Is GOLD still a good choice?

[grapejelly]

Re: Is GOLD still a good choice?

the proper use of gold is as a place to store your capital so it is not vulnerable to the depreciations and depredations on paper. That hasn't changed and won't change for quite a few years. I don't expect to get rich on gold but I do expect to preserve my capital and if others reach the same conclusion, the tide could turn and we could have an increase in precious metals prices far exceeding the decline in paper's purchasing power. But that is speculative. Holding gold, IMHO, is not.

[Guest]

Reply to JK on his question re Gold Vs. Oil

I was going to PM this to JK in response to his specific question, but I'm posting it here. This is all about why precious metals have a bid above and beyond central bank monetary abuse. It's about the oil.

JK -

You asked regarding my thesis about $200 and $300 oil, why not invest in the oil majors rather than in gold. As I sketch out how I see it, maybe I should post this to the community pages and see how everyone wants to pick it apart, as some certainly will think what I describe as clearly potential is all in fact hogwash. The answer is complicated. First of all the "oil majors" aren't oil majors any more - the wide open global oil resources of three decades ago which were waiting for these Major's oil production expertise to come in, are in all likelihood a thing of the past now. The Western "Majors" are increasingly bit players in the dwindling global oil reserves that exist today. In stark contrast, the state oil companies are the big dogs, and soon to be even bigger actors on the (possibly imminent) future downslope of oil production.

Seems the Western oil "Majors" are spending increasing amounts of their money between greatly increased drilling programs and exploration just to keep current reserves from depleting too fast as they bring older reserves to market, and they use another good part of their cash flow to buy back their own shares, because they are finding it increasingly difficult to build their valuation by gaining new conventional petroleum reserves in the ground anywhere. Or of course, they are growing reserves by just buying juniors, as growing by ramping up ever more exploration themselves is getting harder to do.

Probably in energy there is a lot more money to be made in either the Juniors and smaller Mid Tiers, or the Service companies, (e.g. Schlumberger - [a superb stock for the long haul], Nabors and the like, or the refiners like Tesoro and Valero, who have unique expertise in processing sour crude which will be increasingly all that's affordable, or available). Also of course Uranium and alt energy will catch a pretty good bid.

But if you extrapolate this thesis of seriously dwindling global production, or even stubbornly flat global production, versus soaring, extremely vigorous economic / industrial emergence of 3 billion odd people in the BRIC economies et. al, you can begin to see that if oil availability really starts to hiccup then the entire global growth paradigm may suffer a serious crisis of confidence. Stock markets are nothing but a consensus of confidence in future growth. My notion is simple - today's manifestly flat global production growth meets unstoppable global demand growth - so something has to "break" in this story when these two smack together (soon enough). The thesis is very straighforward - it's the global scale implications for after the "break" which are downright hairy.

If global production growth for petroleum really is going to enter the "cusp" now, (even without factoring any steep decline) then quite obviously to even the most casual observer, there is a massive collision looming between global expectations for inflation free growth, let alone growth at all, and there is a petroleum story stuck in the middle of this picture that may prove to be a truly colossal "party spoiler". So in my view it's like this: When, not if, this understanding is captured by "the markets", you are going to see pandemonium - because EVERYTHING is predicated upon future industrial growth, which is predicated on smoothly growing petroleum production. No ready or sufficient supply of oil = big, big problems getting any of the alternatives to come on-stream rapidly enough to prevent market cataclysms.

GRG55 may see it altogether differently. This is my view, which is not just my own untutored opinion - it's derived from piggybacking on every reputable source I could find in reading for the past five years, including people like Henry Groppe, of Groppe, Long & Littell, who you'll note Bart agrees is "not someone you often want to bet against" (and also Charley Maxwell and many others just as reputable as these two!) . In my view, as anyone can synthesise without undue difficulty from simply slogging through all the great quantity of detailed reports flooding in from so many sources available today - A) petroleum production growth is flat, and a lot of people warn it may decline, and B) global industrial build-out, which is the single largest industrial event, by orders of magnitude, to come along in 300 years, is requiring more of the petroleum. It's going to be a big problem, no two ways about it. Do we fully understand that the buildout of the industrialising world today is 10-20 times larger in scale than the entire 19th century industrialisation in terms of materials utilization? These trends simply don't turn around (yet alone end!) on a dime.

These two things will collide, a heck of a lot of very seasoned industry people now think, in the next 10-15 years max. I think it will be starting hard within the next five years where petroleum is concerned.

So if all this occurs, some of us might just need to readjust our view that the equity markets are going to be places that anyone can stomach. That is to say, the lure of bonanzas in holding petroleum stocks may even risk being a real firecracker - because the "end of cheap petroleum driven growth" may well be an event wrenching enough to rival or exceed the most tumultuous stock markets in living, or even recorded memory. I will even be contentious here, and reiterate that I do not believe that E.J. has yet gotten a full handle on how much bigger this potential event will be than all the SIV / CB fiat inflation / debt implosion stuff that is the primary focus of iTulip inquiry today.

As carefully astute and as foresighted as E.J. has proved to be, and as astute as the combined firepower of the many contributors here is - even those who acknowledge there is a "problem with the oil sector" going forward, are (going from everything I read on these pages) likely missing the extent to which this event may pole-axe entire global stock markets at some point - and I personally think a number of yet other iTuliper's are even further out - utterly clueless as to how large the implications of this oil depletion thing really are. There are people here solemnly envisioning a world similar to 1981-1988, where the price of petroleum collapses because the "speculation" is withdrawn from this market and "demand destruction" tames it just as their "cyclical textbook" tells them it must - These ones have probably not read widely on the fundamental, epoch changing shifts approaching in the ratio of petroleum growth prospects vs. the world's projected needs in 30-40 years. The mismatch in numbers between one and the other has the world's most august energy information bodies hanging from the chandeliers trying to "invent" the solution whereby the numbers match up. The numbers don't match up at all. .

The willful disinterest in discovering these massively threatening fundamentals among the skeptics is unforgivable really, as they imagine themselves at one and the same time, to be "seriously concerned about all the largest issues of today".

"Alt-Energy" filling the gap that will emerge, in a world where 3 billion more people are industrialising at a rapid pace, is flim-flam, at least going out for the next 25 years, as it won't even encompass 10% of global energy demand. What if I'm wrong, and "alt-energy" ecompasses 25% of global energy demand? Big deal - this won't be more than a band-aid when production declines of petroleum really pick up some momentum. Solar, tidal and wind simply do not have the energy density inherent in petroleum, which represents millions of years of stored solar power. Anyone who imagines that any photo voltaic array on the drawing boards today can capture "millions of years of solar power" to replace petroleum is bordering on the delusional.

How about nuclear? Take a hypothesis. Say you would need to build 5000 nuclear power plants in the next 25 years to cover HALF the globe's present day current power usage. That would be (admittedly we are plucking "large" numbers out of the air here for illustrative purposes) 16.66 nuclear power plants built, fully commissioned and fired up MONTHLY around the world just to conceivably make a mere dent in (e.g. replace half of?) current global petroleum demand, and we'd have to crank them out, every month, for the next twenty five years straight, if we start tomorrow morning.

That's 4.16 nuclear power plants finished PER WEEK around the world. Clearly this kind of thinking is escapist and delusional also. Yet these people are calling those who warn them of this impossibility the deluded ones.

If you put every scrap of skepticism about peak oil temporarily out of your head, and set about reading every scrap of reputable literature you can get your hands on for a couple of months straight - without expending enormous amounts of energy needing to laboriously dispute and debunk each and every article you read - then I assure you, that you will walk away with a deeply subversive, deeply disquieting sense, of the sheer breadth and compellingly detailed variety, the massive scope of the data that's beginning to surface everywhere to substantiate this thesis.

Once you provisionally accept it - then you start looking around at the industrialising trajectory the world is on this decade, and you begin to see the enormity of the potential dislocation that lies ahead.

In that potential dislocation, quite frankly anyone who thinks they have the stomach to be holding a basket of petroleum equities may be crediting either the markets with a good deal more calm and navigability than will prevail in those circumstances, or they are crediting themselves with being considerably more steely-nerved investors than they really are.

We all know E.J.'s thesis on what's going to be happening with the currencies in the next few years. But even E.J.'s vision does not peer out further ahead than the next fifteen years. Flat or declining global oil production is a geological event, which sketches out with some very broad degree of probability, a set of "transitional" global market circumstances that stretch out further even than 15 years. With a bit of grace from the Almighty, we'll maybe find some way to re-invent ourselves, but anyone who tells you "human ingenuinty" and "advanced technology" will / must provide a solution is falling back on mere faith in that assertion (my point: it's just an assertion), as no-one has yet put forward the"marshall plan" or the "manhattan project" for exactly HOW this crisis will be traversed.

In this general environment, we could have either sharp inflation, or sharp deflation, or both alternating. Everything I've read suggests sharp inflation, interspersed by short, very scary, recurring bouts of deflation which is then reversed by massive abuse of currencies to act as "shock absorbers" for a globalising world trying to transition from a petroleum economy. After two centuries of the hydrocarbon economic growth paradigm, I personally flatly disbelieve the "transition" can possibly take less than twenty years. I spent a good bit of time being "positive thinking" because that was supposedly "healthier" thinking and "healthier thinking" was supposedly more "realistic". - But I now conclude all that "think positive" mantra is bullshit, and it will be more like a ripe tomato hitting a brick wall instead. Sure, there may be a "mini-nuke" solution for Jetson homes and Jetson cars and Jetson nations, but I seriously doubt ANY solution can roll out globally faster than this supply growth crunch will roll in.

Put it all together, and what have you got? You've got a perfect storm for Gold to bull forward like it probably has not done in a hundred years, because all the "productive powerhouse multinational companies" that those many people here who are in love with stocks (most of the younger members, methinks) believe will "power us through" will instead be revealed to be big white albatrosses flying a few meagre feet above the really nasty chop of the ocean, with the words "derailed industrial growth paradigm" stenciled in big black letters along their vulnerable flanks. Dwindling oil will make an awful lot of these international success stories mega-cap companies suddenly look very frail. When this change hits the public perception, I personally do not see why or how equities of any kind are going to provide me with safety.

That's why I think owning precious metals, if you believe in an approaching global petroleum / energy crunch, is far more conservative than investing in oil stocks - although in this early stage a lot of oil service stocks are still a good bet. In the above described coming environment, I also think E.J.'s small cap "alt energy" bubble scenario gets the thesis wrong (it won't be a bubble at all, but rather a desperate lunge to make alt-energy pay off in the absence of anything else viable!). And here's another thought - if "peak oil" turns out to be a hard impact event, E.J.'s microcap "alt energy" stocks play may be underestimating the danger of being participants in equities at all during that interlude. There may at such a moment be massive danger in being parked in any global equities at all, because if there really is a "moment of realisation" that oil production is firmly into a permanent decline, if you think about it, that is also the moment when the entire industrial growth paradigm is drawn into question.

Think this is way too melodramatic a scenario? Just stop and wonder, precisely how this is all supposed to keep growing, let alone running reliably at all, if oil supply growth starts to sputter? It appears an absurd, even looney thought, because it's so "unusual". But stop and consider - oil production shows every sign of refusing to expand much further ALREADY, in which case, to our general astonishment, we've practically arrived at this notion's 100% plausibility in the present 2007!!! After that point, it's just a question of A) whether this trend persists, strengthens and eepens in effect, and B) when it's implicit challenge to continuing global growth emerges into popular consciousness, and from there to the "global stock markets"

Many people here are averse to the above described scenario. Why? Because they do not wish to be trapped in an association with a bunch of doomer, Sierra-Club, tree-hugging, green card carrying, presumed idiots, and along with that ideologically smelly association, be required to acknowledge there is in fact now an eminently rational possibility that the formerly comic-book notion of peak oil may be a very harsh event - a critically challenging event - and is indeed "the very large presence already in the living room". What many people find great difficulty to countenance, is the surprisingly rational possibility that "ingenuity" and "advanced technology" won't have a damn thing to say about how harsh the impact of dwindling oil production may really be, given the massively ramping steps that are occurring in global industrialisation.

Imagine a world where the really large, really massively big pools of money globally, the serious money, in the hands of all the world's largest creditors today, suddenly gets really deeply, secularly frightened, by an idea, or a "realization", that industrial growth just literally ran out of sufficient gas (or at any rate, for the immediate 10 - 20 year future anyway, after which presumably "Hail-Mary" solutions kick in) - Imagine this "idea" suddenly breaks wide open, and wizzes around the world in just a few weeks or months as the new "popular insight for the global masses". Imagine a "severe energy price spike" occurs which carries on for several months, and then imagine all of a sudden the word goes around the capitals of the world, that it's about to double up 50% higher yet again, with no clear indication of a letup thereafter.

iTulip says "it will be gradual". OK, where are the empirical grounds for this assertion? We are going to build 5000 nuclear power plants in twenty five years maybe?

You have to assess, if this realisation ever hits global markets, whether you or anyone else in that moment, will want to be within a stinking country mile of any equities, anywhere - period. Precious metals seem a good investment in today's environment (oil still is very much so too!), and precious metals appear to be a very good investment in that potential future environment as well, because a growing bid on them in severely jittery global markets will cause them to appreciate beyond the mere rate of inflation. I think if one buys one's full position of precious metals early, while they are still cheap relative to $300 oil, then one has a very good ballast for the severe dislocations to arrive in 10-15 years max.

Of course, those who disbelieve petroleum can reach $300 USD per barrel (in today's dollars!!) - and STAY there once it reaches this price - these people won't have the necessary signposts to make this informed long term investment now, while it's still early. $800 gold relative to $90 oil is underpriced. $90 oil relative to the situation setting up between future demand and future likely supply is still dirt cheap itself. Ergo, gold in an oil depleting world is dirt cheap still. if you don't believe in oil depletion, then maybe gold is getting pricey. Suit yourself.

I think we see $150 oil within two years, and $300 oil within 7-10 years easily, denominated in today's dollars. Anyone shorting oil is nuts. Daniel Yergin of CERA , who posits a world where petroleum production "flatlines for a decade or two" in an "undulating plateau" (while four or five of the world's supermajor fields are already quite manifestly tipping into decline) is a quack analyst - he will be fully revealed as a quack analyst in due course, and I personally hope, due to the incredibly harmful false signals he's putting out, that his "strategic Petroleum Consulting Practice" dries up and blows away like tumbleweed thereafter.

[jk]

Re: Is GOLD still a good choice?

lukester, i did not ask about the "oil majors." i asked why you don't want to invest more in OIL. this can be done by buying canadian energy trusts, which essentially means buying barrels in the ground, and getting the income as those barrels are sold, year by year. alternatively, you can buy uso, the oil etf, or use futures or commodity funds. i have substantial precious metal holdings, but i realize that gold really is a barbarous relic, useless for most purposes except creating trinkets. people value it, so it has value, i.e. it can be exchanged for other goods. but oil has intrinsic value- it can be used for energy production or as a chemical feedstock. so, given your scenario, why not buy OIL, itself?

[Mega]

Re: Is GOLD still a good choice?

So, you think i should buy some gold?
Mike

[grapejelly]

Re: Is GOLD still a good choice?

So, you think i should buy some gold?
Mike

yes.........

[Guest]

Re: Is GOLD still a good choice?

JK -

Clearly, after gold, owning petroleum is the next best thing in this entire scenario. I owned a whole bunch of Canadian energy trusts for several years, and while they are excellent investments, they are possibly not quite the same thing as owning the oil in the ground. These are corporations, subject to all the vagaries which corporate publically listed shares are subject to.

However I absolutely take your point, and I agree with the principle, in a depleting resource environment, the very best play is owning the stuff itself. That's why I think one of the best (most fundamentally safe) investments going forward will be Jim Rogers RICI index, composed entirely of the physical materials comprising commodities.

The idea of "diversification" out of gold however is tricky. Basically if the above described environment comes about (oil depletion causing a severe economic impact) currencies become toast. In that environment the "gold thingy" becomes ever more merely a cash equivalent, the ONLY pure cash equivalent in that future global economy with a 5000 year pedigree to float right up over any inflation in the system.

So "diversifying out of gold" in this future will be more like merely saying "Jeez, I'm not comfortable holding all this cash, I think I need to diversify into some paper shares". In a way it does not make sense - for mere safety, one does not need to "diversify out of cash"., particularly if that cash is "earning" you 10% to 20% over the prevailing inflation rate in those future years. There will not be any other asset with a better risk adjusted return.

To say gold is "useless" for any practical purpose in that future environment may well be a more difficult conclusion than it can seem today.

__________

lukester, i did not ask about the "oil majors." i asked why you don't want to invest more in OIL. this can be done by buying canadian energy trusts, which essentially means buying barrels in the ground, and getting the income as those barrels are sold, year by year. alternatively, you can buy uso, the oil etf, or use futures or commodity funds. i have substantial precious metal holdings, but i realize that gold really is a barbarous relic, useless for most purposes except creating trinkets. people value it, so it has value, i.e. it can be exchanged for other goods. but oil has intrinsic value- it can be used for energy production or as a chemical feedstock. so, given your scenario, why not buy OIL, itself?

[metalman]

Re: Is GOLD still a good choice?

JK -

Clearly, after gold, owning petroleum is the next best thing in this entire scenario. I owned a whole bunch of Canadian energy trusts for several years, and while they are excellent investments, they are possibly not quite the same thing as owning the oil in the ground. These are corporations, subject to all the vagaries which corporate publically listed shares are subject to.

However I absolutely take your point, and I agree with the principle, in a depleting resource environment, the very best play is owning the stuff itself. That's why I think one of the best (most fundamentally safe) investments going forward will be Jim Rogers RICI index, composed entirely of the physical materials comprising commodities.

The idea of "diversification" out of gold however is tricky. Basically if the above described environment comes about (oil depletion causing a severe economic impact) currencies become toast. In that environment the "gold thingy" becomes ever more merely a cash equivalent, the ONLY pure cash equivalent in that future global economy with a 5000 year pedigree to float right up over any inflation in the system.

So "diversifying out of gold" in this future will be more like merely saying "Jeez, I'm not comfortable holding all this cash, I think I need to diversify into some paper shares". In a way it does not make sense - for mere safety, one does not need to "diversify out of cash"., particularly if that cash is "earning" you 10% to 20% over the prevailing inflation rate in those future years. There will not be any other asset with a better risk adjusted return.

To say gold is "useless" for any practical purpose in that future environment may well be a more difficult conclusion than it can seem today.

__________

way i look at it... usa is the biggest oil importer and growing. usa has to print bonars to pay for oil. bonar is shrinking as global demand for bonars oil transx declines. also, demand for bonars will decline as usa import demand declines relative to other countries.

gold is only indirectly an oil play. it's a play to hedge dollar depreciation. oil demand/supply vs dollar demand/supply. long term oil: up. long term dollar: down. long term basket of currencies value of oil: ? long term basket of currencies value of gold: ?

what if gold is no longer priced in dollars? then i sell gold.

as our new global econ and currency crisis unfolds, there's lesson in here...



what's ej call hillary? fdr-lite?

[Guest]

Re: Is GOLD still a good choice?

Metalman -

<< gold is only indirectly an oil play. it's a play to hedge dollar depreciation. >>

How about gold apparently already rising as an emerging hedge against ALL currencies? All currencies are "tied" to each other by essential trade, now and in the future. At some point they may well figure out how to stop chasing the USD down, but the story does not end there.

The future major driver for gold may not be it's relationship to the USD, but rather to the fact that if a soaring real cost of energy occurs, it will be massively inflationary to all economies. That inflation in all economies = diminishing purchasing power in all currencies, is an environment that could not be more suitable for gold.

Your plan to sell gold "on the day it stops being priced in US dollars" is a trade I would not follow, on the premise that all currencies must continue to drift down as A) they remain engaged in global trade and have to remain within tradeable bands of each other, and B) all currencies start getting used more and more to act as "shock absorbers" for the economic dislocation brought on by dwindling energy supplies.

All nations can be expected to use their paper currencies to soften the blow of the above described constrained energy supplies, if that scenario occurs.

[grapejelly]

Re: Is GOLD still a good choice?

the soaring cost of energy? How can that be inflationary?

It is the soaring creation of paper money that is inflationary.

Gold isn't printed so and it is likely to keep its value during times of inflation such as we are in now.

[Guest]

Re: Is GOLD still a good choice?

Grapejelly -

the soaring cost of energy? How can that be inflationary? - It is the soaring creation of paper money that is inflationary. - Gold isn't printed so and it is likely to keep its value during times of inflation such as we are in now.

I'm very surprised at your take on this.

You don't consider the constant dollar fuel input cost involved in virtually all industry to be a significant factor in the consumer price index? Seems to me one would have to employ some sleight of hand not to.

Widget XYZ costs $10 in fuel to build, another $10 in fuel to transport, $1 in fuel in plastics parts, $3 in fuel for packaging, $1 in fuel in advertising costs, etc. Extrapolate this chain of fuel inputs out to every nook and cranny of the global GDP - manufacturing, services, food and agriculture, mining, heavy industry, medical care, many parts of the FIRE economy as well, in the most basic terms of merely keeping anything running? Fuel input is everywhere, even in the most passive sectors of the economy.

It does not happen overnight, but just for the sake of this reasoning, say oil goes up 300% in constant dollar terms, and widget XYZ's constant dollar fuel cost component just went up 300% too. Roll out 300% price increases throughout the global GDP accordingly. How can this be controversial?

You may be discussing whether the increase in price of fuel was in inflated dollars rather than in constant dollars. Of course, the inflation of the petro-dollar currency is gnawing away vigorously on the other end of generalized inflation.

But that by no means precludes an environment where such inflationary monetary policy can't coexist with sharply rising real energy costs, does it? In the past, all such a scenario required was an oil embargo from the gulf states - it's kind of hard to argue that during the two oil embargoes of the 1970's the price of oil shooting up was "caused by a sudden overnight explosion of the money supply", no? Today, if you even provisionally accept there may be genuine growing constraints upon fuel production (vs. soaring demand), you have a repeat of what were previously oil embargoes, except this time it's something called "depletion" which recreates the "embargo" upon oil supply.

Imagine as my post above argued, that this new type of "embargo" upon oil is permanent (not political this time, but geologic). If that were really happening in the cost of extracting oil, you've got a permanent cycle of rising petroleum input real costs on global industry. Seems glaringly self-evident.

How can this possibly be controversial? The only thing people here might find controversial is merely whether the present day oil "embargo" is A) really fundamentally moored in reality, and B) going to persist for decades and get constantly worse.

If A and B are true, then government printing of money will over time move to the side, to become only one, of two different sources of highly generalized inflation. The concept of high real costs of energy being direct and powerful inputs upon inflation has been around for quite a while, no?

I have noticed a fair sized "blind spot" among iTulip contrbutors as to this topic. It's loosened up a bit recently on the "fiat currency as sole driver" viewpoint, but a year ago if you asked around here people would tell you the only factor worth mentioning in the quite evident emerging tightness of commodities on global markets was debasement of the currency. This is incorrect. You have massive real purchasing power accruing to not only the oil producers, but also all commodity producers. If the price rises of the commodities they export are merely fiat currency inflation derived, why are these countries balance sheets and cash reserves (in real purchasing power!) soaring?

Tucked away within this massive swelling of the coffers of the energy exporting nations, is an invalidation of the thesis that the rise in cost of energy inputs is merely a fiat currency inflation manifestation. That's possibly a rather significant observation, with very large implications for the future, insofar as if geology is gearing up to become the largest factor imposing general future price rises (permanently rising real energy input costs to all goods), we are looking forward to rising inflation as far as the eye can see, until someone "invents" cheap energy for the world.

You'll agree a great number of us don't have any expectation that cheap energy for the world will arrive miraculously any time soon. Because of all the above observations about the potential for much higher real cost of oil, how can current inflation as a trend remain governed solely by currency debasement? If serious, structural petroleum depletion is real, at some point, when the fires of fiat currency inflation have burned themselves out, unless we've dreamed up some "cheap energy" in the meantime, the natural resources "geological embargo" could represent a far more intractable inflationary pressure - if that scenario comes about, even reconstructed strong currencies will start getting pressured all over again as a reaction (used as a shock absorber to soften the blow to social programs if nothing else!) to the soaring cost of energy inputs.

Given the lightning fast accrual of massive real wealth to the energy exporting nations, I have to conclude that process of petroleum resource constraints (geology "embargo" caused inflation) is well underway even today, but the majority of iTulipers don't apparently see it that way.

When, or much more accurately, "if" the "cheap energy for the whole world" mystery is finally figured out and rolled out globally, the world would of course see the biggest boom in history, precisely because energy input costs had just dropped by 90%. But that's sure looking a lot like pie in the sky these days.

Maybe I'm missing some point you were trying to make here about real energy cost = pressure on consumer price index, but I don't see it.

__________

Grapejelly -

Here is a chart borrowed from a post Bill just made on the "China > Blackstone" thread. Quick question: Where the heck did the oil exporting countries in this list of Sov. Wealth Funds get all that massive capital if the rise in the asset they sell was merely caused by inflation? There is a rather large hole in this iTulip "fiat currency = oil price rise" thesis that I note has not yet been even marginally addressed. UAE the largest sovereign wealth fund? Out of what?

BILLS CHART ON SOV WEALTH FUNDS.gif

[grapejelly]

Re: Is GOLD still a good choice?

Lukester, I am not arguing that higher energy prices won't raise prices of other goods.

I am arguing that this is inflationary. It is not.

If oil triples in real terms as you suggest is possible, then the prices of some goods will rise but absent central bank inflation, there is less money for other goods and services.

The only way that higher energy prices can be inflationary is if central banks allow money to be created at a pace that exceeds real growth in the underlying economy.

Think of a thought experiment type desert island economy with Able, Betty and Carol as the only actors. Able buys a fish from Betty. If Betty raises prices of fish to three clams from one clam, then Able has two clams fewer now and cannot afford to buy as much from Carol. This is pretty basic stuff.

If oil tripled in price, rather than inflation skyrocketing, there would be dynamic responses in the economy.

A lot more conservation than anyone imagines possible today.

Less money spent at Walmart and Home Depot.

Call it a recession...demand for other goods and services would drop and less money would be available to spend on other things.

I think a general tax revolt might be the not-altogether-unpleasant result.

[c1ue]

Re: Is GOLD still a good choice?

The other thing to keep in mind is that a lot of this China, GCC (Gulf coast), OOP (Other oil producing nation) money is coming from the US.

Although my opinion of the near future of the US is pretty dismal and well known, nonetheless it is not a good assumption that demand will continue to grow in China/GCC/OOPs while the US suffers withdrawal from its fiat dollar golden age.

There are few examples of successful mercantilism converting into self sustaining consumption/creation; even such as S. Korea still is heavily dependent on exports for continued prosperity.

With the uber-consumer nation no longer able to pay - this changes a lot of equations permanently.

[Rajiv]

Re: Is GOLD still a good choice?

Lukester,

Another way to look at this is that if there were a constant money supply - there is no inflation. If the energy prices go up, goods will reprice relative to one another - but there will be no inflation. There may be an adjustment in the population of relative wealth, but there will be no inflation. There may be a shortage of some goods -- and there may be a huge die-off but there will be no inflation.

[touchring]

Re: Is GOLD still a good choice?

Quick question: Where the heck did the oil exporting countries in this list of Sov. Wealth Funds get all that massive capital if the rise in the asset they sell was merely caused by inflation? There is a rather large hole in this iTulip "fiat currency = oil price rise" thesis that I note has not yet been even marginally addressed. UAE the largest sovereign wealth fund? Out of what?

[ATTACH]149[/ATTACH]

A lot of sovereign funds make money, and compounding returns over years can result in a massive fund.

Even starting with just $50 billion, if the rate of return in USD is 10%, after 20 years, you get >$300 billion.

So that UAE has a $800 billion soveriegn fund is not surprising at all.

Wait, isn't this is what capitalism about? Management of capital?

[grapejelly]

Re: Is GOLD still a good choice?

A lot of sovereign funds make money, and compounding returns over years can result in a massive fund.

Even starting with just $50 billion, if the rate of return in USD is 10%, after 20 years, you get >$300 billion.

So that UAE has a $800 billion soveriegn fund is not surprising at all.

Wait, isn't this is what capitalism about? Management of capital?

Interesting point because of what I have learned from iTulip and Michael Hudson's commentary. I have learned that even if someone (a SWF say) makes money through the miracle of interest compounding, then someone else (producers and consumers) must earn enough surplus to pay that interest and also to make a profit. A real 10% profit per year is pretty tough today, impossible, when you consider that a profit must be made above and beyond.

So the $300 billion from $50 billion will be nominal dollars and that means that, returning to this thread subject, gold is a good investment today. Because the promises made in the future can only be honored in nominal currency (let me stop picking on the dollar...all fiat is the same pretty much in this respect).

The game of the oil countries and China has to be to build as much real wealth as possible with their currency without appearing to head for the exits and precipitating a plummeting confidence in paper. But it is quite evident, at least to me, that the value of paper money will fall quite rapidly. This is a great argument for nominal increases in equity prices and commodity prices and gold in particular. I think more than anything else it is an argument for historically high oil prices regardless of "peak oil" and so forth.