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On Gold Bug Ducks, Magical Regulators, and Innocent (yet funny) Bunny Bloggers
Last week I reposted "Deflation,
Inflation
or Stagflation - You Be the Judge!" on a couple of other blogs and
it got the gold bugs acting awfully Donald Daffy Duckish! First an excerpt
from last year's post...
In continuing the rant on the possibility of the US entering a
stagflationary environment, as was hinted by Alcoa's quarterly report
(see "IsMy Warning of the Risks of a Stagflationary Environment Coming to Fore?"),
I have decided to graphically illustrate the historically most
successful inflation hedges. Click graphic below to enlarge.
For those "gold bugs" who have never ran the numbers, gold offers less
inflation protection than your house does. The same goes for WTI crude
and probably most other categories of oil.
Now an excpert of the Donald Daffy Duckish behavior. Notice the Regulator in
the blue hat, the Gold bugs as Donald Daffy Duck, and Reggie - represented by
my man, Bugs!
A few more facts to munch on:
Click this one to enlarge in order to get a better view.
A different perspective
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Gold is at a record againt the Euro and only 5% below its dollar peak. That should not be happening. But it is. So you have to ask why?
Surely it is not inflationary expectations.
Money is fast becoming a lousy store of wealth. Who could trust money today? Dollars, Pounds, Euros Yen etc all have big issues. So gold gets an edge.
Reggie: Gold is going to move higher because of the distrust in money. It may be illogical, but it will happen anyway.
It aint inflation this time. It's something bigger.
Do note that the US is a police-state. If things get rough and your savings are in gold, there still wouldn't be any place you could unload it. It's the same as it always was- the big holders will be legal and the bit-players will be screwed. ..I mean, it would probably be as useful to have a cycle around your area and see what, in the event of a depression, your area could produce; draw up some plan for the community as a whole to support itself to some degree. Then at least, if there's a village barbeque, you can break the ice.
To all:
This is the reason why I call them Gold Bugs. I put charts up that justify gold as a worthwhile investment over the last 10 years in many currencies, years with significant currency volatiilty, yet no one said "Hey, I agree".
I made it quite clear how bearish I was on real estate and why, and unless RE breaks a centuries old correlation, we aren't getting high inflation in the near term. Still, this appears to have been missed by many.
I put data up that clearly shows gold not coming in 1st, 2nd, nor 3rd as the best inflation hedge, and I get arguments. I actually think gold may have some more room to run up, particularly if it corrects hard and/or we have a major currency collapse. The big problem is the cult-like following that it has, a following that has many a cult member who will ignore the numbers and facts, such as the one's that I just put up, and simply yell gold is the Sh1sn't! This is about numbers, price movement and correlations, not about your sentiments and feelings as an individual. Many proponents of the gold trade that post on blogs seem to adhere to the latter.
It appears those who have gold derivatives or paper/electronic claims on physical gold may be in for the same rude awakening that those who hold CDS ran into, but then again you would have to take a hard look at the evidence to come to such a conclusion.
Re-read your post, and yes you are correct, but the historical inflation hedge argument is, in my belief, an academic, in-the-box calculation. I think where people are having a problem is that we can't look at inflation in a vacuum. The forces at play in our own world aren't just inflationary. We have peak oil, and other commodities to worry about, war, and everthing else. I think what we're witnessing is something that we as a civilization haven't seen in recorded history before (on a global basis) that's why I have a hard time looking at past, very short-term coorelation data, it may be of limited value. We may be witness to one of the most extreme events in monetary history.
Reinhart and Rogoff's data is more of the timeframe we should be focusing on - 8 centuries.
Reggie,
as a reluctant gold bug, I recognize gold only as another currency. The only difference is that this currency (in its physical form) cannot be counterfeited like all the other FIAT our there. In its paper form however, it can and has been (to what most gold bugs have been proving lately). You are correct that gold is not the best hedge against inflation. But, I don't believe my wife would allow be to stack a few thousand barrels of oil in my back yard. Moreover, most other commodities are a function of Chinese demand and also are difficult to store. Furthermore, if the "managed economy experiment that is China" implodes, we will have some very interesting disconnects in the commodity markets taking place simultaneously. Gold may spike while copper may collapse. Then again, gold may follow copper to the bottomless pit. In the end, the whole world may be in one huge, unsustainable bubble where there is no place to run (the mother of all my fears). So, other than buy guns and ammo, what can the average man do to protect himself and his family? Because, even the "Mad Max" outcome is not exactly anyone here is prepared for or looking forward to?
BTW Reggie,
I love your work. Just because I don't agree with your conclusions in this case, does not mean I don't appreciate the data and info your provide. The problem right now is that we are at the gates of hell, we all know that the future will be challenging, and in the end, nobody really knows how any of this will play itself out. All we know is that for the masses, it will not end pretty. The fact is that I doubt anyone will come out of the next decade without some scars. Just like Greece is now banning shorts, the US, UK, and other governments will likely ban "physical" forms of precious metals. They will make some justification like "hoarding", "enemies of the state", "protecting American interests", whatever... point is that unless you are on K-Street or Wall Street, Main Street is screwed! Your choices end up being a choice of the lesser of all evils. Since we don't know what the puppet masters plan for us, it is hard for anyone to plan accordingly. As such, gold bugs as like the rats on the Titanic, looking for ways to escape on a life boat. It may not work, but we have to do something, because we know the ship is going to sink. Hopefully, this life boat will not go down with the ship. But, honestly, who the heck knows? After the fraud in Alabama in Jefferson County, do you really want to be a homeowner there? Finding a place to run is easier said than done.
Rich
As shameful and unwashedmass said - gold has limited appeal as a conventional investment, but huge appeal as a hedge against hyperinflation (not ordinary inflation), various kinds of government action, and general major upheaval kind of stuff. It is small and portable and has no credit risk. No, it doesn't pay a coupon or a dividend, but that's not the reason to own it.
In terms of hedging for ordinary inflation, I think your data and articles are useful. But don't miss the bigger picture.
One big note: For an asset to really qualify as an asset, it should not have negative cash flow. Otherwise, it's more of a liability. When the time comes that you don't have to pay property taxes, fix a leaking sink, and deal with termite infestation, I guess a house is a good thing. It does provide shelter and have a few more benefits.
The gold/silver in my possession have no cost to me. Sure, it does not generate income. But, neither do any NASDAQ stocks. The government currently has no way to tax/steal/repossess this asset through some legal judgement. If necessary, I can always take my gold and move to another country if necessary. Since there is little paper trail, there is little way for them to prove that I have what I have.
reggie....
i think the point you are completely missing is that many of us who do hold gold, we have lost faith in paper currencies. past returns are irrelevant when the currency -- any currency -- is run by the likes of gordon brown or ben bernanke. let's not even pretend anyone could have any confidence whatsoever in Turbo Timmy.
its not a question of returns anymore, its a question of having something left when this all falls apart on GS and JPM.
and all the games they are playing.
what was it i saw last night? GS is now carrying a leverage ration of 467:1?????
Reggie, I understand your point, but you have a very limited dataset (time wise). As shameful says, inflation isn't the complete picture. I am a huge supporter of gold right now, but I'm not a gold bug. Gold is having it's day, and there's going to come a day when it will be advantageous to sell it (tail of bubble phase) and I will have no illusions about selling or feel sentimental about it. We're dealing with a grey swan here of global proportions impacting a tiny industry. It doesn't take much inference or imagination to think that rare earth/precious/industrial commodities and currency alternatives will explode. Silver sits right in the middle of that. Also it's relatively liquid, and if you decide to smuggle yourself to some tropical banking center, your RE property can't be dug up and taken with you (government risk, taxation risk, market risk, liquidity risk, acts of god risks)
You're living in a world of mathmatical models without tempering with common sense at a time when everyone's quant model is experiencing a thermonuclear event.
All in all, I think you're missing the forest for the trees...
Reggie, what is the date of that hedge graph? Hedging was an investment idea before the typical middle-age white boy on wall street learned to reach up your butt and pull out everything you had eaten the day before. To suggest that real estate has the same value in 2010 or in 2015 that it had in 2001 is foolish. You are bored Reggie, or going broke, can't really tell. Real estate is a good investment if you can buy it, develop it, and sell it without putting a single penny into financing it. Real Estate is so 2004 Reggie.
Don't tell me what you think is going to happen in 2010 or 2011 or 2012 Reggie my boy; you do not have a clue just like the rest of us. Tell me about 2013 and 2014 and 2015. Tell me my man, what is going to be happening in the second quarter of 2014 to gold, oil, real estate, wall street,
Russia, China and Obama.
Reggie,
Stay within your zone of competence, you are just revealing how little you understand about gold.
I think you mean Daffy not Donald and speaking of as a lifelong fan of Looney Tunes and gold I completely understand Daffy's actions :)
About gold as inflation hedge, it's also a gov hedge. While my house may do better on your chart for inflation can I pick up my home and take it with me if my gov gets particularly oppressive? I mean some people might but I have not been hitting the gym lately and my bench press is still shy of a few tons yet... :)
If you own a home you are a sitting duck — for any amount of taxes and if there's a mortgage, for any insurance premium increases.
I was screaming years before the crash to not buy, and to sell to my family...and was ignored. I worked in eeh construction biz, and ran my own numbers and saw that it would come down in 05.
And totally agree on taxes. No way is the gov not going to jack them up when they are gripping for money.