THERE IS A HIGH PROBABILITY OF AN IRRATIONAL BUBBLE IN GOLD

Ben Bernanke is confused. And no, it’s not just the monetary system that continues to confound him. This time it’s gold prices. During yesterday’s Congressional testimony Bernanke was asked about the surging price of gold and if that is a sign of no confidence in fiat currencies. He responded:

“Well the signal that gold is sending is in some ways very different from what other asset prices are sending. For example, the spread between nominal and inflation index bonds remains quite low – suggesting just 2% inflation over the next 10 years. Other commodity prices have fallen recently quite severely including oil prices and food prices. So gold is out there doing something different from the rest of the commodity group. I don’t fully understand the movements in the gold price, but I do think there’s a great deal of uncertainty and anxiety in financial markets right now and some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.”

Mr. Bernanke is no dummy. I know I am a bit hard on him at times, but that is only because he is supposedly the Michael Jordan of the financial system so expectations are high. Unfortunately, he has performed more like Luc Longley (no offense to the superb Aussie readers here). Nonetheless, Mr. Bernanke understands that inflation pressures remain very low (even though he has failed to apply or promote the proper solution to our current balance sheet recession). Aside from gold prices there are no signs of inflation in the economy. But I believe gold prices are moving higher due to the public’s opposition to fiat currency, fiscal stimulus and what is generally viewed as continued “money printing”. This is highly irrational in the long-term in my opinion and creates the potential for gold to turn into a bubble is looking increasingly high.

Gold prices have surged this year as the Euro crisis has created increasing concerns over the viability of fiat money. I have previously discussed the great irony here. Gold is viewed as a hedge against the potential collapse of paper currencies . It is seen as the ultimate safe haven currency. The Euro crisis has created an incredibly misguided belief that the viability of paper money is at stake. It has caused the increasing rally cry for reduced government spending and continued shrieking from deficit hawks who haven’t differentiated between the currency system in the EMU and in most other developed nations. Ironically, the Euro is more a reflection on the gold standard than the paper currency systems in place in nations such as the USA or UK.

Is it irrational for gold prices to move higher in the near-term? Absolutely not. This belief that paper money is flawed is likely to persist. Investors and governments are truly convinced that the USA is the next Greece. Last weekend’s G20 meeting was a clear sign that governments are giving up on fiscal policy. This creates increasingly high chances of global instability. After all, I don’t think there are too many people out there who would deny that the rally in risk assets and the glimpse of recovery was due to government intervention. The CBO’s recent report verified as much.

This move towards fiscal austerity is eerily similar to what we saw in Japan in the 90′s and could very well drive us towards continued recession as we talk ourselves off the edge of the cliff. In the end, however, the Euro crisis will pass. That is unlikely to occur until European leaders recognize that their single currency system is inherently flawed (just as the gold standard was) and that means we could see substantially higher gold prices as investors continue to rush into gold with the belief that gold can serve as a viable reserve currency (something that has already been tested in a global economy and also something that has already failed). All of this increasing worry in Europe is likely to increase the odds of a gold bubble. The great irony here is that while many are worried about a bubble in treasury bonds we are likely to continue seeing increasingly high chances of deflation and/or very low inflation while a bubble grows in gold prices. The inflation trade will continue to fall flat on its face, but gold will continue to do “something different” as Mr. Bernanke so eloquently said.

How do I see such a scenario unfolding? I believe there is a fairly high chance of an eventual defection and default in Europe. After all, there is no good solution in the region and the debt problems will persist until something forces the EMU’s hand. If this in fact occurs gold prices could very well reach stratospheric levels. But ultimately, paper money will survive in its current form no matter what happens to the Euro. Cooler heads will prevail and investors will realize the the Euro crisis is unique to that currency system and not a reflection of the floating exchange system as a whole. As this occurs gold investors will realize that the risk of inflation never materialized and that the Euro was not in fact a flaw in paper currency, but a flaw in single currency systems. Should this occur I believe we will see a spectacular collapse in gold prices not unlike the move in the 70′s.

In the near-term, however, dollars, bonds and gold are likely to remain the safe haven trades of choice as deflation remains a near-term risk and investors continue to misinterpret the Euro crisis as a fiat money crisis. Ultimately, one of the above will end in heartbreak for millions of investors and I for one am not betting against the solvency of the USA.

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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Comments

  1. Gold is money. It is money that is not the creation or possession of any government. It was here before people came to the earth, and it will remain long after we’re gone. Governments don’t like gold as money, so they prevent it from being “legal tender”; i.e., you can’t pay your taxes with it. Despite that, governments keep a lot of gold in their vaults as an insurance policy against a really big crisis. So gold has value because we say it does, and in this era of fiat-loving gold haters, it has value because the central banks around the world say it does. It has also been money for 5,000 years non-stop.

    Now this statement “you can’t eat gold”, is really getting tiring. Try eating bowl full of quarters, or a salad made with dollar bills. If the world goes to hell, and fiat money is worthless, gold and sliver will be the only remaining money, because it belongs to you not a government. If you are in a position where you have gold but no food, and nobody will trade food for gold, then you really screwed up.

    A couple years before that day, you should have used your gold to buy a farm, animals, and guns and bullets to protect them, which you CAN do only because you have gold. Regardless, using the Mad Max scenario to decide you don’t want to hold gold today is so incredibly stupid, I can’t believe it. Do you think about that when you buy a stock: will this company survive nuclear hololcaust? Of course not! You buy it because it makes sense right now, and if things change, you sell it.

    Right now, you can look at the debt of the United States and realize that its impossible to pay it back. We have something like 380% of GDP in debt if you include public and private debt. But that does NOT include SS, medicare, medicaid, or all the horribly underfunded pensions. Including those we have something like 800% of debt to GDP. In the end we have one GDP, and all that debt must be serviced and paid back out of that one flow of cash. We need a LOT more money moving through the economy to service that debt comfortably. And that money can’t be borrowed, because that just makes our debts bigger, so you KNOW it has to be printed, which is why we’re doing so much QE.

    Obviously, they’re trying to inflate the currency to make the debts tractable, but a lot can go wrong with that plan. You can print money until the cows come home, but if you can’t get it into circulation, and keep it moving, prices will stay low, or continue dropping. You might have enough money in the system to pay the debts, but people have to have enough of it not to default. We can easily end up where the only option is a global Jubilee, ALL debts are forgiven and we start over. Things will have to get really bad before that happens, and I doubt the dollar (or any other currency for that matter) will survive it. At that point gold will be the best thing you can own. Always remember, Jubilees and new currencies are common in history. In this age of computers, artificial body parts and rockets to the moon, you’d think we would be smart enough to avoid these generational pitfalls, but obviously we’re not.

    If ANY of this happens (and something serious HAS to happen) you will be really glad you put 10-20% of you net worth into physical gold. A lot more has to happen (and probably won’t) before we get to the point you’re pissed off you can’t eat it!

    • Wait, what day will it be when dollars will be worth nothing and gold will be the only way to purchase real assets?? Can you even really purchase many assets with gold these days?

      See you’re missing the point and proving it at the same time. No one is saying gold has no value simply because you can’t eat it. The point is that if there’s a currency collapse (especially the world’s reserve currency), then there’s no reason to believe that gold will have any value either. Think about it, what’s the difference between a cotton and linen piece of paper versus a yellow metal in terms of real value? If that’s not clear enough, how about a copper penny vs. a gold coin?

      In a state of nature, value will only be attributed to essential items that guarantee one’s survival. Frankly, I’d probably prefer not to be On The Road in Cormac McCarthy’s world…

  2. It is negative interest rate, stupid.

    After declaring war against savers for a decades, Bernanke told public he got no clue.

    Is he an idiot or pretending to be an idiot?

    • “After declaring war against savers for a decades, … ” LZ

      And borrowers who are left owing more than their homes are worth. And banks who are insolvent.

      There is way to bailout the borrowers, compensate the savers and fix the banks. Just have the US Treasury create a sufficiently large amount of legal tender fiat and distribute it equally to every adult in the US.

      To prevent hyperinflation and to prevent the problem from occurring again, reserve requirements would have to be set to 100% till we have fundamental reform in money and banking.

      • Changing reserve requirements wouldn’t change anything. The system would still have the same amount of debt as more banks would fill the demand for debt.

        • “Changing reserve requirements wouldn’t change anything. The system would still have the same amount of debt as more banks would fill the demand for debt.” DanH

          Huh? No way. A 100% reserve requirement means that banks can only lend their own capital and money deposited with them for the purpose of lending. Demand accounts could not be lent out.

          • Banks only lend because there is demand for loans. Changing the reserve requirement wouldn’t change the demand for loans.

            • “Changing the reserve requirement wouldn’t change the demand for loans.” DanH

              With a 100% reserve requirement, banks could only lend existing money not create money from nothing as they lend it. As a result, interest rates would rise till the amount of existing money to be lent equaled the demand for loans at those interest rates.

              Please chime in here “In Banking” and settle this dispute.

              • I believe you’ve got the math wrong here. If banks held 100% of their reserves then interest rates would decline as there would be enormous demand for those funds. I think more banks would pop up, however, and markets would normalize over time. Changing the reserve requirement would not actually change the amount of money that is lent out. As TPC has described, banks operate in a closed system. They lend money at the vertical level (I believe) and not at the horizontal level where government actually creates money. In other words, banks don’t really control the money supply. They are just a facilitator.

              • FB,

                First let me say that I agree on the ramp up of reserve ratios – but, it must be done slowly and over time (between 0.5% and 1% per year). I think this is a much better way to bleed leverage than instituting even more financial rules (when current rules are hardly even understood or enforced). HOWEVER, 100% is an impossibility. A bank with a 100% reserve requirement wouldn’t be able to lend anything as all its cash would need to be held on hand. This would require banks to charge fees on maintaining a bank account of any kind and even higher fees for banking transactions…and no interest could be paid on deposits (not that much is being paid anyway). It would create demand for loans, but that demand would either go overseas where it can be done OR it would exponentially grow the micro lending market. Either way, trade imbalances would soar.

                I think realistically, 20% is doable but only if banks and markets were left less constrained in terms business they can engage in. This is not to say there should be no regulations – but rather, that existing regulations are enforced by much more diligent regulatory bodies who track the entire process from front to back. At the end of the day, our markets are shrinking as international markets don’t have so many pointless expensive regulations. Look at ICE, LME, LSE, etc vs NYSE, CME/NYMEX, AMEX.

                • “A bank with a 100% reserve requirement wouldn’t be able to lend anything as all its cash would need to be held on hand. This would require banks to charge fees on maintaining a bank account of any kind and even higher fees for banking transactions…and no interest could be paid on deposits (not that much is being paid anyway).” IB

                  True, (mostly). It would force banks into the loan brokering business instead of the money (credit) creation business. They could still charge and pay interest on genuine loans, however.

                  So then, where would new money come from to pay the interest? The government could easily create and spend debt-free legal tender for that purpose. Is that what I recommend? No, what is needed is genuine reform including repeal of legal tender laws, the abolition of capital gains tax, the abolition of government privilege for any money and the allowance of alternative private currencies.

                  Until we get reform, however, a bailout of debtors and savers would not only be just but maybe necessary to prevent a Great Depression and WWIII.

                  • Count me in on this movement! Of course, there is no such thing as debt free legal tender in this world. And worse off perhaps is believing that the government could somehow manage loan lending when they couldn’t even manage the regulation of such – much less their own budgets.

                    I do like the idea of a common stock based currency but its more of an ideal than a practical solution for a number of reasons. And technically speaking, the Federal Reserve Note IS a private currency (the word “Federal” is a misnomer – the Fed banks and Federal Reserve are private entities). Additionally, the debt is already there and we have to tackle that issue first.

                    I will say that this is exactly the type of brainstorming that should be going on. A fundamental reworking from the ground up. Forget the blame game or the finger pointing or the bailing out – we need to be examining this issue from a completely different perspective. Cheers on pursuing that front

                    • @IB,

                      Except for a just and perhaps necessary reset using legal tender fiat, I believe in total liberty in money creation and acceptance so we are free to disagree with regard to money solutions; to each his own. Personally though, I think common stock is an ideal form of money and that it would prevail in a free market place for quite a few reasons. It neatly dodges the problems of unjust price inflation, loaning at interest, deflation and the need for socialism to redistribute wealth. It requires no precious metals yet can easily accommodate them. It is inherently cheap to produce yet has genuine value assuming the rule of law. It shares wealth at the same time it purchases it. It is decentralized and should be stable since no lending means no likelihood of deflation. So when it comes time for reform, I don’t want common stock to be neglected as a form of money. It is superior to gold in every civilized way, IMO.

                      “Of course, there is no such thing as debt free legal tender in this world. ” IB

                      Well, governments could issue debt-free fiat whose value would be its acceptance for taxes. The “debt”, in this case would be the future tax liability of taxpayers. It need not and should not be legal tender for PRIVATE debts.

                      I appreciate your enthusiasm for reform and liberty. Money is a wonderful tool if implemented justly otherwise it is potentially deadly. It could also be profitable to bankers and without the risky and dangerous boom-bust cycle.

                    • “Additionally, the debt is already there and we have to tackle that issue first.” IB

                      The solution to that is breathtakingly simple and for reason will be rejected unless bankers get behind the idea. But if they do, the banks will be fixed in nominal terms but at the same time the current banking model will be discredited for all time (hopefully). Not to worry though, with genuine liberty in money creation the bankers could have quite a bit of fun designing private alternative profitable monies and be genuine benefactors of society.

  3. “In the absence of the gold standard,there is no way to protect savings from confiscation through inflation.There is no safe store of value… Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rigths”. Alan Greenspan -1966-.

    • “Gold stands in the way of this insidious process. It stands as a protector of property rigths”. Alan Greenspan -1966-.”

      And what does Greenspan know? You’d take the word of a central banker? Liberty is the protector of property rights. Wealth is not static, it is dynamic. Gold is a non-performing, static asset.

      Common stock, if not based on an an unstable money system like ours, is the idea store of wealth not gold.

      • You are thinking about the RETURN ON CAPITAL. I think about THE RETURN OF CAPITAL.

        • “You are thinking about the RETURN ON CAPITAL. I think about THE RETURN OF CAPITAL.” domingo

          Have you ever wondered why the stock market as a whole can be wildly volatile without any change in fundamentals? The answer is simple. The cause is not “animal spirits” as Keynes suggested; the cause is the unstable, government backed money-for-debt banking system dealing in the government enforced monopoly money supply that stock is bought and sold with.

        • Actually, “animal spirits” would be irrelevant if the animals didn’t have money from thin-air to speculate with.

  4. This is my new favorite site…., thanx TPG, and your thoughtful contributors!

    Does anyone know why there is such a spread between the increased price of gold (GLD) and the Gold Miners Index (GDX) in the past 4 yrs?

    GLD has risen about 90%, while GDX has only risen about 30%. It seems they should be moving more or less in tandem. In fact, they did, up until late 2007.

    Just wondering…

    • Rog- GDX is the SENIOR big miners……can get wiped out just like any corp. stock(in a market correction or crash) cause thats what it is-corp. mining ETF stock—very different than metal even metal ETFs like GLD……historically,in the late stage of a gold run-up,miners outperform gold itself- another sign this is still in early stage.miners will outperform in the BIG run up to come.

      GDXJ are smaller junior miners BTWay…

      i don’t know what all the paranoia about owning physical is i can drive down the street and sell it at a low % of transaction….yes that % will change when the price falls down the road, but i don’t spend 10 hrs. a day(on non-fishing days) keeping my fingers on the pulse around here and other places to let the yo-yos beat me to the counter anymore than TPC is the last one to the DOW-shorting party.

      • Thanks Boatman!

        Appreciate the info, tho not sure if it explains the separation. Looks like GDXJ follows GDX pretty closely. I’m more or less counting on the gap between GLD and GDX to close, hopefully in a postive manner!

        The mining stocks can get wiped out in a market correction, particularly in a correction in gold (doesn’t make sense to pay to dig it out of the hole and refine it, if the price isn’t there), but so can gold prices. The risk seems about the same.

        BTW, I agree it won’t be much of a world if we get to the point of using gold as currency. I grew up in a somewhat medieval economy, (farming, bartering, large family) and have no desire to return to it, even if such an economy would punish bankers!

        Not seeing sufficient benefit of owning the physical stuff, though I agree it is not that hard to acquire. Transaction costs seem a bit high (roughly 7% in, and 7% out), in exchange for the promised added security.

        • there is only a loose reason that mining corporate stock should ABSOLUTELY follow raw gold price.its not like oil and energy companies because gold is not oil…..gold is not the same as the mining cos. that dig it…..it just doesn’t work like that.

          cost of mining is from 200-500$/oz but they are looking at starting 700$ mines……and no, they don’t use mercury like IB thinks….it is a mechainical strip process in the middle of the desert–no where near as bad as coal or as dirty-they are not leveling west virginia…..but you don’t see my buddy IB protesting coal.

          u need to shop better on that 7%….try united precious metal refiners in albany NY and gainesville gold in gainesville,FL.

          coins are for chumps, 9999 gold is 9999 gold…i like 10 oz.jewelry bars-2% and a 35$ assay fee to exchange-peanuts…. and GLD is fine for trading.

          tho i been doing 3x short s&p DRN not gold,lately

          all the extracted gold in the world is a block 60′x60′x60′ intigueing

          • Boatman,

            The Coal MINING is a fairly efficient process and not as bad from a pollution perspective (it’s coal BURNING that creates the problem). However, it nets much more energy in its consumption than its production and there are much cleaner coal burning plants these days that don’t release mercury – the only problem is they cost more and China, being the greatest consumer of this resource, can’t really be bullied into creating these cleaner coal burning plants. Moreover, many of the alternatives come at a much higher cost, both in dollar terms as well as to the environment; We’ve got a 200+ year coal supply right here within our borders. But like I said, its a necessary evil. If you don’t think so, then be ready to consume 1/3 of just about everything that you currently consume as its used to produce the vast majority of energy in this world used for everything from Chinese products to electricity for your A/C…and even the gasoline for your boat!

            Gold MINING is incredibly inefficient and doesn’t yield any energy (and consumes a lot of energy while producing lots of environmentally destructive effects). It does have a significant industrial use (most electrical contacts favor gold as it doesn’t oxidize) but this volume is minimal compared to Gold which exists mainly to be coveted. Moreover, there’s no real way to gauge the extent to which third world countries (not only S. America, btw) are using mercury to extract gold – it’s an illegal and unregulated activity. It would be like trying to gauge the consumption of say marijuana from licensed sellers in California vs the illicit trade which exists in all 50 states. Finally, as microchips and silicon wafers head to the garbage heap, these are invariably shipped and dumped in other third world countries where people melt them to recover the metals used within (usually in the same pots and pans they use for cooking) – releasing tons of poisons and other pollutants. Yes, I know this is a stretch but still, there’s tons of waste generated for something which simply fulfills a primitive desire for aesthetics.

            • it has no asthetic value to me…the only jewelry i own is a 50 year old wind up stainless steel rolex that was my long dead dads….

              not everyone on this planet has your investment ability or even mine,such as it is,so for average people to provide a hedge on inflation and deflation every once in a great while(only 3rd time this 100 years) it serves a purpose and always will.nothing else does what it does for certain people…..it is of no use to you no doubt, and you will never like it or understand it but it will continue to be there…….don’t be pissn n moanin about mercury n smokin your heaters at the same time……u looked up to 2nd hand smoke lung cancer rate?…i buried a friend from it.

              the biggest mercury problem is what”s in the amalgum fillings in your mouth(20-30% mercury and killing people everyday) BS what the ADA says.

              gold will always be around,from time to time be of use to some people, and always confound bankers(a direct bernanke quote-last two words)…….i love that last part.LOL

              all in good fun, huh buddy?

              • boatman,

                You do make me laugh – I must admit. And of course, I certainly could be wrong about Gold – that doesn’t mean I don’t understand it….after all, I work in Commodity derivatives for a living.

                I also have a fair amount of gold and silver “hand me downs” which have a much greater value due to the rarity of what they represent – not the fact that they’re made of precious metals. That’s about all the exposure I desire.

                I’m not pissing and moaning about mercury – its just even more reason to stay away from this “investment” class. Regardless, my heaters don’t affect anyone else except me – so no big deal. I certainly don’t find it to be a good habit but then again there’s a lot worse I could be doing. Believe me, I’ve got a pretty good leg up on most people in my age group. And I’ve never had a cavity in my life.

                Feel free to invest however you like – its you’re money after all. I was lucky enough to make my year in 2 months so I’ve shifted focus to my other strategies until something better comes across my radar. As this market churns back and fourth, I’m making a pretty steady gain either way. Good luck to you though.

                PS For a group of people who are confounded by Gold, they seem to do a pretty good job of making money off of it…..daily

                • i’ve prettymuch made a coupla years, but all i buy is beer food diesel and gasoline mostly…i fix everything else myself from curiosity..there is a site:fixyourowntv.com that has got housewives fixing there own LCDs…..amazing….

                  this kinda market suits me, as i am sure it does you. digging up relative corp. value in a steady slow bull would not be the real us……….yawnn…… (yuan?)

                  but we don’t have to worry about that for years (and alot more tears from others)

                  believe me, i will take the bankbuyers to the woodshed on my off-radar long gold.

                  back off on the heaters whenever you can.

                  allways a pleasure…..goodsaturday to you, sir.

                  scott

    • Two thoughts/speculations:

      1. Gold stocks are stocks. They go up and down with the market as a whole, just as other stocks do. Look at today — GLD dropped, but gold stocks as a group rose along with the overall market. GLD dropped yesterday by a lesser amount, and many gold stocks dropped as did the market. The time since 2007 hasn’t been stellar for someone who bought equities in 2007 and held onto them since.

      2. A lot of people haven’t felt comfortable with the gold bull market. Gold is volatile, and some of its corrections have been pretty significant. Right now, many people seem to think that gold is too expensive; why should they pay up for a company that produces an overpriced product, unless for a trade? (Mining shares are even more volatile than gold, which seems consistent with the idea that they are more favored as trading vehicles than investments.)

      Maybe sometime in the future gold stocks will decouple from the overall market and correlate much higher with gold price fluctuations. If that happens, perceptions about what are reasonable valuations of the miners could change, probably to the upside. Of course, who knows when/if that will happen.

  5. B.Bernanke is not confused. He lies and pretends. He know that in the keynesian monetary system the Fed always can “monetize” the goverment debts and destroy the currency.The investors know this too and they run to cover in gold as protection of their proporty rigths.The question is: do you want to store your finantial wealth in paper assets?. Good luck

    • In theory, fiat debt-money can be made scarcer than gold. One might always dig up some gold to pay his debts but to create fiat on one’s own is counterfeiting.

      I suspect the central bankers will sell their gold at a profit and then deflate the money supply by selling high yielding central bank bonds, for example. As the price of gold drops the central bankers will just buy it back again.

      I doubt the Fed will allow the US dollar to be destroyed; it will plunge US into a Great Depression first. Besides, debtor bailout + a 100% reserve requirement could save the day without hyper-inflation or a depression.

      • Where is the Central Bank that is selling gold and contracting the monetary base?
        All over the world the Central Banks are buying dubious debts, expanding the monetary bases and pretending that this is not inflationary.

        • “All over the world the Central Banks are buying dubious debts, expanding the monetary bases and pretending that this is not inflationary” domingo

          True because the banks refuse to lend into a deflating economy except to buy US Treasuries for a risk-free return. But you make a very good point, the central banks selling gold would be deflationary just as selling any central bank asset would be.

          My point is just that central banks can deflate almost as well as they can inflate. Am I wrong?

  6. anyone here who thinks gold is just another commodity like bernanke says he does(you don’t think he could be fibbin’ to us do you) should leave the room because you are too emotionally delusional to the facts now and of history to be controlling your own investments.

  7. For some perspective, in China back in the 80′s, my friend’s relatives told me people were buying extra refrigerators as a “store of value” to combat inflation. (No, I’m not making a bad pun just to get 5 stars; actually I need more than that just to redeem myself from earlier).

  8. All currency is based on faith. The very first currency was not gold. It was just plain old rocks or shells. It simply represented a opinionated value of some other good or service for future trade. Until you understand the basis of money you can not understand a fiat currency or even gold. Gold is just a shiny piece of metal. I’d rather have a cow than an once of gold.

    • Cows are only currency until the grass runs out…then they are a cost. Gold doesn’t eat.

      • now here is a man that truely knows about farms instead of pertending to.

        most here are thinking-it covers my yard and you can buy it in front of any schoolyard-whats the problem?

  9. There will always be inflation in a fiat currency. There must be otherwise you will not have economic growth. Fiat currency is like your ability to repay personal debt. Perhaps at some point others lose faith in your ability to repay that debt. Hard assets such as gold will always have value. So you repay with hard assets. A better bang for your buck right now might be a copper penny. You can still buy an US penny for one penny. It’s worth 1.9 cents as copper. If copper loses 95% of it’s value you still have a US penny worth one cent. Dido for a US nickel.

  10. There is one way buying Gold is rational even in a deflationary environment – if you think the issuer of the paper money itself will fail. If the US goes the way of the USSR, its money will be worthless. Ditto for the EU. If you think that the government itself will collapse, then you should put everything into gold, canned food, guns, and ammo.

    But you should only buy physical gold, never paper.

  11. I bought a few GLD puts recently as a bet on a minor pullback in gold before the end of the year, but subsequent to that, I’ve wondered whether it might make more sense to embrace the bubble while simultaneously hedging (particularly since hedging the gold ETF GLD looked so cheap last time I checked). Maybe the way to go is to buy GLD, hedge it against, say, a 20% or greater loss, as long as that remains relatively cheap to do, and then — when hedging starts to get expensive — dump GLD and continue to hold the puts a little longer as a bet in the other direction.

    • The two main gold equity indexes, the HUI and the XAU made their highs back in March of 2008 when gold first hit 1,000. Since then, on a weekly chart, gold has made two successive higher highs while the share indexes are making successively lower highs. Silver is also following the same pattern as the mining shares. Add to that, the Daily Sentiment Index, from trade-futures.com recently hit 98% bullish. When you add it all up, I would think a hedge on GLD might not be a bad idea.

      • short term true john…..top of the gold market for years now…….don’t bet on it

        • For the big picture on gold I’m with you. In no way do I think this is the final top. I’m just a little concerned over the short to intermediate term and these corrections can sometimes get a little nasty. To me, at the moment it just doesn’t look to good. Having said that, I began getting long in the mid 300′s and have no intentions of selling anything here. I’m just standing aside for now and I suppose if I was more short term oriented, which I suspect most people are, I would at the very least hedge the position.

      • GLD sells some of its holdings every year to pay for storage and management fees (I think 0.4%). Additionally, trading in GLD never allows you to pay the Long term capital gains tax.

        This isnt actually bad considering what electronic ETFs charge for management without any of the same costs associated with managing, storing and transporting gold. But it is something to consider.


  12. Aside from gold prices, there are no signs of inflation in the economy.

    typical idiot.. same Ben’s ball park.. there’s no hi/low prices..
    all prices are relative to INCOME..

    if prices are flat,, but income is falling.. its same ballpark
    prices are getting up,..

    what a jerk
    alex

    ps
    ..
    the Michael Jordan of the financial system – so expectations are high
    ..

    since when… have ben ever worked in private sector… how do we know he’s any good.. only good is his ‘BEARD’ :)

    psps
    BTW what about oil prices .. doesnt price double from 2009 ?

    • they don’t include energy n food in the CPI, mostly to screw the old folks on the COL soc. sec. raises and to lie about inflation.

      i think they only count LCD tvs alex……..and maybe mobile phone service

      and certainly not the price of a draft beer anywhere

  13. Who the heck really knows how it will pan out in the end or if gold is truly over-valued? under-valued? a Default hedge? a true source of wealth? Just another commodity? Inflation Hedge? Risk play? Blahblah?

    I’ve been long gold for years and continue to be for one simple reason, it’s currently in a very well defined and spectacular secular bull market with plenty of legs, which has not even begun it’s final parabolic move, FULL STOP.

  14. I followed this seeming intelligent article UNTIL he said recession. then i stopped reading.

    thas war monger talk.
    this republic is in a DEPRESSION.
    costofwar.com

  15. I know a family who is very hard working and makes a great deal of money. The problem is they have borrowed more money than they can ever pay back. But I have faith in them. Please. They will still default. The US will too. It may just be called something fancy like quantitative easing.

  16. A viewpoint from a “Ham ‘n Egger

    Context: I’m 52
    I remember in the late 70′s early 80′s when Au shot up to unprecedented levels. Ya’ll will know if it was $500 or $800. The only context was gasoline, inflation, I think, and Jimmy’s failed rescue attempt somewhere in the Iran desert. As a young adult I remember hearing the same arguments. I only had a few bills to fold at that time. It sounded real bad so I prayed.

    Now we have “Gold II”
    I’ve come a long way and so has the economy / world. For Gold it’s “The same old soup, just reheated”

    I enjoyed TLC’s comments. Let’s go back to Pieces of 8, and carve a sliver off the Krug and give it to the attendant at the Chevron station. A good commodity swap. To miss use the “guns and butter” economy model, we’ll be ok with the guns because the gun trader will gladly take the gold. Not so sure about the butter guy. btw: I think G&B is a great paradigm. Many people can’t decide which direction to go and there are great arguments for each case.

    You must look at intrinsic value. Jewelry, Electronics come to mind. High gold prices do not appear to have had a great impact on electronics prices, so the amount of Au needed can’t be that great in that sector. I’ll bet jewelry sales are up because it’s the one commodity you can wear.

    If you’re in The Green market you definitely want gold to go down. If you think the Amazon was destroyed by clear cutting lumber, you ain’t seen nothing like what gold mining is doing. The indigenous people are ripping the Amazon up to the tune of an acre an ounce! (See National Geographic) Another economic model on display.

    Since I missed the Gold Train, and I just can’t get my arms around it’s intrinsic value versus current price, I’m long rental property. It’ cheap and returning at least 9%. If do t mi d a little work and your morals are a tad south, you can get 30% as a Slum lord.

    Heck, it’s a cheap hard asset with decent returns. You can’t live under gold.

  17. The world’s foremost information authority, “Wikipedia”, tells me that the US bullion holdings are 147 million Troy ounces. Value at $1,200 per ounce. About $147 billion. The New York Fed supposedly has a similar holding but it’s for other countries.

    A couple of thoughts came to mind.
    - $147B ain’t what it used to be. That’s equal to BP per disaster.
    - Do we nationalize the gold at the Fed
    - Who controls the most gold? Hugo Chavez?

    I’d rather have our currency tied to Soy Beans.

  18. “it is impossible for a country to default on debt denominated in the currency it prints” – posted by Giulibe way up top.

    Erhm, Britain had the reserve currency once before, everyone else gave up on it, the result is the same in the end, even if the path is different. Everyone thinks that the rest of the world will put up with a worthless dollar, but they won’t, not forever. Even Helicopter Ben admitted the debts are unsustainable, ergo print like hell and beat the dollar into submission (gold up).

    I agree with In Banking that if the SHTF, it will be staples of life that are the most valuable and gold will just be something to melt for bullett tips, but that doesn’t mean that while everyone gets more fearful of the eventual outcomes that gold won’t skyrocket, as it is the most ancient hedge against uncertainty. How is JP Morgan going to deal with a run up in gold when it has to unwind its short position? – It will unwind! and drive that sucker up like you have never seen it before. I do not think that Mad Max will happen either however. I think most of what TPC wrote is correct, but I think that he is a bit too opimistic on the US dollar, therefore I see the following likely to occur:

    Short term deflation, possibly leading to Japan style for the US, BUT because the reserve currency IS the dollar, fear worldwide, and the need to preserve capital in the US will cause an irrational run up in gold to stratospheric levels as people leave the US dollar for everything else (like other currencies and gold). Don’t think that this is unlikely, China and Japan already started unloading US debt at the beginning of this year. I do not see the US coming out of this very well, not with high unemployment, deflation of assets (ie housing prices, commercial RE), and rising debts and future unfunded liabilities. There will be a collapse in gold eventually, once everyone decides on a basket of currencies as the reserve to replace the US dollar, perhaps as soon as 8 years from now when the unfunded liabilities really strangle the ability of the US to cover its obligations.

    Just my two cents.

    • with you, juno,as i am as we bump into each other around the $internet.

      the string ben is pushing on morphs to a spring(gonna take a while) n hits him in the nose…….

      i can’t tell TPC how this happens……i can’t argue against his position with facts.

      but happen it will……not manufacturing anything here probly the root cause.

    • Here is a hypothesis:

      Before the dollar was debased, in time of depressions – when prices were falling – gold nevertheless was withdrawn from circulation.

      After the domestic debasement of the dollar during the Great Depression, the dollar was devalued against gold – GDP began expanding in gold terms only after this debasement. When the dollar’s peg to gold was removed by Nixon, the price of gold went up, but this was not because of inflation. It was actually because we were experiencing the second great depression of the 20th Century. (If you track the value of GDP during the period by the price of gold, and compare it to the periods before the dollar was debased, this will be obvious.)

      In response to the 1970′s depression, Washington began to inflate the economy, which produce the stagflation of the period. Gold does not, and has never responded to inflation – it responds to the expansion and contraction of economic activity.

      The price of gold has risen since 2000 – while inflation has been fairly tame. The Fed is trying desperately to generate inflation, but to no avail.

      Inflation expectations are not responsible for the rising price of gold, it is rising because economic activity is still contracting.
      The price of gold s rising now, because we are again in a depression, it will not moderate until we hit bottom.

  19. Charley, To clarify, I have not stated that inflation is or will drive up gold, but rather that (irrational) fear will do this as well as the fact that real interest rates are negative at the moment and this is precisely why gold has gone up thus far since 2000. You are correct on most else otherwise. To me, it is just another investment to get out of when the time is right (as its rising).