ddtuttle

Gold Is Not an Investment: It's an Insurance Policy

Our entire financial system screwed up, the Fed, the government, bankers, Investment banks, insurance companies, pension funds you name it. We are sitting on $40T in private debt, $11T in government debt and about $50T in unfunded liabilities for SS and Medicare. Collectively they let that happen.

Now we are stuck in a massive worldwide debt deflation, working our way out of that all that debt. It will take decades and it will depress our economy for at least that long. In a deflationary spiral cash is king, and gold is the ultimate cash.

The Fed will try to inflate their way out of this, but the deflation is just too strong. There's no way even Bernanke will print $100T, just to get us back to a status quo. At some point we will have eliminated enough debt that the inflationary solution might work for the rest. But this is probably 10 years away.

This is of course assuming the USA doesn't default,. When you add the completely unknown outcome of $500T in derivatives on top of our $100T in debt, that is possible.

So that leaves us with decades of deflation.
Possible inflation after 10 years.
Default on it all.

Do you need an insurance policy for that? Maybe not if your Buffet who is 76, has $30B and lives on less than your average college student. But I have some funds that I want to preserve, and if this perfect storm sinks my boat, I want a life raft. How about 10% of net worth in physical bullion?

The only reason that will go down is if I'm totally wrong and we have a great recovery, in which case the other 90% will be doing fine.

Top IEA Economist: Peak Oil by 2020

CERA was probably the most pessimistic analysis Co. around. But they get paid for being right. They finally rolled over and admitted we have passed peak oil.
Anybody who says otherwise probably has a political agenda, or just hasn't studied the facts. IEA has an excellent record, but Faith Birol is an ECONOMIST, and we know how right they've been recently.
Anybody who thinks oil companies haven't looked someplace obvious for oil is nuts. Otherwise why would they be drilling 20,000 ft under 7000 ft of water for unknown amounts of oil?
Over the last 20-30 years the industry began exploiting offshore oil. These fields are turing out to deplete very rapidly. The latest fields in North Dakota Bakken are in tight formations and are also depleting very rapidly.
Peak oil is sometimes called the end of cheap oil, so that even if we can produce 74 Mbpd, it will be much more expensive per barrel, and more expensive to refine. Either way the price goes up.

How $30/Barrel Oil Could Save the World

The ONLY thing that can save us is $200 oil. We are past peak oil, so that's no longer an issue. The issue now is global depletion. We get 50% of our oil from just few giant oil fields, nearly all of which are in decline. Most of the little oil fields are in decline too.

At the moment the recession/depression is destroying demand faster than the decline rate, so the effect is invisible. But exploration and development of new fields is at a stand still. This supply destruction won't be felt until we try to reverse the economic decline, when we'll find we don't have enough oil to grow our economy AT ANY PRICE.

The entire global economy is based on cheap crude oil, which is very close to gone. What is left is lower quality, more expensive to produce and runs out faster. Our economy can only run at the rate we can pump oil, which is quietly going down.

I'm not saying we won't have oil, but the world of 60 Mbdp looks VERY different from the 74 Mbpd world we live in today
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In the end this is good, because this is the only way we'll ever switch away from oil is to make it abundantly clear to everyone on the planet, we need to switch, and $200 oil is the only way to do that.

BTW: $200 oil is still cheap!

Gold: Clarification, Part 2

When you're trying to find out what things are worth independent of paper currencies, it makes perfect sense to compare various commodities.
However, gold and oil are fundamentally different. Every drop of oil that comes out of the ground is "destroyed" with a month or two. It is a flow based commodity. Gold however, is saved not consumed; 95% of the gold ever mined is still available. More importantly, we have passed peak oil so the price will now start going up because flow rates will shrink essentially forever. On the other hand, supplies of Gold will rise slightly with mining output, so we should expect an ounce of gold to buy less and less oil in real terms.
This chart would be a good way to separate inflationary increases from real ones due to declining supply.

Gold Price Forecast: Market-Long-Wave Analysis 2009-2012

There's no question that gold has behaved very strangely since we went off the gold standard. Except the the spike in 1980 (1) it really lagged, not even keeping up with inflation, until we got to about 2000. Then it's been a great investment.

The problem with gold is that it has 2 identities: first is its role as a commodity by which I mean jewelry. It is perfectly reasonable to assume a correlation between housing and jewelry.
The major difference is that we can build many more houses than we'll ever need. But new gold must be mined. We are limited by geology to increasing the store of gold by about 1% per year. Today few mines can function below $600/oz. This might drop as mining equipment and energy prices drop, but we're also running out of cheap gold: the easy stuff is always mined first, and has already been stored in vaults (reburied if you like).
All this presumes gold is a commodity. But most people also understand that it is a kind of monetary instrument, if not exactly a currency. Paper is more convenient, so in good times gold's role as money is mostly ignored. When times are bad this role reasserts itself, and gold becomes an important insurance policy against the problems inherent in paper money; namely the government can print as much as it likes (digital money takes "printing" new levels of triviality).
In the 1980's gold's monetary role was briefly realized creating a price spike. Then things returned to normal, and it just puttered along for 20 years. Since 2000 we've had 27% growth, which restored gold's luster as an inflation hedge. If you think gold is a commodity, then this was just part of the bubble, and it will drop along with everything else, as shown in your graph.

But gold has the ability to divergre from this behavior when people start thinking about it as money, as they have for thousands of years. If currencies other than just Iceland's start failing, gold's safe haven status will become apparent to EVERYBODY, and its price will rise.
Given all this, central banks don't want gold's price to go to the moon. It can go up, but not too fast. They work very hard to keep its rise reasonable. No one knows what they will or can do this time around, but probably they'll do back flips to keep it from going much above $2000. This is the CPI corrected value from 1980, and the CPI is much less than real inflation.
Good graph, very interesting.

Is It Possible the Current Recession Was Caused by Oil Prices, Not Housing?

This connection has been known in he Peak Oil community for some time. The problem was the balance of payments, which were dominated by puchases of foreign oil. You remember T Boone Pickens $700 B dollars a year trasnfer of wealth.
The big NYC banks desperately wanted to keep that surplus denominated in dollars, i.e., keep it here in the United States. The way you do that is to find attractive investments for Arabs, Venezuelans, Nigerians the Chinese etc. So they ship us oil (or plastic toys) in exchange for stocks, bonds, and you guessed it, CDOs SIVs MBSs and the ever popular CDSs.
Much of this was made up of securitized mortgages. However, this program was so successful the big banks cranking out these "instruments", ran out of mortgages. So we ignited a cash-out refi boom that went on for years. But pretty soon that was also exhausted, so we started giving anybody a mortgage. The beast had to be fed: keep dollars in the US at all costs.
The big banks pressured (extortion is more like it) congress, and mortgage originators to ignore lending standards and credit worthiness. Freddie and Fannie were practically owned by the big banks who buy all their MBS paper, and they were coerced to lobby congress (remember they still had a pristine reputation in DC) for all the changes necessary to start cranking out junk mortgages.
You can see our insatiable appetite for oil led to the need for the Wall St super banks to completely corrupt the residential real estate system. At first glance it appears that the real estate crisis was the cause. But that makes no sense; Bankers actually aren't that stupid. They were being driven by Wall St banks engaged in what appeared to be a strategic effort to keep the all the petro-dollars here. In fact they were just perpetuating a perverse level of borrowing in the USA (and elsewhere it turned out). Bankers are that stupid.
This is the mechanism, and as I said, this is well-known in the Peak Oil community.
Of course, nothing is ever that simple, but this connection cannot be ignored if you want to find causes that actually make sense.

How the Gold Game Could End

There is absolutely nothing weird about gold having perceved value, but no utility. ALL value is strictly a symbolic attribute. We decide collectively and individually what something is worth, based on internal human perceptions. It might be emotional, nostalgic, utilitarian, speculative ... whatever.
A Picasso can be worth millions, certain Ferraris the same. But my drawings aren't worth as much as a Kia. Even little pieces of paper with strange pictures printing on them in green ink have value. Value is ALL symbolic, ALL perception.
Gold has held a perception of value for thousands of years, and still does. Why do you think tons of it are put into guarded vaults the location of which is kept secret? People (lots of them) still think its valuable. Who cares if the value is merely symbolic? That's true of everything.
You would die in 3 minutes without air, yet air is free because it's not rare, it's everywhere. Gold is rare.
Oil has value, but only when its burned and converted into energy. Oil is efemeral, you always need to pump more because its always gone. 95% of the gold ever mined is still in human possession. Gold is permanent.
A perfect apple has value, but let it sit around a few weeks, and it's garbage. Gold doesn't tarnish, or rust.
Governments print symbolic value onto paper, but when they need a little extra, the temptation to just print more is irresistible. You can't print gold.
Actually the non-utility of gold is what makes it a good monetary instrument. It is a REPOSITORY, because its never consumed.

The Globalization of Natural Gas

Missing here is the price of liquifying, trasnporting and gasification of LNG. Raw costs are close to the current price. Probably not a coincidence. So a small drop in US price (or the dollar), will make it unprofitable for some producers.
It is also much cheaper to ship it to Europe, which as you said is having problems with Russia's supply. Consider that round trip from Qatar through the Suez is shorter, takes less fuel (LNG), and allows more trips per year.
If we truly have a gas glut, then we should be subsidizing the conversion of cars and trucks to CNG or LNG to take even more pressure off gas prices.

ECRI: Economy Showing Signs of Future Stability

I have been following the WLI for many years. It is stabilizing at a very low level. In other words growth will still be very negative but not accelerating. The simplest interpretation is that GDP growth will be many percentage points in the red for the foreseeable future.

Fed Intervention, Market Response Confirm: We're on the Path to Hyperinflation

We are currently experiencing deflation on a global level. World net worth has dropped something like 50%, an amount that dwarfs the amounts actually "created" by central banks. We are in a deflationary spiral that show no signs of stopping.
When prices finally stop going down we'll have assets worth a fraction of their former value and many times the corresponding money supply. That will be a recipe for inflation, but from massively deflated values and prices.
Until then cash (and gold) are king. Once the inflation starts, then you'll want to switch to commodities (and gold).

The Shedlock-Schiff Affair: A Chronicle

Schiff is a money manager. It doesn't matter that he was right on TV about the US economy going down. He lost a lot of money for his clients. He bought the "decoupling theory" hook line and sinker. Peter believed (and still does) that the US is going to go down and everybody else is going to be much much better off. Don't believe it. The whole world is going down all at once because the global economy is MORE coupled than before, not less.
If you're looking for a metric to figure out what might happen, consider demographics. Chinia, Japan, UK, Europe all have older populations than the USA. India has a very young population. You will see relative strength wherever there is a group of young people who can work and consume for many years. This means after the US dollar corrects against the major currencies, they'll all go down together, staying more-or-less even in exchange rate. Peter Schiff bet the exact opposite way, and lost a ton of money.
BTW: Shedlock's company, Sitka, has performance charts on their web site, and they're pretty good. They pride themselves on extreme transparency.

The End of Gold, Part Two

I have been studying gold for only about a year. I have purchase quite a bit, so that colors my arguments.
Gold has a split personality: commodity and currency of last resort. As a simple commodity, people buy gold and make jewelry out of it. Gold has very little industrial utility, especially at these prices.
However, gold is also a "monetary instrument", that is it is a repository of value. This is why most of of it is held in vaults as bullion.

When times are good, gold behaves like the commodity, because the need for a safe haven is not there: paper money is trusted and works just fine. The gold sits in the vaults collecting dust not doing much of anything.

But when times are bad enough that people fear all the paper currencies value, then there is a rush to gold. There is so little gold available for investment purposes, that any significant rush would send the price through the roof. If every body in the world tried to put 5% of their portfolio into gold, that would require many times the gold extant in the world today. Since most of it is held by central banks, there would a many fold shortfall for retail investors. Not to mention existing investors would very little incentive to sell their stake.

At the moment the dollar is enjoying a safe haven status: the world still thinks our paper money is actually worth something. However, the other currencies in the world, sterling euro etc. are falling dramatically. Gold has hit record after record in the last few months denominated in these other currencies. We are surprisingly close to a moment when, if the dollar falters, there is nothing left but gold.

Gold is in what you call an anti-bubble, because the world hasn't given up on paper yet. At the same time many investors need cash, and gold is one of the only things that has gone up in the last 8 years. Desparate investors are selling stakes to fend off creditors, redemptions and to stay liquid.

I hold a lot more dollars than gold, mostly in real estate, so I'm not happy about gold going through the roof.

Country Default Risk Continues to Rise

I guess my only question is who is going to pay on an insurance policy after the USA goes bankrupt? Surely that event will only come when things are so bad, everybody's broke, including the other side of the CDS transaction.

The Coming Dollar Deflation

We are in a huge deflationary spiral. I have read figures like $29T of global wealth destroyed, just so far. The central banks have printed only a fraction of that. So it's easy to why the money supply is shrinking. You can call this dis-inflation if you want, but at some point it becomes regular deflation.

Of course the world is worse off than we are. England and the EU certainly are, Russia is toast, Brazil India and China all have a lot of stuff shoved under the rug (unreported liabilities, weird government interventions, and huge investments in US real estate securities). So the US dollar remains the strongest currency. Add the repatriation of global investments gone bad, or just requiring redemption and that lifts the dollar doubly.

However, we almost lost the entire financial system, again, last week when Citi caved in. We have had 3 episodes, each worse than the last, where immediate action by B&H was required to save the system. Can they keep this up indefinitely? Is this really good news that they can save time and again. Will they make a mistake?

We easily could loose all the big banks, after all they are already bankrupt. Will the gov be forced nationalize the banking industry? What about the auto industry, the insurance industry? We are a long way down these roads already.

I think B&H (Ben and Hank) are realizing that they cannot print enough money to stop this monster, and are shifting their priorities accordingly. Banks are just trying to find a way to survive to fight another day. The auto industry is toast.

Where does your confidence in the system come from? It is amazing!

Anyway there are serious dislocations coming the consequences of which are impossible to predict. But within all the scenarios gold will retain its value. It will soar if we end up with hyper-inflation. It will be hedge against other assets falling in price a deflationary scenario where the US gov is shaky.

Gold is not a commodity, it's not a currency, it is an insurance policy against exactly the scenarios we seeing play out on CNBC everyday. If Gold goes to $2000, that means everything else you own (your house, car, 401k etc.) is worth less than half, not exactly a great scenario there either.
DDT

The Day After: Is the Honeymoon Already Over?

This isn't about Obama or the Democratic congress, its about the two and a half long months before we get rid of our lame duck president and congress. Go back 2.5 months in your mind then project more of the same going forward ....