Why is Gold Going Up?

[we_are_toast]

Re: Why is Gold Going Up?

Please keep in mind that I'm not claiming that dollar devaluation is irrelevant in the price of gold. What I am saying is that it is not the only factor, and at times, perhaps not the most important factor.

Let's look at it from another angle . . . .

In 2001 gold was around $270; it's now around $1900. That's a 7x price rise. Has the dollar devalued 7x? I know I'm not paying 7x higher for any items that I normally use.

IMO, this establishes that the price of gold can rise significantly without commensurate dollar depreciation.

Not sure how you can win this argument Raja. Any rise in the price of gold will be perceived as a dollar devaluation to those who believe that's exactly what it is. I have some trouble excepting that Gold can "only" rise through a true or expected devaluation of the currency. You then have to ask, what value does gold truly have? Does Gold have value simply because the holders of Gold believe it has value? Isn't this true for fiat currencies as well?

Do Glenn Beck followers buy Gold because they believe the U.S. $ will devalue, or is Gold an almost mystical material to have during the coming apocalypse? Do engaged couples in India buy Gold because of fear of the devaluation of their currency? Many Chinese have a long tradition of holding Gold, and I doubt the valuation of their currency would effect that tradition either way.

And if we make the claim that the demand for Gold is due to the concern of devaluation of the currency, wouldn't the suppliers of Gold have to have the opposite belief?

[jk]

Re: Why is Gold Going Up?

There is a difference in buying gold "just for the hell of it", and buying gold because you see the economic world collapsing around you.

fair enough. and i agree that it's impossible to say that ongoing devaluation and - more importantly in my mind - fear of future devaluation are the ONLY drivers of the gold price. for one thing we know that momentum traders will jump on anything that moves and magnify the trend at times. nonetheless, my take is that devaluation and fear thereof - fear of the currency collapsing - is the major mover.

[jk]

Re: Why is Gold Going Up?

What do I know. In my opinion, in 2010 the majority of investors knew that Greece was going to default.

In any case, what I fail to see is people in Europe buying gold (because of our own european crisis) even with greek bond yields at 100%

I'd like that the things were different, since 42% of my net liquid worth is invested in gold.

gold quoted in euros is waaaayyy up over the last year. and if you don't personally know a lot of people who own gold, so much the better. gold is STILL under-owned. it means the rise has that much further to go.

[Alvaro Spain]

Re: Why is Gold Going Up?

gold quoted in euros is waaaayyy up over the last year. and if you don't personally know a lot of people who own gold, so much the better. gold is STILL under-owned. it means the rise has that much further to go.

Yes, I agree that gold quoted in euros is way up over the last year. The thing is that gold is a comodity priced in dollars, and when the euro gets devalued, gold price quoted in dollars does not seem to climb significantly more than when the euro keeps its value. This would seem to indicate, validating the iTulip thesis by the way, that gold prices respond more to CB movements and possibly fear of dollar issues, such as USA treassuries losing its monetary role, etc.

[Munger]

Re: Why is Gold Going Up?

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.

When I read this piece, it seemed pretty clear that Krugman was not offering this as an explanation for the price of gold. Rather, he admits up front that he has no idea what is causing it -- speculation, Glen Beck, etc. This article was an attempt at thinking through the price of gold in a deflationary period absent exogenous factors.

[metalman]

Re: Why is Gold Going Up?

When I read this piece, it seemed pretty clear that Krugman was not offering this as an explanation for the price of gold. Rather, he admits up front that he has no idea what is causing it -- speculation, Glen Beck, etc. This article was an attempt at thinking through the price of gold in a deflationary period absent exogenous factors.

krugman always sells the fed's next printing campaign with well-timed deflation warnings.

deflation today? cpi index rising...



even the bogus bls data have the cpi over 3.5%...



you a producer? you're screwed... inflation's up there with 2008...



percent...



krugman = bullhorn economist

[lektrode]

Re: Why is Gold Going Up?

krugman always sells the fed's next printing campaign with well-timed deflation warnings.

deflation today? cpi index rising...
...
krugman = bullhorn economist

and they all seem to be singing the same song (do _any_ of these guys ever go food shopping or pay their own utility bills?)
it would appear that as long as labor doesnt have 'pricing power' then theres 'low/no inflation worries' and away they go:
http://www.bloomberg.com/news/2011-0...ion-risks.html

but those of us in the trenches are seeing LOTS of upward pricing pressure - and this one in particular, for a guy who lives 2200 miles out in the middle of nowhere (where any work issues on the waterfront can cause supplies of toilet paper to vanish from supermarket shelves, whereupon it quickly becomes 'priceless'):

http://www.oregonlive.com/pacific-no..._railroad.html

Hundreds of Longshoremen storm Port of Longview early this morning

Published: Thursday, September 08, 2011, 7:58 AM Updated: Thursday, September 08, 2011, 9:56 AM

LONGVIEW, Wash. — Police in Washington say hundreds of Longshoremen stormed the Port of Longview early Thursday, overpowered security guards and damaged railroad cars and dumped grain that is the center of a labor dispute.

Longview Police Chief Jim Duscha says six guards were held hostage for a couple of hours after 500 or more Longshoremen broke down gates about 4:30 a.m. and smashed windows in the guard shack.
He says no one was hurt and nobody has been arrested. Most of the protesters have returned to their union hall.
Duscha says brake lines were cut on a train and grain was spilled from cars.
The train arrived in Longview earlier Wednesday night, when the Cowlitz County sheriff's office said its officers and area police arrested three people initially for trespassing and 16 others later as they lingered on the tracks. The arrested protesters were detained as the train slowly moved along nearby. Most of the several hundred ILWU protesters had already departed after leaders vowed to come back another day.
The shipment is the first to arrive at the new grain terminal operated by EGT. The union believes it has the right to work at the facility, but the company has hired a contractor that is staffing a workforce of other union laborers.
EGT chief executive Larry Clarke said it was unfortunate that law enforcement needed to make arrests.
"The dangerous actions here by the ILWU not only hurt the surrounding community, but also have a harmful impact along the supply chain for U.S. farmers and their families seeking new opportunities in export markets worldwide," Clarke said.
ILWU members first blocked a Longview-bound train earlier this summer, halting all shipments to the site. The latest attempted delivery came after a federal judge issued a restraining order against the union. Protesters first blocked the train in Vancouver early Wednesday morning before regrouping to halt it again in Longview.
At one point, police tried to arrest a small number of the union activists on railroad tracks in Longview, but the crowd surged forward. The sheriff's office said just three arrests were made "before it became too dangerous for officers and they withdrew." The police retreated about 150 feet.
A top union official later called off the protest that twice blocked the shipment to the Port of Longview. International Longshore and Warehouse Union International President Robert McEllrath told hundreds of supporters Wednesday evening that they were not backing down.
"We'll be back," he shouted at law enforcement officials. He told supporters they would return to block another shipment with an even greater mobilization.
About two dozen officers gathered nearby during the stalemate, with some wearing helmets and masks. Others videotaped the protesters, several of whom were hit with pepper spray during the police action, said Dan Coffman, president of the International Longshore and Warehouse Union Local 21.
The blockade appeared to defy the federal restraining order issued last week that prohibits the union from blocking entrance to the facility in Longview. A judge issued the order after federal officials alleged the protesters engaged in death threats and assaults.
Clarke called the blockade a blatant disregard for the law as spelled out by the judge.
Union officials said they were simply fighting for their jobs.
"The issue is that EGT is failing to honor its lease agreement to hire union longshore workers," spokeswoman Jennifer Sargent said.
--The Associated Press

Related topics: ilwu, international longshore and warehouse union, longshoremen, port of longview

[photoncounter]

Re: Why is Gold Going Up?

Raja, I don't remember reading on itulip that gold will "only" rise due to dollar devaluation. As I understand, Ka-poom event will be the final nail in the coffin that will take the gold price much higher, but that did not mean there cannot be other developments/reasons that cannot lead to increase in gold price. In fact, these other developments (bank failures, sovereign defaults, QE-n, etc) were discussed/touched upon by EJ few years ago and have been refined along the way. All the reasons you list in one of your other posts on this thread (as to why is gold going up or may go up) are true and one easily can figure that out by reading EJ's commentary, following discussions and other threads. At least I could, and I consider it part of the ongoing framework. FYI, I have no economics background and have been reading itulip for only 2.5 years.

If I understand correctly, iTulip's hypothesis is that gold will rise due to the devaluation of the dollar. Yet it seems to me that dollar devaluation does not seem to be even a factor at all in the present situation.

Right now, gold seems to be rising on a fear that the Euro Zone will fall apart, resulting in some kind of global economic collapse. There is concern that those countries, and the banks that have invested in, are insolvent and wil fall. This would make the dollar stronger . . . and gold would rise, as it is now doing. What's happening seems of a different nature than a disinflationary Ka.

Is iTulip's scenario missing a big part of the picture?

[raja]

Re: Why is Gold Going Up?

Raja, I don't remember reading on itulip that gold will "only" rise due to dollar devaluation. As I understand, Ka-poom event will be the final nail in the coffin that will take the gold price much higher, but that did not mean there cannot be other developments/reasons that cannot lead to increase in gold price. In fact, these other developments (bank failures, sovereign defaults, QE-n, etc) were discussed/touched upon by EJ few years ago and have been refined along the way. All the reasons you list in one of your other posts on this thread (as to why is gold going up or may go up) are true and one easily can figure that out by reading EJ's commentary, following discussions and other threads. At least I could, and I consider it part of the ongoing framework. FYI, I have no economics background and have been reading itulip for only 2.5 years.

Perhaps I have misrepresented the iTulip position, but I don't think so. (metalman is the expert on iTulip canon, and maybe he can chime in here.) I seem to recall several iTulip debates on the gold/dollar relationship, and my impression was that dollar devaluation was cited as the predominant driver of gold price rise, with other causes not worthy of inclusion.

In defense of my position, I direct you to the second post in this thread in which FRED said, "Gold is rising because governments, institutions, and very large private buyers are have become aware of the process of the US$ Treasury system break-down process . . . ." (As I interpret this statement, it means that buyers of US$ Treasuries stop buying because they fear that dollar devaluation will significantly diminish their return.)

FRED did not mention that any other factors could be involved. He did not give any kind of qualifyer, such as "one of the reasons" or "among various reasons". Thus, I think FRED is accurately representing the iTulip position . . . dollar devaluation = gold price rise.

To restate my position, I believe that gold price can be strongly affected by factors other than dollar devaluation, or the fear thereof, and I think that's happening now. Since this seems at variance with (my understanding of) iTulip's position, I feel it is a legitimate topic of discussion.

If someone can come up with an iTulip quote that says something like, "The price of gold is affected by many factors . . ." or "Gold price is driven by multiple causes . . . ", then I will admit my error and henceforth shut my mouth on this topic.

[c1ue]

Re: Why is Gold Going Up?

I don't want to put words in Krugman's mouth, but I think what he is suggesting is not that deflation per se causes gold to go up, but rather that when deflation comes with most other investments going down, gold becomes more attractive.

What's the difference between saying "gold is more attractive due to deflation" and "gold is going up due to deflation"?

2) is the message he conveys by putting up all these graphs and charts.

1) is his actual words so that if gold goes down, he can go back to his "I was right, deflation." Deflation traditionally being seen as bad for gold.

In the past during Japan's deflation, there were other places in the world to invest, and other things to invest in. Now, when we are in a global economic contraction, stocks, bonds, housing and commodities all suck . . . so gold looks very good.

This is inane. There aren't other places to invest today? What do you call the money flying into the BRIC and emerging markets? What about oil and other commodities?

Maybe you should review the events of the early '90s: 1 year before the Soviet Union collapse, the US was in an official recession. So was the UK, Australia, Canada. Europe also suffered, but not as much.

Or in other words: an identical situation as today.

When I read this piece, it seemed pretty clear that Krugman was not offering this as an explanation for the price of gold. Rather, he admits up front that he has no idea what is causing it -- speculation, Glen Beck, etc. This article was an attempt at thinking through the price of gold in a deflationary period absent exogenous factors.

So your understanding of the statement:

So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

is just a thought experiment? As is the statement:

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.

Riiiiight.

FRED did not mention that any other factors could be involved. He did not give any kind of qualifyer, such as "one of the reasons" or "among various reasons". Thus, I think FRED is accurately representing the iTulip position . . . dollar devaluation = gold price rise.

You continue to (deliberately or otherwise) misrepresent the iTulip position.

The iTulip position is that the price of gold will continue to go up because of the ongoing devaluation of currencies - particularly the dollar.

Nowhere is it stated that the price is a linear correlation to the devaluation of the dollar.

For one thing, it isn't just the already extant devaluation, it is also expectations on how far the devaluation will go. Thus if the dollar has fallen 50% by oil terms in the past 5 years (or whatever other commodity comparator you choose as a more neutral indicator of devaluation), the price of gold is different for several reasons:

1) Central banks use it as a base, thus there is an accepted orthodoxy linking gold to Central Bank assignation of monetary reserves.
2) Gold isn't a consumable, has low storage costs, and no spoilage. Most other commodities are the opposite and thus can arguably be said to represent present devaluation only.
3) As alluded to in the above point, gold's characteristics are such that its price represents not just past devaluation, but also future devaluation.

Mish doesn't get any of the above points.

He's a less visual, but equally histrionic, pusher like Cramer - and like Cramer will blunder across a not incorrect strategy simply via volume of assertions.

[FRED]

Re: Why is Gold Going Up?

Perhaps I have misrepresented the iTulip position, but I don't think so. (metalman is the expert on iTulip canon, and maybe he can chime in here.) I seem to recall several iTulip debates on the gold/dollar relationship, and my impression was that dollar devaluation was cited as the predominant driver of gold price rise, with other causes not worthy of inclusion.

In defense of my position, I direct you to the second post in this thread in which FRED said, "Gold is rising because governments, institutions, and very large private buyers are have become aware of the process of the US$ Treasury system break-down process . . . ." (As I interpret this statement, it means that buyers of US$ Treasuries stop buying because they fear that dollar devaluation will significantly diminish their return.)

FRED did not mention that any other factors could be involved. He did not give any kind of qualifyer, such as "one of the reasons" or "among various reasons". Thus, I think FRED is accurately representing the iTulip position . . . dollar devaluation = gold price rise.

To restate my position, I believe that gold price can be strongly affected by factors other than dollar devaluation, or the fear thereof, and I think that's happening now. Since this seems at variance with (my understanding of) iTulip's position, I feel it is a legitimate topic of discussion.

If someone can come up with an iTulip quote that says something like, "The price of gold is affected by many factors . . ." or "Gold price is driven by multiple causes . . . ", then I will admit my error and henceforth shut my mouth on this topic.

EJ writes in:

Since 1998 we have talked about policies that result in currency depreciation. You can go back 13 years and not encounter one instance of the use of the word "devaluation." If you find in any of the 100s of articles on iTulip a single reference to "devaluation" please let me know.

Devaluation is a deliberate government policy to reduce the exchange rate value of a national currency as Switzerland recently undertook to reduce the exchange rate value of the Swiss franc against the euro. A devaluation is accomplished by stating an exchange rate goal and then taking public steps to enforce the rate by purchasing foreign currencies.

No such deliberate policy of devaluation has occurred in the US since the Nixon administration.

I have never forecast a US currency devaluation. Not once in 13 years. Nor do we I to.

Ever.

I do, however, talk about currency depreciation, the process of a currency losing its exchange rate value via market mechanisms, by market participants bidding the currency down without intervention by government agencies to stop the depreciation.

In the long term, over a period of years, moderate currency depreciation improves a nation's export position. However, it also reduces the purchasing power of the currency, causing those who earn income in the currency to experience inflation in the prices of goods and services that are subject to the currency depreciation.

In the short-term, over a period of weeks of months, rapid currency depreciation sends inflationary price signals that halts deflation. It is thus used as a tool to manage a deflationary crisis as occurred during the financial crisis.

In the long term, over a period of years, persistent rapid currency depreciation causes high inflation, as in the case of a bond crisis when foreign debt is owed in a foreign currency.

In a condition of deflation, currency depreciation is The Foolproof Way to end a deflation spiral. This policy is intentional depreciation, not to be confused with devaluation, which is always a public policy decision made and executed with intention. Intentional currency depreciation is never a stated public policy decision.

To prevent the development of a deflation spiral, excess reserves were jacked up to historically unprecedented levels. This policy had the dual effect of providing liquidity to cash starved financial institutions and also caused the dollar to rapidly depreciate.

For a net capital importer such as the US, a sure-fire way to cause a currency to depreciate is to run fiscal deficits that are, in the view of foreign creditors, too large to be sustained. Currency depreciation is the free lunch benefit of running large deficits. It stimulates the economy directly by increasing demand and also indirectly by lowering the price of exports via the response of market participants to lower the exchange rate value of the currency, that is, to deprecate it.

To provide stimulus to the economy in 2009, the US undertook to use large fiscal deficits in excess of 5% of GDP. This resulted in a weaker the dollar, as we forecast.

Since 1998 I have talked about the asset price inflation/deflation cycle causing private and public sector debt to ratchet up as monetary and fiscal policy is engaged to stimulate the economy after each boom and bust cycle. Each cycle lowered the US fiscal position, depreciated the dollar, and caused the exchange rate value of the dollar to decline against other currencies and against gold.

I have also talked about the dissolution of the US-centric US$ Treasury based monetary system. It implies an evolving central bank gold reserve policy that I call Dollar Decommissioning in my book is dollar negative and gold positive.

My argument for 40% dollar depreciation starting in 2001 via cycles of asset price inflation/deflation/reflation policy, plus dollar decommissioning, is a subtle and complex argument that does not lend itself to simplified explanations but it has so far made us a great deal of money on gold over the past 11 years.

In addition, in 2007 I added Peak Cheap Oil to the drivers of a higher gold price. Peak Cheap Oil implies persistent high energy import costs, irrespective of fiscal and monetary policy. It implies both a worsening terms of trade and a worsening US fiscal position; higher oil import prices mean that the trade deficit worsens while high energy costs act as a regressive tax that government counters with subsidies that growth the deficit further. In addition, oil price spikes cause recessions that lead government to respond with additional fiscal stimulus.

Hope that helps clarify the iTulip position on gold.

[raja]

Re: Why is Gold Going Up?

What's the difference between saying "gold is more attractive due to deflation" and "gold is going up due to deflation"?

Not much difference.
However, there is a difference between saying "deflation causes gold to up" and "deflation under certain circumstances causes gold to go up."

Deflation traditionally being seen as bad for gold.

If dollar devaluation is seen as the only cause of gold price inflation, then, yes, deflation is bad for gold. However, as I and others have postulated, dollar devaluation is not the only determinant of gold's price.

This is inane. There aren't other places to invest today? What do you call the money flying into the BRIC and emerging markets? What about oil and other commodities?

My understanding is that the gold market is comparitively small, and that it wouldn't take much shift in global investment behavior to affect gold price. So I would ask, has there been any decrease in the money currently "flying" into BRIC, emerging markets and commodities? Have oil and other commodities gone down? My impression is that many people believe that the world is heading for a global economic slowdown, and there is evidence that slowdown is underway. Hence, there may be significant market opinion that commodities and exporting countries are going to be in trouble.

Maybe you should review the events of the early '90s: 1 year before the Soviet Union collapse, the US was in an official recession. So was the UK, Australia, Canada. Europe also suffered, but not as much.
Or in other words: an identical situation as today.

I am not very knowledgeable about economic history, I wonder how "identical" the situation is today with that of the early 90s. Were there two consecutive years of over 9% unemployment? Had the Fed resorted to near 0% interest rates for over two years? Was the economic structure of all of Europe about to collapse? Was the US government creating trillions in bank bailouts and stimulus? Was the price of gold ramping up?

You continue to (deliberately or otherwise) misrepresent the iTulip position.
The iTulip position is that the price of gold will continue to go up because of the ongoing devaluation of currencies - particularly the dollar.
Nowhere is it stated that the price is a linear correlation to the devaluation of the dollar.

I don't consider myself an expert on the iTulip position, so I may be wrong on that count. If that is the case, someone please provide some evidence. (I see EJ has posted below, but I haven't read it yet.)
My point is that gold can rise due to other factors than dollar devaluation, and at times, those other factors may be more a more important than dollar devaluation.

For one thing, it isn't just the already extant devaluation, it is also expectations on how far the devaluation will go. Thus if the dollar has fallen 50% by oil terms in the past 5 years (or whatever other commodity comparator you choose as a more neutral indicator of devaluation), the price of gold is different for several reasons:

1) Central banks use it as a base, thus there is an accepted orthodoxy linking gold to Central Bank assignation of monetary reserves.
2) Gold isn't a consumable, has low storage costs, and no spoilage. Most other commodities are the opposite and thus can arguably be said to represent present devaluation only.
3) As alluded to in the above point, gold's characteristics are such that its price represents not just past devaluation, but also future devaluation.

I agree that the price of gold can reflect fears of future devaluation.

Mish doesn't get any of the above points.

He's a less visual, but equally histrionic, pusher like Cramer - and like Cramer will blunder across a not incorrect strategy simply via volume of assertions.

I've had my say about Mish in another thread, so won't comment on this . . . .

[raja]

Re: Why is Gold Going Up?

EJ: Devaluation is a deliberate government policy to reduce the exchange rate value of a national currency as Switzerland recently undertook to reduce the exchange rate value of the Swiss franc against the euro.

Merriam-Webster Dictionary gives two meanings for "devaluation":

1. an official reduction in the exchange value of a currency by a lowering of its gold equivalency or its value relative to another currency
2. a lessening, especially of status or stature : decline

Since iTulip is a financial website, it seems prudent to avoid confusion by using a term other than "devaluation" to denote the decline in the value of the dollar. Henceforth, I will use the term"dollar depreciation", following EJ's lead.

To prevent the development of a deflation spiral, excess reserves were jacked up to historically unprecedented levels. This policy had the dual effect of providing liquidity to cash starved financial institutions and also caused the dollar to rapidly depreciate.

Have we experienced "rapid depreciation" since 2001 or 2009? I don't see it.

CPI --

YEAR													AVE
2011
2010													1.64%
2009													-0.34%
2008													3.85%
2007													2.85%
2006													3.24%
2005													3.39%
2004													2.68%
2003													2.27%
2002													1.59%
2001													2.83%

http://inflationdata.com/inflation/I...Inflation.aspx

If you like Shadowstats' figures, since 2001 the SGS Alternate Consumer Inflation is now about 2% higher now than it was in 2001. That's higher, but I wouldn't call it a significant increase in the rate of depreciation since "excess reserves were jacked up to historically unprecedented levels":


http://www.shadowstats.com/alternate...flation-charts

What about stealth inflation (smaller product sizes, etc.)? That should be mostly (but not entirely) reflected in the CPI as well as the Shadowstat numbers. For example, if the box size is smaller, it will require buying boxes more frequently to maintain the same serving size.

To provide stimulus to the economy in 2009, the US undertook to use large fiscal deficits in excess of 5% of GDP. This resulted in a weaker the dollar, as we forecast.

>
Total inflation from 1991 to 2001 was about 31%. Gold price was flat.
Total inflation from 2001 to 2011 was about 29%. Gold price increased 7x.
(http://inflationdata.com/inflation/I...sp#calcresults)


http://goldprice.org/gold-price-history.html

So in those two decades, about the same amount of dollar depreciation, yet vastly different performance in gold price.

Since 1998 I have talked about the asset price inflation/deflation cycle . . . the dissolution of the US-centric US$ Treasury based monetary system . . . in 2007 I added Peak Cheap Oil to the drivers of a higher gold price.

You provide three reasons why gold is going up:

1. A process you described as: "Each cycle lowered the US fiscal position, depreciated the dollar, and caused the exchange rate value of the dollar to decline against other currencies and against gold." In other words, dollar depreciates = gold up.

2. Dissolution of the "US-centric US$ Treasury based monetary system". In other words, when lenders believe depreciation of the dollar has already or will occur, and they stop investing in Treasuries, gold goes up. In other words, dollar depreciation, or the fear thereof = gold up.

3. Peak Cheap Oil causes government subsidies and additional fiscal stimulus . . . which depreciates the dollar, and gold goes up.

IMO, I represented the iTulip thesis accurately in my posts above; it all boils down to: depreciation of the dollar = gold up. It is possible that iTulip acknowledges other factors involved in gold price, but the fact that none are mentioned here suggests that, if there are other factors, they are considered of minor significance.
As I have explained in my past posts, I disagree with the thesis, and feel it is imcomplete..

I do agree that dollar depreciation and the fear thereof can lead to gold going up, but there are other reasons for gold's rise that are, at times, more significant than dollar depreciation. Can I prove that? No. But can the converse be proved? No. Aside from relying on some kind of polling, how could anyone possible measure fear of dollar depreciation or the lack thereof. It is a psychological factor, not amenable to measurement with financial statistical measures.

For those of you who invest in gold, are you motivated by anthing other than dollar depreciation?

Of course, as an iTulip reader you are concerned about the depreciation of the dollar.
But isn't part of your reason for owning gold that it is providing the best return on investment right now? Additionally, is there some thought that the looming global slowdown will result in higher unemployment and lower GDP, which will reduce the value of commodities and the attractiveness of investing in exporting-country investments? When you see Greece on the verge of default, with other countries heading that way, don't you feel some satifaction in having gold in your porfolio. Doesn't some physical, with no second party risk, provide additional comfort?

Ultimately, gold ownership is about preservation of wealth (and sometimes about increasing it). Yes, your wealth can be depreciated by holding dollars in some cases. . . but it can also be depreciated by holding other forms of wealth, such as housing, commodities, etc. So you may want to hold some gold in addition to other investments -- regardless of whether the dollar depreciates or not. Diversification is wise.

My argument for 40% dollar depreciation starting in 2001 via cycles of asset price inflation/deflation/reflation policy, plus dollar decommissioning, is a subtle and complex argument that does not lend itself to simplified explanations but it has so far made us a great deal of money on gold over the past 11 years.

There are other investors in gold who had different rationales, and they also made money.
Outcome does not always prove theory . . . .

[raja]

Re: Why is Gold Going Up?

Paul Krugman wrote about gold prices again in his blog today. An excerpt:

And this means that it is deeply, deeply wrong to think of rising gold prices when bond yields are low as some kind of symptom of monetary excess.
September 10, 2011, 12:04 pm

It's his 3rd post on the subject of gold in the last week.

For those who think Krugman is a "bullhorn" for the forces of evil, no doubt you will dismiss what he has to say. While I don't agree with everything Krugman says, I read everything he says . . . .

[LargoWinch]

Re: Why is Gold Going Up?

... and commodities all suck . . . so g...

this is incorrect.

Case in point: Oil, Copper and Corn to name a few.