As many posters may have followed My Gold comments on Nouriel’s blog, I decided to keep this discussion going, but move it to a stationary location, so we can better debate the macro views of gold. In addition I’d like to point out that while the Professor states that gold is a “safety valve” for countries… I believe this DIRECTLY CONTRADICTS his theory of the fact that there is: “NO SAFE HAVEN”. (if gold was truly a “safety valve” then it WOULD BE a “safe haven”!)
As a preamble, I would just like to remind people that my views and opinions are based on my unique style of research and intuition. I do not have any vested interest for or against gold. At the same time, I stress that you should diversify your reading sources on this topic there are very good/valid contrarian views to mine. (but be aware that talking heads like Schiff and Rogers do not necessarily offer very unbiased/impartial opinion. I can’t say this enough… CONSIDER YOUR SOURCE!!! Gold players want the value of their asset to be high. I do not trust anyone’s opinion on gold if they own it. Ownership poisons the well of balanced opinion.) Bubbles? Gold is sitting on a 200% increase in 10 year span! Its value is 100% above its peak value in 2005 Did the market or any foreign governments experience any disturbances during this time??? In the past year where we’ve witnessed bubbles bursting what happened to gold? Likewise, in a year that was filled with apocalyptic financial news that brought fear to all time highs… what did the volume of gold trading look like? In particular…
When Bear went under… What did Gold Volume do? When Lehman went under… What did Gold Volume do? When FNMA/FRE went under… What did Gold Volume do? When AIG went under … What did Gold Volume do? When Obama was elected… What did Gold Volume do?
Yet January 09 brought on some changes? Why now? Was our situation better in September? Was our situation better in October? …November??? I ask again… Why now?
“Past performance is not indicative of future gains”
If a popping of the real estate bubble has taught us anything… it should be that many of our historic pricing views are no long practical in the modern day real world. How long ago were people still saying: House always go up? For that same reason I have a warning for all the Goldbugs out there… (and all of those others whom are heavily invested/ing in gold) For your sake, I hope I am wrong! …but I can’t help but think there is a major “adjustment” just around the corner for gold.
Yes! I am aware of it’s hedge value… Yes! I am aware of its upside and downside, and its currency weight etc… I think I’ve done “my homework” here? (…and yes, I’ve tried very hard to open myself to its dogmatic value, even though I dislike this commodity due to it “technically” being a “useless commodity” because it is nothing more than a poor conductor of electricity.)
>From the perspective of where I believe “FLOW” will go, (and not my opinion of dislike) this is what I have to say:
I can’t help but think that the power players of the gold market are selling industry fear to increase the value of the asset. (as goldbugs will buy on fear) Done in coordination with the strength of the dollar versus the depressed level of equities, distressed debt, Corp Bds, Munis, etc… I believe the big players (manipulators – market makers/movers) are doing this before stimulus devalues the dollar more. One would think this should inflate the dollar denominated Gold… but net selling, coupled with the fact that gold can’t be used as a backstop/collateral, and the fact that in a limited credit environment, credit will not flow to commodity in a true downturn. Instead, the dollar devaluation (which is a positive for gold) will be pushed against a net sell (which is a negative for gold) for the players in this market to get out at a price that doesn’t leave them catching a falling knife.
So the net sellers devalue gold and inflation of increased stimulus adds to it. Then fear helps get the sales through to buyers at elevated/stable prices. That added credit, of still strong dollars, then buys assets that are at depressed values and are insured through backstopping from the government.
If I was a power player in this market… It would be my move! (this is my OODA loop theorizing) So I believe this to be a potential flow. (until we see gold opened up as a common collateralized security, I doubt it will have any ability to avoid manipulations) If you believe in tightening credit, (or less corporate discretionary credit = money to hedgies that might be more willing to play this market at an impact level) or you believe the upcoming stimulus packages will devalue the dollar, or that the issuance of massive amounts of new USD denominated debt (T’s Corp Bds, Munis, etc…) …then you do not want to own a USD asset that is still trading at 100-200% above its 5 year moving average.
If you look back on volume in the oil market, May08 broke the trend of “light” trading to millions in volume. This lasted for 3 months, and went alongside a doubling of the price of oil. (which I don’t perceive to be “useless”) Then, the floor fell out on oil dropping over 70% from its peak value and at the same time… volume skyrocketed.
Well, In very similar fashion, I believe gold broke its volume trend. (there have been realized fears in the market for almost a year now, since the collapse of BS, LEH, and financial difficulties of ML, FNMA, Freddie, AIG, etc (as well as similar situations overseas) there has been a generalized SYSTEMIC FEAR for quite some time now… yet… none of it led to the same volume that we currently see in the past month.
Now, some may “try to argue” that this is fear turning to reality… …but that is debunked in proof that every time the ACTUAL MARKET STARTS CRASHING DOWN… gold fell hard. (Which flies in the face of its purpose as a hedge?!?!?) This is why in a true meltdown (or credit freeze) its value could potentially be worthless. There’s something else going on here and holders of gold should be on alert! Either they will see a large manipulated upswing, or a 50% drop from current levels! …and if it’s the latter, there will not be any bailout packages for holders of gold.
If I were a betting man… I would take $500 gold over $1,000 gold at high odds! (with a potentially scary $400 floor.)
Inflations effect on Gold:
A thought to take into consideration is this… The US Government is a major holder of gold. It is well “hedged” here amongst the international financial community. …but in a catastrophic downturn… The Government would not want a flight to safety to be gold. It is in the interest of our government to keep Treasuries and US Dollars as the “flight to quality”… and for this reason you will never see an insurable backstop of gold, and continually see a powerful government keep the commodity in check as a “flight to quality”.
So regardless of the potential impact of inflation, I see vested interests in check.
In a recent article I wrote: http://www.rgemonitor.com/globalmacro-monitor/254883/merry_x-mess__happy_2000000000009 I delve into inflation possibilities and other various market calls. For example:
“My predictions on the “unwind” leads us down a road of eventual inflation, as currency intervention on massive scales is required. If debt is not reduced, and cash injection approaches are increased, the inflation will increase at a rate comparable to the socialized costs expectancies that have been added through default. (Somewhere between 3% and hyper, but closer to 3%) I see Asian banks (preferably Japanese, since I don’t believe in Ch-Enron as long as free speech (whistle blowing) does not exist) being rewarded for tighter reserve requirements, and expect a higher safety level for wealth retention there. I expect Japanese cash to start buying (or possibly leasing) valuable real estate, and loaning to growth oriented corporations, etc… in an attempt to put cash inflow/appreciation to better investment use. (this will level out when commodity/resources prices “level up” so that once again puts the low resource country at an equilibrium.) I believe transparency issues may arise in the EU, where Fractional Reserve Banking may have expanded (to irresponsible levels) or been controlled (prudently) by different country banks at such various levels, that it may put a level of stress on the EURO that it has not yet experienced. I have confidence in their ability to work through this, but it will come at a cost to the currency. …and finally, I see oil in and around the $40-$45 range as the new expected price. Deflation will press on and drive prices lower short term, (I “guess” $29 is absolute low) but ultimately, inflation and alternative prices will settle on the $40 mark. I believe the oil nation cash will eventually make the necessary move of marrying their commodity and their cash to the green revolution.” (On the upside of an inflationary run… I have $70 pegged as a likely oil price. )
All the best, Miss America
p.s. For any investors that have followed my calls, I hope I continue to provide beneficial views. If you are lucky enough to profit from my calls… all I ask is that you pass some good along to others. PAY IT FORWARD! (there are a lot of people hurting out there that need help. In addition… I hope you do not have blind faith in my calls? I’d suggest reading other views and draw conclusions that leave you comfortable with your moves.)