Why gold is horrible inflation play and great panic play

[phirang]

There's a fallacy out there that gold preserves wealth during inflation. I disagree: no inherently "useless" commodity preserves wealth during inflation. Gold reacts to panics, not inflation: i must eat every day, and so my food prices will react to inflation. I don't need gold, and so only speculative investment will boost gold prices.

Therefore, I see the coming months as a transition to deflation: as over-consumption comes to an end, so will over-production! Iron-ore, steel, copper, and even the vaunted oil will go down in price. Bernanke is right that, over the long-run(burn thru savings), there can't be inflation without higher wages(save throwing more liabilities onto the Treasury's balance sheet or losing foreign subscribers to the bonar).

That said, we need a few more months of "cushion" to try and salvage the banks before the deflationary spiral begins, and so I will hold gold until I sense the corner has been turned(and also keep an eye out on seignorage issues), and then, cash and shorts will be king.

[FRED]

There's a fallacy out there that gold preserves wealth during inflation. I disagree: no inherently "useless" commodity preserves wealth during inflation. Gold reacts to panics, not inflation: i must eat every day, and so my food prices will react to inflation. I don't need gold, and so only speculative investment will boost gold prices.

Therefore, I see the coming months as a transition to deflation: as over-consumption comes to an end, so will over-production! Iron-ore, steel, copper, and even the vaunted oil will go down in price. Bernanke is right that, over the long-run(burn thru savings), there can't be inflation without higher wages(save throwing more liabilities onto the Treasury's balance sheet or losing foreign subscribers to the bonar).

That said, we need a few more months of "cushion" to try and salvage the banks before the deflationary spiral begins, and so I will hold gold until I sense the corner has been turned(and also keep an eye out on seignorage issues), and then, cash and shorts will be king.

Technically, we can have an inflation spiral without wage inflation. Look around you: we have been experiencing commodity price inflation for years without wage inflation. Politically, we cannot have inflation without wage inflation for an extended period. See: Interview with Dr. Steven Keen: the Future of Debt Deflation (http://www.itulip.com/forums/showthread.php?p=31714#post31714)

[phirang]

Technically, we can have an inflation spiral without wage inflation. Look around you: we have been experiencing commodity price inflation for years without wage inflation. Politically, we cannot have inflation without wage inflation for an extended period. See: Interview with Dr. Steven Keen: the Future of Debt Deflation (http://www.itulip.com/forums/showthread.php?p=31714#post31714)

Yes, but the US has been importing deflation from these subsidy-ridden imports from abroad. That + seignorage = purchasing power.

Now that the subsidy abroad are coming to an end, our ability to import deflation will be reduced and global production will decrease (subsidies require trade surpluses: we're entering a global recession. Surpluses will be lower.) This trend is most certainly deflationary.

Bernanke is a real ideologue about wage-push inflation, and he clearly is looking at China's data etc and sees how to work it out. The real problem though with the wage-push inflation theory lies in the balance sheet of USA Inc: will NPV of liabilites going forward increase or decrease? Will the US maintain seignorage or lose the ability export inflation? How many banks are we willing to lose? How many 401k's can get wiped out?

[metalman]

Yes, but the US has been importing deflation from these subsidy-ridden imports from abroad. That + seignorage = purchasing power.

Now that the subsidy abroad are coming to an end, our ability to import deflation will be reduced and global production will decrease (subsidies require trade surpluses: we're entering a global recession. Surpluses will be lower.) This trend is most certainly deflationary.

Bernanke is a real ideologue about wage-push inflation, and he clearly is looking at China's data etc and sees how to work it out. The real problem though with the wage-push inflation theory lies in the balance sheet of USA Inc: will NPV of liabilites going forward increase or decrease? Will the US maintain seignorage or lose the ability export inflation? How many banks are we willing to lose? How many 401k's can get wiped out?

if gold's a panic play, folks sure have been panicking a while... 7 yrs and counting.

gold is a currency play. period. that said, exchange rates effect inflation... the relationship is indirect.

[c1ue]

Actually I would argue that gold is a GOTH play also - "GO To Hell"

Unlike almost anything else you can name, physical gold is always worth SOMETHING.

Houses burn down. Even if they don't, you must pay upkeep and taxes.

Government and corporations default on bonds.

Companies go bankrupt with their stock and dividends also disappearing.

Commodities require storage costs.

But never in history has a chunk of gold been worth nothing. Maybe less than what it was bought for, but not zero.

[grapejelly]

I disagree with the OP.

Gold prices respond to expectations on the future rate of currency depreciation.

The reason gold stagnated after Volcker's reign was that expectations for future currency depreciation (inflation) were very low.

And importantly there is the all-important concept of time preferences. Time preferences increase when people feel secure enough to invest in the future. Time preferences fall when people begin feeling more and more insecure. Along with that, family sizes decline, people marry later, pessimism reigns in the popular culture, etc.

I think in economic terms, gold is a great store of value during periods when the time preferences are falling. And that is where we are today. Better to have gold in hand instead of some paper certificate (or electronic one) somewhere that is going to be of even less value tomorrow (or may be taken away, or worth zero due to sudden insolvency.)

[raja]

There's a fallacy out there that gold preserves wealth during inflation. I disagree: no inherently "useless" commodity preserves wealth during inflation. Gold reacts to panics, not inflation: i must eat every day, and so my food prices will react to inflation. I don't need gold, and so only speculative investment will boost gold prices.

Although it may be wishful thinking on my part (because I'm hoping that gold will continue to go up for quite a while), I believe you may be mistaken in your analysis . . . .

Gold is not a "useless" commodity.
It's true that we can't eat it or use it for transportation (like oil), but it has a use as a storehouse of wealth . . . and people will attempt to preserve their wealth with sometimes as much vigor as they fill their stomachs. Thus, there is a need for gold just as there is a need for food . . . and until a substitute with similar qualities as gold is discovered and widely used, gold will be in demand in uncertain financial times . . . and when other forms of wealth storage become less desirable, as is happening now with the falling dollar.

[phirang]

Although it may be wishful thinking on my part (because I'm hoping that gold will continue to go up for quite a while), I believe you may be mistaken in your analysis . . . .

Gold is not a "useless" commodity.
It's true that we can't eat it or use it for transportation (like oil), but it has a use as a storehouse of wealth . . . and people will attempt to preserve their wealth with sometimes as much vigor as they fill their stomachs. Thus, there is a need for gold just as there is a need for food . . . and until a substitute with similar qualities as gold is discovered and widely used, gold will be in demand in uncertain financial times . . . and when other forms of wealth storage become less desirable, as is happening now with the falling dollar.

the demand for gold is purely speculative (aside from token uses). therefore, if gold isn't viewed as a good investment, the price tanks.

i see gold as a function that converges far more slowly to inflation than non-discretionary things liek food do: gold can and does over and under shoot inflation because its appeal is so... stochastic!

[c1ue]

I think you are missing part of the point of precious metal investment:

It is not that PMs track inflation. You are correct in this thesis.

But PMs do always retain some value. Even should the absolute present value go down, this number is still positive and said PMs can be exchanged for something else of value.

Think of PMs vs. stocks, bonds, real estate, etc as a stack of dollar bills vs. same amount of dollars in a checking account, a savings account, a CD, or in a loan given to Uncle Fred.

The dollar bills - assuming there is not a total systemic failure - will always be able to buy something. Banks can fail, interest rates can change, but a stack of physical money still can buy something. I am, of course, conveniently ignoring FDIC since there really isn't such a policy governing the value of debt or governance of a company.

There are times when the dollar bills are worth more: in a hyper-deflationary environment, said dollars representing liquidity can buy much more than face value normally.

Similarly there are times when the dollar bills are worth less: in hyper-inflationary environments, the value received is lower than face value.

But there is still some value - even in Weimar Germany, Argentina, etc pretty much the only transactions that occurred at the peak of inflation were cash. No one wants a check or credit card in this case.

So investing in PMs with the idea that inflation will automatically make you richer - that's not clear to me.

But investing in PMs with the idea that the present value stored there will still be worth something - i.e. the 'safest' possible play - that has merit.

Even when gold was 'cheap' at $250/oz, you could still buy things with it. In contrast to the SUV today...

[Lukester]

Ex-monetary metals acting all "squirrely" right when they hit the NYMEX trading band in the early AM. And all on "zero news"? Geez, what a curious coincidence that it's occurring right at that time of the day, eh? Not that we have any particular reason for them to be rising these days...

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[Chris]

Lukester, I posted this on another thread regarding that specific gold event:

Dealers note talk that forced liquidation is underway in the gold market with a hedge fund supposedly being sold out on a margin call. The metal is down $22.50 at $881. Oil has turned down in sympathy. EUR/USD fell into the mid 1.5470s but so far is hanging onto important support around 1.5460/65. Large stops are rumored below that level.
Update: Sources attribute rising margin requirements in energy futures are responsible for the sell-off in gold. They are selling gold to meet fresh requirements in oil, in all likelihood.

[Lukester]

Chris -

I've got a different read - and for a reason. If you check in on this price action daily for 60 days, you'll see that a quite high percentage of those days the two metals are doing this kind of swan dive right when they hit the NYMEX trading window coming out of the London exchanges. Your explanation for this one day is implausible, because they are doing this "squirrel dance" and it's almost always to the downside, precisely at this same time in every 24 hour period, on several different occasions each month. Something about hitting the NYMEX markets just doesn't seem to agree with their "buoyancy". ... :rolleyes:

[Chris]

Chris -

I've got a different read - and for a reason. If you check in on this price action daily for 60 days, you'll see that a quite high percentage of those days the two metals are doing this kind of swan dive right when they hit the NYMEX trading window coming out of the London exchanges. Your explanation for this one day is implausible, because they are doing this "squirrel dance" and it's almost always to the downside, precisely at this same time in every 24 hour period, on several different occasions each month. Something about hitting the NYMEX markets just doesn't seem to agree with their "buoyancy". ... :rolleyes:

Sure but isn't that just a function of the exchange hours? A large sell order sitting on the books overnight would have been seen by anyone will access to that level of market depth before the start of trading. Perhaps there was a panic about the size followed by mass selling? Hasn't the reverse happened in the last few days?