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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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I don't necessarily see how it could rise in times of BOTH inflation and deflation, but if it does - it does what it does. If it can rise in both scenarios, I need to re-examine my way of thinking...
Still, the price of gold was fixed in the depression, so you can't really say that market forces had bearing on its price then.
I don't necessarily see how it could rise in times of BOTH inflation and deflation
And this is exactly the problem with your thesis on gold. Gold's value is proportional to the perceived risk in the system - inflation on the way up, or deflation on the way down. Both are indicative of problems with the overall economy and therefore the reason why gold does well in both situations. When the unit of account (currently the dollar) becomes a moving target or less of a known quantity than it was previously (from inflation/deflation), peoples desire to hold that unit of account goes down and they will find something, shall we say, a little more tangible and solid, and maybe even yellowish. The reason it also does well in deflation is that as the revenues drop and outlays remain the same or even increase, the stress on the economic ability of the govt (full faith and credit thing) comes into play. And the degree to which it comes into play has a direct influence on the upward price of gold.
So long as the real rate is negative gold will increase. That's why it started going down in 80 after the top and interest rates at 18/20%. The real rate was finally positive. Thats why it can go up in deflation and inflation. Its all about the real rate of return.
Folks couldn't hold gold in the Depression, so they bought miners, hence the rise in the miners in that period. Think of the miners as a proxy for gold and work your numbers from there.
"Think of the miners as a proxy for gold and work your numbers from there."
A very interesting point there - how would you catagorize PM ETF's in comparison? Would the dynamics be same? I can see how owning miner stocks is a way to predict "value growth" based on the possibilty of future earnings (of the stock), but the ETF's would rely on the "relative value growth" of the PM's held in trust (assuming they really DO hold the stated qty.).
It almost seems like holding shares in a PM ETF acts as having proxy "money", backed by a gold/silver/platinum standard. These could be traded in the same way that savings passbooks were used in the 30's. Folks couldn't get their (actual) money from the bank, so the passbooks were valued based on the relative (or perceived) health of the bank and used to purchase large-ticket items.
If the ETFs had any actual gold I guess you could. You tell me exactly how much physical metal they have on hand (that is not otherwise encumbered) and we could start a discussion. Until then it's a moot point. Right now it would be impossible to gauge.
"Right now it would be impossible to gauge."
Yup, I agree, that is why I included the caveat. I was just trying to compare an ETF to a monetary system that had (supposed) gold backing. Isn't the Swiss Franc backed to 40% by Gold? It would be the same if the U.S. tried to return to a GOld standard - who would audit our holdings and give an honest count? Standard and Poors, Moody's, Fitch, E & Y?
Everybody will just have to come clean when the time comes -- or be left out.
Tough getting a currency going with unaudited gold reserves.
The only gold I care about auditing is my own or those with whom I want to do business.
You also don't see that we are experiencing both inflation and deflation at the same time. You are a very linear thinker.
Price of gold was not fixed thoughout the depression. Again, review your facts; price of gold was raised after the call-in, still during the depression. Sloppy grasp of the facts lead to sloppy conclusions.
You can't have inflation and deflation at the same time. Look at the price of every asset except for gold... DOWN big time from the peak in 2008. Oil is down 50%, for example.
When we were on the gold standard, there were fixed exchange rates for gold, were there not?
long story short. started buying gold at 400 four/five years ago. silver at eight.
ben has not disappointed.
the day QE2 is announced expect a 200 pt rise in gold.
the people who are going to be very disappointed are the bears. people are not quite as dumb as bennie boy needs them to be.
I commend you for the money that you've made. For me, I wouldn't really be so keen on paying today's prices if I started at your level, but then again, you're still way ahead of the game compared to the average investor.
I also agree that we will see QE2, and I agree that we could see a 200 dollar rise in the price of gold at that time. That is a perfectly reasonable scenario. Oh, you said points. Ummm... no. Not 200%. 200 bucks is reasonable, but not 200 points.
Anyway, congratulations on your good trading and I hope that you get out when the time is right and make money doing so.
Short term doesn't really have any bearing on selling as much as it does on buying, but you are obviously more looking for a good time to sell than a good time to buy, since you already bought in good times to buy.
wow... what a fucking troll this guy
"I commend you for the money that you have made....bla bla bla"
This isn't the old JB; this is a new cocksucker! This mf really is a troll. Doesn't even sound like him at all AND he changed the avatar as well!!
"Oh, you said points. Ummm... no. Not 200%. 200 bucks is reasonable, but not 200 points."
"and I hope that you get out when the time is right..."
You and your ilk are going down!
Gold is God's money, bitchez.
You know, it really is ironic and poetic that the blacks (of subprime predatory lending fame) were the catalyst to bringing down your fascist fiat money slavery....payback for the ethnic cleansing "war on drugs"? God surely does work in mysterious ways.
Anybody who knows what has really gone on in this country since at least 1970 (a bunch of stuff changed starting right around this period, all of them inimical to the long term welfare of the vast majority of the American people), knows why this fake economy just won't hunt.
Listen troll, your ilk eviscerated the middle class, the only thing that made this country an economic and military power house, you douche.
Your chickens are home to roost!
Gold to 250000/oz, bitches!
You mean, "Is the dollar to be worth only 1/5,000 of an ounce"...Very likely, but I'm not sure I'd want to live in a world like that. Likely to be nasty, brutish and short.
I agree there is no sense in saying gold "should be" at such-and-such a level based on the 1979-80 price. Conditions ARE different now.
Problem is, they're much more dire. Most western governments have the math against them. Their debt problems are insoluble unless they can somehow finesse the living standards of their citizenries lower without social chaos. Will this come off slowly, perniciously and unnoticed as ever?
With any currency, the ever-increasing supply is likely to ALWAYS exceed the available supply of physical gold. Anything in comparatively more limited supply, be it gold or real estate or oil or pedigreed puppies is likely to be a better store of value, isn't it? Gold does have the added cachet of being MONEY.
How fast will the dollar fall? I'd agree $2,300 by end of 2012 would be reasonable...but, considering that I started at $670 that would be quite adequate.
jobless wait twice as long before finding work today compared to then. Real wages were rising. Record short work week this time around.
"We do have more govt debt..."
Wow. That's like saying "well, Rosie O'Donnel IS a bit larger than when she was 12..."
Look at this chart from the Fed, then rework your charts.
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blog...
You mean the cooked govt. numbers that you use are better including the "employment" not "unemployment" situation. You even spin your own posts like a govt. shill.
If one adjusts the last gold peak for inflation, it results in a 2500 price. And fiscal conditions were much better then.
Not really. You also have to take into account that the 1980 peak occurred during a time of 20% inflation. Unemployment was higher as well.
We are in a deflationary trend today, not a period of 20% inflation.
I agree that we retrace substantially first, and those familiar with my posts on this site know that I see a target of under 1000 before we go higher.
The technicals simply do not support any more rise in prices at this time. Stochastics, MACD, and RSI are all rolling over, and setting negative divergences when compared with the previous peak at 1220. This bodes bearish for gold over the short to intermediate term.
Long term prospects depend on economic recovery, but I do not think that we will see continued economic malaise that rivals the great depression. 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.
Technicals do support a continued move up. Today the daily uptrend was successfully tested. All other TA is pretty worthless as long as that trend holds.
I'd be skeptical with the divergences that have formed on the charts. I don't see any stochastics or MACD on these charts that are always posted here, nor do I even see trendlines drawn.
Trendlines show a rising wedge, and MACD and stochastics show negative divergences from the previous peak of 1220.
Couple that with the fact that we haven't seen a real correction in gold since the 2009 bottom, and you have to make the call that a bigger correction is due, like at least a 38.2 retracement, but I think a 50% retracement from that move is in the cards.
That's my opinion.
JB,
While I agree the downside is there short, intermediate, I totally disagree with your Economy scenario...........
Why?...........Because of the NEW laws, and policies that have been passed..........people in business, are not, will not spend,hire,because they are clueless what the hell the next year will bring.
It's always another BAD deal for them, and consumers..so, everyone is keeping their money....why speculate, spend, and know (these programs are going to eat you alive).
Americans are in their own Austerity plan.
I met with the executives at a multi-billion dollar REIT on Friday, and laws and policies have nothing to do with it.
The truth is that companies have record cash on their balance sheets, and they will not spend it on assets until assets deflate to reasonable levels.
As long as we have artificial stimulus propping the housing market, we will not see the deflation that is a natural consequence of capitalism.
It doesn't have anything to do with taxes or healthcare. Taxes have been much higher throughout the 20th century, and the economy was better.
It has to do with the necessary correction needing to take place via deflation. Deflation is the natural cure for inflation that is too far, too fast, like we saw in the 2000s.
We have had ten years of inflation, its time for deflation to take its course, then ...maybe hyperinflation, but deflation wins until then. How, pray tell, can you predict hyperinflation? When will it occur? is there a formula to predict it or a specific data that can for tel? When in the previous hyperinflationary events was there the magic iconastic glaring point that everyone said"omg we are going nuclear" and they ran to wheat or real estate and were ready? just wondering?
The truth is that companies have record cash on their balance sheets, and they will not spend it on assets until assets deflate to reasonable levels.
Stated another way, until the asset prices reflect the underlying income generating capability of the asset.
A gold bubble? Impossible! ;-)
Maybe not for your avatar, if he ate a little gold.
LOL
Is gold really worth $5,000, $10,000, or even $50,000 an ounce? Wrong question. The question to ask is $5,000 really worth $5,000? Answer that and you've got your answer for gold.
So suddenly MHFT is the voice of gold moderation crying in the wilderness?
Our Founding Fathers were well-acquainted with the inflationary default of the Continental, and later, the Greenback, the Red Gold Certificates and now the Federal Reserve Note. Kennedy even revived Blue Silver Certificates issue by the Treasury before he was shot.
The Continental and Greenback were eventually redeemed by species bullion backed US Notes, coin and currency, rewarding in the first case banking clients and cronies of Alexander Hamilton who scooped up worthless Continentals after learning they would be made whole.
Like today, Hamilton won his contentious case for rewarding speculators by higher taxes on the little people (the Whiskey Tax Rebellion that called out General Washington and Federal Troops) by dint of owning the NY Bank and NY Post, pointing out US interest rates would skyrocket otherwise. Similar arguments were ignored with resepct to redeeming Confederate Notes.
http://www.answers.com/topic/hamilton-s-economic-policies
Thus the US Mint Act of 1792 observed the Constitutional Order that gold and silver were legal tender and Congress controlled the money supply by declaring the relative weights and monetary measures of gold, silver and copper with Gold Eagles, Silver Dollars and Copper Cents in a ratio of $10 to $1 to $.01.
People could bring their bullion to the mint to be coined at no charge.
The Mint was regularly audited and discrepancies, embezzlement or fraud were punishable by loss of a $10,000 Bond, or hanging.
http://en.wikipedia.org/wiki/Coinage_Act_of_1792
The low ratio of pure gold to pure silver to pure paper drove first gold, then silver out of circulation per Gresham's Law (Copernicus, Oresme and Aristophane's Frogs earlier) to be melted and sold at higher than face value, ultimately leading the Mint and Treasury to default with nickel, steel and zinc clad adulterations.
The gold to silver ratio, while ten to one in the Bible, was recently 67, suggesting gold may be overvalued relative to silver.
http://en.wikipedia.org/wiki/Gresham%27s_law
FDR devalued the dollar -69% by revaluing gold from $20.67 an oz to $35, and the US Government gradually increased it to $42.22 an oz.
The US Mint issues legal tender one ounce Gold Eagles with a face value of $50, and a new gold coin with a face value of $5. Maybe someone is expecting hyperdeflation and a much stronger dollar.
http://www.silvercoinstoday.com/us-marshals-commemorative-gold-and-silve...
http://www.straightstocks.com/market-commentary/beware-official-u-s-gove...
JPM shipped their gold coins to London and JFK bought mining stsocks in Canada.
Gold and silver stocks did well as their wage costs fell while Uncle Same continued to buy their product at a fixed price.
After Nixon closed the international gold window in August 1971 around $42 an oz, Gold was legalized in 1974 by Jim Blanchard, Gerald Ford, Jack Kemp, Ron Paul et al after only criminals could trade it in America, thanks to FDR in 1933.
Media then were full of headline hype from expert economists like Samuelson and the head of the Fed, how gold, no longer supported by government, would fall to under $10 an oz.
http://www.gold-speculator.com/appenzell-daily-bell/18036-obama-financia...
http://mises.org/books/goldpeace.pdf
Today,. gold and silver rise and fall with supply and demand.
The point and figure target of gold is not $2300, $5000, $10,000 or $50,000 an ounce, but $1110.http://stockcharts.com/charts/gallery.html?s=%24gold
Both Greenspan, a 1966 Ayn Rand gold advocate as defense againts (warfare) welfare statism in Capitalism, the Unknown Ideal, and Milton Friedman, indicated in private correspondence that a return to the gold standard was not feasible with the large number of dollar obligations.
http://www.321gold.com/fed/greenspan/1966.html
Certainly commercial users of copper, gold, platinum or silver for
They are currently somehting like $715 Trillion to $5 Trillion worth of gold ever mined.
Dollar debt derivative default deflation may yet do something about this inequity.
ZH could do its community a world of good by disclosing who junks whom, and commenters could do all of us a service if instead of just junking posts they do not like, they gave at least a facsimile of courteous intelligent discussion...
@ Henry Thoreau
"The question to ask is $5,000 really worth $5,000?"
Yes it is, take it to the fucking bank and find out or go buy some groceries, and finally, Henry, get your head out of the philosophical clouds, they are just both commodities.
It is not a question of philosophy - it is a matter cold hard economic logic. The question is put exactly right: how many 0s does it take to make 1? You may claim that these 0s can buy groceries, but you only prove that the real "price" of groceries is $0.
+++
i think we know the answer....
Gold does not change in value, but fiat currency inflates...constantly.
Gold never changes in value???
I can imagine there has been a time when gold was thrown overboard to lighten a ship in a storm.
Maybe you should look at the oil/gold ratio since 1998.
Maybe you should look at the inflation of silver which occured back in the 1870's.
Gold does change in value, sometimes at a rapid pace.
Forever inflating...sure...until it doesn't
http://www.armfa.com/blog_images/debt_1952_segment.JPG
@jlee2027
Gold does not change in value,but fiat currency inflates...constantly.
Wrong. Wrong. Wrong. You keep repeating this in various threads, and it's horribly shortsighted and misleading.
Palin/Big Bird 2012
How kind of you to present absolutely no rational arguments or evidence of any kind whatsoever to make your case, proving yet again that you have no motivation here other than petty, immature, and feeble-minded partisan sniping.
@missing link (Keebler elf)
Listen lady, I already responded to this exact same quotation a day or three ago and don't feel like reposting it. In fact, it's such a dumb statement that it really isn't worthy of a discussion.
You're just angry because I completely barbecued you last week regarding your transparent attempt to brag about (supposedly) attending Wharton. And don't think I didn't read about you being unemployed two days later.
Stay in your tree and don't return until you bring some fudge-stripped cookies for everyone. That is, if you haven't been fired from the Keebler Association of Cookie Workers as well.
http://blogitoutb.com/wp-content/uploads/2009/03/keebler.gif
Now, now... while I agree with you on your market call and think that the Keebler thing is funny as hell, you should be nicer to the elf. LOL.
This statement is wrong. Nothing is pegged to gold. The only constant is human labor, that which creates all value.
When an avocado falls off the tree into my hand it has value with no human labor.
Avocado farm or natural orchard? Protected orchard? Are you sure that no drunken guy 'watered' the tree? Avocados are gross, so no value anyway... All just opinions, natch.
Yep, the only thing humans add to the earth is labor. The sun and soil do most the work for our food after everything is planted. Adam Smith once thought the best measure was corn because corn was needed to feed labor whether it be horses or us. Now, I don't know, machines have replaced so much of what we had to do. Life should be VERY easy for most of the world now, but its not. Much of our labor is wasted in pointless endeavors.
wasted...kinda like our precious fossil fuels you mean?
To the guy who thinks gold never changes value. Sure buddy. we're on a desert island. you have fifty ounces of gold and I have fifty pounds of wheat.
good luck with your valuable gold.
You can't spend wheat. Try taking it to a store and buying something.
And try spending the wheat ten years from now when it's spoiled.
After you die on the desert island from trying to eat sand, still clutching your 50 pounds of gold, and I am still around because I had my 50 lbs of wheat, I will pry that bar from your cold dead hands, and then I will have some wheat left over probably, and your gold.
Nah, Im going to pop ya from a hunderd yards and eat yer wheat, and then Im going to wait until my 500oz is worth a bazzilion dollars and then im going to dump it in the ocean so the price goes up from there. No im not posting from my moms basement, but from my living room which I work from, and I race motorcycles most weekends, not sit at a computer masturbating, so go get a life and quit wasting away dreaming your going to rule the world with frns and bushels of wheat, like you have ever seen one.
Oh... I admit to not knowing how to race motorcycles. Never had the time. Too busy dreaming about FRNs and bushels of wheat... Hmmm.... Every denomination of a par note pays LIBOR+one peck. That's kind of cool.... Kind of a cool inflation hedge and good funding tool for farmers... wonder if anyone's ever done that....
On the other hand, I spent my weekend working, not puttering around on motorcycles. To sup, I had buckwheat and rice grown not 200 yards from my dining room (but the buckwheat flour physically came from a 2.2 bushel bag in my storehouse), ginger root I dug up off the borders of my stream, fern shoots taken from the forest a few months ago and pickled, and wild onions taken from the border of the rice paddies and frozen a couple of months ago, trout farmed by my next-door neighbor, cooked over charcoal made by my next-door neighbor, salmon caught locally and salt-cured (hanging from my eaves for the past 7 months) and other vegetables from my garden and others' in the neighborhood. I exchanged fruit from down south for his fish, the charcoal I bought. The veggies were various exchanges. The salmon I bought from the fishery association when it came up-river in December. The rice is from last year's harvest (this year's isn't for another 2 months, but my kids spent their weekend chasing frogs in the rice paddies). Still have a couple of bushels of that. It HAS been a while since I saw a bushel of wheat. My grandfather is too old to farm and his two sons don't either. He had some wheat, and some peanuts. I only have a couple of pecks of wheat around to make bread. Tough to find a full bushel where I am.