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The Ultra Bull Argument for Gold
I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we are seeing is only to beginning of a 30 fold rise in prices similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.
So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using (click here for the chart at http://www.madhedgefundtrader.com/july-13-2010.html ). To match the 1936 peak, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.
I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp like by comparison.
The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg to unload my own Krugerrands in 1979, was triggered by a number of one off events that will never be repeated.
Some 40 years of demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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XAUUSD / XAUEUR / XAUAUD bearish warnings issued since July 1 continue . . .
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Prechter's argument is that Bernanke will sit by while we have a big deflation, and only then use his tools to reinflate.
Why would Bennie do that? If he has the tools to cause the reinflation that Prechter says he has, why wouldn't he use them at the first wiff of his hated deflation?
The Fed can affect the velocity of money in many ways, the simplest being a phone call to each CEO of a major bank.
So here's QE2, from my recent "Dear President Obama":
2. You are going to make four major moves to turn this situation around 180 degrees. Please sit down as you read this; I would not want you to get hurt if you faint. The first is a fiscal move. You are going to rebate all individual income taxes paid for the last three years, with a minimum check of $25,000 to single taxpayers and $50,000 to those filing jointly. Yes, if they filed jointly and paid $2,000 in taxes over the last three years they get $50,000 back. If they paid $50,000, they get $50,000 back. If they paid $250,000, they get it all back. What if they had such a low income they didn’t even file? They still get $25,000 or $50,000 back.
I want you to be very Presidential about this. Go on TV and urge people to take this as a do-over to get rid of their credit card debt, get caught up on their house payments, buy snow tires or do some elective surgery. You might have Billy Graham talk about the Jubilee Year, if he is still alive. Urge the community do-gooder organizations to put programs in place to advise people on how not to blow their one-time windfall.
Nancy Pelosi will be mad as hell. Harry Reid won’t be – he is going to get whipped in November if you don’t do something popular. Just point out to Nancy that those paying over $250,000 paid about 80% of the taxes for the last three years, but are only getting 5% of the money flowing back. I am making those numbers up, but you get my drift.
Won’t this cause inflation to take off? Not right away – we have too much unused capacity, and the Chinese have too much stuff in warehouses that they have been churning out to keep their pretend GDP numbers up, with no buyers. Believe me, GM will not run out of Silverados just because all the tattooed 20-somethings get an unexpected $25,000 in the mail. But they will sell a hell of a lot of Silverados. Later, inflation is going to skyrocket anyway, and you can (correctly) blame it on Bernanke, Geithner, Summers, Paulson and Bush. (And Rubin, if you can find him. He seems to have disappeared.)
Won’t this cause the dollar to tank against the other currencies, gold and silver? Yes. But the dollar is a Dead Man Walking. The Fed has destroyed 94% of the dollar’s value since 1913. This will destroy the remaining 6%, but not to worry – you are going to blame it on Bernanke et. al., remember? And that brings us to your second major move....
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100 million taxpayers X $35,000 average rebate = $3.5 trillion, right in the ballpark. And this time it trickles up and does some good.
Gold is worth less than a brass casing, primer, powder and lead slug.
Gold is worth less than similar weigh of steel shaped into a blade and sharpened carefully.
Gold is worth less than one head of lettuce, if there is nobody willing to sell the lettuce to you!
And a diamond is worthless when what you really need is TP to wipe your ass.
Now, do you have anything intelligent to add here?
The bull case for gold going to $5,000 or $10,000 an ounce should be redefined to be the bull case for gold denominated in other things as well. Most importantly, labor. If by the time gold gets to $5000 an ounce, the average Walmart floor-employee is earning $1000 an hour, then that would have been an spectacularly painful lesson for the gold bulls.
If gold simply goes up in a vacuum, that's nice but if the world's stock of gold makes it to 10x world GDP, then that might be overdoing it. I have no clue what percentage of the value of the world's gold has been held in the public's hands over time, as a percentage of GDP, but I know the only reason why I hold it is because I think someone else will want it more than they do now, which is by speculation by definition. I do not buy it because I think that there will be so much cell-phone circuitry in demand that the supply of the world's gold will meaningfully impacted.
When we are living well now, we are thinking about living in a deserted island. It is stupid.
Note to self: do not visit deserted island with gold stash and no wheat... obviously I am bound to end up such a situation one day... /sarcasm
clearly OP does not understand the bull case for gold
Gold is a vote against the squid, and therefore carries life changing consequences for its holders
Vote early and vote often!
If I were a gambler, I'd load the boat with Chinese shorts.
Malaysia will begin using its new gold Dinar on August 12th. It will be the first nation to pay public workers in gold. All State owned companies will pay workers in gold Dinars.
Malaysia certainly is not big enough to rock the gold price by itself but, it will show the world that gold and silver both are the world's true form of money.
I am sure that China will watch this very closely.
So when gold goes up, Malaysia will end up outsourcing public workers because they will be ridiculously overpaid?
Agree DP, and enjoyed your other posts. With interesting developments like this, who needs to read fiction. Do you have an opinion about the possibility of gold ownership being banned again? Recommendations?
this shortly posted on itulip should be bullish for gold
http://fmxconnect.com/fmxmetalsconnect/post/2010/07/19/Guardian-Can-Mala...
its a story from the uk guardian about a possible gold backed currency.
What would happen if the USA paid off it's entire $13T debt load by printing new dollars? How low would the dollar fall compared to the Euro/Yen? How much would a cappincino at Coffee Bean cost me?
We could just repudiate the debt to foreign bankers: http://www.quatloos.com/Q-Forum/viewtopic.php?f=12&t=6098&start=0&hilit=federal+debt
The literate don't read Lew Rockwell. Repudiate the debt, and those foreigners will certify that the US reverts to the Third World immediately: US imports 75% of its fuel and virtually all of its consumer tech, so imagine life without a car and without the internet.
That's the funniest thing I've read in a long time. Talk about hardship!
Ooooh. Dark ages here we come.
I've lived without those, and a lot of other things, and life was just fine.
I am generally agreed. There are a few good articles from time to time at Rockwell. But I don't go there much. It has days that its posts remind me of some of the worst shock jocks. And a little like Maury Povich, too.
Bottlecaps are the wave of the future.
I am long dental floss.
I have quite a large stash of Pogs in the safe. You guys are holding the wrong assets!
If we must get into it, I have quite the baseball/basketball card collection as well. Some comics too.
So, if we were to establish some arbitrage system - similar to FX for these items, we would be ahead of the curve! We could be the next Goldman Sachs!
POG/COMX, COMX/AMO, BsBC/POG, BkBC/AMO, etc.
For the sake of argument, those who think we are on the edge of a new dark age due to the impending economic crisis have a lot in common with Lyndon Larouche: http://www.larouchepub.com/
For objectivity, also check out: http://laroucheplanet.info/pmwiki/pmwiki.php
>>The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg to unload my own Krugerrands in 1979<<
All references to your past trades seem gloriously profitable and prefectly timed. Yet anyone following your selections in real time find that they are anything but.
Contrarians against gold will eventually assert themselves if gold goes a lot higher--Barrick's chairman on Squawk Box said he doesn't want his descendents living in a world of $2000-$3000 gold anytime soon, on the same program US Gold's chairman acted like a villain out of a James Bond movie, expecting gold to go over $2000 by the end of the year.
Kitco's Nadler talked about "The other price of gold" last week: http://www.kitco.com/ind/nadler/jul142010.html
Barrick's chairman and Nadler: dilds that have also been dead wrong on the gold price.
US Gold's chairman: a class act that has also been right on the gold price.
Isn't Barrick the miner that sold gold forward when it was $300?
MHFT,
You and I have a similar technical analysis. We both see gold moving to a few grand in the short term. But when I consider the likely possibility that the doelarr will not be the reserve currentsea very soon, and that it will not be replaced by an existing one in use by the status quo (SDR will be THE ONE), I begin to wonder if TA matters in the long run.
For the sake of it, I will run down my TA:
As I feel everybody and their mother should have seen these recent "crisis" coming (housing in '05/Equities in '07) I think that gold should have been at its REAL high coming into the FALL of '08. So We have $2500/OZ then. So it gets plastered along with everything then, fine. But it did not get hit along with equities in the spring of '09; it had decoupled. So then the fall of '09 saw it back up to its NOMINAL high, and we could argue that once again, it should have been at its REAL high of $2500. As we are now trading above that, I think gold should be valued somewhere in the range of $3300 currently. Now, considering that I think we still have a decade left in the gold bull market, I think $5,000 is easily attainable (the market is always right, right?). I think this because what other assets are reliable in this environment? Which equities? Which bonds? Good luck picking them out! This is why gold is so valuable. It is what it is, and no one but YOU are responsible for it. This TA is done without the above consideration; this TA is using fungible currentseas.
So I say $5,000, and this before doelarr debasement. If the bottom drops out, I will not stress enough that gold/silver/platinum once again become the most viable mediums of exchange. This and Central Banks have never stopped using it as such; there is still a gold standard! It is merely hidden in plain sight. By the way, you said it yourself in your article about homes in Tahoe; gold is a medium of exchange still.
And I will add a little something to the equation that shows the upside for gold; peak oil. First, one half of all homes in America are of the suburbs. Once peak oil rears its ugly head, these homes will become absolutely worthless. This devastation will be the deflation that 'mark to market' is waiting for (I believe that we will not mark to market until the hand is forced to, and this will force the hand). Interestingly, I think that there will be an inverse relationship between peak oil and PMs, as everyone that still has "wealth" will rush to preserve it. In this case, gold could very well move upwards of $10,000-$25,000/OZ (this in REAL terms, NOMINALLY the number could be huge). And once again, this is with a fungible currentsea.
In re: the economy 1970's v. today - IMO the difference is the massive STRUCTURAL deficits across all the levels of government. Illinois has a 100% budget deficit (50% of revenues). US government - around 80% (that's just on cash - not entitlements). There's no way the governments can correct these deficits without massive unrest - which leaves you trapped in the debt-fueled cycle.
I don't know if gold is a good trade for short to intermediate term. I do believe it is a good diversification - especially when you have no real intention on selling...
"I don't know if gold is a good trade for short to intermediate term. I do believe it is a good diversification - especially when you have no real intention on selling..."
Very sensible.
"when you have no real intention on selling"
Oh that's what being a bagholder is now called.
Quite!
40 years of a way of life will be gone. hard money is back. just because fannie mae goes bankrupt and your debt gets wiped out but doesnt make it easy. still have to eat pay taxes gas will be ultra expensive. there will be no jobs
this is going down in the next 6 months.......the new 100 dollar bill has gold numbers and everything with a gold plaquard that was no federal reserve note it was honest money backed by gold. too bad the bankers just stole all the money and don't ever have to worry about stocks or a job again.
pensions are confetti as well
there will be no bank run all banks that go under will be transferred to another bank.....all accounts will be converted to gold backed treasuries
It will allow this country to rebuild and prosper again (soon!).
the 50,000.00 number was mentioned on CNBC few months ago, by one of metal traders - i dont think that guy has shown up more than a couple of times in the show...the way he put it, gold will reach $2,500, then revalued in some kind of certificate or whatever...
it could be 4,000 it could be 10,000 times higher, the rules of the game will change and if they do, does it matter if it is 100 or 100,000 times more? i dont think it does...either way the few hunderd thousands dollars most of the middle class has will be worthless....the rest is history
Correct. You cannot value gold in dollars; the dollar is too unstable. 5000 or 50000 doesn't matter, you are measuring the dollar worthlessness not gold.
"Correct. You cannot value gold in dollars"
You have no idea what the you are talking about.
Of course I can value gold in dollars (and vice-a-versa) and value gold against a basket of stocks or against a basket of other commodities.
And not only is this something I can do, it is done every day by millions and has been done so for ages.
Really, you haven't a clue what you are talking about.
Obviously you do not comprehend the statement that one cannot value gold in dollars; of course you can price gold in dollars or any other fiat but that's not the issue. Really, you havent a clue about value and, moreover, you are an insulting dumb shit to boot.
"And not only is this something I can do, it is done every day by millions..."
If there truly was a free market, I might be inclined to agree with you. However, things as they are, I disagree. Au/Ag are being valued these days by an entity over which we have little or no control. Until everyone wakes up and demands delivery, will accept nothing less and call an attempted fiat payout what it really is: a default, we have absolutely no idea of the value of anything in fiat terms. It's all hocus pocus conjured up for the Gang on Fortune Hill's amusement.
Regards
"For ages" is a huge exageration. As fake as your avatar.
The price was controlled for years so it could not be valued independetly and that has of course skewed the historical charts.
Here is a chart for the value of the U.S. Dollar vs Gold. First notice the flat line for the beggining of the chart then notice around 1971 when the dollar went off the gold standard the cliff dive.
http://en.wikipedia.org/wiki/File:Value_of_US_dollar.gif
we are already at 19-22 unemployment....your bank dollars will be converted to treasuries but based on what gold price is the answer.
Free houses for everyone.....just no jobs after everything settles.....yes back to the gold standard...the rich have all the money soon to be gold backed treasuries and they are buying all the gold right now
"yes back to the gold standard"
Is this based on any other research, or your sole opinion. Not trying to stir you up, but I see so many opinions against this happening - mainly due to the fact that the general opinion is that Fort Knox may be empty, or full of gold-plated tungsten bars. I enjoy citation for the formation of an opinion. It allows me to see the same data and maybe reach the same, or a differing theory.
Cash is KING in deflation...just be sure to get it out of the bank before they declare the "Holiday". The shiny will be great at the end of their collapse due to deflation and i will be backing up the truck... maybe in 2-3 years. And there will be plenty of it around when deflation grabs. Look at today, gold broke under 1180... the slow grind down has begun.
This is why *they* WILL execute the big 10 $Trillion QE ... and this time will probably not wait until gold and the S&P gets back into the 800s. The battle line seems to be much higher than that.
Seems to me that the lowest gold will go might be down into the 900 handles... maybe.
I am thinking that if QE Dos does get the green light, however that could be justified, the first mandate may be to bat gold down. A 'I told you we don't need it' from BS. However, any manipulation will have severe long term repercussions, as is always.
It took 10 years for gold to get here and it has seen many bumps along the way including 2008 when if you had bought it a the drop you'd be up around 50%.
"The slow grind..." I bet you said the same thing before and have gotten used to being wrong so much you don't even notice anymore.
What deflation? Taxes up, insurance up, health care, food, education, gasoline almost $3. Oh, house prices that were up 300% in ten years fell 50% from peak. Some deflation.
As I have been saying since the beginning of the disinformation campaign in late 2008, "Deflation" is a lie.
Hey, Akak!
Just wondering what will happen to that black hole of defaults growing on bank balance sheets like a cancer? How will that affect the deflation argument? I get a little befuddled when Fed reserves get thrown in there since I don't have a full handle on how the reserves function as "money".
Useful link: Examples of hyperinflation
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation