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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  • DanH

    So near term bull and long term bear on gold?

  • BK

    How has he performed compared to Andrew Bogut?!

  • tooearly

    SO gold to the moon and then a crash;
    bold call that. not

  • BK

    I actually think its a very bold call.

    Given that 99.7% of people don’t understand the monetary system, i think TPC is making a huge leap of faith to suggest that investors will eventually realise the differences between the monetary systems. They are yet to realise thus far.

    Maybe I’m too bearish on that bit…but it goes without saying that if people one day do figure it out, then it is an absolute certainty that gold will be stuffed!

  • Derfem

    Gold is as irrational as TB-US… Technically in the same configuration. Short-term bull, but one-life move on the short side on long term. The overall sovereign is bearish on LT. One world, one market.

  • petershort

    …’in the long time’ he says….well in the long time we’ll all be dead, hehehe….
    sucker

  • Nout Wellink

    There is a simple reason gold is ‘out of line': it is true money. All the people who treat it like a commodity are just not getting the message. But I am not surprised: if you have lived in the fiat era of 1970-2010, you have forgotten what real money ought to be. And that is NOT paper backed up by debt.

  • boatman

    like i say on my surfboard(and a few other places)……if it swells, ride it……

    everything is a “sell” sooner or later……its about when

    there would still be an ultimate investment for fear(irrational or otherwise) if gold didn’t exist(i guess then we would have the silver-haters).

    i won’t risk alliteration by posting the DOW:gold historical chart again here

    a ounce of gold will buy the DOW, or at least half it,before this is over. whether it makes sense or not……..i am constantly amazed by the things human beings do that make alot less sense than buying gold.

    euro and US real estate unwinding will be more convulsive and/or prolonged then most think.

    the rope ben is pushing on might well ultimately become a “spring”……i know ya’ll have seen those slip out of their confines….if not,no matter…….deflation is working for gold

  • Giulibe

    I agree, it is impossible for a country to default on debt denominated in the currency it prints, in a floating exchange regime. That country can always print money and buyback treasury debt. In so doing, the supply of the currency increase. There are 2 ways new printed currency can go: real economy or financial markets. We are in a world of excess supply ad deleveraging balance sheets, real economy doesn’t want new money, at any price, so the new money created by central banks (FED and BoJ in primis) is going into financial markets, inflating the price of risky investment assets (during positive mood cycles) and “safe” investment assets (during risk averse cycles).

    In any way, if money go in real economy (inflationistic world) gold increase,if money go in financial markets(deflationistic world)gold increase. Gold is a currency, the first currency. The value of gold increase if the supply of other currencies increase beyond the amount necessary to accomodate GDP growth.

  • boatman

    most do not WANT to get it…..it means a prolonged convulsive event in the worlds marketplaces(we ARE there…..hellooow)……very unsettling…….these are the same guys that tell me “don’t fight the market” (i don’t, to a point) when corp stocks are wayyyy overbought past fundamentals(when i get a nosebleed and TPC goes short I SELL).

    most do not want to own the same asset as scared old people stuffing mattresses.

    or bandana wearing skinny guys with guns(i got mine) and canned goods(i wouldn’t eat anything out of a can) digging bunkers(i’d rather get vaporized) in their back yard screaming “the sky is falling”

    then there is the bugs that think they’re gonna “will” their stash to their children………wrong.

    its just an investment(a good one right now) that i will short on its way down……everything goes down sooner or later.

  • Charley
  • B Ferro

    Downloading on Longley when you had your choice of both Bill Wennington and Jud Buechler? Just don’t get it…

  • domingo

    Forget the gold-inflation-deflation mumbo jumbo.I buy gold because in the ABBA LERNERs keynesian world = paper money currency system all the private financial wealth is in the goverment hands and at last all the goverments will destroy their currencies buying its debts.

  • F. Beard

    TPC,

    I am new to this site. So far, very good. Thanks. So what is the solution, in your opinion?

  • Nout Wellink

    The real bubble is of course fiat money. Way too much of it has been printed, completely out of line with economic growth. Six newly printed dollars (i.e. debt) created 1 dollar of economic growth in the past decade. That is a clear sign something is terribly wrong. Gold simply signals that in 2001 it was game over for normal growth. Since then the U.S. has experienced negative GDP (see shadowstats.com), but Greenspan and co. has sold us the story that inflation = economic growth. Alas, it is not.

    Gold will perform great during money printing and disastrous monetary policies. I don’t see an end to that soon, so as long as we have Bernanke, Geithner & Obama the bull market in gold will continue. Von Mises taught us that the 2 outcomes of a credit crunch are deflation, or destruction of the currency. They have chosen the 2nd option, Bernanke’s sole goal is to prevent Great Depression II from happening. So he will kill the dollar, which is hugely bullish for gold.

  • slightly_skeptical

    TPC, OK, I don’t get it what do you want Bernanke to do on the monetary side? He’s got interest rates at near zero, he keep cheer leading the economy at every opportunity, he’s opened up the swap lines in case there is a credit freeze up in Europe, so what more must he do? Are you suggesting he do more quantitative easing?

    I’m not sure what else he can do, the fiscal side is in the administration and congress’s hands, so Bernanke can’t do much about that other than to encourage them.

  • F. Beard

    “Von Mises taught us that the 2 outcomes of a credit crunch are deflation, or destruction of the currency. ” Nout Wellink

    How about a third solution from Moses, not Mises, debt forgiveness (Deuteronomy 15:1, Leviticus 25)?

    Here’s how:

    1. set reserve requirements to 100%
    2. Print a sufficient amount of debt-free legal tender and distribute equally to all adults in the population. This will allow debtors to pay down their mortgages to market price levels and would also compensate savers for years of artificially suppressed interest rates. Note that the banks would be made whole in nominal terms but would suffer relatively in real terms. The long term solution is to repeal legal tender laws, the capital gains tax, government deposit insurance and allow alternative currencies.

  • F. Beard

    Some thoughts I’ve had on gold:

    1. Where is it written that the average rate of mining gold shall be roughly the same as the average economic growth rate?

    2. Someone has said that it is silly to dig gold out of the ground just to bury it again in bank vaults. Isn’t this a waste of human effort?

    3. Central banks hold vast amounts of gold. Is gold a fallback position for the central banking establishment? Why should we let central bankers, who caused this problem, set the ground rules?

    4. Keynes said gold was a “barbaric relic”. I am no Keynesian but he does have point, doesn’t he?

    I am a libertarian. I believe in complete liberty in money creation and acceptance so it is none of my business what people use for money. However, unless we truly are barbaric there is at least one better form of money than PMs even in a truly free market without legal laws. What is it? Good ole common stock. It has value just like gold yet it is at most just pieces of paper backed by the rule of law.

  • jt26

    TPC .. the other aspect of the “fiat money crisis” fear (other than the Euro) is the unfunded future liabilities.

  • http://blogfirstrider.blogspot.com/ Firts

    I agree, I think TPC is absolutely correct.

    Bubbles always last longer than we expect them to last.
    Not being in a bubble as it grows is like missing a fast moving train. Or as if you got out of the elevator to haven and it just keeps going higher until one day for no special reason the rope breaks and you realize how much higher you are having gotten out to soon out of this irrational dream world.

    Until this happen believer’s will rationalize there position. Just as they did with the Internet bubble the so called new economy P/E ration where a thing of the past it was now cash burning rates and sales to prices etc. The real estate bubble was unstoppable, bricks and cement can’t go wrong with that. Oil at $147.00 where is peak oil now?

    Now Gold is going up, up and up but that’s ok since we are told that Gold is not a normal commodity.
    Does this not sound familiar? The famous words “It’s different this time” is it not?

    No one can tell how long this one will last since this is an international, world wide extravaganza including the Chinese and they love gambling but when it ends it will no be nice.

  • Arsene Holmes

    There’s room

    http://en.wikipedia.org/wiki/File:GermanyHyperChart.jpg

    At the peak (or low) the $/Mark was 1$ = 4 Trillions Marks

    1921 $/Mk 60
    1923 $/Mk 4,000,000,000,000

    oops

  • F. Beard

    Speaking of hyper-inflation, isn’t the solution to just set reserve requirements to 100% ?

  • http://datadiary.com.au Rohan Clarke

    The great thing about watching Luc Longley play was that you didn’t need a replay…seems like an apt benchmark to me.
    Agree that the spectre of the ‘USA is next’ is looming, and that austerity measures are just as contagious as rising credit spreads. The odds of a self reinforcing double-dip are shortening.

  • http://blogfirstrider.blogspot.com/ Firts

    F. Beard

    Good point as you mention share certificates “just pieces of paper backed by the rule of law” they dont need to have an aditional intrinsic gold valuation ?
    We need an acountable form of Government instead of digging gold out of the ground just to bury it again in bank vaults”.

  • In Banking

    I’m 100% in agreement with TPC here, even if only for the fact that goldbugs are quite an interesting group who seem to have some real fundamental flaws in their logic. For one, how can you believe in the destruction of currencies (and thus global financial collapse) and be spending so much money on a useless yellow metal?? Who’s going to want your yellow metal when there’s no way to get food/water/shelter? We’re much more likely to move backwards to a bartering system than using gold as a currency. I’d be going for lead and gunpowder if I believed that….

    Gold is attractive because its perceived as the new brainless investment. Its the new Buy/Hold play and looking at a chart along with the doom and gloom media convinces people that its an easy way to make money. Those silly “Cash4Gold” commercials aren’t helping either (and certainly fleecing a lot of desperate suckers). Spot prices aren’t even showing the massive physical premiums people are paying to get Gold. I’ve never seen spreads like those used by gold dealers – that should tell you something (reminds me of NYC’s midtown electronics stores). Besides that, mining for gold is one of the most destructive industries out there as the vast majority of it is done using mercury which invariably runs off into rivers, lakes and oceans. I mean, how can it be that a open water fish like Bluefin Tuna shouldn’t be consumed more than once a week due to toxic mercury levels or Inuit woman having toxic breast milk due to mercury? Poisoned life on the fringes of civilization is a horrible failure we’ve brought about. I wouldn’t encourage this industry on those grounds alone (beside the fact that I think its a waste of capital).

    You’re better off with a multi-currency cash horde stored under your mattress. At least you can take that out and carry it around.

  • F. Beard

    “they dont need to have an aditional intrinsic gold valuation ?” Firts

    You got it, I think. Conventional money is an unnecessary and unstable intermediary in common stock transactions.

  • AWF

    Does the reason matter??

    The “voters” in the stockmarket say buy

    What else do you need to know?

    The price of gold is going up.

    JPMorgan (Short-Gold) put out a BUY BUY BUY recommendation on GOLD

    It seems the door is not wide enough to UNWIND the MASSIVE SHORT POSITION JPMorgan sits on—Only the price action will tell.

  • http://www.pragcap.com TPC

    Buechler. How could I forget?

  • http://www.pragcap.com TPC

    Voters don’t always get it right. American politics should prove that.

  • http://www.pragcap.com TPC

    Interesting idea, but how do we unwind the current system? Changing the reserve requirement would have to be a very slow unwind and it would likely involve an unbearable amount of deflationary pain.

    I think the same effect could be achieved through proper bank regulation. If we don’t allow these banks to turn into casinos that carry huge solvency risk (instead make them more like utilities that serve the economy) then we mostly eliminate the fear of bank failure and bank runs. The USA should also implement a full guarantee on deposits.

  • http://www.pragcap.com TPC

    VERY unique situation and not really applicable to the USA today.

  • http://www.pragcap.com TPC

    What is “unfunded”?

  • http://www.pragcap.com TPC

    Agreed. I am a bit too hard on him. He is powerless in terms of what he can actually do. But he opines on fiscal policy all the time and carries a huge amount of influence. He should recognize by now that monetary policy has failed and that we need to better understand our fiscal options. He has never expressed such an opinion.

  • Angry MBA

    Gold is attractive because its perceived as the new brainless investment.

    Yep. In addition to that, gold has also become a proxy for expressing tea-party style resentments ear of the political system. It’s an ideological statement, more than it is an investment choice per se.

    If gold was a currency, it would be worth far more than it is today, and it would track inflation. Of course, it isn’t, and it doesn’t. Sadly for the goldbugs, it’s just a commodity in the same way that wheat and pork bellies are commodities…well, except that wheat and pork bellies make for a nicer lunch.

  • slightly_skeptical

    TPC, if he did that publicly, what message would that be sending the markets and the main street. Now is not the time to drive fear into the markets, he needs to continue to be the cheer leader, he has no choice. Did he ever? In the back ground I’m sure he’s pushing for another stimulus, or at least asking the WH to tone down the anti business rhetoric. “Whatever it takes”, wasn’t that the catchcry from him and Geithner?

    Let’s hope they keep the pedal to the metal, before they decide to ease up of stimulus measures (both monetary & fiscal). Now is not the time to pull back.

  • F. Beard

    “Interesting idea, but how do we unwind the current system? Changing the reserve requirement would have to be a very slow unwind and it would likely involve an unbearable amount of deflationary pain.” TPC

    First of all, government backed fractional reserve lending in a government enforced monopoly money supply is simply a government backed counterfeiting cartel; it loots savers via negative real interest rates and drives borrowers into debt they can’t repay when the money supply shrinks. So, reserve requirements should be set to 100% to put an end to that, at least in government enforced monopoly money supplies. That would then allow the government to safely distribute a sufficient amount of debt-free legal tender to all adults in the population to reverse the past injustices of the current system. Debtors could pay down their mortgages to current market price levels and savers would be compensated for years of artificially suppressed interest rates. The banks would be made whole too in nominal terms. Of course, there is no free lunch so the banks would lose in real terms or at least not gain the advantage of having some of the few remaining dollars in a deflating money supply.

    “I think the same effect could be achieved through proper bank regulation. If we don’t allow these banks to turn into casinos that carry huge solvency risk (instead make them more like utilities that serve the economy) then we mostly eliminate the fear of bank failure and bank runs.” TPC

    I am a libertarian so I believe in a minimum of regulation; just the usual laws against fraud and insolvency. What we need are optimum money solutions which only the free market can provide. That would require the elimination of legal tender laws (after the reset proposed above), the abolition of the capital gains tax and the elimination of government privilege for any money such as FRNs. As for government moneys, let them be legal tender only for government debts (Render to Caesar only what is Caesar’s) backed by their taxing authority.

    “The USA should also implement a full guarantee on deposits.” TPC

    The private insurance market should be sufficient, IMO. I believe that government privilege is the cause of our problems not a solution.

  • http://www.pragcap.com TPC

    He’s a fairly outspoken man. I am not saying he should admit that monetary policy has failed. Absolutely not. But I do think he should try to push Congress in the right direction. After all, that is basically what these hearings are for. Not only to keep him accountable, but for these Congressman and women to pick his brain and ask for advice and guidance. His comments regarding the deficit and our debts instill this fear mongering campaign that we are going bankrupt. He certainly knows we can’t go bankrupt (he has said as much), but for some reason he doesn’t seem to be able to advocate an approach that might be more geared towards Main Street. I don’t get it. It could be politics or it could just be that he doesn’t get it. But he should. Anyone can recognize by now that his Wall Street driven recovery has not solved the underlying problems. It has been a terrible form of trickle down and it has failed. He should recognize this and push Congress in the right direction. You would think that a Republican might even advocate tax cuts, but I don’t recall him ever advocating such a thing.

  • slightly_skeptical

    Jeffrey Sachs – Time to plan for post-Keynesian era
    http://www.ft.com/cms/s/0/e7909286-726b-11df-9f82-00144feabdc0.html

    Attacking last years big stimulus. Thinks our problems should have been handled via monetary policy (with modest safety nets).

  • boatman

    armeggedon would definitly take bullets to trade with…….but we are talking about a commodity that is up 352% in 10 years while the DOW is flat…..just a temporary investment.

    the mercury u are refering to is used by poor s. americans to capture very little gold, not REAL gold miners……..the burning of coal for electricity produces hundreds of thousands of times the mercury….as is the lead left over from gasoline octane enhancement….its everywhere son, and all of it is deplorable…..own any energy stocks lately?

    but i don’t expect you to like gold as an investment.

    as for a bed of currencies……i’ll sit down with you here in 2-4 years while we are both shorting gold, and i’ll tell you what i made on the runup…..deal?

    as always, thats what makes it a market, and to each his own, and i always appreciate your comments.

    PS, apple is up 20,000x inception, and a guy i know bought an ipad w/2 unemployment checks,irrational u think?……someday aapl will be worth zero……now thats a bubble……one i rode some of,matter of fact.

  • http://www.pragcap.com TPC

    The problem though is that the loans are in the system because there is demand for those loans. The fact that these banks lend out more than they have in their coffers is a result of excess private sector debt. That will exist as long as there is demand. So we could increase reserve requirements, but the demand for loans will remain. So what do we do? Increase the # of banks by 10 times? In the end, we have essentially the same exact system without the high level of solvency risk at each institution.

    As for regulation – the last 20 years should be proof that the private sector cannot regulate itself.

    As for insurance – the private sector cannot be relied upon to back all debts. Especially in times of crisis. At the end of the day there is only one institution large enough and powerful enough to back all debts and guarantee payments. Relying on the private sector to do this in time of panic is a recipe for disaster.

    I have a huge amount of respect for the Libertarian movement, but I just don’t think it’s a very realistic position. Government can and does do good things for the citizenry of the USA. The war entangled history of the USA is by far the surest example of this. We have quite literally fought our way to the top and established a very desirable place to live in doing so. Unfortunate in many respects, but a great showing of government good for the people.

    I should add that this does not mean I am an advocated of trampling other nations and policing the world, but we have fought many injustices throughout our history and it has established quite a great place to live in my opinion.

  • http://www.pragcap.com TPC

    Sachs is wrong. You can just look at the borrowing data to prove that Bernanke’s plan didn’t work. Did it help to stabilize the economy? Perhaps marginally. But it did a lot more good for the banks than it did for Main Street. Unfortunately, the banks aren’t the crux of this problem. They were merely a symptom of the problems on Main St.

  • F. Beard

    “So we could increase reserve requirements, but the demand for loans will remain. ” TPC

    Well, if the banks could not create money then interest rates would rise till the supply of loans equaled the demand for them.

    However, that is besides my point. After a just reset, I advocate total liberty in money creation and acceptance subject to the usual laws against fraud and insolvency. Let banks practice fractional reserves as they wish but only in their own PRIVATE money supplies not in a government money supply. Or allow banks to practice FRL with government money too but with no government backing
    and ruthless enforcement of insolvency laws.

    “I have a huge amount of respect for the Libertarian movement, but I just don’t think it’s a very realistic position. ” TPC

    Liberty is extremely practical. The problem is, we have not had it since 1913 at the latest.

  • http://www.pragcap.com TPC

    The 20th century was a pretty good time to be an American. There has been, arguably, no greater period of prosperity, innovation and societal advancement in any civilization in history.

  • In Banking

    Boatman,

    I too always appreciate your posts – I would say I’ve certainly learned much more here than I’ve taught anyone!

    I totally understand what you’re getting at in terms of polluting effects of mercury. However, I wanted to frame it in the context of my post as a whole: given that gold has little industrial value (though what it is used for is certainly important), why pollute the earth digging up, aggregating, and burying back again? The other examples you mentioned are unfortunate, yet necessary evils to supply our digitized/motorized/power hungry society. And no, I don’t own any energy stocks at the moment – though I certainly have invested in them in the past and certainly plan to do so in the future.

    The problem with the argument that gold is up 350% is that it wasn’t a straight run up, most of the move was in the past 4 years, and one would have to tie up tons of capital to make a relatively small absolute return. It’s been more of a “two steps forward, one step back” rally with gold having periods of fairly sizable sell offs and lots of stagnation. Saying that the DOW is flat over 10 years pretty much makes my point – gold as an investment is attractive because it lounges under the banner of “Buy and Hold”. For me, investing is hardly ever a buy and hold strategy (unless you’re investing in your own company) and the greatest gains come from being an active investor/trader.

    I’ll be glad to have that convo in 2-4 years, but I’ll tell you right now that I’ve pretty much only got 2 currencies – Euros and good ‘ol greenbacks – and that’s really just the denomination of my assets (minus my short term cash position). But I don’t plan on sitting on the sidelines during that time and have little doubt that I can outperform gold on my own. Then again, I find the markets intriguing and its like a game to me so I don’t have any problem chasing the next hot trend. But rest assured, I’ll definitely be there as the herd stampedes towards the really small doorway – it was tons of fun shorting oil at $150! By the way, I saw Beowulf in 3D a few years ago and immediately bought IMAX stock afterwards. Made a nice profit sold out and watched it crater. Was too scared to jump back in at around $3-4 and have been kicking myself since considering the reason that I liked it to begin with. That’s a few hundred % in a much smaller timeframe.

    I’m totally on board with the AAPL call. The company has had great success in waking up from the graveyard. But from an investment perspective as well as a technology perspective, I really dislike it. I will admit that I did help a friend make some nice coin showing him how to write options on his losing position as it dropped back down to fair value last year. But this company will inevitably have to take a knee under the weight of Jobs’ ego.

  • F. Beard

    “The 20th century was a pretty good time to be an American.” TPC

    Well, there was the Great Depression that blighted the lives of many Americans and which directly led to WWII and the deaths of 50-86 million non-Americans. And as Ben Bernanke admitted, the Fed caused the Great Depression. And after that, there was the terror of nuclear annihilation as we learned that fascism beats communism in an economic race.

    Fractional reserve lending has worked well after a fashion despite the fact it is dishonest and unstable. There are better ways to do money, I’d bet. Let’s allow liberty and see?

  • http://www.pragcap.com TPC

    What do you propose? A reversion to the gold standard? Changing reserve requirements would not necessarily fix the system. In its current form FRL only strengthens the oligopoly, but does not necessarily change the amount of money in the system which is an exogenous effect.

  • boatman

    unfortunately, Jobs might not be around to do spout anything…..a “whipple” procedure to deal with pancreatic cancer has an abismal success rate,even medium term…..i know too much about medicine to need doctors, as i know too much about investing to need a financial planner…….but thank god i don’t know everything…..and never will.

    any long gold money i have is that which has been way off the radar screen for years……everything else is a trade.

    euro bouncing back some…….and look, gold “directly” coupled to dollar again, but doing better than it.

  • F. Beard

    “What do you propose? A reversion to the gold standard?” TPC

    Heavens, no! Government should simply get out of the money business except for issuing its own money to be used for tax purposes and enforcing the usual laws with regard to fraud and insolvency. The free market would then provide money solutions for the private sector. BTW, I predict that common stock would win out over precious metals because it is much more flexible, just, democratic and stable since it does not require fractional reserves, lending at interest or even lending at all. Currently, capital gains taxes prevent the use of common stock as money in addition to legal tender laws, the FDIC, and other government privileges for FRNs.

  • boatman

    and IB, “cash for gold” is on a par with renting furniture and TVs…..doesn’t mean owning a TV is a bad idea……..renting a TV what a suckers concept, like spending your paycheck on the lotto-“a tax for the mathmatically challenged”

    over

  • scharfy

    Ah the sweet religion that is goldbug-ism.

    Price is irrelevant. Just buy it. No reasonable metrics apply because its different this time. If everyone did business in gold it’s price would be 60,000$ an oz!!!!!

    The “Great Reset” where every citizen will barter with gold coins and lugs 40lb safes around with them is near.

    The dollar is being debased. ( Nevermind the fact that the money supply is CONTRACTING!!!!!!!!!!!!!!!!!!!! )

    Surf on brothers! Some you you will get out alive. But most of you won’t. That is a mathematical necessity.

    But I hope the shit goes to 2,500/oz. It’ll create more downside fun. Maybe its just my personality – i’m too optimistic.

    The “SKY IS FALLING STRATEGY” has been proven wrong far too many times to ignore. I know, I know, this times its different.

    I’d rather starve and die if we go Mad Max, than be sittin around looking at a stack of gold @ 500 an oz when the S&P goes to 2000 and spits off 4% dividends.

    Hey I’m pretty grumpy – maybe I COULD be a goldbug.

  • haris07

    TPC,

    I agree with your initial thoughts, but believe that your later thoughts will be proven wrong (that’s just my opinion). I think that deflation is currently the secular theme, but fiscal and moentary authorities have fired their first bullet (unfortunately in the wrong direction that only helped banksters!) and there is little tolerance for something else so soon. As deflation takes hold and markets fall hard, I believe that gold will also fall (and ironically enough US $ and US bonds will rise and remain strong). However, that is where I end agreeing with you and begin to differ – Bernanke will panic and announce an absolutely ape sh%^ crazy QE 2 program…convinced that this is the only approach. Me thinks something stupid like $5 trillion or something like that. Yet again, most of this will be misallocated and misspent and other than providing another short term bandage, it will also fail. However, with this massive money printing, we will get inflation. And gold will rise and possibly soar.

    Short term bear on gold, long term super bull because Bernanke will do whatever it takes to debase the $ (note that I am not saying that the US will “default”, won’t happen, ever) and that will result in gold soaring.

  • In Banking

    Yup! And the biggest difference between the precious metals and every other commodity is that the rest are actually consumed!

    Then again, in India its popular to serve some desserts covered in silver or gold leaf…

  • http://fridayinvegas.blogspot.com Kid Dynamite

    TPC – congrats! you managed to write a post about gold (anti-gold, in fact) without inciting a massive flame war in the comment section! i am impressed. As i said last week, the only topic that gets people more fired up than MMT is gold… somehow you managed to avoid the backlash on the gold piece – take that as a complement that your piece must be good!

  • Johnny

    There are a couple of things that I’d like to say about gold.

    I’ve noticed that when most people are bullish on something (as has been the case in gold recently) that the end is near. Everywhere I look, I see ridiculous predictions about the future price of it, and nobody thinks that it will ever be down, despite it’s run up of 500% since 2001.

    The charts of gold look even worse, especially the monthly. We have a rising wedge nearing completion with double negative divergences on MACD and RSI. I’d say that the top of the gold market is about 1300ish before the drop happens, and I’d say that the drop happens before the end of the summer – barring that it overthrows the wedge temporarily.

    Gold is the “no brainer” trade, like housing was in 2006, and like dot com stocks were in 2000. When something is a “no brainer” it is about to get brained.

    Just look at a site like zerohedge to see all the irrational predictions about it that you need. Gold to 50000? Ummm… yeah. Maybe 30 centuries from now. LOL. It took ten years to rise 500%. It’s not going up another 4000% any time soon.

    Buying physical is a sure way to make the investment in gold as illiquid as possible. While other people are scrambling for the exits, the holders of physical will be among the last to get out. It’s a financial move that is just asking for death.

    I wish everybody well in their investing, but it’ll be great to see the Glenn Beck types taken out when the wedge finally breaks down.
    This is still America. We are nothing like Zimbabwe or Weimar Germany. The sun will come out tomorrow, and when it does, expect a post 1980 style whoopin to hit gold.

  • In Banking

    “What is your long-term outlook for inflation, the dollar, and gold?

    Inflation is part of the way societies sweep away the old order. All currencies eventually get debased – like it or not. Compute one penny invested at the time of Christ, compounded at 3 percent per year. Then consider why nobody has anywhere near that amount these days.

    Gold tends to be dug up, refined, and then buried again. The geographical entropy of all gold on the planet seems to decrease over time. A lot has been collected in vaults. I project the trend as one toward a central world gold stash.”

    – Ed Seykota, Market Wizards
    (Father of computerized trading and a 60% annual return net of fees…for 30 years)

  • Johnny

    Kid Dynamite-

    I also read your blog on occasion, and good job with it.

    The reason a massive flame war erupts when you say anything negative about gold is it is like a religion to those that are invested in it. Most do not listen to reason, and can only see as far as their emotions take them. Couple that with the fact that they are on the winning side of a trade, and it just makes things that much worse.
    However, most of the most emotional people about the topic are also the most illiterate. Their posting indicates this…

    That’s why I stopped posting at sites like a certain fight club knock off. I’d say that places like here and Mish’s site are filled with much more rational people, even if I always don’t agree.

  • DDT

    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!

  • F. Beard

    “Compute one penny invested at the time of Christ, compounded at 3 percent per year. Then consider why nobody has anywhere near that amount these days.” In Banking

    Because conventional money and banking loots wealth rather than shares it and is unstable to boot when it uses fractional reserves?

    I notice the common stock company is only 400 years old. If it were only cut loose from the underlying unstable money and banking system then I predict we could have a golden age for a while. Otherwise our unstable system is going to kill a lot of us sooner or later.

  • In Banking

    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…

  • In Banking

    Well, he’s trying to show that nothing retains value over time.

    If gold always retained value, why is it only 828 pounds sterling?

  • prescient11

    Targeted stimulus to repair consumers’ balance sheets and destroying supply of housing.

    Pay the damn builders not to build for a couple years. Don’t we already do this with farmers?

    That will help the private sector big time!! That, and then get the fiscal house in order in 2013-14. And cut bs spending that affects as little jobs as possible.

  • F. Beard

    I’m no gold bug. Gold is the fallback position of fractional reserve bankers. I’ll have nothing to do with it. Instead, I’ll lobby for liberty in money creation and usage and hopefully leave the bankers holding gold with only commodity value. It’ll serve the bastards right.

  • In Banking

    Well gold will always serve a purpose in that respect. If two countries don’t care to hold reserves of eachother’s currencies, they’ll transact through gold crosses. We do this all the time with swaps. But this isn’t investing in gold any more so than driving to the beach is investing in the highway

  • LZ

    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?

  • boatman

    take a seat,kid,the day ain’t over yet……..but i can’t figure out what it is gets everyone so freaked out about it.

  • DanH

    I think most of the readers here are too smart to bother with BS. TPC is genuinely interested in making money and perhaps influencing public policy if he can. It shows in his writing. This site is no BS. That’s my favorite thing about it. It cuts straight to the point.

  • F. Beard

    “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.

  • DanH

    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.

  • domingo

    “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-.

  • F. Beard

    “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.

  • F. Beard

    “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.

  • Roger Ingalls

    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…

  • domingo

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

  • F. Beard

    “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.

  • domingo

    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

  • boatman

    well listen to you all about the sunshine and america…..and of course i agree.

    but you ain’t SEEN bullish on gold yet……..just because Cramer mentioned it.

    when my next door nieghbor is buying,i’m selling….n believe me he ain’t buyin yet.far from it.

  • DanH

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

  • boatman

    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.

  • boatman

    usually true, but not right now, F

  • boatman

    good luck with that lobbying for liberty, F……i truely wish you all the luck in the world.

  • F. Beard

    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.

  • boatman

    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.

  • F. Beard

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

  • jt26

    “Unfunded” = US gov future liabilities (medicare, social security etc.).
    The fear is that the government will not be able to afford these, and printing will be chosen rather than austerity or benefit cuts.

  • F. Beard

    “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.

  • F. Beard

    Thanks. “There is nothing so powerful as an idea whose time has come.” In any event, knowing how things SHOULD BE gives one an edge in speculating in the world as it IS.

  • DanH

    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.

  • boatman

    THERE IA A HIGH PROBABILITY OF AN IRRATIONAL DISCUSSION ON GOLD

  • jt26

    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).

  • Johnny

    I see commercials to buy gold, everybody on CNBC is pumping gold, the Faux News people are pumping gold, my barber was talking about buying gold, my mom was talking about buying gold, my pot smoking buddies that don’t invest are saying now is a good time to buy gold. Pretty much everybody is bullish on the stuff.

    I don’t really see any bears anywhere on it, except for on this site.

    I’d say that 95% of people are bullish on it, at least.

  • domingo

    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.

  • F. Beard

    “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?

  • domingo

    You are rigth.

  • http://www.maxxgraphix.net maxx

    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.

  • http://www.maxxgraphix.net maxx

    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.

  • Roger Ingalls

    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.

  • Marty

    Yeah, lots of people TALK about gold, but that’s VERY different from taking a risk on owning it. How many barbers, pot smokers and moms do you know of who have actually traded some of their hard earned cash for some of the “yellow dog”? Talk is cheap…

  • Marty

    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.

  • Roger Ingalls

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

  • F. Beard

    “In its current form FRL only strengthens the oligopoly, but does not necessarily change the amount of money in the system which is an exogenous effect.” TPC

    OK, I see where the confusion is. FRL multiplies the exogenous money into credit which I refer to loosely as money also. It has the same effect; it drives up prices. I suggest we replace most of the credit money with legal tender fiat and ban FRL till we have fundamental reform. I guess I am suggesting the US Treasury create enough legal tender fiat to payoff every mortgage in the US and distribute it equally to every adult in the US.

  • ron

    American politics proves that the system is incorrigible .

  • Leland

    “I notice the common stock company is only 400 years old. If it were only cut loose from the underlying unstable money and banking system then I predict we could have a golden age for a while. Otherwise our unstable system is going to kill a lot of us sooner or later.” (F. Beard)

    But the stock market has also become a fractional reserve system, albeit one with a 50% reserve ratio rather than the 10% reserve ratio of the banking system. When a broker loans their clients shares to a short seller, that creates a situation where two people each have an unencumbered claim to the same shares — in other words, the original owner and the person who bought the borrowed shares from the short seller can each demand that their shares be delivered to them. If everyone at once were to demand that their shares be delivered to them (similar to a run on a bank), only one could receive the actual shares and the other would be stuck with the short sellers worthless IOU. The stock market fractional reserve system is somewhat less out of control than the banking system but it really is the exact same fraudulent system, counterfeiting of warehouse receipts, that you mentioned earlier. Both fraudulent systems must be outlawed if we are to have truly honest and sound money and a truly honest and rational market.

  • Andrew P

    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.

  • http://steamcatapult.com/ Dave Pinsen

    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.

  • boatman

    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

    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?

  • F. Beard

    Interesting point about short selling but the difference between short selling and FRL is that the common stock actually exists in a short sell whereas the banks create (counterfeit) money as they lend it. Naked short selling is counterfeiting though. Actually, Bernanke wants to do away with reserve requirements for banks. Mish Shedlock says there are “fictional reserves” anyway.

  • In Banking

    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.

  • John

    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.

  • boatman

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

  • In Banking

    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.

  • John

    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.

  • boatman

    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?

  • http://na alex west


    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 ?

  • boatman

    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

  • In Banking

    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.

  • F. Beard

    “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.

  • 3421138532110

    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.

  • In Banking

    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

  • F. Beard

    @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.

  • F. Beard

    “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.

  • http://pragcap.com/fitch-warns-on-british-debt jacksonaction

    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

  • In Banking

    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

  • boatman

    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

  • Chux03

    “Because gold is the world’s lowest risk investment. Gold has the lowest risk and perhaps the most reward”.

    Stewart Thomson of http://www.gracelandupdates.com

  • bee

    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.

  • http://www.crn.com/it-channel/212101428;jsessionid=F2J03JHWKT5SLQE1GHRSKHWATMY32JVN?pgno=4 RadRod

    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.

  • http://www.crn.com/it-channel/212101428;jsessionid=F2J03JHWKT5SLQE1GHRSKHWATMY32JVN?pgno=4 RadRod

    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.

  • Juno

    “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.

  • boatman

    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.

  • Leland

    The only difference is in the reserve ratio. Banks are allowed to legally counterfeit $9 for every $1 of their depositor’s dollars they hold in trust (a 10% reserve ratio); brokers are allowed to legally counterfeit 1 share for every 1 of their customer’s shares they hold in trust (a 50% reserve ratio). Actually, I’d say that dollars are in fact backed by all assets owned by the Federal Reserve banking system (in other words, they are in a sense a share of that government sanctioned coercive monopoly). The creation of new dollars by the Federal Reserve is just a dilution of its shares, the same as when any other company issues new shares with no increase in the assets backing them.

  • Leland

    I thought I should add that the reserve ratio isn’t really the issue here. To restore a truly honest and sound monetary system, the real requirement must be that banks can ONLY loan funds for which their depositors do not have an unencumbered claim. Banks hold (at least) two different kinds of deposits. Most normal checking accounts are considered “demand” deposits, meaning that the depositor has the right to demand at any time that the funds be returned to them without restriction or penalty. Various types of savings accounts and certificates of deposit are usually contractually encumbered in some way, meaning that the depositor cannot always demand the return of those funds without restriction or penalty. Banks should ONLY be allowed to loan out funds that are contractually encumbered, with restrictions and penalties upon any immediate return; they should not be able to loan out demand deposits, funds to which a depositor has has an unencumbered claim. In other words, the answer is in enforcing the rule of law (in enforcing contracts). In that case, there would be no counterfeiting involved because, since the depositor is encumbered by contract from accessing those funds, the bank can loan them without creating a second (counterfeit) claim upon those funds. Our banking system used to work that way. The problems started when the laws were changed allowing banks to only maintain a reserve ratio of all funds held (including demand deposits) rather than being able to only loan out contractually encumbered funds.

  • Charley

    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.

  • Charley

    BTW:

    Bernanke knows all of this – he is just playing dumb.

  • F. Beard

    I agree with your thinking here.

  • Juno

    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).