What do you mean, "No gold bubble?"

[FRED]

http://www.itulip.com/images/askitulip.jpgDear iTulip,

Hey, am I reading you correctly? Gold is not going to be the next big bubble and make me so wealthy that most of the people I know won't talk to me anymore? Your new look at gold was a bit of a surprise to me and maybe a few others.

Can you elaborate on what you think the precious metals are going to be doing as the bubbles deflate?

Thanks!

Rick

Dear Rick,

We are aware that some of our readers are surprised, if not to say saddened, by our position that no "bubble" in gold is going to happen. Our point is that asset bubbles, such as in tech stocks and mortgage backed securities (MBS), cannot occur without the help of governments in the form of monetary policy and tax policy. Gold will go through the roof, but government will always be on the other side of the trade.

So why not a gold bubble? Can you imagine the day when you can go to the bank and borrow a few hundred thousand dollars to buy gold and write the interest on that loan off against your income every year as you can with your home? How about a $500,000 tax free capital gains give-away on gold you and your wife own for more than two years as is available to home owners? Imagine what would happen to the price of gold if it was re-classified from a "collectible" with a short term capital gains tax rate of 35% to, say, an asset class that benefits from the 15% rate that hedge fund managers pay on their annual 2% carry on invested funds? The gold price would jump from $750 to over $1,000 practically overnight.

But those policy changes are never going to happen. Why? It's important to not confuse the bubbles in MBS and stocks with the underlying physical objects backing the paper, dot coms and houses respectively. Their valuations certainly impact the value of the securities, as hapless workers at dot com companies, venture capitalists who failed to bale out of their dot com investments in time, the 33 year old pension fund managers who bought the MBS, and millions of home owners can attest. Perhaps the market for mining stocks can be bubbled up, except that not only is the mining industry's lobby not as savvy as the real estate industry's, but gold specifically is a bet against government management of currency and credit markets. Why would the government bet against itself?

No bubble in gold is possible, at least in the same sense of bubbles in MBS and tech stocks.

This does not mean the gold price can't go through the roof as the latest government gambit to fight markets and manage currencies and credit unravels. We have not changed our $2,500 - $3,000 gold price target.

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What is in question is the purchasing power of those 2,500 - 3,000 bonars. One isn't rich if one's gold is worth 2,500 bonars (http://www.itulip.com/glossary.htm#B) if a cup of coffee is going for $25. Most of our effort here at iTulip is focused on understanding the level of currency depreciation and all-goods inflation we are likely to experience as a result of the ongoing Ka-Poom debt deflation.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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[zoog]

So... a year ago you were sure there would be another gold bubble... now you say no way? Why the change? It seems to me your list of requirements for creating/facilitating a bubble is at least as old as this earlier gold bubble prediction. Did you at that time think the government would somehow step in with tax advantages for gold, and now you think differently? And how did the 1980 bubble happen without government fueling the fire?

What Gold Bubble?

by Eric Janszen

October 13, 2006

... If and–in my opinion–when another bubble in gold happens, it might look something like this. The chart below shows a hypothetical future gold bubble.

http://www.itulip.com/forums/../images/2010goldbubble.jpg


This is not a prediction that a new gold bubble will happen between 2009 and 2011. No one can say that. But you can "phase shift" this hypothetical future gold bubble years in or out from that date, and increase or decrease its peak and other characteristics of the bubble depending on a number of unknowable factors, and give yourself at least a way of "seeing" what is going on when it does happen. This is important because it is easy to get caught up in the Apocryphal Beliefs that will be expressed by everyone the bubble employs near the top–think investment banks in 1999 and realtors in 2005–so having a picture is useful to keep your head straight.http://www.itulip.com/forums/showthread.php?t=507

[FRED]

So... a year ago you were sure there would be another gold bubble... now you say no way? Why the change? It seems to me your list of requirements for creating/facilitating a bubble is at least as old as this earlier gold bubble prediction. Did you at that time think the government would somehow step in with tax advantages for gold, and now you think differently? And how did the 1980 bubble happen without government fueling the fire?

http://www.itulip.com/forums/showthread.php?t=507

You got us there! We're trying to make a point about government co-sponsored bubbles vs good old fashioned market driven bubbles, and that governments are not gold-friendly. Buying gold means betting against the house. Gold is an unpopular bet for this reason. Just so everyone, including reminding ourselves, knows what we're up against.

[jk]

i think there will a huge spike [call it a bubble or not] in gold sometime down the road a few years. right now it's moving up on diversification from the dollar. it is not popular. [ask your friends if they're invested in gold.] its price is not announced during every business report on the radio. it is not making headlines. at some point it will get popular, and greed will give it a good push. then, later, fear will turn on the afterburners.

[rabot10]

OMG I made the front page - holly shi# i hope i come up with something else - I'm really not that smart

[BiscayneSunrise]

I think this is one of those times, we wished for one handed economists :-)

But seriously, while PM's have some good upside, as Fred points out the best side of the bet is to go with the house, who will do anything to ensure the economy stays well enough to ensure their re-elections.

The last thing a government wants is a strong gold based currency that reduces their power to manipulate through a fiat currency.

[tree]

OMG I made the front page - holly shi# i hope i come up with something else - I'm really not that smart

The alternative universe equal of making the front page of the WSJ? All Tulip readers are smart, Rick, or they wouldn't be here.

[*T*]

Like many things these days, gold is internationally traded and priced. So how the US govt chooses to tax it is important but not decisive. Different, international factors can cause a bubble, without US citizen participation.

In India, for example, the govt is favourable towards gold trading. (Without wishing to post hearsay - I think it offers a 'buyback' guarantee that it will buy back gold purchased through the correct channels for at least the price that was paid, but I am unable to verify. I'd be grateful if someone could confirm.)

One could perhaps envisage hordes of non-US folks looking to replace depreciating dollar real estate and equity assets with, for instance, gold, and the local government would have nothing to say about it. There are plenty of dollars outside the US. In which case the perceived gold rise will be experienced mostly by dollar-denominated players.
Or perhaps the Chinese may suddenly get gold fever when domestic inflation comes home to roost, and start buying gold.

I am not saying these will come to pass, but I am saying we do not require US govt tax breaks or major US saturation marketing to precipitate a gold bubble. There are many ways it could occur.

[rabot10]

The alternative universe equal of making the front page of the WSJ? All Tulip readers are smart, Rick, or they wouldn't be here.

Thanks I am going to have the kids and wife read your post - hope U can
support it lol. I know that I can

[Lukester]

BiscayneSunrise -

Have to disagree with you on this point:

<< as Fred points out the best side of the bet is to go with the house, who will do anything to ensure the economy stays well enough to ensure their re-elections >>

First of all this is a very short term strategy.

But the main point, as *T* has put it quite well, this calculation is very US centric.

Many of iTulip's calls are highly US centric, and there is a partial inconsistency in this view because another very central tenet of iTulip's thesis is the fading of American relevance and market position in the world. Most of us probably agree that fading is already well along in it's process.

What the FED wants, what the FED "will permit", in reference to Gold's price, appear to me a highly iffy assurance upon which to hang one's serious long term, and frankly now even short term, major bets. Even if one assumed the US FED still exerts the determinant sway over precious metals prices, this idea relies on global central banks moving in lockstep with the FED's moves in the coming years.

I question whether the US FED can provide any kind of global determinant of what the rest of the world will value Gold at, as Bretton Woods II crumbles.

How in the world will this flailing US FED cap the price of the senior global currency (gold metal) when the only way to cap it is by coercing G7 central banks to cough up more of their dwindling reserves? Far eastern countries, with the bulk of the world's savings, have minuscule gold reserves compared to the US and EU countries. How is Western CB gold dumping going to provide the FED with the effective tools it needs to cap Gold when it breaks past the old nominal highs of $850?

Do we then really rig our investment strategy based on 2 or 3 billion small savers accumulating bits of gold in countries around the world (who know little, and could care less, about the US FED's plots to suppress the metal), who we'll rely on to timidly 'stand down' each time the FED waves a big stick at the bullion price again? I seriously doubt this paradigm holds going forward, if it even holds any more right now.

Respectfully,

[fogger]

I never imagined a government sponsored bubble. What I see coming is a global awakening to the fraud that is fiat. Lots of fear will drive it, not financing and tax advantages.

[GRG55]

BiscayneSunrise -

Have to disagree with you on this point:

<< as Fred points out the best side of the bet is to go with the house, who will do anything to ensure the economy stays well enough to ensure their re-elections >>

First of all this is a very short term strategy.

But the main point, as *T* has put it quite well, this calculation is very US centric.

Many of iTulip's calls are highly US centric, and there is a partial inconsistency in this view because another very central tenet of iTulip's thesis is the fading of American relevance and market position in the world. Most of us probably agree that fading is already well along in it's process.

What the FED wants, what the FED "will permit", in reference to Gold's price, appear to me a highly iffy assurance upon which to hang one's serious long term, and frankly now even short term, major bets. Even if one assumed the US FED still exerts the determinant sway over precious metals prices, this idea relies on global central banks moving in lockstep with the FED's moves in the coming years.

I question whether the US FED can provide any kind of global determinant of what the rest of the world will value Gold at, as Bretton Woods II crumbles.

How in the world will this flailing US FED cap the price of the senior global currency (gold metal) when the only way to cap it is by coercing G7 central banks to cough up more of their dwindling reserves? Far eastern countries, with the bulk of the world's savings, have minuscule gold reserves compared to the US and EU countries. How is Western CB gold dumping going to provide the FED with the effective tools it needs to cap Gold when it breaks past the old nominal highs of $850?

Do we then really rig our investment strategy based on 2 or 3 billion small savers accumulating bits of gold in countries around the world (who know little, and could care less, about the US FED's plots to suppress the metal), who we'll rely on to timidly 'stand down' each time the FED waves a big stick at the bullion price again? I seriously doubt this paradigm holds going forward, if it even holds any more right now.

Respectfully,


Lukester: This thread is focused on "money" as a store of value, but I couldn't help but note that some of your comments could apply with equal validity to "money" as a medium of exchange. In that instance the preferred "money" is still the US$.

Small story to illustrate. I always keep a fistful of US$'s in my wallet because no matter where I end up I can always convert them into anything I need - taxi fare, food, whatever. One of my amusements when travelling on business is to bargain with the vendors in the local souks and markets (good way to gauge the local economy, and chat up locals). A couple of years ago I ended up in Osh, a remote town in Kyrgyzstan in the valley north of the Hindu Kush near the Uzbek, Tajik and Chinese borders. Thriving market with everything for sale from excellent ag products to consumer goods (to my surprise Korean-made goods dominated over Chinese manufactures - disclosing the reason will have to wait for another time). Even in this isolated and remote corner of Central Asia, the US currency was prized above all others. A euro note won't be accepted by anybody there. It is going to be a long, long time before "2 or 3 billion small savers accumulating bits of paper (US$) in countries around the world (who know little and could care less about the US Fed)" will stop using/saving/hoarding the US$.

Point I'm trying to make is that while we trash talk the US$ and switch to gold as a preferred store of value, we shouldn't lose sight of that other function of "money", and the fact in that capacity, for much of the world, the US$ is still the gold standard, and IMHO not likely to be displaced any time soon (no matter what the Fed and other CB's do).

[*T*]

I question whether the US FED can provide any kind of global determinant of what the rest of the world will value Gold at, as Bretton Woods II crumbles.

Indeed, the Fed can hardly even fix the yield curve past 3m - leave that to the Chinese - let alone the price of gold. The Fed is a used-up washed-up has-been.

[art]

Apparently the gold run-up is caused by Japanese grannies.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/16/cngold116.xml&CMP=ILC-mostviewedbox

[BiscayneSunrise]

Lukester,

Thanks for the input.

I'm not sure what you meant when you said it is a short term bet. What is the short term bet? Going with the house?

Agreed that American influence is fading, although perhaps dominance rather than influence is the better word. And the Fed is likely near the end of its rope right now in terms of creating any meaningful difference in the world economy now.

As a form of disclosure, I am just Joe average investor with a 30 year old economics degree from the local state college so I offer no proprietary insight. Granted, I am out of my element here and I am now thinking aloud as I write.

As for gold gaining long term prominence, I'm not so sure. Gold is a relic of the past and As I have mentioned a couple of times previously, I believe the fundamental storehouse of value is the human mind, now able to be more fully leveraged than at any time in history. Companies and Countries that can leverage that talent will do the best. How does that apply to a new world order currency? As you know, some suggest that the new touchstone for currency will be a basket of commodities and perhaps, even a stock index. This basket of commodities and equities, while somewhat volatile, will more accurately reflect the value of human endeavor.

I see a China fund said they want to buy into Bear Stearns. As others have mentioned gold produces nothing in and of itself. Here we see an example of the Chinese who we know to be VERY long term investors recognizing value in human talent not gold.

Perhaps, now the "House" is not the Fed and the US Treasury anymore but the Chinese and various other sovereign funds.

If the various sovereign funds around the world will be calling the tune it is likely they will invest in what? Things that produce more economic and political value over time. Right?

So it sounds like the best long term bet for us as individuals is to get ahead of where you think the sovereign funds will be going. Especially into areas that have some scarcity and/or will be areas of intense investment over the next 5-50 years. (infrastructure?/uranium?/water?/tech?/things chosen to be included in a new currency basket?) Gold arguably doesn't seem to have much intrinsic economic value and it certainly has no intrinsic political value so it shouldn't be of any great interest to sovereign funds. Again, think political value as well as economic value.

Of course, this is a long term projection and in the long term, we're all dead. But to get a feel for how the knowledge economy may play itself out read Revolutionary Wealth by Alvin Toffler

Greg

[Christoph von Gamm]

I am a proud Japanese Granny, Too!!!! Who else?

[Christoph von Gamm]

What you get for a given store of value always is reflected by what people in sum can make available... therefore Gold in a knowledge based economy is not necessarily outdated at all as knowledge also can be translated into how much it produces and then gets valued...

[touchring]

As for gold gaining long term prominence, I'm not so sure. Gold is a relic of the past and As I have mentioned a couple of times previously, I believe the fundamental storehouse of value is the human mind, now able to be more fully leveraged than at any time in history. Companies and Countries that can leverage that talent will do the best. How does that apply to a new world order currency? As you know, some suggest that the new touchstone for currency will be a basket of commodities and perhaps, even a stock index. This basket of commodities and equities, while somewhat volatile, will more accurately reflect the value of human endeavor.


Gold may not be a big earner, but it is anytime better than the dollar.

[jk]

i want to second lukester's point about our analyses tending to be u.s.-centric, and agree too that this observation applies to more than just this discussion of gold. i've been thinking about my dollar exposure lately, and just today started wondering whether i'd own ANY dollars if i didn't happen to live in the u.s. i really need to channel my inner japanese granny.