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  • Will GLD Get A Second Wind? [View article]
    Leaving possible short-term market reactions aside, any increase in rates by the Fed will be so minuscule that it will be economically inconsequential to gold or any other asset class.
    The simple reality is that the world economies are in the grip of deflation, which the Fed, the ECB and the Japanese Central Bank are fighting as vigorously as possible, but without notable success so far. Who would have thought that it would be so difficult to create some inflation?
    While some may enjoy trading gold (and perhaps profit from its short-term moves) the real reason to own gold is as insurance against the catastrophes that are wreaked by deflation and - should it be the case - any subsequent inflation.
    Most understand why and how gold protects against periods of significant inflation, but few understand how gold protects against deflation. Perhaps that's because these two phenomena are not the reverse of each other. Yes, inflation is about rising prices and deflation is about falling prices. Inflation is really about depreciating the currency - which also serves to reduce the real cost of debt, while deflation increases the cost of debt. In the case of inflation the value of debt erodes, while in the case of deflation it explodes. That is because payment failures cause defaults and when that happens it's game over. Gold, however, is not a debt and cannot default and why it is the ultimate safe haven in a deflation.
    Nov 9, 2015. 11:06 AM | 5 Likes Like |Link to Comment
  • Gold Is In A Long-Term Downtrend Driven By Fed Monetary Policy [View article]
    It certainly was convenient that Venezuela had some gold, particularly since nobody was offering to take a couple of billion of any other commodity as collateral. As you may (or may not) know, collateralized loans are always over collateralized to account for possible market movements. I suppose that they could have borrowed against oil, but then where would you store a couple of billion dollars of oil?
    Nov 6, 2015. 08:59 AM | Likes Like |Link to Comment
  • How Will The Fed Impact GLD This Time? [View article]
    It's fine for traders to buy and sell gold on the basis of what the Fed does or doesn't do, but ultimately that is not the issue. The issue is debt - in particular excessive debt - and there is nothing that the Fed can do about that. Indeed, only the market can do something about that and that is what the Fed fears most.
    The Fed knows that we are in a deflation and (like other central banks) are fighting a desperate battle to overcome it because deflation bankrupts debtors. It is my view that their battle has been lost and that the die is cast: the excessive debt will be removed by bankruptcies and a depression will ensue.
    That will cause gold to soar - not by tens or hundreds but by thousands of dollars. That is the reason to buy and hold gold.
    Oct 26, 2015. 08:42 PM | 2 Likes Like |Link to Comment
  • Gold Is In A Long-Term Downtrend Driven By Fed Monetary Policy [View article]
    Mr. Lerner appears not to believe that the US is part of a global economy and that Fed policy will determine the fate of the gold market. That is not my view. Gold is traded in a great many currencies and in many of them it is doing quite well. If you were a Brazilian, gold would be looking pretty good as compared to the real. Indeed it is looking pretty good in any emerging country market.
    What we are seeing is a fraying of the global economy and, not unsurprisingly, it is starting at the edges and will work towards the center. The issue to worry about, however, is deflation. If you are in the commodities business, deflation has already arrived; the key industrial commodities like copper, iron ore, coal, crude, etc. are selling for less than 50% of what they were selling for a year or so ago. One might think that would be good for those that consume those commodities, but the problem is that demand is down and that's why the prices are down.
    What's the connection with gold? The answer is that deflation bankrupts debtors (check out Glencore) and in that environment, people look for assets that are not someone else's debt and gold is one such asset. Unlike real estate or art or jewelry, it is highly liquid and easily converted to cash in both small and large amounts.
    Or just look at Venezuela; in April they were able to borrow $1 billion from Citibank, but only because they collateralized their loan with gold. Had they not had gold, they wouldn't have gotten the money. I think they now understand the value of gold if they did not previously.
    I think we will find - sooner rather than later - a significantly greater appreciation for the value of gold than is now the case.
    Oct 20, 2015. 05:16 PM | 3 Likes Like |Link to Comment
  • Will The Labor Market Bring Down GLD? [View article]
    As the equity and commodity markets around the world tumble, a lot of seemingly counter-intuitive things are happening. The weakness in gold is but one of them. Others would include strength in both the Euro and the Yen and in the bond markets.
    When a host of counter-intuitive things happen, it is not because we have gone through the looking glass and landed in Alice's Wonderland, but rather that other forces are at work. One of them is leverage: great on the upside, horrible on the downside.
    Right now a vast number of leveraged positions have investors scrambling for liquidity (e.g., margin calls) and are in the process of covering and/or exiting their bets and raising cash. The Euro, the Yen and the bond markets have huge short positions some of which are now being reversed creating demand for those assets.
    On the other hand, there is not a huge short position in gold, so no pressure to buy it and some pressure to sell it to raise cash and deleverage. That is what I think is going on right now.
    The problem is that the exit window is too small for everyone to get out at once and when (or if) that becomes apparent, the creditors will increase the pressure to get repaid and that's when we will see the real fireworks.
    And, not incidentally, that is when investors will realize that gold is money (and not somebody else's liability). The Central Banks have already figured this out and that is why so many of them are buying gold. As adage suggests, watch what they do and not what they say.
    Sep 29, 2015. 03:24 PM | 4 Likes Like |Link to Comment
  • Buy Gold While You Still Can [View article]
    I would recommend that you read "Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay. It will tell you all you need to know about money and depressions and it may change your views. It was first published in 1841, but is still in print.
    Sep 28, 2015. 09:26 AM | 1 Like Like |Link to Comment
  • Buy Gold While You Still Can [View article]
    I don't think that international trade deficits and surpluses payments can be settled at any jewelry store, pawn shop, eBay or coin collector's shop. Nixon's decree did not apply to private transactions.
    Sep 28, 2015. 09:17 AM | Likes Like |Link to Comment
  • Buy Gold While You Still Can [View article]
    A most interesting article, but the comments are equally interesting. Gold and fiat currencies have been around for a very long time. I think that a look at history will demonstrate that gold has always come out ahead. The real question is how long this period of fiat currencies will last. So far it has lasted 44 years (since Nixon decreed that the US dollar would no longer be unchangeable for gold).
    Sep 27, 2015. 09:35 AM | 4 Likes Like |Link to Comment
  • A Strong U.S. Dollar Is Nearly Impossible [View article]
    Given the fact that the dollar is used worldwide, I think that the principal influence on the value of the dollar will be market forces and not policy. In this regard, I would note that there is a $9 trillion short in the dollar made up of all those who borrowed dollars and converted them to their local currency. In addition, a great many of those borrowers' national currencies are falling (thus making their borrowings more expensive). This dynamic alone will put considerable upward pressure on the dollar.
    Sep 22, 2015. 11:54 AM | Likes Like |Link to Comment
  • Gold - Strong And Ugly [View article]
    I am not sure why you would compare gold to platinum as platinum is primarily an industrial metal and gold is primarily an alternative to currencies serving as a financial safe haven and store of value in times of economic stress. Nor do I understand your belief that deflation would be unfavorable for the price of gold. Indeed, I am not aware of a single incident where gold has not risen in times of deflation.
    I think that the problem is that as (fortunately) deflation occurs so rarely, few are knowledgeable about what happens when one does occur. Bottom line, as the price of goods and services fall, debt becomes increasingly hard to service and defaults start to rise. In addition, as the cost of goods and services falls, the value of cash rises as the same amount of cash will buy more goods and services.
    Eventually, the process snowballs and in the process new debt becomes increasingly hard to obtain and existing debt becomes increasingly suspect. So far, the antidote has invariably been to devalue the currency vs. gold.
    As the world is (since 1971) no longer on a gold standard, one would need to be recreated for that to be an option and, not incidentally, it would also serve to reduce the value of debt. So far, the only known antidotes to excessive debt are inflation and deflation and, at this point in time, nobody has had much success creating inflation, albeit they have certainly tried.
    Sep 21, 2015. 10:21 AM | 1 Like Like |Link to Comment
  • Gold Is A Terrible Inflation Hedge: Looking At The Numbers [View article]
    You (and J.P. Morgan) have it exactly right.
    History (and not just the last 35 years) is needed to understand gold's role as money. For the last 44 years we have seen an experiment in fiat money and the results have not been stellar. In particular, it has not served as a good store of value, one of the requirements of "money". Indeed, since 1971, we have had a 471% inflation with a 1971 dollar equal to $5.71 today.
    This process has encouraged the taking on of ever increasing amounts of debt, the cost of which has been significantly reduced by the effect of inflation, which not incidentally, has also substantially increased asset prices.
    Presently, we are at the end of this cycle because the marginal return on additional debt is no longer attractive and thus inflation is no longer likely. Indeed, despite (desperate?) attempts to create some inflation, it has proven impossible to create even the most modest (2%) amounts of inflation. Who would have thought?
    The unfortunate reality is that we cannot create inflation because the deflationary forces are too great. Just look at the commodity markets for oil, coal, iron ore, copper, etc. that are selling for less than 50% of their highs. That's nice for the consumer, but not so much for those who have financed those activities. Soon we will see a few defaults, and then the deflationary snowball will gather some momentum. Eventually, we will see that J.P. Morgan was indeed right.
    Sep 19, 2015. 10:11 AM | 1 Like Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One [View article]
    Gold will have value as a currency - which is its only value beyond its industrial uses and those do not account for a significant amount of its value. Cash will also increase in value in a deflation, because prices of goods and services fall. Currency, however is debt and because of the need to reduce debt in a deflation, currency is often devalued against gold. That's what happened in the '30's and in earlier deflations. That of course implies a return to some form of a gold standard.
    Sep 15, 2015. 09:19 AM | Likes Like |Link to Comment
  • Are We On The Precipice Of Another 2008? [View article]
    It is not clear whether the clouds that are appearing in the world financial markets are new or whether they just represent a continuation of the storm that started in 2008. The problem then - as it is now - was too much debt (both public and private) and since 2008 every country of any economic significance has continued to increase their debt burden.
    Some countries, and the US in particular have taken significant steps to reduce the risk profile of their financial institutions, which, among other things, involved moving private debt to the public balance sheet.
    Presently, we are seeing some fraying at the periphery of the financial system (Greece, Portugal, Brazil, Argentina and Russia to mention a few). The most worrisome element right now is the collapse of the commodities market and while cheaper gas, iron ore, copper, etc. may look like a good thing to the consumer, it looks ominous to those who have provided the financing for that sector.
    The real danger is not the losses or write-downs in the financial sector, but the loss of liquidity for the banks (and financial intermediaries) that can occur when lenders to the financial sector get nervous. As we know from history, there is no amount of capital that will protect a lender against a loss of short-term financing. And when, or if, that happens it's Katy bar the door.
    Sep 12, 2015. 10:54 AM | 6 Likes Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One [View article]
    Two points to your comment:
    1. Gold was not a "hedge" for the US dollar in the '30's because, at that time dollars were freely exchangeable for gold at a fixed price. When Roosevelt devalued the dollar against gold in 1934, the price was fixed at $35 per ounce and US citizens were prohibited from owning gold, the dollar remained fully exchangeable for gold at this price until 1971 when Nixon severed the link between the dollar and gold.
    2. Subsequent to 1971, gold has not been linked to the dollar and has appreciated substantially from its price in 1971 - as I am sure you will agree.
    Sep 11, 2015. 09:13 AM | Likes Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One [View article]
    I would note that gold is a good hedge in a deflation, because a deflation makes debt more expensive to service thereby creating bankruptcies, which, in turn, make debt suspect as an investment. People forget this because deflation is a rare event; however, in every deflation in economic history gold has performed well. Indeed, often because the government decides to devalue its currency (debt) against gold. That's what happened in the US in the '30's.
    Sep 10, 2015. 09:56 AM | 1 Like Like |Link to Comment