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What’s Next for Gold?
Now that gold has hit my target for the year of $1,340, it is time to pause and reassess. A nice reversal may take place after the November election, especially if the Republicans take the house. While their promises to reduce the deficit are gold negative, the fact is that their tax cutting proposals are more likely to lead to bigger deficits, not smaller ones. With only 18% of the Federal budget discretionary, and the rest tied up in defense spending and entitlements, the amount of spending cuts they are proposing are impossible. Even if we eliminated all discretionary spending, the government would still be hugely in the red.
Another factor that could lean on gold prices would be a rise in capital gains taxes from 15% to 20% passed by Congress during the lame duck session. That would trigger a stampede to take profits in all asset classes before the year end. With gold up 35% this year and at the top of the list of performers, it could get hit with a serious bout of profit taking.
None of this changes the long term fundamental case for gold. The current environment of negative real interest rates is the dream scenario for the yellow metal. The last time this happened was during the seventies, when gold moved from $34/ounce to $900. As long as interest rates and stay low, you can expect gold to continue its rise. Goldcorp (GG) CEO, Charles Jeannes, says he believes we will see a $1,500 print sometime ‘in the next one or two years.” Goldcorp is one of the largest gold producers in the world.
Although not many have noticed, the re-emergence of inflation has already started. Anyone who looks at the blistering prices rises of wheat, corn, soybeans, sugar, iron ore, coal, and other key raw materials can’t look me straight in the eye and say there’s no inflation. Of course the last place you will find it is in government statistics, a deep lagging indicator.
The fall is always the peak demand time of year for the yellow metal, and the Fed’s recent move towards QEII is likely to give the barbarous relic a shot of steroids. The only question here is whether a $100 pull back starts here, at $1,350, $1,400, or even $1,500. When it does, you can expect a ton of buying waiting for it below from central banks, institutional investors, ETF’s, and individuals alike.
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 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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People and soverigns are buying gold because they are terrified of fiat printing to infinity.
If you don't understand that they you don't know what is driving the price of gold.
you don't think the HFT algorithms figured out that the higher the price goes the more people throw money at it.
If you don't understand that they you don't know what is driving the price of gold.
Nice call gold douche...
Sorrry, my fault on the sarcasm....
Yet it was very appropriately placed.
I in fact welcome the increasingly shrill bubble-callers in gold --- the more center-thinking sheep join in doing so, the more gold will NOT be in a bubble. No financial bubble can exist when the majority believe it to be so.
For what it's worth, I feel that gold is not going to "bubble" to any significant extent in any event --- its price (and value) will continue to rise, until gold is reincorporated into the world monetary system, at which time its price will merely more or less plateau. Idiots who view gold as just another potentially bubblicious financial asset are going to get their asses handed to them in the next few years, and my schadenfreude at seeing this happen will be great indeed.
Friend akak,
You too keep welcoming the gold trolls, as I would like to pick up my "last few oz" when I get back!
Since gold is hitting records globally, in many currencies,
would US tax policy have that much influence on the price?
Especially since participation in gold by US citizens is weak.
It's hitting us the hardest, and Europe.
Not so much the Aussies,and a few more.
DosZap, merehuman, Rocky,
So nice to see my ZH friends AND gold up, up and away all the way from here from Tahiti! Maybe I'll sell a few oz when back and this trip will have been nearly for free!
It wouldn't. Global monetary debasement around the world has more to do with the price of gold than anything else. Mad doesn't know much about gold so I wouldn't take his advice on the subject.
Mad doesn't know what is driving the price of gold yet he comes on here with a post about why gold should now pull back because it has 'hit my target for the year'.
Mad is a joke.
May your flame of reason always shine Burnbright
Gold negative, why? Gold does well in times of deflation, if that is what you are hinting as for the Replubs making a run at Congress. And if for some reason rates are raised, they rates will have to chase gold, and gold has a full head of steam.
But then in the second paragraph you note inflation; yes both are occurring and gold is hedging both ways. Gold is like an old school football player who went both ways.
Gold is a long term play. Not many people will unwind their trade. There may be no large pullback, there may be lurches forward. Stop your worrying!
Mr. Hendrix,
Yes sir,
I am aware of the value of Gld either way.It will hold it's purchasing power in either situation.
My comment was, a lot of folks have LARGE positions at very cheap prices,and it would behoove some to take some $$$ off the table, and invest it into Ags, and Oil.
Without losing their core metals holdings.
That way, your butt's covered 3 ways from Sunday.
Investing in gold can be risky though, and you might need to wait for a long time before you are able to realize any profit.
Say in late 1979 you saw the oil shock and you saw inflation come and you saw massive deficits to come. Congratulations, you were a genius! You would have been spot on, all of those macro directions realized in the early 80s!
So being such a macro genius, if you decided to go long gold back then:
http://seekingalpha.com/article/167512-gold-s-real-inflation-adjusted-hi...
... then you might have bought gold for $7150 in today's dollars. Today you'd be 30+ years waiting and an initial investment of 1 million dollars [in today's dollars] would be worth only 188K dollars - a 75% drawdown (!).
How much longer do the gold buyers of 1980 (and there were plenty of them) still have to wait to get to the inflation-adjusted break-even point of $7150?
How about those who died in those 30 years and were never able to realize a profit? How about those who got seriously ill in those 30 years and would now need the money for treatments?
How long is 'long' ? 30 years? 60 years? 100 years?
The thing is, there are other 'long term' investments available if you can predict the macro direction(s) with a reasonable probability in the months or years to come, which correlate to the correctness of your predictions much more immediately than gold.
Not to mention the fact that gold is not a true commodity (its industrial use is much less relevant than that of say silver), it's a historic psychological object of faith, fear and fashion - not unlike paper money and other types of human promises.
And the thing is, as with most psychological objects it's much easier to identify excessive levels of fear and go short in them - than to identify future fear and go long in them. Optimism is much more contagious in the human psychology, while fear rarely persists for long. This property of humans, no matter how surefire way it is to lose money in the markets, is a basic survival trait that we evolved in millions of years. This biological herd effect wont go away from the human psyche anytime soon.
I know that this is not a particularly fashionable contrarian view here on ZH.
(Btw., this is the only real advice you ever need to trade successfully - the rest are mechanic skills. You are welcome!)
I'll go with your entire argument if one is using gold as an "investment". Otherwise, the argument turns on gold as a store of wealth. I know you covered that aspect as well, but the argument is not complete, nor over.
This is a must read for a view not ordinarily seen:
http://zmarter.com/finances-opinions/who-is-john-galt.html
BTW: I don't junk reasonable arguments such as yours.
I'll quote what appears to be one of the most important points of it:
I agree that there's a constant transfer of 'wealth' going on. To a degree it is inevitable in a world that is neverendingly dynamic and where resources are limited and where in fact the identities of 'resources' are dynamic as well. To another degree transfer of wealth is also certainly done artificially - those who know how to take from others do it, from those who don't know how to prevent it (or cannot prevent it).
But I dispute that inflation and deficit is the only - or in fact main - form of it.
The main problem is how do you define 'wealth'? Which historic version of you is "wealthier":
Which of the two you's is wealthier and why? I'm really curious what you think about it.
MCT. I fail to see your point here. If you are trying to make a link between the modern, gold-less (as money) world vs. the world of 150 years ago with gold money, then I would say that you are making a false implication, or confusing chance correlation with causation. Just because our political, financial and monetary systems have become corrupted and perverted over the last 100+ years does not necessarily imply that all the social and technological advances in the interval are somehow due to that diminishment of political and economic freedom ---- indeed, I would say that they almost miraculously happened IN SPITE of our abandonment of gold and liberty.
Everything that the link I reacted to concentrated on the absolute value of gold and similar concepts. I'm trying to make the point that wealth is relative not absolute, and that real wealth relies in a modern society that you get born into 'for free'.
Or put differently: the 'size and real value of our society' is increasing steadily. Why should we couple valuations of wealth (which is increasingly steadily) to a fixed quantity of gold, via legislation (the gold standard)? A fixed amount of monetary base is almost hardcoded to deflation of prices, which has a very bad human psychology associated with it. We get frictional forces all the time, friction between the growth of population and production - against a fixed-size monetary base. Countries figured out these stress forces decades ago and abandoned the gold standard.
Furthermore, why should those who were lucky to be born earlier, when there was still more per capita gold for them to acquire, be better off than those born later? Why should hoarding of wealth be rewarded - how is that leading to more real wealth - of the kinds of advances that I mentioned in my comparison?
I.e. I'm at issue with the whole "wealth is constant and should be preserved constant" concept. It is not and never was - real wealth is still expanding almost exponentially. Inflation and deficit is all but a small detail in the vast dynamism and complexity of the world. Moderate amounts of inflation, which works against the hoarding of money (i.e. activates money into the real economy) can be seen as a public service. The fact that it also makes valuations harder is unfortunate but secondary. Valuations of anything except the most basic necessities are hard anyway.
Or put in yet another way: inflation is the 'entropy of money' - and just like entropy in the real world it has a lot of positive properties, when used in moderation.
I'm also at issue with the issue of "wealth is constant." I'm also at issue with denominating things in gold and claiming thats 'real' terms, for the psychological and pragmatic reasons mentioned.
A chef takes a few dollars of produce and meats, and makes a meal fit for a king. This is 'real wealth' being created out of thin air.
The materials for an iPad cost only a few dollars. But it's value is $499 and up. This is 'real wealth' being created out of thin air.
XOM pumps oil out of the ground, refines it, then give it to you. This is 'real wealth' being created. (The oil in the ground is 'worth less' then the oil in your fuel tank.)
MSFT creates money out of thin air. MSFT could "produce" 10,000,000 license keys for Office 2k10 and exchange them for 'real' goods and services. These copies of Office provide real value (and thus wealth), but they were magically generated just as easily as Ben generates FRNs.
There are many other examples.
Real Wealth is relative, and is currently expanding. You are richer just for reading this reply. ZH is richer because you viewed some advertisements. YOU just created wealth!
(As an aside: Keep in mind that 'real wealth' might not expand forever. We may be approaching physical and organizational limits that could halt wealth expansion.)
Realistically, we need a growing money supply to keep up with our innovation and the expansion of our society. More people, doing more things need a bigger current account. We need systemic entropy (currently mainfest through inflation but it doesnt have too.)
(This is a major problem with gold as legal tender, as Keynes hinted 'barbarous relic')
The problem with all of this is keeping score. We need a way to keep score in order to measure wealth creation in society. You can't efficiently produce or allocate something if you can't measure it. This is the problem with state issued fiat currencies. They aren't good for keeping score.Gold is just another fiat currency. GOLD IS A FIAT CURRENCY. I repeat: GOLD IS A FIAT CURRENCY.
It's just really, really, rediciously hard to print/counterfeit. It's also easy to divide, measure, and exchange. These attributes makes it a pretty trustworthy fiat currency, especially compared to some of the other options.
Gold is not 'real' wealth. Never in history a pile of gold make you intrinsically wealthy. Gold is not inheriently a store of wealth any more then any other fiat currency.
However, Gold is CONVERTIBLE into real wealth. Gold buys oil, clothes, guns, houses, dollars, euros, food, labor, and sex. If gold wasn't here, we'd still be able to buy those things.
Gold has value because we say it does. We could wake up tomorrow in a world where gold is only worth the cost to mine it out of the ground (hint: still a lot). Or even less.
Carbon-free BTUs (or some other measurement of practical, usable standard energy) are the closest thing we'll ever see to a non-fiat currency. Economic transactions would be much more fair if bank accounts were measured in BTUs instead of USDs.
Note: None of this theory means jack shit when you have idiots and crooks running the country.
Heh, I nominate this for the 'Best ever ZH punchline' award.
The thing is, they are really just a product of the collective will of the average citizen. Yes, even though most of them would declare under oath that the current state of affairs in Washington is as far from what they wish as it gets.
US citizens have the power to eliminate all these crooks and liars almost overnight. Really, they do.
Still most of the time they elect not to do so, because the phsychology is usually this on the local level: "my politicians are fine, they are our crooks and liars, working to my benefit. The problem is the crook politicans in other counties, states, countries."
This general attitude then gets summed up to the national level and everyone pretends they dont know where the political culture originated from: We The People. We are still all tribesmen at the genetic level and act accordingly.
Ideal environment for divide-and-conquer rent-seekers to live in.
That is really all we need to know. If you back out all of your other points and leave with no other message, then you have the essence of the argument. Gold is not mandated as a currency, at the exclusion of all others, and that alone means that it is not forced by "fiat" to be a currency. Creating wealth is within the parameters of your examples. It is how you store that wealth that is what gold does so well. I don't really have any complaint about "wealth constants". Not sure what that means except that it came from the linked article. The concept was that the Treasury would keep a "constant" amount of gold on hand to value the currency. That could change to increase or decrease the backing of the currency. What's to agree or not agree with? A whole argument has sprung from a non-issue.
http://zmarter.com/finances-opinions/who-is-john-galt.html
And here lies the logical fallacy, because that statement is not true in terms of deflation as people experience it.
It is really simple to see: we have a gradually expanding population, we have gradually increasing complexity of businesses. If the monetary base is kept constant, then the per capita (and per business, etc.) amount of money to be earned decreases.
And that kind of wage, price deflation is what starts the depressionary feedback loop.
By keeping the monetary base constant we get deflation hardcoded.
Furthermore, hoarded wealth will in fact increase in value because the same amount of gold can buy more goods and services in an expanding society.
In other words: a constant monetary base (the gold standard) rewards 'lazy, stupid, passive money', rewards fat cats who hoard gold in bank vaults, etc. Those that are hoarding are rewarded by an increasing value of the gold, for absolutely no work they are performing to society.
And, most societies, rightfully and wisely so, said 'no' to such rent-seeking, parasitic requests and prefer 'active money' - because it helps a society grow more real wealth.
One method to 'activate' money is for central banks to use flexible money supply via reserve banking, another method is to declare and maintain modest inflation targets. It only transfers wealth in so far that wealth is passive and rent-seeking. As long as it is taking real risks in the real economy it is rewarded.
This is a really simple concept and I've yet to see anyone arguing against it actually acknowledge these arguments as legitimate.
To argue in the opposite you'd have to explain how wealth stored for a long time and increasing in value all automatically (with no work performed and no risk taken) is beneficial to society.
Okay. "Uncle!" Good luck to ya.
It often seems assumed that rising real interest rates would automatically negatively affect the price of gold, yet I can't help but notice that rates rising significantly from 2004 into 2006 (Fed funds rate going from 1.0% to 5.25%) did NOT seem to adversely affect the bull market in the precious metals in any way. Was this just a fluke, and whether it was or was not, how is it explained?
Right, and if the Fed raises rates now the economy implodes into a real deflationary spiral. The Fed have put themselves into a real tight corner.
"Another factor that could lean on gold prices would be a rise in capital gains taxes from 15% to 20% passed by Congress during the lame duck session. That would trigger a stampede to take profits in all asset classes before the year end. With gold up 35% this year and at the top of the list of performers, it could get hit with a serious bout of profit taking."
Gold is taxed as a collectible and has never been eligible for the 15% capital gains tax. But I'm sure you knew that (didn't you?)
http://www.zerohedge.com/article/guest-post-give-unto-caesar-what-pay-when-youre-selling
28% for collectibles, IIRC.
yellow metal, barbarous relic" make gold sound crappy to me. Whats wrong with calling it golden or "Precious". Lets toss that crappy yellow relic into the vulcano. Now silver shines for all in its many uses. The luminescent metal outperforms gold and is more rare now than that ugly yellow gold
just funnen as the world turns around the drain one last time. Lol
seems I recall 750M oz of silver produced last year and no production peak, against maybe 80M oz range of gold with a production peak in 2001. Silver is not rarer than gold.
Incidentally, less than 5M oz Platinum were produced in the same timeframe. Maybe 70M oz of Palladium.
Don't ask me how you can still get either of these last two metals for current spot prices; either that or gold is overpriced.
its a barbaric relic because when limiting dollars to it, actually means limiting spending, limiting printing, actually being fiscally limited dare I say being forced to be responsible.
It is barbaric because there is only so much of it in the world, and our dear leaders are much too advanced to be limited in their financial genius to let something barbaric like gold limited their drunken sailor spending sprees.
to all you sailors out there, my deepest apologies for the analogy.
Let's get it straight folks: Keynes referred to the "gold standard" as a barbarous relic, not the metal itself. Gold was not the object of his derision.
They can't tax gold because it's the one commodity that is traded taxfree all over the world.
No country can decided on it's own "let's tax gold".
All the gold in the US would go oversees.
SD,
Remember your in Belgium.
Some states tax it when you buy it, some states tax it if you buy less than a $1,000.00 worth. None if more.
Yeah they tax it,at 28% of your profits if it is held past 12 mos.(When you sell).
It's taxed at your regular tax rate if sold prior to a year.......(12 mos or less).
Of course your not taxed just for having it, it's when you sell it that you get hammered.(Federally)
I would wager we could see a MASS liquidation and profits taken on PM's before 12-31-10.
These few exeptions which I never heard of won't change it.
In Europe, Middle east, Azia, Afrika = All tax free.
Internet tax free!
Right! This madhedgefundtrader blather isn't worth reading.
Love it. Yesterday at UpChuckyCheese I exchanged a dollar bill for 4 credits but only received 3 of them back. I went and spent it on 4 songs in the jukebox but it only played 3 of them (the machine said I took too long to choose the tunes).
How is it that real money can be taxed by paper currency?
Give to Caesar the what is Caesars (and it ain't no Caesar salad).
"now that gold has hit my target of $1340 for the year"
Guess you had your sites set a little low bud!
Gold is moving on fear of fiat and possibly inflation...not your 'target for the year.'
Best put a little thought into your posts prior to posting...madhedgefundtrader. You haven't a clue.
"Gold is moving on fear of fiat and possibly inflation...not your 'target for the year.'"
love it - though a punch to my ego - me too think too high of myself :-)
Republican tax cuts for the rich are even more toxic in a depressed economy than they were in the early Bush years - they are contractionary. (Imagine a company you were long decided to slash product prices by 5% unilaterally, while being massively in the red. It would be wise for you to go short immediately and ride that short down to zero.)
If republicans manage to push the deficit above the limit of stability while squandering the money mainly on those who will only hoard it (instead of investing it in the economy) they might finish what they started under Bush: push the economy either into super depression, or, if the deficit is even larger, super hyperinflation.
Both of which can actually cause a new spike in gold, denominated in USD.
Will be fun to trade.