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Will gold shine again?

Vitaliy Katsenelson's picture




 

This is the second in a series of what some may consider as “gold bashing” articles. I am not short gold in any shape or form. I have no axe to grind against gold bugs. I am simply presenting the other side of the argument in response to what I deem to be dishonest, gold-pimping commercials (e.g., “If gold prices went up to $5,000 this pile of gold would be worth $300,000”) that we are subjected to all day long on TV. I may be wrong, but I am honest.

Will gold shine again?

Gold is an important but very different asset class that competes with stocks and bonds. Unlike stocks and bonds, its main attractions are scarcity, durability and resistance to oxidation - it simply never stops shining.

In fact, most of the gold ever mined is around today. It is exhibited in museums, worn as jewelry and buried deep in the vaults of the central banks. Peter Bernstein, in The Power of Gold, wrote:

“Despite the complex obsession it created, gold is wonderfully simple in essence. Its chemical symbol AU derives from aurora, which means “shining dawn,” but despite the glamorous suggestion of AU, gold is chemically inert. That explains why the radiance is forever. In Cairo, you’ll find a tooth bridge made of gold for an Egyptian 4,500 years ago; its condition is good enough to go into your mouth today. . . . Stubborn resistance to oxidation, unusual density, and ready malleability-these simple natural attributes explain all there is to the romance of gold.”

Despite its unique properties, gold has not been a good investment. Over the past 200 years, its returns have barely kept up with inflation. Its value has a low correlation with stocks (prices of gold and stocks move independently of each other most of the time), which is a big positive from the portfolio construction perspective; diversifying with gold can reduce a portfolio’s fluctuations(volatility). But the diversification benefit comes at a large cost: Once added to the portfolio, gold substantially reduces that portfolio’s risk-adjusted returns. Its dismal returns negate any benefit the portfolio receives from reduced volatility.

One thing about gold, however - it is real! You can hold it and touch it and see its shine. This tangibility makes it seem impervious to the whims of politics, nature and time, as opposed to paper assets such as stocks and bonds. Gold’s physical attributes attract investors during times of economic uncertainty, and so it serves a purpose in the markets and society - it is a stabilizing influence. It feels safe.

Doomsday currency

The thinking of the so-called gold bug (a believer in gold’s supremacy, a gold aficionado) often takes on a variation of this form: While in the bunker (or any other variance of the “world-falling-apart” scenario), you cannot pay for food with paper money or a stock or bond certificate. You may do so with real tangible assets, such as gold. If this scenario played out (God forbid), it is conceivable that gold could become the de facto currency. In that event, you need to have real gold in a safe or buried in your backyard. The wise gold bug would have managed portfolio risk by also investing in a good arsenal of guns, as the demise of government bonds would likely lead to the end of the rule of law as well. Gold held by your broker or through ownership of gold stocks or exchange-traded funds will not come to the rescue; these bytes and bits are not superior to default-free bytes and bits, for example, U.S. Treasuries. Canned food may actually be a better store of value in this “world coming to an end” scenario.

The ever-increasing complexity and globalization of the financial system, rapid spread of international trade and the availability of risk-free investment instruments that were not available to investors in previous economic crises may have changed investor behavior during economic doomsday times. Financial instruments such as Federal Deposit Insurance Corp.-insured checking and savings accounts, U.S. Treasury bills and Treasury inflation-protected securities may challenge gold’s status as the safest haven in times of inflationary crisis.

Treasury inflation-protected securities may turn out to be the key challenger to gold’s store-of-value supremacy status in the future. Aside from being issued by the U.S. Treasury and therefore backed by the full faith of the U.S. government, they also protect investors from inflation - one of gold’s most-valued qualities. TIPS’ principal is tied to the CPI: The principal value increases with inflation and falls with deflation. When the security matures, the original or adjusted principal is repaid, whichever is greater.

Though TIPS appear to have superior financial properties to gold, they still lack one of gold’s main attractions - tangibility. After all, they are still just bytes and bits on a brokerage firm’s or bank’s mainframe, or pieces of flammable paper stored in a safe.

Holding gold has costs

Any cash flow-generating asset, like a stock or a bond, can be valued on the future cash flows that it is expected to generate. Predicting gold prices is extremely difficult because gold is not a cash-generating asset. In fact, it is important to note that gold actually has a negative yield. Gold is a cash-consuming asset; its safekeeping and transportation cost money. TIPS, as well as any bonds and dividend-paying stocks, have a positive yield; they pay investors for holding them.

Gold is also considered a good currency hedge, especially for the U.S. investors who are concerned about the declining dollar. Again, our financial ingenuity is stealing gold’s long-held exclusivity on that trade, providing options that were not available a few decades ago. To protect themselves against the declining dollar, U.S. investors can use currency futures and options, foreign-currency-denominated mutual funds and certificates of deposit; they can buy foreign stocks on foreign exchanges or through American depositary receipts; and, of course there is a most recent development - currency exchange-traded funds.

In both the long run and the short run, gold prices are driven by fear of the world coming to an end and investors’ expectations of future inflation. Although gold has some industrial applications - in jewelry, dentistry, computers, jet engines, electronics, as a superconductor, etc. - linking its intrinsic value directly to its price is difficult. Perception of its ability to store and preserve real value, especially in an inflationary environment, is the key driver of gold’s price.

As long as investors perceive gold to be a refuge in times of uncertainty, gold will act as such. It is important to note that gold’s monopoly as an instrument of choice at the time of fear and uncertainty has been undermined by other very capable and often superior financial instruments.

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo.  He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007).  To receive Vitaliy's future articles by email, click here.

 

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Tue, 09/08/2009 - 04:34 | 62069 Mediocritas
Mediocritas's picture

PMs moved nice in HK, right on cue, busted 1000 and 1004 with ease. Let's see if we get a NY response or if the big bad bears are in hiding.

Tue, 09/08/2009 - 05:27 | 62086 Gordon_Gekko
Gordon_Gekko's picture

And the dollar just went down the shitter - again. And Bobby Prechter just took it up the ass - AGAIN.

Tue, 09/08/2009 - 05:33 | 62089 Mediocritas
Mediocritas's picture

Have to confess China caught me out a bit here. I expected the dollar to go down in flames and PMs to slingshot, but I didn't expect it right now. In fact, I am mainly positioned for a different scenario: equity collapse, dollar / Treasury rally, PM pop and fade. Hedges are holding up ok for now and no need to scramble out of positions but still...not exactly my finest timing.

Sounds like you are on the right side of things. Kudos.

Tue, 09/08/2009 - 02:22 | 62054 Mediocritas
Mediocritas's picture

Anyone else expecting to hear the IMF talking about gold sales again real soon? They do like to throw that one out there from time to time when the market gets a bit hot. Hey, this time they might actually have to deliver as the USA will be classed as a 'Heavily Indebted Poor Country'.

http://www.imf.org/external/np/exr/facts/gold.htm

CBs seem more willing to sell *cough* lease their gold when a member gets caught with their pants down. I can't wait to see who comes out of the woodwork if a high % demand physical when Sep & Oct contracts come due.

Mon, 09/07/2009 - 23:45 | 61979 Gordon_Gekko
Gordon_Gekko's picture

"I may be wrong, but I am honest"

Sure, you may be "honest", but you are definitely stupid.

Mon, 09/07/2009 - 23:41 | 61946 Gordon_Gekko
Gordon_Gekko's picture

Again, this just seems like a mish-mash of all the misconceptions about Gold out there rolled into ne single article. I think PM has done a good job with rebuttal (of course I can add plenty more, but I'm feeling a bit lazy at the moment), so I'll just say this (again - courtesy FOFOA):

"ALL CASH IS A SHORT POSITION ON GOLD".

And there have been TONS of it generated worldwide since we went off the Gold standard. Think about it. A majority of the world population is long cash and short Gold. It's the BIGGEST short position on Gold in the entire HISTORY of mankind. Most people don't even realize that they are short, and won't until it's too late. So your little "storage costs", "cash flow" bullshit etc. is not even gonna matter when the sheeple herd scrambles to cover.

Also, I suggest you read what happened in Argentina before coming up with the "canned-food-is-better-than-Gold" argument. Just because paper money is destroyed DOES NOT MEAN that there will be Armageddon - GET IT?

"Will Gold shine again?"

WTF dude? "again"? Gold has been in a bull market for a f--king DECADE now. Where have you been?

"The thinking of the so-called gold bug (a believer in gold’s supremacy, a gold aficionado)"

Hmmm. So what does that make you - a paper bug (a believer in paper’s supremacy, a paper aficionado)?

Mon, 09/07/2009 - 22:27 | 61929 Old. No. 7
Old. No. 7's picture

This is blogging bastinado.

Mon, 09/07/2009 - 21:56 | 61905 Anonymous
Anonymous's picture

When my dad died in 1983, the undertaker took the gold out of his teeth and gave it to me. My mom kept his wedding ring. I believe most gold is still around.

Mon, 09/07/2009 - 21:23 | 61873 Anonymous
Anonymous's picture

Wow how many straw men can you fit in one blog post?

Mon, 09/07/2009 - 21:19 | 61867 Anonymous
Anonymous's picture

I wrote a letter to Antal Fekete a while back regarding the sheer impossibility of using Gold as currency in a world with near 7B people, Mathematically, the amount of gold ever mined up only amounts to about .7 ounces per person. Issue everyone a 1/2 ounce gold coin, see how far that one goes.

FDR defined the Dollar as 1/29th the value of an ounce of gold, thus it took $29 to buy such an ounce, except you couldn't because you weren't ALLOWED to own gold, it all supposedly sat in safe keeping in a vault in Fort Knox or the basement of the Federal Reserve, wherever.

If/when the Dollar collapses as a currency, the number of Gold Coins floating around out there will be miniscule. Good luck buying a Twinkie with your American Eagle, if you have one. I sure wouldn't take your Gold for my Twinkie. Obviously, Gold Certificates or ETFs are worth even LESS than that, and it should be quite entertaining to see how Gold Ownership claims are resolved among numerous people who all own the same lump of gold.

For the individual, negotiating currency collapse is mainly about Barter. A store of some Cash is good for the beginnings of a collapse, but eventually you have to have real STUFF people will want to trade for. I am big on Booze as a store of value, a bottle of Vodka lasts near forever. In the event of a collapse, if you could trade for a Gold Eagle or a Bottle of Stolichnaya, which would you trade for? I'm loading up on Vodka, not Gold.

RE

Tue, 09/08/2009 - 00:48 | 62029 Mr. Mandelbrot
Mr. Mandelbrot's picture

Look at what's occurring in Zimbabwe.  The laws of supply and demand mean any amount of gold in an economy would be optimal (stable supply with increased demand means smaller amounts are tradable for the same basket of goods in the economy).  Zimbabweans are using gold in increments as small as a tenth of a gram to trade for their bread.  You are thinking along the right lines with your vodka play.  Alcohol, like all nonperishable drugs, do have a function as money (extremely liquid, fungible, divisible, not easily counterfeited, high value to mass ratio, etc.)--hence the drug laws.  Once one understands drugs have monetary qualities (and were used as money in many societies in the past), it becomes clear that the "war on drugs" is actually another front in an effort to stamp out as much competition as possible for the fiat legal tender used by people today.

Mon, 09/07/2009 - 23:07 | 61947 Gordon_Gekko
Gordon_Gekko's picture

"the amount of gold ever mined up only amounts to about .7 ounces per person"

This is another big misconception about Gold. So what? All you should be concerned with is the PURCHASING POWER of that Gold, not what it's nominal price is. BTW, what would YOU say is a fair amount of Gold per person? 1 ounce, 10 ounces , 100 ounces? Again, all that matters is what you can buy with those .7 ounces - if it gets you a whole lifetime worth's of goods, then who cares?

Mon, 09/07/2009 - 21:00 | 61846 Anonymous
Anonymous's picture

this opinion piece is so full of ignorance, myths, and falsehoods that i will not even deign to comment.

i am no more interested in debunking nonsense....the fool and his money are soon departed....

you go, fool!

Mon, 09/07/2009 - 23:36 | 61968 Gordon_Gekko
Gordon_Gekko's picture

Bingo!

Mon, 09/07/2009 - 20:41 | 61827 Anonymous
Anonymous's picture

TIPS are tied to the CPI which is determined by the government. This is a problem. Suppose -- I know it's almost impossible to comprehend -- but, just suppose that the government manipulated the CPI figures partly to keep the TIPS in line.

As I say, it's highly unlikely that anyone in the government would manipulate anything like an official index, so go ahead and pick up TIPS instead of gold. It's a far superior investment.

Mon, 09/07/2009 - 18:47 | 61757 Anonymous
Anonymous's picture

TIPS are not such a perfect alternative as you describe. Assume you buy TIPS that pay 3% above the rate of inflation. Well, if inflation is 25% in one year, your TIPS will pay 28%... all good right? Assume gold matches inflation and only pays 25%... Seems TIPS win, except they don't. You have to pay taxes on TIPS, assume a rate of 30% and your 28% is reduced to 19% or so...

One of the reasons why governments love to inflate currencies is because of this tax implication. While nominally you gain, on an after tax inflation adjusted measure, you lose, and they rob you of purchasing power.

Mon, 09/07/2009 - 23:43 | 61976 Gordon_Gekko
Gordon_Gekko's picture

Here is what TIPS is:

A promise to pay more toilet paper in accordance with a FUDGED inflation number.

Mon, 09/07/2009 - 17:41 | 61726 Anonymous
Anonymous's picture

"China alarmed by US money printing"

http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US...

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,"

"The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction. "

I think 10% to 20% or your portfolio in physical gold and/or silver is always a wise idea, but best to dollar cost average in at this point.

Mon, 09/07/2009 - 17:31 | 61720 Anonymous
Anonymous's picture

http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US...

china will be buying on any correction. hmmm, nice floor, wouldn't you say old chaps?

Mon, 09/07/2009 - 17:19 | 61712 Anonymous
Anonymous's picture

Dear Mr. Katsenelson, answer this: why is gold on the balance sheets of central banks world-wide?

You are mostly correct that financial ingenuity *may* replace the monetary qualities of gold, one day. But there is one thing you do not know: I dont trust neither you nor your colleguaes to manage my money, today! Why? Well, it is the thinking like ".... the availability of risk-free investment instruments that were not available to investors in previous economic crises may have changed investor behavior during economic doomsday times. .." Risk free?! Are you barking mad? Tell "risk free" to the many banks here in Europe (guided by the way of thinking your promulgate here) that bought MBS's. They were, apparently, risk-free.

You sir, and your ilk - your whole profession, you make me sick.

We need a financial infrastructure and markets as developed economies, but this? Risk free casino, everyone! The decades-long overdose on liqudity will end one day. My only regret is that the wealth of the West has been thus squandered.

Gold is not for "investors". Hardly also for individuals, maybe only for retirement. It is an independent (free from political economists) regional and national wealth reserve that has a utility as a collateral. It *should* be used by central banks to drain excess liquidity in good times (and buying it back in bad times) thereby performing the essential task postulated for every central bank: being a buffer in the business cycle. The bufoons in NY have totally overtaken the collateral and wealth reserve function of real assets by secutitizing them (Ponsifying the nation's wealth in other worlds) so you can drive your Porche.

Sick and unbeliavable.

Aleksandar

Mon, 09/07/2009 - 16:47 | 61694 Gunther
Gunther's picture

“Over the past 200 years, its returns have barely kept up with inflation.” Gold was cash until 1933/1971, since then it is up 28 times. The correlation with stocks is usually NEGATIVE; look for a chart of the DOW/gold-ratio, for example at http://home.earthlink.net/~intelligentbear/com-dow-au.htm for illustration. Gold reduces risk-adjusted returns. That is bullshit in any stock bear and gold bull market. Why is government debt considered default-free if history tells otherwise? Do risk-free investment instruments exist outside of financial theory classes? To consider cash deposit risk free in inflationary times is surreal. If you can not value gold, it is the fault of your theoretical framework. The market can do so. It is possible to generate cash from writing out-of-the-money options against the holdings; but that adds risk. Moreover, the storage fees are small compared to any investment manager’s fees. Please provide better arguments for your case.

Mon, 09/07/2009 - 16:27 | 61691 Anonymous
Anonymous's picture

Will gold shine again?
What does this mean? Gold has outperformed the stock market for a decade. Perhaps the question should be 'will stocks shine again'?

Doomsday scenario
This is an old anti-gold canard which says you are better off with toilet paper, canned food or bullets than gold. It ignores the fact that people always need a medium of exchange. History shows, from Rome to Weimar Germany to Zimbabwae that gold, not TP or Spam, is the preferred medium of exchange when paper becomes worthless. Of course, TP has one very delightful use. Everyone should have some.

Holding gold has costs
Holding stocks and bonds have cost. Does your broker work for free? You can also lose 100% of your paper investment (hello AIG, fannie, freddie, etc). How many times has gold become worthless?

Stocks and bonds are cash-flowing? What's the current dividend yield on the S&P? On Enron? Citibank? The 2 year T bill? Not too high. My checking account pays 0.00.

Gold has storage costs? My bank gave me a safe deposit box for free, which kinda offsets the zero percent interest rate on my deposits.

Gold intrinsic value is hard to measure? The intrinsic value of green rectangles is zip.

TIPS have a positive yield? Not really, though it may have a NOMINAL positive yield TIPS will always lag inflation. Therefore TIPS have a negative real yield, and sometimes no nominal yield, such as when the cooked CPI shows deflation.

Gold is a measure of fear? The price of many things (guns, burglar alarms, bonds, etc.) reflects fear also. Does the fact that fear influences the price of something make it a bad investment? Of course not, because many other things (inflation expectation, scarcity) influence prices as well.

Mon, 09/07/2009 - 16:24 | 61688 Anonymous
Anonymous's picture

Vitaliy, Gold as an investment over 200 years? Inflation protection? Tips and inflation protection form US Treasuries? What kind of nonsense are your writing about? So many subjects and so little time, let me try and counter some of this foolishness......

Alternative inflation protection from US Treasuries, Tips...not sure if you are aware, but due to debt crisis and the QE globally, and the significant downtrend in the US dollar, you are probably seeing the end of a 25 year plus bull market in long US Bonds. Interest rate start a new long term down cycle and your US treasuries will guarrantee you mucho losses. How much? well, take a long term Bond bear prior to this current bull market, say from 1951 to 1981 produced a 86% decline. Nice result for 30 year period wouldn't you say? So the bond market going forward doesn't appear to be a wise portfolio inclusion. Depending on what period of time you are speaking about, Gold has always performed it's function over time to preserve wealth. A one ounce gold coin in days of Rome at it's peak bought a similar amount of goods as it does today. There is no paper or other currency in world that can even say it has lasted more than 50 years, so that inflation argument is rubbish. From 1932 which was a key year in the Dow stock index until 1980, the Dow has moved up 2500% From that same period, gold has moved from $20 to $875 which would be a $4375% advance. Now I am not saying gold always outperforms the Dow or any equity index, but from a key low in 1932 in Dow which could be said to be the "buy of the century" as far as timing goes, it doesn't compare well with gold for that 48 year period.

Anyway, going further back into history if you stay in the US, now you run the risk of comparing currencies which do not exist...Continentals, the Silver currencies, gold back systems etc. As you can see, the underlying currency will affect investments, so it is always critical to understand the primary trends in that nations currency while making decisions on bonds, equities or any portfolio item. A weakening currency in the US will put a large bid under gold and continue a longer term trend which has been in force since 2001 and is the only investment I know of that has had an increase each and every year since that time.
the majority of gold investors are not doomsayers or nutjobs, but normal investment people who understand there is a time for each investment and currently, after a bear market of aproximatly 1980 to 2001 it is a long term gold bull cycle which has ( without any negative doomsday type events) a normal course projection of $2500 oz. just based on cycles and technical charts. A bull market will continue to unfold and reach it's climactic prices. Now if things go bad, or get nasty, then the price targets change and think more in line of the price you dislike $5000. But nobody wants to see bad stuff happen and gold bulls don't need to have wars or economic armeggedon. Just the normal business cycle will do thanks..

cheers

Mon, 09/07/2009 - 16:19 | 61687 Anonymous
Anonymous's picture

Ferfal tells a tragic story of a woman who self immolated in the lobby of a Buenos Aires bank, all because they revoked her USD denominated account and cashed her out in pesos. Smart physical holders already know what a farce unallocated PM storage is, just beware someone else holding ANY of your hedges.

Mon, 09/07/2009 - 16:16 | 61685 Anonymous
Anonymous's picture

http://www.youtube.com/watch?v=s3LdNxV0yPM

In Zimbabwe, a total gold economy, and the poor folks pan for gold. Those who can't pan for gold, starve.

Zimbabwe is 80% literate, and used to be a prosperous export economy. A few years of the printing presses is all it took. How many hyperinflation events have been in the past 100 years, most without a war or disease, they happen by the printing presses.

So, here you have the basic minimal society, where only gold is money.

Zimbabwe used to be well educated, hospitals, trains, mines, farms, you could buy a BMW, just like the USA.

No one could stop the ruler and his tribe of thugs from destroying his country. Everyone could see it coming, but the lure of socialism was too strong.

Mon, 09/07/2009 - 15:45 | 61662 Anonymous
Anonymous's picture

Point by point:

Will gold shine again?
What does this mean? Gold has outperformed the stock market for a decade. Perhaps the question should be 'will stocks shine again'?

Doomsday scenario
This is an old anti-gold canard which says you are better off with toilet paper, canned food or bullets than gold. It ignores the fact that people always need a medium of exchange. History shows, from Rome to Weimar Germany to Zimbabwae that gold, not TP or Spam, is the preferred medium of exchange when paper becomes worthless. Of course, TP has one very delightful use. Everyone should have some.

Holding gold has costs
Holding stocks and bonds have cost. Does your broker work for free? You can also lose 100% of your paper investment (hello AIG, fannie, freddie, etc). How many times has gold become worthless?

Stocks and bonds are cash-flowing? What's the current dividend yield on the S&P? On Enron? Citibank? The 2 year T bill? Not too high. My checking account pays 0.00.

Gold has storage costs? My bank gave me a safe deposit box for free, which kinda offsets the zero percent interest rate on my deposits.

Gold intrinsic value is hard to measure? The intrinsic value of green rectangles is zip.

TIPS have a positive yield? Not really, though it may have a NOMINAL positive yield TIPS will always lag inflation. Therefore TIPS have a negative real yield, and sometimes no nominal yield, such as when the cooked CPI shows deflation.

Gold is a measure of fear? The price of many things (guns, burglar alarms, bonds, etc.) reflects fear also. Does the fact that fear influences the price of something make it a bad investment? Of course not, because many other things (inflation expectation, scarcity) influence prices as well.

Maybe I should write articles for this site.

Mon, 09/07/2009 - 21:02 | 61850 gookempucky
gookempucky's picture

Please do-- I knew I should not have read the 2nd article as it is copy of what the majority here have known for many years past--most if not all here probably manage their own money and wouldnt give the VK's the time of day.

The same mold of that clown Dave Ramsey--gold is not a good investment paper tigers chasing paper tigers.

Nothing else in the world like it GOLD

Name: Gold
Symbol: Au
Atomic Number: 79
Atomic Mass: 196.96655 amu
Melting Point: 1064.43 °C (1337.5801 K, 1947.9741 °F)
Boiling Point: 2807.0 °C (3080.15 K, 5084.6 °F)
Number of Protons/Electrons: 79
Number of Neutrons: 118
Classification:
Transition Metal
Crystal Structure: Cubic
Density @ 293 K: 19.32 g/cm3
Color: Gold

END OF STORY

Mon, 09/07/2009 - 15:43 | 61658 dot_bust
dot_bust's picture

I fail to see how holding fiat money is safe and efficient. Gold provides people with a way to preserve the fruits of their labor, building their wealth in a stable, efficient way. Conversely, Treasuries, equities, and fiat currencies often fluctuate quite unpredictably, and their value is determined by the ultra-rich, whose sole purpose in life is to transfer assets from the middle class to themselves.

Paper assets have become the purview of the rich. They have, in essence, become a giant Ponzi scheme. Presently, countries all across the globe are devaluing their currencies  by using quantitative easing. In such a situation, paper money is devalued as fast as you can accumulate it. It is somewhat akin to trying to run in quicksand.

I think of what is transpiring now as a global theft, and only precious metals are a form of protection from being robbed by the rich.

 

Mon, 09/07/2009 - 16:11 | 61680 Anonymous
Anonymous's picture

Yeah, all that gold is a great form of protection, until the government decides to sieze it! If things get to the MAD MAX stage, you can be sure Uncle Sam will step in as in the past, to demand you hand it over.

Sucks....

I think going long on hookers, blow and canned goods is a much better strategy myself.

Mon, 09/07/2009 - 15:30 | 61652 Anonymous
Anonymous's picture

Au comes from Aurum, not Aurora.

Mon, 09/07/2009 - 15:25 | 61647 lookma
lookma's picture

Over the past 200 years, the dollar has lost over 95% of its value

..............

The thinking of the so-called gold bug (a believer in gold’s supremacy, a gold aficionado) often takes on a variation of this form: in the future, I can buy largely the same amount of stuff with my gold as I can now, but I will not be able to do the same with a currently commensurate amount of fiat currency.

............

Any cash flow-generating asset, like a stock or a bond, can be valued on the future cash flows that it is expected to generate (Of course this analysis makes implicit assumptions about the value of the currency in which those future cash flows are denominated)

............

To protect themselves against the declining dollar, U.S. investors can use currency futures and options, foreign-currency-denominated mutual funds and certificates of deposit; they can buy foreign stocks on foreign exchanges or through American depositary receipts; and, of course there is a most recent development - currency exchange-traded funds. (Of course this assumes the issue is the value of one fiat currency against another, goldbugs tend to think all fiat currencies are being debased, and thus view the fiat v. fiat a false comparison).

Mon, 09/07/2009 - 15:16 | 61645 Anonymous
Anonymous's picture

Thanks for letting me know there are still some kool-aid drinking paper clowns to take the other side of the Gold trade. Keep on believing in your government and its paper promiseses. This gold bull market has a long ways to go!

History keeps repeating because people don't know or understand history. All paper is being devalued relative to gold. Gold ain't doom and gloom, it's a conservative and realistic way to maintain wealth during a deflationary secular credit contraction/Kondratieff winter. Since the US and UK are the world's squatters/debtors entering this period, their currencies are most at risk over the next decade. If you you think trust in paper is low now, wait until the next inevitable leg down in the stock market is near completion.

Once the Dow to Gold ratio hits one, then it is time to ring the cash register and buy back paper assets from the paper clowns at pennies on the dollar (and maybe some real estate). You don't have to be a bug to profit from an obvious bull market.

Mon, 09/07/2009 - 15:06 | 61643 Anonymous
Anonymous's picture

Silly me....I always thought the AU symbol for gold comes from the latin "aurum", for....gold.

Mon, 09/07/2009 - 15:06 | 61642 Anonymous
Anonymous's picture

As is said about fractional reserve banking, "If people knew just how little REAL money is holding up all the rest, there would be abject panic."

They have tried to fractionalize AU similarly, and have so far succeeded in an expansionary environment. But like all ponzi schemes, contractions even small contractions (not what we are presently experiencing) have disproportionate degrees of shock which destoy these ruses. The paper gold trade is about to have a come to jesus.

Mon, 09/07/2009 - 14:57 | 61637 George the baby...
George the baby crusher's picture

I say COMEX and delivery failure. All this paper gold, now there's a darn scary story.

Mon, 09/07/2009 - 17:22 | 61713 Rusty Shorts
Rusty Shorts's picture

If you want to see something scary...

 

http://www.youtube.com/watch?v=QovBLFZhQME

 

.."you see, the last hundred years of (oil) prosperity on this planet...that was just a freak of nature, a lucky break that we burned up faster than a stick of dynamite stuck up the time line of man".

 

Mon, 09/07/2009 - 15:27 | 61651 Mediocritas
Mediocritas's picture

Already happened once this year. ECB came to the rescue.

http://seekingalpha.com/article/129128-did-the-ecb-save-comex-from-gold-...

The game now is to divert as many people as possible into paper (GLD, SLV, etc), take the heat off. Stated what I think of these things here: http://www.zerohedge.com/article/who-going-buy-gold#comment-61453

Mon, 09/07/2009 - 17:18 | 61711 George the baby...
George the baby crusher's picture

Thanks for the links.  How long will the game keep playing?  I'm constantly at the edge of my chair.

Tue, 09/08/2009 - 01:51 | 62047 Mediocritas
Mediocritas's picture

I see two probable scenarios:

1: This really is it. The BRICs are going for it Hunt style and they're going to call bullshit on the entire naked PM / price suppression scam that's been going on for decades. In that case, the game is over. I don't believe CBs have the ability to beat the BRICs if the BRICs go all out.

2: This is a huge head-fake. The BRICs merely want their cut of the action. They'll set up their physical holdings in Hong Kong then launch ETF mania, flood the market with fraudulent paper (just like everyone else does) and tank the price of PMs straight back down again.

My first instinct was #2 and I believe that, ultimately, we will end there. In the short term though, #1 is looking increasingly like the correct scenario. As a PM bug, I hope #1 is the case but we will see.

Mon, 09/07/2009 - 14:31 | 61632 Anonymous
Anonymous's picture

Counterparty risk

insurance against sudden further debasement

transportable and hard to track

scarcity hampers the ability of regulator-in-collusion manipulation by rogue gov't sponsored trading houses

Universally respected and exchangeable worldwide

Central Banks fear it, it is their sworn enemy

In economic resets, it provides the foundation

In a sea of corruption, it assists in bribing and purchasing passage to freedom, or escape from imminent danger

If dollar has lost 13% of purchasing power since March, and this is in a very "deflationary" environment, where will it go once QE really heats up? Or in a currency crisis? Or in a bond failure? Or in a wholesale dumping by oversea holders?

What if contracts on the metal fail? Or if a paper ETF defaults, or fails an audit?

What if the Federal Reserve pulls out all the stops and monetizes everything in danger of default? Or fails to "mop up" their accelerating excesses of the past years?

What if the currency is somehow "reformed" overnight, or restrictions are placed upon is axes of freedom? What if price or wage controls are again instituted? What if rationing, executive orders, or martial law further hamper free trade?

What, in the event of war, as in the six days war, will the reaction be?

The fabricated gold universe (contracts, ETFs) could have a counterparty failure with only a modest global "bump", any significant geopolitical action would magnify the fear and uncertainty.

Gold is the catchbasin and winner in all cases. Upside in this environment is a significant advantage, with limited downside because manipulation is becoming successively harder to pull off.

As the moniker is ZERO HEDGE, paper hedges and ironclad promises WILL FAIL! Have it, hold it, or lose it.

Mon, 09/07/2009 - 13:51 | 61612 Clive S. Multrum
Clive S. Multrum's picture

You don't need a doomsday type scenario for gold to work out well as an investment.  According to this site (http://www.onlygold.com/TutorialPages/All_The_Gold_In_The_World.asp), which is probably close enough to being right, the value of all the gold in the world, including I presume what is in peoples' teeth, is about $4.8 trillion at $993/ounce.

Sounds like a lot of money, but what percent is that of all the investments in the world?  All the stocks, bonds, money market funds, real estate, foreign reserves, whatever, what do they all add up to?   How about if we add in all the currency, M-2, etc., of all the countries in the world, translated into US dollars? Anybody know?

Beats me, but I would guess at least $100 trillion, and if I am very wrong, it is probably because it is $200 trillion or higher.  So gold probably represents a very tiny piece of the overall investment pie.

And that is counting all the gold, but most of it, the stuff in your teeth, in a lot of the jewelry, and in the vault at Ft. Knox and other government repositories, is going to sit there no matter how high the price, and not enter the market.

Given all that, a very tiny shift in investment portfolios around the world, from anything that isn't gold into gold, could have a huge impact on the price of gold.  It wouldn't take a doomsday scenario to cause it, just a small increase in mistrust of central banks, for which there is ample cause.

Mon, 09/07/2009 - 15:23 | 61648 Mr. Mandelbrot
Mr. Mandelbrot's picture

My wedding ring is 12 grams total weight of 14 karat (.575 pure) gold, which translates to .222 troy ounces of pure gold.  It will be buried with me as will the gold crown on one of my molars (probably another .5 - .10 troy ounces -- sorry I can't weigh it!).  I've seen the 5 billion ounces of gold mined in all of human history number many times.  Assuming this is the best figure we have, how much of it is in cemeteries on fingers and teeth not to mention all the gold as money era caches in the ground that were lost or forgotten over the six thousand years?  It seems that www.onlygold.com's figure assumes all the gold mined in history is still in someone, somewhere's possession.  

Mon, 09/07/2009 - 21:13 | 61862 ZerOhead
ZerOhead's picture

Can you stake a claim on a cemetary?

Mon, 09/07/2009 - 15:27 | 61600 Hephasteus
Hephasteus's picture

I kind of screwed that post up. What I meant to say is that central banks are inflationary while the periphial banking system is deflationary impoverishing. You'd have to look at central bank lending to see the inflationary picture which is completely hidden and the periphial bank returns on loans get's a hit against that inflation in valuation. This is why you get relativities in economy. Since all the central banks are located in the largest population centers most of it's inflation actiivity occurs in the local economies which is why you get such extreme skews of price bubbles on gasoline, housing etc between the large population centers and the rest of the country. You can almost see the flow of the central bank money just by looking at how local economies either grow or remain rooted in the presence of a bubble. Florida isn't a large population area but there is a great deal of central bank activity there because it bubbled hugely in both this depression and the great depression. So it really makes you wonder what the hell the central bank does in florida and why. I personally think it's drug loans. LOL

Edited. Ok. Starting to see how nevada inflated so much from sucking up gambling money and forgot about all the snowbirds in florida driving the housing prices up independant of the full time residents.

Mon, 09/07/2009 - 13:29 | 61599 AnonymousMonetarist
AnonymousMonetarist's picture

Have never owned gold but intend to.

Believe though at this time it is too expensive.

One does not have to reject modernity to embrace gold ... one need only embrace the concept of a currency crisis and its' inevitability.

History will rhyme.

Mon, 09/07/2009 - 12:30 | 61570 Anonymous
Anonymous's picture

Thank you for setting up a straw man (gold owners as a bunch of gun nuts wearing tinfoil hats) and then knocking that straw man down. This is very courageous and demonstrates both your intelligence and understanding of economics...

Money has two functions: a medium of exchange and a store of value. Paper money is superior as a medium of exchange while gold is better as a store of value. When economic activity is increasing, paper money is more valuable than gold because of its superiority as a medium of exchange. Unfortunately, right now, economic activity is declining. This means that the store of value that gold provides is more valuable.

Recessions are a time for economic imbalances to be worked out. One significant present imbalance is in the price of gold relative to the amount of paper money (US Treasuries, Fed Reserve Notes, Credit). The imbalance is more likely than not to be addressed before this recession is over, just like in the 1970s.

Mon, 09/07/2009 - 16:26 | 61689 pivot
pivot's picture

The truth is that gold really is a EOW, mad max type of investment, but as Vitaliy points out, there is much uncertainty as to whether it is the best.  If you think gold is anything but a physical asset that can be exchanged because it is rare, you are fooling yourself.  If you think the US dollar is doomed, ok fine, you can play that a lot easier using 21st century financial infrastructure to swap your exposure (though admittedly as a US citizen you are taking a reasonable-sized risk in that you can't buy a gallon of milk in NYC in EUR... you know, while you're waiting for the world to end). There is no reason to buy an asset that you then have to pay to store (insure?), which generates no cash flow.  Buying gold truly is a gamble because you are betting that someone tomorrow will pay you equal to or more than you paid for it, otherwise what would have been the point?

Another thing that is never discussed (not just in gold bug world but other financial advice too) is what happens if/when you are wrong.  What if the world doesnt end?  I am not convinced that if you have a ton of gold in an EOW situation that that is even appealing (wouldnt you be one of most targeted?), but even if it is, what's your expected return (low probability event tied with uncertain payout = not appealing)

Mon, 09/07/2009 - 12:25 | 61568 Anonymous
Anonymous's picture

The author is being disingenuous by painting people who own gold as doing so because they expect a Mad Max apocalypse. The reality is that we (or at least I) are simple expecting economic crisis conditions of the type we've already had several times in the last 100 years (Weimar, the Depression, various hyperinflations in Argentina, Zimbabwe, etc). None of those involded a descent into violent anarchy or civil war; yet holding gold at a minimum maintained your wealth or (quite possibly) increased it substantially versus your peers.

I lived through the Argentinan hyperinflations myself and can tell you that commerce does not stop and life goes on relatively normally. The only difference is that your thinking adjusts to make calculations and contracts using proper stores of value as the denominator, and you exchange any local cash into stores of value immediately.

As such, those who argue "gold is useless, you can't eat it in a crisis" are also mistaken because portable, compact, and private stores of value (whether they be metals, yuan, singapore dollars, or something else) *WILL* be in great demand in a wrecked economy; even if made illegal and driven to a black market. Anyone producing or selling anything will prefer to be paid (or immediately want to deploy their profits into) proper stores of value. In Argentina 1989 that meant US dollars. Given the lack of familiarity with foreign bills in the USA, it's likely to mean metals.

Mon, 09/07/2009 - 12:19 | 61563 Anonymous
Anonymous's picture

The author is being disingenuous by painting people who own gold as doing so because they expect a Mad Max apocalypse. The reality is that we (or at least I) are simple expecting economic crisis conditions of the type we've already had several times in the last 100 years (Weimar, the Depression, various hyperinflations in Argentina, Zimbabwe, etc). None of those involded a descent into violent anarchy or civil war; yet holding gold at a minimum maintained your wealth or (quite possibly) increased it substantially versus your peers. I lived through the Argentinan hyperinflations myself and can tell you that commerce does not stop and life goes on relatively normally. The only difference is that your thinking adjusts to make calculations and contracts using proper stores of value as the denominator, and you exchange any local cash into tangibles immediately. As such, those who say "you can't eat gold" are also mistaken because portable, compact and private stores of value (whether they be metals, yuan, singapore dollars, or something else) *WILL* be in great demand in a wrecked economy; even if made illegal and driven to a black market. Anyone producing or selling anything will prefer to be paid (or immediately want to deploy their proceeds into) proper stores of value. In Argentina 1989 that meant US dollars, but in USA 2012 (or whenever) it's likely to mean metals.

Mon, 09/07/2009 - 12:05 | 61549 Hephasteus
Hephasteus's picture

I appreciate him taking the opposing side too but I am quite disturbed by the "holes" in his education that seem to be in everybody's education because they in fact would allow people to have much deeper understandings of financial systems that the people who really run them don't want them having.

Please watch "The Money Masters". You can buy it or watch it on you tube.

Nixon had to close the gold window in 1971 due to the extreme fractioning of the underlying assets. To understand this I want you to try a few numbers. They don't have to be even very good guess. i want you to run the average houshold mortgage the average amount of commercial paper etc etc until you get a good idea of what you are dealing with and then find a good loan amortization program and you'll find that roughly every house mortgage carried to maturity on a 30 year mortgage roughly doubles the money supply. Do the same thing for all the car loans and everything. Now do that for 1950's america where people didn't debt much. Maybe 1 low interest house loan, maybe 1 relatively cheap car loan. Then go on through the 60's and see how much the fractioning has accelerated. The system indebts more and more so the amount of fractioning happens at an exponential rate.  Then you will become aware how the consumer behavior in late 90's through 2007 affected everything. In fact had the bubble kept going it would have had tremendous amounts of inflation. Since wages don't keep up it just dumps people off on the side of the road as it steams towards meaninglessness. Had it been done at 10 times fractioning it would have been rediculous. But at 20 30 times on the bigger banks the inflation was just FLAT OUT LUDICROUS. I mean the way it sets up it doesn't actually inflate the money supply that much but it does deflate the buying power of everyone under it's thumb. It turns poor into rediculously impoverished middle class into poor, upper middle into middle etc.

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