Adam Katz

Credit Markets and the Price of Gold

Smarty Pants,

Another point that I should make is that in our discussions my original thesis has been faded out. That is that the demand for gold is keeping it above it's intrinsic value. I am sure you are smart enough to understand that just because something is priced in dollars, it doesn't mean that the asset has a perfectly negative correlation to the value of the dollar. CAT for example is subject to its own supply/demand, although the dollar value does have some implications it is not the whole story - the same with gold.

What I believe we saw in the run-up in gold prices (and oil) is that the idea of limited supply puts pressure of excessive volatility to the upside. Too much money chasing too few goods and the gold price itself over inflated. When you compare it's price to other real goods (real estate, oil, silver) those prices have come down far more than gold has. The gold market still has more inflation priced into it than a lot of other assets, purely due to short term supply and easy fundamentals to understand for retail investors.

At the same time I accept the risks to the upside and should that occur I believe it will be drastic and that's why I hold OTM calls. A flood of demand coming in from the Saudis, China, or anyone could put massive upward pressure.

From the U.S perspective, I think the clearest play is shorting long term treasuries. I just think that the most obvious outcome of all of this is that the U.S will have to pay significantly higher interest rates to borrow long term. Should they aggressively print to the point that gold goes to $2000, I can guarantee you that the long term borrow costs will be through the roof as well. Should they convince the world to keep lending to them and not be forced to print massive amounts of money in the short term, yields will go up as well as supply explodes.