lorddarley

5 Reasons Gold Is Going to Rise: A Response to Nouriel Roubini

You shouldn't mistake paper money for "money." We have had a massive loss of "money" with this financial crisis, and it's ongoing.

Buildings worth $50 million are now worth $30 million. Stocks worth $10 million are now worth $8 million, etc.

By printing money, the Fed is using its money to replace the lost "money." It's not all going back in the same places, of course. Much of it is going into commodity and overseas speculation.

The devious thing for US taxpayers is that much of the private debt that is no good because of the loss of "money" has been shifted to the US Treasury. The US will, accordingly, have less to spend (in the long term) for taxpayer entitlements, because it will eventually lose its unlimited fiat powers. It will then confiscate private wealth while claiming to remain non-socialist.

I don't think gold is an exceptional hedge for a US taxpayer in this upcoming socialist scenario. If you have money in any form, you will lose it to pay for entitlements of others. Expatriation is about the only sure way to save capital. It's a complicated process, and the Bush exit tax makes it expensive. But we will have more severe currency controls in the future as part of a socialist agenda when most voters will rely on government funds. Holding gold, or anything else as a US citizen won't help you much.

The Arithmetic of Gold: Why Its Price Has No Ceiling

What perplexes me is that there continues to be such demand for the dollar. The interest rate at the last 10 year auction went down.

So who is spending the massive amounts necessary to finance the US debt? Someone is wildly wrong.

My theory is that people see the dollar at a much higher level next year than at present. There will begin to be a cut back in military commitments. There will be a modest raise in interest rates and tax rates because economic activity will pick up. There will be capital inflows back to the US, simply because the EURO is hardly worth its present price and US assets are on sale. The government will also be restricted in discretionary spending due to its assuming so many of the problems of the last bubble.

I'm not down on gold, but it is just one of many commoditis, and they are all having a good run during fearful times. With a return to normalcy, which the bond buyers anticipate, I don't see it behaving better than its asset class.

How Low Can the Dollar Go?

This will be a long term and painful process.

It is inevitable due to our decision (I don't remember voting, but I own a foreign car, so I guess that's a vote) to integrate within the world economy.

US labor is being repriced, and politicians are spending money like mad to shelter labor from the truth. Things won't get better for most private sector people until foreign wages go up, or until we decline further, in the name of "competition." Even privileged civil "servants" will start to feel the sting, but most of them are protected.

It's a sad state of affairs. Americans without jobs and prospects will not be good Americans. We should cut off the oil imports, and limit the junk we buy from Asia. Our favored political class, in Washington and the states, are incapable of solving this as they pursue their own self-interest.

It's Rome, redux. The collapse of a dedicated citizenry caused by imports and a corrupt ruling class. Until its final days, most Romans still thought they were living in a "republic."

Groundbreaking WSJ Story on Gold

Arthur,

You and I will garner negative comments for taking a "contrary" position, but I fully agree with your post. Especially important is your observation that: "The production cost of gold keep falling as the oil price falls."

There is no way that a commodity, even if it's gold, can maintain pricing that is double (at least) the production cost.

With the ability to move funds cross border to sounder currencies, and with the option to purchase baskets of commodities, and with bond vigilantes ready to hike rates if there is a hiccup, there are too many other ways to protect savings than to horde a commodity that is overpriced compared with production costs.

Naysayers, before pouncing, consider which is in the majority these days: posters in favor of gold, or posters who are skeptical? Also, ask yourself how long the US can continue unchecked with its profligate habits. The US will soon be in the humilating position of other banana republics. The IMF will not be telling us what to do, but the bond market will. The unhappy state of US finances does not make gold a good investment at these levels. Bring it down to $5-600, and it's off to the races.
















On Jul 13 12:52 PM Arthur Hau wrote:

> I don't know why people are still holding any gold when they could
> have sold their last piece at around $1,000 per troy oz!
>
> I have my gold futures margin account ready now. I am hoping that
> some crazy people from the media launch their last wave of gold rush.
> Then I will short-sell a couple of lots of gold in the futures market
> to earn some interest when it reaches close enough to $1,000 per
> troy oz again!
>
> If everything goes well, we will see gold price falling below $600
> some time next year! So, my gold futures account will show $400 capital
> gain per troy oz, plus interest from short sales! :-)
>
> Why would gold ever fall below $600?
> 1. No one has too much money to hoard too much gold, except for the
> Chinese who would like to get rid of the U.S. dollars by buying some
> gold.
>
> 2. The production cost of gold keep falling as the oil price falls.
>
>
> 3. Unlike oil, the stock of gold can only rise cause it is pretty
> much not a consumable asset (with the exception of some gold being
> used for industrial purposes).
>
> 4. Last time when there was a gold rush, there was the Iraq-Iran
> war, double digit cost push inflation, ... Now, we only have a fading
> oil crisis, a bearish asset market, ...
>
> 5. The low interest rate cycle will soon be over some time next year
> cause they are starting to talk about the strategies for the current
> stimulus package.
>
> The last bubble remaining is in the raw material and precious metal
> markets! No doubt about that!

Groundbreaking WSJ Story on Gold

I own the gold mining stocks through GDX. At times I have owned GLD, although I have no idea if it could deliver physical gold if there were an emergency.

I gues it's my lack of sophistication that keeps me from buying physical gold. First, when buying coins, I don't know who to trust. I don't know if the coin has been diluted with alloy. Also, I don't know how much cash I could get in a time of hyperinflation and whether I would just get cheated by middlemen. In fact, I don't know in a lawless time of hyperinflation how I would even keep the metal safe and get it to a place where I could negotiate it.

I don't care how long any dealer has been in business, or how many recommendations they have, or if there is a sealed little plastic bag around the coin. Madoff taught us that the most respected can cheat you. Lord knows what is being sold to Chinese and Indians, but my gut tells me there is more than a little larceny in some of the "pure gold" being sold.

Until customers can feel safe (i.e. by buying gold directly from the government and storing it with the government) I wonder if there really will be a wholesale transfer of paper money to gold.

Is Gartman Right About Shorting the Dow and Gold?

Asset prices were high because of an extraordinary "velocity" of money. All of this printed money is replacing high hopes, and is geared toward restoring the make-believe asset values of the last 10 years.

We have not even begun to experience the deflation which will be cause by state, local, and foreign country defaults on government debt. Commercial real estate, which has lost its key tenants (the financial industry and those who service it) is not talked about in the official circle of optimists, but the square foot asking price (necessary to service mortgage debt) is totally unrealistic.

Wages, in real terms, are going down, and anyone who mistakes government job growth for real job growth is smoking good stuff.

Someday, there will be inflation again, but even the mighty Fed cannot replace the asset values which were artificially inflated by an unprecedented binge of borrowing and speculation.

I keep stock of the gold miners (not the hard stuff) for diversification. There is really no long asset which is a good investment at this point except for high yielding utilities. The trend is down, and investments should be in instruments which will benefit from the trend.

How Does $9000 Gold Sound?

Gold can be mined for about $500/oz, or less. To get to $9,000 gold, there would need to be a huge new source of demand. Although I have been buying a lot of GDX, the goldminers' ETF, I just don't see the world going "all in" on gold.

More realistically, diversified baskets of commodities are a better protection for those who (justifiably) mistrust fiat currencies.

Technology has eroded gold's claim to be the sole source of "real value." ETFs are the way most individuals own gold. An electronic device is now the accepted substitute for the real metal.

So, if ETFs are the way (and it's the only practical way in which gold could be thought of as a substitute for trillions of fiat currency), why not a more diversified and sophisticated mix of commodity ETFs, rather than just gold?

I see gold doing well in the inflationary future. That's why I own GDX. However, its days as a sole alternative for "money" are over, thanks to technology. The demand for gold will remain the same as for other commodities, a bit above production costs.

LordDarley

Silver and Gold Are Money, Not Just a Store of Value

Protecting income in a world of fiat currencies is job #1 for any investment advisor. There is still a long term case to be made for gold at nearly $1,000/ ounce. However, even strong bulls must assess risks. My concerns are:

(1) production costs seem to be only $500/ounce, so any commodity priced at 2x production cost can have setbacks

(2) rising interest rates could hammer gold; consider that gold was near today's price 30 years ago when Volker killed it by raising rates

(3) safety of ETFs. Can paper ETFs be turned into the hard metal during a time of crisis? Not all of this is in vaults, and ETFs rely on counterparties to deliver.

On balance, I don't think gold is the place to lock up a substantial portion of one's wealth. If I had to make a one decision investment to protect against inflation, it would be in common stocks of companies which have world class franchises, pay dividends, and have pricing power.

For the record, I own gold ETFs, and sleep better for that, but there is signiifcant risk in gold at this price due to the above factors, especially the prospect of rising rates in spite of giovernment efforts to suppress them.

U.S. Dollar Strength and Implications for Gold

I think we are in for massive deflation. If inflation were even a remote possibility, the US treasury would be issuing long bonds at today's "low" rates.

The appetite for long bonds is enormous, due to pension liabilities. So why don't they issue them?

They don't issue the long bonds because they know there is no inflation in the future, and that interest rates will get even lower, and stay low.

It's a great privilege to sit on your backside and collect interest when you do nothing. Billions of people now have money, and would like to collect interest, and do nothing.

Surprise. People will be underemployed and interest rates will stay low for the forseeeable future.

LordDarley

Is the Equities Party Over?

I don't think there is much sense to this "analysis."

The entire capitalization of the world's equity markets is only 50 trillion or so (as of 2007). Some of this is crap, so the stocks of quality companies, which are needed for pension funds and insurance company portfolios, can't be more than 30 trillion market cap.

Assuming a reasonable cap rate, you could buy all the world's quality stocks (theoretically) for $3 trillion or so a year. Do you really think stocks are undervalued?

Helping to finance this theoretical purchase is the labor and ambition of billions of people just getting started on the path to prosperity.

Stocks of the world's quality companies are a screaming, unbelievable buy if you can think past the next few quarters.

LordDarley

Headwinds for Gold?

To evaluate gold in the short term, don't you have to consider the much lower cost of production?

Black Gold or Yellow Gold?

Gloom and doom. Less than 400 million people have rights to a huge land mass with incalculable resources, a stable system of democracy which protects property rights, and the best educational system in the world (at the top end, and also at the bottom end for our lower tier, who are ignored in other systems).

A main problem is a stupid president who did not understand that he should be a steward of his country's wealth. He wa captured by the oil industry and oligarchs who want to pass on trillions to their offspring without taxes.

I am hopeful our next president has read more than comic books, and will chart a program that makes it possible for the US to grow.

We can double our population (easily done) and we have growth.

The current malaise is just a blip, with dislocation among two groups that have disporportionate shouting rights: out of work Wall Streeters and "moiddle class" people who were seduced by Madison Avenue and lived beyond their means.

The US is the best bet of any country on the planet. Keep the whining in proper perspective, and don't elect another president who was near the bottom of his class. Presidents should be well educated and smart.

We have bright prospects, if we work and stop whining.

LordDarley