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Gold Becomes Inflation Hedge as Bond Markets Manipulated by Central Banks
By EconMatters
Gold Break-Out Coming?
An interesting dynamic taking place in financial markets on Thursday as Gold saw some substantial buying interest up $22 to the $1295 an ounce area. It is obvious that inflation is picking up considerable steam as we just blew a 0.4% on the CPI Inflation Breathalyzer and believe it or not the 10-Year Yield is at 2.57% yield, welcome to mispriced and manipulated markets in the Central Bank manipulated markets era that we call free markets or bubbles galore.
Hot Philadelphia Fed Survey
At any rate since bonds are being bought and only sold when there is risk associated, i.e. Employment Reports, Fed Meetings, 10-Year Bond Auctions, Inflation Reports and as soon as those are finished the buying frenzy continues now that risk to their positions has subsided and they can load up on more free money chasing that Yield Carry Trade.
Read More >>> The Inflation Era Has Arrived!
However, look at the Philadelphia Fed Survey – hot on allaccounts, for example the prices paid component was 35, this is an extremely hot reading so there is definitely hotter inflation in the economy than the Fed is willing to admit. The small business optimism metric is near record highs, and job creation is really percolating right now all fueling into the hotter inflation equation.
Gold as an Inflation Hedge
Therefore Investors need some way to hedge their portfolios to this trending inflation concern, and since Bonds are massively manipulated they are desperate for inflation hedging vehicles and believe it or not it looks like Gold is starting to serve as this substitute for inflation hedging. Whereas investors were weary of using Gold due to its lack of Yield and the Central Banks raising rates; however since they are stalling on that front for the time being, maybe investors feel more comfortable using Gold for this inflation hedging purpose.
Read More >>> The Macro Story As Told by Gold, Copper and Oil
Gold Highly Manipulated Market
Gold has its own problems with manipulation, it was almost a daily occurrence that traders would make a small fortune smashing through stops every 7:30 am trading day like clockwork, and there are many other manipulative trading techniques utilized that require an entire article just on that subject alone! Financial markets really are as wild west as ever, and they will only get worse once the Central Bank Shenanigans come back to bite financial markets and volatility shoots off the charts!
Danger Zone for Retail Investors
I would recommend that retail investors in equities move tocash right now, not bonds but actual cash! Sure retail investors will lose out to inflation eating away at their investment in real terms, but this is still a better outcome than losing one`s principal in addition to the nefarious hit of inflation on one`s principal. But the Federal Reserve and the Bank of England can only stall for so long in raising rates substantially from here, and given that many asset prices are artificially supported like equities and bonds through cheap liquidity, investors are potentially risking boatloads of principal trying to keep pace with inflation and the risk reward profile has a negative expected value over a substantial investment window.
Read More >>> Why 401K Investors Should Move To Cash
Gold is a Commodity - Commodities by Nature are a Highly Volatile Asset Class
However pay attention to Gold and see if this uptrend continues and the reason for any strength will be due to it being used as an inflation hedge, I don`t recommend retail investors using Gold via the futures market as an inflation hedge because there are just too many crosscurrents going on in Gold, and the Gold futures market is highly manipulated, and I will just leave it at that!
Maybe place a small bet in the Gold ETF GLD, but don`t get carried away, actually purchasing physical Gold would be my preferred method for using Gold as an inflation hedge, but stay proportional to one`s overall investment allocation and do your due diligence on the best physical storage of value and vendor.
Don`t go putting 35% of your investment funds in some Gold investment vehicle, it’s not the holy grail as some would have you to believe, it is a freaking commodity for goodness sake. And commodities are called commodities for a reason, and more investors have lost their shirts investing in commodities than bad beat poker stories.
If one is a trader that is a different story, let the technicals be your guide to staying on the right side of the Gold trade. I will do a follow up later on the technicals in the Gold market, but for now this is just a heads up to what is potentially going on in the Gold market and worth paying closer attention to going forward.
Inflation Worries & Portfolio Hedging Instruments
But inflation is starting to bust out on investor`s worry list, and it is only going to get hotter for the remainder of the year, and some financial vehicle will be required to fill this inflation hedging purpose if the bond market being more manipulated than any other market by central banks fails to serve this role for investors who need to hedge the inflation risk in their portfolios.
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Take a look at a long-term chart of the Gold price and what you will see PLAIN AS DAY is a multi-decade "cup-and-handle" formation that targets a price of $2,500+ per ounce. The recent 3-year decline from the 2011 interim high represents the "handle", which has now been completed.
Monthly GOLD MACD is crossing up first time from last 15 years....ITS A SIGN?...no ,ITS tHE SIGN¡
It is presented in this article as a thesis that a basic investing decision, which is rational, can be made between the return to be realized on Bonds, and the return to be made on Gold, (or Silver), owing to it's "price" rising as the underlying currency devalues. Permit me an observation. I hope to disabuse you of this idea that Bond Yields can or will ever accomplish the purpose of off-setting the on-going devaluation in the underlying currency known as "inflation". This will never happen. The people you are buying the bonds from are the same people who are devaluing the currency. Why would they pay you as much or more than the actual underlying devaluation in the form of Bond Coupons? Notice please that this is not in their interest. Notice also that they have all the power, here; you have none. If they seem to have made a mistake and allowed you to buy some bonds that appear to pay an adequate compensation for the devaluation of the currency; they will correct the mistake by increasing the rate of devaluation of the currency. Is this not obvious? Gold, (silver), "prices"; on the other hand, which are actually the valuation of the currency are not under their control to any significant degree over any significant span of time. International parties will enter bids to buy Gold and Silver and cause "price" increases, eg. anounce the "new value" of the currency to the world. This cannot be avoided by the "monetary authorities" that make "bonds" available. they wish it could; but it cannot. This process of "re-evaluating" the currency by the votes of tens of thousands of financial entities, world wide, does not go smoothly; it is subject to spurts and lags, caused by human distraction and enthusiasms. Do not allow this to confuse you. Whereas a Silver Quarter will still buy a gallon of gasolene now, fifty years after the quarter was issued in 1960, a one quarter interest in a "dollar", ie: .25cents; is essentially worthless. There is no bond, nor any bond investor wise enough to make their 1960 money buy what it did in 1960. To quote an authority on the subject, Franz Pick; "Bonds are instruments of guaranteed confistication". How could it be otherwise? If your retirement horizon is 7-10 years in the future Silver is the only rational choice as a store of value. It's important to understand what you're trying to store; buying power. Not "numbers".
My inflation hedge. Only 45% Gold. The rest. 45% silver,5% lead, 4% long term food storage, 1% fuel and misc.
Always have a bit of cash stashed, but look for sales and forward buy future necessities as much as possible. One thing is certaian. The vast majority become poorer as time proceeds. John Williams maintains 90% chance of hyperinflation starting sometime in 2014. Hedge accordingly.
http://seekingalpha.com/article/2276753-bank-of-englands-quarterly-repor...
And yet the miners are still going bankrupt and Germany is content to wait seven years for the return of theirs...
FAIL.
EconMatters,
Please check out a dictionary to discern the difference between 'principle' and 'principal' - I find I treat the article with less respect if the person writing it doesn't know the correct spelling of words, particularly where they pertain to the subject matter being written about.
DavidC
I offred mine editing seervices, fur frea, but i hivint herd back frum them yit...
you should change your Username to EconKinderGartenMatters and get back to shorting oil, at least that was amusing.
fyi, cashing out all your 401k could take three weeks, be prepared!
It took me two years ;)
"Gold is a commodity"??
Hahahahahahahahahahahahahahahahahahaha... :)
@ Kreditanstalt
I agree:
Hahahahahahahahahahahahahahahahahahaha... :)
it is a freaking commodity for goodness sake
some never get it, amazing, truly amazing!
I'm not going to downrate you , because technically you are correct. That being said however, gold is a commodity with many attributes one of which is MONEY!!!
The gods find gold more valuable than money.
Stack On
these dbags should apply for a job on Fast Money
how econmatters even eixsts is a mystery to me.
there is no worse inflation hedge than gold. FOOD is a good inflation hedge! LAND is good inflation hedge! DOLLARS are a good inflation hedge...but not gold. (We've had a vertible tsunami of inlfation since the Fed was created. Gold has not moved all that much relative to other prices...especially land.)
Gold is a hedge against DEFAULT...it's price will not nor will it ever drop "to zero" as Wall Street did in 2008. So cut the bullshit! We all look bad here when Econmatters speaks! this guy is a DIPSHIT!
If housing prices start to get hammered again there's no way to stop the defaults from ramping up again. THAT is why gold moves...not because of "inflation" but what comes AFTER the inflation. It's also a great hedge against "freedom fuckers." In short "being safe in the privacy of your own home." This internet thing is CRAZY. It's a recipe for social chaos and anarchy. The best hedge against the fact that it can't be turned off is gold.
"DOLLARS are a good inflation hedge"
What? How can you hedge against the inflation of a currency WITH the same currency being inflated? Dollars would be a great inflation hedge in an economy where we were using poker chips as cash, but it is dollars that we are using.
If you just hoard dollars to prepare for dollar inflation, you'll eventually accumulate enough to participate in the inflated economy, but that isn't hedging. You aren't beating the inflation, and you can only get the dollars at the price of the day...Inflation destroys the value of those dollars, so you are losing money just by 'buying' them.
I don' think you've thought this out.
FAIL! What is the price of oil in ounces of gold since the creation of the Fed?
Disableledvet.
I think you are wrong about zirp and nirp. Interest rates CAN STAY AT zero forever, or at least as long as it takes to transfer all real assets to a small group of people. We are in their end game and now the target has migrated from trophy assets to ALL assets. So yes interest rates will stay low for as long as that takes. They are in control and they are borrowing the money to buy the worlds assets. I hate to write this but we need to be part of the ponzi to survive and prosper.
"They are in control and they are printing the money (out of thin air) to buy the world's assets." - FIXED.
"Borrowing" would suggest the money is in the bank already and the banker's are paying the saver interest and doing their due diligence.
They aren't and haven't been for quite some time.
If you had been born in 1913 and were given the choice between two monetary units as a gift - gold coins or paper money - which would you choose as a savings tool? Hmmmmm, let's see... 10 one-ounce coins were worth $200 paper money then. If you still had those coins in your possession today, they'd be worth roughly $13,000 paper dollars. Would you rather have those old pieces of paper - still worth their measly $200 - or the gold coins?
Inflation hedge explained.
If you took your $200 1913 dollars and invested them in something paying 5% over the lifetime of the investment, your $200 would have turned into $27,615.
They would not have paid 5% over time, and you would have been taxed on the profits!
Gold under your bed would not have been traceable and not taxed.
The symbiosis between the banks and the state is just that, one rats you out and the other steals what you have. The reserve bankers are treating you like milking cows. Gold is their arch enemy and it is your best weapon! Stay out of the banks, they are the main reason for the monetary shit we are all descending into.
http://inflationdata.com/Inflation/images/charts/Inflation_Trends/inflat...
Gold is a store of value, maybe the "something" that was invested in crashed during the great depression, ever heard of it? PM's will always hold value, the same thing can't be said for stocks.
Exactly, Agstacker. We're talking about PMs & real estate as STORES OF WEALTH... not chips to be gambled in the stock market.
absolutely correct. As a hedge against inflation it sucks...it's the preservation of ones capital base where gold is valuable...it's a hedge against financial assets which will be worthless in the not so distant future
Yes...it is to preserve the purchasing power of what you HAVE should the prevailing currency lose value or fail. But it is a long term thing...In the short term, the price swings wildly out-of-wack with the prevailing currency, but I'd think that this would be a sign of how unhealthy that currency is becoming. So right now, gold seems cheap in our dollar system. But that isn't because gold itself has become "cheap", it's because the currency is sick, and isn't accurately reflecting true values anymore. And if your mindset sees the gold as the commodity, and the currency as money, it would appear that the gold has gotten "cheaper" when in fact it is the CURRENCY that is gyrating in value, NOT the gold itself.
Gold shows its true value when your currency fails. Measuring its value against a sick currency is misleading, but it is human nature to see the value of stuff in terms of the currency you are currently using.
dollars, inflation, -- good????
food, inflation hedge?? sure, if you grow it yourself!
I think you missed parts of the course,
DOLLARS are a good inflation hedge...but not gold.
Truly amazing...Truly amazing...
When DOLLARS are that which are being inflated then just how can they be the hedge against it?
That demonstrates your total lack of understanding about hedging.
Hint: You have dug yourself into a hole. Stop digging.
You've got the 'dollars' part very wrong.
The fact is the internet thing can be turned off.
Some quicker than others,
But all things go;
Zero
it is a freaking commodity for goodness sake.
Gold is not a commodity, it's money.
And commodities are called commodities for a reason
And gold is called money for several reasons ...
and more investors have lost their shirts investing in commodities
Like pork bellies?
than bad beat poker stories.
Ace on the river, one time.
Gold is BOTH a commodity AND money! Yes, that's right...'New Shimmer' is a floor wax AND a dessert topping!...
Actually, trying to put gold into a specific category makes you miss the most important feature of gold...it can segue from money to commodity and back again with relative ease. As long as the currency is healthy, the values will stay more or less in tandem. It is only when the currency starts to become sickly that the 'values' appear to decouple. And when the face value of that currency dips below the value of the commodity you are MAKING it out of, then you have to start doing stuff like making your coinage out of crap metals, and taking your paper off the gold standard.
But whenever that has been done historically, it is the GOLD that starts to become more 'valuable', and the fiat currencies that become worthless. Of course, to the folks actually using the currency, it appears that the opposite is happening because they use the currency value to calculate the 'cost' of gold, which misleads you as to it's REAL value. You are calculating its value using a dying currency, at a time when that currency is becoming increasingly worthless as a judge of value for anything.
Today, the "price" of gold as measured in US dollars is irrelevant, and just gives folks the impression that it is declining in importance.
"Yes, that's right...'New Shimmer' is a floor wax AND a dessert topping!"
& 'Quarry' the mined breakfast cereal could soon cease to be one of the other great SNL spoof commercials & become a 'health-giving' product, thxs to fracking.
Loved them both. Thxs for the reminder. Nothing to do with gold as I went all-in earlier in the year. Popcorn please :)
I miss those old SNL's too..."Save the liver!", Bass-o-matic, Irwin Mainway...good times...
"Don`t go putting 35% of your investment funds in some Gold investment vehicle, it’s not the holy grail as some would have you to believe, it is a freaking commodity for goodness sake. And commodities are called commodities for a reason, and more investors have lost their shirts investing in commodities than bad beat poker stories."
What a load of bullcrap. "Investors" haven't lost their shirts... "traders" have when swapping gold and silver like stocks. If one buys the PMs simply to store their monetary wealth, they'll ALWAYS win out in the end... especially in these insane financial times.
35% is actually a prudent or even conservative amount to have in your portfolio right now. C'mon... if you KNOW that inflation and higher interest rates (they can't go lower) are coming, then common sense tells you this is the time to stock up on physical assets. Gold and Silver are merely the most convenient ways to store. Of course, real estate is also a good option, but you have to pay taxes on that... not so with PMs.
" "Investors" haven't lost their shirts... "traders" have when swapping gold and silver like stocks."
Exactly! Trading is NOT investing! Investing is a relationship that grows and develops over time. Trading is speed-dating, trying to cram as many 'dates' into your evening but never taking any of them home.
Both have their pros and cons, but they are NOT the same at all.
Show's you how well the central banks, especially here in the States have been at encouraging people to forget what real money is. Job real done, but can they feel yet secure to give it the George Bush Jr's infamous "Job Accomplished" shout?
the exact pivotal point of weakness of this article.
The reason why gold is being manipulated is not because it is a commodity.
It was and is being manipulated because people view it as an alternate currency to the dollar.
When the manipulation fails will it become more or less an alternate currency to the dollar?
Exactly
It's a commodity AND a currency, it always has been. But when an economy misbehaves, gets ahead of itself, TPTB have to break that link, or gold's value as a commodity will reveal the weaknesses of the currency. They MUST be decoupled to preserve the illusion of value of the currency, and to keep people from seeing just how badly their currency is being devalued.
But historically, all of those currencies that did this have failed. Today, in many places in Europe, old Roman crap-metal coins turn up regularly when folks dig a new garden...they're about as valuable as the rusty nails and glass shards they are buried with, and people will go "Oh, look at that...", and give it to the kids as a curiosity.
But if they should happen to come across a gold coin, they know they have found something of some value. I keep a bowl full of old coins, most no longer being used anywhere...All nearly worthless. Some are quite lovely, (and I always appreciate the artistic touch) and were quite common in their day. All were used by people just like me, to buy their little products, stash in their little piggy banks...they are all 'dead' now, worthless even to coin collectors...a bowl of historical artifacts. NONE of them are made of gold or silver.
Then I consider my jar of 'scrap gold'...in it is an old Edwardian earring, broken and hopelessly twisted, tossed aside by its owner as junk no doubt. But it is 18k junk, and still has value today just for that reason. In fact, it has MORE value than that entire bowl of old coins.
It puts the whole "What's gold really worth?" argument into perspective for me.
Well stated.
I have some old Roman coins from around Vienna. Not gold but old...
For me, gold is a stupid hedge - meaning, it's a hedge against all the stupidty in the world, which by my charts, is nearing all time highs.