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Gold: It’s All about the Dollar…and Yes, Dr. Roubini, Inflation
- Andrew Hall
- Australia
- Barrick Gold
- Brazil
- Central Banks
- China
- Credit Conditions
- Creditors
- David Einhorn
- Double Dip
- Dow Jones Industrial Average
- Federal Reserve
- Gold Bugs
- Greenlight
- Gross Domestic Product
- India
- International Monetary Fund
- Jaguar
- John Paulson
- Money Supply
- Nouriel
- Nouriel Roubini
- NYMEX
- Output Gap
- Paul Tudor Jones
- Recession
- recovery
- Unemployment
- Volatility
By Economic Forecasts & Opinions
Gold prices surged to a new high Tuesday on news that India's central bank bought $6.7 billion worth of gold from the International Monetary Fund (IMF). December gold jumped as high as $1,087, before settling at $1,084.90 an ounce on the NYMEX breaking the previous record of $1,072 an ounce on Oct. 14. Prices are now up 22.7% for the year heading for a ninth straight annual increase. (Fig. 1)
Unusual Correlation
Historically, gold moves in an opposite direction to stocks because of bullion’s traditional role as a safe haven in times of crises. But gold has recently climbed in tandem with rising equities. For example, the Dow Jones Industrial Average, a bet on the economic recovery, is up about 15% this year. (Fig. 2)
This unusual correlation is driven mostly by excess liquidity, return of risk appetite, and a weakening U.S. dollar. The creation of the U.S. national marketable debt to a record $7.01 trillion to revive growth, along with the Federal Reserve’s maintaining the benchmark interest rate near zero since December 2008, and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and increased economic volatility later.
Economic uncertainty, inflation worries and the weakening U.S. dollar helped push gold to a new high this year. Weakness in the dollar benefits gold, which is often used as an alternative asset hedge to a depreciating dollar. The Dollar index (DXY) has declined about 10% this year. (Fig. 2) Right now, the general trend is still for further dollar weakness on the back of the Fed’s easy monetary approach, which will be supportive for the whole commodities complex.
Gurus Now the New Gold Bugs
During the bull market just a few years ago, gold was the last place people would look to put their money in for an asset class. Nowadays, almost everyone from investment gurus to store clerks is either piling into or at least talking about gold.
Fund manager John Paulson increased his bets on gold this year, while David Einhorn of Greenlight Capital was buying gold for the first time. Andrew Hall, the star trader of Philbro, has also reportedly been buying gold this year.
Meanwhile, Paul Tudor Jones, also told clients on Oct. 15 that the time to hold gold is now "as faster inflation and increased purchases through exchange-traded funds, and by central banks boost demand amid stagnant mine output."
Roubini: Gold Has Nowhere to Go
Contrasting to the renewed enthusiasm in gold, Dr. Nouriel Roubini, in a recent interview with IndexUniverse, says gold will go up only for two reasons: inflation or another Armageddon depression.
He indicates that there is currently no inflation risk, as we are still in massive deflation due to a glut of capacity, weak demand, and high unemployment. He went on to say that we’ve also avoided the “tail risk of another depression.” So, without inflation and depression, gold likely has nowhere to go in the next three to four years.
Dr. Roubini did conclude that there is “a wall of liquidity" chasing assets, and a correction could be coming in risky assets with an anemic recovery.
No Inflation & Avoided Depression?
The warning of a deflationary threat from many mainstream economists such as Dr. Roubini suggests a group-think mentality that the output gap and anemic economic growth would keep inflation low (in the next three to four years, according to Roubini), in spite of central bank policies creating massive monetary inflation this year.
But Dr. Roubini’s assertion that we face no inflation risk, AND at the same time avoided another depression in the next three to four years seems to defy logic. The “no inflation risk” assumption is a recessionary scenario, if prolonged, would lead to depression, i.e. the W-shaped double dip.
On the other hand, if we have averted another Armageddon depression, which implies resumption of growth. Economic strength typically leads to inflation with everybody chasing assets. Ergo, there is got to be one or the other, i.e., we should either have inflation; dip into recession/depression or…both, most likely before the end of year 2011.
Money Supply & Velocity Spells Inflation
It is well established that there is a positive correlation between the money supply and inflation. The amount of dollars in the system has increased dramatically. (Fig. 3) But the inflationary pressure from the “wall of liquidity” has been offset by a decline in the velocity due to reduced economic activity and tight credit conditions. (Fig. 4)
This reduced velocity in money is part of the reason why when stripping out the two stimulus plans, cash-for-clunkers and the home buyer tax credit, the U.S. economy grew a mere 1.64% in the 3rd quarter, with quite a subdued U.S. consumer and underlying producer price inflation data.
However, based on the latest Federal Reserve data, the decline in velocity seems to be ending. (Fig. 4) If the reversal trend takes hold with an improving GDP outlook, we are likely to see renewed growth in the price inflation level.
Gold Should Be at $2,300?
The fast ascent to new record highs this year has some of gold proponents worried it might be getting ahead of itself. But on an inflation-adjusted basis, the prices of almost all commodities have reached their 1980's level, except for gold and sliver. On that note, gold would have to double to $2,291.55 to reach its 1980`s high, which its supporters believe means gold could go much higher.
Confidence Lost at Central Banks
In addition, many U.S. creditors have fundamentally lost confidence in the US dollar and are incrementally diversifying into hard assets and non-dollar currencies. There are indications that China, for example, could be shifting to a partial gold standard through reserve accumulation.
The Reserve Bank of India (RBI) yesterday said it had bought $6.7 billion worth of gold from the International Monetary Fund (IMF). The purchase RBI made is nearly half the 403.3 tonnes gold that the IMF decided to sell in September to raise resources for lending to low-income countries. Most speculate that China would be the buyer for the remainder of the gold for sale by the IMF.
The deal represented one-eighth of the IMF’s total gold stock. This is the first time since 2000 that the IMF has sold gold to a central bank. India's affirmation of current gold prices is a big sign that the nation sees the recent surge in gold isn't likely to abate any time soon. It also signals that the fall in the US dollar seems to be pushing central banks to strengthen their portfolio with gold.
The purchase will lift the share of gold in India's 285.5-billion foreign exchange reserves from near 4% to about 6%, which is much less than most of the developed world and four times China’s. This lower gold to reserve ratio also suggests the China and India could continue to be the buyer in the gold market.
More than Just Skin Deep
There are others who are concerned that the relatively high prices of gold could crimp jewelry demand from India and China, which accounts for two-thirds of the total gold demand. However, culturally speaking, most Asian countries see gold as the ultimate instrument for value preservation. This tends to keep the demand level of gold fairly stable regardless of the price of gold.
Even if the jewelry demand drops due to the high flying gold prices, the current trend is that investment demand for gold could exceed that of the jewelry demand, similar to the trend of the 1970’s. This change primarily stems from the investment community losing confidence in current monetary policies and corporate earnings.
Dollar & Inflation to Support Gold
Of course, people no doubt will keep arguing about whether gold is a legitimate currency. Either way, gold has done well in periods of economic and financial difficulty, such as the 1970s, when the dollar was weak, inflation was high, and confidence in government was low. The weak dollar and inflation perspectives discussed here are enough to support a continuing gold rally for the next few years in the asset class.
Portfolio Strategy
Investors should consider using gold as a way to insure their portfolio by allocating no more than 10% of their holdings to bullion and gold stocks. However, beware that the battered greenback could weigh on operating costs of producers with significant operations outside of the U.S. Companies like Barrick Gold (ABX), Kinross Gold (KGC), Jaguar Mining (JAG), Newmont Mining (NEM) and Yamana Gold (AUY) have substantial operations in Canada, Australia and Brazil, making them vulnerable to a depreciating U.S. Dollar.
# Maybe self-destruction is the answer #
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Amusing to hear Roubini being called a mainstream economist, he has always been seen as a radical.
...But then again, we have a perverse penchant for putting our faith in the hands of the most corrupt people on God's (formerly) green Earth. Law school graduates---who would'nt know an honest day's labor nor the meaning/concept of the word "honor". Selah.
Roubini makes a contrarian call that anyone with a brain could have made and it came true. Instant rock star. Curb makes sense, but IMHO Bernanke was so intent on avoiding Great Depression II (thanks, Bush/Cheney-Greenspan) that in order to avoid a panic, he himself over-reacted with the foolish policies he employs. Funny how inflation is considered benign while energy, housing costs, healthcare costs skyrocketed. When the few people that still possess capital decide to buy gold and hoard it (sideline money)...well, the American economy is dead, and the rest of the world perishes as well. Bailouts, stimulus, manipulation of the stockmarket, gimmickry accounting were desperate attempts to jump start a dead battery--and it was destined to fail. Remember the last scene of Fight Club? Mayhem. With what we learned about GD I, and Japan's crash-and-burn, we should have done much better.
Dr. Roubini needs to review capacity utilization and unemployment (94%) in Zimbabwe. I know I can buy a $100 Trillion note on ebay for approximately $1.25.
http://www.google.com/hostednews/afp/article/ALeqM5imTkGEP84_3QTVcSGu_8W...
Curb, thank you for your eloquent thoughts, that's exactly what I believe as well.
However, we are different than the Great Depression because of the social safety nets and we are different from Japan due to demographic reasons.
I think it's some weird hybrid mix here, we have consumer deflation and investment bank inflation.
Consumers aren't buying gold, they are not buying oil (at least directly) and they are not buying commodities.
These will continue to rise because it's the only place it makes sense, other than Treasuries, for banks to put money.
But I agree we will keep seeing deflation, although somewhat moderated given that a good correction has already happened, in housing, luxury goods, etc. THIS IS A GOOD, YES PAINFUL, BUT GOOD THING!!
What we do not want to do is break our currency. Also, Chinese stimulus and others are operating from SURPLUSES meaning they can keep stoking demand for some time to come. But I think smart people are looking at our government like it's crazy, we are adding TWENTY FUCKING PERCENT of the debt IN A YEAR!!!! One year = 235 year history of this country.
And then these morons want to throw in a national healthcare bill. Unless there is a fiscal responsibility revolution like 1994, the dollar will lose its hallowed status in ten years.
Thus, hard assets are a good way to go, I like hard assets that are not subject to much manipulation, such as the rare earths and investments that go towards clean technologies and major infrastructure changes, as I think government is really the only spending power for the next two years and that's where they're headed, all around the world.
+100
The presence of social safety nets is a huge difference between now and the 1930's, made possible by a pure fiat currency. Toxic assets cannot be written off, because the liabilities (i.e. deposits) cannot be disregarded; the government is on the hook, one way or another (call it FDIC, call it "excess" reserves, whatever).
And you're right: people are not buying gold; people are selling scrap gold because they need the cash. They don't have the money to buy gold. Commodities will decouple from FX/equities/real estate big time; the public debt explosion results in a crisis of TRUST; commodities in your hand don't require you to trust anyone else; people will put their faith in clean technologies because they know deep down that they are the only way out of this mess.
The market always wins--
Yep--you can manipulate for awhile,then the market,will do what it wants--when it wants--
I really don't see any chance of inflation happening--
Bernanke is in over his head,i don't think he's smart at all--
Supposedly a scholar of the GDP #1--
Yet,he's making the same mistakes as they did back then--
Trying to reflate,by increasing money supply--
But--sentiment has shifted--banks wont lend and credit worthy people and business wont or can't borrow--
you are kinda proving my point. I think he was smart (UGGH THAT HURTS TO ADMIT). He knew in order to have a differnt result he had to prevent th emoney getting into the system. Which is why when they went to QE, they also started paying interest on the reserves held at the FED. Increasing the money supply availble to banks to bring them up on their capital ratios. He never intended to increase lending, why the interest on the reserves then? Where I do think he made a mistake was the assumption that the banks would stop lending all together.. I believe he anticipated that the new money would stay within the system, but there was enougha vailable credit out there to keep the economy going. The banks all of a sudden got religion and became prudent lenders. They yanked credit lines, took current lines down to the value outstanding and increased their requirement for who is credit worthy. See BEN....with all the current manipulations going on...you still can't control the markets. YOU CAN NOT FORCE BANKS TO LEND and YOU CANNOT FORCE PEOPLE TO SPEND. Try all you want to control the markets, but the markets always win BEN...they always WIN.
All of this money is going to banks. Banks have huge toxic assets/MBS on the books. Per Whitney's
new report they will have to deal with it by Q1 2010. Proof you want?
Banks are hacking credit lines. None of the newly printed dollars moving because they are
all sitting at banks shoring up their balance sheets. So when banks are forced to finally take their hits next year doesn't that money pay for those hits?
Do I have it wrong?
GE rating cut coming
Berkshire rating cut coming
Shouldn't there be another liquidity crunch forcing all assets down?
curb--
I agree with most of your post--
The money being printed,is supposedly,replacing the the desruction of credit money (debt)
As you point out,in the M1-mult--velocity is collapsing = deflation--
Also--during the credit expansion,another factor that gave the elusion of wealth,was from outsourcing industry,allowing China to export cheap goods into NA--
Rising home prices (Heloc) as you point out--added to the pipedream--
I didn't even get into the velocity of money. But I think that is something BEN counted on happening. Yeah, he is an as...but he is a smart ass. The only way he could so much was if he could control the amount that went into the system. By paying interest on reserves do you think banks are going to lend instead of getting free money???? As long as they are paying the interest.....they can play the game. If that money ever gets freed up......well, then i guess all bets would be off. I would expect a purging of that liquidity prior to taking the interst off, if they ever take it off. It could be a way to keep banks within ratios, while remaining insovlent. Fucked up isn't it? But then again, what do I know?
OK, I am gonna chirp in on the inflation-deflation thing. My vote.....no inflation. The thing I look at is the amount of money......and my view onmoney is a bit different. We are looking at the wrong thing. I am prepared to get berated by everyone here, that seems to be what everyone does best anyway. What if all this "printed" money by Bernanke was not new money, but replacement money??? I am not defending Bernanke, the guy needs to be taken outside and beat within an inch of his life, before being publicly executed due to the games and risks he has taken.
OK....my view. Over the last 15 years (not including the last 18 months) we experienced one of the biggest inflationary periods I can remember. No one was complaining....why? Everyone was making money. There was rising wages. That is what inflation is. Not rising prices.
But were we really seeing increased wages or just the appearance of increased wealth? Peple looked at income differently. They now included the unused credit available on their credit cards to determine wealth, and their unused portion of the HEOC they took out on their home, the loan they took out against their inflated 401K, the appreciated value of their....this is how we measured out wealth and ability to spend and spend and spend. guess what.....the market is in the process of correcting. This is what markets do, when left to act on their own (read no government manipulation). An correct they did. Housing prices in some areas are down over 50%. Credit lines are reduced to the amount outstanding. 401k's were cut inhalf and HELOCS pulled as quickly as they were written. What has this left the American people? What has this left our economy? It left an American populous deep in debt, with no available credit. Roubini is right, there is no demand, there is a glut of capcity and there is high unemployment and still rising. Home values are not done going lower. Companies have not finished laying people off and more companies will go out of business. Lending is not picking up.
How much Wealth or money has been lost in the system? How much purchasing power has disappeared? TRILIONS..... The ability of the American buyer to keep our economy and the economy of the world going is gone. It will come back, but not until WAGES begin to rise again. We are working 33 hour weeks...a 60 years low. This is on top of the employment problem. So those of the people with a job are working reduced hours...earning less. Where is the potential for growth there? What I say all that "printed" money is, was an attempt by Bernanke to replace all the lost buying capcity. Has he really PRINTED NEW money, or has he simply replaced money that was lost inthe system, BUT was needed by the system to work?
Asset values are continuing to decline. Commodity prices are only going up due to the devauling of the dollar, something that WILL NOT GO ONE FOREVER. If commoidty prices are not increasing due to pent up demand.....where is the inflation??? We are in a period of debt deflation, with decreasing asset values. Japan is pace to default way before the US, yet our leaders make every decision they did. They started ont his path 25 years ago. We have sat and watched them destroy their own economy under a spiraling debt led deflationary tsunami. Our leaders beleive if we act faster and larger we can go down a different path. Japan has seen their people go from a savings rate of 15% to 2%. We are starting at a 2% rate (a bit higher recently, but trending back down with unemployment). I am sorry....I don't see the potential for inflation. If prices go up....people will not buy (can;t afford to buy) and prices will correct. If we see a currency event - what everyone says will lead to hyper-inflation it really won't matter. It would take the whole world down, as NO ONE DECOUPLES FROM THE LARGEST ECONOMY......regardless of what Economists say.
The last 15 years have not been the greatest inflationary period ever. That is just wrong. The disappearance/decline of purchasing power of your currency is what you should be focusing on when you define inflation. In an inflationary environment, real wages probably would decline, they don't rise or stay fairly flat, like the US real wage basically did from 82-2005. Moreover, inflation is not equal across sectors -you can have more inflationary pressures in some sectors of the economy than others.
The last 15 years was a low inflation, low volatility, low interest rate world that none of us are likely to see again. The 70s on the other hand, are an example of a truly inflationary environment.
You are just plain wrong. In the last 15 years what happend the average price of a automobile? The average price of a home? the price of dinner for 4 at a local restaurant? No one cared...because everyone lived on credit.
INFLATION IS BROUGHT ON BY RISING WAGES. THE RESULT OF WHICH IS RISING PRICES. The problem we had during htat period is wages were not rising, only our perception of our own net worth.
You said:The disappearance/decline of purchasing power of your currency is what you should be focusing on when you define inflation. The problem here is our decline of purchasing power never happend. We changed what money was and instead of using wages as currency, turned to debt and credit. Our purchasing power grew tremendously thanks to this and EVERYONE took advantage. Prices rose and since that is how everyone defines inflation....I say that period was inflationary. By my own rules, it would not be..
Normally I do not respond to anonymous replies, but I made an exception today.
Roubini has gone Hollywood.
http://trends.coolerchoice.com/2009/11/03/nouriel-roubini-still-partying-with-hot-chicks-while-the-world-ends/
Hyper-inflation--deflation and political uncertainty (currency crises)
Those 3 factors--will drive gold--
Someone looking at the money supply growth should consider the Fed's money multiplier from the banking industry.
With an M1 banking multiplier of less than 1 the money supply must continue to grow at an expansive rate to prevent deflation due to the destruction of money in the banking system.
Please correct me if I'm wrong, but the only place debt levels are rising is at the state and federal level. Everywhere else they seem to be stagnant or lowering according the the 9/09 Z.1 numbers. Debt destruction is deflationary and with high unemployment, more defaults are bound to occur. Until toxic assets are written off, aren't we just pissing in the wind? If we do have a recovery at some point the Fed will be late to the game as usual and inflationary pressures could explode, but for now are not just in a holding pattern? I own physical gold and silver, and will continue to do so because it is a wise physical store of wealth for the future. India bought $6.7 billion in gold, but isn't that chump change compared to the quadrillion in derivatives floating around out there? Anyway, I always have gold/silver on my mind, but try not to get gold fever.
-Mindfully Retarded
I agree generally. And if China does what they said and default on CDSs it would make the Gold and S&P corrections last fall look very small.
Deflation first, then inflation later.
http://finance.yahoo.com/echarts?s=GLD#chart1:symbol=gld;range=2y;indica...
Perhaps the move in gold is related to chinas defaulting on derivative contracts. Derivatives are the ultimate weapon deployed by bankers to confiscate real wealth from productive companies. China now sees through the banksters game and doesn't want the squid on its face. This is why we face Armageddon.
Nothing to see here, move along.
imo--Gold's big move starting in 2001,was not from inflation--
It was from hyper-inflation of the credit money system--
The long bond seen it and so did gold--
Gold doesn't react well to just run of the mill inflation--
Look at a chart from 1980-2001--Gold was flat,all the way through-
I thought those signs where when everyone wants it.
Then again, what I've learned from the last two bubbles is that I should probably wait until there are a dozen identical TV shows about idiots making $ hand over fist flipping gold.
A question I have is: why did gold move 300% from 2001 with no inflation....and now we should suddenly own gold because we should be affraid of inflation.....I agree on the long term with you but would rather buy lower....
"I agree on the long term with you but would rather buy lower...."
How much lower? Did you want it lower when gold was at $800, lower at $600, lower at $400?
Those boats have left. But, take heart! There is a new boat leaving every day.
You'll know when it's time to remain on the dock; the signs will be clear.
Well, maybe because there was inflation. The fact that it did not show up in the CPI was probably due to the willingness of the Chinese government to keep RMB pegged to the US dollar (hence undervalued) and collect huge ammounts of treasuries in order to do so (same goes for pretty much all the major oil exporters). Remember, one of the first and most conservative definitions of inflation is an "excessive growth in monetary supply", while price increases in different asset classes is just the way inflation manifests itself. Look at the monetary supply between 2001 and 2007 and you will see that it was expanding rather fast during that period.
agree with you, off course there was inflation....but relative to the what people are expecting in term of inflation as a reason to buy gold. I just want to point out that when news agencies/paper/advertisements etc are screaming to buy gold you are not alone as a gold bull. Everyone want to own gold right now. In 2001 barrons ran a big article on gold. Almost everybody, including all sorts of experts agreed that it was not the right time to buy gold....goldilocks, new economy, inflation=dead etc type arguments. It went up 300% from that day. I would like to own real money as well but around 700.
Well, that's of course a personal choice to either buy it now or wait till it goes down to a more reasonable level. However, I don't see it going back to 700 or even 800 an ounce anytime soon. It could've, should the Federal Reserve step up and raise interest rates, but it didn't, nor I believe it will do so anytime soon. Consider this recent rally as a measure of central banks' maddness (they are all mad, with the FR being absolutely nuts and with the rest following its lead) and not as a result of inherent greatness of gold as an investment. And gold is not an investment after all: it doesn't generate any income, it doesn't pay you off any dividend, it just protects wealth from the central banks' loose monetary policies. The central banks are being even more mad than they were before, so gold is headed higher. This may seem simplistic and radical, but looking back at the previous years one can see that some statements could seem radical at the point in time, but turned out to be understatements several years later (like prediction in 2001 of gold going up 100% by 2008). However, not selling gold here, I'd rather buy some.
I just want to point out that when news agencies/paper/advertisements etc are screaming to buy gold you are not alone as a gold bull
True, but there are also folks screaming to short you on your scrap gold as well. It works both ways, and it merely means that yes, gold is in play. Many, many are still watching puzzled, or waiting until the train leaves to ask if there are tickets left. Asiablues is correct to mention the large hedge funds, but the most important point was overlooked. The demonstrably prescient Einhorn was already in gold - paper gold. He liquidated his GLD holdings to buy and store bullion, sensing (correctly imo) that the storage/insurance premium was a pittance compared to the beatdown that will occur when the reality of the paper markets become manifest.