Why is Gold Going Up?

[FRED]

Re: Why is Gold Going Up?

When you say "devoloped" does that mean changed? Meaning that what you said back in 2001 is not true now?
In my opinion, a thesis that has changed was not a correct thesis.

The concept of a "financed-based economy" is Bill Gross's term, a term that he has not used since 2009 when he came to realize the political implications of the term that he was unaware of at the time he coined it. He didn't know the country was run by a financial oligarchy and that he was part of it. Now he does!

Michael Hudson allowed us to identify the FIRE Economy and it's role in the perversion of the American economy since the 1980s. in 2001 when we bought gold we only knew that that system that was producing asset bubbles was broken. Now we know how and why.

We are always learning.

And . . . what is the cause of the US$ Treasury system breakdown? Is it not a failure of the politicians to control the greed of the Financial Elite? Yardini said, "“Gold is the asset of the last resort when investors have lost confidence in governments and fear they’re out of control. Since I don’t see governments getting their act together and moving in the right direction, gold will go higher.”

It seems that you agree with Yardini . . . while at the same time saying, "Yardini didn't know anything about Y2K in 1999, didn't know anything about gold from 2001 to 2010, and doesn't know anything about gold now."

This is confusing.

In 2001 we jumped into a time machine to appear in 2011 to read Yardini's words of wisdom. Then we went back in time to steal his brilliant insight! That's why we bought gold for these reasons in 2001 and he did or didn't't -- we don't know how much gold he actually has -- in 2010 or whenever.

Yes, we agree with him!

[LargoWinch]

Re: Why is Gold Going Up?

I used to enjoy your clear and level headed posts.

Same here. Perhaps raja is now trying to "score points" in these pages in retaliation of iTulip's bashing of Mish which he is a supporter of?

[GRG55]

Re: Why is Gold Going Up?

...This is confusing.

From The Economist:

Super QE, or beggar-thy-neighbour

Sep 6th 2011, 13:43

CURRENCIES don't tend to move 7-8% in one day in the modern era but the Swiss National Bank has achieved the feat today. It announced a "minimum" exchange rate target of 1.20 francs per euro ( here is the announcement) and the markets fell into line. In reality, the target rate is a ceiling, not a floor; if you turn the cross-rate round, the Swiss want the franc to be worth no more than 83.33 euro cents.

As was remarked in a previous column, the Swiss franc has been rivalling gold as a safe haven and the authorities are worrying, as the statement shows, about the deflationary threat. So it will create Swiss francs to buy "unlimited" amounts of foreign exchange...

...Other countries have used QE without explicitly aiming to drive down their exchange rates, although the Bank of England has broadly welcomed the decline in the pound and QE enthusiasts cite the decline in the dollar as an example of the success of the Fed's policy...

...It is all a bit reminiscent of the 1930s. when countries went off the gold standard, they gained a competitive march on their rivals, increasing the pressure for such countries to leave the standard as well. If one country devalued by 10%, the next might do so by 15%. QE may similarly begat more QE.

David Bloom of HSBC has a further reflection on the consequences.

We have long argued that the Norwegian krone is a better safe haven play than the Swiss franc. In every respect, the krone has superior qualities. However, the market will now fear that if it pushes the krone (or the Singapore dollar) too far. there will be push back from the various central banks. The market must fear this will cause a sharp escalation in the currency wars. The only safe haven that will not do QE, put in capital controls, or complain about its strength is gold. It must emerge as the winner.

...

[lektrode]

Re: Why is Gold Going Up?

....In 2001 we jumped into a time machine to appear in 2011 to read Yardini's words of wisdom. Then we went back in time to steal his brilliant insight! That's why we bought gold for these reasons in 2001 and he did or didn't't -- we don't know how much gold he actually has -- in 2010 or whenever.

Yes, we agree with him!

whoa! REALLY? eye _knew_ it!
you guys have perfected the science of alchemy!
where IS the entry hatch for that baby?
one could really fix a lot of problems (not to mention settle the score with a number of women i've encountered.. ;)

[*T*]

Re: Why is Gold Going Up?

Do you think the japanese yen could perform the safe haven role that the CHF was doing?

No, not while the BoJ prints.

[*T*]

Re: Why is Gold Going Up?

Mega's thoughts:-

I Expect China or rather her population to play a MEGA part in this drama, what i wonder is if China does what Schiff sez & decouple from the West her currany (RED) will climb quickly in price. Now the BIG question, as the RMB climbs will the people of China SUDDENLY see a "Fall" in the value of Gold, thus they suddenly DUMP Gold & go to RMB?

If so then that sudden movement could cause a World CRASH in Gold as Mega amounts suddenly flood the market?

Mike

Michael Pettis had a good post on balance of payments explaining why he thinks China will not prosper for long after the west explodes. I see China as the mirror-bubble to the US.

[jk]

Re: Why is Gold Going Up?

From The Economist:

Super QE, or beggar-thy-neighbour

Sep 6th 2011, 13:43

CURRENCIES don't tend to move 7-8% in one day in the modern era but the Swiss National Bank has achieved the feat today. It announced a "minimum" exchange rate target of 1.20 francs per euro ( here is the announcement) and the markets fell into line. In reality, the target rate is a ceiling, not a floor; if you turn the cross-rate round, the Swiss want the franc to be worth no more than 83.33 euro cents.

As was remarked in a previous column, the Swiss franc has been rivalling gold as a safe haven and the authorities are worrying, as the statement shows, about the deflationary threat. So it will create Swiss francs to buy "unlimited" amounts of foreign exchange...

...Other countries have used QE without explicitly aiming to drive down their exchange rates, although the Bank of England has broadly welcomed the decline in the pound and QE enthusiasts cite the decline in the dollar as an example of the success of the Fed's policy...

...It is all a bit reminiscent of the 1930s. when countries went off the gold standard, they gained a competitive march on their rivals, increasing the pressure for such countries to leave the standard as well. If one country devalued by 10%, the next might do so by 15%. QE may similarly begat more QE.

David Bloom of HSBC has a further reflection on the consequences.

We have long argued that the Norwegian krone is a better safe haven play than the Swiss franc. In every respect, the krone has superior qualities. However, the market will now fear that if it pushes the krone (or the Singapore dollar) too far. there will be push back from the various central banks. The market must fear this will cause a sharp escalation in the currency wars. The only safe haven that will not do QE, put in capital controls, or complain about its strength is gold. It must emerge as the winner.

...

in other threads we've started discussing the idea that it will be the u.s. which will put in capital controls/"exchange" controls vis a vis gold.

[raja]

Re: Why is Gold Going Up?

Perhaps raja is now trying to "score points" in these pages in retaliation of iTulip's bashing of Mish which he is a supporter of?

Hmmmm . . . .

According to some, it appears that my original question about gold price behavior is not worthy of reasoned debate, as I am accused of nursing a grudge against iTulip for an investment call gone wrong . . . or seeking retaliation because I am a "Mish supporter".

Fine.
But for those who are interested in more than ad hominum, let me restate the question:

My understanding of the iTulip thesis has been that there will be a so-called KA period, in which the economy will go downhill in a disinflationary fashion. In response, the Politicians will attempt to keep everything afloat by "printing" money, resulting in the dollar becoming devalued. Gold will go up because of dollar devaluation (or fear of it) as people seek to invest in non-depreciating assets. This latter stage is called POOM.

FRED used different words to say the same thing: "US$ Treasury system will break down, as US$ economic leadership breaks down". That is, the Treasury system breaks down because borrowers have no faith in the value of the dollar. Their faith is lost due to unrestrained money creation by failed leaders and the resulting devaluation of the dollar.

What I and other commentators like Yardini are suggesting is something different -- the gold price is NOT going up because of government reflation attempts, but because investors fear a global economic crash manifesting in several ways, such as breakup of the Eurozone, bank failures, Chinese out-of-control inflation, demand collapse, GDP stagnation . . . and, yes, one factor also is fear of possible future fiat devaluation.

Thus, it seems to me that the iTulip thesis is incomplete, and ignores many other factors behind the rise of gold's price.

I will respond to those who want to discuss this on a factual/theoretical basis, but I will not respond to ad hominum attacks or reputation-based arguments, e.g., "So and so was wrong ten years ago, so he must be wrong now."

[jk]

Re: Why is Gold Going Up?

What I and other commentators like Yardini are suggesting is something different -- the gold price is NOT going up because of government reflation attempts, but because investors fear a global economic crash manifesting in several ways, such as breakup of the Eurozone, bank failures, Chinese out-of-control inflation, demand collapse, GDP stagnation . . . and, yes, one factor also is fear of possible future fiat devaluation.

raja, you need to explain why those other factors would lead to a higher gold price in the absence of a fear of devaluation. it is not self-evident that "breakup of the Eurozone, bank failures, Chinese out-of-control inflation, demand collapse, GDP stagnation" would make people want to buy gold, except for the fear of currency devaluation. please elucidate.

[jiimbergin]

Re: Why is Gold Going Up?

raja, you need to explain why those other factors would lead to a higher gold price in the absence of a fear of devaluation. it is not self-evident that "breakup of the Eurozone, bank failures, Chinese out-of-control inflation, demand collapse, GDP stagnation" would make people want to buy gold, except for the fear of currency devaluation. please elucidate.

+1

[GRG55]

Re: Why is Gold Going Up?

+1

+2.

raja: If you haven't noticed Wall Street "analysts", like Yardeni, make their living from "explaining" to their audiences why stocks, bonds, currencies, commodities and other "stuff" goes up and goes down. Every day Bubblevision and the so-called financial press are filled with these pundits grasping at one reason or another as to why something is rising or falling in price. As you will have noticed in my old posts I am particularly fond of poking fun at those that try to explain and forecast the movements in the oil price.

If you are still listening to them, perhaps the noise is to loud you're not able to listen to E.J...

[Munger]

Re: Why is Gold Going Up?

raja, you need to explain why those other factors would lead to a higher gold price in the absence of a fear of devaluation. it is not self-evident that "breakup of the Eurozone, bank failures, Chinese out-of-control inflation, demand collapse, GDP stagnation" would make people want to buy gold, except for the fear of currency devaluation. please elucidate.

Krugman offered an interesting analysis on the price of Gold today. (Queue up the anti-Krugman ranters ...)

Treasuries, TIPS, and Gold (Wonkish)
(Yes, it’s 4:30 AM where I am. I found myself wide awake, thinking about gold prices. You got a problem with that?)

In assessing economic prospects since the financial crisis of 2008, there have been two kinds of people: people who divide people into two kinds and people who don’t inflationistas and deflationistas. The inflationistas look at budget deficits and monetary base, and see severe inflation and soaring interest rates as the obvious outcome; the deflationistas say, hey, we’re in a liquidity trap, so monetary base is sterile and budget deficits are just soaking up some but not all of the world’s excess saving.

I am, of course, a big deflationista, and as I see it record low interest rates strongly vindicate my position. As I like to point out, if you’d believed the inflationistas at the Wall Street Journal and elsewhere, you would have lost a lot of money.

But what about gold? As some readers and correspondents love to point out, you would have made a lot of money if you’d bought gold early in this mess. So doesn’t that vindicate the inflationistas, to some extent?

My usual response has been that I have no idea what drives the price of gold, to say that it’s a market driven by hoarding in Asia, Glenn Beck followers, whatever. But maybe I’ve been too flip here. Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that.

Well, I’ve been thinking about it — and the answer surprised me: soaring gold prices may be quite consistent with a deflationista story about the economy.


OK, how do we think about gold prices? Well, my starting point is the old but very fine analysis by Henderson and Salant (pdf), which was actually the inspiration for my first good paper, on currency crises. H-S suggested that we start by modeling gold as an exhaustible resource subject to Hotelling pricing.

Here’s how it works. Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now). The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price:



Crucially, at least for tractability, there is a “choke price” — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path.

So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest, so you get a price path that looks like this:



Obviously there are many such paths. Which one is correct? Given rational expectations (I know, I know) the answer is, the path under which cumulative flow demand on that path, up to the point at which you hit the choke price, is just equal to the initial stock of gold.

Now ask the question, what has changed recently that should affect this equilibrium path? And the answer is obvious: there has been a dramatic plunge in real interest rates, as investors have come to perceive that the Lesser Depression will depress returns on investment for a long time to come:



What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold.

But if the price path is going to be flatter while still leading to consumption of the existing stock — and no more — by the time it hits the choke price, it’s going to have to start from a higher initial level. So the change in the path should look like this:



And this says that the price of gold should jump in the short run.

The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.

But suppose this is the right story, or at least a good part of the story, of gold prices. If so, just about everything you read about what gold prices mean is wrong.

For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

And if you view the gold story as being basically about real interest rates, something else follows — namely, that having a gold standard right now would be deeply deflationary. The real price of gold “wants” to rise; if you try to peg the nominal price level to gold, that can only happen through severe deflation.

OK, none of this necessarily rejects other hypotheses about gold; in particular, there could be a bubble over and above the Hotelling aspect. But the crucial message is, I think, right: If you believe that gold prices are signaling an inflationary threat, I have to tell you, I do not think that price means what you think it means.

Update: Larry Summers directs me to a 1988 paper he wrote with Robert Barsky (pdf) with a similar theme, although applied to the gold standard era rather than recent events.

http://krugman.blogs.nytimes.com/201...sh/#more-24069

[jiimbergin]

Re: Why is Gold Going Up?

If you want to see the anti-Krugman ranters go to the thread started earlier about this post

http://www.itulip.com/forums/showthr...with-deflation

BTW I am one of them

[shiny!]

Re: Why is Gold Going Up?

If you want to see the anti-Krugman ranters go to the thread started earlier about this post

http://www.itulip.com/forums/showthr...with-deflation

BTW I am one of them

Frankly, I was hoping he would talk more about the space ships.

[unlucky]

Re: Why is Gold Going Up?

Krugman offered an interesting analysis on the price of Gold today. (Queue up the anti-Krugman ranters ...)



http://krugman.blogs.nytimes.com/201...sh/#more-24069

I have respect for Krugman and I am not a Krugman basher. But frankly in this article, he has "lost it". He argues that low interest rates (from bond prices) imply that the price of gold must jump, so that it will take longer to "use up" the available supply of gold in "dentistry".

Dentistry is one of the few uses of gold in which you can imagine the gold being actually retired from circulation after use, i.e. people don't normally dig up dead bodies to recover gold teeth (they do in times of distress/barbarism). However there are many, many firms that offer "dental gold recovery" services and I imagine they exist because there is demand.

But dental use of gold is small in relative terms. In 2010, 50 tonnes of gold were used for dentistry, versus investment demand of >1500 tonnes and existing total inventories of 165,000 tonnes. At that rate, it will take 3300 years for dentists to exhaust the world's gold reserves, even assuming that nobody digs up the bodies or sells their own gold teeth. Should we really believe that the gold price is rising because we're going to have negative interest rates for the next 3300 years? (Maybe things are worse than I thought!)

Other uses of gold do not remove it from circulation. I.e. jewellery is just another way of storing wealth (ostentatiously) and it is converted back into vault gold during times of stress (witness all those cash for gold outlets). Industrial gold is largely recovered during recycling and again there are entire firms that exist purely to earn money by doing this.

There is a very simple reason why the price of gold has been rising since 2001. 20% of the world's gold is held as reserves by central banks (for unmentionable reasons). The part of the market that has brains predicted after 2000 that central banks in aggregate would feel a need to increases their reserves in the foreseeable future (again, for unmentionable reasons). In 2009, the smart money was proven right as shown in EJ's recent article. Since the amount of gold held as central bank reserves is more than 600 times larger than the annual amount used up in dentistry (assuming zero recovery), it's likely that this source of demand together with the investment demand that it stimulates has overwhelmed Krugman's Hotelling model.