The Fate of Treasuries in the Upcoming Ka-Poomification

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Your view on the Dow being a fraction of US stocks is of course correct... and now ask yourself how representative it is on a longer term basis of all US stocks.

I believe you may have missed my point.

I was talking about the total amount of global investment money in stocks, bonds and derivatives . . . and, as I said, the Dow Jones Index comprises a very small portion of that amount. The point I was making is to compare worldwide investment money and stocks of above ground gold.

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

I believe you may have missed my point.

I was talking about the total amount of global investment money in stocks, bonds and derivatives . . . and, as I said, the Dow Jones Index comprises a very small portion of that amount. The point I was making is to compare worldwide investment money and stocks of above ground gold.

I don't believe I missed your point, and also believe that you missed mine.

Do the same comparison with the DJW if you like, and you'll see roughly the exact same picture. Then also consider that gold went up over 20x in the last major bull, and also that there is more worldwide investment money today.

And then consider how far the Nasdaq went up, and stock certs are much easier to print than metals are to mine or agricultural commodities are to grow, etc.

Overall, if you don't want to buy or invest in precious or other metals even for a small portion of your portfolio, then don't... but it seems to me that you're not aware of the full factual picture.

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Do the same comparison with the DJW if you like, and you'll see roughly the exact same picture. Then also consider that gold went up over 20x in the last major bull, and also that there is more worldwide investment money today.

Bart, I think we are definitely misunderstanding each other, or maybe it's just me misunderstanding you.
In any event, I would like to clear it up, if you're amenable to that . . . .

I agree that the DJW shows "roughly the exact picture" as the DJI. I agree that "gold went up over 20x in the last major bull". Also, we are agreement that there is definitely more worldwide investment money today.
But I still don't think any of that contradicts my point, in fact it helps it, which leads me to believe that I am just miscommunicating. So please let me make my point one more time with the goal of straightening this out.

Grapejelly directed me to a chart showing how much gold is required to buy the DJ Index. I don't dispute that chart. But my point is that there is a whole lot more investment money in the world than the DJI, so if only a fraction of that global investment wealth was put into gold, it would drive the prices up to astronomical levels. For example, if 1/4 of all the stocks, bonds and derivatives were allocated to gold, it would come to $23,000 per ounce.
I think we can agree on this, it's just a matter of math.

Now . . . I am not saying anything about "how representative it (DJI) is on a longer term basis of all US stocks."
But I am saying when one attempts to calculate mathematically the amount of world investment money, the Dow Jones stocks are a fraction of the US stock market, which itself is only a part of all the world's stocks markets. Furthermore, as a class, stocks are only 6% of the global stock, bond and derivitve universe.

That's the only point I was making about Grapejelly's chart . . . really just a mathematical one.

I also draw conclusions from that point, which I have elaborated on in this thread, and I would be eager to discuss those with you. I am here to learn, and I would be happy to have my ideas improved upon or overturned . . . .

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Bart, I think we are definitely misunderstanding each other, or maybe it's just me misunderstanding you.
In any event, I would like to clear it up, if you're amenable to that . . . .

I agree that the DJW shows "roughly the exact picture" as the DJI. I agree that "gold went up over 20x in the last major bull". Also, we are agreement that there is definitely more worldwide investment money today.
But I still don't think any of that contradicts my point, in fact it helps it, which leads me to believe that I am just miscommunicating. So please let me make my point one more time with the goal of straightening this out.

Grapejelly directed me to a chart showing how much gold is required to buy the DJ Index. I don't dispute that chart. But my point is that there is a whole lot more investment money in the world than the DJI, so if only a fraction of that global investment wealth was put into gold, it would drive the prices up to astronomical levels. For example, if 1/4 of all the stocks, bonds and derivatives were allocated to gold, it would come to $23,000 per ounce.
I think we can agree on this, it's just a matter of math.

Now . . . I am not saying anything about "how representative it (DJI) is on a longer term basis of all US stocks."
But I am saying when one attempts to calculate mathematically the amount of world investment money, the Dow Jones stocks are a fraction of the US stock market, which itself is only a part of all the world's stocks markets. Furthermore, as a class, stocks are only 6% of the global stock, bond and derivitve universe.

That's the only point I was making about Grapejelly's chart . . . really just a mathematical one.

I also draw conclusions from that point, which I have elaborated on in this thread, and I would be eager to discuss those with you. I am here to learn, and I would be happy to have my ideas improved upon or overturned . . . .

Cool & thanks - we were apparently talking past each other at least to some degree.

I think I'm at a point of not understanding what your overall points or questions are, other than agreeing that if even a small fraction of the overall investment money went into precious metals, they'd explode upwards.

I expect it - my own personal minimum long range gold target is $3,500 currently and my silver target is $130, and I think they're conservative targets if anything... and they do assume minimal gov't control/interference too. A 20x of the $250 gold bottom is $5,000 too.

[grapejelly]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

I think raja is saying that gold isn't good as a store of wealth because it's so rare that a price bubble can easily develop in it, drive it up high, and then people realizing that they can't possibly own much of it, thus resulting in it crashing.

None of this makes sense from a supply and demand angle, however. As the price goes up, momentum investors will pile in, true.

But in the longer run, if and when paper starts declining in value due to some crash or unforeseen event, people always look to flee into gold and silver.

In the long, long run, gold and silver won't be good stores of wealth because they pay no dividends. But in this part of the long cycle, they should be superb stores of wealth, and in fact bonds should be horrific should past patterns at least rhyme.

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

I think raja is saying that gold isn't good as a store of wealth because it's so rare that a price bubble can easily develop in it, drive it up high, and then people realizing that they can't possibly own much of it, thus resulting in it crashing.
...

Crashes have happened in every market over time... but here's what happened in Argentina since 2001 and the peso devaluation. My point is that gold and metals respond to more than just supply & demand or manias.

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

. . . bonds should be horrific should past patterns at least rhyme.

Depends on the type of bond . . . .

TIPS and I-Bonds are a different animal than corporate or other Treasury bonds in that they are indexed to inflation. Even if the CPI is manipulated, I wouldn't expect the performance of TIPS and I-Bonds to be "horrific". As I discussed in more detail in an earlier post, TIPS would keep up with inflation 99.28%.

[jk]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Depends on the type of bond . . . .

TIPS and I-Bonds are a different animal than corporate or other Treasury bonds in that they are indexed to inflation. Even if the CPI is manipulated, I wouldn't expect the performance of TIPS and I-Bonds to be "horrific". As I discussed in more detail in an earlier post, TIPS would keep up with inflation 99.28%.

if the dollar dives, tips and ibonds will not come close to holding global value

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

My point is that gold and metals respond to more than just supply & demand or manias.

I see your point . . . and I agree that gold and metals respond to more than just supply and demand or manias.

However, if we are talking about a gold bubble -- which I am -- then, by definition, there is mania.

Also, I am talking about a global bubble, so the issue of supply is very real. If $92 trillion in global investment money (the amount used in the scenario from my post above) goes chasing 4 billion ounces of gold, we are going to have a rapid and dramatic rise in the price of gold. Are people going to pay $23,000 or $90,000 for an ounce of gold? I say no. My fear, then, is that the bubble will rise to astronomical heights so rapidly that people will quickly realize that it is a bubble and gold will plummet just as rapidly. In the case of a global financial meldown, could global communications and worldwide computer investing make the bubble grow and die in a matter of weeks? I don't know, but it's something I worry about.

To address your example of Argentina, gold went up was because the value of the peso went down due to overworked government printing presses. But the value of gold worldwide did not soar as a result because the amount of Argentinian investment wealth moved into gold was negligible.

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

if the dollar dives, tips and ibonds will not come close to holding global value

jk, you don't say why "TIPS and I-Bonds will not come close to holding global value" . . . so I'm forced to guess . . . .

1. You are thinking that TIPS are denominated in dollars, so if dollars lose their value, TIPS will lose their value?
But because TIPS are indexed to inflation, they won't lose value. If inflation results in bread going to $100 a loaf, that change will be reflected in the CPI, and the value of TIPS will go up accordingly.

2. Or . . . maybe you are thinking that the CPI is manipulated by the government, so TIPS will really not keep pace with inflation. But this point was brought up by another poster, and I showed how TIPS would keep up with inflation 99.28%, which I grant is a loss, but is far from "not coming close to holding global value."

3. Or . . . maybe you are thinking something else, in which case I wish you would share your ideas . . . although I recognize you are under no obligation to educate me ;)

[jk]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

I see your point . . . and I agree that gold and metals respond to more than just supply and demand or manias.

However, if we are talking about a gold bubble -- which I am -- then, by definition, there is mania.

Also, I am talking about a global bubble, so the issue of supply is very real. If $92 trillion in global investment money (the amount used in the scenario from my post above) goes chasing 4 billion ounces of gold, we are going to have a rapid and dramatic rise in the price of gold. Are people going to pay $23,000 or $90,000 for an ounce of gold? I say no. My fear, then, is that the bubble will rise to astronomical heights so rapidly that people will quickly realize that it is a bubble and gold will plummet just as rapidly. In the case of a global financial meldown, could global communications and worldwide computer investing make the bubble grow and die in a matter of weeks? I don't know, but it's something I worry about.

To address your example of Argentina, gold went up was because the value of the peso went down due to overworked government printing presses. But the value of gold worldwide did not soar as a result because the amount of Argentinian investment wealth moved into gold was negligible.

raja, your scenario is both too rapid and too extreme to be useful in planning. could gold go to $90,000? yes, but it would require a weimar level of inflation. could gold go to $5,000? that would require some significant inflation, but it is within the realm of my own imagination, at least. could the gold/dow ratio go back to 1, like it was in 1980? yes, at about 3-6000 i imagine, or maybe at 15,000. whatever the peak, the run-up won't be instantaneous. look at last february's parabolic run. you could have gotten out at 650, 680, 710. the fall was faster, of course. look back at the 70's-1980 run. you had time to get out at pretty good prices both before and after the peak. it was hard to catch the exact top, but that's to be expected. calm down. everything takes far more time than you expect. thus keynes famous remark about the market's ability to stay irrational longer than you can stay solvent. you can't invest on the assumption that even a correct analysis of fundamentals will be instantaneously rewarded. but similarly, there is latitude in making both your purchases and sales as long as you don't demand that you get the exact bottoms and tops.

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

jk,

Thank you for your (more detailed) reply.
This gives me something to chew on . . . .

could gold go to $90,000? yes, but it would require a weimar level of inflation.

But runnaway inflation is not only reason that gold could soar.
What about a collapse in the global derivatives market, which spreads to the stock and bond markets. Where will people put their rapidly plummeting assets? Gold.

look at last february's parabolic run. you could have gotten out at 650, 680, 710. the fall was faster, of course. look back at the 70's-1980 run.

I agree with those examples, within their context.
But I'm talking about a global financial crisis, not a blip in the Chinese stock market. And global finance doesn't work the same now as it did in the 70s and 80. Now we have internet trading and worldwide markets, so events can unfold at a very fast pace.

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Also, I am talking about a global bubble, so the issue of supply is very real. If $92 trillion in global investment money (the amount used in the scenario from my post above) goes chasing 4 billion ounces of gold, we are going to have a rapid and dramatic rise in the price of gold. Are people going to pay $23,000 or $90,000 for an ounce of gold? I say no.

Then I guess you won't buy it over a certain point regardless of whether it goes to $1,000 or $100,000 and will miss out on any mania action or hyperinflation/chronic inflation action, currency devaluation effects, etc.?

To address your example of Argentina, gold went up was because the value of the peso went down due to overworked government printing presses. But the value of gold worldwide did not soar as a result because the amount of Argentinian investment wealth moved into gold was negligible.

Of course, but those who did move in to gold actually gained purchasing power and as I recall that's much of your goal.

Do check and see what happened to the gold price in British pounds from the '20s through the '40s and into '70s etc.

Do also note that, with few exceptions, gold is moving up rather smartly worldwide now too, and for over a year. And printing presses are not running slow worldwide either.

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

jk, you don't say why "TIPS and I-Bonds will not come close to holding global value" . . . so I'm forced to guess . . . .

1. You are thinking that TIPS are denominated in dollars, so if dollars lose their value, TIPS will lose their value?
But because TIPS are indexed to inflation, they won't lose value. If inflation results in bread going to $100 a loaf, that change will be reflected in the CPI, and the value of TIPS will go up accordingly.

2. Or . . . maybe you are thinking that the CPI is manipulated by the government, so TIPS will really not keep pace with inflation. But this point was brought up by another poster, and I showed how TIPS would keep up with inflation 99.28%, which I grant is a loss, but is far from "not coming close to holding global value."

3. Or . . . maybe you are thinking something else, in which case I wish you would share your ideas . . . although I recognize you are under no obligation to educate me ;)

I imagine jk will jump in, but my answer is all of the above and then some. The CPI is such a poor measure of consumer prices that it's hardly worth discussing, and the difference between inflation and even a correct consumer price index is also not small, to put it mildly.

You're also missing a major factor - TIPS (or anything similar that is denominated in dollars) will lose **global** purchasing power as the dollar loses relative value.

[jk]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

as bart said, the key word in my sentence was GLOBAL. still, raja, i think i understand your concern: you are picturing a systemic crisis leading to rapid deflation with a rush for cash. and in such a scenario, tbonds and tips will certainly benefit.

now you need to assign a probability to this scenario, and than probabilities to multiple alternative scenarios, and think about how you want to deploy your resources. the fact that one scenario shows gold losing value does not imply that you want no gold, unless you think that particular scenario has a probability of 1.