David Rosenberg Part 2: "Gold Is Increasingly Being Viewed As A Currency Of Its Own"

Tyler Durden's picture

From David Rosenberg, and verbatim agreement with what Zero Hedge has been discussing for almost one year. Also, even with gold down, note the price action in PHYS.

Here’s the deal on gold. When we had the post-Lehman collapse, gold fell from $900 to $720 an ounce but it still managed to outperform other commodities and rise in many other currencies, outside the U.S. dollar. That post-Lehman collapse phase was a giant margin call where investors sold their winners, like precious metals, and on top that, there was insatiable appetite for dollars from the global banking system caught short of greenbacks.

What is happening today is truly fascinating. Gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid. What this means, of course, is that gold has managed to hit new highs even as, (i) the U.S. dollar has risen, which means gold is breaking out against all major currencies; and, (ii) other industrial commodities, such as oil and copper, have slumped from their recent highs. So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own.

Moreover, with the growth rate of fiat currencies globally being met with a skeptical eye by investors, especially now that we know that if the ECB, of all central banks, can engage in debt monetization (those clinging to the belief that this was modeled after the Bundesbank have been clearly duped), the one thing we do know about gold is that most of it is already above ground and that production peaked a decade ago. In other words, investors have more faith in what the shape and direction of the supply curve for bullion looks like relative to individual country money supply growth. This is why deflation is good for gold — the reflationary efforts provide a big boost. Even without the interventionist efforts to monetize the debts, as long as policy rates are near-zero, gold leasing rates will do likewise.

While FDR fixed the dollar price of gold in the 1930s, we know that bullion doubled in Sterling terms during that deflationary cycle. Gold is a hedge against instability of all kinds — don’t think for a second that deflation does not engender instability whether it be financial, economic or political. To be sure, gold is also a hedge against inflation — but that is going to come much, much later and will be the icing on the cake.

While I am concerned near-term that gold is overbought and could be ripe for a setback; however, unlike the equity market, bullion is in a secular bull market, which means dips, when they occur, are to be bought. Gold can trade down to $1,130 an ounce and none of the trendlines would be broken.

More to the point, secular bull markets usually end in parabolic blowoffs and we are nowhere near that point — see the chart below for what long-term trough/peak moves across different asset classes looked like in the past and tell us that gold is now in a bubble. Not a chance. And, as we have said in the past, if central banks were to ever be compelled to hold the same share of gold in reserves to back up their respective monetary aggregates, the gold price would rise to $3,000 an ounce.

Believe it or not, $3000 an ounce on gold may yet prove to be a conservative forecast. If the gold price to world GDP ratio were to ever scale up to the peak three decades ago, it would imply an ultimate peak of $5,300 an ounce. Even better if the relationship between gold and the M3 money measure where to revert to the 1990 high, gold would move to $5,700 an ounce. A more cautious projection would merely put gold on the same footing as the CPI, and heading back to the previous peaks in this ratio would suggest $2,300 as the peak in gold — only a double from here. Or perhaps the gold price-M1 ratio is one that should be considered and even here gold would go to $3,100 per ounce under the proviso that prior highs get reestablished. For more on this fun-with-figures analysis of how far gold can go, see Why We May See Gold Hit $5,000 on page B2 of the NYT.


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AlexanderKZ's picture

This chase for gold IOUs will finish badly.

Mako's picture

Fixed it for you.

The chase for all IOUs will finish badly. 

Divided States of America's picture

Its 1 PM Eastern time on a friday afternoon before a nice weekend of juicy news from Europe. Time to jumpstart this market with a rumor of a ONE ZILLION dollar bailout being discussed right now.


Btw, the markets are WELL OFF their lows...as repeated before and after every commercial break on CNBC.

godfader's picture

Sorry Rosie, but that's worthless drivel. Nothing we didn't know.

Divided States of America's picture

Hey give the guy a break. Hes dead right in his analysis. Unfortunately he's not on this planet where logic and sensibility rules the day. He was nice enough to reply some of my emails back last year, until I told him he sounded a bit desperate on his bearish calls..he stopped replying to my emails ever since.

LoneStarHog's picture

Hey, Mr. Rosenberg, try posting this over at Douchinger's The Market Ticker. 

frippy's picture

Krazy Karl and Prechter are the best Gold fades out there.

Two smart guys who don't know jack about Gold.


Bloodstool's picture

Guess we'll see.  Logically, if you believe the deflation meme, consistency implies all assets deflate in price, as credit disappears in an ongoing wave of private, commercial and sovereign defaults.  Net, net, I think gold prices decline over the next couple of years (although the hysteria, short term, might drive prices higher) and then go way higher, post restructuring. 

But, why should gold be spared?  People will need to convert the gold into something useful to consume at some stage.  Think about it.

akak's picture

Even under the mythical fiat currency deflationary scenario (to which I do not subscribe), what those analysts like the clueless Precher fail to grasp, because of their inherent Keynesian leanings, is that gold is functionally NOT a commodity, like copper or wheat, but a currency!  And what happens to the value of a currency under deflation?  It RISES!

Bloodstool's picture


1.  Gold is money.

2.  You have no clue about Prechter, per your comment.  He is not a Keynesian, by any stretch of the imagination.

3. The U.S. dollar's purchasing power, relative to all other currencies is currently rising.  This will change.  But, for now, it is rising.

4. Per the government's own numbers - look 'em up some time - real M2 is down year-over-year. For the first time in 50 years, real y-o-y M3 is deflating.  That, pure and simple, is DEFLATION.

So, your "opinion" is meaningless. The facts speak clearly.

akak's picture

Yes, the facts do speak clearly.  And until I see broadly falling prices across the whole economy, instead of RISING prices as we are seeing today (aside from the bubble assets of real estate and houses), then I will continue to cry "bullshit!" on the never-before-seen chimera of deflation under a fiat currency regime.

(And no, it did NOT happen in Japan, either!)

And please stop repeating the lie or implication that the US dollar is rising --- it is ONLY rising against other depreciating fiat currencies.  In an absolute purchasing power sense, it is NOT rising, and never has, nor is any other fiat currency.

Bloodstool's picture

I guess if you "feel" strongly enough about it, you must be right.  For my part, I'll stick with numbers that support the deflation case:

1.  Tax revenues continue to decline - can't fudge those

2.  M2, M3 y-o-y declining (per U.S. Treasury) - economy slowing further (no demand)

3.  Housing - main portion of avg. human's expenses (@30-40%) - prices continue to decline.  Record default rate continues

4.  ah, hell, what's the point.  You're all about feelings.


akak's picture

You can contort statistics any way you like, but go out into the real world and ask any wage slave or retiree whether their cost of living is rising or falling, and then report back to me.

No, I am most definitely NOT "all about feelings"!

dnarby's picture

You guys need to read more Mish.

He explained that gold does well in deflation because of currency fears.

Gold is a "no-confidence" vote in fiat currencies.

Because of this, under deflation (which we are in) gold just doesn't rise as much (or goes down a bit, or 'consolidates') vs. fiat.  If currency fears are strong, gold rises.  This is in addition to normal market forces of supply/demand, etc.

If and when inflation finally hits, gold then soars, eventually becoming unpurchasable by fiat at any price.

akak's picture


I agree with you dnarby, except for the deflation part, which I think is a matter of muddled and mixed-up definitions (credit does NOT equal money, for example) in any case.

Prechter, however, denies that gold is a currency, and insists on treating it as a commodity, hence his call for it to fall to the sub-$600 range.

dumpster's picture

statistics and the book of 1984

2X2=  5.1984

Screwloose's picture

When did the Treasury last publish an M3 figure?

akak's picture

Denninger, in particular, despite being an obviously highly intelligent person, has spouted some absolute nonsense on the subject of gold, repeating all the classic Keynesian disinformational soundbites regarding it ("can't eat it", "doesn't pay a dividend", "not enough of it to ever back money again", "will NEVER re-enter the monetary system --- because I say so!", blah blah blah), and attacking anyone who even timidly speaks out in favor of it in the most vitriolic manner that would make even Jon Nadler proud!

I guess it just goes to show you, once again, that intelligence and common sense are two entirely different attributes.

Bloodstool's picture

"I guess it just goes to show you, once again, that intelligence and common sense are two entirely different attributes."

Wow.  Very convincing argument for why gold must go higher. 

I wonder who is spouting non-sense? 


akak's picture

And when did I ever say that gold "must go higher"?

Thanks for putting words into my mouth.  But since you have already done so, given the current fiscal policies of the US and other western governments, then yes, gold must go higher. 

Bloodstool's picture

We violently agree then.  Gold is going higher...eventually.  You are wrong about deflation though.  It is here.  It is now.  And gold is going DOWN until deflation has done its work.

Read Prechter and understand his position before you "put words in [his] mouth." 


akak's picture

I have read Prechter (whom I consider largely discredited by now) for the past three years, initially and for long with an open mind, and I find his positions to be increasingly ludicrous, and his predictions increasingly incorrect. 

I've been waiting for his sub-$600 gold for over two years now, and in that time what has gold done?

But we are probably not very far apart in our overall assessment of the current financial and political climate, I suspect.  Sorry to sound so harsh to you earlier --- if you find value here on ZeroHedge, then you are a comrade in arms, Prechter notwithstanding.  :-)

thesapein's picture

I'm also tired of the "flight from risk" and "safe haven" spouted about by new proponents. They make gold sound so archaic, like we're going backwards, and that the only reason to go gold is out of fear?

Oh, we're all so scared. These are not the same gold bugs that help build golden ages.

Gold as a currency is simply a better product than competing fiat currencies. It's not going back. It's not based on fear. We trade into gold because it's superior.



dumpster's picture

denningers  also quip .. you can's have sex with it  ,,, he had a twenty in has other hand curled up

dumpster's picture

nice  dollar rant akak

no i do no believe that many get this ,, even here on zero hedge clueless ,

sure a few do,, but the majority still watch this index like some hawk to see if the buck is gaining strenth ,

from time to time many have to be reminded and thanks

akenathon's picture

Now that you have China also into the equation which could revalue Renminbi (which is equal to US dollar devaluation) and we can double easily in one single day. Don't trade against europeans retails on this as they have experience on how to beat their own central banks...It was the case in the early 90's when everybody was buying DMK vs. all other currencies and DMK went up by 40% on average.

In the US people still have too much faith on their Government and central bank. In Europe they never truster their politicians nor their central banks..so don't think that as all retailers are buying gold and silver, this people are late...

jmf's picture

Moin from Germany,

this "bubble chart" from Todd Harisson is even more impressing....



jmf's picture


one of my favourites.... Should dampen all GOLD IS A BUBBLE TALK immediatly.....

No doubt GOLD will become a bubble.....

But i doubt that this will happen any time soon....




George the baby crusher's picture

 Gold doesn't go into a bubble gold can become overpriced. It's too simple a commodity.  Overpriced, underpriced, but not bubble.

ToucanSam's picture

Sorry, but your comment doesn't make any sense.  A bubble is the overvaluation of something based on abundant liquidity (money which today is fiat currency) chasing after something.  Therefore if something is overvalued and it's because there's a lot of money chasing it, it can be a bubble, even for a simple commodity as oil or gold.  The fact of the matter is, gold today is considered a commodity because its value is pegged to the dollar.  The value of gold itself is based on fiat currency, and therefore, it is just a commodity priced according to supply and demand.  Therefore, where there's too much liquidity (aka money) chasing something and prices rise rapidly, it can lead to a bubble.  If the price of gold continues to be valued on the dollar, and the dollar strengthens, then it can fall in value.  Now if the dollar fails completely and some other currency doesn't replace it while gold becomes the medium of exchange as money, then the value of the gold itself is whatever someone is willing to trade for however much gold.  When that happens, gold can never be in a bubble since it's value is determined by the market and not by another medium of exchange (aka money).

I know a lot of people here think gold is worth the rise because it's considered money, but don't get too sure of yourself.  Noone in the housing market at the onset of its price rise thought it was a bubble (well, maybe not all people).  I have PM's because I want to have it "just in case" the worst happens, not because it's worth it or anything like that.  How does one put a dollar value on PM's when PM is something to barter with and the dollar is just a piece of paper?  In any case, even I don't know if the price reflects the true value (since the dollar is weakening over the long haul) or if it's just in a dollar bubble.  I buy gold and silver because it's something that in times of a currency crisis, people naturally accept PM's as money, assuming we're not in a Mad Max environment, which I don't foresee (I hope I'm right).

hedgeless_horseman's picture

The "bubble chart" can easily be scaled to show gold peaking, last week, at the same point on the verticle axis as the other four variables.

anynonmous's picture

One call that you have been pretty good on Rosie, is gold.

Minyan Vince's picture

You may want to check out Jim Rickards interview with King World News where he looked the same ratios and declared that the amount of gold the US possessed through out the last 40 years has consistently always maintained the same ratio to the money supply multipliers (M1 M2 M3), since the 1960's. So his logic was the US never "really" went off the gold standard. From that ratio his thoughts are for $5000/oz

mdtrader's picture

I topped up my goldmoney account today on that pull back on gold. My view is that the politicians will plump for more money printing and that will be good for gold in the long run.





sunstreaker's picture

I am looking for convertible gold mining bonds or gold bonds. Does anyone have suggestions?

sunstreaker's picture

I am looking for convertible gold mining bonds or gold bonds. Does anyone have suggestions?

uno's picture

careful gold bulls, the IMF is gonna announce 1 zillion tons of gold for sale after the close today, no physical delivery allowed.

akak's picture



And what are you willing to bet that they won't even be willing to tell us just where that one zillion tons of gold are actually physically store?

Oops, wait, my mistake --- whatever made me think that I had any right to ask our overlords such impertinent questions!  We're all supposed to implicitly trust them, I forgot!

uno's picture

fine print will say customer satisfaction is not guaranteed, all sales final. 

JackTheOffer's picture

What the devil has happened?  A rule change that I missed?  One reply after another, and no....




uno's picture

we are a kindler and gentler crowd,


gold female dogs

akak's picture

I am astounded that anyone still buys the erroneous idea that the dollar is rising --- it is NOT! Please, everyone, STOP repeating this falsehood, and stop buying into the financial establishment's propaganda!

The only thing that is rising (aside from the price of gold and silver, of course) is the woefully misused and misinterpreted "US Dollar Index", which is NOT a measure of the dollar's value in any kind of real terms, but is only a reference against other, simultaneously-depreciating fiat currencies. The dollar is NOT rising in value, and NEVER has done so, outside of the circular (non-)logic of the Dollar Index, which only defines one falling fiat currency against another, in a daisy-chain of circularity in which there are in fact NO fundamental or possible objective definitions of any of the fiat currencies contained within it, as they are all, and ONLY, defined against each other.

To say that the US dollar is "rising" on the DXY, merely because the Euro is falling, is analogous to stating that if two men are sitting in separate leaking rowboats, and one begins to take on water faster than the other, then the other must be therefore rising out of the water!

It is interesting to note that before the current worldwide financial crisis, say going back about two or three years, this US dollar index was rarely seen or used outside of the only appropriate context for it, among foreign exchange daytraders. Yet in the last couple of years, I have noted it being loudly trumpeted and paraded out by the "mainstream" financial media (usually when the index is rising, of course) as if it were some objective measure of the dollar's intrinsic value, when it is demonstrably not. I have always bristled at this, as I feel that it has become just another tool of misinformation by the PTB to misinform the average citizen, and distract him from the reality that fundamentally the value of the dollar, like that of every other fiat currency, moves in one and only one direction: down.