Well, that just about wraps it up for GOLD!............

[jpetr48]

Re: Well, that just about wraps it up for GOLD!............

Raz
Thank you, very informative.
Joe

[doom&gloom]

Re: Well, that just about wraps it up for GOLD!............

nice find, thank you.

[nero3]

Re: Well, that just about wraps it up for GOLD!............

Yes, but US stocks are not cheap also.

It depends on what you compare against. If you compare todays earnings ,with earnings in 2000, when the unemployment was very low, dollar strong, and consumer confidence really high, it can't really be done. There was a point between 1980-1982 the market had a P/E ratio above 40.

A currency chart, long term, between the danish currency and the dollar, give a match in 1978, with 2008, and now it's a match with late 1980 (or around 1994).

The market is relatively high relative to GDP, of course. However in a world of high priced stocks it's not that easy to find opportunities, I think a better opportunity is in a country where the currency is poised to go up. One opportunity is to buy some high quality stocks and ride out the rest of the secular bear-market (if it's still in a secular bear).

[nero3]

Re: Well, that just about wraps it up for GOLD!............

There is one reoccurring nightmare I have from time to time. The story goes like this: I'm checking my stocks my portfolio, etc. And the dollar crashes. it a matter of just a few hours, millions turn into billions. It happens so fast it's nothing to do when it first happens.

[FRED]

Re: Well, that just about wraps it up for GOLD!............

Published Jan. 12, 2011 when gold traded at $1,381 is this forecast of a decline in the gold price to $1,100 by EJ. I'm pre-printing a portion of the article here to help better inform the community on the gold market. By the way, in 2009 we forecast a deficit of $1.5 trillion in 2011, very close to the level that the CBO announced earlier this week. Previous gold price correction forecast made in 2007 for a > 20% in 2008 but for gold to end the year higher than at the open.

Gold over $1400 and still no gold bubble

A friend sent me a note to ask what I think of Mark T. Williams' recent article “Fool’s Gold” in Foreign Policy magazine about World Bank President Robert Zoellick's international gold standard proposal. The article makes an ideal launching point for our 2011 assets forecast.

Over the past 40 years I have learned to place gold market analysts into three main categories. Two of them are portfolio hazards.

The goldbug gold market analysts occupy the first hazardous analyst category. They perennially argue in defense of higher gold prices. They did so even during the 1980 to 2001 bear market in gold when gold prices fell from a peak of $850 to a low of $265. To them, now is always the right time to own gold. They ignore the fact that gold performs well when real interest rates are negative and poorly when they are positive, well when currency risk is rising and poorly when it’s falling. They imbue gold with magical properties. They like gold. Gold represents a solid, tangible anchor of certainty and constancy in a period of turbulence and rapid change.

There are several sub-categories of goldbug. The religious goldbug. The ideological goldbug. The monetary fundamentalist goldbug. But they all have one thing in common. They all believe that special properties of the metal itself are the main reason for gold’s special role as money and currency in history.

The historical fact is that governments made gold money, first for the uniform collection of taxes within the sovereign’s realm and later to guard against the misbehavior of governments in the conduct of trade. It is this latter role for gold that never really ended in 1973, as we noted in 2001 when we took our gold position, despite the official elimination of gold’s role in the monetary system. Modernity has not eradicated the tendency of governments to be even less honest with each other than they are with their own citizens.

The second category of detrimental gold analysts are the perennial gold detractors, the gold bashers. They exist as a counterpoint to the goldbugs. They dislike gold for what it represents. To them, gold is an affront to technocratic monetary management based on the promising idea that monetary policy makers know what to do to maintain stable currency values and can be trusted to do it, no matter the political consequences and regardless of the wide range of political decisions made by politicians outside the control of the monetary technocrats that effect currency values, in particular unmanageable fiscal deficits, the number one killer of currency exchange rate value.

The third category of gold analysts, the gold realists, are not detrimental to your portfolio but they are not much fun to read. They never tell you what you want to hear. They don’t glorify gold to the satisfaction of goldbugs nor do they vilify it to sooth the egos of those investors who were too timid or easily swayed by gold vilification arguments to buy gold insurance against a broken monetary system when it was still cheap.

The gold realists are cold hearted, unsentimental analysts who continuously re-assess their position in the gold market. I count myself among them.

We don’t buy into the goldbugs’ magical thinking. Human nature being what it is, gold is like everything else that can be bought and sold, good in the hands of good men and bad in the hands of the pernicious, just like fiat money.

We gold realists don’t buy the monetary technocrat’s argument, either. We know that even if the monetary technocrats are competent and honest, politicians can undo them vote after vote. Without the discipline of the international gold standard to keep politicians for making politically convenient yet fiscally unsound short-term spending decisions, each administration simply pushes the ever-larger barrel of contingent liabilities on to the next administration with a nudge and a wink. The liabilities pile up decade after decade.

Career economists vie for employment within the academic, government, and banking institutions that comprise the monetary technocracy that created this mess. They invent creative explanations: supply-side economics, the Asian savings glut, Bretton Woods II, and -- my personal favorite -- economic dark matter, to explain the inexplicable.

I have a simpler explanation for America’s imbalances dilemma. The US Treasury reserve based monetary system was, as economist Robert Triffin predicted in the 1960s destined to run into trouble. It did in the late 1990s, but no American president has had enough credibility to level with the American people and explain the simple fact that we need to take a haircut in order to adopt a new, more sustainable system; we must reduce our liabilities and our dependency on foreign capital inflows to finance our trade and fiscal deficits. But the American social contract of prosperity in exchange for citizenship was shredded by war and asset bubbles and replaced by entertainment and government subsides. There is no one to deliver the message and very few people to deliver it to.

For me, the time to start owning gold is when the country that is supposed to be the bedrock of a debt-based global monetary system goes off the rails as the US did in 2001. The blunder of a stock market bubble based on lies from US accounting firms about the accounts of technology companies was followed in quick succession by a “preemptive war” predicated on lies from the about imminent security threats and a securitized debt financed housing bubble based on lies by US credit ratings agencies about debt securities ratings.

The accumulating cost of bailing the economy out of each policy error ratcheted up the US budget deficit from 4% to 10% of GDP. None of it would have been possible under the international gold standard that the US abandoned in the early 1970s. Global bond markets would have delivered punishing bond yields that drove the dollar up and forced the US to get its house in order.

The US fiscal position was in balance at the time the current global monetary system solidified in the early 1980s. Today it is far out of balance and is one crisis – China crash, Peak Cheap Oil Cylce recession, “premature” Fed rate hike – away from a level that might crash the US Treasury bond market.

Putting aside the threat to the global monetary system posed by US economic policy gaffs, even the premise that monetary technocrats are the good guys holding the line against the scourge of inflation is invalid. They had a direct hand in the last two asset bubbles, the collapse of which precipitated the dollar’s decline in 2001.

Monetary authorities failed to execute their responsibilities as regulators. They then compounded the damage caused by abdication by denying the existence of the bubbles they helped create. Instead of using the bully pulpit of central bank authority to reign in the bubbles and lessen the damage, Greenspan argued, incredibly, in 2006 that paying off credit cards with cash-out home refinancings is good household finance. Years later in 2008 his successor Bernanke testified before Congress that no housing bubble existed, two years after it ended, as anyone could see.

All of this by way of framing the gold market analysis of Mark T. Williams. Which of these three categories of gold market analyst does Mark T. Williams fall into?

“What is your name and who do you work for?”
- Hunter S. Thompson

The short bio at the end of the FP article says Williams teaches finance at Boston University School of Management and is a senior adviser to the Brattle Group. Who is the Brattle Group?

"The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governments around the world."

I figure I’d have better luck finding a cigar smoker at an Earth Day rally than a proponent of an international gold standard among a group that includes a former U.S. Federal Reserve Bank examiner.

I expect the usual economics school line on gold: gold pays no interest, gold is risky, and so on, the same arguments I've been reading month after month, year after year, since 2001 when I bought gold at US$270, or expect the author to wander off the monetary technocrat reservation into goldbug land any more than I expect the validity of the monetary technocrat paradigm to be called into question.

Even before I begin reading the article, and after reading dozens of similar articles over the years, I anticipate little in the way of well-researched arguments backed by facts.

I wasn't disappointed. In fact, the arguments made in “Fools Gold” are remarkably pedestrian. I've seen better since the first "gold is a bubble" arguments started to appear in 2006, such as from Feldstein and Roubini in 2009 (See “Lessons of the American Lost Decade – Part I: The gold bugs were right”).

Williams sets up and knocks down one straw man argument after another.

"Today, gold is in a bubble. The price stands at an all-time (non-inflation adjusted) high of about $1,400 per ounce. This is remarkable given that inflation remains well under 2 percent…"

So gold is a bubble because inflation is reportedly low? What if the inflation that gold is pricing in hasn't happened yet? What if the inflation will not be the kind of we had in the US in the 1970s when the last "gold bubble" happened as retail buyers panicked out of paper due to too much of it being printed. Maybe the inflation that gold is pricing in is instead the kind that happens when a currency goes bad after decades of excessive foreign and domestic borrowing -- suddenly, even after years of low or even negative inflation, the way inflation in Argentina went from below zero to 40% in nine months starting in the middle of 2002 after the peso-dollar currency peg collapsed.

“…and the cost of mining the stuff has remained $450 to $550 per ounce. In other words, as soon as it is out of the ground, you can turn around and sell it for three times what it cost you to dig it up.”

Williams additionally argues that gold is a bubble because the gold price is high relative to the cost of gold production. I believe that difference is called a "profit" and profits are what mining companies are in business to make. Maybe Williams is right and a 72% gross margin on gold production is "too high."

Markets usually have a solution to such a problem: producers ramp up production and increase supply to meet demand and within a few years prices fall. For a prime example, take a look at the lease market for container ships today. Given that gold prices have been rising continuously for ten years, you’d think that by now that expanding supply would catch up with demand and push prices back down again. The reason that has not happened is not because gold producers can’t keep up with demand, but because they can’t keep up with the rate of decline in demand for the currency in which gold is priced -- dollars but also yen and euros and others – as they are issued in the form of debt by governments to ward of debt deflation.

Williams goes on to associate the wrong cause to the effect of gold’s rise.

"The problem is that all these theories hold true in a recession, but they will fall flat once the global economy moves from chaos back to economic prosperity."

Gold is a good inflation and currency hedge in a recession? Whose crazy theory is that? Gold prices typically fall during a recession. Even goldbugs don’t argue otherwise.

Gold prices rise after a recession, due to currency devaluation caused by the monetary policy of technocrats and by fiscal stimulus by politicians. Dollar depreciation is a major component of reflation policy. These policies are billed by the technocrats as “deflation fighting” but that’s like calling an electric space heater a “cold temperature fighter.” Calling a spade a spade, fighting deflation means creating inflation but from a condition of negative or low inflation.

When Williams warns that the return of prosperity will end the gold price rise, he cannot mean the spiraling commodity price inflation produced by pro-inflation policies of governments and central banks, but some other kind of prosperity, the kind that pushes up bond yields.

"When stocks start to rise and bonds offer a higher interest rate, gold won't look so good. And its price will fall -- just like it would for any other investment. The drop could happen as soon as 2011 or 2012."

Now we’re getting somewhere. If we do see bond yields rise above than the actual versus reported rate of inflation, gold will in fact tumble. We may see this briefly in 2011, if the Fed acts or China blows up, but it won't last long, not until we iron out America's housing bubble debt hangover, cheap oil dependency, and $70 trillion contingent liabilities problem.

Today the spread between the real rate of inflation and the reported rate that the bond markets follow is pushing up gold prices. When the Fed hints at its first rate hike, gold will correct. I expect prices to fall approximately 20% as we saw in 2006 but not as far as the larger correction we saw in 2008.

But it won’t last long. America’s economy can't survive positive real interest rates when its housing market is still in the tank and its economy is clawing its way out of its output gap at less than 4% annual GDP growth. The most effective way to create negative real rates when the Fed Funds rate is stuck at zero is to create more inflation, once again through QE and currency depreciation. The trick may not work as well this time, however. The Fed may find itself on the wrong side of the seigniorage revenue Laffer curve, a concept we’ll devote considerable time to this year.

Williams’ gold bubble continues as a string of opinions without data or analysis to back them up. I've noticed this in every one of the gold vilification articles I've read over the past decade. The authors act as if they are allergic to data. Instead, they rely on credentials to back unfounded assertions, like this one:

"Already, there are signs that gold is poised to burst. The market has been good for too long and the hype is too intense."

This marks at least the 20th claim that I've read since 2006 that "gold is a bubble about to burst" when I wrote "What Gold Bubble?" in Oct. 2006" when gold traded around $560 and since I wrote “Gold update: Gold over $1000 and still no gold bubble” in October 2009.

Williams not only claims that gold is a bubble but that it is about to burst: "The market has been too good for too long."

By that standard Apple Computer must be eight times the bubble gold is. APPL is up 43x since 2006, the year that Williams marks as the start of the gold bubble, while gold is up only 5x.

A bubble is not identifiable by price alone.

Williams is not the only analyst I’ve read lately who thinks it's 1980 again, when inflation was 15% and the Fed raised the Fed Funds rate to 20% to slam the economy into a recession and crush an inflation spiral.

"Many investors are too young to remember the last gold bubble in 1980, when prices peaked at $850 per ounce and then plummeted 60 percent in a single year."

2011 doesn't look anything like 1980 to me. The CPI in December 2010 was reported at just over 1%, the Fed Funds rate is scraping zero, and median duration of unemployment is still nearly twice as high as it was in the darkest days of early 1980s when tight money policy induced two massive recessions. Today, in contrast, the Fed shows no sign of tightening. Instead, the Fed regularly issues statements that "inflation is muted" and that the Fed Funds rate will remain low "for the foreseeable future" because "demand remains weak."

2011 is the mirror opposite of 1980 from a monetary policy standpoint. In 1980 the Fed sat atop a ski slope with a 20 year downhill ride ahead of it, and a tail wind of falling interest rates to drive the economy forward. How much money can a homeowner save by refinancing a mortgage from 10% to 9% to 7% to 5%? Now multiply that by the entire base of bonds across the entire economy and you start to get a sense of how simulative 20 years of declining interest rates was starting in the early 1980s. Once the Fed worked up the courage to push rates high enough to stop the inflation spiral in late 1979, a 20-year disinflationary boom followed. That's why the stock market performed so well from 1980 to the year 2000 and gold prices fell.

No, 2011 is not 1980. Today the Fed is stuck at the bottom of the mountain. Interest rates have only one way to go: up. And up they will go, but not because the economy is recovering, as Williams contends, but because the Fed is in a policy ditch, inflationary flood waters are rising, and the finance, insurance, and real estate (FIRE Economy) ski lift that produced the stock market and housing bubbles, to rescue the US economy in the previous decade, is broken. That leaves only fiscal policy or debt restructuring as viable policy choices, as Richard Koo warned us in 2007. Failure to restructure debt will lead to structural deficits. That development is inherently currency negative for a net debtor like the US under a floating exchange rate system.

"For the following two decades, money invested in gold was dead money."

I’m a firm believer in the investment nostrum "past performance is no guarantee of future results.” Stocks did well from 1980 to the year 2000 but that was no guaranteed they'd do well from 2000 to 2010. Gold performed badly from 1980 to 2001 when stocks did well, but that did not predict the performance of gold for the next ten years. I argued in 2001 that the conditions of declining interest rates that drove the economy forward from 1980 to 2000 were great for stocks and bad for gold, and that the condition of asset price deflation and the policy responses to it, fiscal and monetary stimulus, would be great for gold and bad for stocks. That was the theory behind the investment in gold and bonds.

The gold vilification crew starts with the premise: “Gold investing is a losing proposition.” By sticking to a doctrinaire theory of stocks, bonds, and gold pricing, their portfolios fared poorly.

Several of the few gold “facts” that Williams presents are off base.

"Even investments made as recently as 1988 and held to 2004 generated zero return. The real money made in gold has only happened in the last six years. The last gold bubble took four years to inflate; the latest bubble is six years in the making."

Gold prices have been rising for ten years not six, and gold prices have gone up every single year since 2001, a fact that contradicts Williams’ assertion that gold prices are volatile.

I could go on but it's obvious that author is another in a long line of generic gold detractors. He asks and answers the question "Is gold a bubble?" But that’s the wrong question.

The right questions

"Why are gold prices so high when inflation and bond yields are so low?"
"Why did gold outperform stocks since 2001?"
"Why have gold prices gone up every single year since 2001?"

If Williams asked and answered those questions he’d discover that gold is not a bubble and he’d also understand the meaning of the curious event of Robert Zoellick’s international gold standard proposal.

The head of the World Bank recommending a role for gold in the global monetary system is not out of line with the World bank’s stated mission to serve the interests of emerging market economies before those of the major economies. The mission of the IMF is the reverse. The IMF is 100% behind the SDR project as a backup to replace the broken US-centric system. For the IMF, in the words of Paul Volcker who initiated the SDR project, “Gold is the enemy.” If the head of the IMF ever did propose a role for gold, the event will be attended by a steady rain of frogs and clouds of locusts because that will mean the monetary order is about to come to an abrupt and untidy end before the SDR project, now being tested in the periphery of the system in places like Jamaica, didn’t get far enough for official launch.

The meaning of Zoellick’s international gold standard proposal is the opposite of Williams’ explanation. Rather than evidence that "the gold mania has reached the rarified halls of the World Bank" as Williams asserts, Zoellick's idea is the inevitable result of two conditions, which were my reason for investing in gold in 2001:

1. Thirty years after the official end of the international gold standard global central banks continued to hold as currency reserves 25% of all of the gold ever mined in history. Why? To hedge the risk that a global monetary system based on the debt-backed currency of a single sovereign state, no matter how large, is inherently risky. What if the voters of the country that issues the debt-backed reserve currency elect crazy leaders and the country starts to behave badly? What if that country takes on enormous domestic and foreign liabilities to appease voters? What if that country launches expensive adventurous wars? What if that country allows gigantic debt-financed bubbles to develop and then has to spend trillions in public funds to bail the economy out from the aftermath of the collapse, piling liability atop liability?

2. From where I sat in 2001, after my front row experience of the technology bubble, it appeared to me that the US was no longer the US, that the dollar was thus no longer the dollar, and thus the global monetary system was on the road to eventual crisis or even collapse.

Today, US "deflation fighting" inflationary policy is fueling hot capital flows into emerging markets, and creating inflation crisis. Time is of the essence.

Zoellick, speaking for the central banks are speaking for the national governments they are accountable to, is saying in effect, "Forty years ago global central banks held on to their gold in case the USD reserve currency experiment failed. It has been failing since 2001. After the US-centric financial crisis a currency crisis is imminent. If you cannot put your nation back on the rails in short order, we must make gold an official reserve currency again or risk catastrophe."

China is coping with an even more severe conundrum today than America’s. Inflation is pushing 7% and they haven't even crashed their property bubble yet, although they are making steady progress toward that end (see China Crash 2011 - Part I: The repetition compulsion of central bankers). After China’s monetary technocrats bring a decade old property bubble to a crashing conclusion later this year, how will China continue to buy US Treasury debt to maintain demand for dollars and finance America's fiscal and trade deficits? They won't.

What will happen to the US bond market and dollar then? Perhaps a version of the tragedy that befell Germany starting in 1930 when investors in the US and UK succumbed to the Great Crash of 1929 and discontinued financial support for the National Socialist Party, or when the IMF found itself overwhelmed with demand for financial support in the wake of the year 2000 US stock market crash and cancelled programs to prop up Argentina’s bond market in 2001, or a dozen other cases of nations in history that depended on foreign capital inflows for growth, then lost access to those flows because creditors lost the will or means to continue to export capital. The price of gold, the only non-national reserve currency that central banks possess, has for 10 years hinted strongly at the answer: if the nation that issues the world’s reserve currency suddenly loses access to foreign capital to refinance its debt and finance is current account and the operations of government, the adjustment in Treasury bond yields, dollar exchange rate value, relative to gold, can be swift and come without warning.

Gold Inevitability

Central banks have no other option. Gold is the only major reserve currency that central banks have to fall back on. There is simply no time to devise a new system based on SDRs or a currency basket or anything else.

Gold is not a bubble. The gold price has risen to historically unprecedented levels because the center of The System is broken and presents historically unprecedented risks. The Peak Cheap Oil Cycle and the China bubble are the most likely triggers for the currency crisis that central banks started to fear enough in 2010 to begin to increase their gold holdings for the first time in 40 years. If the time to buy gold is when the foundation of the monetary system starts to crumble, then the time to sell it is when a new, viable replacement system is about to come into being.

This is the key to understanding the US economy in 2011: commodity price inflation, housing price deflation, a weak labor market, a structural fiscal deficit, and overall economic recovery too slowly to pull the US out of its output gap, peak cheap oil cycle two, and a China crash. By the end of the year we’ll be pining for 2010.

[thriftyandboringinohio]

Re: Well, that just about wraps it up for GOLD!............

Today sure looks like we're all set up for gold to close below $1,300, first time since last September and about a 9% pull-back from the peak.

[ddn3f]

Re: Well, that just about wraps it up for GOLD!............

Raz,

As always thank you for the information.

[nero3]

Re: Well, that just about wraps it up for GOLD!............

One thing that certainly bugs me is how the US economy will get the momentum needed if republicans can get their way with the debt. It seems they think not being prudent will bring on the bond vigilantes, but it's the other way around. Through not getting enough revenue and growth into the economy, the bond vigilantes will come through ,meaning those republicans are promoting those policies that will bring exactly what they fear.

[FondoFinder]

Re: Well, that just about wraps it up for GOLD!............

Another great article, however:

Re: "When the Fed hints at its first rate hike, gold will correct. I expect prices to fall approximately 20% as we saw in 2006 but not as far as the larger correction we saw in 2008."

There's no hint of the first FED rate hike yet though. It may have helped if it had said "When the Fed hints or the BRIC countries do". On the one hand, saying the Fed can't and won't raise rates 1/4 percent, then pointing out Brazil's rate hike afterwards as justification of the call is not very helpful.

Better than my call though

[globaleconomicollaps]

Re: Well, that just about wraps it up for GOLD!............

hey! what is going on with gold today?

[nero3]

Re: Well, that just about wraps it up for GOLD!............

In around 1981-1983 there was a big wave of defaults, it's symptomatic of the bull-market in the dollar I think. I wonder if something similar is just getting started now with Egypt.

[nero3]

Re: Well, that just about wraps it up for GOLD!............

hey! what is going on with gold today?

In the case you did not notice. Yesterdays sell-off was caused by one man, controlling 10 % of the long futures market, a USD 10 million fund that was. It's just amazing, a fund that small (before their 70 % loss), controlling 10 % of the paper longs.

[thriftyandboringinohio]

Re: Well, that just about wraps it up for GOLD!............

Well, the price dropped early. News came out that a certain hedge fund had dumped its gold options at a loss, and this news is claimed to be the event that caused the sudden reversal and gold going positive. Plus things are getting uglier in the streets in the middle east.
Who knows.
EJ did tell us to brace for high voliatility in gold price, and we seem to be seeing exactly that.

[globaleconomicollaps]

Re: Well, that just about wraps it up for GOLD!............

he must have held 10% of the oil contracts too from what I can see in the oil markets.

[radon]

Re: Well, that just about wraps it up for GOLD!............

In the case you did not notice. Yesterdays sell-off was caused by one man, controlling 10 % of the long futures market, a USD 10 million fund that was. It's just amazing, a fund that small (before their 70 % loss), controlling 10 % of the paper longs.

And I bet leverage doesn't exist in your world either.