say the equity value of the economy is negative. The best proxy for that is the stock market.
Stocks aren’t going to zero. They have option value. But a 90% fall from the peak is what I see happening eventually. Over what time frame, I haven’t a clue.
But that’s what happened during the Depression. Today we’re far more leveraged…
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 69 comments:
What I'm hearing reading and studying, an increasing % of people way smarter than me are saying Mr. Market will end up the year right where it is right now, somewhere between DOW 9000 and 10000. Upside from where we stand is only 500. However, if a correction to, say 8500, does occur, then it's buy time.
Made a mini-fortune since late March. Maybe I'm wrong, but I'm not willing to risk loosing the gains made back to greed in an extremely nervous, overbought, overvalued, wildly diluted market.
Recently, this downward trending, whipsaw market is akin to a teenager whose peers chose to sit at a different lunch table.
Really? And why doesn't any one know? Because the Federal government does't HAVE a balance sheet. If they did---don't hold your breath---I am sure it would be bristling with undervalued assets like: the western forests, rangelands, minerals and water (unless envirowackos lock them up); and intangibles like our military dominance of the oceans (including shipping lanes.
On Oct 02 09:32 AM yellowhoard wrote:
> Gold is where money goes when other investment classes are going
> down.
And, for the deflationist argument, yes, it's true we're experiencing deflation in some assets (not energy or food mind you) but governments everywhere are ensuring there's going to be plenty of paper circulating to chase these when the animal spirit of buying returns.
On Oct 02 11:24 AM cyclingscholar wrote:
> <<Right now, the American economy is worth less than the value implied
> by the market value of its obligations. How much less, no one knows>>
> Really? And why doesn't any one know? Because the Federal government
> does't HAVE a balance sheet. If they did---don't hold your breath---I am sure it would be bristling with undervalued assets like: the western forests, rangelands, minerals and water (unless envirowackos lock them up); and intangibles like our military dominance of the oceans
> (including shipping lanes.
There is something terribly wrong in our country. End it...buy gold.
During the 1920s, the United States experienced a remarkably bullish equity market. However, gold stocks, in general, were not participants; instead, they underwent a downward trend. Gold companies had been afflicted by a bearish market since the late 1880s. This would all change with the onset of the Great Depression. Gold stockswould prove to thrive during this global economic slowdown. Our central illustration will focus on the Homestake Mining Company, one of the world's largest gold producers in the early twentieth century.
Homestake's main operation was in the heartland of the United States, mining gold from the hills of South Dakota. Most gold sector historians agree that Homestake serves as a fair representation for the entire gold mining industry at the time. One must note that the U.S. government passed the Gold Standard Act in 1900 which placed the entire country on the gold standard, creating a fixed exchange rate with all other countries whose currencies were fixed to the gold price. With a fixed gold price, gold stocks fluctuated around production levels, growth rates, cash costs, and net asset value. Changes in the gold price were unable to affect the stock price when the country entered the Great Depression.
Homestake stock sold for about $65 per share in 1929. By 1933, the average stock price for Homestake was around $370. This represents a gain of more than 450% over the course of four years. The Dow Jones Industrial Average fell 89% over the three years between its 1929 peak to its 1932 bottom. Not only did stock prices increase for Homestake, but dividends also skyrocketed. In 1929, Homestake paid dividends of about $7 per share. By 1935, dividends had increased to $56, a staggering rate of 800% over six years. During these deflationary times, gold stocks not only retained their values but provided significant returns for investors.
Deflation, the underlying crisis during the Great Depression, results in heightened gold stock prices. The reason why is that deflation diluted the value of the U.S. dollar while the price of gold was fixed by the government. While some would argue that this fixed gold price ensured the rise for gold stock prices, this fallacy is simple to debunk by examining the positive effects on gold stocks after the removal of the gold standard in 1971. Even though the gold price was no longer fixed, gold stocks performed normally. Interestingly, Congress passed the Gold Reserve Act of 1934 and gave the government permanent title to all gold assets. Most importantly, it increased the gold price to $35 and further devalued the dollar. This certainly contributed to the spike in Homestake's share price from 1934 to 1935.
Looking forward, gold stocks are very promising under the current market as deflation is likely. Should deflation enter the 2009 economic crisis, gold stocks will be set to perform at record highs. Gold prices would cross the $1000 barrier and further elevate gold company shares. The magnitude could be far greater than what was witnessed during the Great Depression when Homestake had annualized gains of more than 100%. Gold will no longer be seen as a placeholder for value, but as an investment for an uncertain future.
----------------------...
Money without intelligence is like a car without a road.
www.intelligentinvesti...
Also, while gold is holding its value at a high level, gold miners see all their cost DECLINE as prices recede - energy, cement, steel, explosives, drilling, etc etc etc - so gold miner profits expand.
A dollar collapse feeds on itself, as inflation rises, rike premia rise, and interest on the deficit skyrockets. A classic case of reflexivity.
Gold and precious metals may be the best protection, but any tangible, global commodity would also hedge against the scenario Rolfe describes (e.g., oil, chemicals, agricultural products).
The reason why Homestake and other gold mining stocks took off from 33 is because of an inflationary event, not a deflationary event. It was because FDR banned US citizens from owning gold and then increased its value from $20.67 to $35. This massively increased the nominal value of gold miners because reserves and all future revenues were suddenly worth massively more in dollar terms. This set of a mining boom (output doubled from then to 1940) and a bonanza for gold stocks.
If FDR had done the opposite and increased deflation (by moving the dollar to $10 say) then this would have sent gold mining stocks in to a tailspin. Fortunately for them though, the government wanted inflation not deflation and that's why their dollar value surged.
On Oct 02 02:29 PM Joe Duggins wrote:
> Starting in 1929, the world would witness one of the greatest economic
> downturns ever recorded. Originating in the United States, the Great
> Depression began in late October with an unprecedented stock market
> crash.
Charlie C.
Eventually it will explode.
I would try contacting private producers first. At present, I think that all the tanks are brimming, so you may have a difficult time finding capacity. If you don't buy in sufficient quantity, you won't be able to sell it at a decent price, though. I think that you need about 25,000 gallons for the standard contract - about a swimming pool full.
On Oct 03 08:52 AM charlie c. wrote:
> Can some one tell me how to buy barrels of oil? I do not want any
> oil stocks. I am told that one can purchase oil and store it for
> a fee of $2.50 per barrel.
> Charlie C.
You mistyped - should be 'Deflation increases the purchasing power of the dollar.' Deflation also kills housing prices and asset prices, leading to malinvestment.
On Oct 02 03:38 PM chap08 wrote:
> Joe, I'm afraid that you've got all of this the wrong way round.
> You are wrong to say that: "Deflation, the underlying crisis during
> the Great Depression, results in heightened gold stock prices. The
> reason why is that deflation diluted the value of the U.S. dollar
> ...". It is inflation, not deflation, that dilutes the value of the
> dollar. Deflation increases the value of the dollar.
>
> The reason why Homestake and other gold mining stocks took off from
> 33 is because of an inflationary event, not a deflationary event.
> It was because FDR banned US citizens from owning gold and then increased
> its value from $20.67 to $35. This massively increased the nominal
> value of gold miners because reserves and all future revenues were
> suddenly worth massively more in dollar terms. This set of a mining
> boom (output doubled from then to 1940) and a bonanza for gold stocks.
>
>
> If FDR had done the opposite and increased deflation (by moving the
> dollar to $10 say) then this would have sent gold mining stocks in
> to a tailspin. Fortunately for them though, the government wanted
> inflation not deflation and that's why their dollar value surged.
>
>
> On Oct 02 02:29 PM Joe Duggins wrote:
We live in a interconnected global economy with independent sovereign nations. Sovereigns have to protect and feed the populace, not just make money. A nation with critical resources is valuable because of these resources. A currency that has been leveraged does not mean the nation's resources have been destroyed and finally, extended is not over-extended.
There is no "standard" global currency - gold's position as a de facto international currency only matters as long as it (gold) can be traded for something else. Gold appreciating or depreciating relative to one's home currency, not its perceived global value is the only thing that really matters. Knowing what gold is used for is critical when using it to trade.
All speculators, investors and charlatans will tell you (and what academics and really smart people won't tell you) is getting someone to take something less valuable for something more valuable is the key to successful trading.
The things most sovereign nations have in common right now is: 1) they are worried about internal strife and maintaining homeland security; 2) they are trying to avoid a disastrous trade war with important partners; 3) they are looking to not wage a hot war if they can get the same things by negotiating and swapping resources.
Accountants do not run nations. The chaotic circumstances we find ourselves in now....is an arbitragers dream. Don't be a sheep.
With all due respect. If youneed help figuring out how to store oil, you may be making a mistake storing oil.
Likely you will be better off buying an analogue of oil.
On Oct 03 08:52 AM charlie c. wrote:
> Can some one tell me how to buy barrels of oil? I do not want any
> oil stocks. I am told that one can purchase oil and store it for
> a fee of $2.50 per barrel.
> Charlie C.
On Oct 03 09:41 AM Northstar10000 wrote:
> Nat Gas has so many potential surprises that you must own it.
> Eventually it will explode.
The FED will wait to raise interest rates, because they know that once they start - kiss the Stock Market goodbuy. That will be the last wave of asset destruction. By the time the Obama regime is finished, not only will we not be able to curb terrorism abroad, we won't have enough resources to protect the country. A Russian academic has already carved up the US: Alaska to Russia, the West Coast to China, the South to Mexico, the Mid-West to Canada and the NE to the EU. I can see you shake your head, but we are on track to see the revenge of the Reverend Wright.
Great post Rolfe!
I don't know how banks related to govenment, as long as they don't transfer banks debt into govenment balance sheet----tax payer's money, stock market shouldn't devaluate that much.
We certainly seem to be at the top of a grand American consumer driven credit cycle. People don't have access to the easy money of the Bush bubble years and the ATM house has been foreclosed upon. The goal then for the banking regulators is to engineer an orderly contraction of price and credit so the system doesn't implode and wipe us all out.
The second issue is that all borrowing isn't the same if the government borrows for infrastructure projects that create value then we win on multiple levels. First, we employee thousands of people and stimulate the economy now, which helps solve the price stability problem noted above. Second, if we build ourselves an incredibly valuable smart grid, fix the deferred maintenance of our transport system, invest in renewable domestic energy production and create a killer internet pipeline system, we create an infrastructure that generates wealth for decades. We are living on the investments made by our ancestors in the 30s. People are still powering their houses from Hoover Dam.
Smart grids, combined with alternative energy and better internet pipelines have synergies that we have not yet imagined or begun to exploit. Similarly, the combination of fixing our roads and pushing the development of cleaner more fuel efficient trucks will improve our interstate commerce.
We can't afford inaction. If you dance around the volcano now, you'll be sacrificed later. As our 20th century infrastructure falls into further obsolescence.
One has simply to look at the method of purchasing today's bread by the population there to make the case for gold.
Rolf bewilders me: He seems to say if you dip the brush often enough in the black paint can the velocity will give you a white wall. Then upon reflection, says, wait a minute, upon close observation, the paint in that can really is--and remains, Black.
And see who takes your ETF , after the collapse, in tomorrows black market??. The sign will read "No checks for Chickens". And no amount of Political numbers "Razzle-Dazzle" is going to put one in your pot!!.
And it's not going to get any better unless you are dreaming...
On Oct 02 09:38 AM pslater wrote:
> Well done Rolf. I hold gold through ETF's for the same reasons mentioned
> in your article. I believe the risks of BHO and his merry band of
> henchmen repeating FDR's gold confiscation and currency devaluation
> are significant. I have also believed for the last year that the
> very credibility of every Central Bank in the world (and therefore
> ALL fiat currencies) relies on the price of gold not going up too
> much. Zero Hedge's recent discovery that the Fed has been manipulating
> the gold market for decades is chilling to say the least.
Hey when you own the bullion, why not lease it out to banks and make some income that way? Any objections?
On Oct 03 03:07 PM FDNY RET wrote:
> Zimbabwe printed a "LOT" of money, even more than us in comparative
> size terms of course.
>
> One has simply to look at the method of purchasing today's bread
> by the population there to make the case for gold.
>
> Rolf bewilders me: He seems to say if you dip the brush often enough
> in the black paint can the velocity will give you a white wall. Then
> upon reflection, says, wait a minute, upon close observation, the
> paint in that can really is--and remains, Black.
>
> And see who takes your ETF , after the collapse, in tomorrows black
> market??. The sign will read "No checks for Chickens". And no amount
> of Political numbers "Razzle-Dazzle" is going to put one in your
> pot!!.
On Oct 03 03:22 PM john connor wrote:
> Market manipulation has been done for decades and Gold ETFs are used
> with the FOMC, GS, JPM. That money is taken from the ETFs to short
> the market via futures. GLD in it's own prospectus doesn't state
> that is wholly owns the gold. Who has done a recent audit and has
> video proof of it's holdings? Because evidence, like SLV-silver ETF
> holds no gold only derivatives. If you really want to invest in gold/highly
> liquidable and to strip the shorts and shoot the price of REAL gold
> to the moon is to take delivery of the metal from the COMEX. Being
> stripped of the REAL metal will force the commercials and the gov't
> to step into the market to make good on the contracts. Just look
> at the evidence GATA and what the Chinese are doing and follow suit.
> ETFs are a scam, simple as that. Sure it is easy, Ive used them but
> once you buy the physcial the price WILL/HAS gone up:-)
Oh, btw, did you know there are different types of depressions? Deflationary(Great Depression), Stagflation(70s-early 80s), and Hyperinflationary(curr... collapse, where we are heading) the Weimer Republic, Argentia, Hungary and Zimbabwe is currently.
On Oct 03 10:22 AM MarkitWacha wrote:
> Deflationary periods, like what we're in now, are silly and dangerous.
> Basically, Helicopter Ben needs to get in his chopper and start it
> up like he promised in 2003/2004. I'll take 10% inflation over 1%
> deflation ANY day.
>
> You mistyped - should be 'Deflation increases the purchasing power
> of the dollar.' Deflation also kills housing prices and asset prices,
> leading to malinvestment.
>
> On Oct 02 03:38 PM chap08 wrote:
I don't have any problem with the idea of gold as a store of value and I own some through a fund. The need for holding physical gold should be left to those that are paranoid and fearful of an apocalypse (I don't own a gun and don't plan to buy one).
But those, like Carlos, that compare the US economy to Zimbabwe, Argentina in the 70s or the Weimar Republic, are incredibly off in their analysis (if repeating what has been said over and over qualifies as analysis). There is no economic comparison, in size, strength, or amount of deficit per capita).
But America does need to get its act together and start focusing on policy that will shrink the deficit and not expand it. But this should be done in a smooth, measured way. It is the sudden direction changes that cause economic problems (as suggested by the author).
The world needs and trusts America as a customer, hence the currency Reserve status. But that is also the problem. America needs to move away from being a net importer and get the capital account back to neutral (where it hasn't been since the early 1960s). A devalued dollar vis-a-vis big net exporters like China and India, that peg the dollar exchange rate, would be very helpful for all of world trade. I am hopeful (not certain) this will happen over the next 10-15 years as China and India (and other less populous emerging economies) discover that domestic consumption has its benefits and it is unnecessary to "beggar they neighbor", which is net importers America and Europe at this time.
And yes, I recognize that dollar devaluation will benefit the price of gold, which is why I own some. I also own ETFs and stocks of Brazil, Taiwan, Canada, Australia, and China, which all have large natural resource or export based economies that will appreciate as the dollar depreciates.
Credit definitely got out of hand. But it can't all be reeled in at one fell swoop without killing the patient.
On Oct 03 02:56 PM storm999 wrote:
> Nice column but I think you are dancing around the edge of the volcano.
> You argue "growth in spending, is no longer possible without incremental
> borrowing. We’ve gotten ourselves into a cycle of perpetual borrowing
> to, in Schroeder’s words, “pump the economy back to a high-water
> mark that was phony to begin with.” This makes two assumptions we
> are at the top of a credit cycle and that all borrowing is the same.
> When did we Americans become so afraid of making smart investments
> for our future?
>
>
> We certainly seem to be at the top of a grand American consumer driven
> credit cycle. People don't have access to the easy money of the Bush
> bubble years and the ATM house has been foreclosed upon. The goal
> then for the banking regulators is to engineer an orderly contraction
> of price and credit so the system doesn't implode and wipe us all
> out.
>
> The second issue is that all borrowing isn't the same if the government
> borrows for infrastructure projects that create value then we win
> on multiple levels. First, we employee thousands of people and stimulate
> the economy now, which helps solve the price stability problem noted
> above. Second, if we build ourselves an incredibly valuable smart
> grid, fix the deferred maintenance of our transport system, invest
> in renewable domestic energy production and create a killer internet
> pipeline system, we create an infrastructure that generates wealth
> for decades. We are living on the investments made by our ancestors
> in the 30s. People are still powering their houses from Hoover Dam.
>
>
> Smart grids, combined with alternative energy and better internet
> pipelines have synergies that we have not yet imagined or begun to
> exploit. Similarly, the combination of fixing our roads and pushing
> the development of cleaner more fuel efficient trucks will improve
> our interstate commerce.
>
> We can't afford inaction. If you dance around the volcano now, you'll
> be sacrificed later. As our 20th century infrastructure falls into
> further obsolescence.
>
The above comment; if I understand it correctly; is that pslater holds paper gold!
I find this quite extraordinary; not being personal: but we have known that paper gold has no reality, may I suggest that you read your contract closely, this is a none provable, non inspectable theoretical asset.
Better by far to own gold in the ground, not only secure but real with the leverage potential to increase your holding substantially, especially in the light of history as disclosed in these posts.
To illustrate the link below charts the comparison.
data.cnbc.com/quotes/G...
Here is the point, if you are concerned about timing gold before a market crash, to time buying a metal etf, don't worry about it. All one needs to do is wait till the market crashes, relax, and when it flat lines for 2-4 weeks, buy the miners or the miner etf. If history is worth anything, your gains will well exceed a pure play like GLD, SLV and your gains will likely be several multiples higher than the commodity holding ETF's.
Keep in mind that miners are also companies and will fall with the other companies listed on the exchange. If you wait no guessing is required, just stay in cash, and make a calm and rational move after the crash.
For what it is worth,
Mark Joseph
Its' obvious that if overseas dollar holders started to sell their holdings in a big way we would be in serious deflationary territory and Gold will soar in value, but it is argued that dollar holders won't do this because they hold too many dollars and risk a big reduction in their foreign holding's asset value. This argument makes sense when we are talking about large sovereign nations like China, Japan, France, UK, Saudi Arabia etc.. But what about small dollar holders?
It is said that there are more paper dollars circulating in Russia than in the US! The Russians have never trusted banks, they have always stuffed their savings into their mattresses. I'm not sure if individual Russians can buy Gold on the open market, but I bet they can on the underground market; that's probably where they got their dollars in the first place. What about small states that have dollar holdings, like Liechtenstein and Monaco and Yemen, why shouldn't they get out of the dollar right now? I bet they are getting nervous.
So in the event that all the smaller dollar holders get out what does that mean for the dollar? Does anyone know how many US Dollars lie in the hands of private individuals and small sovereign countries?
If this is true, then owning the gold companies would be the ONLY way to own gold. Gold companies would retain their value as they sold gold to the government. Perhaps this is why the gold mining index has reversed its relative position with bullion lately.
Thanks for the ideas.
On Oct 02 02:43 PM Slvrizgold wrote:
Th> Because MONEY is the most valuable asset in deflation. And GOLD is
> the best form of money because it cannot be inflated/debased/deval...
>
>
> Also, while gold is holding its value at a high level, gold miners
> see all their cost DECLINE as prices recede - energy, cement, steel,
> explosives, drilling, etc etc etc - so gold miner profits expand.
Great advice.:
> It is worth noting that right after the fall in Oct / November 08
> and the March crash (09) the miner's silmultaneous market crash (GDX
> ETF) well exceeded the over all dow and S&P crashes. The rise
> of this sector (miners) well, well exceeded the rise in the general
> market and far more made up for the earlier drop.
>
> To illustrate the link below charts the comparison.
>
> data.cnbc.com/quotes/G...
>
> Here is the point, if you are concerned about timing gold before
> a market crash, to time buying a metal etf, don't worry about it.
> All one needs to do is wait till the market crashes, relax, and when
> it flat lines for 2-4 weeks, buy the miners or the miner etf. If
> history is worth anything, your gains will well exceed a pure play
> like GLD, SLV and your gains will likely be several multiples higher
> than the commodity holding ETF's.
>
> Keep in mind that miners are also companies and will fall with the
> other companies listed on the exchange. If you wait no guessing is
> required, just stay in cash, and make a calm and rational move after
> the crash.
>
> For what it is worth,
>
> Mark Joseph
YOU CAN GET IT WRONG
AND STILL YOU THINK THAT IT'S ALRIGHT..."
The move in gold has been entirely due to dollar weakness, in euros gold has done squat. In a deflationary period (note: in the Detroit area we are getting bigtime deflation in grocery prices, but then we actually have grocery store competition in this region), the value of the dollar will go up, hence, gold will go down. Period. At some point the trends will reverse, but gold could be a lot lower by that time and never get back to these gold prices. In any event, I would not buy gold (or miners) until it at least is making new all-time highs (or is selling for less than $400/oz).
In 2006 I was sending out warnings which compared the current Nasdaq to the Dow of the later 1930's, now I see that analysis all over the place. Upon further cogitation, I have concluded that the 1938 comparison only goes so far (even though the percentage changes of the drop and the snapback rally have been almost identical to the Dow of 1938): the rest of the story is that the market is ALSO going to act like the market of 1930, where the snapback rally was followed by a drop of another 80% from the new "lower high"; the analogy I've been using is that of a rollercoaster, where after the first dip the cars get towed up a big hill to the top of the REALLY BIG DROP!
Now the real fun begins.
On Oct 02 01:24 PM Mayascribe wrote:
> Very funny, Michael! What do you during eclipses?
... and in it she said: "Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation."
I'd like Ms. Schroeder to explain to me what her idea of "inflation" is.
Then I'd like her to explain to me what "currency depreciation" means.
Apparently she thinks they are two different phenomenon.
FDR "confiscated" privately held gold but only had a 15% success rate; kind of like prohibition - it simply went underground (no pun intended).
On Oct 02 01:24 PM Mayascribe wrote:
> Very funny, Michael! What do you during eclipses?
On Oct 03 08:25 AM David Sullivan wrote:
> I prefer oil to gold. Either Iran will explode a bomb or Israel
> will bomb Iranian choke points in the next year. In either case,
> oil doubles. The oil shock may only last a month or so, but it will
> be severe.
My 2 cents-
will gold go higher maybe
But if you think we will have inflation which gold bugs are betting on wouldnt it be better to buy dividend paying stocks which do alot of business outside teh US?
My personal plan is to wait for the "1932" bottom then move into developing market stocks.
When all stocks lose value but god goes up, you'll be able to buy more when the real bottom is in.
;-)
On Oct 04 07:31 PM bobbybutte wrote:
> I enjoyed the article
>
> will gold go higher maybe
>
> But if you think we will have inflation which gold bugs are betting
> on wouldnt it be better to buy dividend paying stocks which do alot
> of business outside teh US?
Best of luck,
Eric
On Oct 04 09:58 PM ebworthen wrote:
> Good point.
>
> My personal plan is to wait for the "1932" bottom then move into
> developing market stocks.
>
> When all stocks lose value but god goes up, you'll be able to buy
> more when the real bottom is in.
>
> ;-)
20% Food store and Uranium (ore).
Or put another way, if you invested $1000 in The Dow, you would have $9500 now. If at the same time you invested $1000 in gold, you would have $22,700. And you never would have paid a cent in tax, you would have had no continual trading costs, zero turnover and no expense ratio.
There is one major caveat to this...dividends. With dividends, it is likely that the Dow has been a better investment, but when one factors in inflation, stocks are NOT the great investment vehicle people think. That is just what bankers and investment professionals tell you. I know. I was one.
Not only does inflating and spending redistribute the wealth in unexamined ways, it also skews the economy, increasingly "punishing" economically viable actions and "rewarding" economically foolish actions or conditions. It should be no surprise that all currencies that have gone into this inflationary spiral unchecked have perished, with dramatically negative consequences for the people and countries who possessed the currency. Because the United States has begun this process, a spirit of self-preservation strongly suggests reducing your holdings of fiat currency and increasing your holdings of commodity currency.
Gold is the primary form of commodity currency in the world.
----------------
Money without intelligence is like a car without a road.
www.intelligentinvesti...
> Here is a wicked stat...in 1972 the Dow traded at 1000. Gold was
> at $44/ounce. 37 years later, the Dow is at 9500. Gold is at $1000.
> This mean that in a CONSTANT currency (gold) the 37 year capital
> appreciation of the Dow is MINUS 57%!!!!!
>
> Or put another way, if you invested $1000 in The Dow, you would have
> $9500 now. If at the same time you invested $1000 in gold, you would
> have $22,700. And you never would have paid a cent in tax, you would
> have had no continual trading costs, zero turnover and no expense
> ratio.
>
> There is one major caveat to this...dividends. With dividends, it
> is likely that the Dow has been a better investment, but when one
> factors in inflation, stocks are NOT the great investment vehicle
> people think. That is just what bankers and investment professionals
> tell you. I know. I was one.<
You, roy piper, have just given the perfect example of what inflation does and is. You're bang on the money.
OK, the variables of future policy choices may make the difference. Still, I have a question about the future of gold which some here may be able to answer.
It seems to me that, while there are some commercial uses for gold, the major part of what is mined is then accumulated by banks and investors as a store of future value. This is largely driven by fear. Fear for the dollar drives investors to gold. On the other hand, there may come a time and a gold price such that fear for gold may drive investors either to dollars or else to some alternative commodities that have more immediate and necessary uses. Other than self-serving narrators, is there anyone who can use real data (eg, production cost and volume) to argue for the future value of gold? Nick Guarino has offered such an analysis in his report "Gold is about to crash," but he has an interest in selling his newsletter.
Doesn't matter a jot how erudite any part of the article may be but finishing with the line 'time frame...I haven't a clue' is a kindergarten error. Let me tell you, the S&P is going to double, but I can't tell you when either, not even if it'll be in our lifetime.
Investing without a timeframe is technically pointless, you're better off giving it to your Mum.
On Oct 02 11:47 AM MikeX wrote:
> Wait until deflation sucks the money off the economy, and people
> will sell everything including gold to pay off debt which is mostly
> denominated in USD.
Source :
peterschiffchannel.blo...#