Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

[Chris Coles]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

The phrase "looking similar to" is not the same as "is exactly like."

The year may start off like 2003 yet end like 2008 if the markets determine that the U.S. will run out of credit before the economy becomes self-sustaining.

Then the question becomes; how do we define the word "determine", and, for that matter, what do we keep a constant eye upon that will tell us when that event, (determination), is about to occur?

[goadam1]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

The phrase "looking similar to" is not the same as "is exactly like."

The year may start off like 2003 yet end like 2008 if the markets determine that the U.S. will run out of credit before the economy becomes self-sustaining.

I don't know how I feel about that bet. Gold is the disaster hedge.

What will define self sustaining? The credit crisis and the ensuing recession was a chapter in a long story about disruptive tech, globalization, debt, declining infrastructure investment and on and on. Perma bears are as confused as those who can't figure out why jobs haven't magically returned now that the "crisis" is over.

I feel like you are answering your own sort of question. But why will it be an either or?

[goadam1]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

The phrase "looking similar to" is not the same as "is exactly like."

The year may start off like 2003 yet end like 2008 if the markets determine that the U.S. will run out of credit before the economy becomes self-sustaining.

Why is reflation just a US concern?

[FRED]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

Why is reflation just a US concern?

Because we need a continuous inflow of "excess savings" from "developing countries."

[goadam1]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

Because we need a continuous inflow of "excess savings" from "developing countries."

I understand this part about capital in-flows.

Asset prices can melt up or down in dollar terms in a US credit crisis (depending of the crisis du jour). But the fed isn't the only central bank with a stake in supporting asset prices. We saw liquidity save the day in many currencies and countries during the credit crisis.

[goadam1]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

Because we need a continuous inflow of "excess savings" from "developing countries."

Swap Australia with Japan and the bottom chart is a nice take on "wealthy" countries with too many old people and limited exportable goods. Not too surprising. How much is the problem generational dynamics?

[vinoveri]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

The year may start off like 2003 yet end like 2008 if the markets determine that the U.S. will run out of credit before the economy becomes self-sustaining.

Should this happen, it will be a political event vs economic event, no, creditor nations politically deciding to cease buying US treasuries? This to me seems unlikely to happen on a mass scale, at least for a long while, and even then, it would seem to have to occur in a coordinated fashion, i.e., as long as the politcial machine can keep SOME countries buying our debt, then the game can continue, albeit with dollar devaluation (and concommitant asset inflation, e.g., equities).

What is capital anyway, not real capital, but fiat currency shell game capital?

If the Fed can buy on US treasuries, and other CBs can as well, so if China cuts back it's purchases, JP and UK can increase theirs. What are they really lending us after all? Real capital? No, just recycled dollars. Any CB can print its own currency to any extent, exchange those for $ on the Forex, and then buy treasuries. It boggles the mind .... It may end badly, but only when a coordinated global assault on the U.S. dollar commences, and this may be a long way off.

[metalman]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

rereading the 2006 'what gold bubble?' article i notice the 2nd comment...

akrowne Senior iTuliper

Join Date: Jul 2006 Posts: 172

Re: What Gold Bubble? - Janszen

---

Great piece. The inflation-adjusted historical gold price series is pretty sobering.

i'd forgotten that krowne got his start on itulip. good on him!

[tallone]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

The phrase "looking similar to" is not the same as "is exactly like."

The year may start off like 2003 yet end like 2008 if the markets determine that the U.S. will run out of credit before the economy becomes self-sustaining.

I'm confused. Did EJ mean the year before 2003 (not after,) gold rallied 20% and the S&P fell 26% ? Does this change what he is trying to say?

[tallone]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

"So far the reflation rally of 2009 is looking similar to the reflation rally of 2003 when the now famously asset inflation happy Greenspan Fed launched the housing bubble with 1% interest rates and deregulation of mortgage credit. The S&P shot up 23% that year and gold rallied 17%, the year after gold rallied 20% and the S&P fell 26%.

In the first two years of that post-bubble bust reflation, in 2003 and 2004, the S&P grew 3% net while the gold price went up 27%. The “bubbles in everything” that resulted from reflation policy produced lackluster returns on the S&P, while gold had three strong years between 2005 and In the first two years of that post-bubble bust reflation, in 2003 and 2004, the S&P grew 3% net while the gold price went up 27%."

I'm confused with these paragraphs. In 1st paragragh, did you mean year before 2003, not after. I can't match numbers up in 2nd paragragh, either. I'm a graph newb, so can someone help?

[halcyon]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

Good post. Let me play a little bit of devil's advocate here, not necessarily because I disagree as you'll see, but because, well, it's always good to throw some contra in the mix, even if it's a small one. Also, I don't claim to understand all the possibilities unravelling in the near future, so take this for what it is worth.

Gold considered by some to be a decent indicator of inflation expectations. Regardless of this, it may or may not be a good inflation hedge (depends on circumstance, and how one defines inflation).

In fact, many current hedge fund gods are at least claiming they are buying it as an inflation (expectation) hedge recently/currently (Einhorn, Paulson).

This of course does not mean it's not a (deflationary) collapse-crisis hedge to many others - or even to the same people.

Further, it doesn't mean that gold necessarily retains wealth perfectly (even if better than many others) well over a long period of time:



Now, with those out of the way, let's look at bonds.

Many big hedge fund players are claiming they are shorting later date UST long bonds. This includes Pellegrini, David Einhorn & Julian Robertson, who said in his FT interview in mid October that he thinks this is a better bet than playing gold (paper or physical). Robertson does like gold mining stocks more than gold itself.

The short UST bonds can be considered also as an inflation hedge (interest rates will rise) or as a USD credibility collapse hedge. In either case, as the above hedge fund gurus argue, rates would go up, after-market selling of T-bonds would accelerate and the short would become very profitable, esp. at the level of leverage these guys are more than likely employing for their bet (5x or more).

What is of interest, although I can't find exact timing info on this, is that many of the above hedge fund guys are not buying shorts for the next 6 months, but more like in the 1-2 year horizon. This may be due to the yield curve now, but it also could be due to the fact that they think that the liquidity rally may go on for longer than many expect. Even Jeremy Grantham said two days ago, that he thinks the S&P will drop 'before the end of 2010'. That's still a long time away.

Soros also claims that the fear of inflation will precede inflation itself and may drive up the interest rates and then pushing forward then the inflation itself, causing a new phase in the recession.

Soros also claims that it is unlikely that USD will crash uncontrollably as long as Renminbi is pegged.

Now, above are arguments those of others, not mine. I may or may not agree with them - that is of very little importance. What is of interest that these guys think the game can be played, without an USD total collapse (hyper-inflation, UST credit downgrades) and with good results.

Their preferred tools are: short UST bonds (using many different techniques) and buy gold or even preferably gold miners.

That is, just playing high inflation expectations (like 12% p.a.) and the inevitable tightening coming in bonds. A potential uncontrolled devaluation of USD, possibility of hyper-inflation and a crash of the US is just something that their current moves hedge against (at least partially) as an added side-benefit. But that's not the main motive for their investment.

Also, many say, that as soon as tight monetary policy and sound fiscal policy is reinstated - and that will come at some point one way or the other - then it is likely for the gold to be killed fairly fast.

Take-aways for me in all this are:

- USD cash is dead for now and has been for 7 mo
- gold may work very well here, miners perhaps even better
- biggest potential may be in shorting UST bonds
- the snapback rally in USD is likely some semi-distant time in the future and can hurt gold/UST shorts, if liquidity is removed or markets start to anticipate tightening

I don't claim this is right or that I have fully understood what the guys I mention are after. So again, caveat emptor, ymmv, and all that.

[LargoWinch]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

Their preferred tools are: short UST bonds (using many different techniques) ...

halcyon, I remember FRED saying that shorting UST Bonds is a very risky endeavour since the Gosvernment can always take your money and them some.

Also, many say, that as soon as tight monetary policy and sound fiscal policy is reinstated - and that will come at some point one way or the other - then it is likely for the gold to be killed fairly fast.

How can tight monetary policy be reinstated with that much debt still in the system both private and public?

I believe the name of the game is real negative rates for a long long time all over the world, which is bullish for precious metals.


Just playing the conter contra here. ;)

[Jay]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

How can tight monetary policy be reinstated with that much debt still in the system both private and public?

And with the unemployment picture looking dismal and huge deflationary pressures. They can't. Rock meet hard place. Gold meet moon.

[Quincy K]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

I never bought into the "gold is a hedge against inflation" theory. Gold is a hedge against a currency collapse and devaluation.

But then again, any tangible asset is a hedge against a currency collapse and devaluation including large cap stocks and housing.

[CanuckinTX]

Re: Gold update: Gold over $1000 and still no gold bubble - Eric Janszen

I'm confused. Did EJ mean the year before 2003 (not after,) gold rallied 20% and the S&P fell 26% ? Does this change what he is trying to say?

I think the comma in the quote makes it read differently than what he meant. This is how I read it:

The S&P shot up 23% that year and gold rallied 17% the year after gold rallied 20% and the S&P fell 26%."