Gold Price Plunges: Might as Well Hold Stocks

I knew it was time for some action when I received an e-mail promotion entitled "Fannie Mae/Freddie Mac bailout to ignite huge wave of inflation sending gold to $2,200" last week. Its author argues:

The government is already 6 trillion dollars in debt, and doesn't have this money. So they either have to borrow or print a colossal amount of new paper money. And that's going to ignite a new wave of inflation that will make the late 1970s and early '80s -- when inflation reached 14% a year -- look like a Sunday school picnic. Gold almost tripled back then and I expect it to at least double with the coming wave of inflation.

With another Jimmy Carter in the wings for the White House, who am I to argue against the "history repeating itself" line of argument?

So far, however, gold is behaving just like the speculative commodity it is. Just like oil -- whose realistic and immediate upside is $150, $200, $500, depending on who you ask and which plummeted $30 in the last two weeks -- gold is hitting the skids right now. Yesterday, gold for December delivery fell to $895.50, down $12.40. Prices hit lows of $889.10 in electronic trading.

Part of the reason for this temporary decline is that gold's hedge value against the dollar fell as the greenback ignored dire predictions for the demise of the U.S. economy and actually increased to a six-week high against the euro and pound sterling.

On August 1, Howard Ruff wrote on Kitco.com:

Gold and silver seemed to have stalled out, raising questions as to whether or not the bull market is still intact. It still is! I remember during the bull market of the '70s when gold and silver stalled out for as much as two years with a decline of up to 30% on the way to their eventual highs of $50 silver and $850 gold. Then as now we heard a chorus of voices claiming the bull market was over, so liquidate! The fundamentals of money-supply growth were still in place, so I begged you to hang on, and we were eventually handsomely rewarded.

Today is the same, only more so. With government unfunded liabilities (for Social Security, Medicare and Medicaid) more than $50-trillion, and no end in sight, and government doing its ostrich act (head in the sand) hoping the pain will just go away, and their standard practice of just throwing money at every intractable problem, we have set the stage for continuing soaring inflation. (...)

So hang in there and be patient. Someday you will brag about buying silver below $20 and gold under $100.

I know "gold under $100" is just a typo. At least I hope it's not a Freudian slip. But if, as Mr. Ruff implies, fluctuations of 30% and more are supposed to be accepted as standard deviation for gold, this supposed Führerbunker against inflation -- I have to tell you that I take U.S. banking stocks any day.

Oil's downside by now has been pegged at $110 and even $70 per barrel, that's 26% or even 50% below its record high. For gold, a synchronous decline would result in prices around $750 or even $500 per ounce. It seems unlikely. But, since my gold bug friends brought up the Carter Administration... history not only documents straight increases -- but horrendous drops far larger than that, all within the last three decades.

Stock position: None.

Comments

[Donald Johnson:]

Back in the 1970s I wrote a column mocking Harry Browne's claim at a seminar I covered that gold was a hedge against inflation and recession. This was not long after gold trading opened on the CBOT and NYMEX, and I've always considered gold a haven for speculators who know when to buy and when to sell.

Gold's not an investment. It's a bet.

2008 Aug 06 08:58 AM

[FoxV:]

not exactly sure what your getting at here Mr Amberger. Mr Ruff makes true statements about the US fiscal circumstances. Care to actually address his points?

As for gold at $750 and $500, those aren't support points on any chart I've seen. The Gold support points I have are $850 (very strong), $800 (weak) and $650 (Herculean strong).

Care to provide some data to your arguements

2008 Aug 06 10:24 AM

[chux08:]

"gold is behaving just like the speculative commodity it is."

That's this author's problem....gold, he thinks, is a commodity. That is UN-TRUE and a big mistake for gold (and silver to a lesser degree) is REAL MONEY. The rest of the world knows this but only in America is gold's role as the only true store of value/wealth distorted into something different. Well, they try that to a certain extent with manipulating markets etc but guess what ALWAYS comes back to it's true value, unlike those paper FRN's??
Gold as a bet against the establishment or even as a hedge against unstable times and economies? OF COURSE it is, that's what scares the powers that be about gold and silver the most, the once and future form of REAL MONEY. There will be no other way no matter what your convoluted definition of wealth may be today. Those that forgot or ignore history do so at their own peril. Gold and silver have thousands of years of history and use and their day is about to shine again. Hope you have some...

2008 Aug 06 10:34 AM

[Larry House:]

If gold is just a commodity, why did we once have a gold standard supporting our currency? Perhaps we should have an oil standard financial system now. You can call gold whatever you want, but the solidness that it gives to a currency is without question. The place of gold as a standard of value around the world is without question. The value of this article can be summed up in "The price of gold goes up and down." Big deal.

2008 Aug 06 12:27 PM

[FoxV:]

Here's a good example why Gold will one day (soon?) regain its status as REAL money

bloomberg.com/apps/new...

"Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after using an accounting change to record a $5.2 billion gain related to its debt securities."

Don't like the value of your paper, then just changes the numbers written on it. Banking stocks, the biggest purveyors of fictitiously valued paper, are dead men walking IMHO

2008 Aug 06 12:53 PM

[bold4gold:]

Gold is much more than just a "speculative commodity." You should listen to your friend and buy some!

2008 Aug 06 05:07 PM

[DenisL:]

Old conservative investors always believed that one should Hold at least 10% of assets in gold....always for unforeseen crises. I think that is prudent nowadays. This 10% is a minimum until we see what the monetary base/M1 money supply do next month. The monetary base had a huge jump this month giving a hint of future inflation. At some point the Fed MUST inflate. Government spending had gone nuts even BEFORE the housing price decline. The continuing decline at least until late 2009 underpins WAY too many overleveraged debt instruments held by banks that we are not even thinking about yet....but we will! The presumption now is that M1 inflation will kick in after next year. Then gold will be a great buy, but if they are inflating the base now (at it sure looks like they just might be), THEN one might want to hold a LOT more than 10% of assets in gold. Gold is GREAT to hold in economic crises (like we are in now) and in war. War with Iran is possible, not likely if we are sane, but if we go to war and we will then get $400+ oil, then one would be very happy to be holding gold. VERY happy.
So own some gold now....and buy a LOT more if it goes lower. It will go back up, the question is when. Just keep an eye on the warmongers, Bush/Cheney/McCain and the spend us into oblivion guy, Obama. The M1/monetary base and declining housing prices will dictate the timing...or a war or something other crisis. Everthing is kind of brittle and jittery and skittish right now. Just my opinion. Take it for what it is worth.

2008 Aug 07 09:41 AM

[User 30121:]

Hmmm...what are you kidding, J. Christopher? Are you SUGGESTING that we (living in crisis) IGNORE the only way out of this funk--by buying Gold and Silver--reject that way out, and put our $$$ in the paper-driven stock market where greedy elitist egomaniacs will roar with delight? I think your a fool, sir.

2008 Aug 07 10:07 AM

[Charles Lon...:]

Everyone is right and everyone is wrong. Winners and losers can be found in any market, be it gold, stocks or horse racing. To the point, time horizons for entry and exit are paramount. I note that the ONLY advice for selling gold when it was recently at its high came from Elliott Wave International. I am too stingy to pay for their newsletter, but they actually did a freebee on the subject that stands on its own. Long term as in more than a year? Sure, count me in for gold.

2008 Aug 07 01:01 PM

[Jake2:]

Fun listening to Gold Bugs arguing with one another, isn't it?

2008 Aug 08 12:15 AM

[NOWHEREMAN:]

Stocks are less of an investment and more of a bet than gold will ever be. Sure, Sure, Sure stock indexes have all multiplied many times over the last hundred years while gold has only gone from $35 to above $1000.

BUT, that gold is still with us somewhere while thousands of stocks which existed during that time frame are not.

You want safety buy gold. You want to bet on a stock, speculate go buy Enron or Bear Sterns...ooops not around any more! too bad they didn't invest in gold instead.

2008 Aug 08 12:16 AM

[Charles Lon...:]

This will be one more revelation of falsehood. Stock indexes such as the S&P500 are manipulated, or to me kind, "managed". That is to say, losers are simply removed and replaced. See article and all comments at: www.clusterstock.com/2...

2008 Aug 08 01:38 PM

[Tom Szabo:]

Mr. Amberger, I seem to recall back in the Taipan days you were more friendly to gold when it was still languishing at sub-$300. Why the change of heart now in its moment of triumph? It seems to me you hold a personal grudge against the Midas metal, possibly the result of one too many disappointments. You're right, gold is not a true hedge against inflation. That's why it's price went from $42 to $250 between 1971 and 2001 (an increase of 500%) while the CPI (1982 = 100) went from 40 to 177. Ooopss . . . gold must not be a true inflation hedge, it outperforms inflation by too much! Note that I'm using the longest time frame and absolute lows, so unless you are a hopeless case, the results would have been better. In fact, the more you think in terms of decades not days, the better those results will be. Unless you're saying the world's monetary and financial system is about to undergo a paradigm shift of lower credit, less banking, less spending, lower entitlements, less consumption, etc. In that case, why would you want to hold banking stocks?

2008 Aug 08 06:30 PM

[Lukester:]

Great comment Mr. Szabo! I've also followed Mr. Amberger's comments and thoughts over the years, and occasionally they are not bad. However the comments on gold above are more than a little myopic at this juncture, and as you point out, quite ahistorical too. I am also underwhelmed by his perception of "value" in the purchase of these "beaten down financial stocks". If his intuition is telling him these are "great buys" now due to their being something more than a mere trader's six month rally (perhaps at very best), and if he were my financial adviser making a "sell gold buy financials" call, I would pan him for that call. That means, "thank you, but you have just been dismissed". The interest in financial shares here at "bargain" prices evidences a curious lack of engagement with the most probable course of America's economic fortunes in the next five to fifteen years.

I much appreciate your own work Mr. Szabo, and that of your stalwart (now former) associate, Antal Fekete, who enjoys a reputation for considerable sobriety and depth of thinking as to the decade facing us ahead.

Mr. Amberger's offhand comments here suggest he might benefit from shedding one or two of his conceits and "reading around" a little more broadly. A certain Mr. John Williams of Shadowstats, and a certain (now former) US Comptroller General "Walker", come to mind as an obligatory first stop on such a "reacquaintance tour" of our current economic landscape, for Mr. Amberger. Anyone wishing to sound breezy and glib on the topic of gold and silver's relevance today is skirting perilously close to becoming a "callow financial analyst", which is sooner or later, a risky analyst to follow. There was a time, for several decades past, when Mr. Amberger could get away with that sort of breezy dismissal of the need to seek shelter from a structural, very high inflation (not "hyperinflation", but cripplingly high inflation nonetheless) which the US is apparently now condemned to go through at some point in the next few years, but Mr. Amberger at least to my view does not have the margin as an analyst, to indulge that breezy dismissal any longer. He no longer has this license, not by my say-so, but by the say so of people like Comptroller General Mr. David Walker and Mr. John Williams, who has been tracking the government's approaching fiscal "hard landing" (more like a ripe tomato about to hit the concrete at speed) for many years. Mr. Amberger apparently needs to either shed his gadfly tone about his recommendations as a financial adviser confronting this fiscal mess upcoming, or "go back to school" and desist from dispensing financial advice while he gets up to speed on the larger issues behind gold's re-emergence.

2008 Aug 10 03:35 AM

[J. Christop...:]

@ silveraxis: Read your comments about gold to my father over the phone. He laughed. Since he is able to operate the various Inflation Calculators, he's still waiting to break even on his 1978-1981 Krügerrand & Maple Leaf "investments". Suffice to say, he ceased being a goldbug sometime during the Kohl years in Germany.

(Wonder what he'd say about that inflation hedge quality had he bought gold in March at $1,033...)

More here: www.todaysfinancialnew...

2008 Aug 11 03:45 PM

[Lukester:]

Mr. Amberger,

Surely you can't be hauling this ancient straw man argument out of the cupboard? I expected something more from you. Financial asset and material asset markets as you know far better than I, move in large multi-decade cycles. To employ your father's recollections of the "performance" of his gold and silver investments (which he purchased in 1979-1980?) across the next 25 years is the very essence of a straw man argument. Quite apart from anything else, if your father purchased gold and silver in those two years he was relying on some extraordinarily poor macro cycle advice! Any housewife with a modicum of astute sense in 1980 would have noted gold had already been in a bull market for 15+ years and it was hence becoming considerably "long in the tooth"?

This is a popularised argument, not a real argument.

No-one is falling prey to the "gold is pure money and always has been" simplifications either. It can and does suffer huge swings on any annual basis. That it "pays no interest" however has got to be the most obtuse objection out there in our present decade however. However your thesis (buy financials because they are at a juicy discount) while suggesting readers "dump" all their gold holdings is a gadfly investment advice.

I reiterate, that you go to iTulip.com and read Mr. Eric Janzsen (feel free to comment there, newcomers are welcome!) Perhaps most to the point, read the most intelligent opinions you can locare (not the easy to contradict stupid ones) refuting your notion that we must be entering an environment wich will see financials prosper and gold wither. It is important that you do not purport to provide well grounded financial advice colums here without sober mindedly reading through the data (not opinions, data) provided by Mr. John Williams at shadowstats.com.

Now rather than entertain your father on international telephone calls, an exercise which conduces primarily to positive bias re-affirmation, why not forward this communication to your dad without further comment, while you BOTH then go to consult Mr. William's data at Shadowstats as a "grounding exercise"?

There is nothing remotely to do with an "offended gold bug's religious principles" reaction at work here Mr. Amberger. What is at work is the simple "reality check" that last time some of us readers of your comments checked the data, we still noted (sharply steepening!) negative real interest rates.

If you consider it robust financial advice in such an environment to steer your readers towards financials and away from gold in that environment, I think your rationalisations for this insight must involve some considerable acrobatic warping of the standard economic theory. Sharply worsening negative real interest rates are toxic to financial assets' income streams, to the stability of their collateral, etc, and that is not even venturing into the huge potential for the further decay of their "collateral". Negative real interest rates conversely, are highly beneficial to gold, nasty corrections notwithstanding.

Rather, it appears that you have gone the way of so many other "once-stalwart" analysts, in recent days, who don't always succeed in staying balanced on top of the ball - you've interpreted or rather "conflated", a severe reaction in the commodities sector, led by oil and gold, with a secular change of trend. An investor riding a secular trend makes the really big money - by staying long when it's apparent the past six year gold bull market would be highly anomalous to abort in mid-trajectory.

And any student of the long cycles (commodities vs. financials, running like clockwork in alternation the past century and before that too) readily notes it is indeed a mid-trajectory for this commodity cycle, and indeed there if your ead of the declining quality of ore grades in practically all essential minerals and then look up from your analyst's desk far enough to note we will hit 8 billion human locusts on the planet in another thirty years, it becomes apparent that this commodity cycle may be somewhat "anomalous" in it's "longevity".

A really astute analyst will go in search of the most intelligent proponents of a thesis contrary to his own, not go and consult with people who merely reinforce his theory with straw man arguments drawn from 1980.

No acrimony here at all Sir. Only cool assessment of the dubious merit of your market call, as it will bear upon the next five - eight years, particularly for the Americans and the British, who's currencies are in various stages of accelerating depreciation. In the USD case we may well have a sharp and persistent rally, even extending out many months in an extreme case - but anyone arguing that USD rally has real national fundamentals for legs is a pied piper of gadfly analysis, at leasty in my view. The USD is a share of USA INC. And USA Inc. is a "corporation" heading for the intensive care ward in the next five years, at least if we are to accept ex-Comptroller General of the US Govt. David Walker's testimony. Maybe he is too light-weight for you? Read Mr. John Williams, at very least. Or re-read him, if you have already read Williams and concluded that you had fully digested the data he presents.

shadowstats.com (where have you been Mr. Amberger?).

Another superb source for tracking the very currency dysfunction which you so glibly overlook is Doug Noland, at prudentbear.com. You must know these two analysts perfectly well, but you seem to merely skate ate their revelations as would an MSM financial analyst. Whatever happened to all that old TAIPAN insight?

2008 Aug 17 07:37 PM

[Lukester:]

One more snippet Mr. Amberger, to bolster your insight on the relative merits of "over-hyped gold" vs."beaten down financials in the bargain bin":

[ Eric Janszen from iTulip: ]

QUOTE:

3) The dollar and inflation. In the minds of those forecasting commodity price and wage deflation, they have not made the connection between over-indebtedness and currency values. They can see collateral values vaporizing, the volume of loans issued contracting, and credit contracting, the conditions of a debt deflation. But because their analysis is ideological they cannot see the essential contribution of Keynes to our way of thinking about this problem, because he observed correctly is that what happens under these circumstances is that the demand for money greatly intensifies. If that demand is not met, commodity price and wage deflation results. Under the gold standard in the early 1930s, that demand could not be met. When FDR took the US off the gold standard the demand for money was quickly met and inflation resulted.

2008 Aug 23 02:41 PM

[Lukester:]

This piece of the quote above did not post - this is the remainder of the quote above:

Japanese policy makers were constrained in the 1990s by the fear that the yen would hyperinflate if they used currency depreciation as a tool to meet demand for money. The Fed today can meet the demand for money with neither the gold standard to constrain it nor serious fear, at least at this point, of the dollar hyperinflating. As long as the US can depreciate the dollar, commodity prices will not deflate.

4) Commodity price inflation is a leading indicator of future wage inflation. A few months ago we posted the Fed's research that demonstrates this. If this inflation goes on long enough, rising wage inflation is an eventuality. As this is a global inflation, we will see global wage inflation.

5) Rates of change, and thinking in two dimensions at once. Falling demand is not in and of itself deflationary. If it were then we'd see commodity price deflation in Zimbabwe. Combinations of rates of change in demand for goods and demand for money compared to the rates of change in the supply of goods and money are inflationary or deflationary. There are four variables not two as the deflationists conceive.

2008 Aug 23 02:45 PM

[J. Christop...:]

All chit-chat aside... with gold almost at $750... I think I really was quite on the mark... if I say so myself: www.todaysfinancialnew.../

2008 Sep 10 05:27 PM

[yipes:]

Metals bad, fiat good...yea, thats the ticket. Also...
Pro Wrestling IS REAL !!!

2008 Sep 16 09:41 PM

[dran:]

But you were wrong on Oil's downside.
"Oil's downside by now has been pegged at $110 and even $70 per barrel..."

On Sep 10 05:27 PM J. Christoph Amberger wrote:

> All chit-chat aside... with gold almost at $750... I think I really
> was quite on the mark... if I say so myself: www.todaysfinancialnew.../

Jan 15 10:39 PM