Gold under £1000 !!!!!!!

[raja]

Re: Gold under £1000 !!!!!!!

Keen to hear the thoughts of our community here.

Here are my thoughts, FWIW . . . .

People can only buy gold if they have the money to buy it.
When the next crash comes, for whatever reason, there's going to be a shortage of money. (According to MSN Moneycentral, US families lost $11 trillion in 2008.) People who are feeling the pinch aren't going to be investing in gold.
Not only that, investors will sell what has value to make up for losses, e.g., margin calls.
This could create gold deflation due to demand destruction, and we're getting a tiny taste of that right now.

However, some scared people who do have some money will buy gold, but only if they think there will be big inflation trashing the dollar, or societal collapse. The last crisis, with it's QE's, did not create Big Inflation, the scary kind that makes people think their money's going to become worthless.

So, there are opposing forces here . . . .
Gold UP -- If there's scary inflation created by government "printing", and people believe inflation is coming. Or people feel like doomsday is coming.
Gold DOWN -- if there's not a lot of money around, and there is no Big Inflation.

To know where gold is going, we have to understand which is the stronger force -- lack of money vs. fear of inflation. And, we have to consider the timeline . . . .

It depends on politics . . . .
Will the government debase the currency with "printing", leading to inflation, or will a movement arise that prevents "printing"? I know itulip predicts the former, but I don't think it's a certainty.

My prediction: First, there will be a crash, and the gold price will go down. It will be deflationary, as unemployment goes up, and people don't have money to spend. In response, the government will "print", which will create dollar debasement and inflation. At that point, people will have no money to spend, and the little money that they do have will become worth less. The price of gold will not take off, as many people expect (sorry Mega), but it will stay constant or go up modestly. The opposing forces counterbalance -- all assets will be subject to deflation due to demand destruction, but the value of the dollar will weaken against necessities, which will not suffer lack of demand . . . because they are necessary. Gold is not a necessity.

[Adeptus]

Re: Gold under £1000 !!!!!!!

Good input Raja,

That's an interesting prediction, but we shouldn't have to guess too much. We have unemployment charts and we have charts or data showing number of gold eagles and silver eagle sales for the past few years. I'm pretty sure sales spiked during the entire recession period. Now having said that, I'm not sure average joe, or should I say, paranoid joe is sufficient a force to impact the price of gold. I think we have to look at the high middle class and the rich (who own most of a western country's wealth), and what they are going to do with their money. They are going to continue to have enough to eat, but will be worried about preserving their wealth. Far larger than gold and silver eagle sales we have the GLD and SLV etfs for evidence. As the sovereign crisis moves from small countries to bigger countries, those rich are going to run out of their local stock markets (as evidenced by Greece - stock markets declined to 1992 lows, Portugal - stock market down 50% since 2008, etc), and into something else. If they run to the US dollar, that will be met with Fed currency deflation response through more printing. How many more QE's before everyone realizes that running to the US dollar/Tbills is not the answer? I think we are starting to see a turn now, with BRIC's moving away from Tbills, establishing bilateral trade and slowly deminishing the role of the US dollar as the reserve currency.

Your main point nails it though...

To know where gold is going, we have to understand which is the stronger force

. As per above, I don't think the stronger force is average joe. The stronger force IMO, is government, or more specifically the Central Banks - and they are anti-deflation.


This past weekend I listened to the John Butler interview about his book "The Golden Revolution". Aside from having many similar views to EJ, and being a big follower of Jim Rickards, he lays out 4 possible scenarios of the end game:

1. Someone (possibly Russia?) is going to, in place of a military confrontation, initiate economic warfare instead by moving their currency to the gold standard. This would very quickly deminish new purchases of US Tbills as instead countries around the world would purchase a gold backed reserve currency for their reserves, which would then lead to gold reserves being used to execute global trade, leading to a global gold standard if not for currencies, at minimum for partial but significant gold reserves - enough to shoot the price of gold through the roof from where we stand.
2. US sees scenario 1 coming and pre-empts it by going to a full or partial gold backed currency first, and so as to not lose reserve currency status or have its debts implode as nobody would buy their Tbills, they would announce gold repricing overnight to $5,000+ to $10,000 /oz by offering to buy it in the open markets.
3. BRICS move to gold backing and trade themselves, which over a not to long period of time, results in a domino effect, forcing all other countries who need to import from them to also back their currencies by gold, or at minimum buy gold to hold in reserve to execute trade.
4. No country has the balls to go to a gold back reserved currency as the consequences are too unpredictable, and also due to fear of retaliation, so the "Gold vigilantes" do it - that is, the big money around the world loses faith in the US and Euro, and given there's no other alternatives they move to buying gold en masse.

[raja]

Re: Gold under £1000 !!!!!!!

Adeptus,

Thanks for your response.

I hope you are right about gold; I would prefer that it continues to go up.
But I have concerns . . . .

Several things spring to mind in reading your post:

That's an interesting prediction, but we shouldn't have to guess too much. We have unemployment charts and we have charts or data showing number of gold eagles and silver eagle sales for the past few years. I'm pretty sure sales spiked during the entire recession period.

I guess your point here is that gold sold well even under high unemployment and recession, which suggest that gold will not deflate.

But I would respond by saying that the world is in a worse position than it was before, and gold won't follow the same path this time.
The higher classes were not damaged by the 2008 crash to the extent that they didn't have money to invest in a rising asset, and they did invest in gold over the last 4 years. However, notice from the chart below that there was an effect on gold in 2008 when people thought the world economy was going to crash. Bear Sterns started to crumble in 2007, and in March 2008 gold falls.
And now, the fears have resurfaced with the goings on in Europe.
In the chart below, you can see that gold had been going progressively up from the beginning of 2006 to the beginning of 2008. Then, gold went sideways for a year, and a couple of times dropped $270+. It followed the same pattern for the past year, with three large dips.

Now having said that, I'm not sure average joe, or should I say, paranoid joe is sufficient a force to impact the price of gold. I think we have to look at the high middle class and the rich (who own most of a western country's wealth), and what they are going to do with their money. They are going to continue to have enough to eat, but will be worried about preserving their wealth. Far larger than gold and silver eagle sales we have the GLD and SLV etfs for evidence. As the sovereign crisis moves from small countries to bigger countries, those rich are going to run out of their local stock markets (as evidenced by Greece - stock markets declined to 1992 lows, Portugal - stock market down 50% since 2008, etc), and into something else. If they run to the US dollar, that will be met with Fed currency deflation response through more printing. How many more QE's before everyone realizes that running to the US dollar/Tbills is not the answer? I think we are starting to see a turn now, with BRIC's moving away from Tbills, establishing bilateral trade and slowly deminishing the role of the US dollar as the reserve currency.

My position is that there will be demand destruction for gold because an economic crash will leave people will far less money to invest. Gold will not escape the deflation in assets, even though is money as well as an asset. You make three points to counter my position:

1) The average Joe is not a customer for gold.
2) The Europeans won't put their money in their stock markets. (But presumably they would put it in the US stock market instead. However, since the US stock market will crash, too, your point is still valid.)
3) The middle-high and upper financial class will have money, and they will want to put that money into gold to protect it against Fed-caused inflation and competing currencies.

Let me address each:

1) I have no idea of the distribution of gold customer by class. So let's leave average Joe out of the equation.
2 & 3) It's true that when those with money see a threat to the value of their money, they will invest it where it is most advantageous. But what if the crash comes unexpectedly? That's what usually happens. All of a sudden, stock values are halved. It's typical for people tend to hold their investments hoping for a recovery rather than take a loss. When no recovery comes, will the higher classes rush into gold, with what money they have left?
How many higher class people are savvy enough to understand what's going on? Yes, people who bother to educate themselves will, but I imagine that most wealthy people have financial advisors whose own incomes depend on giving bad advice. So, the wealthy will see their assets plummet. Will they rush into gold to preserve their wealth, or will they need to use their remaining money to salvage their rich lifestyles and maintain daily expenses? The global economic crash will be big like the Bernie Madoff Ponzi collapse, but worldwide in scope.

Also, there are other things to invest in, some of which do not have some of the problems/fears that are connected to gold (I imagine you are familiar with those issues, but I can reiterate them if you like).

The stronger force IMO, is government, or more specifically the Central Banks - and they are anti-deflation.

I would say the Central Banks have two goals: 1) stay in power, 2) enrich themselves and their wealthy buddies. With deflation, the wealthy who see the crash coming may use their accumulated wealth to buy up assets at bargain prices, such as real estate, privatizes public property, infrastructure, etc., instead of investing in gold.
On the other hand, if you expect an inflationary future made possible by "printing", remember that Paul Volker said, "Gold is the enemy." Since government is, up to a point, all powerful, do you think it wouldn't try to destroy the enemy of fiat?

This past weekend I listened to the John Butler interview about his book "The Golden Revolution". Aside from having many similar views to EJ, and being a big follower of Jim Rickards, he lays out 4 possible scenarios of the end game:
1. Someone (possibly Russia?) is going to, in place of a military confrontation, initiate economic warfare instead by moving their currency to the gold standard. This would very quickly deminish new purchases of US Tbills as instead countries around the world would purchase a gold backed reserve currency for their reserves, which would then lead to gold reserves being used to execute global trade, leading to a global gold standard if not for currencies, at minimum for partial but significant gold reserves - enough to shoot the price of gold through the roof from where we stand.

I think Butler's scenarios are theoretically plausible, but only makes sense by ignoring other factors . . . .

Russia is a basket case. Don't expect any big power plays from there.

2. US sees scenario 1 coming and pre-empts it by going to a full or partial gold backed currency first, and so as to not lose reserve currency status or have its debts implode as nobody would buy their Tbills, they would announce gold repricing overnight to $5,000+ to $10,000 /oz by offering to buy it in the open markets.

You expect the US to give up fiat? Politically unlikely. Without fiat they can't fool the masses and keep them sort of happy without "printing" to support the dole.

3. BRICS move to gold backing and trade themselves, which over a not to long period of time, results in a domino effect, forcing all other countries who need to import from them to also back their currencies by gold, or at minimum buy gold to hold in reserve to execute trade.

I expect currency wars. But that will only make the depression worse. BRICS moving to gold would also disallow them the usefulness of fiat. I don't think any government will give it up.

4. No country has the balls to go to a gold back reserved currency as the consequences are too unpredictable, and also due to fear of retaliation, so the "Gold vigilantes" do it - that is, the big money around the world loses faith in the US and Euro, and given there's no other alternatives they move to buying gold en masse.

This would be a reasonable scenario if there wasn't a depression going on. In order to have gold vigilantes there has to be money to do the gold buying.

I do see your points and agree with them, but I also see counter-forces that might be stronger.