Why is GOLD NOT rocketed in value?

[johngaltfla]

Re: Why is GOLD NOT rocketed in value?

I would have thought it would?
Mega

Patience grasshopper. The gold and silver bugs will have their day soon. Once the US Dollar index cracks 79 and drops like a rock, you will see all precious metals skyrocket. Sinclair is spot on with his long term analysis of these markets and when the US is burning this fall, you'll see a true flight to safety.

[Spartacus]

Re: Why is GOLD NOT rocketed in value?

hold the phone!

While I agree (with caveats) with everything you wrote this was not my point

My point was, you don't want to be the chiclet-toothed smiling guy from Eric's "desperate optimism of the invested" article, wearing an "I heart Gold" button.

Gold could go "TO TEH NOOOOOM!!" like they write on the boards

but there are good reasons for caution.

[Guest]

Re: Why is GOLD NOT rocketed in value?

Johngaltfla -

Well said.

Notwithstanding the fact Finster suggests Mr. Sinclair's views are best taken with a pinch of salt most of the time - I believe Mr. Sinclair would run circles around 9/10ths of this community in terms of understanding liquidity flows and the futures markets and gold - he's got the chops, and they were hard-won from 30 years experience.

On the topic of Gold:

Why is a collapse in precious metals prices in an initial 'KA' mandated by iTulip's theories?

Why is 'KA" even inevitable? Are people here capable of anticipating any script other than one which follow's iTulip's Ka-Poom theory to the letter? Why all the conformity of thought? Does any real possibility exist events may not follow that script at all? If so, do you have a game plan for it?

Seems many here are uncertain. They don't trust thinking it out for themselves without leaning on someone else's idea. Seems they are relying heavily on guidance from iTulip as to when to proceed taking a decisive inflation hedging stance.

Unless it follows a "ka-poom" script with very minor variations allowed by "orthodoxy", many posts suggest people feel a very hesitant making their own informed bets and executing them with decision.

Mr. Janszen's very astute original idea - Ka-Poom - risks falling into mere dogma here, because too many are hesitant to draw their own autonomous and informed conclusions at this juncture - in August of 2007.

Mr. Janszen came up with "Ka-Poom" by thinking for himself, six or seven years ago. There seem many people here seven years later, who keep hunting around in circles and then coming back to "is it KA yet?", or "is it POOM yet?" while examining the progression of events anxiously from month to month rather than in terms of years.

The script becomes their imperative. On this topic, everyone seems to be leaning heavily on someone else to do their thinking for them. That's what strikes me, from reading all the "are we there yet?" posts.

Can I invest in inflation hedges now, or should I wait? Maybe I'll just put my toe in the water now to test the temperature, then if it's not the right time, I can always pull my toe out.

How independent of thought is this community, when everyone is convinced they must follow the KA-POOM script to the letter? With the collapsing credit markets, and Central Banks panicking globally, the writing seems to be plainly on the wall - and if you all fancy yourselves contrarians, this is the time when the metals are cheap because Joe Public does not yet realize the currencies are beginning to circle around the toilet bowl in preparation for a flush - yet I've never seen such a large number of fence-sitters as among the frequent posters on this website!

One or two openly commiserate at the "folly" of someone who suggests there is wisdom in maintaining long term positions in a few select commodities approaching impending severe competitive international bidding (oil and gold, in case you didn't guess) with superb long term fundamentals right now, while they are cheap and unloved - and riding right through the whole progression of events playing out this summer. They look down upon such action as mere foolishness, because it does not follow the 'Ka-Poom" script - without which they would apparently feel rudderless.

Look at Jim Rogers, or Eric Sprott, or Warren Buffett or any number of other serious investors. Do you see them panicking and selling everything because iTulip's "KA" has arrived?

No - they maybe raised a bit of cash in previous months, but they are not dumping their entire commodity portfolios because of a liquidity crisis - because they are the "strong-hand" investors, and they invest long term. It seems only iTulipers display the frenetic hop-scotch "strategic" investing style which refuses to commit two months past the end of it's nose.

With tsunami's of paper flooding everywhere, I keep reading sober sounding analyses here of the wisdom of piling into treasuries and 'cash'. Yeah - it's wise - for about three months it'll be wise. Then you'll need to time your transition to other assets exquisitely to have made any more profit than those who sat in those long term investments to begin with. The metals markets can move with quite sharp speed, and require a long view, and plenty of calm.

There is a critical distinction between investing and trading. If trading is what you choose to do - then call yourselves traders, not investors. If investing is with a minimum five year term in mind, which asset will outperform - Gold or US Treasuries and Cash?


_____________


By Ned W. Schmidt, CFA, CEBS

August 8, 2007

As U.S. mortgage market infrastructure continues in collapse, era of paper assets is fading into history. Last week's chart showed that Gold has provided higher returns than paper assets over past ten years. Today's graph places situation in a longer term perspective. Era of real assets, personified by Gold, is early in a cyclical upswing. Good part is yet to come. Plotted is ratio of US$Gold to S&P 500.

When rising, Gold is performing better than paper equities. The ratio remains at a multi year high, confirming that the rise of Gold over paper equities continues. Solid line is average for entire 62 years, and provides means for valuing Gold and paper equities. Based on Gold's price, the S&P 500 should be 570, down 60% from current level. Based on S&P 500's current price, Gold should be at $1,700, up 150%.

Reality will be somewhere in between these guesses, but the bias has to go to Gold.

FOMC may have made a wise decision Tuesday, one of their few. Goal of moderate inflation benefits all. Bailing out hedge funds, private equity funds, mortgage brokers, and bond dealers benefits the undeserving. Saving speculators is not part of Federal Reserve's mandate. Risk exists as an attempt will likely be made to fix collapsing U.S. mortgage market.

Better solution would be to rapidly flush down the drain those funds and brokers which have exacerbated mortgage mess. Sooner they are gone, quicker system can recover. Doing what needs to be done, rather than politically fashionable, has rarely been a Federal Reserve policy. Given the Fed's record and continued likelihood of mortgage market bailout, moving out of both North American dollars into Gold is the wisest investment course.

© 2007 Ned W. Schmidt
Editorial Archives

Dollar Set to Crumble from the Sub-Prime Market Fallout

By John Lee Aug 3 2007 4:27PM www.goldmau.com

In our March GoldInsider newsletter I wrote the following piece:

“The Subprime Market and Blatant Market Support:

You must have heard about the subprime loan fallout by now. New Century Financials, America’s second largest sub-prime lender, was delisted so I could not grab the chart, but here is the company’s sister, Novastar, which is not far behind. The pace of the fall out is startling to say the least. These are $billion companies listed on NYSE. So what’s the story all about?



Updated Novastar Chart to July 2007

Non-bank companies like New Century and Novastar provide mortgages to lesser qualified home buyers, charging interest rates of around 10% instead of 6%. Then, they packaged those mortgages and sold them either to institutions or bigger mortgage houses such GM or Countrywide at 9%. Those non-bank mortgage lenders borrow money from banks at a lower rate and lend to consumers at higher rate to make a profit. They rely on credit from banks to operate.

New Century’s mortgage production for 2006 was $60 billion. I would estimate the sub-prime mortgage market to be around 100 to 200 billion. This is nothing to sneeze at considering this is directly related to money creation. With America’s M3 growing at 1 to 2 trillion a year, 200 billion accounts for 10% of money creation and the hole, or the void must be filled. It’s not a trivial issue.

What’s more, while those companies carry their own portfolio of mortgages, they sell most of the mortgages they create. Thus the problem doesn’t resolve itself upon the fallout of the subprime lenders, as many of those faulty mortgages have already passed onto the big lenders and institutions. This is a double whammy to the big lenders as they not only have lost a source of revenue/referral, but the quality of their existing portfolio of loans is in doubt.

The extent of the problem is unknown and I don’t think we will ever know. GM or Countrywide, however, cannot fail and issues with bad debt can be fixed by the Fed. There is surprisingly little disclosure from the banks regarding derivatives or CMO (collateralized mortgage obligations), paving the way for an easy fix by Bernanke, who can simply replace questionable CMO “assets” on GM’s balance sheet with dollars issued by the Fed. Under the disguise of structured products, there is no telling or predicting damage by outsiders.

I am also very surprised by how well the market has held up. Typically with a down leg like that seen on Feb 27, another leg down leg should ensue within three days. This didn’t happen and the Dow is very resilient above 12,000. I watched the tape all day on March 5 and 6 and saw steady buying, which in my view is quite inexplicable – who would be buying while Asia is down some 4% the night before and while the problem could potentially jolt the financial system? What was interesting to me was that as mysterious buying surfaced gold quickly rebounded; perhaps the blatant market support left such distaste in some trader’s minds that they resorted to gold to make a statement?

My view is that the Fed will print their way out of every and all trouble. There is no other way. Subsequently I see an interest rate cut as early as April by as much as 50 basis points to keep the money creation continuing. We have passed the point of no return. There is going to be no Volcker (who raised interest rates to double digits to save the fiat system). This is going to be very bullish for gold.”

August 3rd Update:

Since our last update, 3 mortgage related hedge funds from Bear Sterns totaling $16 billion had collapsed. American Home Mortgage Corp, the second largest non-bank mortgage lender, accounting for 2% of all newly issued mortgages had tanked 80%+ in one week as banks have refused to provide more credit to them.



The Deutsche Industriebank AG German fund involving American mortgages and financial obligations of US$11.07 billion required the government bail out. Australian Macquarie Fortress Investments, worth $873 million, was forced to sell assets to avoid breaching its loan agreements. And Europe’s biggest bank, HSBC, is to write off $11 billion to cover mounting losses in its troubled American offshoot, HSBC Finance Corporation.
Dow closed up 150 points on Wednesday, with American home mortgage issued warning on Tuesday afternoon. We find such market action incongruent and can only conclude that Plunge Protection Team was at work.

The conclusion from this is three fold:

1. The Fed will not be able to raise interest rate. Doing so will cause systemic collapse of all USD debt markets.
2. The Fed will bail out any mortgage problems, amounting between $100 billion to perhaps over $200 billion, estimated by analysts at Financial Times.
3. Plunge Protection Team is likely to guard equity and bond markets with fresh, newly minted liquidity. This will only further reduce the investor appetite towards US dollars. There is now disdainful taste in holding those hot dollar potatoes.

Technically dollar index is set to break down beneath 80 shortly. Gold is antithesis to the dollar, and gold’s breakout over $700/oz is imminent.





John Lee,
CFA john@maucapital.com

[Jim Nickerson]

Re: Why is GOLD NOT rocketed in value?

Pukester,

It will be good if and when you can get over being full of yourself.

[Guest]

Re: Why is GOLD NOT rocketed in value?

Jim -

Why don't you get a grip on your animosity and express your disagreement in a more intelligent manner?

I'm fine with disagreement - it's keeps one alert - but calling people childish names to vent your pique does not enhance your argument.

Really Jim - you're too old to be resorting to that.

[Guest]

Re: Why is GOLD NOT rocketed in value?

Why this bear market will be inflationary :

August 11, 2007 Inflationary Bear Markets by Matt McCracken
PART I: INTRODUCTION TO INFLATIONARY BEAR MARKETS (IBMs) PART II: WHY ARE IBMs SO DANGEROUS? PART III: WHAT CAUSES IBMs? PART IV: SIMILARITIES BETWEEN NOW AND THEN PART V: COULD IT REALLY HAPPEN AGAIN? PART VI: CONCLUSION PART I: INTRODUCTION TO INFLATIONARY BEAR MARKETS (IBMs) When the market is fluctuating near its highs, it can be easy to forget that markets move in cycles rather than lines over time. It's similarly easy to forget how effective corrections and bear markets are in eliminating most or all of late-stage bull market gains. - John Hussman, Ph. D., 6/18/2007 About every 30 to 40 years, the US stock markets experience a rare but significant type of correction that catches Wall Street completely off-guard - an event I call an Inflationary Bear Market (IBM). This type of bear market only occurred three times throughout the 20th century ('07, '37 & '73). Personally, I believe that we are due for another one of these events. In this article, I'll explain why and what you can do to protect yourself and your hard earned savings. But first, I'd like to differentiate between an "Inflationary Bear Market" (IBM) and a "Deflationary Bear Market" (DBM) because they are very different animals. A DBM occurs when there is more stuff than there is cash to buy it, so the price of stuff goes down (i.e. deflation). An IBM occurs when there is more cash than stuff, so the price of stuff goes up (i.e. inflation). DBMs are much more common than IBMs. DBM's are caused by a cyclical slowdown in the economy. During these economic down cycles, income-producing securities such as bonds, Real Estate (REITs) and defensive equity sectors (i.e. Utilities) outperform and may even make you a little money. Securities that generate cash do well because there is a shortage of cash. Companies that make stuff (growth companies) but don't necessarily generate cash (high P/E's) get slammed. Commodities tend to perform poorly during DBMs as a slowing economy reduces demand for the stuff that makes stuff. IBMs are unnatural events caused by the overheating of the economy, typically as a result from government interference of free markets. Preceding an IBM, governments seek to stimulate the economy by creating excessive amounts of money which in turn debases their currency leading to price manipulation which eventually results in severe price imbalances. These price imbalances create inflationary pressures that continue to persist even in the face of a cyclical economic slowdown. These imbalances lead to severe price movements in all asset classes which results in big gains and big losses! The opposite takes place in an IBM as a DBM. Securities that generate cash get slammed because cash is of little value because there is so much of it. Companies that make stuff, commodity companies in particular, do well because there is a shortage of stuff. But even better than buying the companies who make stuff, is buying stuff directly - or at least derivative instruments whose price is directly linked to stuff. The next market cycle is shaping up to be an Inflationary Bear Market (IBM) that will provide a once-in-a-lifetime profit opportunity for those who know how to invest in this type of market environment. Unfortunately, the ensuing IBM will lead to significant losses for the majority of individuals who have implemented a traditional asset allocation of stocks, bonds and REITs. PART II: WHY ARE IBMS SO DANGEROUS? Wall Street is oblivious IBMs because quite frankly most of the folks who were around for the last one are retired, dead or were too young to remember it. They have no point-of-reference when it comes to investing in an IBM. They are oblivious to the events that proceed it and therefore are completely ill-prepared to protect their clients assets during one. IBMs destroy "Safehaven" investments that investors use to protect their clients in a bear market. "Safehavens" are cash generating investments that are genuinely considered safe or defensive. Securities such as US Treasury and AAA bonds, REITs, and dividend paying stocks (i.e. utilities, financials, ect.) Since cash loses value because of its mass production by central banks, securities that generate cash lose value. Governments and their Central banks respond to the problem the same way they always respond to a problem - by providing additional stimulus to the economy which creates more inflation - which caused the problem in the first place - making the problem even worse. The result is a bear market that is far more devastating then ordinary bear markets. Historically, IBMs have seen losses that are more severe and happen faster than DBMs. Here is a rundown of the last three IBMs. Dates Peak Bottom % Decline Duration 1/19/06 - 11/23/07 103 53 48.5% 22 Months 3/6/37 - 3/31/38 194.4 98.9 49.1% 13 Months 1/11/73 - 10/3/74 120.2 62.3 48.2% 21 Months (I used figures from the Dow Jones Industrial Index for the first two and the S&P 500 for the third.) It took 2.5 years for the S&P to lose almost 50% in the early part of this decade. Imagine those same losses in 13, 18 or 21 months. That's what happened the last two times our government let inflation get out of hand. And this only addresses the potential for equity losses. Remember that bonds and other income producing investments will lose as well. In 2000, if you maintained a solid balance of 50% equities and 50% bonds, the appreciation in bonds offset a good portion of your equity losses, but this was not the case in '37 or '73 (I couldn't find Bond data going back to 1907). I estimate that AAA bonds depreciated a half a percent in '37 - but this was coming off the worst deflationary accident our country has ever experienced. From January, 1973 through December, 1974, US Treasuries loss 4.3%. A balanced portfolio of equities and bonds would have depreciated 23% from 1/1/73 through 12/31/74. In order to protect your portfolio from losses, it is paramount that you avoid the sectors that will suffer the most damage. Ironically, these sectors are the ones that most financial advisors steer their clients into as the economy slows down. PART III: WHAT CAUSES IBMS? IBMs occur when there is a confluence of a slowing or stagnating economy coupled with continuing price inflation in commodities and finished goods. A British fellow name Iain McCleod coined the term Stagflation back in the 1960's to describe such a set of circumstances. While stagflation was coined to describe the state of the economy, I refer to the corresponding market correction as an Inflationary Bear Market. As I stated earlier, Bear Markets are typically deflationary. Equity price's depreciate as the economy slows down reducing the demand and prices of commodities and finished goods. This was the case in 2000, 1987, 1968 and 1929. But occasionally (every 30 - 40 years), the government gets so carried away with stimulating the economy; they create a scenario where inflation pressures persist even when the economy slows down. Personally, I do not believe it is an accident that these events are spread out as they are. It takes a generation to wipe out the old guard and bring in fresh, new politicians - new politicians who have no recollection of how destructive inflation can be. These new politicians see an economic slowdown, such as the one in 2000 and respond by stimulating the economy. It's not their fault; it's a Pavlovian response for politicians to mess with free markets. The first mistake they make is to over stimulate the economy. The second mistake is to do it all over again when the economy slows again. It works fine the first time but backfires the second. Historically, IBMs come as an aftershock from a severe deflationary event. In 1929 and 1968, equity markets suffered substantial losses from significant economic slowdowns ('29 being much more severe). In response to these losses, the federal government created both physical and fiscal stimulus to aid in the recovery of the prior economic depression or recession. Rather than let market forces do their job, the government seeks to buy votes by bailing out the economy. And it works for a while - but then it doesn't. By 1937, the "New Deal" had stimulated the economy to the point that price inflation was inevitable - regardless of economic conditions. In the 70's, there were multiple factors contributing to the inflationary picture. The three most significant were: The War effort in Vietnam. Wars aren't cheap and they always lead to inflation. The devaluation of the US$ by President Nixon when he reversed the Bretton Woods international monetary system effectively taking us off the Gold Standard. The massive spike in Oil Prices resulting from the OPEC oil embargo, the peaking of US Oil field production and the Nixon administration's price controls on Oil in 1971. PART IV: SIMILARITIES BETWEEN NOW AND THEN History seldom repeats itself, but if often rhymes. - Mark Twain Looking back over the canvas of our country's economic history, it is hard to ignore the shocking similarities of today's economy and the early 70's. Let's take a candid look at the following themes and see how today's economy rhymes with the early 70's: Rising Commodity prices A slumping housing market Rising Interest Rates Engaged in an pre-emptive, polarizing war Government actively debasing our currency Rising Commodity Prices For the purpose of measuring commodity price inflation, I'll use the CRB index. Since the CRB Index was created in 1956, there have been two periods of significant commodity inflation - the 1970's and today. Here's a table that compares the history of commodity inflation: Four Rate of Change of the CRB Index: Time Frame % Change Average (1960 - Current) 14.1% Average for the 60's (0.5%) Average for the 70's 42.4% Average for the 80's 3.4% Average for the 90's 0.3% Average for the 2000's 74.2% 1/73 - Prior to IBM 36.8% 10/74 - Post IBM 113.6% Here's what I found truly amazing. If you measure Commodity inflation from the inception of the CRB index (1956) throughout the end of the Century (1999), but eliminated the decade of the 1970's, commodity prices actually fell over 31%!!! (Source: Commodity Research Bureau) I have to qualify this statement by saying that there is some substitution bias. For example, Regular Gasoline has been replaced by Unleaded Gasoline. Lead doesn't play such a vital role in our economy anymore; therefore it makes up a smaller percentage of the index today than it did in the 70's. However, when the good people at Reuters change the weightings of the index and make substitutes, they attempt to do it in an equitable fashion so the impact is minimal. In its 50+ year history, the index has only been changed or adjusted nine times. Regardless of the substitution bias, we're only talking about a few percent. The key point is that over the last 50 years, commodity inflation has been all but nil with the exception of the 70's and the current economic cycle. I think that provides the necessary evidence to compare the impact of inflation on equities and bonds from these two periods. A slumping housing market I'm attempting to establish that inflation can coexist with a recession resulting in Stagflation. Since housing is one of the biggest components of our economy and it is especially vulnerable right now, I chose to focus on it. There have only been four periods since 1960 where Housing Permits fell by more than 30% in less than 12 months, which were 1973, 1980, 1990 and 2006. All four episodes ended in recession. I could write a dissertation about the issues surrounding the current housing slump but I'm far too lazy for that sort of thing so I'll just copy a bunch of quotes I've kept from recent articles from the financial media. Homebuilder's confidence Plunges Again in July With interest rates moving higher, a glut of homes sitting unsold, and the problems in the subprime mortgage market worsening, U.S. home builders' confidence in the housing market plunged further in July...The NAHB/Wells Fargo housing market index dropped four points to 24 in July, the lowest since the 20 recorded in January of 1991 and the third lowest reading in the 22-year history of the survey. - CBS marketwatch - 7/17/2007 Sales of existing homes Drop to Slowest Pace in 4 Years Reflecting further housing troubles, sales of existing homes fell in may to the lowest level in four years while the median home price dropped for a record 10th consecutive month. - Associate Press - 6/25/2007 Housing Construction Falls in May Construction of new homes fell in May as the nation's homebuilders continued to struggle with a steep housing slump that has been exacerbated by rising problems with mortgage defaults. The Commerce Department reported Tuesday that construction of new homes and apartments dropped by 2.1% last month, the poorest performance since a huge 13.9% plunge in January. - Associated Press - 6/19/2007 Rising Interest Rates Leading up to and through the 1973 IBM, bond prices fell causing interest rates to rise in order to properly discount the inflationary pressures in the economy. Here's a side-by-side comparison. Date Yield Change in BBPs Date Yield Change in BBPs 12/31/71 5.93% 12/31/05 4.39% 12/31/72 6.36% 43 12/31/06 4.71% 32 06/30/73 6.90% 93 6/30/07 5.03% 64 12/31/73 6.74% 61 12/31/07 ??? 10/30/74 7.90% 193 ??????? ??? Engaged in an pre-emptive, polarizing war. I'll try not to get political, but it's tough to address the issues of government intervention in the markets without talking about government. I'll stay away from any potentially sore subjects and stick to points that can't be argued - at least by rational people. Wars are expensive. Vietnam and The War in Iraq have had a polarizing impact on our country. All the messing around we've done in the Middle East hasn't made us too many friends over there. It's undeniable that we've exhausted a sizable amount of goodwill. Why is this important and how does it play into the stock market and inflation? There are two main reasons why the War on Iraq will impact the markets. First, as I stated above, Wars are expensive. The Congressional Budget Office delivered a report to lawmakers in July that estimated that the total bill for the War in Iraq will be at least $1T. The most liberal estimates at the beginning of the War were at $200B - 20% of the current estimate. We've already spent $500B. We've gone deep in debt financing this War. We can argue all day long about whether the war is worthwhile or not, but we cannot argue that we've accumulated massive amounts of debt paying for it and eventually the debt will need to be paid. The second reason is that the War in Iraq gives the Middle East justification for using the "Oil Weapon". The following is an excerpt from Jim Roger's book Hot Commodities regarding the Oil Embargo of 1973: What most people have forgotten (or never knew) was that the OPEC oil embargo had little to do with high prices. In the early 1970's, long before the war, oil supplies were already tighter than they had been for decades. The huge US oil fields had already begun to decline. Oil producers no longer had the capacity to produce a surplus, while demand for oil was increasing. To stall inflation, the Nixon administration had put price controls on oil in 1971, discouraging investment in oil production or exploration and encouraging Americans to consume more oil...The Cartel's most prolific producer, Saudi Arabia, had resisted "the oil weapon" but, before the war, in September of 1973 the Saudies finally agreed at an OPEC meeting in Vienna to summon the world's major oil companies to confer about a price hike the following month in Vienna. A month before the War broke out, OPEC had already decided to raise prices. All the war did was give OPEC justification for the embargo - which they conveniently used. Something they could point to and say "Look, you did this to yourselves, you foolish Americans." The inconvenient truth is that the "Elephant Fields" in the Middle East are losing production. They have pulled every trick in the book to keep pumping at an unsustainable rate and when the inevitable decline in production takes place, the War in Iraq will allow them to project the blame onto the American's. The next spike in oil prices will be supply driven - not demand driven - they just need a reason to allow it to happen. The following is just some of the evidence of the issues surrounding Middle Eastern Oil production: Saudi Arabia has not allowed a full audit of their largest oil field, Ghawar, since 1975. They haven't permitted any sort of audit of their oil fields since the 90's. OPEC does not police or audit their member countries. OPEC members are allowed to report their accounting numbers as whatever they see as reasonable. This allows OPEC members to engage in one-upping each other by claiming to have more reserves then the others. Many oil market prognosticators including Matt Simmons and T. Boone Pickens are calling for a significant reduction in the capacity of OPEC's largest oil fields. Oil fields tend to lose 4-5% of their productivity each year. By their calculations, the "elephant" oil fields belonging to OPEC members should start seeing a significant decrease in production if they aren't already. Currently, Oil imports have decreased by double digits year-over-year. We will not run out of oil in any of our great-great-grandchildren's lifetimes. Canada has more oil than Saudi Arabia. There is tons of oil off our coasts and in Alaska. The problem is that the "easy" oil is running out. Getting usable oil out of the ground in Canada and other places is expensive and difficult - but it is there when we need it. I don't foresee Oil going to $200/bbl or anything ridiculous, but it could get considerably more expensive in the short-term - which will provide the proper incentive to ramp up drilling efforts aimed at more difficult oil. Government actively debasing our currency: Treasury Department Data going back to 1978 show that every administration except [George W.] Bush's entered the foreign exchange market to buy dollars in an attempt to support the currency. - Bloomberg, July 23, 2007 In August of 1971, President Nixon suspended the convertibility of the US currency into Gold, thus effectively ending the Gold Standard in the US and worldwide. In one fell swoop of his Presidential Pen, he did more to devalue our currency than any other President ever would or could do. During the 90's, the federal government maintained a "strong dollar policy" resulting in the US$ appreciating substantially. The trade weighted US$ index increased approximately 50% from 1993 through 2002. But since the beginning of 2002, the US$ has fallen by almost 1/3 and just broke through its all-time low. Despite rhetoric out of Washington, it is well-known that the US government is seeking to devalue its currency through various means. Paul Samuelson, the 1970 recipient of the Nobel Prize in Economics says, "The early line of the George Bush administration was that we want a strong dollar, [but over time] they began to want a depreciated dollar." (Source, Bloomberg 7/23/07) There is a strong consensus among top investors (Warren Buffett, Marc Faber, Jim Rogers, ect) that the US$ will continue to depreciate and erode its global purchasing power. I'm not wishing to make a statement on the merits of currency debasement. Lots of people feel very strongly one way or the other. I don't. There are plusses and minuses to debasing a nation's currency. Here is what I do know. Our government is seeking to debase our currency - as it did in the 70's. A debased currency is inflationary. I'm not interested in making political statements. I'm solely trying to draw comparisons to today and the stagflation that our economy experienced in the 70's. Part IV Wrap-up: Obviously, there are dissimilarities between today and the 70's. To paraphrase Twain, "History simply rhymes, it doesn't repeat itself." There are a whole host of issues that I could point to that would differentiate what happened in the 70's versus what is happening today. For starters, the bear market in '68 wasn't nearly as bad as the one in 2000 (however, valuations weren't nearly as high in '68 as 2000). We are not enduring a Cold War that could end in Nuclear Holocaust. Oil prices are not likely to go up 500% in just a few months as they did in '73. I'm simply trying to draw comparisons and the closest economic situation to today's, is the 70's. And for that reason, I think it is wise to play the odds and invest in a strategy that would have delivered superior performance during that period. PART V: COULD IT REALLY HAPPEN AGAIN? Investors and ordinary citizens have good reason to worry about a perfect economic storm: [1] A deepening loss of confidence in the dollar leading to higher interest rates, [2] the higher rates bringing a crashing end to a hedge-fund, private equity, and merger binge that has depended heavily on cheap borrowed money; [3] the boom in bait-and-switch mortgages ending in a morning-after of rising defaults and sinking housing values; [4] inflationary pressures in food, oil, and other commodities leading to still higher interest rates - all unsettling stock and credit markets and putting a new squeeze on consumers borrowed to the hilt. - Robert Kuttner - Boston Globe, 7/30/07 While I'm not quite as pessimistic as Mr. Kuttner, I believe a steep sell-off in equities coupled with continuing price inflation is a strong possibility. In fact, I believe that without some sort of seismic shift in the economic landscape, an IBM is inevitable for the following reasons: The Necessity of Inflation Bond and Equity Fundamentals Leverage Ben Bernanke - Deflation Fighter The Necessity of Inflation Why must our government inflate the heck out of the world's economy? Simply because of our twin deficits - Trade and Budget. It's really quite simple. When our economy was booming, we bought a ridiculous amount of oil and gas from the Middle East and a bunch of other crap from Japan, China and other Asian Tigers. In return, they invested in our government's debt instruments (i.e. treasury bonds). Granted, they would have liked to buy other stuff, like ports and energy companies, but we wouldn't let them, so they just kept pouring their imported US$'s into Treasuries. With interest rates already at historic lows, the inflow of US$'s just pushed prices higher and rates lower. How ingenious of us! We stuck those suckers with bonds yielding 3-4% knowing full well we could just inflate the world's economy, rates would rise and then we could invest our money in Eurobonds and other foreign Treasuries yielding 6-7%, pay off the 4% notes and keep the rest. Brilliant! Market Fundamentals Here are just a few of the fundamental issues with Equities, Bonds and Real Estate: The market's valuation is well above its historical average of 14.5 while earnings growth has peaked and set to decline. The market is currently experiencing its fourth longest bull market rally and its second longest stretch without a 10% correction. Yields on every type of income-generating security are at all-time lows (with the exception of some points on the Treasury curve). Utility stocks currently provide their lowest yield since 1930. REITs are 50% below their average historical yield. AAA bond yields are at a 40+ year low. The risk premium on Junk bonds is at its lowest level ever (recently started to correct). As these yields improve and return to more normal levels, investors will exchange over-valued equities for higher-yielding securities. A slowing housing market coupled with the oldest baby boomers now exiting their peak spending years will likely result in a precipitous decline in US consumer spending, which accounts for 70% of the nation's economy. There are long-term fundamental issues with our nation's currency. Weakness in our currency will likely lead to a broad-based sell-off of US assets by foreign investors. Leverage There is an unprecedented amount of leverage in the market. When this leverage is unwound, very bad things will happen! Steve Baily of the Boston Globe says that "Leverage is a wonder on the way up, and frightening on the way down." We have seen begun to see the first signs of the impact of leverage. Practically every day there is news of another hedge fund collapse. The root cause for the demise of these funds was leverage. When a fund is levered up 10:1, as many are, a 10% loss in the underlying assets turns into a 100% loss for the fund. That's how a fund filled with mortgage backed securities that own a claim on real property that has real value can go to ZERO in less than 6 months. The implosion of the Bear Sterns' funds and others will not be an isolated or "contained" event. More of these will come and as investors liquidate their Hedge Fund shares, the velocity of money coming out of the market will be "unprecedented". Back in 2001, if an investor liquidated $1 from a Mutual Fund, the Mutual Fund had to liquidate 97 cents of equity exposure. When investors liquidate Hedge Fund shares, the fund will have to unwind on average $5-$10 worth of equity exposure to redeem $1 worth of fund shares. Ben Bernanke - Deflation Fighter The man who is charged with navigating our economy, Fed Chairman Bernanke, is ultimately ill-suited to deal with stagflation. The Fed chairman earned the nickname "Helicopter" Ben for a speech where he claimed that we could defeat any sort of deflationary threat by figuratively dropping money from a Helicopter to increase spending. Bernanke did his Ph. D. dissertation on The Great Depression and how it could have been prevented through various means of stimulus. Please forgive the sports analogy, but we have an offensive coordinator coaching the defense. His entire adult life has been spent focusing on defeating deflation - not inflation. Bernanke has had it easy thus far but he'll start "waffling" on the topic of inflation as the economy begins to weaken. PART VI: CONCLUSION IBMs lead to sharp price movements as years of growing imbalances become unwound. The sharper the price movements, the greater the opportunity for profit - and loss. Unfortunately, the strategy implemented by the vast majority of Wall Street minions will be on the losing side. My goal is not to make sensation claims to generate fear in the marketplace, rather I seek to provide an objective and realistic view of anticipated market movements based on historical precedence. I am not looking forward to the events that will likely take place during the next cyclical correction - but I do anticipate them. I am not a doom and gloom type person. I have been very bullish and fully invested in equities for 3 ½ of the last 4 years. While many financial advisors were taking a cautious approach in 2003, I had my clients fully invested starting in April after being in cash for all of 2002. It wasn't until last year that I "let my foot off the gas." I don't want to see our economy go through a period of stagflation and the corresponding market correction - but I don't want to see world hunger, corrupt politicians, adulterous Evangelists or another damn episode of American Idol either - but we live in a broken world where sometimes things go wrong. It's naïve to think that occasionally the market won't lose a little bit here or there. Sometimes, those losses are more than just a little bit and the next market cycle is one of those times. I hope I'm wrong for the sake of the millions of boomers who are getting ready to retire - but I'm not willing to bet on it and I don't believe you should either.
Matt McCracken McKinney Avenue Capital

[Jim Nickerson]

Re: Why is GOLD NOT rocketed in value?

Jim -

Why don't you get a grip on your animosity and express your disagreement in a more intelligent manner?

I'm fine with disagreement - it's keeps one alert - but calling people childish names to vent your pique does not enhance your argument.

Really Jim - you're too old to be resorting to that.

Pukester,

It will be good if and when you can get over being full of yourself.

[c1ue]

Re: Why is GOLD NOT rocketed in value?

Lukester,

Interesting article you included.

However, going back to the gold point:

If indeed we are in a redux of 1973, this actually would seem to argue against buying into gold now.

According to the historical gold chartshttp://www.kitco.com/scripts/hist_ch...rly_graphs.plx, although gold did enjoy a runup from 1972 to 1974 from around $50 to around $180, it sat in a declining holding pattern for 5 years after that.

Certainly you can buy and hold for 10 years or longer, but all I've been saying is that it is neither a slam dunk nor necessarily the best possible investment that I see.

[Guest]

Re: Why is GOLD NOT rocketed in value?

Always great to hear your views C1ue ( iTulip's #1 agnostic on precious metals ).

You tell me if the charts of gold and silver look to you like they have upside or down right now - after a one year consolidation pattern?

Extra long consolidations create powerful momentum. It's going to bust out one way or the other. What do the tealeaves suggest on the international level?

How much you want for that shiny barbell you been hanging onto ?

Wouldja give a fellow iTuliper a goodwill break on the price? I'm very needy! :rolleyes:

[spunky]

Re: Why is GOLD NOT rocketed in value?

The Euro wasnt around in the mid 70's


I dont buy the dollar bottom if the UDX hits 79


The buck got a nice pop this week, as the psychological belief of ferners in the fed and the cheesy US gov, eventhough we are forecasting in a fed rate cut which should be dollar bearish.



If I had extra cash to burn I would be buying up some cheap mining stocks, mine though, all goes to forex :cool:

[c1ue]

Re: Why is GOLD NOT rocketed in value?

Always great to hear your views C1ue ( iTulip's #1 agnostic on precious metals ).

Yep, I don't believe in the god of go(l)d :p

You tell me if the charts of gold and silver look to you like they have upside or down right now - after a one year consolidation pattern?

First of all, I'm not a big fan of technical analysis.

I do consult technical charts, but I always keep in mind that the charts are only useful in the absence of market moving events.

Secondly, what time frame are you looking at?

The events I see potentially unfolding are 15 year time scale - and I do use Japan's post bubble deflation as an example.

In this context, for me, as I have said before, it is not clear that gold is the best possible investment.

Thirdly, the reason gold would go up is a loss of faith on the dollar altar, I'm not certain either of the timing or even that the event will occur. This is itself a market moving event which I do not believe technical analysis will be able to accurately predict either in timing or magnitude.

I believe it should, but there are a lot of people in power plus money on the other side. This makes the timing asymptotic - i.e. it will go from 0 to 200mph.

This is just like my view on the yen.

I believe the yen is strongly undervalued and there are many reasons why it should no longer be where it is relative to the dollar, but that collapse has not happened yet.

On the other hand, an investment in Japan which itself has strong potential would have the yen appreciation as an extra benefit.

For example, 3 bedroom apartments within 15 minutes of a relatively inner circle train station are going for around 45M yen. Rent for this same place would be around 300K yen/month. This isn't at my magic 10% rent/price ratio, but it isn't that far.

If I find something that meets my ratio and is in Japan, then in my mind it is a far better investment than gold.

1) I have the rent/price ratio for which I'd buy property almost anywhere.

2) Yen appreciation could net me 20% even if property does not appreciate

3) Property in Japan is not that cheap, but not that expensive. There is a realistic possibility of a resumption of property price appreciation.

[Guest]

Re: Why is GOLD NOT rocketed in value?

C1ue -

Property in a major Japanese city at 10% rent/price ratio sounds superb. I completely agree, if anything for the ten year term, in Japan at the epicenter of Asia growth this would be an audacious and also conservative investment. Probably a fascinating place to live and work too!

I grew up in Italy and I'm following the property markets on the Dalmatian coast (Croatia & Slovenia) with great interest. You can still buy a two bedroom condo apartment in a beautiful medieval coastal towns in Slovenia, maybe 50 - 100 KM from the Italian border and Venice for 60K - 70K Euros. That's also only a moderate day's drive from Vienna!

This will be the French Riviera equivalent for the entire booming eastern half of Europe in ten years. It's a huge value play compared to any other European historic coastal community. The idea of retiring to a beautiful cliffside medieval town only one or two hour's drive from Venice for a measly 100K USD today has me very tempted to sell a bunch of other savings and just do it. I have a premonition I'll be kicking myself if I don't.

I'm willing to bet Slovenian real estate has more upside than even a condo in a major Japanese city at 10% rent/price ratio, but clearly your idea is excellent. Wherever one can find value pockets in the real estate markets, this is one of the classic areas to invest stably for the long term. I envy you speaking the language and having contacts there.

As for technical analysis, it is by far a minor consderation to what I consider compelling about the precious metals right now. Looking at the global, epic problems the currences are facing I find precious metals dirt cheap. A perfect instance of fabulous opportunity hiding in broad daylight. It's nearly invisible to the investing public! The perfect contrarian signal.

[c1ue]

Re: Why is GOLD NOT rocketed in value?

Lukester,

I agree that the southern part of eastern europe has a lot of potential.

I would caution, however, that you look closely before you buy.

I can tell you for firsthand knowledge that a lot of Russian oil money is flowing into real estate in the entire eastern european sector.

I looked into real estate in the Black Sea area, and it was not in the least cheap.

Definitely possible to ride the wave, but timing to get out will be tricky.

This is why I haven't bought real estate in Russia; even though the 1 bedroom $50K apartment I looked at last year just resold for $100K, doesn't mean I like playing that game.

I didn't in the US, and I'm not going to here.

By the way, you don't need to speak Japanese to buy real estate there.

There are over 1M foreigners living in Tokyo, and while certainly you should not expect universal English recognition - on the other hand there are many many services that cater to investors.