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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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Fri, 05/14/2010 - 13:03 | 352085 AlexanderKZ
AlexanderKZ's picture

This chase for gold IOUs will finish badly.

Fri, 05/14/2010 - 13:30 | 352160 Mako
Mako's picture

Fixed it for you.

The chase for all IOUs will finish badly. 

Fri, 05/14/2010 - 13:03 | 352086 Divided States ...
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.

Fri, 05/14/2010 - 13:09 | 352105 godfader
godfader's picture

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

Fri, 05/14/2010 - 13:15 | 352123 Divided States ...
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.

Fri, 05/14/2010 - 13:48 | 352207 Internet Tough Guy
Internet Tough Guy's picture

So is your post.

Fri, 05/14/2010 - 13:11 | 352111 LoneStarHog
LoneStarHog's picture

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

Fri, 05/14/2010 - 13:21 | 352135 frippy
frippy's picture

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

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

Clueless.

Fri, 05/14/2010 - 14:54 | 352378 Bloodstool
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.

Fri, 05/14/2010 - 14:57 | 352387 akak
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!

Fri, 05/14/2010 - 15:06 | 352411 Bloodstool
Bloodstool's picture

Uhhh...

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.

Fri, 05/14/2010 - 15:20 | 352439 akak
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.

Fri, 05/14/2010 - 15:29 | 352467 Bloodstool
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.

 

Fri, 05/14/2010 - 15:41 | 352487 akak
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"!

Fri, 05/14/2010 - 19:24 | 352936 dnarby
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.

Fri, 05/14/2010 - 19:34 | 352943 akak
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.

Fri, 05/14/2010 - 22:32 | 353123 dumpster
dumpster's picture

statistics and the book of 1984

2X2=  5.1984

Fri, 05/14/2010 - 16:09 | 352570 Screwloose
Screwloose's picture

When did the Treasury last publish an M3 figure?

Fri, 05/14/2010 - 14:54 | 352379 akak
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.

Fri, 05/14/2010 - 15:12 | 352427 Bloodstool
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? 

 

Fri, 05/14/2010 - 15:23 | 352450 akak
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. 

Fri, 05/14/2010 - 15:34 | 352484 Bloodstool
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." 

 

Fri, 05/14/2010 - 15:40 | 352498 akak
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.  :-)

Fri, 05/14/2010 - 16:19 | 352598 thesapein
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.

 

 

Fri, 05/14/2010 - 19:25 | 352937 dnarby
dnarby's picture

Yeah, baby +10

Fri, 05/14/2010 - 18:02 | 352785 dumpster
dumpster's picture

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

Fri, 05/14/2010 - 18:08 | 352795 dumpster
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

Fri, 05/14/2010 - 13:22 | 352140 akenathon
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...

Fri, 05/14/2010 - 13:23 | 352146 jmf
jmf's picture

Moin from Germany,

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

http://2.bp.blogspot.com/_1V7wnZxPqok/S9VVq1Grr2I/AAAAAAAAMuQ/KpQUtOVebws/s1600/gold+bubble+2.gif

 

Fri, 05/14/2010 - 13:46 | 352198 Nout Wellink
Nout Wellink's picture

Great chart, thanks.

Fri, 05/14/2010 - 14:01 | 352248 jmf
jmf's picture

Moin,

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....

 

 

 

Fri, 05/14/2010 - 15:59 | 352535 George the baby...
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.

Fri, 05/14/2010 - 23:53 | 353119 ToucanSam
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).

Sat, 05/15/2010 - 12:47 | 353664 hedgeless_horseman
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.

Fri, 05/14/2010 - 13:25 | 352149 anynonmous
anynonmous's picture

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

Fri, 05/14/2010 - 13:40 | 352184 Strider
Strider's picture

Lloyd Blankfein relates on Goldmans next move.

http://www.youtube.com/watch?v=J3YRWhg4YaA&feature=player_embedded

Fri, 05/14/2010 - 13:42 | 352189 Minyan Vince
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

Fri, 05/14/2010 - 13:43 | 352191 mdtrader
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.

http://goldmoney.com/?gmrefcode=gm99

 

 

 

Fri, 05/14/2010 - 14:10 | 352279 sunstreaker
sunstreaker's picture

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

Fri, 05/14/2010 - 14:10 | 352280 sunstreaker
sunstreaker's picture

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

Fri, 05/14/2010 - 15:13 | 352431 JackTheOffer
JackTheOffer's picture

Gold Bonds, sure.

http://www.goldbond.com/gold-bond-products.html?p=1

Caution: don't eat it.

Fri, 05/14/2010 - 14:12 | 352288 uno
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.

Fri, 05/14/2010 - 16:03 | 352552 akak
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!

Fri, 05/14/2010 - 16:15 | 352585 uno
uno's picture

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

Fri, 05/14/2010 - 14:18 | 352301 JackTheOffer
JackTheOffer's picture

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

 

Bitches!

 

Fri, 05/14/2010 - 14:23 | 352314 uno
uno's picture

we are a kindler and gentler crowd,

 

gold female dogs

Fri, 05/14/2010 - 16:04 | 352555 akak
akak's picture

Auric dams!

Fri, 05/14/2010 - 14:46 | 352349 akak
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.

Fri, 05/14/2010 - 14:56 | 352382 Henry Chinaski
Henry Chinaski's picture

Good clarification.

Fri, 05/14/2010 - 15:29 | 352466 mrgneiss
mrgneiss's picture

Good points, akak, but you are preaching to the choir here at ZH, although there may be a few outliers.

Fri, 05/14/2010 - 16:08 | 352568 akak
akak's picture

I wasn't sure if I was or not --- I am relatively new here, but had seen my personal bugaboo, the US dollar index, brought up a number of times, at each of which I just bit my tongue.  I guess I finally felt the need to vent my frustration with it.  It just really "frosts my balls", as my dad would  have said, to see people implying or stating outright that "the dollar is rising", when it truly never is.

Fri, 05/14/2010 - 16:51 | 352665 holdinmyown
holdinmyown's picture

"It just really "frosts my balls", as my dad would  have said, to see people implying or stating outright that "the dollar is rising", when it truly never is."

In the long term you are absolutely correct in your view that all fiat currencies are falling together but at different rates.  In the short term however you can definitely make the case that the dollar (USD) is rising.  The fact is that all world commodities are priced in USD.  So if the USD rises this usually means that commodities priced in USD will fall (at least in the short term).  Take oil for example.  If  you are a US consumer you are paying less for for 1 bbl of WTIC than you were at the beginning of 2010.  However, priced in EUR the French consumer would be paying more now for that same bbl than she would have paid Jan1,2010

Fri, 05/14/2010 - 18:21 | 352819 akak
akak's picture

And you are, of course, correct in your observations and analysis of the US dollar in that limited regard.  I cannot deny that in terms of specific commodities or foreign goods, yes, they can fall in dollar price with fluctuations in the currencies.  I guess my point was that the dollar has never actually risen, and I would argue could never rise, in purchasing power taken over the whole broader economy, or for the average person within the economy.  That would imply a falling general price level, something that has never been seen in the USA outside of the period 1929-1933, while we were still on the gold standard.

Fri, 05/14/2010 - 20:24 | 352990 holdinmyown
holdinmyown's picture

I'm not sure what "general price level" means.  There is a difference in goods that are essential to our daily lives and those that we woulld like to have (wants vs needs).  I believe that inflation and deflation can occur at the same time.  I call it "indeflation".  We can (do?) have inflation in essential goods while simultaneously have deflation in non-essential goods.  See my blog at:

http://chinookarch.blogspirit.com/archive/2009/03/30/inflation-deflation-indeflation.html

or at

http://chinookarch.blogspirit.com/archive/2009/04/26/is-it-possible-to-have-deflation-when-the-central-banks-prin.html

Fri, 05/14/2010 - 18:10 | 352799 dumpster
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

Fri, 05/14/2010 - 23:14 | 353147 ToucanSam
ToucanSam's picture

I'm no expert on fiat currency so correct me if I'm wrong, but currency is simply a medium of exchange.  The dollar is a medium of exchange of value.  If everything is exchangable with fiat currency, and one currency rises over another, to me, that means the rising currency's value is stronger over the weakening currency.  In other words, if I make $10 dollars and the dollar rises relative to other currency, then I can exchange my $10 for more of another country's currency, or more of another country's products priced in their currency.  Even gold and silver are priced in fiat currency, which is why the value of gold and silver may not necessarily represent the true value as I mentioned in a post above.

What I think you're talking about is that the price of certain goods in dollars is rising and the assumption is that it's because the dollar is weakening.  Prices rising doesn't necessarily mean the currency is weakening since as I mentioned, the strength of a currency is relative to other currencies.  Looking at the prices of specific goods is not a good indicator of the currency's strength or weakness.  That's because the price of a good can fluctuate based on supply and demand while the value of a currency is relative to other currencies.  You can't say the dollar is necessarily weaking just because prices rise.  There could be other circumstances for a price rise such as natural shortage, taxes, regulatory costs, wage inflation (higher demand), etc..  In fact, if the dollar was really weakening, you'd see prices rise across the board both for domestic products and imports, but everyone can see that's not true (yet).  Only certain goods are rising in price, while others are dropping.

Finally, your analogy isn't quite right.  The currency's value relative to each other isn't the rate of water leaking.  It's the size of the bucket.  The rate of water leaking is really the amount of debt.  One country's debt rises faster than the other's making their survival shorter if their bucket isn't big enough.  Well, with fiat currency, you have magic buckets which can grow and shrink as the owner sees fit.  The US is making theirs bigger, while others can't or is trying as well, to stay afloat.  In fact, if my bucket is big enough, I can remove all the water in my boat and yours.  Therefore, through inflation, I can own the world with my bucket, even though we're both sinking due to debt increases.

Fri, 05/14/2010 - 23:16 | 353164 akak
akak's picture

Toucan, I do agree with your first two paragraphs, at least. 

I wasn't trying to say that the dollar is not rising based on a comparison to just some specific commodity --- agreed, that would be a misleading and meaningless judgement.  But if the general level of prices throughout the economy are rising, or at least not falling, then it is also misleading to say that the dollar is "rising", if most prices are not simultaneously falling, would it not?

Yes, if the dollar "rises" relative to the euro, then I MAY be able to buy olive oil from Greece at a lower price next year ---- if (and only if) that relationship between the two currencies holds for a sufficiently long period of time.  But in practice, prices of imports do not tend to jump up and down with the foreign exchange rate on a daily, weekly or even monthly basis.

As to your last paragraph, I am a bit confused by your analogy with buckets, which I had not used in mine.  I would say that in my analogy, the currency's values would be the relative level in the water of each boat, with nothing to do with the rate at which they are sinking.  I only mentioned rate in the context of one sinking faster than the other, thereby achieving a lower level in the water, corresponding to a lower value relative to the other boat ---- both are sinking, but one is now lower than the other one.

Fri, 05/14/2010 - 23:43 | 353204 ToucanSam
ToucanSam's picture

What I was trying to say was that prices rising in general isn't necessarily due to one currencies strength/weakness to another.  Prices rise due to inflation, the creation and injection of more money.  This really has nothing to do with the strength or weakness of the currency to another since it's the currency's ability to be trusted that strengthens or weakens it.

You're right, prices of imports do not necessarily change daily, but that's more a factor of the foreign supplier's willingness to lose/gain the currency exchange difference, as well as the amount of supply purchased and available at a specific exchange rate.

The comment on the analogy was because you mentioned two men in a boat that's sinking with one taking on more water than the other.  I understood that to mean you assume the rate of fiat currency depreciation is relative to each, but in the long term, they're both sinking.  My comment was that the leak isn't based on the currency's sinking at different rates, but rather the sinking is due to the amount of debt a currency is burdened with.  The bucket that the men are using to bail out the water is one currency's strength relative to the other, but also the ability to increase the size of the bucket to bail out the water (debt) is a factor.  The dollar can be printed to make the bucket bigger, thus bailing the man out from the loan of debt (water leak), but other currencies may not have that same ability.  Therefore, the dollar's strength to another currency is simply a comparison of purchasing power for the other currency's goods.  Neither is sinking due to the fiat currencies' debasement, but rather the currency's debt load.  If neither currency has debt, there'd be no water leak.  It would simply be a matter of whose currency is stronger or weaker to buy more or less of the other's goods.  The effects of debasement is simply a matter how much that extra currency is in the system.  Once it's in the system, then everything rises due to expanded consumption (jobs = money to spend).  Once consumption increases, demand increases, which increases prices due to supply constraints.  If the money doesn't go into the system, then it does not easily affect prices in the same way.  The prices are affected for imports as the exchange rate is weaker for the debased currency.  If multiple currencies are debased at the same rate, then your exchange rate is at par, and therefore, theorethically, you should see no price effect.

Fri, 05/14/2010 - 23:46 | 353216 akak
akak's picture

Gotcha.

Yes, I agree with you, I just got a bit mixed up with the buckets in the prior post.

 

Fri, 05/14/2010 - 14:49 | 352365 bluewarrior
bluewarrior's picture

Though I am very bullish on gold, I doubt old can reach great heights without having the administration intrduce some rules to kill it. If an alternate currence which is not in the control of the country's administration emerges, it significantly impacts flexibility.........gold has only so much to go before it gets pulled down someway or the another.

Fri, 05/14/2010 - 15:20 | 352445 JackTheOffer
JackTheOffer's picture

If laws and rules were really that effective, the average person would not even know what marijuana is.

Fri, 05/14/2010 - 16:30 | 352620 akak
akak's picture

BW, I have often fretted about precisely that same thing.  Or some onerous and heavy-handed capital gains taxes on precious metal profits.

Sat, 05/15/2010 - 09:58 | 353538 Reven
Reven's picture

Any kind of punitive capital gains tax on gold would drive everyone to physical and into the underground economy, thus increasing the physical demand for gold (which they definitely don't want to happen).  There's already a network of retailers around the country forming that accept gold and silver as payment for goods and services.  Networks such as this would grow like wildfire and faith in fiat currency would plummet. 

 

No, any attack on gold ownership is ultimately self-defeating.  Citizens are not the little trained minions of the US Government like they were in the 1930's.  They will not respond well to Obama stealing the people's gold (through taxes or confiscation).  The only weapon in the arsenal of the fiat peddlers is propaganda and disinformation.

Fri, 05/14/2010 - 15:59 | 352540 BlueDonkey
BlueDonkey's picture

Greeks return to the British Sovereign article from Banks' News website in Greek...you can translate from babelfish to get a jist of it 

http://www.banksnews.gr/portal/home-page/124-top-story/738-2010-05-13-22-13-50

Fri, 05/14/2010 - 16:08 | 352567 Gwynplaine (not verified)
Gwynplaine's picture

If a conservative gold forecast is roughly triple today's price, what then is Rosenberg's consumer price forecast?  Gold at $3,600 wouldn't be so bad - except that other goods will likely follow.   Will a loaf of bread be $10?  Or dinner for 2 at Applebee's somewhere around $150?

To go one step further: will gov expenditures have to triple to keep up with inflation?  Even if tax receipts thereby tripled, there is no way they could float 3x next year's debt issuance.

Does this gold forecast mean it's "game over" sometime next year?  That's the question that should be addressed.

Fri, 05/14/2010 - 17:04 | 352694 The Disappointed
The Disappointed's picture

Will a loaf of bread be $10?  Or dinner for 2 at Applebee's somewhere around $150?

Man, we're already on the way. Got charged $3.29 for a half gallon on milk today. Talk about sticker shock.

Fri, 05/14/2010 - 16:37 | 352629 I think I need ...
I think I need to buy a gun's picture

yep.....jim rogers said it about a year ago forced liquidation...ie margin calls to pay off other things.

 

trader dan on jim sinclairs mineset said it best today how can the dollar index even be relevant if what its against the euro may dissolve? what then is a dollar worth?

Fri, 05/14/2010 - 16:48 | 352655 I think I need ...
I think I need to buy a gun's picture

i don't know about 10 dollar bread but what happens is things go up in price and there are shortages because there is no money in the system to lend to open a new bakery. In inflationary times you buy gold and buy nothing else except food. this time gold may form a bubble buy its part of the permanent solution so it won't get killed on the way back down ie 1980

google gold certifciate ratio.

Fri, 05/14/2010 - 18:14 | 352807 dumpster
dumpster's picture

very common here in Seattle to pay $4.50 for a loaf of bread.. not the wonderbred sold in supermarkets type ,,, but good ingredients real bread lol

Fri, 05/14/2010 - 18:16 | 352810 dumpster
dumpster's picture

gold will not go back down like 1980 as it will compete in the real world of money ,

 

it went down in 1980 under a direct attack by the fed and the banks .. they shorted the heck out if it, made it appear to be nothing

Fri, 05/14/2010 - 19:39 | 352950 mchandler@ameri...
mchandler@ameritech.net's picture

There is plenty of gold to use as money. It just has to be divided into smaller pieces.

Fri, 05/14/2010 - 22:49 | 353134 dumpster
dumpster's picture

smaller pieces , plus 5000-6000 will come close

silver is a unit of exchange ,

when will folks understand that gold.. is a backing .. a trust of the promise to keep productive labor and savings free from the printing presses of mad politicians and free spending do gooders

gold is  STORE of value .

it does not have be cut up.. it doesn ot have to have any thing done it is gold  

even in the templier days gold was put in safe place .. when people traveled they were given script backed by the gold .

even today if we had freedom .. a person could start his on trading company like a starbucks cofee chain you would have a stinkero pile of gold and silver .. divieded among all your shops.

people would come in .. if they are traviling deposit some gold get paper reciepts then you go anwhere the shops are and get your gold

or go to the shop for a fee get a paper promis that can  be redeemed any where

you do not need to spend the gold and buy the cofee lo,

 

Sat, 05/15/2010 - 00:04 | 353236 ToucanSam
ToucanSam's picture

Isn't that a funny thing?  Gold IS a store of value, but they used paper currency to make everyday exchanges.  Fiat currency today works because everyone accepts it.  But I don't think we'll see countries going away from fiat currency even if the today's currencies collapse, because most countries don't own enough real gold to go back to it.  If the world tried to go back, you'd have all-out wars, not to mention the inability to enact socialistic programs and wasteful government spending.

Sat, 05/15/2010 - 02:28 | 353347 Grand Supercycle
Grand Supercycle's picture

 

The March 2009 bear market rally ended last week. 

http://tinyurl.com/39ptoac
 
http://www.zerohedge.com/forum/latest-market-outlook-1

Sat, 05/15/2010 - 10:40 | 353563 Ned Zeppelin
Ned Zeppelin's picture

As for the "can't eat it, doesn't pay dividends" argument, gold is no different than any fiat currency (which serves none of those purposes either). And like a fiat currency, if there are sufficient numbers who believe it is a stable store of value, then it will serve that "currency" purpose. Gold has both currency and commodity characteristics, with the weight given to either attribute depending on the level of faith in the then extant fiat currencies. Gold does have the attribute of scarcity, since it cannot be printed. And gold does seem to act as an objective marker of value in the relativistic world of fiat currencies.

Thu, 06/09/2011 - 17:15 | 1355792 sun1
sun1's picture

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