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E.D. Hart
147 Comments
The Myth of Gold as an Inflation Hedge
You make some excellent points.
Why does gold investing split people emotionally into two camps?
Its a commodity, its a metal, its an asset, its a store of value, and its mostly negatively correlated with the other markets made out of paper.
Why not own some paper and some metal both?
It does well in times of rising inflation, like now, and poorly at other times.
A well known fact, but underreported one, is the well orchestrated efforts of the worlds central banks to keep the price of gold artificially low.
Therefore, it does make some superficial sense to point out that gold has been a relatively poor investment and "barbarous relic" since 1980.
But, why not since 1971, as others have said?
How is the use of historical price data not a reliable indicator of the future potential?
Because US, UK (Gordon Brown), and EEU have been systematically selling hundreds of tons on the gold markets yearly to lower prices.
And they do so at a loss of future price appreciation.
They do so to suppress the price to placate inflation expectations of the public--and lately this has been ineffective.
I frequently shake my head at the "shooter behind the grassy knoll crowd". I don't think most conspiracy theories pan out--a simpler explanation can often (tho not always) be found.
But in this case, the theory that world governments artificially suppress the price of gold--it's really out in the open (mostly).
Gordon Brown dumping approximately half of British gold reserves at the low is but one of many examples.
Eventually they will learn, or run out of gold. Furthermore, the reporting of the CPI itself is artificial and erroneous. Real inflation is closer to 8-10% than 4%...and it has been for many years.
Governments provide bogus inflation numbers to control costs in their budgets and have an essentially free lunch.
As bond investors and the fixed income crowd wake up over the next five years to the stealth tax of inflation--they will pull money out of bonds when they can. Some of that money goes into TIPS, some into commodities, some into other assets.
Finally, the inflation adjusted price of gold is NOT $2200 or so as reported in the media...it is closer to $4000 plus.
Why the discrepancy? Because the media is using official government statistics. See: Shadowstats.com
I am a skeptical reader of the site, but its basic premise is correct. Inflation is vastly underreported.
Bernanke Brushes Aside Inflation, Focuses on Growth
Rising heat is the cause of higher temperature.
Higher temperature cannot cause rising heat, because temperature is the measurement of the phenomenon, heat.
Is it possible to have rising temperature without rising heat?
It is not.
Risk Management Lessons from Bear Stearns
A very interesting article, and I always read what you have to say. But, I'm skeptical.
Like reader 51324 above, I would think that the 1% tail risk would misidentify volatility as risk and give false positives (stocks such as BRK that may go into a period of higher volatility due to big one time event--such as the need to payout for reinsurance, such as when a hurricane hits--but it would be under no real risk of defaulting on credit.)
Microsoft, or Altria might be other examples of higher volatility for big one time event, but no real probability of defaults or credit risk.
Might QPP 1% tail risk algorithm also produce false negatives? Incorrectly identifying those with limited risk due to low volatility, and then a sudden collapse? Does Fannie Mae fit here?
I don't know, but I'm very curious. Thanks for the research and the writing.
Eric from Alaska
Get Out of Commodities - Barron's
Did Barron's Really Pan All Commodity Investing?
Barron's Misses the Other Side of the Commodities Story
Did Barron's Really Pan All Commodity Investing?
I know because this is what clients say they want.
Then, it makes the erroneous connection that commercials are "smart money".
Keep in mind that Citigroup's purchase of MBS and other derivatives was "smart money", as was the idea of off balance sheet investments. Thats "smart money" taking more risk than the "dumb money".
But many of these commercials are more "speculative"... (i.e.--short term and leveraged) than the ETF holders.The short term, and leveraged positions of the commercials shorts in particular is the opposite of "non-speculative&...
The evidence that the article uses would better used to make the opposite conclusion of the one it comes to.
Moreover, The word "bubble" is overused, and in fact, a linguistic bubble has developed in its use. The contrarian linguistic sentiment indicator I use tell me that as the use of the word Bubble increases in the press...the overall level of actual financial bubble declines. (ok, not really, but it amuses me).
Bubble should include--increasing financial leverage, short term traders taking more and more of the trades, and a subjective sense that the assett price cant decline,
Therefore: belief that Houses cant decline+excessive leverage+ house flipping= bubble.
lets look at commodities: overwhelming belief that they will decline+little leverage on long side (but excessive leverage on short side in some commodities+little evidence (at least in most of ETF's) that traders are DOMINATING the markets. What does this spell?
Not a bubble...a short term correction perhaps. Lets not contribute to the linguistic bubble by overusing the word "bubble".
Its a misuse of language and non-analytical.
Hank Paulson's Cognitive Dissonance
Who first said socialism in America is mainly for the rich?
Barron's Misses the Other Side of the Commodities Story
Looks like more than speculation to me.
Get Out of Commodities - Barron's
1) Commodities are increasing in US dollar terms, but in other currencies as well...so it is not merely a US dollar play, and over the long term, commodities can rally with an increasing dollar (but not short term).
2) Commodities are an asset class, simple as that, although under owned. Most people, by far, have little or no exposure.
3) Commodities do well in a rising inflation environment, but tend to under perform in stable or falling price environments.
4) Why no mention of the "bond bubble"? Bonds are ridiculously overpriced and under yielding. Why isn't the smart money rushing for the exits from bond exposure, including treasuries? Answer: There is hope of another rate cut, and inflation expectations are for moderating prices going forward.
5) Keep your exposure to commodities to a reasonable level--say 5-30% depending on your inflation expectations, and then don't worry about it. Diversify across the four mega classes of assets and the markets will take care of themselves--real estate, stocks, bonds, commodities. Then it doesn't matter if Barron's is correct or not--going forward, you are protected.
How Cheap Are Gold Stocks Relative to Bullion?
How Cheap Are Gold Stocks Relative to Bullion?
Dividend Aristocrats: Top Dividend Growers
Is the Gold Rally Really Over?
First you raise some valid points about credit creation. You make a good case that we are facing two options: deflation or inflation. Then you call previous SA community members "gold bugs", which is both dismissive, and implies a certain shallowness of thinking, and emotional response to the markets.
The people I know that invest in commodities are some of the most critical thinkers, and objective analysts I know. Its not dumb money.
I cant speak for the others, but I agree with the author. I read in Barrons in 2001 that gold was only going down because of the coming deflation.
oops.
Soooooo, noboby really knows what the future holds. We might be facing deflation. But that would require several unlikely events to occur concurrently.
Yes, that Japaneese managed to deflate...this is true. But with Bernanke at the helm, as a known and committed inflater, who has written white papers on how to avoid deflation, we are most likely in inflation territory.
The commitment, the knowledge, and most importantly the political will and motive is there to make sure deflation never happens in this country. Elections coming up, significant underreporting of real inflation to hide the governments sleight of hand, the GLOBAL growth in M3 of almost all developed countries at rates well in excess of 10%. Fortyfive, or $54 trillion in unfunded future liabilites of the US Government, the real cost of the Iraq war at $3 trillion.
Great debts typically get inflated away--thats been the lessons of governments of Governments which promise more than they can deliver.
Finally, the bull market in gold and commodities is a GLOBAL phenomenon. Its not confined to the major but contained US debt implosion.
Why I Don't Own Commodities
"The hubris of rich liberals who..." can only be outdone by the hubris of even richer neo-conservatives who wage wars for "freedom" and "democracy" based not on facts, or the wisdom of generals with a lifetime experience in the arts of war, but on faith, ideology, and gut instincts...and send 4000 Americans to their undeserved deaths.
(Please don't remind me they volunteered to serve--they didn't volunteer to serve under false pretenses, lies, manufactured evidence, and propaganda/misinformat... campaign).
But its just a thought, probably has nothing to do with commodities or inflation...or oil, or future wars that will effect these same trends....