ddtuttle

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.

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