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Bull Markets, Buying Opportunities, and Gold
Bull markets are extraordinary opportunities for wealth creation. There is something unquantifiable about the persistence of price as it moves higher. How to define a bull market is another question, but however it is done, we can agree that something different has occurred to create the dynamics that seem to persist in a bull market.
As many readers are aware, I monitor investor sentiment across a variety of markets. I do this not so much as to be a contrarian, but to determine those points where there are changes in trends. You see, it is in the extremes of price where changes in trends occur. A good example that everyone is familiar with is the overbought market. Typically, in an overbought market, we would expect too many bulls because as prices rise so does investor optimism. Because a market is overbought, it is reasonable to expect a correction in price. Every now and then, the market doesn't correct and overbought becomes more overbought. The "normal" cycle of overbought leading to oversold and back to overbought is broken as prices just trade higher. It is in these instances that new trends are born. The market doesn't behave in a way that one expects leading to a new trend.
So what does this have to do with the bull market in gold? See figure 1 a weekly chart of gold (cash data). The indicator in the lower panel is the MarketVane Bullish Consensus for gold, which is a measure of investor sentiment. When the value is high, there are too many bulls and when the value is low, there are too many bears. This chart goes back to 1997.
Figure 1. Gold/ weekly
The portion of the indicator contained within the yellow rectangle was prior to the bull market in gold, which started in 2001. We can see that extremes in the MarketVane Bullish Consensus identified extremes in gold fairly well such that those extremes were associated with corrections in price.
Then came 2001, and something happened in the gold market. Whatever that something was is debatable, but whatever it was, it was the start of the gold bull market. Old rules of looking at gold no longer applied. Prior extremes in the MarketVane Bullish Consensus, where gold typically reversed, no longer held true. Failure of price to reverse lower at old extremes resulted in new price dynamics, never before seen MarketVane indicator values, and the gold bull market. This can be seen by the blue arrows on the chart.
Since 2001, the MarketVane Bullish Consensus has been in a new range as defined by the gray rectangle, and the recent sell off in gold has done nothing to change that range. In fact, with sentiment at the bottom of the range, this should be considered a buying opportunity for gold on the order of 2003, 2006, and 2008. And until the gold market does something different, there is no reason to think otherwise.
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Buy gold at 1387.
Quatloos?
In a deflationary scenario, gold plunges even more.
In a unicorn scenario, gold turns into green and purple gumdrops.
CPM are right; Gold IS money. The only thing surprising me was the fact of Gold not breaking AND staying above $2000 already - until I realized that most debts are denominated in $Usd, therefore how you gonna raise greenbacks to pay it off?
As the True Money Supply grows exponentially, the inflated prices of all assets leads to greater and more frequent liquidity CONTRACTIONS due to uneconomic allocation of capital, distortions, and mispricing of assets. Example: Labour price (wages) will never keep pace with housing price increases therefore leading to looser approval standards, leading to sub-prime crisis.
Fears of a Mad-Max post-crash future will lead only to greater government intervention and control and inefficiencies.
Gold going to 1050-1150, then a pop, then a lot lower -- see ya under seven hunder.
Idiots are buying now, it's all levitation and the smart have exited or are doing so as this author suggests.
yeah. Those idiots like central banks and such
So you believe that gold is going to fall BELOW its average cost of production?
I suppose that is just marginally possible, for a VERY brief period, but I would hardly bet the bank (so to speak) on it. Your scenario is at the extreme end of what is possible, and nothing logical supports it, as currency depreciation is ongoing and likely to accelerate. But good luck wishing on moonbeams and unicorn farts, Nadler.
Have you ever seen the price of gold near $700?
If the answer is yes, what more proof do you need for feasibility?
I wish prices were set by logic, but we both know that to be untrue.
This isn't 1286 where your idea of money in metal is practical.
Yes, gold was at $700 not too many years ago --- when oil was at $50, and not the $100 of today. See the connection? Mining and refining gold is a VERY energy-intensive operation, and as the price of oil rises, so too does the cost of extraction of gold. Gold is NOT going back to $700 before oil drops back under $50 long-term --- and just what are the odds of that?
Gold going to 1050-1150, then a pop, then a lot lower -- see ya under seven hunder.
Such a presice prediction. Reminds me of a guy on the street corner with a 'worlds gonna end on Tuesday' billboard. Best not take investment advice from either.
Smart money backed the truck up early in the decade. Who is left?
Reminds me of a certain spokesman for an ostensible online dealer of precious metals (and pooled PM accounts, hmmm .....) who is constantly bleating about the ever-imminent 30 to 40% decline in the price of gold, and whose pretzel-logic can simultaneously claim that gold is "in a bubble" even while denying that is has been in a ten year bull market!
id like to hear his argiments on a 30 to 40% decline in equity markets....not a bull but...when everything trades off, Everything trades off.
Equity markets are a mirage. You are right about "risk off" across assets, that is highly likely.
I've seen equity markets make burnt toast three times in my life thus far by your calculation.
The spokesman in question is invariably bullish on the US dollar and US Treasuries, however, and always talking them up while mocking holders of gold --- "Radical Goldbug Extremists", in his own words. Spoken like the true bankster snake that he is.
"Gold going to 1050-1150, then a pop, then a lot lower -- see ya under seven hunder."
If it were only true.
If it ever drops to $700 (fiat) I'll take the 30% hit on my 401k & IRA's and cash out...gladly. From then on, its just a matter of smilin & wavin at the "true believers" trapped within their glass house.
Would you? Most say they would, but the preceeding fall usually changes many minds. You better be long NFLX!
According to your comments the bottom I speak of is in the ballpark.
To bring this thread back on topic...
What's the best way of rehypothecating half a cooked Turkey? As all my readers are aware I eat turkey at this time of year and never know whether to short it in a curry, hedge it with sprouts, or go long with a sandwich?
Noz
always a great time to buy gold.
http://covert.mypressonline.com
I would go with 100:1 COMEX long turkey futures --- but watch for margin increases as the shelf life of the underlying asset diminishes in storage.
Be sure to avoid MF Butterball.
hmmm....
Going forward I see some inventive, innovative, and essential uses of "Marlon's Favorite" Butterballs
Noz
Yeah, I hear that they were a real turkey of an outfit --- all their investors had the stuffing ripped out of their portfolios, "gobbled up" as it were. Meanwhile, Corzine was swimming in gravy.
They should be hung from the nearest giblet.
I think you meant to say "They should be hung by their giblets." Ouch.......................
And trussed-up like .... well, you know. Those basteds!
In any event, I think their goose is cooked.
To bring this thread back on topic...
What's the best way of rehypothecating half a cooked Turkey? As all my readers are aware I eat turkey at this time of year and never know whether to short it in a curry, hedge it with sprouts, or go long with a sandwich?
Noz
Ship it to London first.
Consider expanding yer recipe book: Turkey Tetrazinni, Turkey burritos, Turkey ala King, Turkey parmesan...
Take delivery
Happy holidays!
my take on the 'inflation-deflation' arguement.
I believe that any purchase requiring credit will enter a deflationary stage, but everyday goods (food, gas etc.) will experience inflation. Any stance that does not differentiate is flawed IMHO.
For all the talk of looming inflation and hyperinflation on these boards, I am just not seeing it. We are supposed to be seeing high inflation for how many years now? It seems the deflationary effects of credit tightening is neutralizing most of the price inflation effects of an increase in money supply. I think Mush Headlock had it right in his recent On The Edge interview with Max Keiser.
And yet year after year, prices ARE higher in all categories except for the previous bubble assets of housing and real estate, and I see NO sign whatsoever of generally falling prices --- so where is your so-called "deflation"? If your flat-earth monetary theories had any credibility at all, shouldn't we have seen your much-predicted generally falling prices by now?
Go study some history, and you will soon observe that in times of fiscal profligacy, it is currency debasement that inevitably occurs, NOT some kind of magical fiat currency appreciation --- something for which, quite notably, there is not ONE historical example, in contrast to the hundreds of examples of the former.
PS: It is to the further discredit of the deflationary flat-earthers that they almost always posit the false dichotomy, as you did above, of either deflation or hyperinflation. For the record, I firmly believe that what Americans (and quite possibly most Europeans) are going to fall victim to is a sudden and drastic, but not absolute, plunge in the value of their currencies, on the order of 75%, within a several month to one-year timeframe --- exactly as experienced by Icelanders in 2008, and Argentinians in 2001-2002. These episodes were not "hyperinflation" as generally defined, but they still wiped out most of the savings of the average person involved.
I'm 100% that Japan will be the first major too see the demise of its currency. There is no other possible way out.
Hyperinflation is deflationary. It may cost $1000000 to buy bread, but historically, during hyperinflation, your gold will buy you a lot more. As far as i understand it, hyperinflation is not caused by money printing, it is caused by loss of confidence, thus increased monetary velocity. The increase in velocity means central banks have to print to avoid collapse.
Thus first comes hyperinflation, then comes massive printing.
What was experienced by Icelanders, and Argentinians, and many, many others was a fiat, or declared, change in exchange value vis a vis the functional reserve currency of the planet; ie; the dollar and the Euro. They are both now, pragmatically, reserve currencies. It is not possible for this type of event to take place in the case of either the dollar or the euro. It should be clear that you can't devalue the dollar in terms of the dollar by declaration.
What was THAT supposed to mean? Do you REALLY think that arbitrary (and nominal) fiat prices are the ultimate metric of value?
Of COURSE the dollar and/or the euro can be, and will be, devalued, and no reference to ANY other fiat currency is necessary for that process. They will simply be devalued in absolute, not relative, terms --- in other words, their purchasing power will plummet.
If I "posited a false dichotomy" it was surely by mistake. I was trying to say increase in money supply is not resulting in price inflation at least from my observations. Is it being neutralized by tight credit? Cow shit I know. I have read "when money dies" and just ordered "currency wars" by Rickard. Trying to learn. Rickard claims gold price will eventually come to reflect money supply. If I understand him correctly he boils the price down with "eight grade math" basically that one variable money supply. I would like to see a historic chart of the money supply vs. Gold price. Does it it always come back to one to one or only sometimes? Are there other factors as well?
The history of Gold prices has been studied carefully by dis-interested academics, as you might well surmise, since it is an important subject. The correlation of gold price with the rate of cost increases, or the CPI, for instance, is very low. It doesn't correlate well with any single monetary statistic, such as "money supply". The price is set by a public market. Psychology and mass psychology are very much in evidence here. In general it will serve you well to have a vision, or world view, of the market as a psychological phenomenon and not any kind of mechanism. All price movements are self-fulfilling prophecies, or exhibit positive feedback, falling prices cause prices to fall, and vice versa. This should be clear. Over a sufficient time period Gold and Silver do tend to measure the purchasing power and supply of the fiat monetary units. But this correlation is subject to large deviations for significant lengths of time due to excursions in human opinion, (on the part of market participants). On the subject of price increases vis a vis money supply; what the actual "money supply" is is very un-clear. The Fed doesn't actuall know, either. And secondly, there is known to be a fairly long and variable time delay between the initial act of "printing",( for the sake of simplicity), and the consequence in purchasing power. It's also definetely true that most of the so called "new supply" of monetary units have gone to making up paper losses in Banks and other institutions; and that this suction hole continues in the form of "de-leveraging". Gold prices sometimes do very well during deflation; basically this is a public market that responds to fear and uncertainty, as well as, or in addition to perceived losses in purchasing power of the fiat unit. I like the article posted here; I agree with the author. It's more likely that metals prices will continue to up-trend; but it's important to note that silver was available in 2002 for exactly the same price at which it made it's bottom in 2001; in other words it might be another year before this uptrend resumes. The market can resolve it;s over-bought price at present simply by remaining in a narrow trading range for long enough to justify a new up ramp. I put the possibility of significant further deterioration in gold and silver prices at less than 25%.
There are no disinterested parties, academic or otherwise. They all come with preconceived notions and prejudices. Especially about gold! That's like disinterested priests studying Jesus.
i really fail to see how you say you are not seeing inflation.
Are you living under a rock?
I use to be able to get 1/2 a cart of groceries for $40 just 3 years ago.
Now it costs me $40 for a basket of groceries.
Ok sure if we take Bernake (excl food and fuel) or Biden (if you buy chicken instead of beef, your cart of grocies costs the same!) take on inflation then yes there is no inflation.
The other thing people miss, inflation is always and everywhere a monetary phenomenon (Friedman). PRICE inflation is only ONE aspect of monetary inflation, it is the most visible (and FINAL) part of inflation.
But what is more insidious is what happens on the road to price inflation. When monetary inflation starts, who gets the money first? the banks? and what do they get to do? they get to buy goods and services at OLD (pre-inflation) prices. THAT is how the federal reserve steals wealth from the middle class and gives it to the rich.
e.g. say there is $10 trillion in circulation. Say there is $1 trillion worth of gold/silver on the market. If the fed issues another $10 trillion, certris paribus, the price of gold/silver (and everything else) should double. But if the Fed gives ME the $10 trillion, I get to spend that $10 trillion and buy the $1 trillion worth of gold/silver, by the time inflation happens and gold/silver doubles in price, I own all of it and still have $9 trillion leftover.
Sure the velocity of money right now is very low which is helping damper the visible inflation, but the problem with profligate money printing is all the fed is doing is adding more kindling to an already dry forest. Once money velocity takes off it will be UNSTOPPABLE, Bernake will NOT be able to 'raise rates in 15 minutes'. Every 1% rise in rates by Bernake would add $150 BILLION a year to the deficit. Going from 0% where we are now, to the long term average of 5% means we'd pay an EXTRA $750 billion in interest ALONE, PER YEAR, that would take the deficit from $1.5 to $2.2 TRILLION a year, yet congress can't agree on $1.2 trillion in reduced spending (not cuts) over the next TEN years. Bernake would not be able to raise rates without severe political issues.
"They get to buy goods and services at OLD (pre-inflation) prices. THAT is how the federal reserve steals wealth from the middle class and gives it to the rich."
Excellent point. But are we really talking about pre-inflation prices or pre-bubble prices?
Bubbles are pumped up with excessive credit and then deflated by withdrawing credit, which is all the purvue of the banking system. I don't consider bubbles to be the same a inflation.
I'm still not convinced hyperinflation or even inflation is the big problem. Here's why. As has been stated many times, credit expansion has brought about inflation where and when credit is spent, as in the housing market and college educations. M2, the measure of money base including currency, savings and demand accounts, money markets and CD's, is between nine and ten trillion dollars. Of that, only about one trillion dollars is actual currency, some circulating and some in bank reserves.
Against that, due to fractional reserve banking, the US has a total of $53 Trillion in debt, public and private. It's not as if there was ever $53 Trillion in currency that has been moved from creditor to debtor.
Theoretically, credit is issued to an entity based on the perceived future income or revenue of the borrower to be sufficient to service the loan, not on the amount of money available to lend, as the Fed is there to supply enough liquidity to keep interest (cost of lending) low. In return, the economy gains production and assets that would not exist at the moment without lending.
The problem is there is no way $9 Trillion can pay off $53 Trillion in debt. What must happen, obviously, is the economy must grow enough that future-generated money base can exceed current debt. At some point it must be earned from future production and invention, which may or may not happen in amounts sufficient to prevent default on that debt.
Deflation follows default, as creditors who do not receive the expected debt service adjust the way they use money to the new scarcity. They spend less and lend less, at higher rates. What are the chances that the American economy is building up to an eventual massive default? It seems inevitable to me.
So, say it all grinds to a halt one day. Your bank is closed, but savings therein are probably gone anyway. What cash you can get from the banks (pennies on the dollar), plus what is in your wallet, is all the money you have in the world. Suddenly, cash is the scarcest commodity, and much if not most is locked in banks or is overseas. This is a similar argument as the scarcity of physical metals coming to light once the paper markets collapse. That's why I don't see a federal default leading to the destruction of the dollar as many believe, only instead to its hyper-scarcity.
Where we are today, I feel, is that public borrowing has replaced the loss of private borrowing to maintain the prices of assets that are bought with credit. Once that is done with, the inflation created from the $50+ Trillion credit elephant passing through the asset bubble python will lead only to deflation as both public and private credit contracts. Against all that, if money printing is, in the end, decided to be the way forward, it would have to be printed faster than credit contracts simply to maintain price stability.
So to think about what doubling the actual money supply would do to metals you must consider whether total credit has increased, decresed or remained the same over that time period. Printing to pay off debt would increase money supply but would at the same time eliminate debt dollar for dollar, which doesn't seem broadly inflationary to me. Especially if that printed $10 Trillion or so was in lieu of borrowing another $10 Trillion from abroad to spend into this economy.
Not living under a rock but on a rock (island of Hawaii). Maybe I am already shell shocked by the high prices here. Anyway thanks for your input. Always appreciate the level of knowledge here.
Having been to the Big Island twice in the last three years, for a month each time, I can fully sympathize with your "shell shock" at Hawaiian prices --- and I say that as a resident of Alaska! Thank God, at least, for the great farmers' markets in Kailua, Hilo, Pahoa and Waimea, at which I bought most of my food (staying in a friend's guest house, I was able to do most of my own cooking).
But wasn't it a pain to have to put up with Higgins?
LOL!
Being able to cruise around the island in Robin Master's Ferrari more than made up for it.
PS: Magnum (ostensibly) lived on Oahu, not the Big Island.
Good post!
And it must be pointed out that if long-term interest rates were in fact to rise to 5%, then we would merely ADD (not "pay") $750 billion to the federal debt --- which would by itself add an additional $38 billion in interest payments to that debt the following year, in ADDITION to the additional $750 billion in total interest payments on the debt the next year, in ADDITION to the baseline $1.5 trillion being added to the debt each year through the federal budget deficit --- and so on and so on, growing exponentially each passing year.
In effect, the Fed, in combination with the federal government, has painted itself into a corner in regards to interest rates --- they can ONLY remain more or less where they are now (i.e., unrealistically and economically damagingly low), or else the whole Ponzi farce finally blows up in short order.
Those buying gold because of 'printing' are going to be sorely disappointed -as they can never print enough to make a dent in the amount of credit destruction on horizon. Those buying gold because they see currencies eventually failing are in the right, but they will not enjoy their lives when gold buys equiv. of $10,000 in todays terms of stuff. Because they may not sleep at night and there may not be food, medicine, etc.