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  • gold bubble or not and precious metals trading. what is the future of gold.
    I should make it clear from the start that I firmly believe that there is no gold bubble. In fact, gold is fundamentally undervalued and likely to go much higher. I believe that next year we are likely to see 2500 price and longer term we are going to go to 5000 and higher.
    Let's discuss why gold is not a bubble. To be a bubble, you need massive buying, just like we saw in housing and tech shares. Only 0.7% of global assets are invested in gold. This is hardly a bubble. I would argue that against the backdrop of negative real yields, money printing and currency debasement, a minimum of 5% investment in gold and silver should be a part of any portfolio. Gold has preserved its purchasing power for thousands of years and this is not likely to change.
    Gold is called a barbarous relic and a thing of the past by various economics Ph.D.'s with little understanding of the nature of gold. I guess that this implies that paper money is a very modern and advanced invention. This is hardly the case. In fact, paper money has existed for a long time. It is a Chinese invention from the 10th century during the Song dynasty and saw widespread use by the Ming and Yuan dynasties. The currency changed over time as overprinting always resulted in hyperinflation and a new currency had to be printed. Eventually the use of paper money (also called flying money in China) was abandoned in the 15th century in favor of the more robust metal based currencies.
    I will give three market reasons why gold is a good buy:
    1. Central Bank buying. This is a big change in the market from the selling that we saw until only a few years ago. The European CB's unloaded a large part of their holdings losing billions in the process. The biggest seller (and also loser) is the SNB but the UK, Netherlands and  several other Western banks also sold. This has now stopped and the Western banks are not selling (unless you believe the rumors that they sell from time to time to suppress the price). New players have come to the market and they are all buying. CB's from the newly richer EM countries are sitting on a lot of cash and are buying. China, Russia, Mexico, Korea and others are buying. Check this link for the record September purchases by China - this is private and official buying. Emerging market countries didn't use to have large reserves and having accumulated such paper reserves are now looking to diversify. They hardly have any gold and will be buyers for many years.
    2. Inflation and currency debasement. There is a great debate between the economists calling for inflation and the ones calling for deflation. There has been huge money printing going on everywhere and this currency debasement has pushed gold prices much higher. The focus has been on the FED with its money printing programs called QE1 and QE2 (you understand that MP1 and MP2 meaning money printing 1 and 2 would not sound as good). The fact is that the rest of the world's CB's are just as aggressive in their money printing efforts. The BOE just started a new money printing program. China, India and Russia increase their money supply more that 20% per year, every year. More recently we saw large protests in Israel against the extremely high inflation in the country, inflation caused by its irresponsible Central Bank.
    There is an argument that money printing will not cause inflation due to the collapse of lending and weak demand. While weak demand is likely to keep a lid on prices, I prefer to look at history. History in countries as diverse as the Roman Empire, China in the Middle Ages, Germany in the 1920's and the UK in the 1970's shows that money printing always leads to inflation. There has been absolutely no exception to the rule and the fact that monetary policies are now controlled by professors doesn't change this basic principle. Inflation is a funny animal and you never know when and how it rears its ugly head. Now we see it in food, medical and educational costs while housing in the US has gone down. We don't know where it will strike tomorrow but you can rest assured that CB's fighting the ghost of deflation will make sure that this ghost never shows up.
    3. Debt levels in the developed world. We are overwhelmed by news on Greece and now Italy and their debt problems but the fact remains that the US, Germany, France and Japan are also in trouble. In 2010-2011 fiscal year the US ran a larger budget deficit, as a percentage of GDP, than Greece. With the developed economies sitting on something like 100% DEBT/GDP, the future is clear: more money printing is in place. Notice that this 100% number is actually low as ''clever'' accounting allows governments not to recognize much of the debt that they are responsible for. For example, FNMA, the failed housing agency, is supported by the state but its huge debts are not on the balance sheet of the country (the US still pays though). There are many other examples like that and the picture of the actual debt out there is actually much worse than reported. Further to that, one has to look at the unfunded liabilities of the various governments. In the US this includes Medicare, Social Security and others. If you include the future costs of these programs, the DEBT/GDP is higher than 600% and some economists believe that it is higher than 1000%. Given that the potential tax receipts of the government are about 20% of GDP, this is totally unsustainable. Not owning any gold means that you put your faith in governments to manage their finances responsibly and preserve the value of their currencies. I don't see even a remote chance of this happening.
    I will finish by a short comment on current gold prices. Gold doesn't look cheap at 1790 per ounce and may see volatility and better entry points. With higher prices the market will become more volatile. The risk remains that we see a big move up due to an escalation of the usual debt problems out there. On the downside the risk is that demand from China and India comes down. China is very clever about its gold buying and they alternate buying in size with periods of low demand to push prices down and buy again. My view is that the huge amount of debt in the world, money printing and fiscal irresponsibility will push gold prices much higher over time. Of course, financial commentators will continue to talk about the gold bubble. After all, they mostly work for governments (directly and indirectly) and higher gold prices clearly show how good a job these self-serving politicians are doing.
    I am long gold.
    Nov 08 7:03 AM | Link | 8 Comments
  • gold bubble
    This is a big topic. Is gold a bubble or not? How do you understand the fair price? Why does it trade the way it does? Is it a safe haven or not?
    I don't believe that gold is in a bubble and certainly that ''bubble'' hasn't burst. True, gold is off its 1900 price but is still smartly up year to date. How many assets can claim that? AAPL has dropped a bit but does that mean that it is in a bubble which has burst? 
    There are good reasons that push gold prices higher and why people invest in gold. It has a 5000 year history of preserving its value. Of course, many journalists claim that it is a barbarous relic of the past. Perhaps, but the good news for gold buyers is that gold doesn't need propaganda from these people to go up and go up it does. There is a limited supply of gold in the world and the annual production increases supply by only 1.5% and nobody can change that. Look at the $, EUR and other fiat currencies. Their annual money supply growth has become exponential. There is just too much paper money out there. Of course, it is not equally distributed and not every cash rich nation or person would buy gold. Still, many do and the limited supply of gold compared to the unlimited supply of fiat money means that over time gold prices go up. This will continue as I fully expect a global QE with money printing by all central banks under the sun and we are talking big money printing. Gold will shine ever so brightly.
    I will point out a couple of statistics for you. Annual world production of gold is worth less than 10% of US budget deficit and less than 30% of US current account deficit. Keep in mind that a large portion of gold's value goes into production costs (excluded from the previous statement), while politicians and central bankers (working independently but always in agreement) can print trillions of fiat money at no cost. They do print and will continue to do so in the future - just look at what they've been doing for the last 20 years. 
    Due to its volatility over the last few weeks some observers say that gold is not a safe haven. Of course, this is the ''correct'' political line. Just pile your money into ''safe'' T-bills at 0% rate and see the purchasing power of your money collapse due to inflation. This is a safe way to lose over time. Given gold's history it is likely to preserve and perhaps increase its purchasing power. There are risks and market volatility but my personal opinion is that you can ignore gold at your peril. Forget the propaganda by people saying ''even if it makes money it is stupid'' or ''barbarous relic''. Look at what makes sense and execute your plans ignoring the fools. 
    How do you value gold? How do you know that you are not buying at prices that are too high? This is a tough question. There are valuations out there. One of them can be found on (I have nothing to do with the site). Apart from that I look at the growth in M0 money supply. This is published by the St. Louis Fed - go to their website for the information. I believe that gold prices are closely linked to the money supply M0 but other money supply indicators can also be useful.
    Don't sell your gold!

    Oct 03 1:18 PM | Link | Comment!
  • gold bubble, money, deficits, economy and prices, gld, gold
    We've heard many times how gold is the ''ultimate bubble''. I see a new article every 2-3 days that ''now'' is the time to sell and take profit. There are people who write a new ''sell'' article every month or two. Surely, as the price goes up, it is even better to sell!
    The arguments why one should sell are fairly similar: no income from gold, the world wouldn't collapse without gold - gold is not important, ''barbaric relic'', etc. I can answer these very briefly. It doesn't have income, because if u have gold, it is yours, not somebody else's liability. It is hard to claim that US govies have income when real interest rates are negative - negative real income! Gold has been money for 5000 years and the desire of some ''clever'' modern people to convince us that it is not money is not going to work. It is naive to think that some ''modern'' person understands money much better than the ancients. Trust me that the ancients had their share of intelligent people and we are not cleverer than them. In our social affairs we are just as short-sighted and misguided and this is going to continue, which is why gold is much better than any fiat money that ever walked the face of the earth, to be promptly forgotten in a few years. I don't think that the modern paper money will be any different and will go down the drain of history. This is not going to happen to gold and it is likely to preserve its purchasing power. The argument that gold has no value because the world wouldn't change if there was no gold forgets to mention that the same is true of all paper currencies. How would the world change if we burn all fiat money? The point is that the amount of  gold in the world increases at 1.5% per annum, which allows gold to preserve its value, while irresponsible Central Banks tend to print money like crazy to debase their currencies. This is why gold is a good ''store of value'' and fiat money is not and you probably remember that this was one of the important aspects of money.
    Where does gold go from here? We had a few strong weeks and now prices have been more stable for the last few days. Are prices likely to collapse or at least correct meaningfully?
    To answer this we need to look at the supply/demand situation as well as the economic situation in the world. Many Central Banks have now become buyers with the CB's of Korea, Greece (yes bankrupt Greece), Russia and many others buying. Chinese and Indian demand is off the charts. China and India have very high inflation and the locals buy gold to preserve their purchasing power (as well as for other reasons). There is nothing else they can buy as the former safe haven - the (formerly) mighty dollar can't help them and their local fiat money is constantly debased by their respective governments through money printing. The West hasn't really bought much gold and I wonder what would happen if the Western population loses faith in their fiat money. The demand for gold is so strong that I don't see a substantial pullback from there. My suggestion is to keep on buying even now and average your cost over time. You don't want to wake up one day with gold at $4000 and remember how you missed buying it because you waited for a $5 pullback. 
    On the economic front things don't look pretty with the global economy weakening. I am in the camp that thinks that we are in a recession but if you don't believe this, you are likely to agree that the economy is not growing much (global as well as the US economy). We already see the actions by Central Banks: BOJ has a new QE program, SNB prints money, ECB buys Italian and Spanish bonds and lends more to banks (this is QE but they are ashamed to call it that), BOE talks about more QE. When all these mighty banks are so proactive, you can bet that the FED will not stay far behind. They prolonged ZIRP for two years, possibly plan a Twist operation and eventually will twist all that into money printing on a grand scale. As nobody can print gold, you can bet that the increased supply of fiat money will be the rocket fuel that will propel gold prices much higher. I had a target of 1750 for the end of this year (before the latest rally - check my old comments). Given the latest financial crisis, I move to a range of 1850-1950 for the end of this year. My 2015 target of 3000-5000 looks conservative to me and I believe that we can see higher prices as the debt monetization around the world is likely to accelerate as governments get even more frustrated and desperate.
    Aug 15 12:57 PM | Link | Comment!
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