Why are gold and silver tanking so rapidly?

[bart]

Re: Another question: Why is gold and silver tanking so rapidely?

Got anything more specific? Saying that "the Dollar is a "share" in USA, Inc" is not quite the same thing as saying the dollar is backed by demand from debtors who are short it.

If anything, the ideas are almost polar opposites. The vague "share in USA, Inc" formulation presumably addresses why the dollar has been as weak as it is (and gold prices as high as they've been). In contrast, the much more concrete "debtor demand" notion explains why the dollar isn't weaker than it is (and gold prices higher than they are).

And then there's this, which is vaguely based on Sinclair's concept:

[whitetower67]

Re: Another question: Why is gold and silver tanking so rapidely?

THEORY making the rounds - Bear Stearns was LONG, LEVERAGED in Gold

---

and this long position's being unwound for cash to meet the losing positions.

Spartacus, could you please provide further info on this -- I'd be interested in hearing more.

[oddlots]

Re: Another question: Why is gold and silver tanking so rapidely?

I'm sort of fascinated that there are so many philosophically negative comments regarding gold in this thread given its home. Hello? Bear Stearns stock price has gone from a high of ~ $170 to $2 in the last year and a half. Modern finance is in almost complete disarray. We have gone from a screaming, euphoric top in 1) structured finance 2) private equity 3) corporate debt 4) real estate 5) government debt to lock-ups in the associated markets for all of these. We have lived through a ~ 20 year period of incredible prosperity where interest rates relentlessly declined and asset prices relentlessly rose while outstanding debt of all kinds ballooned and almost no-one asked how this is possible over the long haul.

The utility of gold in such an environment is simple: it is no-one's liability. It is the one currency without a government attached. It's "utility" should be obvious.

Does this mean I think gold can't be overpriced, can't be a bubble? Of course not. But if you can't explain how the barbarous relic with no utility got to ~$1000 and how and why modern finance - which somehow convinced us that debt at any price and in any volume was a good idea - has been so completely discredited... well you're not even paying any attention.

I'm speechless.

[Spartacus]

Re: Another question: Why is gold and silver tanking so rapidely?

"further" info?

I have no info and gave no info, just reported a plausible sounding rumor.

Blaze's guess is a pretty good one too - Gold falling in sympathy with petroleum

Spartacus, could you please provide further info on this -- I'd be interested in hearing more.

[GRG55]

Re: Another question: Why is gold and silver tanking so rapidely?

so, grg, what is it? the dollar is rising along with equities. commodities are falling along with gold. is the market saying that all the extra demand from ems [for commodities] isn't really there? or that agricultural commodities are going to become much more plentiful? or that the antidollar trade was just a bad dream?

Difficult for me to believe that any fundamentals, much less all the fundamentals, have suddenly changed. This is a financial event only. Precipitated IMO by the climax in pessimism around Bear Stearns. Now that particular exhaustion is behind us, the parabolic overshoot in the US$ down, gold/grains/oil up is correcting. What will be the next investment theme for the long only fund managers as they sell down commodities and worry about a sovereign bond bubble? By process of elimination it would appear to be something in the equity universe. Remember they have career risk holding lots of cash. I am guessing economically sensitive US equities, particularly those that derive most of their income in US Dollars instead of foreign currencies, may attract interest for a short time (months?).

This is the reason I started closing my small short positions more than a week ago, and started peeling back on Swissie and Euros. The Fed, as Bernanke warned us in that infamous speech, is showing remarkable creativity in its actions, and for the short term one may be unwise to bet stongly against it. I am probably early, but the (heavily goosed, election-year) US economic numbers may not be as bad as expectations, and the Euro zone will probably start to disappoint under the weight of still high interest rates, unresolved banking issues, and a steadily imploding housing market spreading across the continent.

The secular trends appear durably in place though.

Your post below, from another thread, says it all.

speak for yourself, fin - what do you think? it appears the markets think they've died and gone to heaven. ben is being canonized - inflation from rising commodities? no longer a problem. rickety, over-leveraged financials? no longer a problem. j6p going broke with his mortgage reset? no longer a problem. happy times are here again, so i guess we skeptics are just plain wrong! for the moment.

[GRG55]

Re: Another question: Why is gold and silver tanking so rapidely?

The Yen still seems to be holding it's own.

The Yen will give up some ground if the US equity markets gain some short term traction.

I sold my Swissie and Euros (rationale above), but am holding the Yen for two reasons: 1) If I am wrong about the short term reversals in the secular trend; and 2) I expect the Asian currencies to take more of the load than the Euro/Swissie in the next phase of the US $ bear market.

[metalman]

Re: Another question: Why is gold and silver tanking so rapidely?

Before I knew better I used to have the same opinion of it. It's hard to get one's head around the area that something is designated as valuable above its functional use. But thank god you and others think of it this way. It's keeping a lid on the price until I can get enough cash from other sources to put into gold. I'd have another $250,000 in my account had I been able to get funds into it last summer instead of adding it gradually as money was freed up.

Have you read any of the reasons given in various books/columns for why gold has value in this situation?

People like to show graphs from 1980-now and point out how poorly it did. But it went from $42/oz to 20 times that in 9 years in the 70's before that. You know, a period of high inflation, lackluster stock market, and high oil prices. Sound familiar?

Each investment class has its time and purpose.

By the way on Survivor tonight they showed huge stones that used to serve as currency in micronesia. They were valuable because someone said they were. Today worthless other than as relics. Yet after 5,000 years gold is still used to store value. So it's not really the same thing as starfish or large stones, is it?

Gold will go up and down. But with the train wreck our economy is, I think it's going up before it goes back down. I certainly find it less speculative than bidding on future income flows of companies headed into at best a deep recession. Especially ones that don't even pay dividends and until they do are purely speculative.

i vote this the best post on this topic of the correction in the gold price. well said.

if anyone here fell asleep in 2006 when gold traded around $650 and awoke today to see it at $919, you'd say "wow!" not "ohmygod what happened?"

i completely don't get all of this hand wringing. gold is a $800 value in my mind with a $119 spec fund premium that may go away at any time.

if it goes below $600 i'd say we're in a volcker deflation and i should have sold at $800 and i will sell some then. but there will be plenty of warning. the dollar will be well above 80, for instance.

[blazespinnaker]

Re: Another question: Why is gold and silver tanking so rapidely?

People who buy gold in large amounts of their portfolios are speculators. It is way too volatile (just look at the history - it's undeniable).

They're like the poker players who go all in because they have a hand that has a 60% chance of winning.

Sure, you *should* win, but their is a good chance that you could also face something called "gambler's ruin". If you bet more than 50% of your portfolio, there is a very good chance (40%) you're going to have a hard time coming back. Even if you bet 20-40% of your savings, there is a chance you could lose two times in a row. (about 1 in 6) .. Do you really want to gamble your life savings on a 1 in 6 chance?

And there might not be another 60% bet that'll come along to help you dig out of your hole.

Going all in, when you bet 5%, even 10% of your total portfolio makes sense. You can do that quite a few times, and it's pretty darn unlikely you'll face ruin before you go beneath your ability to come back on future bets.

Gold is simply far too volatile to bet a large chunk of your portfolio on.


As for 'it's the asset class of the future' ... You need to be pretty god dammned sure. You need proprietary models that are beyond the reach of the public if you plan to beat the market. You won't find advice on a public forum, because anything here is probably already priced in. People like Warren Buffet can beat the market, because they have access to data that is not available to folks like you and I (he gets stats from all his own companies, etc)

[GRG55]

Re: Another question: Why is gold and silver tanking so rapidely?

i vote this the best post on this topic of the correction in the gold price. well said.

if anyone here fell asleep in 2006 when gold traded around $650 and awoke today to see it at $919, you'd say "wow!" not "ohmygod what happened?"

i completely don't get all of this hand wringing. gold is a $800 value in my mind with a $119 spec fund premium that may go away at any time.

if it goes below $600 i'd say we're in a volcker deflation and i should have sold at $800 and i will sell some then. but there will be plenty of warning. the dollar will be well above 80, for instance.

I don't get the handwringing either mm.

Deflation my azz! Volcker himself holding the next FOMC press conference is about the only thing that would frighten me (and bail out Ackerman).

Let's set aside commodities and commodity producers for a moment (what do they know about anything other than moving dirt, right).

Let's ask the customers of the customers of Rio, Vale or BHP about sub-prime, CDOs, Bear Stearns, recession, deflation, financial crisis. What are they going to say? Vale got 71 freakin' percent. No way the Chinese steelmakers aren't going to pass that on to their customers, and no way the customers don't know already know it.

March 22 (Bloomberg) -- ...Rio and rival BHP Billiton Ltd. are demanding an iron ore price gain for annual contracts starting April 1 that would exceed a 71 percent increase won by Cia. Vale do Rio Doce.

The company was prepared to wait for Chinese steelmakers to agree to the higher increase, Sam Walsh, chief executive officer of Rio Tinto Iron Ore, said in Beijing today...

http://www.bloomberg.com/apps/news?p...d=aW1Zhh65S54g

When was the last time we had all the OECD economies slowing down, led by the USA, while oil is at $100, copper at $3.60, lead at $1.20, and aluminum at $1.25. You deflationists and commodity bears out there: run a five year chart on these and then try to convince yourself we've had a commodity price "crash".

As EJ is trying to tell us, everything about this recession will be unfamiliar and disorienting. EJ says the rules are not the same as the past 25 years of FIRE economy. I say the rules are not the same as for any US-led recession since Hilter and Hiroshima.

Gentlemen (and ladies too!), start your engines. The fastest part of this little race will begin soon.

[jk]

Re: Another question: Why is gold and silver tanking so rapidely?

i think your remark, grg, that this is a financial event [not reflective of macroeconomic trends] gives us the most likely explanation of recent market movements. it also fits with the rumors of prime brokers [being leaned on by the sec being leaned on by the fed] reducing credit availability to hedge funds. this would have provided still an additional impetus to their reducing overall exposures to reduce their value at risk in the face of heightened volatility. thus, everything that was working goes into reverse as they sell some of their long positions and buy to cover some of their short positions. this is the same phenomenon that occurred with the quant funds in aug-sept last year - they all lost a lot of money when some of them were forced to unwind positions, pushing the quant-rated "good" stocks down, and the quant-rated "bad" stocks up.

whatever the specific motivations of the buyers and sellers, however, this indeed looks like a countertrend market movement. hussman describes such as "fast, furious, and prone to failure." we've got the fast and furious....

[Finster]

Re: Another question: Why is gold and silver tanking so rapidely?

Good thing I am not a monk, taking oaths in front of God. I once took a vow here on iTulip that I would never, ever take on the Shadow Fed Chairman again. Maybe I am just a slow learner (and why to I get the feeling I am going to regret "rising to the bait" - JN's descriptor)...

All in the good spirit of mutually enlightening and entertaining debate, GRG. You are more than up to it ...

My dear Finster: Your debtor demand argument has one gaping hole:


Your last sentence above is the most correct of the lot. There are millions upon millions of people on earth that are not directly and personally indebted, and...surprise...they also willingly trade their labour, and output for US Dollars. Every single day.

The US Dollar (FRN) is a claim (or share of) the current balance sheet of the United States economy. US T-bills and T-bonds are a claim on the expected future output (future income statement) of the United States economy.

Using Buffett's weighing machine/voting machine analogy, in the short run interest rate differentials and similar factors may influence relative (fiat)currency valuations. In the long run, I am sure you will agree, the relative value of a nation's fiat currency (against other fiat, and against hard) is determined by its economic stature, and that economy's ability to support and sustain such things as its military power, social stability, growth rate, legal system, foreign policy, etc.

Ask someone who is a citizen of, say Singapore as one example, where can they turn to, and which nation will come to their aid in the event of aggression from one of their neighbours? Singapore exists ONLY because the USA is what it is.

The US Dollar has been falling in recent years for a wide range of reasons, not just money printing and sub-prime. The globalization of trade, the creation of the EU, increasing economic interdependence, all served to reduce the world's dependence on the USA for many things compared to 50 years ago, including manufactured goods, markets, military protection.
The Dollar is as strong as it is because the world still needs USA, Inc. The Dollar is not as strong (sought after) as it used to be because the world doesn't need USA, Inc. quite as much as it used to a decade or five ago.

I hope you are not too disappointed to hear that we are in agreement on virtually all of this. ;) My point was twofold: 1) To counter the gold bug argument that currency can only have that value by which it is backed by gold (and deflate the highly overrated Sinclair a bit in the process); and 2) that the forces at work on the value of the USD are not unidirectional, but opposing. In particular, that the ability of the government and banking system to create a virtually unlimited supply is in tension with massive demand from people who desperately need it to service and repay debt.

If there is really anything of substance to quibble over, it might be the mechanism by which economic weakness negatively impacts the value of the currency. It is commonly seen more in the terms in which you put it ... that the dollar derives its strength from being seen as a "share in USA Inc.", and that the "stronger" the economy is, the stronger the dollar should be and vice versa. My take is that while this is usually the effective result, that it works via the intermediary of monetary policy. That if the economy is seen to be weakening, then the government/banking system will increase the supply of money, in turn diluting its value. If this is correct, it is not the "weakening of the economy" that actually causes the weakening of the currency, but the official response to that weakening of the economy. Were it not for this intermediate link, the economy could weaken or strengthen a lot without any obvious effect on the value of the currency.

[blazespinnaker]

Re: Another question: Why is gold and silver tanking so rapidely?

My point was twofold: 1) To counter the gold bug argument that currency can only have that value by which it is backed by gold (and deflate the highly overrated Sinclair a bit in the process); and 2) that the forces at work on the value of the USD are not unidirectional, but opposing. In particular, that the ability of the government and banking system to create a virtually unlimited supply is in tension with massive demand from people who desperately need it to service and repay debt.

Don't forget an exceedingly powerful US military.

UAE has already agreed to continue pegging to the USD .. why? Because the US backs them up with their military. Both Canada (oil sands) and Saudia Arabia will also continue to support the USD with their oil for similar reasons.

Does gold have that kind of military / political clout? No.

[Honzajs119]

Re: Another question: Why is gold and silver tanking so rapidely?

"further" info?

I have no info and gave no info, just reported a plausible sounding rumor.

Blaze's guess is a pretty good one too - Gold falling in sympathy with petroleum

Greg McCoach - emphasis mine

Mining Speculator Hotline

Hotline

This is Greg McCoach with a Mining Speculator Hotline for Friday, March 21, 2008.

Events this past week have prompted me to send out this communication regarding the sudden collapse of the precious metals prices.

Here is what is happening.

The demise of Bear Sterns, which was reported to the public Sunday evening and Monday, has in turn caused their assets to be sold off in masse this week.

On their book of liquid assets was a rather large, long gold position. It is being sold off in order to raise cash to offset their massive losses. The spot prices have been hammered because of this activity. It will be short-term in nature. If you're looking to buy physical precious metals to diversify your portfolio at this point, you are being given an unexpected gift to do so. It won't last long.

Another item in Bear Sterns closet was a massive short-position in the ten year treasury. This off course is being unwound this week, which is making the dollar looking a bit stronger than it really is. Don't be confused by this nonsense. The dollar will soon resume its downward trend.

The fact that Bear Sterns was shorting the dollar to such a degree shows that they were not playing along with the game of the establishment Federal Reserve banking crowd. They have been severely punished by the powers that be.

What brought Bear Sterns to their knees was their own riverboat gambling mentality that not only jeopardized them, but the financial system as a whole. This kind of story is just the beginning of what will be a long list of companies that meet a similar fate. Will the Fed and the citizens of the United States be able to bail out all the financial sewage that is about to be uncovered?

What the Fed is doing is nothing more than sleight of hand trickery to give to itself the assets of Bear Sterns. As I have said before, the Federal Reserve is no more "Federal" that Federal Express. It is a private organization owned and controlled by shareholders, the largest of which is J.P. Morgan Chase. J.P. Morgan Chase in other words is the Federal Reserve, so don't be surprised that they end up with the assets while you and I pay for the debts from the whole mess.

When are people in the United States going to wake up to the ugly realities that are now upon us? This ongoing calamity of financial chaos is going to cause extremely serious consequences to each and every American. Your wealth, security and lifestyle are all at stake as the coming months and years unfold.

You should be doing everything you can to:

1. Avoid, pay down, pay off debt
2. Buy physical precious metals - particularly gold and silver
3. Get money outside the country or at least in a better currency
4. Get away from dollar denominated risk
5. Get a food storage - you can't eat gold or paper dollars!

There are going to be banking failures in the United States and around the world. You should be evaluating the merits of who you bank with. Most of the big banks are in a world of hurt. The smaller, independent banks have not leveraged themselves like most of the big banks have. They may fare better, even though they don't offer all the nice, online services the big banks have.

As far as our junior mining stocks go, they will rebound. Right now they are getting hit yet again as investors like us prepare to write checks for our capital gains taxes. Yes, it appears many of us have waited till the last minute to raise monies to pay for these taxes. Most of us will have to sell something to pay for this.

So, in the next few weeks, expect further weakness as this takes place. The better companies will be hit with this activity as well. Those who have the cash to buy will be given the best opportunity to buy low and sell high.

After tax season however, and as the precious metals prices begin to make very large moves in April taking them to much higher levels, the juniors will finally begin to move again.

My message is to stay the course in your good positions, especially our Top Ten companies that are listed as Strong Buys.

As we move forward in the next six to eight months, I see a time where we will begin to beef up positions in companies that are either in production (such as Excellon, Jinshan, and Capital Gold, or are near-term producers. Companies that are more speculative and do not have any near-term production capacity will be eliminated. The reason for this is that the risk capital markets are going to be getting much tighter moving forward and many juniors who are still in the speculative phase will find it much harder to raise monies moving forward. I will be talking more about this in the coming months.

That is all for now.

Greg

[Nicolasd]

Re: Another question: Why is gold and silver tanking so rapidely?

Don't forget an exceedingly powerful US military.

UAE has already agreed to continue pegging to the USD .. why? Because the US backs them up with their military. Both Canada (oil sands) and Saudia Arabia will also continue to support the USD with their oil for similar reasons.

Does gold have that kind of military / political clout? No.

Canada's oil sands are not sold to the US because of their migthy military. It is part of the NAFTA agrement which freed-up trade between US and Canadian markets. In turn , US has a became our best regular customer , accounting for 75% of our exports.This has enabled Canada to run current account surpluses and budget surpluses while reducing debt to somewhere around 33% of GDP .:p.

Canada, from it geographical position , does not need any type of military protection from potential enemies except perhaps from the US themselves should they become too interested in our ressources :eek:. Who should we ask then to defend ourselves ? China or Russia? :rolleyes:


GRG55 could correct me if I am wrong , but my understanding is that there is a project to run pipe lines from Alberta to the British Columbia coast so we can sell oil to China and other pacific rim countries. Selling of our ressources to the US in USD is not an absolute necessity in today's shrinking global offering .It has been a mutually profitable agrement but it can not be taken for granted.

On a final note, US military is exceedingly powerful ............for conventional wars. It is not so good for guerilla.

[GRG55]

Re: Another question: Why is gold and silver tanking so rapidely?

Canada's oil sands are not sold to the US because of their migthy military. It is part of the NAFTA agrement which freed-up trade between US and Canadian markets. In turn , US has a became our best regular customer , accounting for 75% of our exports.This has enabled Canada to run current account surpluses and budget surpluses while reducing debt to somewhere around 33% of GDP .:p.

Canada, from it geographical position , does not need any type of military protection from potential enemies except perhaps from the US themselves should they become too interested in our ressources :eek:. Who should we ask then to defend ourselves ? China or Russia? :rolleyes:

Canada does depend on the US military for its protection. The armed forces of the two countries have a very high level of operational integration. Geography is not the protection it used to be, and it's actually getting to be a nasty, nasty world out there in some respects. :eek:

GRG55 could correct me if I am wrong , but my understanding is that there is a project to run pipe lines from Alberta to the British Columbia coast so we can sell oil to China and other pacific rim countries. Selling of our ressources to the US in USD is not an absolute necessity in today's shrinking global offering .It has been a mutually profitable agrement but it can not be taken for granted.

There have been some proposals to pipe oil west to tidewater, but I seriously doubt they will ever be built. More likely Canada will expand its coal energy exports to Asia instead. it seems unlikely that North American oil production will ever need to find markets outside the continent - unless our governments buy each of us an electric car, and soon.

There's also a proposal to build an LNG receiving terminal at Kitimat and pipe the natural gas east to connect into the existing export grid to the USA. This project only makes sense because the US has such a dysfunctional regulatory process to get a receiving terminal built on its own coastline. The Mexicans have permitted a terminal in Baja California that will pipe the gas north into California (Gotta keep Lukester's A/C running after all ).

Now that the FIRE-economy is in its terminal cancer phase, I figure Canada should just be patient. The Lower-48 will become the 11th province soon enough. :cool: Alaska will support it - after all they're even more wedded to government handouts than we Canadians. ;)