Gold Regains Its Luster

Although I dig the chart porn, via WSJ, the timing is rather inauspicious . . .

Gold_luster

Source:

Investors Rush to Gold
Metal Hits New High; Fans in the Mainstream
E.S. BROWNING
WSJ, January 31, 2008; Page A1
http://online.wsj.com/article/SB120174306415930617.html

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What's been said:

Discussions found on the web:
  1. Roger Thatchery commented on Feb 3

    Turn the chart upside down and it is a report card on the dollar. The dollar never recovered from the breaking of the gold standard in ’71.

    Intelligent people will agree that no fiat currency has ever been sustained in history. It’s a simple fact. But those same people believe that our fiat dollar can go on forever. That is cognitive dissonance.

    By the way, the price of oil measured in gold has remained constant for about a century.

  2. Steve Barry commented on Feb 3

    Gold is the perfect currency…hard to produce out of thin air…can be sub-divided…doesn’t decay or tarnish…is dense and doesn’t take up much space. Much better for the people than green pieces of paper or electronic blips.

    That being said, in the coming synchronized global bust (which really had to follow the synchronized global boom all along) there will be a decreased need and demand for gold as asset prices drop. A few years into the depression, that will be the time to load up, if you wisely preserved some wealth.

  3. Grodge commented on Feb 3

    According to the graphic, the side note says that gold has been a “horrible hedge against inflation” since 1980.

    Gold has had a nice run only in the last 10 years and seems to be melting up. For those of us with significant gold exposure, the next big question is when to get out… at 1250? at 1500? Because to drop could be dramatic as in the 1980’s.

    And the second question is where to put assets once gold starts to come down…

    My concern for using gold to back our currency is that any new gold discovery in Russia or elsewhere would act to devalue our dollar. Now, the currency is being devalued mainly because of our government’s own short-sighted policies. But our government is (theoretically) in our control and can be changed to restore the full faith and credit in our currency.

  4. lurker commented on Feb 3

    Any candlestick watchers here? GLD just put in a bearish engulfing on the daily charts. FWIW. That, combined with media attention to gold’s run could signal a correction at best. Will watch how it plays out but agree with Barry that, per usual, the timing is poor. But financial editors are not traders so that is to be expected, and perhaps exploited?

  5. techy commented on Feb 3

    steve barry:

    do you really think we will go into depression?

    are you saying there is a very small chance, that maybe USA will ward off depression by inflating a lot and then changing its way of life(borrow and spend will be frowned upon).

    i would like to read your analysis on this?

    as for me, i dont believe in global decoupling, but india is showing some promise of economic independence (exports started its incline, but they are now a very small part of the overall GDP, plus its mainly in services, i.e software outsourcing, call centers….which will not go away because of cost benefits)

    but china maybe a different story.

    another thing, whats your analysis about the current rally, whats your best guess as to when they will be hit by reality?

  6. Winston Munn commented on Feb 3

    Steve Barry wrote, “Gold is the perfect currency.”

    Gold is not a currency but a commodity, and its usefulness as backing for a modern currency is dubious.

    It is important in any debate of currency to understand what money really is: money is nothing more than an exchangeable representation of labor, either physical labor or intellectual labor.

    Imagine in a Utopia that one person owned all the world’s gold but not a single other person needed to labor – no home builders, maids, chefs, automakaers, etc.

    In that world, of what value is gold? It is labor that grants money its value, because money is an expression of labor.

    With that understanding, gold-backed currency is a poor choice for a modern, industialized nation that is experiencing rapid population growth. Unless the gold reserves can match the demand for increased currency (labor usits), gold will have a deflationary inpact by restricting growth – leading to higher interest rates, increased savings, and an alteration of time preferences, causing a decrease in supply to meet the lowered demand.

    If gold reserves cannot match growth demand, the only options are to debase the value of the currency in relationship to gold or to devalue gold prices. In the history of gold-backed currencies, both solutions have been tried – without great success.

    A blanket condemnation of fiat currency is equally without merit – the historical difficulties with fiat have not been caused by the fiat itself rather the inability to control its unjustifed expansion by the governments who have controlled its production.

    The value of gold-backed currency is that it handicaps governments ability to expand currency production; the disadvantage is it can also act as a restriction on a population and an economy’s ability to grow.

    As is the usual case, nothing is as simple as black and white.

  7. techy commented on Feb 3

    i agree with your comment winston.

    in another maybe unrelated example..

    india used to have a gold backed currency for most part.
    before year 2000, the interest rates were as high as 13%, even then inflation was rampant, because of demand/supply issues, merchants always used to jack the prices of commodities and food, and everyone else followed them.

    maybe open market did not exist which may have caused the above issue.

    liquidity was a big shortage, and getting a home loan even with 40% downpayment, and 18% interest was very difficult.

    but still inflation was high, so can i conclude that only monetary policies may not be responsible for high inflation?

  8. Steve Barry commented on Feb 3

    Winston,

    Ok…I give into your main point…gold is not the perfect currency, but surely a vastly superior option to the mess we are in now. A quote once more from Ludwig Von Mises, who said gold was “the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic.” The gold standard, he said, “is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard.”

    Winston and others, take the time to read this and comment back.

    Once and Future Money

  9. drey commented on Feb 3

    Here’s why I just sold off my GLD position this week:

    1. Bear market bounce in stocks has been as sharp as it has been predictable – nevertheless, it is ultimately doomed.

    2. When markets get a grip on economic reality and resume their downward move they will easily slice thru recent lows (no way will you have a V-shaped bottom – get a clue Cramer).

    3. The next round of panic selling sparked by additional, unexpected writedowns, failure of a bond insurer, unwinding of BAC/Countrywide deal or whatever will not be staunched by an emergency rate cut and will get truly scary in a way that many investors are not prepared for.

    4. The question is, when that occurs, will gold be the safe haven that investors flock to or will it get hammered right along with equities before eventually decoupling and resuming it’s rise a few weeks or months later?

    Opinions?

  10. Francois commented on Feb 3

    I do not know if gold will be a safe investment in this particular bear market.

    However, if one estimates a very high probability of a sharp downturn, how about some 9 months or LEAPS puts on market indices? Looks like a “safe” (as in higher probability than most other trades) investment to me.

  11. Winston Munn commented on Feb 3

    Steve,

    Having read the link you provided, my take is that the information seems accurate enough but the conclusions are not logically consistent – meaning that other conclusions could be drawn that are equally valid.

    First, the conclusion that gold is somehow “real” money. As I explained above, the concept of “real” money is an illusion. Sure, history is replete with examples of gold being used to transact, but as a national currency it has flaws as I explained above. The only real currency is labor.

    Second, to claim that debt-fiat has no value is ludicrous; debt has value as an asset as long as the debt can be serviced; if this debt-fiat had no value, it could not be exchanged for goods and services. If the claim is it cannot be exchanged for gold or silver, take it to a coin shop and see if it can still be exhanged. I have yet to find a coin shop or exhange that will not trade debt-fiat for silver coin or gold coin.

    The difference is that it cannot be exchanged at banks for equal value – but all that means is that the debt-fiat does not represent a percentage of the value of gold – but it still represents some percent of future labor. Under this hypothesis, the fall in the value of the dollar is related to the value of holding U.S. debt, i.e., productivity is expected to slow, thus making the debt of less value due to increasing default risk.

    To understand debt-fiat requires the knowledge that debt is nothing more than a claim against future productivity. If debt can expand productivity above the cost of debt, it is of value; when productivity cannot expand to meet this requirement, debt is capped, and any futher debt expansion then has a negative affect on future productivity.

    The flaw in debt-fiat is the expansion cap of debt service can be reached artificially by exorbitant government spending on non-produtive enterprises – wars being the best example of such.

    However, even with its flaws, a gold-standard may eventually be required, but not because it is necessarily superior, but for the same reason the car keys are taken from a teenager who keeps collecting speeding tickets.

  12. tyoung commented on Feb 3

    “Because to drop could be dramatic as in the 1980’s.”

    Grodge
    For gold to collapse it would require a Volker type Fed to restore trust in the currency. Not much chance of that!

  13. Philip commented on Feb 3

    Great comments and discussion today. I do wonder about the short-term profitability of staying in gold. I have decided to keep a couple dozen ounces for nothing other than peace of mind and diversity in a strange market. von Mises was right, there is no such thing as a perfect currency for the exact reasons Winston mentioned. Money attempts to store past utility for future use. There will always be inefficiency in converting utility into money, risk in carrying money from the past into the future, and inefficiency in converting money back into utility. Add onto this actual supply issues (too much or too little) in the currency object itself and the reality of money can never come close to the abstraction.

  14. bitteroldcoot commented on Feb 3

    Inflation adjusted gold price?
    Isn’t that kind of an oxymoron?

  15. cathompson commented on Feb 3

    It may be different this time, and if the world is coming to an end perhaps one should be hoarding fishing poles, but I don’t think that either gold or gold stocks have been particularly non-correlated in the last few bear markets.

  16. Steve Barry commented on Feb 3

    Winston,

    Fiat currency doesn’t cause liquidity fueled debt booms…governments do. I agree with your last statement…we have to take away the keys, or in this case the printing presses and helicopters. The founders of this nation did not forsee the government having this power over the people.

  17. Steve Barry commented on Feb 3

    “Inflation adjusted gold price?
    Isn’t that kind of an oxymoron?”

    That’s a good one. How’s this one which I swear I heard from a CNBC anchor, I forgot who it was, a few years ago:

    “The US dollar is still the gold standard of currencies”…think of the wackiness of that one.

  18. techy commented on Feb 3

    i am not an economist, so maybe i will state a simplistic reason for the rise of gold.

    falling dollar and speculation.

    just like all liquid assets it appreciates if the herd likes it, and depreciates if herd leaves it, gold will also fall.

    people are getting into gold, because they think everyone is getting into gold…

    as long as USA has the biggest economy and strongest military….its currency will carry value.

    taking a contrarion view:

    what if the banks are done doing write downs?
    what if credit market is unfreezing?
    what if falling mortgage rates lead to a bottom in housing?
    what if that will restore confidene in usa economy?
    what if money starts flowing back in from emerging markets now that its proven that they are very risky, which means dollar will not go down further, means gold will be under pressure, and stocks in usa will appreciate.
    what if the consumer is really not drowning in debt, and maybe there is still some room to breath?
    what if wages start to rise?

    the consumer part i can take back since falling retail sales has proven that consumer has been stretched….but other are a good possibility.

  19. Winston Munn commented on Feb 3

    techy,

    I believe your “what ifs” are the driving force behind this “relief rally”. Trouble is that the concepts are not supported by the data.

    95% of the time the right move is to follow the herd; it’s only when the herd is walking off a cliff or can’t find the path out of the abyss that it pays to be contrary.

  20. drey commented on Feb 3

    Agree that gold’s big move of late has been fueled largely by speculation but the question remains, what will happen if/when there is a genuine panic in the stock market? Will all asset classes tank together, and for an extended period of time as Jeremy Grantham suggested months ago, or will gold explode upward as the economy weakens, rates sag further weakening the dollar, and investors look for a safe haven?

    Maybe it comes down to whether one thinks the likely scenario will be stagflation circa the late 70s or Japan style deflation – damned if I know which but either way it won’t be pretty.

  21. techy commented on Feb 3

    drey..

    in my opinion gold is in a bubble as all fad assets/stocks become when they are popular with everyone and his uncle..

    and as with all bubble, it will reach a peak, where the early birds will exit enmasse, or some people may say smart money will exit, and that will lead to price decline….which can be as much as 30-40%.

    the only true value of gold, is for indians, since they treat gold jewelary as a hidden asset, which comes handy during bad times….they keep buying gold as a tradition, and they dont have much investment sense, other than that gold can is very liquid and never loses its value much (1980 crash of gold value was invisible to them)

    winston: i agree that maybe the herd does not want to think about the cliff dive.., but just wanted to bring to light …what if we are wrong and the herd is right?

  22. drey commented on Feb 3

    techy –

    not sure I can afford to be right while the herd is wrong much longer – LOL.

  23. Pat Gorup commented on Feb 3

    Great thread. Silver’s inflation adjusted price is $8, its price increases lag those of gold (tops later), its a store of value, and has been used as money by the general populace around the world for a very long time. And has never been confiscated.

  24. Winston Munn commented on Feb 3

    techy wrote, “what if we are wrong and the herd is right?”

    I keep Jesse Livermore’s advice in mind: “The good speculators always wait and have patience, waiting for the market to confirm their judgement. Markets are never wrong – opinions often are.”

  25. techy commented on Feb 3

    winston..

    the way the markets are these days….

    they change their opinion/judgement every week…and all i am doing is waiting :)

  26. David commented on Feb 3

    The fed is key. Bernanke will be under political pressure to keep those rate cuts coming. The fed funds could easily get down to 2% … against Bernanke’s better judgement. If that happens, gold will go a lot higher. But the political situation will change dramatically after the election. The fed may tighten at that point, in which case gold would stop rising.

  27. alexd commented on Feb 3

    The next gold will be biological.

  28. DMR commented on Feb 4

    “Inflation adjusted gold price?
    Isn’t that kind of an oxymoron?”

    If Gold = Commodity + currency

    the inflation adjusted chart just gives the view of gold as a commodity.

  29. jojo commented on Feb 4

    Because to drop could be dramatic as in the 1980’s.”
    For gold to collapse it would require a Volker type Fed to restore trust in the currency. Not much chance of that!

    not necessarily. we still have more tankage (and margin calls) to look forward to.
    The fed’s moves are simply the last impotent moves of an inflationary junta…DEflation here we come.

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