Gold Knows

Great Post!

Apologies to Joseph Heller for the title of this post.

Umm, ding. Ding!
DING! DING! DING!
Sayonara long commodities trade, you were great while you lasted!

“Reality dictates that the FED is going to sit there and get bitchslapped by whatever inflation comes our way.”

Maybe not. Bernanke doesn’t appear to be anyone’s lapdog. I suspect he understands the role of the FED and the real danger of inflation.

In the Vietnam era we spent money without corresponding fiscal restraint; the late 70’s/early 80’s were no fun. In fact, action by the FED may be our best hope of keeping the Federal Government from spinning entirely out of control.

Gold knows something… maybe it has more to do with Iran than with Ben?

“Gold smirks” is the surest sign of that commodity’s top!

FADE-FADE-FADE !!!

The COT is massively bearish!

Seperately, the Put Call is just hysterical…and the Achilles heal for the bears.

I vote for a new name: “The Goldschlager Economy” Tiny flakes of real gold to mask the fact it tastes like crap.

Interesting thing about some of the metals stocks

Some silver stocks are lower now than they were when SILVER waslower ie, SLW some much higher ie PAAS.

Some gold stocks are lower now ie NEM and GG..Some are higher ie HL and AUY…

Deeper concerns over subprime problems and Cheney’s comments in an Australian newspaper saying they haven’t taken any options off the table with respect to Iran which thus implies military action if diplomacy doesn’t work are helping to boost bonds to the highs of the day and is taking the 10 yr yield to the lowest since Jan 9th. The yield curve inversion b/w the 3 month and 10 yr is now at 50 basis pts for the 1st time since Dec 5th of last yr.

Fred,
hmm…the COT is either bullish or extremely bullish on almost all commodities. Gold is slightly bearish, silver is neutral. In this secular bull market it has so far taken extreme short positions to turn gold. Even multiyear levels of shorting didn’t stop the gold bull last year as it ran from $450 to $740. We have many, many years left of gold’s secular bull run. I won’t be selling any of my gold until I see the general public buying gold like they were buying real estate in 05.

Gary

Uncle Ben knows full well he’s in a catch 22. And he is doing what he thinks is best…Nothing at all. He’s taking the middle road. Rates are where they would if the economy were stable and mostly operating in a generally inflation free environment. This is the way to control inflation. Set the target and let all the other variables smooth themselves out around it. You can’t go chasing it by moving the target around. It’s like paddle ball…One good jolt to get the ball moving and then you keep the paddle still…and sure enough the ball will come back to you.

In the mean time, while things are straightening themselves out. Expect to see gold high, a weak dollar, high oil, etc. It’s going to take quite a while for all of these big gears to realign in the global machine.

Rates should have never moved in 2001. But I guess Greenie had to throw his banker buddies one more period of low rates to help out their credit spreads…and their pockets…one more time before he retired to get paid untold thousands on the lecture circiut.

I agree that the Fed is going to be in a tough place very soon. Note however that inflation was still relatively high in 2001 when the Fed starting slashing rates, and we still (briefly) flirted with deflation. I do disagree with the notion that gold is still a financial asset in any sense. Why are people crawling all over themselves to pay $680 an once for an asset that has no yield, costs you to store, is currently being pulled out of the ground for about $200 an once, and the world has already stockpiled thousands upon thousands of tonnes of? If you really think the world financial system is going to collapse to the point of requiring a new gold standard, spend your money stockpiling ammo and canned goods, because you’ll be wanting those a lot more.

If the yields paid by financial papers are below inflation what good are those yields.One can create credit by the swing of pen if one is talking of paper money.The very fact that it takes $200 to dig gold out ( I am not sure if that figure is quite correct ) explains why Gold has been a great storage of value.Since the beginning of civilization gold has been and will continue to be the real money.The current
paper currency standard will come a cropper as the down side of business cycle unfolds itself.Though politicians and bankers would prefer paper currencies and will do whatever it takes to fight return to gold standards.

Gary,

Per Sentimentrader.com, the COT is the nearly the most bearish it has been over the last 12 mos or so…small specs hugely long, while the professionals/commercials are the most short over that same period of time. It may not call a top TODAY, but my $$ is with the pros.

Gold is a great storage of value???
Let’s see, that gold you stashed behind the canned goods in your fallout shelter cost you say $700 an ounce in 1980. Current purchasing power now, 26 years later, that gold is finally approaching its last speculative frenzy highs in nominal terms, is about $250. What a fabulous investment. Let me sell all my doomed to become worthless stocks and bonds and backup the truck. And $200 an ounce is the approximate average cash cost of most existing mines in the world. New mines being developed typically have cash costs of around $300 an ounce. I’m also not saying that gold won’t go considerably higher in the near future, I think it will, but call it what it is, which is commodity speculation, the same as oil, copper or lumber.

Absolutely inspired! Perhaps completely wrong, but the best opinion pieces I’ve read anywhere this week!

How come bond players display such crass stupidity in driving down the yield when inflation is soaring is beyond me.

The inflation we’ve been seeing recently is largely a product of excess borrowing. In other words, it’s caused by an asset/debt cycle rather than an income/production cycle.

This type of inflation often ends in disinflation or outright deflation rather than accelerating inflation.

Conundrum? What conundrum? Reports out saying foreign central banks still buying US bonds and other US debt instruments at a high rate even though they have a NET shortage of savings as witnessed by inflation in their own backyards and money supply growth double digit worldwide. M-3 in US still growing at double digit levels. As Barry stated, this is “The thrilla in Manilla”.

Ted…through the shreds of paranoia I sense that you will pay the fat corporation the higher price to cut your lawn. Too bad for the entrepeneurial kid who is trying to compete.

At your leisure, open an Econ 101 book…and please, not the Marxist version.

~g~

How come its always the grass cutters we import to lower our costs, I think we would all save alot more money if we started importing some workers to wall st. Oh, Barrons reported a week or two ago that that China estimates that 30% of white collar American jobs will be outsourced. It reminds me of the poem about the Nazi’s. First they came for everybody else and their was no one left to protect me. Tell the factory, steel, airline and soon auto workers to find a new career. Your turn is coming.

That’s a good point but while saying so aren’t we looking too far into the future.Real inflation is here and now while a deflationary economic collapse could be many years down the line.

Well, inflation was running high after the dot.com burst, but then fell off dramatically in it’s wake (in 2002-2003). If you believe we have a housing bubble that’s bursting you might expect the same thing to happen in a year or so. The problem is this will be priced into markets long before it happens, hence the inverted yield curve.

Of course the bond market could be wrong this time, but if it’s not it’ll be too late to cash in once you have conclusive proof.

Barry, you’re a great writer.

Fred,
Sorry I’m not familar with sentimenttrader. I’m getting my data straight from the weekly COT report. Mar 04 it took a commercial net short level of -190,000+ to turn gold down, Nov 04 it took almost 180,000 contracts short to turn the market, 212,000 contracts short couldn’t stop the bull at the end of 05. We are only at -168,000 contracts this week and silver is only at -64,000. Generally it takes about -80,000 to -90,000 to turn silver around. Heck we’re in a secular bull market, bull markets make new highs that’s what they do. So far on this leg we haven’t even made a new high yet. I’m guessing there’s still more upside to go before we get a significant correction. Maybe quite a bit of upside if the market is starting to wake up to the fact that the inflation numbers published by the government are about as real as all those weapons of mass destruction in Iraq :)

Gary

Great writing. But until the 3rd paragraph, I assumed it was gold versus bonds.

Super-anon

I find your asset-credit versus income-production cycle thought compelling. Do you see it as inevitable that asset-credit deflation must flow through to income-production deflation though? Your reply to JS seems to imply you do.

Barry,

I wont comment on the substance of the post, but as a piece of prose, it is remarkable, and I enjoyed it very much. It is probably the best prose of yours I’ve read, and I’ve been a reader here for ever.

Thank you.

bobd, wall st. is a bunch of pigs at the trough, same with hollywood and the big recording companies. love the idea of the outsourcing of some of those bloated salaries.

Don’t worry little Bondie… go back to sleepy, baby.

Uncle Barry didn’t mean it… it was only just a story.

There, there, now little baby… and close your eyes my child.

Go back to sleepy, baby… sleepy, sleepy… sleEEEEeeepy.

Nite nite my little baby… go back to sleep my baby.

Nite nite and go to sleepy.

Nite nite my precious baby.

Nite nite.

http://tinyurl.com/2o6bk9

http://tinyurl.com/2eplbv

Per BR:

“…if the Fed tries to throttle inflation back down, they will launch a cascade of subprime lending implosions far beyond what we have already seen.” …end quote.
—
You are definitely correct wit’cho para-sailin’ self.

And the reason is not because the Fed may be right or not about inflation, but rather what the consequences of raising rates would likely be, at least now. It’s always possible they may perceive more inflation worries than some may think really exist, but nevertheless, they can’t raise rates and they know they can’t.

No… the reason is because of the core failures of Monetarism, which I have written extensively about on your blog, and the particular problem they have now derives from the failed attempt of the Greenspan Fed to stimulate economic output without creating imbalances at the same time.

Monetarism can never be stimulative to an economy. Let me say that again… Monetarist policies can never be stimulative.

It’s counterintuitive to common understanding, and what I’ve said will be attacked, but no real economic stimulus can come from monetary expansion.

Money is only a facilitator. It is a force that ‘allows’ economic activity, but not a force that ‘commands’ it.

Adam Smith knew this, and ‘Wealth’ is full of his understanding that money is not the value of economic output but merely the representation of it. His contemporary, the philosopher David Hume, understood it as well. They both knew that the species of money, regardless of its supply, simply readjusts to the level of economic output.

Consequently, a central bank can only be restrictive to an economy by removing the basis for its orderly facilitation, but it can never truly stimulate economic output, because market participants simply build in a capacity to rationalize the dilution of excess monetarist expansion.

They conduct this rationalization as a series of failed realizations of the erroneous philosophical concepts of both ‘profit’ and ‘wealth’ that are derived purely as monetarist expressions. If you doubt this, ask any recent mortgagee who is newly upside-down now on equity about it, when just possibly weeks ago they were in the money.

Failed economic realizations proceed, at first, outbound from originating market participants and are perceived by them, and by observers, as successful, but they reflect back later, in the sense of a wave, as successive market participants correctly realize the phantom nature of profits first assumed to exist. Phantom profits are thus gradually intellectualized away by market participants in the form of a reassessment of their assumptions of their own wealth creations. Wealth in its common interpretation is therefore recognized by market participants as having been diluted relative to the wealth of others.

What is understood from this, and from exploring other philosophical concepts of money, labor and productivity, is that true wealth in a society is created as the expression of a reduction of the costs of goods and services, rather than as the accumulation of monetary riches derived from profiting from economic exchanges. This is also possibly counterintuitive to most people, because it requires a rather extensive absorption into abstract concepts, chiefly among these is the concept that the real objective of all human economic endeavors is the progressive marginal reduction of the costs of goods and services philosophically to zero, even if this objective is only understood subconsciously.

Keynes also understood the primary limitation of Classical Theory, that derives from a periodic dissociation of the core identify, MV = PQ, from being what Classicists always have assumed was a linear or near-linear function. But he imperfectly described it by failing to conceptualize the failure in terms of the philosophical fully abstract nature of money. His intent was to describe the failure in empirical terms, since Classicists would only accept it in that way. I’ve read Keynes’ ‘General Theory’ and I’ll characterize my reading in the following manner.

It’s like I’d been on a casual walk and happened onto a city park, one that was beautiful, multi-layered and revealing. I enjoyed the flowers and the manicured ornamental plants, and in fact the whole experience was an education about a man’s life and work that I’d known about since 1983. Even before that, I’d implicitly understood much of what he’d advanced by understanding its effects on the New Deal, which to my father’s death had caused him to regard Franklin D. Roosevelt as among the shining immortal souls of all time. However, I’d never taken the time to read what Keynes had said… instead of simply accepting what people said he’d said.

There is always a difference between those two things.

While I was enjoying the park yet struggling to fully absorb what it offered in countless pathways that could be taken again and again without discovering a new formerly unseen pathway, one that would in its own meandering way cross the others again, I discovered that Keynes had been like the architect who designed the grounds. He’d calculated the hydrology of the water basin and mapped its topography; he’d experimented with the geology of the underlying strata; he’d determined the rates of rainfall and solar warming and allowed for the correct placement, cultivation and grooming of all its plants and animals. He’d financed it, staffed it, and he’d done its accounting, payroll, taxes, signage, marketing; and he’d been the caretaker, the security, and he was the gatekeeper, ticket-taker and immediate supervisor for all things, large or small.

And to do all these things, he’d striven to accomplish the task by working from a sort of Einsteinian ‘Single Unified Theory’ of economy that could answer every question it was given about money, interest and employment.

He outsmarted every philosopher and theoretical economist that came before him who’d just thought they understood Classical Theory. He took it apart piece-by-piece, all the while seeming to enjoy the fact that he himself had been grounded in and even taught the very Classical Theory he was dissembling. However, after reflecting on erroneous assumptions that Classical Theorists had maintained, in the end Keynes built too many assumptions of his own into his successive and very complex chain of mathematical derivations. His mathematical equations accurately depicted the behavior of his assumptions, but not entirely the behavior of the people he made the assumptions about.

I actually determined to read every word of ‘General Theory’ to examine my own doubtfulness that he’d have failed to discover the concept of ‘perceived liquidity’ which I discovered theoretically and have both introduced and wrote extensively about here on The Big Picture. He didn’t. He got close to it several times, but he didn’t realize that the concept of perceived liquidity existed.

All his equations and theorizing were intended to explain only nominal money and its impact on aggregate employment, interest rates and monetary behavior. He was as wrong about quite a few of his assumptions as Classical Theorists were about much of what they said, and both he and they were partly wrong for the very same reasons. They simply failed to understand the fully abstract psychological basis of money.
—
The Perceived Liquidity Substitution Hypothesis

(I) The sum total of all money in an economy is held in only two forms; (i) perceived liquidity, and (ii) deferred liquidity, and market participants hold these forms subjectively and interchangeably.

(II) Perceived liquidity is always greater than conventionally held nominal liquidity measured at the same time, regardless of economic state.

(III) Perceived liquidity is at the steady state equal to nominal liquidity multiplied times a hypothetical terminal low coefficient of perceived liquidity that is always greater than 1 (one).

(IV) Perceived liquidity is at all times substitutable for nominal liquidity transactional demand at a rate of substitution that is always greater than zero, and the rate of substitution varies in direct proportion to variations in the coefficient of perceived liquidity.

(V) Upon an upset to the steady state the coefficient of perceived liquidity will increase to some higher but not unlimited value, and the increase will be proportional to the severity and speed of the upset.

(VI) An increased coefficient of perceived liquidity can not resume its former steady state value until economic conditions resume the steady state.
—
My hypothesis explains why expansive monetary policy can often fail, and the slow motion unraveling of at least a considerable component of the housing market today is very possibly just a reversing wave of successive realizations of the consequences of that failure. Time will tell.

Barry, a witty and inscisive read. I started accumulating precious metal stocks in the last quarter of 2006. Their charts tell the underlying story of where the smart money thinks we are heading. When Jim Cramer said motgage lenders and financials would not be affected by the sub-prime market,It was my signal to go short CFC,GS,MS etc.. You have been on the nose for the past 12 months keep it up Barry.

Gold is approaching this $740 resistance point with confidence. This will be the moment of truth for currencies and US financial hegmony for some time. Take a look at the ABX story since the beginning of the year: http://housingderivatives.typepad.com/housing_derivatives/abx_index/index.html. The sub-prime mortgage market implosion looks terminal. If credit gets fully restrictive to 20% of the housing market buyers and foreclosures/distress housing sales become a nationwide feature, then maybe bottom fell out of 1/3 of the nation’s asset base. Re Barry’s article, gold may bite off a piece of the Fed’s ear….

The traders in comments here calling this a top in Gold seem to be misunderstanding this post. It’s not a call to buy gold here, its a critique of the corner the Fed has painted itself into.

But since you brought it up, here are some thoughts on Gold. Fade (short) the metal or the miners if you like, but you best understand the current set up before you do:

Short term, Gold is overbought. Note that since its low in early October — when many of the same commentors here were calling for Gold to drop back down to $300, Gold has rallied from $570 to $685 — about a 20% move in 8 months. Sentiment is now shifting from a rather negative consensus to a fairly positive bend.

Technically, Gold is now approaching the July peak of $690. There will be resistance there. The Gold stock index (XAU) has been lagging the performance of gold, which is, more often than not, a negative for both Gold and the Gold stocks.

Based on all of the above, this does not look like the beginning of a large up move commencing any time soon. I would call that possible but not probable (unless something funky happens with Iraq).

Given all of these factors, the short term probability of a breakout above $690 is only modest. The correction in Gold, which began last May when it tagged $755, may still have further to go.

However, if we do get lucky and see a decline that carries Gold to under $600 and the XAU down to near 120, consider it an opportunity. Short interest in Gold would inrease geometrically.

If this technical retracement were to unfold, I would expect a monster rally to follow.

Quoting BR:

“It’s not a call to buy gold here, its a critique of the corner the Fed has painted itself into.” …end quote
—
Strangely enough, were the Fed to raise rates, it’s likely that gold would drop rather quickly, because raising rates would be a signal that the Fed would honor its Monetarist heritage. The problem is that Monetarists enjoy honoring half-a-heritage, but they’d rather take an ass whuppin’ than to honor the other half.

Volcker had this figured out and was willing to take the whuppin’, but he was a tall, tall man, in a sense the natural heir to Adam Smith.

Remember, Fisher in Dallas has called Milton Friedman the “patron saint” of the Dallas Fed… and one thing I’ve never failed to respect Friedman for is that he very carefully observed that only the Fed can cause inflation.

So, if Bernanke were to fail to raise rates upon the perception by the Fed of truly increased inflation fears, he’d then possibly have to apologize to Friedman again, post mortem, after already apologizing to him once before (regarding Fed supposed failure during the Great Depression) for just the opposite.

Therefore, Mr. Bernanke would have to do something that he’d know in advance he’d possibly have to apologize for, and while doing that very thing, he’d know that later he might have to apologize again for doing the thing that he’d already apologized for once before. I tell ya… I j-i-s-s c-a-n’-t make this stuff up!

You see what a nightmarish predicament hard money Monetarists can get themselves into? That’s your ‘corner’ that you speak of Barry. I’ll classify it another way… it’s ‘calf rope.’ I bet none of your erudite followers know what calf rope is, huh?

Ages ago, farmers would drive a stake near a ditch close to a road, and tie a calf to the rope. The calf could then eat the grass and clean the ditch (no sling blading needed) to the end of the rope… which was just slightly short of the distance to the road. See what a brilliant idea that is?

Well, calves being the calves that they are (smart as a sack of hammers), later the farmer would inevitably find the calf had wrapped the rope around the stake so many times that the calf was bound to the stake, and bawling to be freed. That’s ‘calf rope.’ And, that’s where the Fed is right now… calf roped!

Tell me BR, haven’t I been trenchant?

Haven’t I been loyal, dependable and analytical?… Don’t I contribute?… Am I not worthy?

So, whurrza love?

It would be extremely difficult for Bernanke to do an encore of Paul Volker as the conditions extant then was markedly different from what it is now.Then in late 70’s US was a
major donor nation unlike now when it’s the largest debtor nation.So while trying to kill one inflation ( CPI ) if Bernake raises interest rate it will stoke up the other implicit inflation ie higher debt payment.Let’s not forget that a typical 3 person US household has a debt liability of roughly $100,000 that’s rising every day.You raise interest rate means they have to pay more every month in terms of debt liability and that’s inflation too.As far as I understand loss of purchasing power in whatever shape it comes is an inflation.Be it raising the tax or printing excessive money ( indirect taxation ).It’s obvious that Federal Reserve is complelely hamstrung now that they are caught between the devil and deep sea situation.So if stocks are to rally commodities and Gold will outperform and if gold goes down that means equity markets will go down even more.

Ritzholtz on Gold

A bit of tongue-in-cheek from the Big Picture’s Barry Ritholtz.
Do I dare say he sounds like a fellow goldbug in the making.
Link to Ritzholtz’s: Gold Knows 
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