Option Trader Friday Outlook: Is the Dollar Going UUP?

Is it time to buy the buck?

As noted by Andrew Wilkinson on Wednesday, there was a huge volume surge in UUP call options, the ETF that tracks the US Dollars index value, ahead of the FOMC statement. 155,000 November call options were bought at the $23 strike level and another 155,000 were purchased at the December $23 strikes. The November calls came in at around .15 and are now .25 (up 66% in one day on UUP) and the December calls were executed around .25 and are now .40 (UUP up 60%) - this is not bad for a day’s work but was it just a day’s work or are we betting on a trend?

As you can see from David Fry’s chart, it’s not just the 300,000+ options (controlling 30M shares) that have been trading bullishly around the dollar - there has been a stunning surge of volume buying that has built up since mid-October as the dollar index skates along our own target low of 75.

So strong was the demand for shares of UUP that we noted in Member Chat that the PowerShares DB US Dollar Index Bullish Fund (UUP) was halted pending clearance of their request to register another 100M shares "in order to meet investment demand."

“There’s been a lot more interest in this ETF because investors are using it as a hedge on the dollar,” said David Stec, an ETF options trader at Group One Trading on the Chicago Board Options Exchange floor. “Yesterday, with the amount of options volume they saw, they probably have to add some shares. The ETF is based on the dollar versus a basket of currencies, so if there aren’t enough shares it might trade at a premium.”

The Dollar trading at a premium? Surely you can’t be serious! Well, I am serious and don’t call me Shirley… While this may be contrary to what you’ve been hearing in the MSM, where dollar bashing has become a popular blood sport, it’s the main reason we’ve been having trouble buying into this commodity-led rally, which has been primarily based on the 15% pounding the Dollar has taken since March. As I often point out to members, if you adjust the S&P to reflect a real currency, like the Euro or the Yen, then you’ll find that our "spectacular" 60% rally in the S&P since March is really just a 27% rally and looks like this to a foreign investor (S&P value converted into Euros):

Even mighty gold, which seems unaffordable to impoverished Americans at $1,095 an ounce (where we shorted the gold futures just this morning), has still not retaken its highs against the Euro from March and is, in fact, over 4% below that level:

So let’s say that gold can climb another 5% to $1,150 before European and Japanese traders see it as a double top. That’s why we went short on gold as very much ado was made about nothing when India purchased 200 tons of gold from the IMF this week. India is only buying at the "top" when priced in Dollars - as priced in Rupees, India is paying 20% less than they would have last year, when a dollar could buy you 39 Rupees (now 47).

Sadly, Americans are fairly clueless about currency conversion and the gold bulls prey on that ignorance and put up all kinds of charts and draw trends and attempt to baffle you with statistics because they can be fairly confident that not for one moment are we going to step back and look at things from a global perspective. Oil is scammed in a similar fashion but, unlike oil, the gold market is heavily dependent on physical demand and they can only drive up the futures as long as they have fresh suckers to reel in; but the price of gold collapses like quite the house of cards as soon as anyone tries to unload their shiny bits of metal.

That’s why you see non-stop advertising telling you to buy gold coins as an investment. The speculators need someone to take physical gold off the market, just like the Krugerrand craze that was used to drive up the price of gold. That’s why India’s purchase was such a relief and sent gold up 7.5% in the last 5 sessions - there had been a fear that the IMF would have to sell gold on the open market. China was originally targeted to be the gold buyer but the Yuan is pegged to the dollar and China had no interest in paying such a ridiculous price to store gold while India’s currency is just rolling off their 2-year high and they are using gold to lock in their gains.

As Goldman Sachs’s head of commodity research said on Wednesday: "It’s not a weak dollar that’s driving up crude prices - it’s higher oil prices that are driving the dollar down, sending metals and softs soaring. Oil represents 40-50% of the U.S. current account deficit, so a higher oil price represents an outflow of dollars that pushes the currency lower." Goldman is, of course, one of the most despicable commodity pushers on the planet, and I will detail this weekend how the global population is having their pockets picked in the great global oil scam, but Currie does get to the heart of the matter - there are NO fundamentals supporting the price of oil, gold or any of the other racing commodities, this game is all about the weakness of the dollar and heaven help them if that play begins to unwind and they try to exchange their black goo and shiny bits of metal for a very scarce supply of dollars.

Scarce dollars? What is this guy smoking, you may wonder? Well, this is something we’ve been tracking since July and here we have a chart of the M3 money supply that clearly shows that, since July, $750Bn have come OUT of circulation, reversing over half of the run-up in dollar float that begian last year with the passage of the TARP spending, that took M3 from 13.5Tn to $14.5Tn over 12 months:

"Hey wait", you may say, "this is not what they’ve been telling me on TV". No, it isn’t. That’s because the $2Tn that was injected into the economy wasn’t injected into a healthy economy, it was injected into a badly damaged economy and $1Tn of that money has already been used to repair the damage (mortgage defaults, credit-card defaults, derivative losses, Madoff scams) that has already been done to the system.

The very notion that putting $2Tn into the economy causing you to immediately have $2Tn of surplus cash to spend assumes that there was no need for the money in the first place. That’s like saying that you have a car that needs 1 quart of oil (TARP I) and you put in two quarts of oil - how much oil will be a surplus? Obviously the answer is one quart and that, of course, assumes you don’t have a leak or are not burning off a lot of oil as your economic engine continues to smoke. Unfortunately, the commodity bulls have the sheeple (who are terrible at math) convinced that there are two EXTRA quarts and that those quarts will somehow breed and multiply and create a third quart of stimulus until the world is simply awash in dollars and the only thing we will be able to count on is their black, sticky goo and shiny bits of metal to save us. What nonsense!

Like an accident victim needing a blood transfusion, this economy NEEDED $1,000,000,000,000 just to stay alive last year. Whether or not the additional stimulus was really necessary remains to be seen but the fact is that, as clearly illustrated on the above chart, the "excess" supply of dollars is being sucked up at a rate of $150Bn a month since June. The prior administration pumped the money supply up from $7Tn to $13.5Tn over 8 years and caused a MASSIVE commodity (including housing) bubble that burst with great fanfare last year. Just like any balloon, the economy expanded as money was poured into it, giving us the illusion of strength right up until the moment it burst. Now we have taped up that balloon and we are trying to reinflate it, but that doesn’t mean we are going to go right back to push it to the breaking point again, does it?

What’s really funny about gold in all this is that there are 5Bn ounces of gold in the world that have already been mined, and pretty much all of it is still in circulation as gold is not generally destroyed. In the past two years, the "value" of that gold has gone up from $3.25Tn ($650 per ounce) to $5.5Tn ($1,100 per ounce), a gain of $2.25Tn or pretty much ALL the money in the world that has been created since that time. That would, I suppose, make sense if gold was the only thing on Earth we spent money on but (funny thing) oil went up too - from $45 a barrel last fall to $80 a barrel today. Now oil is a little trickier than gold because we actually use it, but let’s say that we consume 85M barrels of oil a day globally, so a $35 increase in the price of oil costs us an extra $1.1Tn a year and, even better than that, the 2Tn barrels of oil that are in the ground gained $70 Trillion in value or 1.5 times the entire global GDP.

Isn’t that fantastic? I’ll bet you never realized how rich we were that we could afford to spend $72.5Tn on just oil and gold this year. Kind of puts that piddly $700Bn stimulus into perspective, doesn’t it? Of course, oil and gold weren’t the only commodities clamoring for those "extra" Trillion dollars - the entire CRB, valuing oil, gold, copper, lumber, food etc, rose 37% since March. 20% of the global GDP ($45Tn) is spent on Food alone, so that's 37% of $9Tn or a $3Tn bump in your annual food bill to go with the $1.1Tn bump in oil prices and another $1Tn spent on industrial metals (although no one is actually buying cars or houses, so that impact is limited).

Where is all this money coming from, you may ask? Well, as I said yesterday, this money is not excess money at all, this money is being squeezed out of the pockets of the labor force, who have been forced to accept not only the same pay but LESS pay in dollars from their employers, driving their standard of living down a stunning 12% in just one year while their corporate masters make stunning "productivity" gains as they get much, much more for much, much less.

What happens if these workers wise up and ask for money? That would create a demand for dollars to pay them with as the 10.2% of the US population who are now officially unemployed would themselves require $500Bn of those scarce dollars in order to go back to work. A simple 6% raise given to the working population - just enough to get them 50% of the way back to their 2007 standard of living - would suck up another $1Tn of global "surplus."

An ounce of gold is only worth $1,000 if you value 20 of them more than you do a new Toyota. An ounce of gold is only worth $1,000 to a person who values it more than a month’s worth of food for his family. An ounce of gold is only worth $1,000 if people have nothing better to do with $1,000 than buy a shiny bit of metal. If your boss decided to give you an ounce of gold this week instead of your paycheck - what would you do? You would go change it for dollars! What then, is more "valuable"?

So it is not the dollar itself that is worthless, rather that a lack of competition for available dollars has driven the price of commodities sky-high along with a prolonged attack on the dollar by the commodity pushers, who also happen to be the currency pushers, who also happen to be the experts the MSM turns to when trying to make sense of something as complex as International Exchange Rates. Once there is a real demand for the dollar - whether is is to buy labor or machines or cars or refrigerators - suddenly the "value" of black sticky goo and shiny bits of metal will normalize. And don’t forget that a resurgence in the price of US real estate can also pull dollars away from our runaway commodity sector.

Sadly, the majority of our market rally is based on commodities and it’s very likely that, priced in dollars, stocks will find equilibrium closer to that 27% up level we see for the S&P priced in Euros than the 60% level we’re currently at priced in dollars. Let’s say we level out at the 40% line, which would be right about 940 on the S&P and 9,650 on the Dow - not too far off from where we are now and, if we can hold that line against a rising dollar, then we may be able to rotate out of this mess but only if commodity prices come down to reality and stop sopping up all of our global liquidity.

Non-Farm Payrolls were a slight disappointment this morning with 190,000 jobs lost but it is the 10.2% unemployment figure that is spooking the markets. Fortunately we went bearish into yesterday’s hyperactive close as I said to members at 3:40: "Boy I just cannot bring myself to sell a DIA put! I figure a 100-point pop into the open will cost .50 and then I’d have to pay .50 to roll up to the $104 puts and sell 1/2 the Dec $100 puts for $2.60 (now $3.05) so that’s my plan - risking a 20% loss on the DIAs to leave the Jan $103 puts naked overnight. Still only about 55% bearish with that but I just can NOT get behind this very low volume move today."

As we expected, October hourly earnings are creeping up much faster than expected (0.3%) as we have very likely reached the end of the productivity gains (which were for Q3, which ended in Sept). We still have Wholesale Inventories to look at at 10 and we’ll see how much credit consumers lost at 2pm. Next week there is not much data and we are not going to be greedy on our short plays unless we see some volume conviction to the selling.

Our upside target levels remain as they were all week: Dow 9,962, S&P 1,066, Nas 2,097, NYSE 6,955 and Russell 580. Those will determine how we feel going into the weekend but I am pretty sure that 55% bearish will be the answer unless we get a huge sell-off that we want to cover.

Have a great weekend,

- Phil

Comments

[The shark:]

Brilliant as always - thank you for the insights - in language that I can understand.

Nov 06 10:57 AM

[svosavvy:]

nice article about dollar relationships. I also wonder what happens when treasury yields are actually bid up in now "competitive" auctions. Maybe fixed instrument yields as a whole increase and become competitve and people hungry for yield will rebalance out of stocks to an extent.

Nov 06 11:02 AM

[Nathaniel C:]

As regards the gold price, I would argue that people are losing faith in fiat currencies. The only alternative to fiat paper currencies is gold and other commodities. So you can blame the FED for rising gold and commodities, because if they immediately stopped printing trillions and increased interest rates, commodities would fall quite hard.

Nov 06 01:36 PM

[Mark Anthony:]

Philips Davis:

What you observed is a gigantic group of fools rushing into the US dollar. The fools and their money will soon be parted. Nothing more and nothing less. There is no need to over-interpret the market's foolish behavior.

Remember, in any market, the majority is always wrong. The big winners are always the minority.
seekingalpha.com/user/...

Your time is better spent studying the fundamentals of the US dollar, rather than speculate on OTHER people's foolish moves.

Nov 06 04:05 PM

[Andrew D:]

Phil,

I like your call. I can still remember you were calling oil topping (although you were a couple of months earlier). This is when people are betting really money, instead of just talking on TV.

Nov 06 07:11 PM

[User 473989:]

The tradings of UUP and its options on 11/05/2009 has very little or nothing to do with the expectation of the dollar movement. But it rather a short term play on the limitation of UUP share due to SEC suspension of the issuance of new shares. Once SEC approve, the UUP will drop down. At this point of time, the UUP movement is has very little to do with the dollar movement

Nov 06 07:13 PM

[Dialectical...:]

I have never trusted analyses that assume the people on the other side of the trade are a hoard of people who are bad at math... The goldbugs I know are pretty good at math. They understand that $1 now is less than $1 in 1980 while 1 oz of gold now equals 1 oz. of gold in 1980. Which would you rather have held on to for the last 30 years?

I have a $100 bill from 1950. It is not in uncirculated condition and as such it has no collectors value. It is worth $100. But I can't spend it, because I think it is cool that it is so old. What is not cool is thinking about how much that bill was worth when it was printed. The original owner could have taken his family for a three day weekend at a cabin on the lake. Today he could get dinner and drinks with a few buddies at a TGI Fridays.

Sure the dollar is going to go up and down, but don't try to paint those who put some savings into gold and silver as a bunch of simpletons.

Nov 06 09:02 PM

[untrusting ...:]

Fair enough to point to gold as a possible investment. But you have to compare investments then, not just raw dollars.

Lets do a comparison then on $100 at 1980 as you suggest.
1) Gold
- Average price of gold in 1980 per historical chart was: $594/oz. Therefore for your $100 you would get: $100/594=.1683501 oz.
- Today your .1683501 would be worth: .1683501 x $1096.90 = $184.66
2) Almost any high quality stock
2.1) GE - Jan/02/80 price of GE =$48.75 . Therefore for your $100 you would get: $100/$48.75 = 2.051282 shares of GE.
- Stock splits in GE: 1983=2:1, 1987=2:1, 1994=2:1, 1997=2:1, 2000=3:1 Therefore, just your stock splits alone would result in:
2.051282x2=4.102564 x2=8.205128 x2=16.410256 x2=32.820512 x3=98.461536 shares of GE today
- Therefore 98.461536 GEx $15.33 closing price today = $1,509.41
- Now consider the GE dividends from 1980 to today. They ranged from $0.015/share in 1980 to $.31/share lately. So assume an average of 1/2 the range or about $0.16/share quarterly since 1980.
That would be: $0.16 x 4 quarters x 29 years x average of 50 Sh = $928.00
- That gives you a GE total of $1,509.41 + $928.00 = $2,437.41 for the 29 year investment of $100 in GE.
2.2) And you probably could show much the same for many other stocks as well.
3) The comparison in total for your 1980 $100 US dollars.
3.1) Gold for your $100 in 1980 is now worth = $184.66
3.2) GE shares for your $100 in 1980 is now worth = $2,437.31

So you can go ahead and argue all you want about how valuable your Gold is, but the facts clearly show that almost any decent dividend paying stock would absolutely KILL your gold investment. In short, you can keep your 1980, $100, .1683501 oz of gold. Meanwhile, I will cash in my GE dividends and stock at $2,437.31 and buy $2,437.31/$1,096.90 = 2.2219983 oz. of gold. Thus I will have 2.2119983/.1683501oz = 13.19 times as much gold or return on investment as do you gold bugs. So if you think that's a good investment, then go ahead and keep buying more gold. Meanwhile the dividend stock buyers will keep outperforming you 10x over for decades to come. Probably even treasuries or low risk bonds would have far outperformed your gold investment, but too lazy to go through and do a comparison on that.

On Nov 06 09:02 PM Dialectical Materialist wrote:

> I have never trusted analyses that assume the people on the other
> side of the trade are a hoard of people who are bad at math... The
> goldbugs I know are pretty good at math. They understand that $1
> now is less than $1 in 1980 while 1 oz of gold now equals 1 oz. of
> gold in 1980. Which would you rather have held on to for the last
> 30 years?
>
> I have a $100 bill from 1950. It is not in uncirculated condition
> and as such it has no collectors value. It is worth $100. But I can't
> spend it, because I think it is cool that it is so old. What is not
> cool is thinking about how much that bill was worth when it was printed.
> The original owner could have taken his family for a three day weekend
> at a cabin on the lake. Today he could get dinner and drinks with
> a few buddies at a TGI Fridays.
>
> Sure the dollar is going to go up and down, but don't try to paint
> those who put some savings into gold and silver as a bunch of simpletons.

Nov 07 12:53 AM

[untrusting ...:]

Phil,
Many good points in your article, well worth considering. Thanks for posting it.

Nov 07 01:07 AM

[talld:]

Phil,

You are my favorite of all of the people I have found to read about the economy, with the possible exception of Will Rogers.

Nov 07 01:29 AM

[lower98th:]

About the money supply....the recent rate of change is clear, but Do Levels Matter? M1,2,3 are all up 25%ish over bubbly loosey-goose Greenspan 2006, aren't they?

Nov 07 07:59 AM

[Northstar10000:]

Don't make things too complicated. Scale into SDS

Nov 07 08:47 AM

[Iron Skillet:]

Sure we lost 750 billion. But we are printing money. Fact. Other countries are trying to get away from the dollar. We are thinking about another stimulus . Fact(More printing). You ever thought the way to have corrected the problem was just by naturally letting it take care of itself. Other countries like India are growing and consuming world supplies, which will replace us as consumers. If these other countries like China put there dollars out in circulation and thats a big if. We are in some deep crap. Been watching the news lately? We have gone to the point of no return. Not unless we quit all wars that we are involved with and quit all social programs and earmarks? See that happen. We are going to continue to print money. If we print money until we have equivlent of pre 2007 that just adds to debt which means we are going to pay with future labor. Do you think there is enough people to pay that off. With the baby boomers retiring, I dont think so. Are currency is in big trouble. We should not be so arrogant to believe we can inflate our way out of a problem. Look at history. Just because we are America doesnt mean the laws of supply and demand wont catch up with us

Nov 07 09:07 AM

[vonschumann10:]

yea, take a look at the chart of the S and P since March priced and gold....then try to keep smiling about your dividend paying stocks.

Nov 07 09:26 AM

[jotenn:]

I think your comments on CNBC are a bit unfair...after all, they have had Dr Doom (N. Roubini) on a number of times, and he has laid out a similar scenario on the dollar. Other commentators have also been dollar bullish although this is arguably a minority opinion. Like any source of information, info from CNBC must be treated skeptically, but can be valuable, as I can attest from many successful trades sourced there.

Nov 07 09:35 AM

[Brad Denny:]

"Oil is scammed in a similar fashion but, unlike oil, the gold market is heavily dependent on physical demand and they can only drive up the futures as long as they have fresh suckers to reel in; but the price of gold collapses like quite the house of cards as soon as anyone tries to unload their shiny bits of metal."

Entertaining reading. I learned a lot and enjoyed every minute of it.
Is it possible that the two words "oil" and "gold" in the first line of the above quote are transposed?

Nov 07 09:57 AM

[Bravekind:]

Thanks for your thoughts. I understand your point about much of the money simply repairing the damage, that is covering bad debt, and so NOT increasing the domestic money supply however, the money we use for oil, and for buying other foreign goods, and for paying interest of the debt does continue to flow into the reserves and accounts of other countries, so on a global purchasing scale, dollars continues to pile up and thus lose value.

This is precicely the reason to buy gold. The most solid of currencies, if you want to park cash.

The argument above, comparing gold to stocks, is comparing apples to oranges. Stocks are investments in a company, in production. Stocks entail risk, and so enjoy a reward premium (or loss!). You used for your example a successful stock. There are stocks in which you would have lost all your money. Gold (like the dollar is suppose to be) is a store of value, the best one available to us.

Nov 07 10:16 AM

[vonschumann10:]

the argument about unemployment and wages is sheer, utter, nonsense. The vast majority of the Fed's monetary stimulus still sits in bank vaults as excess reserves, and banks, primarily because they perceive no good avenues of lending, have been content to sit upon those reserves. Firstly, if workers 'wise up' and ask for more money, the likely result would be increased unemployment with real wages rising above the 'market clearing rate'- this is precisely what happened under Hoover in the early years of the Depression. But, assuming the author's rather tenuous premise that more money would be needed to pay the unemployed to return to work, how is that that money would 'suck up' any surplus of dollars? I hate to use Keynesian logic, but the circular flow is a rather simple concept- if we're talking about these increased wages 'sucking up' some sort of surplus (the only surplus is in bank vaults), we're talking about an outflow of money from the monetary base and excess reserves and into the spending stream. This would lead to price inflation as embodied in traditional measures of price inflation like the CPI, and would almost surely lead to a further weakening of the USD and a rise in all commodity prices. Furthermore, if unemployment for some reason were to decline- for instance, if by some miracle the stimulus package managed to succeed in stimulating output of some kind (not, of course, of any economically useful or sustainable kind, but output nontheless), banks would most likely resume lending to the working class and smaller businesses, which would only further contribute to the flow of dollars out of reserves and into the real economy.

Nov 07 10:35 AM

[Gigem77:]

"but the price of gold collapses like quite the house of cards as soon as anyone tries to unload their shiny bits of metal." This is hyperbole without any evidence. .

The eurobanks have been selling 500 tonnes a year for at least a decade and the price of gold has risen 400% over that time frame. The IMF just sold 200 tonnes to India and the price of gold went higher.

The rest of the piece can be likewise shredded.


Meanwhile, the dollar shorts are covering fast and the DXY is less than 100 pips above the year's low. www.reuters.com/articl...

Nov 07 10:53 AM

[User 170860:]

"as priced in Rupees, India is paying 20% less than they would have last year, when a dollar could buy you 39 Rupees (now 47)."
From 39 to 47 Rupee is 20% cheaper so in terms of Rupees they are paying MORE and not less.

Nov 07 11:12 AM

[djj420:]

If you're planning on going long the US$, you have to be pretty nimble. If effect, you're playing chicken with a train. A US$ rally could go on for at most a few months, or it could be a head fake that quickly reverses in just days.

If you're planning on staying net short the US$ (and not overleveraged; but well diversified in commodities/producers, PM's/miners, foreign bonds & commodity currencies, etc.), you could see your account values swooning for a while. But you'll eventually get it all back and then some. Just sit back, relax, sleep well, and let the macroeconomic tailwinds eventually work in your favor. Better yet, load up on anti-US$ plays when nobody wants them- because you can rest assured that the day will be coming that EVERYBODY wants out of the sinking ship that the US$ has become.

Nov 07 12:11 PM

[adan:]

before run off to another article, and forget, had to say, great article :

nice comprehensive array of data and shennanigans going on 'round the dollar -

our shared store of value for our hard efforts...

like you mentioned, "Where is all this money coming from...this money is not excess money at all, this money is being squeezed out of the pockets of the labor force, who have been forced to accept not only the same pay but LESS pay in dollars from their employers, driving their standard of living down a stunning 12% in just one year while their corporate masters make stunning 'productivity' gains as they get much, much more for much, much less...."

the weaker-dollar-is-good-... is, truthfully, only meant for a few of us, though not me ;-)

Nov 07 12:55 PM

[untrusting ...:]

Bravekind,
Your arguement is totally nonsensical. Are you saying that gold cannot lose value? Of course it can. It has many times before and will again, it just happens to be in an uptrend right now (at least against most currencies). In fact if one remembers correctly, gold has actually lost value currently against the Australian dollar in the current environment, so it not even true that gold has not lost value vs. some currencies.

The real truth is that gold is mainly an alternative investment. As such you have to compare putting your investment dollars into gold vs. say stocks, bonds, treasuries, real estate or any other investment alternative. When you make the comparison as an investment over any reasonable period such as 5, 10, 20, or 30 years then gold does not compare favorably as an investment. We showed you just one factual comparion via GE stock, and gold was a terrible investment when compared to GE stock. Go ahead and do your own comparisons on any asset you want and for the most part you will find that gold does not compare very favorably.




On Nov 07 10:16 AM Bravekind wrote:

> Thanks for your thoughts. I understand your point about much of the
> money simply repairing the damage, that is covering bad debt, and
> so NOT increasing the domestic money supply however, the money we
> use for oil, and for buying other foreign goods, and for paying interest
> of the debt does continue to flow into the reserves and accounts
> of other countries, so on a global purchasing scale, dollars continues
> to pile up and thus lose value.
>
> This is precicely the reason to buy gold. The most solid of currencies,
> if you want to park cash.
>
> The argument above, comparing gold to stocks, is comparing apples
> to oranges. Stocks are investments in a company, in production. Stocks
> entail risk, and so enjoy a reward premium (or loss!). You used for
> your example a successful stock. There are stocks in which you would
> have lost all your money. Gold (like the dollar is suppose to be)
> is a store of value, the best one available to us.

Nov 07 01:07 PM

[Gigem77:]

Untrusting:
10 years ago GE was a 60 dollar stock. 5 years ago it was 36 bucks. Today it is 15 bucks and change. During that time, gold has run from 255 to 1100. So your GE example shows how gold beat a blue chip stock over 1, 5 and 10 year periods. There have been no stock splits since 2000 and the dividends have varied from 10 cents to 31 cents, in no way compensating for the devastating drop in price.

The same thing is true of the dow, the nasdaq or the amex. Over the past 1, 5 and 10 years gold has outperformed by a large margin. GE is priced where it was in 1997 showing that buy and hold investors like you are getting killed. I bet you still own Oracle from 80.

Nov 07 01:28 PM

[untrusting ...:]

vonschumann10,
More total gold bug nonsense based on wishful thinking rather than factual comparison. It is pretty obvious that you are unwilling to do any type of objective comparison.

Take any number of examples from March/09 (as you suggest) and it is abundantly clear that any investment or trader would have far have outperformed your gold play.

1) Gold in March/09 was about $900/oz (little higher actually). Today Gold is about $1,100 oz. A gain of about $200/oz or 200/900= 22.22% (not annualized).
2) Virtually any stock just in the US market has far outperformed that.
2.1) C - was at about $1 then, now about $4 = 300%
2.2) BofA was about $3 then, now about $15 = 400%
2.3 GE was about $7 then, now about $15 = 115%
2.4) DOW was about $6 then, now about $24 = 400%
and on and on and on and on.
- The simple fact is that any stock trader would have killed the return on gold (let alone any extra return via dividends), simply by buying almost any decent stock.
3) Any high yield bond. Most bonds have returned over 50% since March, let alone any extra return from interest income.

So, you can stick to your delusional belief that gold has been a superior investment to other asset classes, because that is all it is, a delusional belief. The facts simply do not support the conclusion of gold as a better investment when compared to other asset classes such as stocks or bonds. If you can prove otherwise, then go ahead and prove it with some factual examples of virtually any widely held stock or bond. Of course you will not be able to, because your statements are based on personal belief and opinion, as opposed to factual comparison and analysis.

Personally, we have far outperformed your 22% return on gold with combinations of selected longs, occassional shorts, and many put and call options since March/09. None of which had anything to do with gold. So yep, we are smiling and expect to keep smiling for many years to come with superior returns that we expect to continue to far outperform gold investments.


On Nov 07 09:26 AM vonschumann10 wrote:

> yea, take a look at the chart of the S and P since March priced and
> gold....then try to keep smiling about your dividend paying stocks.
>

Nov 07 01:46 PM

[snoopyjc:]

UUP is currently a very broken ETF. See my chart analysis here: chart.ly/tzqdba and here: chart.ly/meaarx
--joe

Nov 07 01:48 PM

[Dialectical...:]

No, I don't have to look at investments when the argument is to buy dollars(!). Your analysis proved that my gold did okay from 1980 as compared to the dollar. My point wasn't that there was no better investment nor that you shouldn't buy stocks.

I agree with your analysis somewhat (I certainly wouldn't use GE as my hero stock). But tell me where in the above article the author is advising us to buy GE?


On Nov 07 12:53 AM untrusting investor wrote:

> Fair enough to point to gold as a possible investment. But you have
> to compare investments then, not just raw dollars.
>

Nov 07 01:52 PM

[talld:]

To those talking about 750 billion being the price tag of the bailout I can only assume you listen primarily to politically biased news sources. They fail to ever mention the almost 9 trillion spent during the Bush era for their own reasons, and leave their readers thinking the "bailout" was Obama's.

Please, vary out your news sources a bit okay? Here is a link to show that Bush spent nine trillion on the bailout. Please at least take a look at it.

www.bloomberg.com/apps...

Nov 07 02:12 PM

[Bravekind:]

I repeat - gold is a dependable STORE of value. The dollar is not. The following helps to clarify this. Professor Siegel makes the mistake of lumping gold against investments. But what he proves instead is gold's reliability as a store of value versus the dollar. This would have been clear had he included the fact that a $1.00 from 1802 is worth just Five Cents today.
----------------------
According to University of Pennsylvania finance professor Jeremy Siegel in his seminal book Stocks for the Long Run, here's what a dollar invested in various things would have grown to, from 1802 to 2001. (Amounts have been adjusted for inflation.)

•Stocks: $599,605
•Bonds: $952
•Bills: $304
•Gold: $0.98
----------------------...

Nov 07 05:01 PM

[sethmcs:]

The rush to gold is at least two or three years premature. Wait until the collective world governments screw up the exit strategy from the stimulus. Then you got a good case for gold. Until then deflation is the biggest threat.

Nov 08 01:40 AM

[Erick Tippett:]

The federal reserve board here is quite expert at creating
bubbles, commodities are merely the latest convenient
vehichle for their specious economic philosophy, though I
agree with Prechter that gold can be tricky and may be wildly
overvalued at present. But there is also the argument that
it is highly undervalued as well. Time will tell which argument
is most accurate as this market continues to give signals that
perhaps a severe correction is at hand with a strong dollar rally
certainly fitting that scenrio, it may not be far off at all!

Erick Tippett
Chicago, Illinois

Nov 08 03:59 AM

[CLH:]

A well stated analysis. Gold and commodities are bubbles waiting to head down.

Nov 08 07:10 AM

[ChrisG:]

Cherry picking time frames you are. Try comparing gold and S&P from Nov 07 to now. Different result no?


On Nov 07 01:46 PM untrusting investor wrote:

> vonschumann10,
> More total gold bug nonsense based on wishful thinking rather than
> factual comparison. It is pretty obvious that you are unwilling to
> do any type of objective comparison.
>
> Take any number of examples from March/09 (as you suggest) and it
> is abundantly clear that any investment or trader would have far
> have outperformed your gold play.
>
> 1) Gold in March/09 was about $900/oz (little higher actually). Today
> Gold is about $1,100 oz. A gain of about $200/oz or 200/900= 22.22%
> (not annualized).
> 2) Virtually any stock just in the US market has far outperformed
> that.
> 2.1) C - was at about $1 then, now about $4 = 300%
> 2.2) BofA was about $3 then, now about $15 = 400%
> 2.3 GE was about $7 then, now about $15 = 115%
> 2.4) DOW was about $6 then, now about $24 = 400%
> and on and on and on and on.
> - The simple fact is that any stock trader would have killed the
> return on gold (let alone any extra return via dividends), simply
> by buying almost any decent stock.
> 3) Any high yield bond. Most bonds have returned over 50% since March,
> let alone any extra return from interest income.
>
> So, you can stick to your delusional belief that gold has been a
> superior investment to other asset classes, because that is all it
> is, a delusional belief. The facts simply do not support the conclusion
> of gold as a better investment when compared to other asset classes
> such as stocks or bonds. If you can prove otherwise, then go ahead
> and prove it with some factual examples of virtually any widely held
> stock or bond. Of course you will not be able to, because your statements
> are based on personal belief and opinion, as opposed to factual comparison
> and analysis.
>
> Personally, we have far outperformed your 22% return on gold with
> combinations of selected longs, occassional shorts, and many put
> and call options since March/09. None of which had anything to do
> with gold. So yep, we are smiling and expect to keep smiling for
> many years to come with superior returns that we expect to continue
> to far outperform gold investments.

Nov 08 10:20 AM

[JasonGordon:]

Great article! I thoroughly enjoyed reading that. Not only was the information useful and in great depth, but your style of writing is entertaining. You also have a way of breaking down each concept so that it can be understood simply... I love it...

Keep up the great work!

Nov 08 10:30 AM

[Avery Goodman:]

I agree that the dollar is about to rally, and commodities, including gold (to some degree), are going to take a temporary beating. However, I disagree with your reasons why, and your idea that money disappears from the system simply because debtors default. The fundamentals are far more complex than that.

A $700 billion stimulus, especially when combined with TARP, TALF, and various Fed credit provisions is certainly NOT "piddly". Federal Reserve printing programs represent a real and important threat to the long term stability of the financial system.

I believe and hope that the Fed is about to drain some of the funny-money. However, if they don't, and, instead, add more funny-money, they will be putting our Republic in jeopardy. They will cause a spiral of negative opinion toward the dollar that will prove extraordinarily expensive or impossible to control, in spite of the current demand for dollars overseas. In that scenario, we will face the toxic fallout of hyperinflation, of the same type that created Hitler, after the Wiemar period.

Nov 08 12:59 PM

[LanceLink:]

A generally well-written article, but also a lot of cheap shots, like this one:

"An ounce of gold is only worth $1,000 if you value 20 of them more than you do a new Toyota. An ounce of gold is only worth $1,000 to a person who values it more than a month’s worth of food for his family. An ounce of gold is only worth $1,000 if people have nothing better to do with $1,000 than buy a shiny bit of metal. If your boss decided to give you an ounce of gold this week instead of your paycheck - what would you do? You would go change it for dollars! What then, is more "valuable"?"

I buy gold because I am looking for a safe store of value, for the long term. Of course I have to turn any asset into dollars before I can "use" it. What does the above passage prove?

Nov 08 03:32 PM

[tucsonbandit:]

Why do I always have to be buying gold in a 2-4 week period of 1980?

if a person goes back 40 years, and not 30 how does it look? I mean over 40 years stocks and their dividends should always kick the crap out of some horde of metal, sitting there doing nothing.

gold 1970: $37
gold 2010 : $1100

DOW 1970: 800
DOW 2010: 10,000

Gold=up x 29.73 or almost a 30 fold return.
DOW=up x 12.5

Actually, its not even close, even if you want to add in dividends. Oh well, so much for a 40 year time horizon. Guess you are back to picking some tiny window of time in 1980 to make a point.

Nov 08 07:15 PM

[tradrmick2:]

If you look at a Euro chart, it's hard not to see it going back to 160 or even 180. Good luck with the long dollars and short gold. It might have been ok for a day trade, but I'm pretty sure a longer term horizon will have you eating both of them.

Nov 08 08:14 PM

[User 449749:]

The author "untrusting investor" analysis was very interesting, and you must remember he was talking since 1980, not since march. Surely long term dividend paying stock create a great ROI. March to November been a great "trading" environment for stocks, futures, options and yes gold...and it has been a great opportunity pick up long term "investments" such as dividend winners.


On Nov 07 09:26 AM vonschumann10 wrote:

> yea, take a look at the chart of the S and P since March priced and
> gold....then try to keep smiling about your dividend paying stocks.
>

Nov 10 10:25 AM

[el dante:]

why you people argue over stocks vs gold is plain stupidity. which one of you genious investors out there are not holding any shiny metal bits to hedge against the dollar or enjoying the profits to be had since january. if you can't do abit of both, my oh my, you must be one terrific trader

Nov 10 09:34 PM