RANDOM TRAVELING THOUGHTS
I love traveling. Not only for the personal rewards, but for the business rewards as well. There are few things that an investor can do that give them a true feel for the market. Most investors get their outside information from various financial TV networks which is almost guaranteed to poison your mind with inaccurate information. Others get it via word of mouth. Some of the lucky ones are in a position to see the economy at work on a daily basis via their jobs. But few forms of information gathering can be as useful as traveling. Like troops in battle, a traveler gets a real feel for what’s going on on the ground. During my recent trip back home to the suburbs of Washington D.C. a few things really stood out to me:
- People are still obsessed with residential real estate. The bubble might have burst, but the fever hasn’t subsided. As we said in our 2009 investment predictions, this was likely to occur in residential real estate as signs of recovery appeared. Investors truly believe this is a great buying opportunity. I can’t tell you how many tv shows I still see on various networks about flipping homes or how to profit from the real estate market. The Real Estate section in the Washington Post has entirely replaced the pathetic Business section they once had. And most importantly, consumers still talk about real estate like it’s the place to be. The fever is still very much alive and that makes me wonder how long this market will move sideways to down. This looks like classic bubble psychology to me…
- The malls are eerily quiet. I love visiting malls (and I absolutely loathe shopping). But where else can you ask 5 different store employees about the sales outlook in different industries? Three things really stood out. First, I purchased a pair of dress shoes at a well known store. The store clerk actually took the shoes and put them back on the rack when I handed them to him. He thought I was returning them and was shocked that I was actually purchasing them. He told me no one was actually keeping the items they had purchased before Christmas. Second, there were dozens of jewelry stores in the malls I visited. And 5 out of 10 of them had signs out front saying “we will buy your gold!”. Third, there are an incredible number of vacancies at the malls. One large mall I visited had an entire department store vacancy which probably accounted for 10% of their entire store space. Incredible.
The takeaways: residential real estate fever is still here, consumers are still hurting, gold fever is high and commercial real estate remains a mess.
okay, point taken. But you’re in DC. The real-estate market there isn’t going south anytime soon. I wonder why!
On the signs in the jewelry stores, do you think it’s a sign that gold has topped out, or we’re at the beginning of a big move? Not sure myself.
The story isn’t much different back in Southern CA.
I still think gold represents the massive risks accompanied by the reflation trade. Whether the recent downturn is a buying opportunity or the top is beyond my knowledge, but I know the gold fever is high. It could continue higher, but these situations rarely end well.
I’d be more concerned about a gold bubble when John & Jane Doe are buying it NOT selling it. To me this is more of a sign of how troubled financially a lot of people are by having to scrounge up any gold they can find to pay for necessitates.
I would ordinarily agree, but the gold market is relatively thin and the options for purchasing physical bullion are clunky & weird vs. other investment options. I would think a catastrophic even would have to occur to see Joe 6Pack trading bullion. Silver popped on the Hunts, gold could well pop on Paulson. But with so many people screaming “BUBBLE” that seems to be just as contrarian (yeah, I’m really sick of the millions of “bubbles” occurring everywhere, geeze we’ve turned into a prescient lot). I really have no clarity on the situation either unfortunately.
I thought the airports were dead in my travels from Orlando to Nashville during the peak travel days. I think Sprott’s commentary was dead on that he put out. I agree the malls seemed quite, everyone out is looking for something for nothing…
The common sense in Sprott’s commentary is awesome. Too bad his timing is probably wrong.
FWIW, with “we will buy your gold!” signs common it seems unlikely Joe Public was “right” & selling all the way up to the top of the gold “bubble.”
I’ve seen the comment a couple times now & am interested to hear TPC clariify more about, “gold represents the massive risks accompanied by the reflation trade.”???
Gold perfectly represents the Fed’s herding of investors into risk assets. There is no rational reason to purchase gold unless you truly believe we are resorting back to a gold standard and you truly believe fiat currencies will fail (which is ludicrous in my opinion). We are not going back to the gold standard and paper money will exist until some newer technology replaces them. We are not going back to the gold standard nor will we begin carrying gold around as a form of exchange. Yet, investors are forced, via monetary policy, to invest in this asset because the U.S. government continues to destroy its currency via reckless policies.
They are herding investors out of low risk assets and into high risk (even irrational) assets.
Thanks. I agree a new gold standard is not happening.
However, the Fed “continues to destroy its currency via reckless policies” seems to concede gold has at least some “rational” value even without a new gold standard.
>> the Fed “continues to destroy its currency via reckless policies” seems to concede gold has at least some “rational” value even without a new gold standard.
Agreed. I’m baffled by the extreme opinions on both sides of the argument. I don’t think fiat as a concept has to end, but any single currency can once it’s devalued enough. In that case it has failed one of the 3 essential functions of money, as a store of value (the other two being a medium of exchange and unit of measure).
In other economies historically you could hold “hard” currencies, like the USD, and stay in cash outside of your personal fiat. When your personal fiat IS the USD, then what? It is clear the $’s ability to maintain value is impaired, but Euros and Yen don’t look that good. And if we all try to cash in for Norwegian Krone (what was the size of their economy again)?
Hence the appeal of gold, even if you can’t eat it (the other argument against it … I previously had no idea so many people were eating their dollar bills…)
I guess the thing that baffles me is that investors actually believe we’ll resort back to a gold standard. There is no chance we will do that. We will either move to a currency basket or some sort of commodity basket. The gold standard is not happening. This buy gold/sell the dollar trade implies that there is some chance the gold standard comes back. I don’t see it.
Maybe I am missing something but from all of my research a currency basket appears like to only rational alternative to a dollar standard.
In a rational world gold should have no connection to the dollar.
I agree with both your points for the most part. No gold standard. And yes, I think we’ll eventually end up with a currency basket.
But would you agree to get to a currency basket, the dollar will have to suffer a lot more pain? If devaluation stopped today, my guess would be the dollar reserve would remain.
If your vote is continued devaluation, why would you want to hold dollars (or any depreciating asset)? The connection to gold — the mattress effect. Gold is so closely linked to “money” it’s simply the backup plan, for right or wrong (who wants to stuff oil in their mattress?)
IMSHO, we’re not living in a rational world right now.
TPC said “you truly believe fiat currencies will fail (which is ludicrous in my opinion)”
No, what’s ludicrous is someone believing that fiat currencies will NOT fail.
599 fiat currencies have already failed:
http://dollardaze.org/blog/?page_id=00017
At present there are 176 currencies in circulation in the world. The median age for all existing currencies in circulation is only 39 years and at least one, the Zimbabwe dollar, is in the throes of hyperinflation.
http://www.marketoracle.co.uk/Article8100.html
“Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778)
Of course paper currencies have failed before, but do you really think we will revert back to the gold standard? Let’s just say the dollar fails. Will we revert back to the gold standard? Of will we move onto some sort of commodity based standard or a basket?
I personally think there is a 0% chance of reverting back to the gold standard. We’ve tasted the success and wealth of the fiat currency world (along with the misery it brings) and the politicians will never revert back to a more restrictive and prudent system.
I hate to be so blunt, but the gold bugs are really kidding themselves if they think the gold standard is coming back.
TPC, you’re not making any sense. First you said and I’m paraphrasing that its ludicrous for fiat currencies to fail then in your next reply you said “Of course paper currencies have failed..”
So, you think its ludicrous that paper money will fail, even though it has happened throughout history?
Also, I NEVER said “we will revert back to the gold standard”. I was just commenting that it was foolish to think that fiat money will NOT fail.
That didn’t come out as clearly as I meant. I meant that it’s ludicrous to think that the fiat currency system will fail and that we’ll revert back to the gold standard.
Great debate. I wish I had even a few of the actual answers. Clearly I am in the minority with my beliefs because gold is an outstanding asset in terms of performance.
One thing that gold bugs are discounting is that investors (esp. retail) in 2010 have many more options than in the 70′s for hedging “inflation” risks. You have hard currency or very low debt/deficit developed countries (Canada, Oz, Norway etc.) directly investable with ETFs (Norway, sort of). You have commodity ETFs. You have currency ETFs. You have sector ETFs (esp. consumer staples, utilities etc.). You have sector+hard currency ETFs. You have short-dated currency forwards (if you have the right account and modest $$s). I think gold will trade higher, but there is nothing I see in comparable assets that indicates it will go back to “1980 inflation adjusted peak of $2200″. I also don’t think it is overvalued … consider a modest fair value in 2004-5 of $500. At this time there were motivated but not crazy buyers and they had rational reasons because of he Euro, low Yen returns, US Fed Funds at 1%. It is up only 2X since then … many other commodities, shanghai real-estate and probably silicon valley condos have done at least as good. The gold chart doesn’t look like a classic bubble either. I would hold if u have an existing position, but if it gets to $1.3-1.5k … sell your gold stocks (if they have responded). Sprott is obviously talking his book.
TPC, it’s never about the gold standard. Gold is money. Plain and simple. And it’s supply is decreasing.
Hence, I do not believe we are in a bubble.
Is gold really money? How many times in your life have you actually used gold to purchase something? How regularly do you do this?
Personally, I don’t think I have ever used gold for anything besides gifting. It might have been money 50 years ago, but it’s not anymore.
” There is no rational reason to purchase gold unless you truly believe we are resorting back to a gold standard and you truly believe fiat currencies will fail (which is ludicrous in my opinion)”
my current rationale for gold going up is, that the most of goverment debt (any country with over 100 percent debt/gdp ratio) will not be ever repaid or currencies need to be devalued in order to repay the debt….so far we have only seen that market doesnt care about QE and there will be huge need to finance worldwide deficits in next years. so i expect more QE (aka dillution of money) all over the world next year.
wasnt it same in the GD1? crash, some sticksaves, then bond market crash and default of several countries on their debt….
a look at even the chinese debt curve recently and all the printed money wallpaper the whole world is using to cover up all the private debt (hello…its still there) can only lead a rational invester to believe inflation is on the horizon bigtime.
gold and to a lesser extent other commodities are the only haven here, although some money can be made with the dollar short term in this printed money and “step back from the cliff and feel good about not going over” temporary environment.
but what ran us up to that cliff is still gaining on us.we turn to face it soon.gold goes up for years.
it is THE bubble play of the 20-teens.
I don’t deny that gold can go up further, but I question the rationale behind the thinking that gold is a replacement for the dollar. Supply/demand at work, yes, dollar replacement, no.
replacement no……but a fear flight of a short or long term duration.another bubble in a bubble world.
i always appreciate your site and your opinion.
Thanks Boatman.
I am just trying to connect the dots here. There are a huge number of people who buy gold as a dollar hedge. But if gold isn’t used as money and we aren’t going to revert back to the gold standard (both of which are true) then why should gold be viewed as a dollar hedge?
Even the fear trade is flawed. After all, if you’re really worried about armageddon it’s lead you need, not gold.
This whole gold movement just doesn’t seem to make a lot of sense to me. I view gold in much the same way I view diamonds and that means the mechanics of supply and demand should be the only thing that influence prices – not some fantasy connection to the dollar that is a thing of the past….
I think Exter’s inverse pyramid is roughly correct. And in general I think there’s a lot more difference in gold and diamonds than gold an money, even though you need both to make an engagement ring.
To the extent $s have failed to be a store of value, one could argue US fiat is not money either. Gold at this point satisfies 1 condition of 3 for money. USDs 2 conditions of 3. What will it take to make gold a medium of exchange? I don’t know, but theoretically there’s a higher probability of that occurring that, for e.g., than using Sumerian sea shells, as 50 years isn’t *that* long ago, and gold as currency has a many thousand year tradition (as well as being minted currently in a state resembling currency now).
The store of value in a currency-type equivalent is good enough for many without it being a medium of exchange, with a large enough population betting on doom (i.e., will become a medium of exchange) to put some wind beneath the price. Even now, clearly it’s not as liquid as the dollar, but it’s easily exchanged and much better than pure barter if some doom scenario does happen.
In Houston,TX
the economy is stable but running at a slower pace
I noticed a slight increase in rail traffic at the spring,tx
terminal- moving autos and coal
I was surprised to hear the train whistles!!
Sometimes 3 times a day-
I thought they sounded happy that they had something to do
2010 should bring us more of the same govrnment QE and thus higher stock prices -Unemployment will remain very high -the people receiving extented benefits continue to increase and the people who have exhausted all benefits are increasing
The rational for owing Gold are varied but the bottom line is the price for it is going up!
Happy New Year to all–I hope