E.D. Hart

7 Myths About Gold Debunked: Bubble Warning; $600 Target?

On the use of the term "conspiracy theory" as an aspersion:

Its only a "conspiracy theory" if the other side totally denies it.

With regard to manipulation of gold prices, the fed has long accepted that gold is an international form of money, and thus is rightly in its purview to manage the exchange rate mechanism (i.e.--mask inflation)

Bernanke, Volcker, and Greenspan have all put comments to the same effect on PUBLIC RECORD.

How is that a conspiracy theory exactly to believe that gold prices are manipulated when the fed says exactly that?

The fact is gold prices are manipulated weekly, by the FED, the IMF, and central banks around the world---primarily by increasing volatility, and central bank sales.

There is a little problem: the Chinese are not cooperating, nor are the Russians with this plan however. Since the Chinese hold less than 5% of their total reserves in Gold, and they have stated that 15-20% of their reserves is a desirable figure (and total reserves are $2.1 T and counting) --what does that demand do to gold prices?

Ten percent of 2T is 200 billion dollars--hmmmmmm, bursting bubble, or long term supply/demand imbalance defined by changing global exchange rate mechanism imbalance and massive global deleveraging involving flight to commodities and commodity back currencies?

Oh, and by the way--count me an Austrian, even though Krugman is often worth listening to, my money (literally) is riding with the Austrian school.

7 Myths About Gold Debunked: Bubble Warning; $600 Target?

Ditto the above SW Richmond:

July 20 (Bloomberg) -- Gold climbed to a five-week high as a weaker dollar and higher oil prices boosted the metal’s appeal as an alternative investment and a hedge against inflation. Other precious metals also gained.

The dollar fell to a six-week low against a basket of six major currencies on speculation that economic reports in Europe and the U.S. this week will show the global recession is easing, sapping demand for the greenback as a refuge. Oil climbed to the highest in almost two weeks.

“Gold is moving up today due to the lower U.S. dollar,” said Lannie Cohen, the president of Capitol Commodity Services Inc. in Indianapolis.

Gold futures for August delivery gained $12.50, or 1.3 percent, to $950 an ounce at 10:25 a.m. on the New York Mercantile Exchange’s Comex division. Earlier, the price reached $955.40, the highest since June 12. Bullion for immediate delivery in London rose $12.70, or 1.4 percent, to $950.20, after earlier reaching $955.28.

“Gold is now trading like a currency and is rapidly becoming the preferred currency of choice,” Cohen said via e- mail. “Central banks throughout the world are printing money at a rapid pace, and soon investors will lose complete faith in paper currencies. At that time, within the next one to three years, gold will soar to $1,600 and beyond.”

The precious metal will have “short-term resistance” at $963, and a close above $993 would spur a “quick rally” to $1,250, Cohen said.

Commodity Rally

The metal rose to $952.25 in the morning “fixing” in London, a price used by some mining companies to sell production, from $937.50 at the afternoon fixing on July 17.

“The underlying driver is the dollar,” Dan Smith, a Standard Chartered Plc analyst in London, said by telephone today. “There’s a general rally across the commodity complex.”

Crude-oil futures, used by some investors as an indicator of inflation, climbed as much as 2.1 percent to $64.90 a barrel in New York. Oil advanced 6.1 percent last week, while the U.S. Dollar Index lost 1.1 percent, the most in almost two months. Gold tends to move inversely to the U.S. currency.

The MSCI World Index of shares gained for a sixth day on optimism that the first global recession since World War II is easing. A global recovery may accelerate the pace of inflation.

“There’s more positive sentiment for the economic outlook,” Smith said. “Gold is benefiting from that.”

Eighteen of 32 traders, investors and analysts surveyed by Bloomberg News, or 56 percent, said bullion would gain this week as investors seek a hedge against inflation. Eleven forecast lower prices, and three were neutral.

Buying Gold

“We are coming back to gold as a buyer this morning,” Dennis Gartman, an economist in Suffolk, Virginia, wrote in his Gartman Letter today. The fact “that the bond market is weakening and that the energy market is strengthening is forcing our hand,” he said.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, fell 0.3 metric ton to 1,094.54 metric tons on July 17, the company’s Web site showed.

Silver for September delivery gained for a sixth day, climbing as much as 2.6 percent to $13.75 an ounce in New York, the highest since July 2. The metal is set for the longest streak of gains since the start of January.

7 Myths About Gold Debunked: Bubble Warning; $600 Target?

Your article was beautifully written, well documented, and mostly correct in the basic facts--and your conclusion was entirely wrong.
Here's another way to think about gold:

Real interest rates positive = falling price of Au (1980-2000 approximately)

Real interest rates negative = rising price of Au (2000-???)

As long as we have negative interest rates (and that looks to be for quite a while) we will see rising gold, and commodities generally.

For my purposes I don't rely on bureaucratic cpi which are bogus, but on adjusted real inflation as put out by shadowstats.com. Yes, I realize that the government reports low inflation numbers.

There will be corrections along the way--as we have seen in oil, and gold could drop 10-20% in a matter of weeks, but it won't be a bubble bursting; it could be dumping, Goldman Sachs-Government manipulation, IMF de-hoarding, etc.

Long term, we are in a golden bull market, and silver will be even better. Why? Supply and demand. Capital assets seeking a safe home in assets that rise with the deluge of dollars.

Instead, we are in a treasury bubble--look there for your bubble to burst. (buy TBT)

There is no bubble in gold , its a bull market and will remain one until we get a new fed chief; a neo-Volker to raise rates above the real rate (not cpi) of inflation. Look for that to happen in 2018-2020.

In the mean time, buy gold on the dips, and sell your eroding treasuries.

The 7 'Golden Rules' of Picking a Gold Stock

Goldcorp fits your seven rules nicely. I own GG.

The Start of a Run for Gold

I have a collection of German coins. They're gold and were minted during the hyper-inflationary period of the 20's and 30's, before the currency became confetti.

The German government tried to convince its citizens NOT to trade its paper currency for gold; the government said that to hold the DeutchMark bills was patriotic.

Then the bills became worthless. The people that held the gold DM were able to eat, and not live in dire poverty. Those that only held paper suffered much more.

Many people know this little bit of history, but its quaint and far removed, and felt that it cant happen here. The people I talk to consider this an anomaly, an outlier, and highly improbable.

A historical reading of paper currencies shows the contrary truth: that almost all currencies ever introduced reverted to their intrinsic value. Confetti.

The exceptions are the ones extant.

But the current dollar meltdown has been predicted for decades. It is likely to continue for many years. Soros, Buffett, Rogers, and many people far smarter than I have been explaining the dangers of our bloated nations debt problems for years, and expect this to continue.

My coin collection, by the way, has appreciated in value. A German DM in 1920 was worth about .25 dollar, if I remember correctly. My 20 DM coins would have been worth $5 dollars then.

Today they are worth $225 for the 20 DM gold coin. Thats a 45 fold increase, not incredibly impressive, compared to stocks, but nothing to sneeze at.

More importantly, the paper 20 DM I can buy on e-bay for about $5, before shipping.


Now, which would you rather own? Gold has never been relatively worthless, it is the one currency that has been used throughout 10,000 years of the history of money (in almost every culture).

Food is important as is water, and you need them, no doubt. But its a false dichotomy--you don't need to pick one or the other. Food spoils, and is cumbersome to transport. Diamonds might make a good currency too, as would silver. But gold is one form of a store of value. Why not own food, water, silver, gold and diamonds? (Diamonds are the easiest way to smuggle large amounts of wealth with no electronic trace, but they need to be graded and authenticated) .

Why Gold is Likely to Keep Moving Higher

To Mr. Perkins,
A few rejoinders:
"Enough with the charts and all the fancy analysis where gold is concerned: How about a common sense approach!"

The analysis presented is not emotional nor fancy, but is instead rational and empirical, vs. your ideological and deductive remarks.

"Gold has no fundamentals and practical no industrial use." Incorrect on both counts, The fundamentals are supply and demand, as presented buy the author, and are entirely relevant.

Just as we are likely near peak oil, so are we likely near peak gold, with gold demand outstripping gold supply. How much more fundamental do you want?

As for the "no industrial uses comment", this is both irrelevant and incorrect. Many great investments have no industrial uses. And according to reliable sources, gold is made into literally tons of jewelery. This may not meet your definition of 'industrial', but it is real consumption of a limited resource.

"So, gold is either one of two things; a hedge against inflation or a hedge against uncertainty: On inflation, Gold is up about 42% per year since 2001 with US inflation somewhere between 5 and 9%, so gold is light years ahead itself in this respect. Historically though, gold has not been a sound inflation hedge."

Inflation over sufficiently long periods of time tracks the creation of money. The creation of money in the US and many other countries has been growing greater than 15% annually. The official inflation numbers are bogus and completely fabricated. Inflation globally is increasing.

Gold has historically been a poor inflation hedge during periods of falling or stable prices. We are not in one of those periods.

Moreover, gold does not trade in a free market, and this accounts for much of the last 25 year underperfomance. Gold trades in a manipulated quasi free market, very much controlled by governments. This control is ending.

"As a hedge against uncertainty, if things get really bad, gold is virtually useless. One certainly cannot eat gold and jewelry is probably not going to be foremost in most folks minds, except to sell!"

Gold is a store of value. You cant eat stocks or bonds either, but I will invest in them as well. If you have gold jewelry that you sell then you are supporting the point the author is making--that gold can be a rational, even superior investment. As a store of value and an investment holding some of your capital in gold makes sense.

Systemic Financial Crisis and Its Implications for Gold

We will see inflation and deflation over the next five to ten years.

Debt assets,real estate, banks and debt paper will deflate, and real assets will inflate.

Foreigners are net sellers of US treasuries and the US dollar will continue to decline for several years as the Dollar loses its reserve hegemony, and is replaced by gold and baskets of currencies held as reserve.

This process will be take decades. The IMF is a political organization as much or more than a financial one--it will lose money on the sales.


Finally, Visa does have debt exposure--as fewer people use their cards, and bankruptcies increase, transactions will not materialize as expected.

Peak Oil, Gold and the U.S. Dollar

Inflation is a global phenomenon that is not going away anytime soon.
See also excellent WSJ article on Chinese inflation: online.wsj.com/article...

The Myth of Gold as an Inflation Hedge

See also: financialpost.com/stor...

The Myth of Gold as an Inflation Hedge

Bearfund,
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.

Is the Gold Rally Really Over?

David,
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.

Gold and the Dollar: Value is in the Eye of the Beholder

User 149022:

I visited the site, as you suggested, and it corroborated the article above, which I am mostly in agreement with.

Perhaps you could elaborate what I missed?

Depending on who you talk to, the US GOV. has $53 trillion dollars of unfunded liabilities. To raise this money, Politicians (and the FED) can raise taxes, or they can borrow against future taxes, or they can INFLATE.

Guess which one is least painful in the short term (and insidious) and most painful in the long term?

The dollar has shown remarkable resiliency over the last 35 years because it is a global reserve currency--essentially transacting 85% of global transactions between nations at one point.

This is unwinding as we speak, and will take another two decades to do so. The result is the silent ravenges of inflation is the transfer of wealth from paper asett holders to those with future liabilities--governmen...

John Lee Responds to Nobel Laureate Stiglitz's Subprime Thesis

Mr. Lee,
Your libertarian free market philosophy, if taken to its logical conclusion, leads to some interesting conclusions:

1) Most of our governments intervention in markets would be eliminated, including the SEC
2) Federal reserve would be eliminated
3) FDIC insurance eliminated
4) and really, why not have each state defend its own borders (by private contractors) instead of the socialized national defense we have now?

Let each person fend for themselves and see what happens.

Apart from the fact that the vast majority of the public doesn't support these objectives, the contradictions inherent in the ideology would ultimately do it in.

A major reason that so many investors flock to the US with their dollars is that we have well (mostly) regulated markets. Take away that regulation and you seriously curtail the flow of capital across borders. See Zimbabwean stock market...

"Let the careless and the weak fall, isn’t that what capitalism, evolution, and free markets are all about?" Well actually no. Read Adam Smith before the "Wealth of Nations". He states quite clearly the need for some governmental controls.

Do we truly want our markets to be unrestrained evolutionary experiments? Then you would have to accept Exxon/Chevron/Conoco-P... and Mircosoft/oracle/yahoo... as mega monopolies.

It is true that governments often over regulate...but the current mess is not an example of this over regulation.

"Set the market truly free" ? Be careful what you wish for...
Mr. Hart