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Pater Tenebrarum  

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  • Gold- Buffett And Morgan Stanley Agree [View article]
    "During the recent recession, rising gold prices (see chart below) convinced many that precious metals were finally viable investments"

    What a strange thing to say. Since 2000 gold is up by 400% (a five-fold rise), while the SPX is up a grand total of 18.5%. What would you rather have been invested in?
    As to Warren Buffett, he may be a good investor, but his area of expertise are stocks. His frequent comments on gold are completely uninformed and only reveal that he knows absolutely nothing about gold, which is by itself not really problematic. What is annoying though is that in spite of knowing nothing, he still opines on it all the time. Morgan Stanley and most other mainstream brokers/banks missed the entire bull market, got bullish above 1500 and are getting bearish now. At best they can be used as a contrarian indicator.
    Lastly, similar stuff could be read in the summer of 1976 too. Gold had just lost almost 50% from its 1974 high - in fact, looking at broker reports and articles in the press that appeared at the time, they could have been written yesterday. There is zero difference between what was published about gold then and what it being published now. Gold promptly soared by 800% over the next four years. At the top, all the mainstream commentators got bullish again. There is nothing new under the sun.
    Jan 31, 2014. 08:46 PM | 10 Likes Like |Link to Comment
  • End Of An Era For Gold Investors [View article]
    The only form of money that actually survived from 'ca. 1613' is in fact gold. Most currencies extant since then have been repudiated (some more than just once!), and so have most government bonds . And if memory serves, a single bank that was around in 1613 has survived to this day: Monte Dei Paschi di Siena. Unfortunately it just had to be bailed out twice in succession, so by rights it should be considered bankrupt as well.
    Aug 6, 2012. 04:38 AM | 9 Likes Like |Link to Comment
  • Sense And Nonsense About Climate Change. What Do Investors Need To Know? [View article]
    In 1975 the 'scientific consensus' was that global cooling would soon reach catastrophic proportions and that 'something must be done immediately', or we would all starve to death shortly. Among the proposals was nutty stuff like covering the Arctic and Antarctic with black soot so the ice would no longer reflect sunlight.
    Like man scarcity and fear promotions, the AGW theory itself is largely a psychological or social mood phenomenon. There is actually no debate that the world's climate has been in a warming trend for a good while. The debate is over its causes, and whether human activity is to blame. Since warming and cooling cycles have occurred in the past well before there was an industrial civilization, we seem to be witnessing a natural cycle. Moreover, civilization and life itself depend on a warm climate. Woe betide us if the cycle were to turn into a cooling cycle again, as will inevitably happen. Then we will have a real problem. Warming on the other hand should be welcomed.
    Jan 10, 2013. 04:44 PM | 8 Likes Like |Link to Comment
  • U.S. Banking System In Trouble? [View article]
    I have once laid out a theory - unproven of course - that AIG's CDS business was an outright scam from the outset (akin to the so-called 'side letter fraud' , only more sophisticated) and that all participants in this scheme knew it.
    I.e., there was quite possibly indeed a cover-up in order to 'save the system'.
    You can read about the details here:
    Nov 25, 2011. 03:20 PM | 8 Likes Like |Link to Comment
  • U.S. Banking System In Trouble? [View article]
    This is always possible, but I would remind here of how Japanese bank stocks have acted over the past two decades. There were several opportunities to make money in them from the long side, but these were only 'trades'. These stocks have crashed not just one or two times, but multiple times (after every recovery high there was another massive downdraft).
    Generally it is rarely a good idea to buy the sector that has just blown up after leading the preceding bubble period.
    The problem with bank stocks is the opacity of their accounting. No-one know what their assets are really worth, because they no longer need to tell us since mark-to-market accounting was abandoned (even before that time they had considerable latitude to hide toxic waste in the 'level 3' categorization).
    Of course one can not rule out that in a few years time this will turn out to have been a good moment to buy them - but the markets are always full of investment opportunities, why focus on the ones where the risks are well and truly unquantifiable?
    Nov 25, 2011. 03:17 PM | 8 Likes Like |Link to Comment
  • Avoid GLD: Ukraine-Fueled Pop Is Unsustainable [View article]
    It is irrelevant to the gold price how much gold GLD or other gold ETFs hold. Their gold holdings are an effect, not a cause of the trend in the gold price. The total global supply of gold is approximately 180,000 tons. Since demand equals supply, the total global demand is also for 180,000 tons - the bulk of this demand consists of reservation demand. Whether a few hundred tons move in or out of GLD in the course of a year simply has no bearing on the price, it is a rounding error. GLD's authorized participants sell gold and redeem shares when the fund trades at a discount to spot and buy gold and create new shares when it trades at a premium to spot. That is all there is to it.
    Geopolitical events never create durable gold rallies, that is absolutely true (for the simple reason that they have nothing to do with the gold price, unless they lead to economic policy measures that do). The Ukraine rally has already come and gone - it amounted to approximately $60, when gold rose from $1300 to $1360 back in February/March.
    Gold is not an industrial commodity. The gold price is determined by macro-economic drivers: credit spreads, the steepness of the yield curve, real interest rates, money supply growth, the dollar's trend, faith in the monetary authorities, the propensity to save, etc. - it is therefore true that trends in the US economy are far more important to the gold price than what is happening in the Ukraine. We can make a few educated guesses about these trends, but they should not be based on the payrolls data (not only because these data will eventually be revised out of all recognition, but also because employment is a lagging indicator of the economy's trend). The most important thing to realize about the US economy is that the Federal Reserve has done substantial structural damage to it by blowing up the true money supply by almost 95% since September 2008. Price distortions all along the economy's capital structure are the result. This falsifies economic calculation and leads to malinvestment and the consumption of capital. These things cannot be discerned by looking at economic data superficially. After all, the economy 'looked good' in 2006 and 2007 as well - in reality though, malinvestment and capital consumption had already occurred, and all the accounting profits that were reported at the time were an illusion - a fact that the bust eventually revealed.
    As to how the gold price is formed, here is a guide that discusses the all-important factor of reservation demand:
    May 7, 2014. 10:36 PM | 7 Likes Like |Link to Comment
  • Why Buffett Is Not Wrong Regarding Gold [View article]
    No, what matters is the investment cycle. This whole 'stocks are better than gold' argument of Buffett's is simply nonsense. First of all, gold is akin to money, so it should, if anything, be compared to competing currencies. Someone who holds gold holds cash -only a more reliable form of it.
    For someone who buys gold in order to make a return, what is relevant is only whether or not it is in a bull market. Since stocks are usually in a bear market when gold is in a bull market, there is a time for both. Given that these secular cycles last between 15 to 25 years, it is highly important for investors to get this right. One guess who was right over the investment cycle since 2000, Warren or the gold bugs. Now that he no longer has the wind of a secular bull market at his back, he doesn't look such a big genius anymore. 
    To say 'stocks have outperformed over 100 years' is just about the most misleading and irrelevant statement ever. First of all, no-one cares about 100-year performance, since the average life-time investment horizon is less than half that. Furthermore, the stock indexes have a survivor bias. How many of the stocks listed 100 years ago still exist? How many have gone bankrupt? This is never mentioned in these long term comparisons. Companies can go bankrupt, and fiat currencies can become worthless. Neither can happen to gold.
    Jul 19, 2012. 03:13 PM | 7 Likes Like |Link to Comment
  • Zero Hedge Is Wrong About Gold [View article]
    Your view about gold's supply/demand situation is deeply flawed. Gold is not an industrial commodity. It matters not one whit to its price if a little more or a little less of it is mined, since mining only contributes about 1.4% to the total extant supply of gold every year. The Fed has grown the supply of dollars by almost 90% since 2008. Contrary to the widespread erroneous notion that the Fed only creates bank reserves, it also creates deposit money, almost dollar for dollar concurrently with bank reserves, as it buys assets mostly from what are legally non-banks. In any case, even if all gold miners stopped mining it would have almost no effect on the total supply of gold in the near term (its long term growth would of course be considerably impaired). All arguments on gold supply and demand that mention things like mining, central bank buying/selling, ETFs, jewelry demand, etc., misconceive how the gold market actually works. Similar to other forms of money, gold must be analyzed as a currency, not a commodity. The vast bulk of the total demand for gold (including reservation demand) consists of monetary/investment demand. Here is an article that discusses in detail what determines the price of gold:
    Dec 17, 2013. 06:51 PM | 6 Likes Like |Link to Comment
  • Why Inflation Never Came [View article]
    Bank reserves are not part of the money supply. The Fed has however altogether blown up the true US money supply by almost 90% anyway since 2008 (NOT counting bank reserves). That IS the inflation. Rising consumer prices are one POSSIBLE effect of inflation, and not the most important or most pernicious one. The real problem of inflation is that it distorts relative prices in the economy (which causes capital malinvestment) and redistributes wealth (from late receivers to early receivers of the newly created money). There is absolutely no need to try and reinvent the wheel just because no CPI inflation has appeared on the scene yet. The Fed inflated all out from 1933 to 1966 and no CPI inflation was visible either. It is impossible to tell in advance which prices in the economy will rise and when. Moreover, the effect of an increase in the money supply on prices depends also on the demand for money and the supply of and demand for goods. For this reason it is actually not possible to accurately 'measure' price inflation either, as there is no yardstick, no constant, one could use for the measurement. The statistical artifact we know as the CPI can at best inform us about a general trend in consumer prices, but it sheds no light on why they are rising, and there is no such thing as a 'general price level' (as an aside to this, the Fisherian 'quantity equation' is therefore a completely useless tautology. Note it needs the fudge factor 'velocity', a nonsensical concept). The example of the period 1933 to 1980 underscores an important fact however: 'price' inflation can arrive with a considerable lag, but once it does, it can become pretty significant. In any case, if one wants to know whether there is or isn't inflation it makes no sense to look at price indexes. All one has to do is look at the growth of the money supply. In free unhampered market economy, prices would be continually falling as economic productivity improves. We therefore know one thing for certain: if prices are 'stable' then they are definitely higher than they would be in a true free market not meddled with by the central bank.
    May 21, 2013. 05:03 PM | 6 Likes Like |Link to Comment
  • Krugman Is Wrong About Austerity [View article]
    Of course a government can in the short term make things appear to become better by such measures - but it will structurally weaken the economy further by doing so, and only invite an even bigger bust later. This is especially easy to do in a command economy. Stalin's Soviet Union also reported 'impressive economic statistics'. And yet, no-one had any illusion that true economic welath creation was going on. China's massive malinvestment in construction projects (building empty apartment towers, empty office towers and even entire empty cities) is akin to pyramid building. It makes 'GDP growth' look good, but it devours scarce resources in projects that are simply uneconomic. As long as the credit expansion is kept up, this fact can remain masked - but obviously this won't be possible forever.
    May 27, 2011. 12:00 PM | 6 Likes Like |Link to Comment
  • The 'Anti-Austerity' Crusade of Joseph Stiglitz [View article]
    You err. I point you to the severe 1921 recession - the last time the US government adopted a 'laissez faire' stance. It refused to increase its deficit, and the Federal Reserve at the time likewise refused to provide easy money. Now how come nobody remembers that recession? As I said, it was quite severe. The reason is, it was over so quickly - a fate it shared with all other recessions in which government did not intervene before it. When the US government, under Hoover and later FDR, first did intervene heavily during a recession, by means of deficit spending, money printing and onerous regulations, it promptly turned into the Great Depression.
    May 19, 2011. 10:31 PM | 6 Likes Like |Link to Comment
  • The Real Experiment That Is Being Carried Out In Japan [View article]
    I can tell you. They have a terrible 4.2% unemployment rate and their extremely affluent consumers enjoy mildly declining prices every year.
    Abe couldn't let that stand, after all, he's heard for years how horrible the evil deflation was.
    May 15, 2013. 07:38 AM | 5 Likes Like |Link to Comment
  • The Scourge Of Central Banking [View article]
    Just to make one more point clear: I am not claiming that the US dollar is likely to lose its usefulness as a viable medium of exchange anytime soon. Such a possible 'end game'. a breakdown of the monetary system, is not an event that is hewn in stone. It will depend on the future decisions of policymakers, which we cannot predict with certainty. It is always possible that the inflationary policy is abandoned in time. To me the problems with the policy are of a more imminent and practical nature (as noted further above), mostly to do with capital malinvestment and capital consumption.
    However, it is legitimate to speculate about the possibility of an eventual breakdown. We don't know yet which contingencies might motivate future policymakers to throw caution to the wind. This is why I specifically mentioned that in past examples of crack-up booms, the people responsible never did anything to cause them on purpose, and often enough they were well aware of the dangers. They simply erred when they thought they would have things under control when the time came.
    Oct 5, 2012. 12:57 PM | 5 Likes Like |Link to Comment
  • The Scourge Of Central Banking [View article]
    It is true that economic calculation is still 'possible', but economic calculation is nevertheless falsified. As noted above, there are no constants in economics. The fact that an 80% increase in the true money supply over four years has not resulted in 'CPI inflation' does by no means prove that everything is just fine. In reality, there has been a price revolution through the entire economic system, as the introduction of additional fiduciary media distorts interest rates, and with them, relative prices in the economy. It is this alteration of relative prices that is the true evil.
    I would think that the housing bubble should convince even the most dedicated empiricists that this is what the main problem with inflation is. The housing bubble stands as a monument to capital malinvestment due to an overly inflationary policy (in 2001-2002, the true US money supply grew by over 20% annualized). Houses and land can for analytical purposes be treated as akin to capital goods, and in the post Nasdaq bubble inflation this was the sector that received a disproportionate share of the new money that was created. Prices in the housing sector were certainly distorted to such an extent that factors of production were drawn en masse into it, in a capital misallocation orgy of nigh unprecedented proportions. The now well known end result was a financial and economic disaster that almost destroyed the banking system. What were our vaunted monetary bureaucrats planning for back then? A crash?
    Moreover, it should be clear that prices would not only be different, but also generally lower than they now are if not for the inflationary policy. How come that anyone actually believes that a handful of bureaucrats can possibly know better than the free market whether prices should be higher or lower, or how much money the economy needs? If central planning were really so great, we could just as well institute a command economy. Sound money cannot be created by bureaucratic fiat - it can only be a creature of the market. 
    Oct 5, 2012. 12:44 PM | 5 Likes Like |Link to Comment
  • When This Indicator Hits 19, Stocks Always Rally [View article]
    The main problem is that this is just one of a great many sentiment indicators and it is a survey to boot (it tells you what people say, not what they do).
    Most other sentiment indicators are basically in nowhere land right now, neither at a bearish nor at a bullish extreme.
    One long term sentiment indicator has however been at an extreme for over two years now: the mutual fund cash to assets ratio. It has spent most of the past two years at or near a record low (i.e.,mutual fund managers have never before been more bullishly positioned than over this period). That indicator has a track record going back to the 1950's and by its message we should actually expect the mother of all bear markets.
    The AAII poll has probably more significance for the short term, once other short term positioning and sentiment indicators align with it. Keep in mind though that during the bull market of the 1990's, sentiment survey data were often stuck at the opposite extreme for many months, and yet the market kept rising. It is not inconceivable that things will eventually work the other way around in a secular bear market.
    Jul 23, 2012. 01:24 PM | 5 Likes Like |Link to Comment