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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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We get 50% Unemployment, we will not have a Government.......at least one you want.
Well, it's hardly comforting but at least we'll know some things haven't changed.
yes a gold standard is highly deflationary but what is the treasury debt and how much gold do we have theres no way to predict final price. i'm going to be conservative and go with jim rickards 4-11000......
its the end of the line for the dollar. basil 3 banks are buying treasuries come jan-feb your gold backed treasuries will be released...all soverign debt is confetti...hence ben wasn't lieing when he said to buy a house. looks like its back to a gold standard based on treasury debt all other money supply will be wiped out except social security which will be raised to 70. unemployment should top out at 50%....
If anything, in a crash, make sure you can get cash out of the bank.
After having to answer Patriot Act questions ("What did I intend to use the money for?") in Sept 08 I found out they didn't have enough cash on hand and would have to wait 5 days.
Cash is scarcer than most think in a collapse.
And no, your "precious" will not go to $5000 in a collapse. (Drop a zero)
"Cash is scarcer than most think in a collapse."
Is this based on the latest M3 readings from Shadowstats? The latest chart on his site shows a precipitous drop, and could be the trigger for QE-2.0
Now, based on your statement about cash being scarce in a collapse, I believe you. Having read an excellent account of the depression [The Great Depression, A Diary by Benjamin Roth] that theme was often repeated. I just don't know if it will still have the same effect now as it did then. Most transactions were conducted in cash at that time, but now we have a proliferation of debit cards and online bill pay. How will these new forms of electronic access to your balance play in your scenario?
"Cash is scarcer than most think in a collapse."
Well now, that presupposes what is doing the collapsing...
Yes, in Sept.08 I too had a hard time withdrawing a few K in FIAT from my bank.
But in 2010 silver and gold are scarcer than most think, all around, so if it is faith in paper currencies that is caving in on itself, who knows what will happen?
Regards
"Well now, that presupposes what is doing the collapsing"
Credit.
And in a fiat economy, credit/derivatives is cash.
Credit is destroyed = cash is destroyed.
Until M1 collides with M3, at which point it will be too late. The deflationists will be left with their dollars and little else. Perhaps they can burn them for warmth.
Semantics.
Money isn't debt. All FIAT is is the enforced medium of exchange (for now), it's not the real economy.
Any perceived rise in its value is an opportunity to secure hard assets (real money) for those with unlimited access to the 'printing presses'.
So, as you have to earn your FIAT through actual work, and there is no work anymore: deflation for you as a means to distort perception of value.
Meanwhile the True Money Supply is fast approaching escape velocity. Why do you think M3 is no longer being reported?
Ans. Prestidigitation.
Even employing your narrow definition of money there are no net signs of deflation: M1 and M2 are increasing (inflating), despite all the egregious deleveraging that has been going on since late 2008. So, if all FIAT is debt, then for that to happen credit is still being issued at a frantic pace beyond what is being 'destroyed', ie inflating.
Using pre-1980's and Clinton metrics for calculating price increases CPI has been well over 5% in the last two months; a decent indicator of inflation.
Please, show me the deflation.
Regards
Muir,
Go to your bank today, ask for $20-50k, see what they tell you..........and this is not Sept'08, and in a collapse, if you do not have it IN hand, you likely won't get it..........then there's the question will it be worth anything?.
It is true, this is not 08
Cash is not scarce. People simply choose to default on debt, use cash for other things.
I remember $880 per ounce - the stories of Gold's price was being carried on the front pages of the popular press here in the UK exhorting everybody to get into Gold (when, of course, the smart money was getting out).
I've been trickling a constant amount of money in each month since Gold was at $330 and I'm not stopping yet - a friend of mine got in at the low (three days after dear Gordon Brown sold nearly half of Britain's reserves) and he's still long. When asked his target on a TV show earlier this year he merely said 'I don't have one'.
We'll both get out when the popular press start carrying front page stories.
DavidC
You just said at $880 when the front pages were saying buy you were still buying and still buy now. So you won't get out just because the front pages say buy you will get out when you see the masses buying in a true frenzy I'd suspect. It is not the news if it's in the news. The news comes from the people. I have told people to buy for years and they say they have heard others say the same but yet have not bought. So when they buy I know it will be late in the game and I will sell some.
There is not 1 in 100 who would even know where to start buying a gold coin. Most of them never even think of a pawn shop. When the discussion at lunch with your buddies is the best place to get the smallest premium over spot then it's time to start selling -- to them! I've sold gold Eagles over a Starbucks, and I never paid for the coffee. Bought the same coins back from the same people at higher prices. That was over $200 ago. They want to buy now but I'm not selling right now.
"I think the biggest play is actually silver."
http://www.youtube.com/watch?v=RcfY-BY8XDE
Over 110.892 Million oz silver at Comex depositories:
http://www.cmegroup.com/education/market-commentary/Metals/silver-pre.html
From your link:
"Comex Silver Stocks were 110.892 million ounces down 923,430 ounces. Silver stocks have declined in 15 of the last 20 days."
I am not an expert, and have a basic question - is this inventory level inclusive of any stock that has been leased, or is this inventory reflective of unencumbered volume only?
No
"No"
No, as in this inventory does not include leased silver? So this total would be indicative of unencumbered inventory. How would I find out how much of their inventory is held by lease?
No as in "no way to tell".
"no way to tell"
Thats not very encouraging.
Thanks.
Enough to supply the world's needs for about 6 weeks.
IF they have it.
Over 110.892 Million oz silver at Comex depositories:
60+ million ounces owed by customers and 50 million questionable that the dealers hold. And since COMEX is not audited we have to take their word for what's really there. If I was a COMEX customer, I'd get my silver out now. Right now, do not wait, run to remove it because in a shortage they will grab it.
@ ATG.
Whew, thanks for the info. straight from the horse's mouth. Remember all: never look a gift horse in the mouth.
Regards
Bravo - talk...talk....talk....
show me the money!!!!
how much have you made being a gold bear??? or should i say LOST???
well, unless you are playing with others people money....that will explain you stuborness...
I think I finally see some logic in the goldbugs holding gold no matter what. Normally, one should sell an investment if it declines by 10% because it only has to rise by 10% to break even, whereas, if it declines, say 50%, it must rise 100% to break even. The problem is that gold is so volatile that it almost seems designed to shake anyone out who adheres to the 10% rule. So in order to benefit from owning gold, you must be able to ignore the downswings that violate the 10% rule. The only way to do that is to become religious about gold or treat it as a tempestuous mistress, as Lesbia was for Catullus, the Roman poet, so that every dip becomes an opportunity to be strong. Obdurat Catullus
welcome!
it is truly a paradigm shift from what 99.9% of the population live in. gold and silver are God's money...
i have lived here for the last 10 years...and have slept very well, thank you...
"The problem is that gold is so volatile that it almost seems designed to shake anyone out who adheres to the 10% rule."
That is true, and is the very basis for the argument that PM prices are manipulated in order to "extract" the casual investors money regularly. A dip comes in, the investor buys in - a short run up or stable for weeks, then folks with a large position in the PM liquidates and the price starts to drop. Once the 10% rule is passed the investor unloads his position to prevent further loss, and the big players are allowed to come in and add to their position.
I am not saying that I agree with this theory, but this is how I understand that it is postulated to occur. The only drawback to this manipulation is that it tends to still see-saw the price up over time. The buy-and-hold PM investor, if he ignores the 10% retracements designed to shake out "weak hands" should still profit over time. It almost seems to follow the need for a fiat currency to inflate over time (contiunuously expand) in order to maintain liquidity in a growing market.
I don't know - I am not an investor. I am a "saver", doomed to be forever poor.
Very amusing . . . . and perhaps the only worthwhile comment thread. Gold posts invariably generate more heat than light. The argument for gold always seems to rest on worthlessness of paper -- which is something of a red herring, since paper money is largely irrelevant in this economy. 99.9% of what I'd like to think of as my money is denominated in electronic form without any meaningful paper documentation to substantiate my claim of ownership. For better or for worse, we live in a trust-based economy and no one here is likely to prosper if that trust is systematically betrayed.
100/90 is 11%, not 10%.
Being strong took 20 years after the 1980 gold peak...
I believe in gold...someday maybe even more BUT when places like "Goldmoney" state that everyone BUT the Germans and Americans can receive their holdings in the currency of their choosing makes me nervous...
But the chief difference is the economic climate that we find ourselves in.
In the 1970s when gold got to those levels, as the articles states, we had TWENTY percent inflation annually. This was the catalyst for gold's meteoric rise at that time.
We have far from twenty percent inflation today. If inflation is the primary driver of gold prices, as some would suggest, the conditions aren't even comparable. Today we have negligible inflation at best, barely even getting to 2% annually in the most positive scenarios for goldbugs, and deflation in the most widely reported scenarios for inflation/deflation.
Long story short: We don't have 20% inflation today, and will not see it any time soon.
The parallels between the late 1970s and today are nonexistent, which negates the theory that gold prices should see a similar rise.
You are completely off on your timeline. Go look at gold chart vs. interest rates for 70s and 80s. Rates rose in response to gold, not vice versa.
If gold correlated to interest rates why did gold rise for the last decade as rates fell?
because its really correlated to the real rate of return, not just the quoted interest rate. which is the rate minus inflation. If positive then bearish for gold. If negative then bullish.
Precisely so. And negative real rates will persist for quite a while yet, which means that the gold bull is far from over.
++
Johnny Bravo writes in two posts above:
"I view this situation as more comparable to the recession at the end of the 1970s, and I believe that we are in about 1981 of this scenario. I think that we will dip, but that it will be shortlived like the 1982 recession and not a decade long slide like we saw in the depression."
"The parallels between the late 1970s and today are nonexistent, which negates the theory that gold prices should see a similar rise."
Yes, now it all makes sense.
Jonny is a cowardly punk like his daddy Jon Nadler
When one has a visceral and irrational hatred of gold, one is necessarily and demonstrably going to be unable to make intelligently consistent and rational arguments.
It's understandable because "Johnny" is actually several people who work in shifts. It's difficult to keep the story straight sometimes. Notice that his "tone" is different today? Not the same person as the last string of posts.
Mantanmoreland ? These jokers CAN be identified...
http://antisocialmedia.net/final-word-on-weiss/
Interesting stuff.
I don't think anyone cares that much in this case!
Johnny Beotch and Faux News Republican character are the same person. Could be just 1 very angry guy with 6 aliases.
I say it's 6 people on somebody's payroll with 2 screen names.
LMAO.
They say anything convenient at the moment to make a point.
JB, it seems your 'all caps' button has been broken. I would like to thank wholeheartedly the party(ies) responsible. But your 'negligible inflation' figures are all abracadabra'd:
"Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May.
The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS."
From http://jessescrossroadscafe.blogspot.com/2010/07/shadowstats-cpi-alt-running-43-gold.html
"Long story short: We don't have 20% inflation today" And I thought you knew that price increases were only a symptom of inflation...
True Money Supply is breaking orbit, despite all the deleveraging going on since 2008. ANY price increases indicate unprecedented increase in money supply, ie inflation.
Enjoy Wonderland while you can Alice, but stop eating the mushrooms...
Regards
Quite different from the 1970s: now we're on the cusp of a deflationary half-decade or so. (Perhaps we'll get decent price inflation later).
We'll see if gold works well - or better - in a deflationary environment than it does during times of inflation.
It performed very well in the 1930s...
Kreditanstalt, I think the scenario you're sketching out is essentially the Prechter view: gold, commodities, equities down for a while, US Treasuries up, then PMs up, too, while the economy resets. This may be the way things turn out, but one thing seems certain: debtors aren't going to be let off the hook by some helpful inflation in the dollar, which would lessen their pain. No, no. First comes the unbearable pain---collapsing equities, margin calls, credit freeze-ups, bankruptcies and debt repudiation at every level. Maybe European problems cause a rush into the dollar (deflationary) or Chinese commodity demand falls off a cliff (deflationary) or Peak Oil slams economic growth (ditto). But then what?
Remember that the Fed must "inflate or die," so I think at that point Bernanke really hits the Print button on the Hal 9000. Everyone who rushed into the dollar has a Wiley Coyote moment and looks around for something that offers real safety. At that point, confidence in the dollar (but not the dollar itself) disappears, and the stage is set for inflation, but too late to help debtors.
The real question isn't what would the dollar gold price be in such a scenario, but what would fiat paper be worth anywhere?