View Full Version : Simple question for the gold bugs
Here's a simple question for you gold bugs:
If gold is a 'natural repository' of monetary value, and gold prices escalate inversely with falling currencies, then how does one make a purchasing power profit?
If theoretically the increase of gold price should equal the decrease of currency purchasing power, there can be no growth beyond normal population/productivity increases, and these values are cross economy so would not gain relative to the 'average'.
Then the gold investment really only preserves purchasing power, it does not grow it.
If the above is not true, then by definition there must be a timing component to a gold investment - as the corollary is that there will be under/overshoot of gold price as compared to currency purchasing power and that this price action is what produces relative purchasing power gains.
In contrast, an investment in a stock is based on the idea that the company for which the stock exists can grow faster than the economy as a whole, hence the stock will disproportionately gain.
How can this same behavior be true for any commodity, especially gold?
Lukester
03-24-08, 10:18 PM
No worries C1ue. There are most certainly other good investments also. And it may even be gold will be a bad investment. Nothing is certain, especially now.
touchring
03-24-08, 10:42 PM
I cashed out of all my gold and silver, too volatile for my liking now.
Switching attention to SKF. Anyone also looking at SKF?
goldisliberty
03-24-08, 11:29 PM
Good evening C1ue,
You posed the question, "If gold is a 'natural repository' of monetary value, and gold prices escalate inversely with falling currencies, then how does one make a purchasing power profit?"
My four word answer: Debt, Derivatives, Panic and Collapse.
<O:p</O:p
My reasoning:
<O:p</O:p
1) Gold will preserve purchasing power, at a minimum, since it is moving inversely to a dollar which is based solely on debt, and there is an upper limit to the amount of debt which can be carried and serviced as a multiple of GDP since the US economy has transitioned from manufacturer/creditor to service-sector/debtor and such an evolution severely reduces the economy's ability to grow itself out of debt. Further the escalating and out of control social entitlement burdens present fiscal clear-and-present dangers of sustainability. So much so, that there now exists a chance that one day ffice:smarttags" />lace w:st="on">US</ST1:place> sovereign debt will not carry a AAA-rating. Once that happens, the downward spiral is unstoppable since we need atleast $2B per day in USTBond sales to keep the lights on. And few will buy T Bonds if it's not triple-A. (Ben will, more on this below.)
2) There exists a real potential for the purchasing power of gold to exceed the fiat dollar's purchasing power loss because:
a) The currency is debt-based and debt systems can only be sustained with the presence of CONFIDENCE. There has never been the current level of DEBT & LEVERAGE in the history of the world...even relative to population; and, this Debt level and Leverage threaten confidence. Without faith in a currency, actual collapse is not just possible but probable. What do the physicists say: "If something is not impossible, it must happen?" DEBT can = DOUBT at some magic moment.
When a significant number of dollar holders have an epiphany with their morning coffee, the leverage will work against us all, most especially those with leveraged debt.
b) It used to be tough for individuals to borrow because banks didn't trust just any individual to borrow money.
c) We have now arrived at a time in financial history when BANKS DON'T TRUST ONE ANOTHER. This threatens the system entire.
d) And the LEVERAGE which has been employed means many of the untrusting and untrustworthy institutions are not just broke, they are several orders of magnitude broke. It would take a hundred years of world GDP to pay all the debt down.
e) There is a real potential for cascading counterparty derivative defaults crashing not just the paper assets of the hedgies and investment banks but also tearing down the systems which clear transactions worldwide. What if the failing firms with OTC derivatives also are Clearing Members of Major Stock and Commodity Exchanges? What kind of destruction would this create?
f) Circuit-breakers and daily trading limits do not matter if the exhanges collapse. We are likely to soon see true commerical signal failures on the COMEX - within a year, outside two. Hopefully the Clearing Members will stand up and deliver. If not, Manhattan may resemble the island in Will Smith's latest science fiction film, "I Am Legend." (Only saw the trailer, too busy trading and worrying.)
g) There aren't enough TUMS, PREVACID, NEXIUM, MAALOX doses in all the world's pharmacies if this whole over-leveraged debt-based edifice tips over. In fact, heartburn will be the least of our collective worries if this all tips over
h) The oft-mentioned Moral Hazard of the Fed's lending under 13(3) of the Federal Reserve Act to non-banking institutions can have both un-intended consequences and real blow-back. And they're taking garbage paper onto their books as if this paper will be brought back to health sitting in the bowels of 33 Liberty Street, HQ of the NY Fed. More likely the paper will ignite in the glow of 90 billion worth of gold bullion resposing five stories underground.
We believe that the purchasing power of a US dollar in early 1914, after the December, 1913 passage of the Federal Reserve Act, has contracted by somewhere between 90 and 96% to date. Marc Faber gives the Fed five years to finish the longest currency execution in the history of the game.
If the federal budget deficit was tracked from the founding of the Republic until 1980, we took slightly over 200 years to amass a debt of 1 Trillion dollars: $ 1,000,000,000,000.00. Since 1980, this debt (just of the federal on-balance sheet operating budget) has risen to $ 9,397,889,000,000 and rising (watch it rise with each screen refresh at
http://www.brillig.com/debt_clock/ .
The servicing of this debt is over $400 billion per year. This is just not sustainable.
The current spending habits of Congress require over $2 billion per day of foreign capital inflows to purchase US Treasury debt . This is not sustainable, and the TIC report shows the trend is most assuredly not our friend. Our treasury auctions attract fewer foreign dollars each quarter; soon Ben Bernanke may be the only bidder. This is called "monetizing the debt," and in the context of the Weimar experience, "Denn Die Toten Reiten Schneller, " (And then death travelled faster) (or close, it's been forty years since the last Deutsche class).
Any if foreigners don't buy our debt what are they doing with all the trade dollars they're accumulating?
Sovereign Wealth Fund. SWF is a way for the large foreign holders of all our trade dollars to buy "US" rather than our paper debt. They want physical assets not paper assets (bonds). When the richest entities prefer building to bonds, that tips the balance away from paper and leverage and debt. This may create a rush into gold, a kind of buying panic, which is when leverage works in gold's and silver's (even) favor.
Why? Because the amount of gold and silver in the entire world isn't very large compared to all the banknotes and bonds seeking a safehaven.
It, sadly, appears that the only mechanism the current holders of trillions of dollars of derivatives possess to continue to keep their lights on is to increase the notional dollar volume of derivatives. This resonates with Congress' continually raising the debt-ceiling rather than raising taxes or cutting services and pork barrel projects.
Indeed, the higher they build the pile of debt and derivatives, the larger the circle of destruction, post-collapse.
What are the end-of-2008 likely outcomes:
1) The federal budget ceiling, raised last September prior to the new fiscal year October 1, 2007, from $8.9T to $9.8T, will be raised this Spring by Congress to $10.2T; and,
2) Worldwide, notional value of the derivatives trade will exceed
ONE QUADRILLION DOLLARS. That's $ 1,000,000,000,000,000.00, or the whole integer one followed by fifteen zeros and a world of pain.
So, when this unsustainable edifice crashes, the dollar presents a likely prognosis of total collapse. As long as gold (and silver) act as they have for thousands of years, the engine which will drive the wealthy-and-informed into a desparate search of any wealth preservation strategy will be fear such as they have likely never before known.
However, if the dollar drops to zero, the end-game will not involve "selling," gold for soon-to-be-worthless dollars (bonars?). Gold will used, instead, to buy tracts of farmland with clean water, privatized government buildings and infrastructure, not mere shares but entire companies. Contracts will be written with a gold clause to allow the transaction to clear.
So, the lever which will be long enough to move the world, panic and dread, will be the lever which presents the mechanical potential to have one's gold holdings provide a return greater than the extrapolated gain as an inverse to the drop of a dollar's power to purchase.
For the aforementioned reasons, I am beginning to eschew picking a dollar-denominated price target for gold and silver during the next ten years (if the edifice can be kept up that long; maybe only five). Rather, I am using ratios:
Gold/Oil, DJIA/Gold, Gold/Silver, Gold/bread-cheese-milk-eggs (or is that the Gold/Breakfast ratio?). Even Gold/water and Gold/land.
In conclusion, if gold performs as it has every previous time societies have debased a paper currency throughout history, gold will not only perserve your purchasing power, it will keep you solvent until a new form of clearing media for daily commerce (er, money) emerges for your use.
Just as gasoline is one of the most energy-dense products available for our use (along with a multi-trillion dollar infrastructure), gold doesn't spoil like butter, eggs and bread and pork bellies over long periods of time.
I think the chances are very good that the amount of butter, eggs, milk, oil and pork bellies which gold buys today will be larger, for a time, during the crazy times ahead. But, even so, gold and silver will eventually revert to the mean and "just" preserve purchasing power. This means I see a window of leveraged opportunity which will open and then close.
It is too soon to be sure how this plays out, but I think the ratios I mention above will help us time passing safely and successfully through the purchasing power of gold window of opportunity.<O:p></O:p>
I don't know what's going to happen...but have bought into the hyperinflation followed by deflationary collapse scenario. I have done this because all hyperinflations appear to be self-limiting and not sustainable. Once the currency collapses and is replaced the odds favor a depression in which a new cash equivalent's purchasing power rises. The argument of history rhyming rather than repeating makes each crack-up boom-and-subsequent-collapse unique. The levels of debt and leverage with which we are wrestling suggest the upcoming depression will, indeed, be known as The Greater Depression. And gold will be The Greater Asset during this coming maelstrom.
Prosper and be well.
Here's a simple question for you gold bugs:
If gold is a 'natural repository' of monetary value, and gold prices escalate inversely with falling currencies, then how does one make a purchasing power profit?
If theoretically the increase of gold price should equal the decrease of currency purchasing power, there can be no growth beyond normal population/productivity increases, and these values are cross economy so would not gain relative to the 'average'.
Then the gold investment really only preserves purchasing power, it does not grow it.
If the above is not true, then by definition there must be a timing component to a gold investment - as the corollary is that there will be under/overshoot of gold price as compared to currency purchasing power and that this price action is what produces relative purchasing power gains.
In contrast, an investment in a stock is based on the idea that the company for which the stock exists can grow faster than the economy as a whole, hence the stock will disproportionately gain.
How can this same behavior be true for any commodity, especially gold?
For some gold may not look too expensive around $900. What do you think the wealthy citizens of this region would answer to the question of a suitable "natural repository" of value (after the Swiss bank account and the private jet with which to make a quick exit, of course :) )?
Years ago the presence of the US Navy 5th Fleet base in the Kingdom of Bahrain was viewed as a contributor to regional security. Some are not so sure now...
US 'deploys nuclear sub to Persian Gulf'
Sun, 23 Mar 2008 19:46:06
An American nuclear submarine has crossed the Suez Canal to join the US fleet stationed in the Persian Gulf, Egyptian sources say.
Egyptian officials reported that the nuclear submarine crossed the canal along with a destroyer on Friday and Egyptian forces were put on high alert when the navy convoy was passing through the canal.
An American destroyer recently left the Persian Gulf, heading towards the Mediterranean Sea; earlier Thursday, a US Navy rescue ship crossed the canal to enter the Red Sea.
The deployment comes as recent reports allege that US Vice President Dick Cheney is seeking to rally the support of Middle Eastern states for launching an attack on Iran.
This is while US officials deny that Cheney's Mideast tour is linked to a possible military attack on Iran.
According to the latest reports, in recent months a major part of the US Navy has been deployed in and around the Persian Gulf.
The fleet is armed with nuclear weapons and cruise missiles and carries hundreds of aircraft and rapid reaction forces.
BiscayneSunrise
03-25-08, 05:07 AM
Touch, Been thinking about it but GLD gives you similar performance without the volatility.
Greg
jimmygu3
03-25-08, 06:47 AM
goldisliberty, welcome to iTulip. You make a lot of good points. I only hope your predictions are overblown.
DEBT can = DOUBT at some magic moment.
When a significant number of dollar holders have an epiphany with their morning coffee, the leverage will work against us all, most especially those with leveraged debt.
To me, this statement does not make sense, especially considering your later quote:
However, if the dollar drops to zero, the end-game will not involve "selling," gold for soon-to-be-worthless dollars (bonars?). Gold will used, instead, to buy tracts of farmland with clean water, privatized government buildings and infrastructure, not mere shares but entire companies. Contracts will be written with a gold clause to allow the transaction to clear.
So, the lever which will be long enough to move the world, panic and dread, will be the lever which presents the mechanical potential to have one's gold holdings provide a return greater than the extrapolated gain as an inverse to the drop of a dollar's power to purchase.
Most of us with leveraged debt have it in the form of a mortgage. How will a collapsing dollar affect me negatively because of my mortgage? If SWFs are bidding up the price of everything from metals to corporations to farmland, all those dollars dumped into the economy will be easier to get and pay down debt, with mortgage-holders gaining outright ownership of property. If my mortgage was denominated in Weimar Marks, I would pay it off today. Likewise, a dollar headed to zero gives an escape hatch to those with mortgaged title to real property.
Jimmy
goldisliberty
03-25-08, 08:45 AM
Hi Jimmy,
Thank you for the welcome and your kind words.
Please let me parse my own words and see if you agree and, in the light of day, see if my words are clearer to both of us with respect to the points your raised.
1) As we experience a growth of M3, as estimated at www.shadowstats.com (http://www.shadowstats.com) by W. John Williams, over 18%, we expect price inflation to follow soon after. The net effect is, and I agree completely with your mortgage example, that you and I pay down our (leveraged) mortgage debt with ever cheaper dollars. This is, absent other factors, and in isolation, a good thing...as long as we both have our income streams uninterrupted or we're cashing out from long-held metals positions or resource shares which have risen spectacularly.
2) Further, looking at 1999 to 2011, we will likely see a drop in home prices from 1,500 ozt gold (252 x 1,500 = 378,000) down to 110 ozt gold (with a gold spike to ~$3,400). Not only will we retire our mortgage debt but we will, I agree with you, have before us many opportunities for which our gold and silver ounces will "spend," quite nicely, thank you.
3) Now, the problem, (and I agree with you I too hope my predictions are overblown) with a dollar going to zero ala Weimar style hyperinflation, is that many if not most socioeconomic systems will break down. This tends to create massive supply disruptions for a just-in-time economy.
4) Further, again, my "DEBT = DOUBT," is meant to suggest that if we raise the federal budget deficit to, say, $ 15 Trillion in a few years, (and we appear headed there and beyond) this will require $4 or $5+ billion per day in foreign investment in our debt. Even if S&P, Moody's or Fitch don't downgrade our debt from AAA, the market vigilantes will see that their bonds are indeed a Marc-Faber-labelled "instrument of confiscation," and demand punishingly high returns if they invest is us at all.
If we have to pay (like the recent Port Authority of NY&NJ bonds which went at) 20%+, our annual debt service will put us...well, let's say global warming is real (I really don't know), that will work out because such a path will put us on the road to becoming a banana republic (again Faber's line) and I understand bananas like hot climates. So much debt will destroy the US Dollar's ability to serve as the world's senior reserve currency. I'm thinking our trade partners don't like being beggared by holding a currency which in 1975 bought a BMW for $3,500 and the equivalent car is now $35,000, to offer just one mundane example.
Without that privilege attached to our dollar, we will no longer have the incredible luxury of just printing cotton/linen banknotes for $ 0.03 a piece and using those in place of the kind of back-breaking 60 hour+ work weeks many parts of the world experience to make things people like us buy.
5) So, my point is that debt combined with leverage is a true double-edged sword. What will be good for you and me, individually, and for a short time, may not work out so well for the whole society. It's similar to the benefit you enjoy by deferring pleasures now to save money. For an individual this works well so one can have a better future; but what if everyone saved and never spent beyond subsistence shelter, food and clothing? That would lead to a contraction, yes, quite a contraction.
6) The other hidden leverage I didn't mention is the baby boomer retirement looming now and over the next few years. The Gen-Xers and younger generations are smaller in number and will be bearing the burden of the pay-as-you-go Medicare and Social Security System. The leverage of boomers-over-gen-xers leads to more money printing and inflation which in turn raises the level of doubt about the dollar.
7) The epiphany about which I wrote might come over a breakfast table when, as one sips one's first cup of coffee one sunny, early Spring morn, one looks over one's $377 gas & electric bill, $ 245 cable tv bill, $335 lawn care bill, while somewhere on Wall Street a primary broker dealer is suddenly selling for between $2 and $ 10 per share when it had traded a little over a year ago for $170+ because the rest of Wall Street had lost faith the Bear could deliver and cashed out when rumors spread that others were cashing out (= DOUBT). The nagging doubts are many. The solutions, alas, few and painful.
8) The retired boomers will receive a retirement check, the bet is it will not buy much at a time when a disproportionately large number of retirees are clamoring for physical therapists, masseuses, dentists, etc. from a much smaller pool of providers, thus bidding up the price in deflated dollars. The world will be a far more uncertain place when not just the lower classes, but the middle and upper middle classes choose between food and pain relief.
In response to your question:
"Most of us with leveraged debt have it in the form of a mortgage. How will a collapsing dollar affect me negatively because of my mortgage?" It will allow, as I wrote above, both of us to retire our debts. That is good and I agree.
It will, however, make the day-to-day reality rather dire. A collapsing dollar equates to frighteningly high petroleum costs. Energy inputs are everywhere in our society's matrix of food, manufacturing, transportation and the time when the world's oil is no longer priced in dollars anywhere will be a much tougher place, a society rubbed coarse by doubt. Hungry people aren't usually happy people. As James Kunstler and Jim Puplava have mentioned, "the three thousand mile long salad bar," will soon be closed.
I do hope I'm wrong about about bad it might get. And I do thank you and the others here at iTulip for all your thoughts. I'm off to get a $5 cup of five cent coffee and confirm a big wire to APMEX.
Best,
goldisliberty
Lukester
03-25-08, 08:59 PM
Goldisliberty -
I would venture a guess that C1ue knows all the factors you list very well, as do most people here at this point, because these questions have all been discussed at length on this website for the past couple of years. C1ue is simply synthesizing a different set of conclusions, and there is certainly room to do so at this time.
In five years we'll see better which interpretation really played out. At present, we only have viewpoints. I'm betting your view and mine are right, but at this time it's still all merely a viewpoint.
goldisliberty,
I'm enjoying your posts.
Looking forward to reading more . . . .:)
Lukester
03-25-08, 10:11 PM
Goldisliberty -
Raja is one of our most stubborn gold skeptics. I think he's getting thoroughly dazzled by your "in praise of gold" story. ;) Got to say I agree with a lot of it too.
Gold will preserve purchasing power, at a minimum, since it is moving inversely to a dollar which is based solely on debt, and there is an upper limit to the amount of debt which can be carried and serviced as a multiple of GDP since the US economy has transitioned from manufacturer/creditor to service-sector/debtor and such an evolution severely reduces the economy's ability to grow itself out of debt.
I posited that gold might preserve purchasing power, but the question was whether gold gives you relative growth vs. the 'average'.
In fact, I would argue that you would get less than purchasing power parity because holding physical gold engenders holding costs as well as transaction fees, while holding a gold ETF exposes you to middleman risk.
In contrast most other investments pay you to hold them, whether it is a stock dividend, interest on a bond, or interest in a checking/money market account.
Your response seems to sum up that gold will gain more than relative purchasing power preservation due to doubt about the system.
But this doubt itself is a temporary phenomenon - unless you truly believe the present system will be replaced by a gold currency.
So once again you arrive back at my hypothesis, that a gold investment is a temporary position requiring an exit strategy.
As for spending gold - again you have the same problem.
Gold only preserves existing purchasing power into future time scales. It does not itself grow in value vs. the average rise in aggregate purchasing power due to population and productivity increase. This is unlike the above mentioned other investments where you are paid for the opportunity cost of your liquidity.
Your argument is that you can use gold to buy assets in the future, assets with earnings potential (of which gold intrinsically has none beyond pure speculation), but this is again a timing argument.
Were anyone possessed of such strong timing capabilities, it really doesn't matter WHAT you invest in.
Gold bugs have been whining about gold for decades; it is nice that they finally are correct, but I still fail to see a reason why gold is intrinsically superior to any other commodity - say food futures or oil.
Many of the money supply/American economy/etc arguments you use can be applied to any other commodity.
As for gold being a store of value - there were plenty of banking/liquidity panics in the American gold era, not least being the Great Depression, but also this litany of panics: Panic of 1797 (http://en.wikipedia.org/wiki/Panic_of_1797) · Panic of 1819 · Panic of 1825 (http://en.wikipedia.org/wiki/Panic_of_1825) · Panic of 1837 (http://en.wikipedia.org/wiki/Panic_of_1837) · Panic of 1847 (http://en.wikipedia.org/wiki/Panic_of_1847) · Panic of 1857 (http://en.wikipedia.org/wiki/Panic_of_1857) · Panic of 1866 (http://en.wikipedia.org/wiki/Panic_of_1866) · Panic of 1873 (http://en.wikipedia.org/wiki/Panic_of_1873) · Panic of 1884 (http://en.wikipedia.org/wiki/Panic_of_1884) · Panic of 1890 (http://en.wikipedia.org/wiki/Panic_of_1890) · Panic of 1893 (http://en.wikipedia.org/wiki/Panic_of_1893) · Panic of 1896 (http://en.wikipedia.org/wiki/Panic_of_1896) · Panic of 1901 (http://en.wikipedia.org/wiki/Panic_of_1901) · Panic of 1907 (http://en.wikipedia.org/wiki/Panic_of_1907) · Panic of 1910-1911 (http://en.wikipedia.org/wiki/Panic_of_1910-1911)
http://en.wikipedia.org/wiki/Panic_of_1819
At face value, it would seem that being on a gold standard leads to MORE panics, rather than less, although perhaps of smaller size.
So again, I ask where is the intrinsic benefit of gold as opposed to any other investment with positive near term gain potential?
jimmygu3
03-26-08, 09:09 PM
C1ue,
I agree with most of your points, but I will address the following:
Gold bugs have been whining about gold for decades; it is nice that they finally are correct, but I still fail to see a reason why gold is intrinsically superior to any other commodity - say food futures or oil.
So again, I ask where is the intrinsic benefit of gold as opposed to any other investment with positive near term gain potential?
Food futures are a paper financial instrument, oil is the same unless you own a refinery. Gold is a store of value that you can physically possess, that won't decompose, that is has held its value over millennia. Because of these unique properties, demand for gold increases in uncertain times. It also reverts to its mean purchasing power over time, and part of the upward ride we have experienced is due to that. It can overshoot in its mean reversion, a la 1980, and an exit strategy for speculative positions is necessary.
I also believe it should only be a portion of a person's portfolio. Yes, many have done well in the last 7 years with 100% PMs, but many did well in the late '90s with 100% tech. I treat PMs in my portfolio like Lucky Charms: 'Part of this balanced breakfast.'
Jimmy
Here's a simple question for you gold bugs:
If gold is a 'natural repository' of monetary value, and gold prices escalate inversely with falling currencies, then how does one make a purchasing power profit?
If theoretically the increase of gold price should equal the decrease of currency purchasing power, there can be no growth beyond normal population/productivity increases, and these values are cross economy so would not gain relative to the 'average'.
Then the gold investment really only preserves purchasing power, it does not grow it.
If the above is not true, then by definition there must be a timing component to a gold investment - as the corollary is that there will be under/overshoot of gold price as compared to currency purchasing power and that this price action is what produces relative purchasing power gains.
In contrast, an investment in a stock is based on the idea that the company for which the stock exists can grow faster than the economy as a whole, hence the stock will disproportionately gain.
How can this same behavior be true for any commodity, especially gold?
The iTulip 2001 piece on gold (http://www.itulip.com/gold.htm) is still a decent read.
touchring
08-21-08, 01:13 AM
Touch, Been thinking about it but GLD gives you similar performance without the volatility.
Greg
Been 5 mths since. SKF shot up to $200, i missed my chance to sell before the SEC banned naked shorts. :mad:
If theoretically the increase of gold price should equal the decrease of currency purchasing power, there can be no growth beyond normal population/productivity increases, and these values are cross economy so would not gain relative to the 'average'.
c1ue, you make a very good point. Over the course of centuries gold’s purchasing power has always been determined by these factors.
Even at times when gold was officially money its purchasing power fluctuated wildly. There had been times when gold lost purchasing power, e.g. when Spain brought gold (and silver) from Latin America to Europe, or when the big fields in North America or South Africa came on line. On the other hand, deflationary episodes, most noticeably the worldwide depression between the 2 world wars, greatly enhanced gold’s purchasing power. It is obvious to me that despite all claims to the contrary gold’s purchasing power is not a constant over time. The 1 oz. = 1 suit example is valid only in terms of centuries or millennia.
One of today’s biggest drivers for gold is negative real interest on government bonds. Gold competes with bonds and equities. With bonds losing purchasing power and the general stock market performing badly it is a good choice for investors today. The risk of wars and currency destruction by reckless governments adds to gold’s appeal. There will come a time when all this will change, a time when it makes sense to sell gold and go back into stocks and bonds, but it is probably still years away.
So yes, buying and selling makes sense even though we’re talking very long term trades here. I think big money always knew this and acted accordingly.
I still fail to see a reason why gold is intrinsically superior to any other commodity - say food futures or oil.
Gold is unique in that very little of it is actually consumed. The amount of gold above ground is relatively stable. It grows only a few percent each year from newly mined gold which is in line with population growth over the long term. Since gold is not used in significant amounts for industrial purposes there can’t be a sudden fall in industrial demand. During times of decreasing economic activity this is a threat to many commodities. Gold as sound money should do well in times of economic upheaval while many commodities won’t.
That being said, certain commodities will likely do better than others. If the supply of a commodity falls faster than its demand the price could still rise in a recession/depression, even against gold. I would think oil is a prime candidate here. From an investment point of view I don’t necessarily see gold superior to every other commodity.
There is one other point though. In a teotwawki-scenario where trading at the exchanges is suspended and access to or control over your investments is limited a buried stash of physical could turn out to be superior to any other investment.
I can recommend Barton Biggs’ “Wealth, War & Wisdom” to anyone who’s interested in the topic.
Digger</O:p
<O:p
That being said, certain commodities will likely do better than others. If the supply of a commodity falls faster than its demand the price could still rise in a recession/depression, even against gold. I would think oil is a prime candidate here. From an investment point of view I don’t necessarily see gold superior to every other commodity. <o></o>
It's hard for me to believe that the supply of any commodity will rise during a recession/depression.
People will be looking for every opportunity to reduce consumption in order to make ends meet, which would mean turning down thermostats, driving less, buying less stuff . . . maybe even eating less. :eek:
touchring
08-21-08, 08:48 AM
the supply of free time will rise. :D
It's hard for me to believe that the supply of any commodity will rise during a recession/depression.
People will be looking for every opportunity to reduce consumption in order to make ends meet, which would mean turning down thermostats, driving less, buying less stuff . . . maybe even eating less. :eek:
It's hard for me to believe that the supply of any commodity will rise during a recession/depression.
People will be looking for every opportunity to reduce consumption in order to make ends meet, which would mean turning down thermostats, driving less, buying less stuff . . . maybe even eating less. :eek:
raja, the key is supply falling faster than demand. I was thinking peak oil with some big fields' current depletion rates of 5% or more. I'm not saying this will definitely happen but if it happens the price of oil could stíll rise further.
raja, the key is supply falling faster than demand. I was thinking peak oil with some big fields' current depletion rates of 5% or more. I'm not saying this will definitely happen but if it happens the price of oil could stíll rise further.
I understand the idea of supply falling faster than demand . . . and my guess is that it won't. FWIW, the demand cut from a global recession/depression would seem far greater and more steep than the gradual reduction of oil supply output. Of course, if other countries somehow manage to escape the economic downturn and keep their energy demand up, that's a different story . . . .
I understand the idea of supply falling faster than demand . . . and my guess is that it won't. FWIW, the demand cut from a global recession/depression would seem far greater and more steep than the gradual reduction of oil supply output. Of course, if other countries somehow manage to escape the economic downturn and keep their energy demand up, that's a different story . . . .
I love this recurring debate. In a world where consumption has been fueled to unbelievable levels (witness the global real estate insanity) by the biggest credit bubble in human history, the demand that will fall the most will be for all those things that require credit to purchase. Housing and cars are the obvious and now prominent examples, but as you look around you will see that just about anything from consumer electronics to dining out is getting hit.
Now how often do you buy gasoline, your home heating fuel, or bread on long term credit? If you are an American perhaps you put all this stuff on your credit card, and then "never" pay it off, defacto making it "long term credit". But most of the rest of the world doesn't use credit of any sort for these sorts of purchases, and therefore a credit induced economic contraction centred in the USA may not result in demand declining to the degree expected from a simple extrapolation of [forced] USA behaviour change.
Even US behaviour in unlikely to change as much as it perhaps should. I am quite certain that the government will continue finding creative means to provide stimulus handouts, and a good portion of that money will be spent on "necessities" like gasoline and bread, instead of another iPod. Could a home heating subsidy cheque be in the cards this winter? Especially if the "compassionate" Obama gets elected, and the Dem majority in both houses is maintained as seems likely.
I love this recurring debate. In a world where consumption has been fueled to unbelievable levels (witness the global real estate insanity) by the biggest credit bubble in human history, the demand that will fall the most will be for all those things that require credit to purchase. Housing and cars are the obvious and now prominent examples, but as you look around you will see that just about anything from consumer electronics to dining out is getting hit.
Now how often do you buy gasoline, your home heating fuel, or bread on long term credit? If you are an American perhaps you put all this stuff on your credit card, and then "never" pay it off, defacto making it "long term credit". But most of the rest of the world doesn't use credit of any sort for these sorts of purchases, and therefore a credit induced economic contraction centred in the USA may not result in demand declining to the degree expected from a simple extrapolation of [forced] USA behaviour change.
Even US behaviour in unlikely to change as much as it perhaps should. I am quite certain that the government will continue finding creative means to provide stimulus handouts, and a good portion of that money will be spent on "necessities" like gasoline and bread, instead of another iPod. Could a home heating subsidy cheque be in the cards this winter? Especially if the "compassionate" Obama gets elected, and the Dem majority in both houses is maintained as seems likely.
If there is a global recession/depression, incomes will be reduced, jobs will be lost and demand will decline . . . regardless of the cause of the crisis.
If J6P normally uses credit to buy a car, and he doesn't buy that car, it directly affects the jobs and incomes of those producing and selling the cars. Fewer jobs and less income results in reduced demand.
If there is a global recession/depression, incomes will be reduced, jobs will be lost and demand will decline . . . regardless of the cause of the crisis.
If J6P normally uses credit to buy a car, and he doesn't buy that car, it directly affects the jobs and incomes of those producing and selling the cars. Fewer jobs and less income results in reduced demand.
1. "Depression" is a very big IF.
2. You don't appear to be willing to differentiate "demand". To you there is only one "global demand". That is the point I was trying to dispute, apparently unsuccessfully. Demand for everything goes up and down with time, but not all at the same time, and not all at the same amplitude, and not all in the same economic regions. A more granular approach to your simple teeter-totter model is what I am advocating. The recession we are going into now is completely unlike any we have experienced since WWII (and maybe even longer than that). The OECD has not been the marginal source of demand, as it has in all previous business cycles in the past 60 or so years. If you do not think that is meaningful, fine. I disagree, and although I cannot precisely understand all the implications of this change, I believe it is significant enough that it will influence the pattern of current global slowdown in ways that may surprise those, apparently including you, who are expecting a typical (dis-inflationary) post-war recession.
GRG,
You have a point about certain things like gasoline being relatively much less flexible.
I do believe even here in the US that fundamental changes in behavior will occur (are occurring) as the price of gasoline looks to stay above $3 gallon for a long long time, but these changes can happen quite fast.
Given that the US population is, in general, much more mobile and flexible than most countries, it is quite possible that these changes might happen in just 3 or 4 years as opposed to decades.
The analogy I would use is the rich vs. poor in the US as well as in general. The rich are extremely flexible in their spending habits; good years vs. bad years can show 10x or 100x difference. The corollary is that the poor cannot scale their spending UP that much either.
The US in general is absolutely rich vs. the rest of the world; it is quite possible that the US' ability to change its spending is similarly disproportionately large compared to the rest of the world.
But this possibility is exarcebated by the fact that the US has constituted something like 25% of overall world demand in the past decade.
If indeed the US does significantly scale back, one assumption has been that the less wealthy nations will scale their spending up.
Certainly some of that will occur, but the question in my mind is whether this is even possible given the normal Pareto principle of distribution, and more particularly where the money will come from since all of these potential 'internal demand' nations are still heavily dependent on outside capital - they don't have a US-style, post WWII 75% of world gold to squander over decades.
They're more like startup businesses: they've got a nice line, but are spending all of their profits building up the business and factory rather than buying Maybachs for the execs and free massages for the employees.
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