GOLD REPRESENTS THE MASSIVE RISKS IN THIS MARKET
There is no doubt a bubble forming in gold prices. In my opinion, the price of gold perfectly reflects the irrationality across many major markets, most notably, the equity markets. Despite no signs of inflation gold is up over 70% in the last year. As we’ve long opined, this is nothing more than the irrational money chasing that the Federal Reserve has once again created via their magically destructive printing press. The Fed is effectively forcing investors into risky assets as they give investors no other choice to support their retirement/income needs via their ZIRP. The price of gold has gone nearly parabolic in recent weeks and I would now classify gold as the riskiest of risky assets to own. This move down in the dollar and up in gold has come to epitomize the failure of Fed policy to reflate markets back to normality.  As we’ve said before, there are only two outcomes from the Fed printing policy: more bubbles or utter failure. For now, it looks like we’re in store for the former and that means there are more busts in our future.  I think monetary and fiscal policy are currently making our macro problems even worse, but how bad these problems become has yet to be seen.
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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But maybe TPC we need to consider the fact that Gold is doing that because in the event of a total collapse, gold be the only thing worth anything…
Exactly Julius. I think the declining dollar/surging gold price is telling us that all is not well underneath the surface. I am not necessarily saying that gold will collapse here, but something is not right in an investment world where all assets trade higher in near perfect correlation.
“gold may be the only thing worth anything”
this doesn’t wash because you would have to “monetize” your gold in a currency that is declining in value. This is not the 70′s, its worse.
Ken, here is a thought for you, and Soto below: People who own gold are planning on “re-monetizing” their gold…but into a currency that doesn’t exist yet.
You think in a “total collapse” environment that gold will be worth something? Rice, cheese, and gas, yes, gold… no.
Gold has limited value as a commodity in manufacturing, and is a big commodity in the luxury (jewelry) market. But in a “total collapse” environment believe me the bottom will drop out of the luxury market (who wants gold necklaces when they can’t afford rice?), and the manufacuring uses of gold (electrical connectors, etc.) do not have nearly enough volume to support its current price. The major driving force of gold is as a monetary, speculative value. When people get hungry because their dollars are worthless they will dump the gold for rice. The price of gold is dicated mostly for its 1) monetary usefulness (goldbugs, speculation), 2) jewelry, and 3) manufacture. In a total “collapse environment” #1 and #2 will be greatly diminished, as will the value of gold.
I still fail to understand if there is deflation in most of the developed world how gold would provide much protection in the event of complete market failure. For gold to provide real protection, you must have physical possession of it (not just via the GLD since in a true market failure your shares in the GLD might be just as worthless as any other paper asset), you must be able to physically guard it, and you must be able to convert it into useful assets, goods or services (i.e. in small amounts)
In the event of a complete collapse should we assume that the US government wouldn’t outlaw private gold holding as was done during the Great Depression? Then again making possession of gold illegal might just make it that much more valuable.
Anyway, aside from inflation risk, in the long-run such protection is only needed in the event of a default by the US government on both FDIC insured bank accounts and US treasuries. Otherwise, the rise in the price of gold is speculation on the fall in the value of the dollar (as well as other fiat currencies) which ultimately means inflation. Why pay those inflated prices now?
Current gold prices seem to imply an expectation of double digit inflation for years to come, just as gold prices in the late 1970′s and early 1980′s did. Ultimately double digit inflation did not last as long as anticipated and gold rapidly declined in value. Gold is nearing triple its long-term inflation adjusted value (excluding the 70s and 80s bubble). That looks very similar to oil last summer.
I think gold has more properties than simply an inflation hedge. The greenback has failed in one of the essential properties of money – as a store of value. Gold still has that property, at least to a greater extent than the dollar as long as Bernanke has anything to do with it.
The dollar is a store of value to the extent that there is no inflation. It is also a store of value to the extent that you can hold a bank deposit and receive after tax interest which is equal to inflation. Gold provides no return so it must increase in dollar terms by an amount equal to inflation to remain a store of value. If you bought gold in 1980 it was absolutely NOT a store of value. You have lost money even with gold at 1,200 oz today. The price you pay for an asset (gold included) matters.
Today and the ’70s are totally different worlds. The difference in gold and inflation today is that it is not just reacting to U.S. dollar inflation but world currency devaluation. While the dollar may not be making huge moves compared to other currencies, currencies as a whole are being extremely devalued by printing presses. Gold can’t go straight up like it has, but I’m extremely bullish long-term.
Marc Faber last week said that gold at these levels is probably cheaper than it was at $250 in 2001, considering to fundemental picture. I think he is right, and I think gold is behaving very rationally. For this I point to three factors:
1) Central banks around the world are heavily underinvested in gold. You have already read the article I think- Rosenberg says that China’s purchases alone could push gold to $2600. Think of what all the other CB purcharses would do.
2) I saw an interesting chart yesterday- gold exploration budgets have consistenly increased over the past 10 years but new gold discoveries have correspondingly cosistently decreased. Also a big gold mining company recently claimed we have reached ‘peak gold’.
3) The monetary situation has never been more bullish for gold than it is now. Gold is moving up because of anticipated future inflation. In this case I think it represents a leading indicator.
4) $1000 most likely established a floor in gold since the decisive breakthrough after many tests. Even if gold went down to $1000, it would be less than a 20% drop. This is not really a bubble in my opinion.
Oh come on. How many times have seen charts go straight up like this? Yeah, it could last a lot longer, but these things always revert back and usually do so in dramatic and devastating fashion.
Hank, it’s funny you asked because I just read an article from Iacono Research that discredits the notion that this is a bubble in gold, precisely because this current upmove has been repeated many times in the course of the 10 year bull market that begain at $250- and each time people have called it a bubble…only to see it move to new highs year after year.
See the following link and notice the charts:
http://www.iaconoresearch.com/PublicArticles/public_articles.html
When the Dubai news hit, gold fell about 3.4%, while the dollar jumped about 1.6%. This tells me that the dollar is still perceived as the safe haven, whatever people might say about gold.
TPC,
FWIW Kevin Depew @ MV used to discuss the Mr T gold sell indicator, ie, whenever Mr T made it to mainstream media a top in gold is usually around the corner; I just spotted Mr T on an ESPN commercial; don’t shoot the messenger and I don’t deal in ‘whys’.
Just a thought
I wouldn’t disagree that gold is dangerously overbought and I certainly would have to pass on doing any investment buying,
given that the dow went from 776 to 11,700, a 15 fold increase, oil went from $10 to $147 almost a 15 fold increase and those calling it a bubble in those two cases were in a distinct minority and generally laughed at (I know as I was one of them) gold being up 4 fold may not be all that much.
Besides in light of the recent currency devaluations I suspect the people in Vietnam and North Korea sure wished they had some of their money in gold.
If the NK government figured a lot of citizens had gold they’d have seized it long ago.
And I’m sure the Vietnamese would be just as happy holding US dollar bills as they would gold – in fact happier since it’s a lot easier to carry.
I suspect those Vietnamese might loose some of that happiness as they see the things they can buy with those dollar are getting easier to carry too.
Is Gold Overbought—-NO
Is Gold in a “Bubble”—NO
What is it then?
If the stockmarket is a voting booth–what is the Gold vote saying?
Some say inflation and were going to “Hell in a Hand Basket”– an emotional response.
Consider the Gold Vote as Vote of NO Confidence.
No Confidence in the Administration and its “Economic Recovery” policies.
No Confidence in The Fed and The Treasury and its “Reflation” policies.
No Confidence in The Global Recovery–in general.
Can you use Overbought as a description of more buyers saying No Confidence??
Who knows–maybe these buyers want tangilble “Evidence” of Economic Recovery without the govrnmt “medicine”
Agreed with AWF. According to Martin Armstrong, gold is largely misunderstood by the casual observer in the markets. Bazooby raises an interesting point about whether or not gold is a safe haven. In a debt deflation, gold will not perform well, as would not any asset, since all assets are being sold to raise cash to pay off debt. The Dubai default triggered a bit of anxiety that recalled the debt panic around Lehman, when the USD rose and all assets (gold included, but to a lesser degree) fell. In an inflation, gold might do well. But according to Martin Armstrong, gold is not exactly correlated to inflation, since as others have pointed out, inflation would lead to higher interest rates, which would ultimately depress the price of gold (as a non-income generating asset) in favor of recently issued yield bearing instruments. Instead, gold is correlated to a decline in political confidence. So AWF’s analysis is closest on point.
Roubini is correct. In spite of the increased money supply, because of high unemployment, the money is not reaching consumers. This along with increased savings is keeping inflation at bay. Indeed there is a debate over deflation versus inflation. The low interest rate makes higher risk assets more attractive and I agree with Roubini, this along with fear of inflation has caused a rush from the dollar into gold and other assets. However,the high unemployment rate indicates the price of oil is not being influenced by the law of supply and demand; it is driven by speculation as a result of fear and greed.
The recent controvercy in Dubai and Greece are the proof of this, There was a mass exit out of the Euro and into U. S. dollars.