Why I Got Gold Wrong 39 comments
David Bailey
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There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.
One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.
I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:
- Commodities: See "deflation" above.
- Real estate/REITs: Are you kidding?
- Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.
- Corporate Bonds: Spreads too high, too much risk.
- Municipal Bonds: No bond insurance, hurt by falling tax revenues.
- Treasury Bonds: Yields INCREDIBLY low.
- Foreign bonds: Nobody even knows how to buy them.
- American Stocks: Cramer says "1987".
- Emerging market stocks: 1987 or 1929, take your pick.
- Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".
That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.
Gold is the only asset with - if you'll allow me - an untarnished brand.
Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.
Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.
In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:
Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.
In the meantime, goldbugs, have fun and, as ever...
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This article has 39 comments:
"I have a bridge in Alaska that I'll sell you, cheap."
Musta been one of those people who whined 'I hate history - it's so boring!' Just because we are facing near term deflationary pressures does not mean that we are facing longer term net deflation. In fact, the lessons of history are utterly clear: empires at this stage, having exhausted their currency via monetary manipulation and fiscal abuse, who owe and cannot possibly pay, have only two choices: default or debase. Either scenario is a positive for gold.
Fiscally speaking, this nation owes, not $10T, or even $11T - $12T now, but anywhere from $60t - $90T, depending on assumptions. Boomers are starting to retire. This is imminent. Where will that money come from? The only *possible* answer: the printing presses.
Monetarily speaking, the size of the tsunami heading our way has barely registered yet - $700B for a "bailout" plan? Think that's 'real money'? Are you kidding? There are $60T in CDS's out there, and over $600T in derivatives of dubious value. This bailout is aptly named, however - it is intended to serve as an opportunity to the money elites to cash in for a few weeks, a few months, and then leave regular investors holding the bag when it all comes crashing down when the tsunami hits.
Trillions and trillions and trillions of dollars are coming due, both in private and public, and China, Russia, Japan, and the petroStates are almost done lending.
As Arthur Silber has put it: "How in the world does any adult -- any adult who is not suffering fatal impairment of his cognitive faculties -- convince himself that this kind of make-believe can continue indefinitely? The United States government is completely broke and drowning in debt that extends through the next three, five, ten, who knows how many generations. Finished. Washed up."
And Mike Whitney notes: "The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future."
You got gold wrong not because gold bugs got lucky, which is essentially your assertion here (and a rather snide one at that). You got gold wrong because you are ignorant of both history and of the reality surrounding you at this moment in time. Your analysis is laughably limited, that's why you got gold wrong, and why you still have gold wrong for the longer term . For you to be right, the US govt and the financial sector would both have to be essentially solvent, such that there would be 'good places' to put 'money' once the current 'unpleasantness' is over and things return to 'normal'. Normal is over. Things may well 'look' more or less normal again, and this may persist for some time, but real 'normal' is ancient history.
Yes, there's deflation in credit and some asset classes like RE, stocks, bonds, etc. But you completely fail to account for the fact that our govn't (and world govn'ts) are creating money out of thin air for TRILLIONS in bailouts and stimulous packages and nearly as much in routine deficit spending. This money printing will outweigh the loss of money from bank losses, as while the bank crisis will end the deficit spending will not and will even increase. If you think a $550B deficit is bad, wait till we're in full bore recession and tax revenues are way off. $1trillion deficits will become routine. They'll be paid for with printed money, hence.....massive inflation!
Now, if credit default swaps and other credit disasters occur they may dampen inflation for a while, but in the long run we're more like Zimbabwe than Switzerland in terms of our currency.
And quoting Cramer is like quoting a poop flinging monkey at the zoo. Type "don harrold cramer" into youtube search and watch Cramers lies and horrible calls for yourself.
Very interesting choice of words...and very telling from the rest of your comments.
People who were astute enough to invest in Gold, did not invest in Gold and Silver because they are cheering on the sidelines for the collapse of the economy...they were just seeing the writing on the wall. Don't blame them for their lack of faith in the markets, obviously they knew something you admit that you didn't.
Actually, historically and as recently as seconds ago gold has been used as money. Maybe not by those that don't own any , but certainly by those that do.
Question - do you actually have to know anything about gold to be able to post on Seeking Alpha?
goldprice.org/live-gol....
What planet does Mr. Bailey hail from that he thinks Gold is booming right now?
Secondly, it may indeed be true that we are undergoing a deflation right now due to the vaporization of credit, but it is also true that the only way out of that without an immediate collapse of the financial system is INFLATION INFLATION INFLATION.
Thus, if the price of gold were to start showing some strength it might be in anticipation of the huge inflation that is looming. Mr. Bailey, ever heard the concept that the market does not reflect the present economy, it anticipates 6-12 months going forward?
So I hope indeed gold does stage a rally.
Regarding gold as money, you need to check up on your history. Before the dollar left the gold standard, paper money was equated to poker chips. The REAL money was the metal backing worthless paper. And I saw worthless because, post gold standard, the dollar is backed only by the US government's word, which is, now more than ever, worthless.
Right on oldgoldbug. The value of gold doesn't change, only the dollars it takes to buy it.
I think I'll add Mr. Bailey to my watch list so I can make sure to sell whatever he's buying.
Perhaps it will lead to our adopting a sound monetary system somewhere down the road, rather than our "funny money system" of US dollars and other toilet paper whose value is based on the authoritarian power of government rather than markets?
"Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency."
So Islamic states do not adhere to Islamic law. What's your point, Bailey?
These bozos like Bailey make the CNBC nitwits look like Nobel Laureates.
Of all the uninformed dribble I've seen about gold. This is perhaps the worst.
Check my blog for some insightful coverage, or my articles:
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if nothing else, the emotional binding we have to gold will inspire continued interesting activity
love the comments!
--ikk
Correlation with the market is generally negative and also the way the US is printing money, gold is a great hedge.
Yes, it will go down after a crisis but over the long term, it will be more valuable as the dollar depreciates. Buy GLD and hold on for the ride.
Factually incorrect.
Islamic Law proscribes lending-for-interest/u...
Islamic Banking provides for risk-and profit sharing instead. In hindsight, a lot less unstable than debt securitization :-)
The author might also think a little deeper about what he calls "false and chimerical" in the belief that somehow gold is money after all.
Please, SeekingAlpha editors, when will we get that article-rating option??
Also, interestingly, Islamic law favors full-reserve banking.
Thanks for sharing.
On Sep 23 11:54 PM User 268370 wrote:
> Okay, I'm convinced. Gold it is... But how does a new investor get
> into it? Stocks? Coins? Bars? Are sites like Monex and Blanchard
> legitimate? Where do gold bugs go to get there start?
>
> Thanks for sharing.
>
>
Dave
-csh
On Sep 24 08:02 AM david rojas wrote:
> Can anyone tell me what you think the true price of gold is now,
> not the gov. manipulated spot price. Since gold is priced by the
> dollar, Is it really going up in other currencies as well? I hope
> this is'nt a goofy question but I really would like someone to answer.
> You all seem to know more about the subject than me. I've only started
> reading "seeking alpha" for a few weeks, though my instinks were
> correct since I agree with most of you.
> Dave
-csh
On Sep 23 02:27 PM Jimbo wrote:
> I was a child during the great depression, but my understanding was
> that Roosevelt seized privately held gold and raised the price of
> gold from $20 an ounce to $35. This effectively devalued to dollar.
> Gold mining stocks took off and The government "Primed the Pump"
> by printing money. Every economic book I have read seems to say that
> gold rises in price in inflation and deflation. I tends to be in
> the doldrums during periods of price stability.
Dave
csh
www.the-privateer.com/...
That site shows the price of gold in 4 major currencies. I agree with csh though that you are looking at the price of gold from the wrong angle. The value of gold never changes. Instead of thinking of how many dollars or euros it takes to buy an ounce of gold, think of how much gold it takes to buy a dollar or a euro. As the chart shows, the price of gold has been rising in all currencies, mostly because inflation is a worldwide problem at the moment. Part of this is due to international trade. As the Fed devalues the US dollar, foreign countries that export goods to the US also need to inflate their respective currencies so that the prices of their goods in the US don't increase. Many joke that inflation is America's largest export, and they're probably not far off. This is why the PRICE of gold is increasing in almost every fiat currency (note I say price, not value; it's the value of the currencies that are changing).