2 Reasons to be Bullish on Gold

Just some random gold thoughts here via David Rosenberg’s 2013 outlook:

“Gold is also a hedge against financial instability and when the world is awash with over $200 trillion of household, corporate and government liabilities, deflation works against debt servicing capabilities and calls into question the integrity of the global financial system. This is why gold has so much allure today. It is a reflection of investor concern over the monetary stability, and Ben Bernanke and other central bankers only have to step on the printing presses whereas gold miners have to drill over two miles into the ground (gold production is lower today than it was a decade ago – hardly the same can be said for fiat currency). Moreover, gold makes up a mere 0.05% share of global household net worth, and therefore, small incremental allocations into bullion or gold-type investments can exert a dramatic impact. Gold cannot be printed by central banks and is a monetary metal that is no government’s liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling during the higher interest rate times of the 1980s and 1990s, are now reallocating their FX reserves towards gold, especially in Asia. With the gold mining stocks trading at near record-low valuations relative to the underlying commodity and the group is so out of favour right now, that anyone with a hint of a contrarian instinct may want to consider building some exposure – as we have begun to do.

In that light, the bond-bullion barbell continues to make sense to us within a diversified portfolio that includes the parts of the equity market that trade like a bond.”




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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Correct me if I’m wrong – but I would have thought that MMR etc. would not consider the increased monetary base as *particularly* important with regard to inflation, which is presumably what the charts above are hinting at?

  2. The issue is not so much “inflation” as is presently defined but that gold has historically tended to soak up excess speculative liquidity.

  3. How do you gauge “speculative liquidity?” If there’s a dramatic decrease in credit — parts of M2 and above — then an offsetting increase in M1 doesn’t necessarily result in too much liquidity.

  4. If we mix all the recent market reccomentation posts we have to conclude that:
    1) US equities = ultra bullish
    2) EM equities = bullish
    3) EU equitis = bullish, they are cheap respect US
    4) houses = bullish to super bullish
    5) gov bonds = still bullish, Ben is buying all the long term
    6) MBS = bullish
    7) gold = bullish
    8) most of the other financial stuff = bullish anyway
    So don’t be worried, go out and buy, all is good, all is fine

  5. This.

    The article’s main point was really “monetary hyperinflation!!”, which myth MMT proponents spent a long time debunking. It’s weird to see it posted here.

  6. Cullen this guys is saying gold is “disaster insurance” and not really following monetary inflation or price inflation per se. Would love your opinion if you have a chance.

    It is interesting to see on the chart how gold tends to form blow off parabolas during banking crises when fear/panic is at the highest. It seems that gold is anti-investment to peace and prosperity (economic growth)

    And the linkage to monetary inflation is dubious

    Gold as Disaster Insurance: http://www.bullbeartalk.com/forum/lounge/452-wednesday-december-26th-boxing-day-panic-dude-wheres-my-inflation.html#post56914
    Gold and Bubbles. http://www.bullbeartalk.com/forum/lounge/455-thursday-december-27-bubbles-inflation-insurance.html#post57084

  7. Not quite that rosy, my friend!
    treasuries – neutral to quite bearish, except some fearmongers and freaks.
    Gold – somewhat bullish, but not really.

  8. Gold is BEST when 1) real interest rates are negative 2) persistent risk off on the risky markets. So (1) is here to stay for the next 10 years at least while we’re from moderately risk on or fully risk on. In case of a Lehmann 2 crisis, gold will be taxed or outright banned. This is how financial repression worked in the past and will work in the future. So, if you are interested in gold, buy physical and keep it in Switzerland or Singapore.

  9. In a real world wide financial disaster who can afford to buy your gold (for food and clothes)? I suppose you could buy the badly devalued equities of companies that may survive and hope to live long enough for the market to make a real recovery. Or you could just own those equities now and ride out the same scenario. But then again, the crisis may not happen, and your gold would not get the dividends of the equities you sold.

  10. Where are you living man ? I’m living in Asia most of the year and I can assure you I can place my gold anytime in exchange for whatever I need. I’m not sure but I think it’s the same in South America and Africa, may be even Russia.

  11. The most significant change is moving gold from its tier 3 status to tier 1 capital as 100% loan-backing reserves, the same as cash and bonds. For the first time in 42 years, gold is being brought back into our financial system as money.

    Currently banks’ exposure to gold has a 50% risk weight assigned. This means that for every $1 invested in gold banks have to set aside $0.5 of regulatory capital. At the same time cash and some countries’ government bonds have a risk weight of zero. In “flight to safety” times the banks are generally more willing to invest in assets with a risk-weight of zero because doing so they wouldn’t worry about impairing their regulatory capital ratios. On the other hand they would sell higher risk-weighted assets in order to gain cash or improve their regulated capital ratio.

    The proposed reclassification of gold bullion would put it in a whole different risk group of possible investments and on a level with those assets, which are considered to be free of counterparty risk from a regulatory point of view. This would lower the willingness of banks to sell gold in order to improve ratios or acquire cash and would expand the universe of available zero risk-weighted assets as investment options:

    “The Basel Committee it had been actively monitoring “on a continuing basis” the progress of members in implementing the Basel III package of regulatory reforms, as well as the implementation of Basel 2 and Basel 2.5. “The number of member jurisdictions that have published the final set of Basel III regulations effective from the start date of January 1, 2013 is 11. These include Australia, Canada, China, Hong Kong, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland. Turkey will issue draft regulations early in 2013.”

  12. Wrong. Gold is already totally demonetised. This move recognises it as a safe asset, nothing to with money.

    The reason to buy gold is due to the emergent monetary system lead by the Euro, physical gold marked to market as the main reserve asset behind the currency.

  13. How about this.

    Stimulus [Government deficit spending, money supply expansion and a low interest rate policy], need not be, but often becomes channeled into asset speculation [credit driven bubbles] rather then investment in real productive economic growth (job, real wages etc).

    Gold bulls assume [granted without much proof] that these stimuli will be directed into some new credit bubble that will inevitably burst and result in destruction of this inflated created wealth (like the outcome of the housing crisis of 2008). The Fed will likely “re-inflate” the deleveraging and so gold is insurance against such a disaster and/or rejection of “paper assets”.

    Talk of death of fiat is another level of abstraction.