Sell Everything

[jk]

Re: Sell Everything

Anyone know about this one?

Shorts junk bonds... AFBIX

i've been in this fund for some time, at some cost. via the fund you are [in arcane ways] short junk bonds. being short, you've got to pay the yield of the bonds you're short, so there is a constant drain. it's like being short a stock that is paying a significant dividend. so of course my purchase was way early. i'm still holding it, expecting spreads to widen. but i'm no longer holding my breath.

[raja]

Re: Sell Everything

I ran across this in another forum . . . they are discussing the Argentine crisis:

The US now imports 80% of their manufactured goods and 70% of the energy products. That's not far off from Argentina. Big difference, however, the US debt is denominated in DOLLARS. All of it. Going forward a devaluation would have to pay Canada, Kuwait, China, etc more for goods, but their debt would be lifted, unlike in Argentina. Still ugly, but big difference.

Second, Argentina is a first-class country, but they are not the world's engine of obese consumption. If the US stops buying what do you think would happen to the world? To Chinese factories, to Saudi oil prices, to European car and tool manufacturers, to Canadan UAW and softwood prices, to Peruvean copper prices? Once you grasp that, imagine if they DID devalue and were competative, what if the US actually rebuilt factories (and how long would that take, ground-up????) and was EXPORTING, who would they export to? Argentina? China? I'm serious here. Even WITH American consumption we have goods overcapacity. Conclusion: there will be no wave of American exports to right the books. The law of large numbers says it cannot happen.

Third, given the above, what will US$ fall AGAINST? Will Europe volunteer to sacrifice Daimler and Bosch to have a nice, strong Euro? Or will China decide they no longer want to export? Or Japan, no longer needing income to pay for their complete lack of domestic oil? Maybe the Rand would like to get a little stronger? I don't think so. If the US$ falls, for quite a while the Euro, Yen, will follow it down. The USDX could hold at .80 Eur 1.40 and watch the prices of reality rise to $200 oil and $2000 gold. The Peso could fall because it's small, and although it made quite a dent in the ship, the world could suffer its collapse. Not so the US, at least not yet.

Not that the US is the center of the world--that's the myopia of economic and social Luddites--but unless you can come up with a new source of debt and consumption, the fall of the US=worldwide depression. That's why no one wants to shake the camel when he has so many straws aboard.

[bart]

Re: Sell Everything

No question that physical gold would have been good during the Argentine crisis . . . but so would investment in a gold ETF, had one existed at the time.

I'm not nearly as certain as you on an ETF, given all the foreign and local money controls - the corralito - and the general attitude of the government, etc..

[raja]

Re: Sell Everything

Grapejelly . . . Regards Bart's "cage" post, he was making a joke about my "Dow at $250" joke. It took me a minute to get it.

So anyway . . . while in the cage , I took Bart's suggestion and did some homework, learning about the Argentine crisis.

What a mess it was!

I think there was a gold bubble or sorts, although I couldn't find anything specific on this.

Inflation was rampant at the time, so bad that the government closed the banks to stop people from exchanging their pesos for dollars. With the peso ravaged by inflation, the price of gold versus the peso must have soared, and I imagine everybody who could exchange pesos for gold was doing so.

Still, bubble or no, I'm not sure how looking at the Argentine situation sheds light on whether investing in gold ETFs is a good idea, or whether it's foolish. If the U.S. went down the same path as Argentina, would the PM ETFs survive?

No question that physical gold would have been good during the Argentine crisis . . . but so would investment in a gold ETF, had one existed at the time. (TIPS would have been good, too, as long as they weren't Argentine TIPS )

[grapejelly]

Re: Sell Everything

Sorry - "cage" as in "get back in your cage". It was a humor attempt.


Personally, I have a custom built one... and EJ approves of it too... ;)

:eek::p.............

[bart]

Re: Sell Everything

:confused: :confused:

Sorry - "cage" as in "get back in your cage". It was a humor attempt.


Personally, I have a custom built one... and EJ approves of it too... ;)

[grapejelly]

Re: Sell Everything

Cage. You. Now. ;)

:confused: :confused:

[bart]

Re: Sell Everything

You expect the Dow to go as low as $250 ??? ;)

Cage. You. Now. ;)

[raja]

Re: Sell Everything

I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks.

You expect the Dow to go as low as $250 ??? ;)

[grapejelly]

Re: Sell Everything

I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks.

[bart]

Re: Sell Everything

Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.

And in the "Just another possible future . . . ." department, it wasn't a bubble in Argentina... and other many countries too.

[raja]

Re: Sell Everything

this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.

Had the gold ETFs existed at that time, would they have run into the problems you are suggesting?
I don't think so . . . but I'm not knowledgable on this subject . . . .

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes?

Well, if there was a gold bubble, and I wanted to cash out at near the top, then they would be paying me in dollars . . . but it would be multiples of what I had originially invested, because gold would have kept up with inflation.
Also, I don't care if the vaults are empty, as long as I get out near the top. They are only going to be looking in the vaults when things start to crash, and I hope to be long gone by then . . . .

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.

It doesn't matter if it's a phony market, as long as I get out before it blows up.

Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.

Or, do you think gold will always retain it's value in relation to the fiat currency? Historically, that hasn't always been the case.

Another thing to worry about: In the last chapter of America's Bubble Economy, the authors postulate that when the new economy arises from the old, gold will be forgotten, and will return to it's commodity value.
Just another possible future . . . .

[grapejelly]

Re: Sell Everything

If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.

I don't see the stock market as ending, but otherwise yes, this is what I see as the end game.

This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

Well maybe. But this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.

What it does is really put a crimp on imports. It makes domestic production much more important. Ultimately it is very healthy because it could be the rebirth of American manufacturing and making things. But it is quite painful.

My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")

Well, I don't agree with this. ETFs are good in fair weather but unproven in really stormy weather.

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes?

Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.

There are deliveries in real futures markets.

[raja]

Re: Sell Everything

Grapejelly,

Thanks for your response . . . .

I now see the root problem of our conflicting ideas about physical gold -- we are operating from different future scenarios, so naturally we come to different conclusions.

Let me see if I understand your scenario . . . .

You believe the whole financial system will seize up. You say, "I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow."

If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.
This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

But here's where we differ . . . .

My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")

You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone. . . . There will be no money flowing to gold ETFs at some point because of massive "failure to deliver".

This is an interesting point . . . but in thinking it through, here's what I came up with . . . .

For the trading system to work, it assumes that when there is someone who wants buy gold, there is also someone at the same time who wants to sell gold. If this were not the case, then a bubble couldn't form, because as you say, liquidity will be gone. Are you saying there will be no gold bubble?
Also, if trading stops, there is still gold in the ETFs vaults. Shareholders own that, and when things got going again, they would have that wealth.

Of course, someone could steal the ETF gold, or there could be fraudulent activity . . . that is a risk.
There is also a risk that if your scenario came about, and you started using your physical gold for purchases, you might get a visit in the night from some bad people who happened to observe or hear about your transaction.

The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper.

Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

[grapejelly]

Re: Sell Everything

Grapejelly,


Here's what worries me about physical gold . . . .

In the event of a gold bubble, I fear the price of gold could rise and fall so rapidly that the physical-gold-trading infrastructure could not handle the load. Physical gold traders could not possibly service the number of trades desired if the world suddenly decided that fiat currencies, or even just the dollar, were headed for the dumps. jk referred to an article which pointed out that even though gold soared to over 800 two decades ago, it plummeted back to the 600s in only a couple of days. I wouldn't want to be holding physical gold in that type of situation . . . .

Physical gold is precisely what I would want to be holding.

If you study the bubble more carefully you will note that the "over 800" time was extremely temporary. But the period when gold rose to $600 and $700 lasted quite a lot longer a time. If you were a gold investor you hopefully would have already taken a position and would be riding the thing up and if you felt things had changed you would have had a good deal of time to sell. Not at the precise top of course. But you would have done extremely well. As many people did.

In a bubble scenario such as the above, I'm assuming that a gold ETF could be traded very easily, and thus would be preferable to physical gold.
Trading is all electronic . . . and there's no phone calling for quotes or shipping required.

There won't be trading in these vehicles when things go crazy. The whole system will seize up.

You see, from your point of view it's paper. But read the prospectus. You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone.

The only point of owning gold is to make a profit on it, right? This means it must go up in value, then be sold. If it can't be sold at a high price, then there's no advantage of having it, and even the risk of a great loss . . . and that's why I think a gold ETF is "safer" than physical gold.

Wrong. The only point of owning physical is to preserve capital. It may or may not be profitable but it will at least keep up with real inflation and then some. And it is not as I call it "on the grid" so there is no counter party risk. It is isolated from the rest of the financial system that will at some point become highly contagious.

However . . . there is one scenario in which is would be desirable to hold gold rather than sell it, and that's a situation of total societal collapse . . . and I give that a very small probability.

I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow.

I anticipate this happening in the next x years. What is x? Can't say. The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper.

So, if we re-frame this discussion from talking about "paper gold" to talking only about a gold ETF, what would you think?
What are the dangers or downsides of a gold ETF. Under what types of scenarios would a gold ETF be subject to default.
During the bubble scenario I painted above, tons of money would be flowing into the gold ETF. Under this circumstance, there would be no fear of default. Of course, when the bubble starts to deflate rapidly, default could happen toward the end. . . but one has to get out "in time" anyway to make a profit . . . .

Wishful thinking. You cannot have both physical and paper. It's one or the other. There will be no money flowing to gold ETFs at some point because of massive "failure to deliver". To me the question is when, not if.