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  • gold bubble, money, deficits, economy and prices, gld, gold 0 comments
    Aug 15, 2011 12:57 PM | about stocks: GLD, GOLD

    We've heard many times how gold is the ''ultimate bubble''. I see a new article every 2-3 days that ''now'' is the time to sell and take profit. There are people who write a new ''sell'' article every month or two. Surely, as the price goes up, it is even better to sell!
    The arguments why one should sell are fairly similar: no income from gold, the world wouldn't collapse without gold - gold is not important, ''barbaric relic'', etc. I can answer these very briefly. It doesn't have income, because if u have gold, it is yours, not somebody else's liability. It is hard to claim that US govies have income when real interest rates are negative - negative real income! Gold has been money for 5000 years and the desire of some ''clever'' modern people to convince us that it is not money is not going to work. It is naive to think that some ''modern'' person understands money much better than the ancients. Trust me that the ancients had their share of intelligent people and we are not cleverer than them. In our social affairs we are just as short-sighted and misguided and this is going to continue, which is why gold is much better than any fiat money that ever walked the face of the earth, to be promptly forgotten in a few years. I don't think that the modern paper money will be any different and will go down the drain of history. This is not going to happen to gold and it is likely to preserve its purchasing power. The argument that gold has no value because the world wouldn't change if there was no gold forgets to mention that the same is true of all paper currencies. How would the world change if we burn all fiat money? The point is that the amount of  gold in the world increases at 1.5% per annum, which allows gold to preserve its value, while irresponsible Central Banks tend to print money like crazy to debase their currencies. This is why gold is a good ''store of value'' and fiat money is not and you probably remember that this was one of the important aspects of money.
    Where does gold go from here? We had a few strong weeks and now prices have been more stable for the last few days. Are prices likely to collapse or at least correct meaningfully?
    To answer this we need to look at the supply/demand situation as well as the economic situation in the world. Many Central Banks have now become buyers with the CB's of Korea, Greece (yes bankrupt Greece), Russia and many others buying. Chinese and Indian demand is off the charts. China and India have very high inflation and the locals buy gold to preserve their purchasing power (as well as for other reasons). There is nothing else they can buy as the former safe haven - the (formerly) mighty dollar can't help them and their local fiat money is constantly debased by their respective governments through money printing. The West hasn't really bought much gold and I wonder what would happen if the Western population loses faith in their fiat money. The demand for gold is so strong that I don't see a substantial pullback from there. My suggestion is to keep on buying even now and average your cost over time. You don't want to wake up one day with gold at $4000 and remember how you missed buying it because you waited for a $5 pullback. 
    On the economic front things don't look pretty with the global economy weakening. I am in the camp that thinks that we are in a recession but if you don't believe this, you are likely to agree that the economy is not growing much (global as well as the US economy). We already see the actions by Central Banks: BOJ has a new QE program, SNB prints money, ECB buys Italian and Spanish bonds and lends more to banks (this is QE but they are ashamed to call it that), BOE talks about more QE. When all these mighty banks are so proactive, you can bet that the FED will not stay far behind. They prolonged ZIRP for two years, possibly plan a Twist operation and eventually will twist all that into money printing on a grand scale. As nobody can print gold, you can bet that the increased supply of fiat money will be the rocket fuel that will propel gold prices much higher. I had a target of 1750 for the end of this year (before the latest rally - check my old comments). Given the latest financial crisis, I move to a range of 1850-1950 for the end of this year. My 2015 target of 3000-5000 looks conservative to me and I believe that we can see higher prices as the debt monetization around the world is likely to accelerate as governments get even more frustrated and desperate.

    Stocks: GLD, GOLD
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