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  • Gold Likely Entering A Deflationary Spiral [View article]
    As I have commented previously, everyone understands that gold is a good hedge in inflationary times and as the prospects for inflation are waning, people are selling gold. It has been my view that we have been and are still in a deflationary cycle and that is why I maintain an investment in gold.
    Because historically there are so few deflationary cycles (relative to inflationary cycles), few people understand what happens in a deflationary cycle. The principal outcome of a deflationary cycle is the destruction of debt because with falling prices all debtors get squeezed as the cost of debt service rises. Many do not survive. One can try to guess who the survivors are going to be (and there will be some) but all debt will become suspect and one doesn't want to be holding bad debt when the music stops. In addition, during a deflation debt defaults start as a snowball and turn into an avalanche because of the way in which all credit is connected.
    In this respect it should be noted that even cash money is debt. To survive, it is important not to own an asset that is somebody else's liability. One can think of a number of assets that would qualify - art, high quality gems and the like, but of all of those only gold has a uniform price, is liquid and easy to transact. That is the basic argument for gold.
    The other, and simpler, argument is that invariably a return to sound money (which has always involved the use of gold in past deflations). The most recent example is the world-wide deflation of the '30s which was eventually addressed by devaluing all currencies relative to gold. Were we (the world's central banks) to return to the holding of gold as a significant part of their reserves (which can consist only of gold and foreign currencies) the price would need to be set at around $10,000 per ounce to produce the balance between gold and foreign currencies that existed in the 1980s and '90s.
    Jul 1, 2013. 05:54 PM | 3 Likes Like |Link to Comment
  • Gold: Double Bottom Or Double Trouble? [View article]
    It is pretty clear to me that we are in full "bubble" mode now just like we were in 1999-2000. For those who remember those days, the measure used to evaluate companies was not earnings but "cash burn" and most of the darlings of that era are no longer with us.
    In such an environment the market becomes devoid of all rationality, but eventually the euphoria will wear off - when the supply of "greater fools" dwindles.
    The market top that occurred in early 2000 came much later than might have been expected, but those who believed in the cool-aid paid heavily.
    As we look at the developed world today, there is not a lot to offer comfort. Europe is now officially in a recession, unemployment in Spain is now 27%, Japan appears to have started a program to export its deflation, etc., etc. For my part I cannot find any hard data to support current market valuations and when the bloom is off that rose, I think that we will see a return to gold.
    May 20, 2013. 10:08 AM | Likes Like |Link to Comment
  • Short Gold For The Long Haul [View article]
    You are right that any point in time an asset is worth no more than someone will pay for it. You are wrong when you say it is not a currency; when I go to Europe, I must change my dollars for Euros before I can buy something. So too with gold, I must change it to the currency in which the goods are priced so as to buy something and that has never been a problem.
    I would suggest that a large number of purchasers of gold have been motivated by the belief that gold protects against inflation (which indeed it does). However, now that the threat of inflation appears to be receding, those who bought to protect against inflation are selling.
    It is my view that the threat has never been inflation, but rather deflation. Indeed the Fed and the ECB and the Bank of Japan are doing everything they can to create a bit of inflation and they are failing because the forces of deflation are so strong.
    Eventually, people will come to understand gold's role in a deflation and that in a deflation all debts become suspect and many do not pay as expected. They will then look for assets that are not someone else's debt and discover that gold is one of those.
    May 7, 2013. 08:26 PM | 12 Likes Like |Link to Comment
  • The Fed Didn't Cause The Gold Bubble - Or Any Other Bubble [View article]
    I think that we need to understand that the Fed is very limited in the actions that it can take. First, they may buy securities (typically, but not always as it turns out) in the marketplace. Most, if not all, of these purchases come from financial institutions, principally banks. What the banks do with this money is critical: they can lend it (and indeed they can lend up to 10 times the amount of money that they receive from the Fed) or they can do nothing and keep the money in reserves, earning interest from the Fed. When they do the latter, it is not inflationary (it may even be deflationary) and has no impact on the demand for goods and services. It does, however, do a couple of other things, the most important of which is to increase the value of financial assets and housing. This is because it keeps interest rates low, encouraging people to take more risk with their financial assets (so as to get a better yield) and by decreasing interest rates, mortgage rates decrease thereby increasing the price that people are able to pay for housing - which will cause home prices to rise.
    In addition to purchasing securities from the market, the Fed may also buy securities directly from the Treasury - which provides the government with financing and does not drive up interest rates; indeed, the money that the Fed lends the government is effectively interest free as the Fed is required to pay the interest back to the Treasury.
    Unlike open market purchases, this is inflationary as this money flows into the economy as government expenditures.
    Apr 22, 2013. 10:41 AM | 1 Like Like |Link to Comment
  • The Gold Emperor Has No Clothes [View article]
    The simplest and most direct road to collateralizing debt in most Western nations is through a revaluation of existing gold hoards.

    You are absolutely right about that. That is a principal reason to own gold. I would rather it be confiscated that losing my wealth in other assets and there is a reasonable chance that it might not be confiscated and if it is confiscated it will not be without payment of some sort.
    Apr 17, 2013. 06:19 PM | Likes Like |Link to Comment
  • The Gold Emperor Has No Clothes [View article]
    Actually gold performed quite well during the 70's and early '80s when we experienced runaway inflation. When Volker came in and put a stop to that and sound money prevailed and lost its luster. The real point is that there are times when it is prudent and profitable to own gold, times when it is profitable to own stocks and times when it is profitable to own bonds. No investment class performs well all the time and that's particularly true when you discount the value of your investments for inflation - which everybody should do.
    I continue to be surprised at those who report with excitement that the averages are making new highs; those folks don't seem to realize that, when adjusted for (CPI) inflation the markets are worth less than they were in 2000 and that they must increase by nearly 30% to get back to were in 2000. Even with the recent fall, those who have owned gold since the market's high in 2000 have done exceedingly well for the period and vastly better than either the stock or bond markets. I think that there is no question that 2000 to the present was a great time to be in gold.
    The question is when to get out? Here the answer is simple, when we get back to promote sound money policies. So long as officials at the Treasury are talking about things such as paying off our debt with a $ 3 trillion platinum coin and other goofy ideas and the Europeans have run out of ideas for dealing with their debt - other than the equally goofy idea that they can simply confiscate money from the wealthy, we are a long way from sound money.
    I would keep your gold and if you have none you should buy some - unless, of course you actually believe some of the goofy ideas might work.
    Apr 16, 2013. 04:47 PM | Likes Like |Link to Comment
  • Gold Is Worth $370 An Ounce [View article]
    I am afraid that is quite a simplistic analysis. One of the things is (for better or for worse) is a component of International Reserves, which are the reserves held by Central Banks. These reserves consist of convertible currencies, gold and Special Drawing Rights (SDRs), which can be ignored as holdings of SDRs are exceedingly small. These are called International Monetary Reserves and are at the bottom of an upside down pyramid as the basis for the creation of what we call money. In this refined world local currencies are not assets, but rather liabilities - as in US dollars for the Fed.
    In times past, gold has been a significant portion of these IMRs, but the proportion of gold has fallen from well over 75% to under 10% currently. In the process Gold has been vilified as a barbaric relic and worse. The other reality is that gold is very inconvenient to those who believe that the best way to prosperity is through the creation of additional debt - which is what the Fed, the European Central Bank and the Japan are doing presently.
    Unfortunately, history is replete with schemes to create wealth without actually working for it. Equally unfortunate is the fact that so far all of these schemes have failed ending mostly in massive inflation and, sometimes in massive deflation. During these periods there are massive wealth transfers and when the music stops, there is a lot less for everyone. Should you fear such a period, you might want to think about what you can do to avoid it and how you can keep some of what you have.
    Believing that things are worth what someone will pay for them it is clear that at this instant in time there is significantly less demand for gold than there was a month or a year ago. That tells me that there are a lot of people who now believe that the debt for growth and gain is not - as they once thought - nearing a crisis level, but rather, the "new normal". That, of course does not mean that they are right.
    There may also be more sinister reasons for what is happening because high gold prices and the belief that, perhaps gold is a better currency than say, the Dollar, the Euro or the Yen is antithetical to those Central Banks that are counting on fiat currencies as the way out. Indeed, the unprecedented magnitude of gold's fall in a very short period can only trigger suspicions that this move may have been orchestrated. One might also wonder who is buying for, as we all know, for every seller there must be a buyer.
    Apr 15, 2013. 04:47 PM | 4 Likes Like |Link to Comment
  • Gold miners (GDX -4.5%) are getting destroyed as gold prices cross into bear territory. Capitulation, if it’s here, would mean a true bottom in price, and Tocqueville Gold Fund's John Hathaway says that's what we’re approaching; he sees strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in mining shares - "a contrarian's dream scenario." [View news story]
    It is very hard to discern what is going on here; the Cyprus announcement certainly triggered some sales as did the technical analysis and the fear that more countries (Portugal? Spain? Italy?) will be forced to sell gold as well as the buoyant stock market and the reduced fear of inflation. Quite a lot for a single day.Bottom line, we haven't really solved any of the economic problems that loomed large yesterday, last week, last month and last year and until we do we still face inflation, deflation or both and if that is what lies ahead, then gold is the right hedge.
    Apr 12, 2013. 02:45 PM | Likes Like |Link to Comment
  • Gold Takes Out Major Support: Next Stop $1,350 [View article]
    I am sorry that 196 years is beyond my investment horizon and even a long term investor would seem to be a trader in that time horizon. The simple fact is that over shorter periods, like my lifetime (I was born in 1942) there has been times when equities provided good returns and times when they did not. That has been true of gold as well.
    I accept that one cannot generally buy at the bottom and sell at the top, but those who get the major trends approximately right do well.
    We will see what happens with the current short term trend that has US equities outperforming gold. Some of us have doubled our money in gold over the last decade and nobody has done that in equities.
    Apr 3, 2013. 08:47 PM | 3 Likes Like |Link to Comment
  • More on SocGen's bearish gold (GLD) call: The price is in "bubble territory," say the authors - driven there by fears aggressive QE would spur inflation. Instead, consumer prices have actually been trending lower for the last 2 years, and now economic conditions have improved to the point where the Fed can begin thinking about QE's end. "It seems unlikely that investors would want to add much to their long gold postions." [View news story]
    I continue to believe that the real danger continues to be deflation. That, of course, is the opposite of inflation - which is why most people have been buying gold. To those who ignore history, gold has always risen during periods of deflation. We are perhaps now at a transition point where people no longer fear inflation, but do not yet fear deflation.
    Apr 2, 2013. 03:40 PM | 1 Like Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    " is not necessary for the government to borrow or tax in order to fund its operations..."
    If that were true, there would be no borrowing and no taxes. Money would indeed grow on trees.
    That's right up there with those who think that minting a $3 trillion platinum coin (why bother with platinum, other than it sounds nice) to solve all our problems.
    Some printing of currency is always possible, so long as the amounts are relatively small and it is done for a short period of time.
    This has been done steadily throughout history; the problem is that once started it is hard to stop and there are no instances -so far - when it was stopped in time to avoid a major crisis.
    Unless you believe in the tooth fairy, wealth can only be created by work and the production of goods and services.
    Mar 14, 2013. 12:19 PM | Likes Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    The idea that there is not a Social Security Trust Fund is crazy. Currently (as of 12/31/2012) the Trust Fund holds $2,733,073,581 of US Treasury interest bearing obligations which are just as creditworthy as US Treasury Debt held by the public, although they are not marketable. The amount and interest rates are listed on the Social Security website.
    What confuses people is that when the Trust Fund buys government bonds, the Treasury gets the money and just like the proceeds of publicly offered Treasury securities the government receives the proceeds that are now fungible with all other resources.
    Absent some bizarre change in law, the Trust Fund's assets are just as safe as any other Treasury Bond. The doubters should ask themselves if there is an investment that is less risky than Treasury securities. I would argue that there is not as the Treasury can print the money to redeem its obligations.
    Whether or not these bonds may have more or less purchasing power than some other asset is another matter.
    Mar 9, 2013. 12:59 PM | 1 Like Like |Link to Comment
  • Investment Banks Are Now Very Confused About Gold [View article]
    In any bull market, like any bear market, short-term sentiment waxes and wanes and that is reflected in the market averages. National markets will tend to reflect national developments while gold will be impacted by worldwide developments and its performance is different depending on the currency in which it is followed.
    Long-term, gold has had an excellent run in all currencies and has done a good job of reflecting the what has been happening in the economies of the developed world; and, not incidentally, over the last decade has outperformed the developed world's equity markets by a considerable margin.
    What happens to gold is about what happens to debt in a world in which all currencies are also debt, but debt that has no maturity. To the extent that debt remains sound, economies will flourish and real growth will result. To the extent that debt becomes excessive, economies will stagnate and growth will be minimal if not negative.
    In that environment, gold will flourish, principally because it is not debt and its purchasing power does not depend on somebody's ability to repay it.
    To the extent one believes that sound money has returned or that its return is imminent, there is no reason to have gold; on the other hand, if one believes the opposite, then there is every reason to have gold. That's really all one needs to know and all that one needs to have is patience - until there is no longer a reason to hold gold.
    Mar 3, 2013. 03:48 PM | 5 Likes Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    I agree. The point that I was making is that the Trust Fund will be spending the the money currently in vested in US Treasury obligations and that's why it should be accounted as part of the US Government, because that debt is no different from the from the debt held by the public. The fact that it is held by a government entity on behalf of third parties should not permit it to be disregarded as an inter agency obligation. Bottom line, our real debt is $16.4 trillion+ and not the lesser amount generally cited.
    Mar 1, 2013. 01:47 PM | 3 Likes Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    Not so fast. The debt (approximately $3 trillion) held by the Social Security Trust Fund in the form of non-marketable Treasury Securities will be needed to pay benefits regardless. Changing the age requirements or means testing benefits will not have very much impact in the near term. Let's not forget that the money being paid out already exceeds the money being paid in so the $3 trillion Trust Fund is already being drawn on (NY Times, March 24, 2010).

    As for printing dollars, you are right; but in global markets doing so will cause interest rates to rise - which would be catastrophic. So far, the Treasury has been able to keep rates low through QE and much of that money has not been "used" which has been keeping velocity at low levels. The paradox is that if the Treasury is successful at restoring confidence, velocity will pick up and interest rates will soar. There is already way too much latent purchasing power out there.
    Feb 28, 2013. 12:47 PM | Likes Like |Link to Comment