AlexR

Hedge Fund Redemptions May Crash Q1 Markets

High-school Investment Club redemptions might have a bigger impact than Hedge Funds. Hedge Funds are far smaller than they used to be, and many have imposed redemption restrictions.

Own Gold? Time to Fold

The biggest problem all Gold Bugs miss or ignore has nothing to do with where the price of gold is ultimately headed. The problem is volatility. Gold is too volatile to be useful as a hedge against inflation for any period shorter than 50 to 100 years. A broadly diversified basket of commodities, foreign currencies, real estate, and productive assets is a much better bet. You get more reliable protection at much lower volatility.

The Manipulation of Gold Prices

If the Fed or the Treasury are manipulating the price of gold right now, it's only to prop it up and prevent it from collapsing back to the '98 - '03 price levels where every other asset class has gone (that puts gold below $300). Study some history. Roosevelt's massive devaluation of the dollar (i.e. printing dollars to buy gold) in 1933 is widely believed to have helped break the downward economic spiral. Whether that belief is true or not, Bernanke "helicopter Ben" has clearly indicated he is a believer. The idea that there is a U.S. government conspiracy to keep DOWN the price of gold just doesn't make sense in the current environment. Gold could go to $1500 very quickly (one uninterrupted uptrend) but not until all major central banks agree to a coordinated global move, like they did with interest rates, to devalue their paper currencies relative to gold while keeping relatively constant among themselves. A coordinated move is key to avoid a "race to the bottom" which would cause the target price to be overshot. Why $1500? Because that would look nice on the charts, as a continuation of the $650-$1000 move.

Is It Time to Buy Gold?

Although gold is a great investment vehicle for storing and preserving purchasing power, price volatility renders the inflation protection so unreliable as to be useless for individual investing time frames. The minimum holding period where gold starts to preserve value reliably is around 50 to 100 years. So unless you're talking about heirloom assets, university endowments, central bank reserves, sovereign wealth funds, etc, inflation protection is not a good reason to own gold. There are other reasons of course: transportability, privacy, asset diversification, ease of storage, etc.

On Dec 05 11:28 AM AlexR wrote:

> Gold has utility as jewelry, tooth fillings, electrodes, and a few
> other places; and this gives it a natural price floor and ceiling:
> at some price point it's a bargain, but if it moves too high there
> is just a lot of other stuff the average person would rather buy
> with that money. This little bit of utility combined with non-perishable
> composition and ease of transportation justifies a certain secondary
> utility: as a means to store value in the very long-term at very
> low cost (inflation protection, no fees and no taxes, wow!). But
> to extrapolate that into some sort of miracle investment that can
> only go up (especially in a recession) is really stretching the facts
> too far.

Is It Time to Buy Gold?

Gold has utility as jewelry, tooth fillings, electrodes, and a few other places; and this gives it a natural price floor and ceiling: at some price point it's a bargain, but if it moves too high there is just a lot of other stuff the average person would rather buy with that money. This little bit of utility combined with non-perishable composition and ease of transportation justifies a certain secondary utility: as a means to store value in the very long-term at very low cost (inflation protection, no fees and no taxes, wow!). But to extrapolate that into some sort of miracle investment that can only go up (especially in a recession) is really stretching the facts too far.

The Manipulation of Gold Prices

Nobody is manipulating the price of gold, because nobody cares about the price of gold. They are, however, busy manipulating long-term bonds (specifically treasuries), which everybody watches.

Dow Will Equal Gold in 2009

The problem with all "US economic implosion" theories, is that the markets are really not bearing that out. Most world markets have crashed much faster and further than the S&P 500 and Russell 2000. The other bogeyman, hyperinflation, won't happen for a simple reason: most Americans are ready and able to pay higher taxes without much fuss. Compare and contrast to other countries where hyperinflation occurred... direct taxation was impractical or impossible, for various reasons, cultural, political, lack of a functioning tax collection agency, etc, so in those cases printing new money was by far the best option to maintain government spending levels. On the other hand when you have a Democratic government, expiring tax cuts, and a compliant population, not to mention, the IRS, there will really be no need to print that much money at all.

The American Crisis and the Case for an Inflationary Depression

Unfortunately there are no examples of a Inflationary Depression in U.S. history. Somebody should study what happened to South American economies from 1982 thru 1992 or so. I've personally experienced sustained inflation rates of up to 250% (10%/month), and I can tell you, it's not as socially destabilizing as you might think. Everyone from rich to poor figures out some surprisingly clever ways to manage through it. The only long-term effect is a population that abominates debt of any kind, for about to 10-15 years after recovery (note, although fixed-rate borrowers get a nice bonus in the initial phase of an inflationary spiral, lenders have the last laugh as foreign-currency and commodity-linked loans quickly become the norm).

The Coming Dollar Deflation

The author may have a point. If beating deflation is so easy, why have the Japanese failed at it for almost 20 years?