Gold bubble goes pop!

[jk]

Re: Gold bubble goes pop!

My concern is that if the stock markets plummet, commodity stocks will go down with other stocks, and money will flood into Treasuries. Perhaps the only things that would escape that would be gold and other precious metal ETFs that are thought of as money.

This may be a novice question . . . but as far as investing, it seems to me there is a difference between a value of a stock and the commodity itself. For example, if the price of oil goes up, does that necessarily mean that stock in an oil company will rise? The price of the stock is determined by the demand for the stock, and in a stock market crash, couldn't the oil stocks go down even while the price of oil rises?

What will happen to ETFs directly holding commodities. Would they rise with the cost of the commodities, since the value of ETF share may be tied to the price of the commodity and not determined by demand for shares?

I would really like to invest in commodities now (other than gold and silver), but I'm waiting for the market crash before I do so. Is this a mistake?

i bought commodity etf's, not commodity related stocks. two separate things, as you know. what's good for the commodity is usually good for the related stocks, but not always, and less so the other way. for example- the more expensive it is to extract gold, the less profitable a gold mine but the more valuable already-extracted gold. and, yes, in a sell-off it is likely that commodities will sell down with everything else. pm's might drop less, but you shouldn't count on it.

[grapejelly]

Re: Gold bubble goes pop!

Long rates rising...mean that gold is going to go to the moon. Different from other commodities. Gold supply and demand revolve around the soundness of paper and that ain't looking too sound.

Don't believe either that gold is in a bubble or that it will pop. Just like oil will not reach $100 per bbl. Yeah, right.

[GRG55]

Re: Gold bubble goes pop!

My concern is that if the stock markets plummet, commodity stocks will go down with other stocks, and money will flood into Treasuries. Perhaps the only things that would escape that would be gold and other precious metal ETFs that are thought of as money.

This may be a novice question . . . but as far as investing, it seems to me there is a difference between a value of a stock and the commodity itself. For example, if the price of oil goes up, does that necessarily mean that stock in an oil company will rise? The price of the stock is determined by the demand for the stock, and in a stock market crash, couldn't the oil stocks go down even while the price of oil rises?

What will happen to ETFs directly holding commodities. Would they rise with the cost of the commodities, since the value of ETF share may be tied to the price of the commodity and not determined by demand for shares?

I would really like to invest in commodities now (other than gold and silver), but I'm waiting for the market crash before I do so. Is this a mistake?

You got it Raja. There can be a very big difference between a commodity and the equity shares of companies that produce that commodity.

Let's use the oil example. As prices have risen many of the largest publicly traded companies that produce oil have been subjected to increased nationalization, confiscation, taxation and regulation of their assets (or former assets, as the case might be). If we take Venezuela as one example, its policies have resulted in less investment and less production, thus contributing to the fundamentals that are supporting high oil commodity prices. But any companies operating in Venezuela have seen their share prices range from hampered to hammered.

The shares of companies are subject to all sorts of variables like operating costs, escalating capital, increased taxation, political risk, NGO interference, global warming criticism, and so forth. The commodity does not see any of that (when was the last time you heard about anyone protesting outside the HSBC bullion vault in London, instead of the head office of a mining company?)

Other side of the coin. Companies with long reserve life assets, in safe jurisdictions (are there any?) and avoiding financial shenanigans like production hedges to smooth cashflows (a sign of sound management IMO), can be considered a long dated or non-expiring option on the commodity. And eventually that leverage will outperform the commodity if the bull market and inflationary policies last long enough.

[FRED]

Re: Gold bubble goes pop!

this was precisely my thinking a few wks ago when i decided to buy some agricultural commodities. i had too many u.s. dollars of evaporating value, and felt fully allocated to pm's and currencies. what could i buy to get out of dollars?

EJ writes in:

Why expect that holders of dollars are worried that the declining dollar is a long term trend and that hard assets and commodities are aside from the most default risk-free government securities likely to continue to receive money flowing out of dollar denominated assets?

Perhaps images such as the following from a 2003 IMF report are sinking in.

The U.S. generates 28% of world GDP ($13.4 trillion vs $48 trillion) and imports more than 75% of the world's capital flows.

If in a global contraction U.S. GDP falls at a faster rate than the GDP of its trade partners, net flows to the U.S. have to decline and the dollar with it.

Each percentage point decline of flow of capital corresponds to a percentage depreciation in the value of the dollar a ratio of at least 1:1 or higher.

The only argument for an appreciating dollar in the global recession scenario is that the U.S. economy slows more gradually than it's trade partners'.

So far there is little evidence of this.

[GRG55]

Re: Gold bubble goes pop!

EJ writes in:

Why expect that holders of dollars are worried that the declining dollar is a long term trend and that hard assets and commodities are aside from the most default risk-free government securities likely to continue to receive money flowing out of dollar denominated assets?

Perhaps images such as the following from a 2003 IMF report are sinking in.

The U.S. generates 28% of world GDP ($13.4 trillion vs $48 trillion) and imports more than 75% of the world's capital flows.

If in a global contraction U.S. GDP falls at a faster rate than the GDP of its trade partners, net flows to the U.S. have to decline and the dollar with it.

Each percentage point decline of flow of capital corresponds to a percentage depreciation in the value of the dollar a ratio of at least 1:1 or higher.

The only argument for an appreciating dollar in the global recession scenario is that the U.S. economy slows more gradually than it's trade partners'.

So far there is little evidence of this.

Another reason to avoid the Aussie, Kiwi and UK Pound. They may be paying very high interest rates right now, but they have to in order to keep attracting the capital they need to cover the current account. Any stumble and their currencies could get hammered.

I am sticking with countries that have current account surpluses only (except for the bonars I am still trying to convert to something else...)

[grapejelly]

Re: Gold bubble goes pop!

it's tempting to stick with paper...but it's a great time to get out of paper altogether. I am sticking with some paper, primarily PM miners and some ST treasuries, but mostly sticking to hard hard hard assets only.

Interestingly, even PM paper is still way behind the curve as far as bullion is concerned. Maybe it is a great setup and will more than catch up. I think so but you can't be sure. Best to hedge with the real thing.

[Jim Nickerson]

Re: Gold bubble goes pop!

EJ writes in:

Why expect that holders of dollars are worried that the declining dollar is a long term trend and that hard assets and commodities are aside from the most default risk-free government securities likely to continue to receive money flowing out of dollar denominated assets?

Perhaps images such as the following from a 2003 IMF report are sinking in.

The U.S. generates 28% of world GDP ($13.4 trillion vs $48 trillion) and imports more than 75% of the world's capital flows.

If in a global contraction U.S. GDP falls at a faster rate than the GDP of its trade partners, net flows to the U.S. have to decline and the dollar with it.

Each percentage point decline of flow of capital corresponds to a percentage depreciation in the value of the dollar a ratio of at least 1:1 or higher.

The only argument for an appreciating dollar in the global recession scenario is that the U.S. economy slows more gradually than it's trade partners'.

So far there is little evidence of this.

EJ, unless the video was dubbed, I heard you say the other day on CNBC that you would have your Mom in cash NOW. Is what you say above in your post contrary to what you said on CNBC, or is there some deeper rectification of what I think I perceive as cognitive dissonance?

[Jim Nickerson]

Re: Gold bubble goes pop!

WTF does John Mauldin know about Ka-Poom?

Here seems to be his take on things from 3/7/08 (Mauldin's opinions usually show up on http://www.safehaven.com/ on Saturdays, but I don't see it there as I write.) The quote below is from the same message that I receive via email.

Inflation is anywhere and everywhere a monetary phenomenon. And the Fed is not inflating. It is just that simple. My good friend and mentor in the early '80s, Dr. Gary North, who pointed out these charts to me, speculates that the Fed may partially be doing this to help the dollar. Maybe.

But whatever the reason, we are watching two monster bubbles deflate. Housing stands to lose at least $2 trillion and probably $4 trillion in the US, and while the numbers will be smaller in England and other markets in Europe, they will be sizeable. The credit crisis is going to deflate financial assets of all sorts, as the leverage which drove prices up is going to take prices down as risk is repriced. These two phenomena are deflationary.

I know that is not what much of the media and analysts tell you, and I get some very heated (but mostly polite) mail telling me that I simply don't get it. And I understand that price inflation is an issue today. I know oil is rising ($106 a barrel), gold is signaling inflation, and food prices, especially the grains, are off the charts. I know my education costs for seven kids are rising each year, as well as my health insurance. Believe me, I feel your pain.

But I think by the end of the year we will be talking about disinflation, if not deflation. It would be a strange recession indeed to produce inflation in an environment of two major bubbles deflating along with a bear market in stocks. Consumer spending is going to slow. Today we saw a disappointing personal income report, which shows wages rising less than current inflation. These things ebb and flow.

So above it seems Mauldin is making a "Ka" call.

EJ, is Mauldin ferreting out this stuff more quickly than you, or do you diasagree? Last thing I remember from your fingers was somthing akin to our being in Ka and Poom together now, and at least I think metalman bought into that. For myself, I don't have an idea.

I think Mauldin's comment requires refuting or agreement by someone smarter than I.

[Jim Nickerson]

Re: Gold bubble goes pop!

Another reason to avoid the Aussie, Kiwi and UK Pound. They may be paying very high interest rates right now, but they have to in order to keep attracting the capital they need to cover the current account. Any stumble and their currencies could get hammered.

I am sticking with countries that have current account surpluses only (except for the bonars I am still trying to convert to something else...)

Lacking patience as I do, I was in FXE and sold it, and for reasons I can't recall now I chose not to buy any FXF, so I am "stuck" with just a 10.3% position in FXY. None of these mothers is cheap now, at least as I see it.

GRG, what, if anything, looks the least bit promising to you as far as getting more out of the bonar?

[EJ]

Re: Gold bubble goes pop!

WTF does John Mauldin know about Ka-Poom?

Here seems to be his take on things from 3/7/08 (Mauldin's opinions usually show up on http://www.safehaven.com/ on Saturdays, but I don't see it there as I write.) The quote below is from the same message that I receive via email.



So above it seems Mauldin is making a "Ka" call.

EJ, is Mauldin ferreting out this stuff more quickly than you, or do you diasagree? Last thing I remember from your fingers was somthing akin to our being in Ka and Poom together now, and at least I think metalman bought into that. For myself, I don't have an idea.

I think Mauldin's comment requires refuting or agreement by someone smarter than I.

Jim,

Here is a preview of my next commentary as a response to your question about John's note because it is relevant.

John does not understand that we are not in an environment that can possibly result in a sustained strengthening of the dollar and thus cut off the source of price inflation that we have been experiencing.

The fallacy that John believes is that the only source of inflation is wage inflation. This is nonsense that has been circling among wingnut economic bloggers until it has taken on some inexplicable level of plausibility. Wages are but one potential source of price inflation but are by no means the only source. Cost-push inflation from rising import prices due to a declining currency is another and the one that has been fueling inflation in the U.S. for years. Unemployment can rise to 25% and this source of inflation will continue to exert inflationary pressures on prices; in fact, it will get worse and is getting worse.

This is the crux of the whole inflation versus deflation debate. What is occurring is unintuitive so I understand John's confusion. While this dynamic has occurred repeatedly in other countries over the centuries it has never before happened to the United States. The cognitive dissonance is palpable. Looking ahead these commentator ask, Where is our 1980s Volcker recession that crushed the unions, stripped labor of pricing power, and killed inflation for 20 years? Where is our 2001 deflation scare?

My advice to them is: look behind you. The trend that is already big is about to get a lot bigger.

The world is heading into a global economic contraction, led by the U.S., led by the collapse of the housing bubble. But the antecedents of this contraction are, for the U.S., unlike any other. Let's zoom the time scale way out for a moment to see where this contraction is going.

The FIRE Economy bailed the U.S. economy out of the 1970s by substituting return on assets for return on capital. Hudson thinks this can go on until the U.S. absorbs 100% of the world's economic surplus. I say it goes on until the FIRE Economy breaks down and it's been breaking down for the past nine months.

The U.S. generates 28% of world GDP ($13.4 trillion vs $48 trillion) and imports more than 75% of the world's capital flows.

If in a global contraction U.S. GDP falls at a faster rate than the GDP of its trade partners, net flows to the U.S. must decline and the dollar with it.

Each percentage point decline of flow of capital corresponds to a percentage depreciation in the value of the dollar at a ratio of at least 1:1 or higher. Think of the period going forward as a resumption of the process that started in 1971, took a detour during the rise of the FIRE Economy from 1980 until 2000, crashed from a high point of dollar strength and low inflation between 2000 and 2001, recovered temporarily from 2001 to 2007 during the housing and other asset bubbles – at a cost of $1.8M in new private and public sector debt per new job – largely financed with foreign borrowing and thus without creating as much inflation as otherwise would occur.

Now the resulting wall of dollars begins to flow back in our direction.

During periods of global economic contraction following a global credit bubble the global purchasing power of the currencies of capital importers falls and of capital exporters rises.

It has always been thus throughout history and is again. The role of the U.S. in this credit bubble contraction is the reverse of its role in the 1930s. Then U.S. trade partners' currencies crashed and they experienced high inflation as their economies went into depression while the U.S. dollar appreciated and economy went into depression.

It would be great for US wage earners if as the recession progressed that the purchasing power of their meager savings were to rise and their declining real incomes were to turn around and begin again to buy more gasoline, more tuition and health insurance, and so on.

Alas this is not to be, for that implies that the U.S. economy is growing relative to its trade partners'. U.S. trade partners can grow without a steady flow of borrowed money, so they will continue to grow albeit more slowly, or worst case will contract more slowly than the U.S., as they shift to greater internal consumption and trade among each other.

As for your question about CNBC, recommending cash on a channel dedicated to the proposition that everyone should be in the market and trading all the time is pushing your luck. Folks in cash don't need to watch CNBC. I'd like to think I influenced a few CNBC viewers to not ride the bear market – the one we called at the end of Dec. 2007 when many commentators were saying "It's different this time" – all the way into the ground like the last one. Going to cash is better than staying in stocks. I'd rather recommend a portflio that includes PMs, of course, but CNBC isn't Bloomberg. It's necessary to compromise if you want to be invited back, to live to fight another day.

[grapejelly]

Re: Gold bubble goes pop!

I seem to recall the 1970s had very high inflation including during the somewhat severe recessions.


Why should a debt deflation mean a monetary deflation?

The money that has already been "printed" -- if a debt is written off, what happens to that money? It's already been spent, hasn't it?

If borrowed money is paid back, that reduces the money supply. But if debts are written off, how does that reduce the money supply? It may reduce the rate of new money creation, but it can't possibly reduce the money supply.

Since inflation is caused by an increasing money supply, I think these arguments that "debt deflation means deflation" are wrong.

Debt deflation means slower credit creation.

This is "disinflationary" but not deflationary.

Further, in compensation, in panic mode, the central banks can open the floodgates to monetizing what was formerly substandard or unacceptable collateral. So credit creation can continue despite the debt deflation. And this is what I think they are doing, the Fed with the TAF and the new practice to create "high powered money" out of TAF.

The new credit that is created -- where does that go? Not into lending, because borrowers aren't creditworthy. And demand isn't there.

It goes to the banks but they aren't going to lend. It helps maintain liquidity but does nothing for solvency.

I think this new money is a red herring.

The existing money that's out there, the real money, the capital, is being taken out of paper and is being put into commodities. Where else can it go?

So we have:

1. Debt deflation.

2. Disinflation, a slowdown in new credit creation as old debts are written down or written off.

3. Central banks lending money on increasingly doubtful collateral, to make sure the banks don't run out of cash

4. The real money that is out there fleeing paper and going to commodities.

None of this affects wages except to lower demand for labor, and therefore put downward pressure on wages.

But at some point, the governments will have to put real cash into consumer's hands. They will do so through heliocopter drops. They must in the end favor debtors because they are the biggest debtor of all and the whole public-private banking/corporate partnership works on the premise that the banks will continue buying ever higher amounts of government debt.

There will be madcap government debt issuance and that means long rates will skyrocket.

More money will flee financial assets into commodities.

[Jim Nickerson]

Re: Gold bubble goes pop!

Thank you EJ for your comments, and I hope you didn't answer my question and it just went over my head.

Mauldin suggested that by the end of this year "we will be talking about disinflation, if not deflation."

For the sake of this conversation, if you see need to continue it, forget deflation and focus on disinflation specifically as it relates to Ka-Poom. Do you have a sense as to where we are with your theory?

Edit: that pie chart in your reply is going on five years old. Do you think there is no significant change since then in what the chart depicts?

[FRED]

Re: Gold bubble goes pop!

Thank you EJ for your comments, and I hope you didn't answer my question and it just went over my head.

Mauldin suggested that by the end of this year "we will be talking about disinflation, if not deflation."

For the sake of this conversation, if you see need to continue it, forget deflation and focus on disinflation specifically as it relates to Ka-Poom. Do you have a sense as to where we are with your theory?

Edit: that pie chart in your reply is going on five years old. Do you think there is no significant change since then in what the chart depicts?

Jim, that article referred to also includes this chart in our Idiot's Guide to Hard Assets Investing. We wrote it slowly for our readers who don't read fast.

The green boxes show times when everyone goes into hard assets: inflation (even as measured by bogus gov't stats) is going up while bond yields are trailing the rate of inflation growth.

So, the $3.8 trillion question is: What's going to drive bond yields over the rate of inflation to drive money out of hard assets this time?

[jk]

Re: Gold bubble goes pop!

forgive me if i am being dense, but i don't see why a faster drop in u.s. gdp [versus trade partners] requires diminished capital flows to the u.s., any more than slower growth in the u.s. [versus trade partners] has required diminished capital flows. as long as our trade partners have savings and are willing to lend them as vendor financing, they can do so. can't they?

[Jim Nickerson]

Re: Gold bubble goes pop!

Jim, that article referred to also includes this chart in our Idiot's Guide to Hard Assets Investing. We wrote it slowly for our readers who don't read fast.

The green boxes show times when everyone goes into hard assets: inflation (even as measured by bogus gov't stats) is going up while bond yields are trailing the rate of inflation growth.

So, the $3.8 trillion question is: What's going to drive bond yields over the rate of inflation to drive money out of hard assets this time?

FRED, ED. It seems I keep getting answers to questions I don't think I asked, or questions that don't answer the question I asked.

EJ, is it possible for you to give us your opinion as to where we are right now with regard to your Ka-Poom Theory.

FRED, ED., it seems if history is any indicator that inflations induces higher bond yields. Individuals become concerned when inflation today is lied to be 4%, the government is broke, and fools are willing to loan the government money for 30 years @ 4.555%. At some point if inflation is rampant, then bond yields have to go up. What freakin' saftety is there in US treasuries when US bonar is worth less and less, and the US is bound to borrow money in order to operate and seemingly is guaranteeing payback of principal and interest in bonars worth less the further out the maturity of the bond?