Announcement

Collapse
No announcement yet.

iTulip.com Gold Myths Cheat Sheet

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • iTulip.com Gold Myths Cheat Sheet

    iTulip.com Gold Myths Cheat Sheet

    An eight-year-old bull market in gold has spawned more erroneous theories and timing calls along the way than you can count. We break it down to the Top Eight Myths and recount the consensus opinion on gold since the bull began in 2001.

    Here are eight popular myths about gold that we have collected since 2001 when we put 15% of our portfolio into the yellow metal (with the iTulip counter-argument in parentheses):

    A. Earns no interest. (Gold has out-performed stocks and bonds every year since 2001 in real terms.)

    B. Performs poorly on the long term. (True, unless the currency is in long term decline due to structural economic imbalances and negative interest rates are maintained for extended periods to stimulate economic growth of the imbalanced economy.)

    C. Better inflation hedges exist, such as TIPS. (Inflation is a secondary effect of a weak currency. Gold hedges dollar currency risk directly, inflation risk indirectly; dollar denominated bonds cannot.)

    D. Is money (In order to qualify as money gold must act as both a store of value and means of exchange. We use cigarettes in a prison as an example. You must convert gold to dollars before you can make purchases in the U.S. so gold only meets the first criteria. Gold is a currency. We call it the Fourth Currency because it competes with the dollar, euro, and yen in international currency markets.)

    E. Price is primarily determined by physical demand for gold. (That's backwards. The gold price is primarily determined by global demand for the currency that is used as the unit to measure the gold price.)

    F. The dollar will strengthen relative to other currencies and push down the dollar price of gold. (The dollar's long-term value is determined by international political relationships. Its short-term price is influenced by economic events. The long-term trend is negative because the dollar is a reserve currency nearing the end of its life span. Short-term value fluctuations are irrelevant to non-traders.)

    G. Asset price deflation will result from a collapsing credit bubble. Central banks cannot contain the asset price deflation. It will spill over into wage and commodity prices and crash the price of gold. (Central banks can create infinite money through the process of double entry bookkeeping. Consider, for example, TARP.)

    H. The smart moneys wait for F. and G. to happen before taking a position in gold.
    Below we list the popular consensus about gold that we heard over the years since 2000, prefaced by the cumulative average gold price that year.
    What they said, when they said it, and the gold price that year:
    1. Gold $271: "Gold will continue to decline as it has for 20 years to $200 or lower."

    2. Gold $275: "Gold is certain to continue its decline to $200 or lower due to deflation following the collapse of the stock market bubble." (That was the year we backed up the truck.)

    3. Gold $310: "Despite a modest recent rise due to increased gold demand driven by investors’ fear associated with the 9/11 attacks, gold will soon resume its decline to $200 or lower once the fear subsides."

    4. Gold $363: "The rise in the gold price since 2001 is due to a combination of temporary factors, such as investors’ fears about oil and inflation related to the War in Iraq and a weak dollar. Soon the positive outcome of the war will be clear, the dollar will strengthen, and gold demand will drop off, pushing prices back down toward $200."

    5. Gold $410: "Economic recovery is pushing up gold demand and prices. The Treasury department has restated its strong dollar policy. Gold will soon lose its luster and fall back to $300."

    6. Gold $445: "Gold prices increased only slightly this year over last year, indicating a topping in the gold price. Next year gold prices will fall to $300 or lower."

    7. Gold $604: "The spike in the price of gold this year is due to short term dollar weakness. Look for the dollar to rally and gold to decline back to more normal levels below $400 starting next year."

    8. Gold $695: "Gold traded mostly sideways over the last year, indicating a topping in the gold price. Look for gold to decline to well under $500 next year."

    9. Gold $872: Early in the year, "Gold is participating in a bubble in commodities. When the commodity bubble pops, gold will fall more than 50% along with oil and other commodities." Later in the year: "Gold has crashed to $716 along with stocks and commodities and will continue to decline to $500 next year."

    10. Gold $924: "The gold price reflects widespread concern about the financial system in the wake of the global financial crisis. As the system steadies, the gold price will drift down to under $700."

    What does each popular consensus position about gold have in common? One, wrong every time. Two, every few years the prediction of the following year's price "bottom" was increased in ratchet-like fashion. Waiting to buy based on the consensus has been a mistake eight years running.

    iTulip.com Position: The price of gold began to rise after the foreign debt dependent and asset price inflation-dependent U.S. FIRE Economy went into decline in 2001. The steady fall in exchange rate value of the dollar and rising dollar gold prices reflects the decline of the FIRE Economy.

    We hold gold as long as the U.S. economy remains structured as a finance-based economy, particularly while government policy attempts to resurrect it. We sell gold only after the U.S. economy and dollar-centric global monetary system is restructured and the U.S. is able to grow through saving and investment with positive real interest rates.

    We continue to view all short-term pricing factors, such as those we have heard from time to time since 2001, as noise until the global economy and monetary system restructures.

    Download PDF version.

    Read on google docs.

    iTulip Select: The Investment Thesis for the Next Cycle™
    __________________________________________________

    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

    Copyright iTulip, Inc. 1998 - 2009 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 09-11-09, 08:52 AM.
    Ed.

  • #2
    Re: iTulip.com Gold Myths Cheat Sheet

    Nice.
    I thought somewhere last year iTulip recommended 30% gold holdings up from 15%. Did this change (yet)?
    Adeptus
    Warning: Network Engineer talking economics!

    Comment


    • #3
      Re: iTulip.com Gold Myths Cheat Sheet

      Originally posted by Adeptus View Post
      Nice.
      I thought somewhere last year iTulip recommended 30% gold holdings up from 15%. Did this change (yet)?
      Adeptus
      I believe iTulip originally recommended allocating 15% of one's liquid net worth in gold in 2001, when they first recommended buying gold. The percentage was upped last year to 30% in light of the increased risk of a currency crisis.

      For people who jumped in on EJ's original call to buy gold in 2001 (alas, I was not one of them), very little to no additional purchasing of gold was required last year due to the tripling of their initial investment. For late-comers and new-comers, a 30% "rump of gold" is the currently recommended allocation.

      Comment


      • #4
        Re: iTulip.com Gold Myths Cheat Sheet

        D. Is money (In order to qualify as money gold must act as both a store of value and means of exchange. We use cigarettes in a prison as an example. You must convert gold to dollars before you can make purchases in the U.S. so gold only meets the first criteria. Gold is a currency. We call it the Fourth Currency because it competes with the dollar, euro, and yen in international currency markets.)
        I recall this being stated before (many times) at iTulip, so I have been remiss in not expressing my confusion with this sooner.

        I see three classifications that you consider applying to gold here:
        1. store of value
        2. means of exchange
        3. currency

        Well, I think it's three. I personally tend to take "currency" and "means of exchange" as synonyms. But what you write makes no sense that way, so I suppose you have some third meaning for "currency."

        What do you mean by "currency?"

        From your big hint regarding dollars, euros, yen and gold, I take it "currency" means for you "a currency exchange medium" (as opposed to a "goods and services exchange medium", which dollars, euros, and yen are, but gold is not usually.)

        So the following rewrite rewrite of these classifications suggests itself to me:
        1. store of value (e.g. land, infrastructure, long lasting goods such as a well built house, precious metals)
        2. goods and services exchange medium (e.g. political fiat currencies, such as dollars, euros and yen)
        3. political fiat currency exchange medium (e.g. gold and perhaps for a while oil)

        This rewrite suggests that fiat currencies can be exchanged with each other and with gold, whereas usually only fiat currencies, not gold, are exchanged for goods and services.

        Let my state my confusion in a more pungent fashion. It seems that you are stating each of:
        1. Gold is a currency, the fourth currency.
        2. Currencies are used as a means of exchange.
        3. Gold is not used as a means of exchange.

        The above three statements are logically inconsistent. So I must be misreading you. Is the above suggested rewrite any clearer or correct, or is it missing the point somehow?

        The above clarification, if such it be, leads in my view to the proper structure of the international monetary system. Multiple national or regional (e.g. Euro) currencies are managed separately by their respective nations or regional organizations. They exchange against a gold backed medium in a properly regulated world market. Normal day-to-day affairs continue to be conducted in the currency of ones nation or region. If one nation, say the U.S., prints too much of its currency, say the dollar, then the dollar exchange rate will weaken against the world gold backed medium. This will directly impact only those who have chosen to enter into contracts or trades that cross dollars and some other currency, or cross dollars and the world gold backed medium.
        Most folks are good; a few aren't.

        Comment


        • #5
          Re: iTulip.com Gold Myths Cheat Sheet

          Originally posted by ThePythonicCow View Post
          I recall this being stated before (many times) at iTulip, so I have been remiss in not expressing my confusion with this sooner.

          I see three classifications that you consider applying to gold here:
          1. store of value
          2. means of exchange
          3. currency

          Well, I think it's three. I personally tend to take "currency" and "means of exchange" as synonyms. But what you write makes no sense that way, so I suppose you have some third meaning for "currency."

          What do you mean by "currency?"

          From your big hint regarding dollars, euros, yen and gold, I take it "currency" means for you "a currency exchange medium" (as opposed to a "goods and services exchange medium", which dollars, euros, and yen are, but gold is not usually.)

          So the following rewrite rewrite of these classifications suggests itself to me:
          1. store of value (e.g. land, infrastructure, long lasting goods such as a well built house, precious metals)
          2. goods and services exchange medium (e.g. political fiat currencies, such as dollars, euros and yen)
          3. political fiat currency exchange medium (e.g. gold and perhaps for a while oil)

          This rewrite suggests that fiat currencies can be exchanged with each other and with gold, whereas usually only fiat currencies, not gold, are exchanged for goods and services.

          Let my state my confusion in a more pungent fashion. It seems that you are stating each of:
          1. Gold is a currency, the fourth currency.
          2. Currencies are used as a means of exchange.
          3. Gold is not used as a means of exchange.

          The above three statements are logically inconsistent. So I must be misreading you. Is the above suggested rewrite any clearer or correct, or is it missing the point somehow?

          The above clarification, if such it be, leads in my view to the proper structure of the international monetary system. Multiple national or regional (e.g. Euro) currencies are managed separately by their respective nations or regional organizations. They exchange against a gold backed medium in a properly regulated world market. Normal day-to-day affairs continue to be conducted in the currency of ones nation or region. If one nation, say the U.S., prints too much of its currency, say the dollar, then the dollar exchange rate will weaken against the world gold backed medium. This will directly impact only those who have chosen to enter into contracts or trades that cross dollars and some other currency, or cross dollars and the world gold backed medium.
          The confusion stems from the concepts of domestic versus international currency.

          Go to the local all night service station in the U.S. and try to buy 40 gallons of gasoline for your 2006 Hummer H1 Alpha with:

          1. A 1/10th ounce Gold Eagle coin*
          2. EU70 or JPY9,324

          You will get no love. However, bring 10 oz. of gold to any national bank anywhere in the world and walk away with 10 oz. worth of local currency. No one will ever say no.

          * Buy price on a 1/10 ounce Gold Eagle coin today is $108. Average 1 gal. gasoline is $2.59. Think about that! You can buy 40 gallons of precious, non-renewable refined oil with a spec of ever-lasting gold so small you store it in a contact lens case.

          Thanks for your help with the edits earlier.
          Last edited by FRED; 09-11-09, 12:01 AM.
          Ed.

          Comment


          • #6
            Re: iTulip.com Gold Myths Cheat Sheet

            Originally posted by FRED View Post
            The confusion stems from the concepts of domestic versus international currency.
            Is a "domestic currency" what I described as a

            goods and services exchange medium (e.g. political fiat currencies, such as dollars, euros and yen)
            and an "international currency" what I described as a

            political fiat currency exchange medium (e.g. gold and perhaps for a while oil)
            In which case, perhaps this distinction needs to be called out .. or as is more likely the case, it already has been called out and some kind soul (FRED, metalman, or whomever) will end up pointing me to material.

            P.S. -- Everywhere I look so far, the word "currency" is used without distinction between these two kinds (domestic and international) of currency. This leads to such a plainly contradictory statements as the three I listed in my earlier post and impedes comprehension.
            Most folks are good; a few aren't.

            Comment


            • #7
              Re: iTulip.com Gold Myths Cheat Sheet

              Just wish I had a bunch of gold filled contact lens cases.

              Comment


              • #8
                Re: iTulip.com Gold Myths Cheat Sheet

                Originally posted by FRED View Post
                However, bring 10 oz. of gold to any national bank anywhere in the world and walk away with 10 oz. worth of local currency. No one will ever say no.
                That's nice to know. Would you name some European, South American, and Asian banks.

                I'm not aware of any banks in the US. Would you name some, also?

                Or, are you referring to bullion banks, such as Kitco.

                Comment


                • #9
                  Re: iTulip.com Gold Myths Cheat Sheet

                  "The confusion stems from the concepts of domestic versus international currency."

                  "money" and "currency" could be more exactly written "domestic money" and "international currency"?

                  Gold was always the international trade currency, whereas domestic moneys were usually silver & copper.

                  Sweden as most of Europe I suppose minted gold primarily in the form of the international trade coin "ducat". These would not normally circulate at all within Sweden, where the silver mark and later other silver coinage was used.
                  Justice is the cornerstone of the world

                  Comment


                  • #10
                    Re: iTulip.com Gold Myths Cheat Sheet

                    Originally posted by atlantafox View Post
                    That's nice to know. Would you name some European, South American, and Asian banks.

                    I'm not aware of any banks in the US. Would you name some, also?

                    Or, are you referring to bullion banks, such as Kitco.
                    Is Deutsche Bank still a European bank ?

                    http://tools.deutsche-bank.de/cc/loc...do?country=USA

                    Comment


                    • #11
                      Re: iTulip.com Gold Myths Cheat Sheet

                      okay, so a little off-topic but related, what is iTulip position on possible short
                      term strengthening of dollar before a final slide into the dustbin of history?

                      Comment


                      • #12
                        Re: iTulip.com Gold Myths Cheat Sheet



                        okay, so a little off-topic but related, what is iTulip position on possible short
                        term strengthening of dollar before a final slide into the dustbin of history?
                        $USD bull will start on 2009-09-14 at NOON New York time !

                        Comment


                        • #13
                          Re: iTulip.com Gold Myths Cheat Sheet

                          Comment


                          • #14
                            Re: iTulip.com Gold Myths Cheat Sheet

                            OK, the suspense is killing me - what's the eighth myth?

                            A-G is seven, but the lead-in promised eight. :-)

                            Or is this one of those funny self-referential lists where the 8th myth is that there are 8 myths?

                            Comment


                            • #15
                              Re: iTulip.com Gold Myths Cheat Sheet

                              you were that kid alwasys looking for the penny in the corner of the round room, huh?

                              Comment

                              Working...
                              X