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Axel Merk: Got Gold?
Submitted by Axel Merk via MerkInvestments.com,
While some continue dancing, the music might have already stopped: are we already in a bear market in stocks? In this context, we study past bear markets to see whether gold may serve as a valuable diversifier for what's ahead.
Are we in a bear market?
A "bear market" is frequently defined as a decline of at least 20% in the S&P 500 index. Trouble is that by the time pundits provide their seal of approval that we are indeed in a bear market, the index has already lost 20% from its peak. Many of them will likely have told investors to buy the dips all the way down.
In our August 4 Merk Insight Coming Out - As a Bear!, we argued that a bear market is about to commence. Mind you, that was just before the surge in volatility. At the time, some wondered why a "currency and precious metals" guy like myself would have anything to say pertaining to the stock market; just about a week later, there were numerous media reports blaming the currency markets for turmoil in the stock market. Go figure.
We are not going to repeat the entire bear case again, except to summarize that we believe we have shifted from an environment where investors think the glass is half full to one where the glass may be half empty. This is largely induced by the Fed's attempt to extricate itself from its 0% interest rate policy; that's because, in our analysis, just as the Fed's extraordinary policies have fostered complacency, any attempt to move away from it may cause fear to return to the markets. There are numerous implications, but one of them being that investors may be shifting from buying the dips to selling the rallies as their focus shifts from chasing returns to capital preservation.
How to prepare for a bear market?
In some ways, whether or not we are in a bear market already is not the most important question. Instead, investors may want to ask themselves whether they are sufficiently diversified to be ready for the next bear market, which will eventually come.
In the past, we have extensively discussed ways to diversify in an environment where many assets have been rising in tandem. We believe the tide has turned, and prices across a broad spectrum of asset classes may be at risk. We have discussed alternative strategies such as long/short strategies in the currency or equity space that each come with their own set of opportunities and risks. Today, we zoom in on gold. This discussion is not meant as an endorsement of any one tool to be used in a bear market. Instead we look at it in the context of the toolbox former Fed Chair Bernanke used to talked about: just as the Fed has had its toolbox, investors may to have one of their own to be ready for what may lie ahead.
Gold as a diversifier
A key reason we look at gold as a diversifier is because of its low correlation to the equity markets. Correlation is a measure of how two securities or asset classes move in relation to each other. There are times when the price of gold moves in tandem with the S&P 500; other periods, when it moves in the opposite direction. When all is said and done, over the past 45 years, the correlation between the price of gold and the S&P 500 is zero.
Aside from correlation, the other key ingredient investors may want to consider is the expectation of future returns. That's a sticking point for many, as this shiny metal doesn't earn any interest (unless leased out). Having said that, investors also typically use cash as part of their portfolio, often with little motivation to earn interest (indeed, interest on cash is also earned only when it is put at risk by, for example, placing it in a bank account, although government insurance schemes might mitigate that risk).
Being a brick also holds a key as to whether investors may want to have a positive return expectation. Notably, if investors do not get sufficiently compensated for holding cash, the price of gold might rise in relation to cash. In his September 23, 2005 investment outlook, Bill Gross reminded us that there can be long periods, even decades of "financial repression," periods where yields are suppressed below the level of inflation, i.e. when real interest rates are negative. Quoting research by Rogoff and Reinhart, such a period persisted from 1930 to 1979 and only ended when Paul Volcker ‘turned the bond market upside down.'
It was in 2009 that real interest rates turned negative again. Clearly, appreciation periods in the price of gold does not exactly coincide with periods of negative real interest rates, as the price of gold bottomed out years before official inflation data suggested real interest rates were negative yet again. We raise this point as we do not see how the U.S., Eurozone or Japan, to name a few, can support positive real interest rates for extended periods given their government debt levels.
Add to that our belief that the Fed all but promises to be "behind the curve," and we see gold as a diversifier that warrants a closer look. A central bank is considered to be "behind the curve" in raising rates when inflation is picking up, but rates are slow to rise, thus driving real interest rates lower. And this "promise" comes from our interpretation of the Fed's own words as FOMC statements have stated since the spring of 2014 that even as inflation and employment move back to what historically has been considered normal, rates may continue to be lower than what has historically been considered normal. We feel the latest back-pedaling by the Fed due to ‘global uncertainties' is just the latest step on the journey in what the Fed also refers to an attempt to be ‘slow and gradual' in raising rates. Gold in past bear markets
To make this clear: we don't think investors should only consider gold, or any other specific investment, only for bear markets. That's foremost because, as indicated at the outset, it's usually rather late in the game that one figures out that one is indeed in a bear market. If one is not sure of the timing, rebalancing one's portfolio during good times, i.e. taking chips off the table when markets rally, may be worth pursuing. Having said that, when times are good, it's just too tempting for many to coast along without thinking about the next downturn. That's why we are here to wake you up.
Having said this, we think it is still very useful to see how gold, or any asset for that matter, performs when equity markets perform poorly. Below, we zoom in on bear markets since 1971, as that's when Nixon severed the last tie the greenback had to gold; to be precise, he "temporarily" severed those ties, allowing the price of gold to trade freely. While some might argue the price of gold might have had some catching up to do, please also keep in mind that the S&P 500 had just emerged from a bear market that ended in May 1970.
So how has gold performed in past bear markets?


During the five equity bear markets, an investment in gold came out ahead in four of them. The one notable exception is the November 1980 through August 1982 equity bear market, where the price of gold not only also declined, but had rather significant declines.
One might be tempted to shrug that period off by suggesting Janet Yellen is no Paul Volcker. While we know of no economist who believes a Yellen Fed will raise rates as much as former Fed Chair Volcker did, the question, in our view, is whether interest rates may become significantly positive. We've already answered that question above for ourselves, but encourage everyone to draw his or her conclusions. After all, if rates do go up significantly from here, the price of gold may be dragged down. And we might want to add that just because the price of gold performed well in four out of five bear markets since 1971, there is no assurance it will in the next one.
Outlook for gold
In our assessment, part of the reason the price of gold has done well of late despite the expectation of higher rates is because the market may be gradually pricing in that the Fed will indeed be "slow and gradual" in raising rates, whereas a more decisive Fed "exit" might have been previously priced in.
In plain English, we think the market may have gotten ahead of itself, accepting the narrative that the Fed will raise rates as many other countries ease. We believe the market is gradually realizing that the Fed is far less flexible than it hoped it would be, thus causing a re-pricing of expectations. We don't think this will necessarily change the Fed's "desire" to pursue an exit.
This re-pricing of expectations may have profound implications for the U.S. dollar, and with it, the price of gold. At the same time, the "desire" to pursue an exit may keep investors in the ‘glass is half empty' camp for some time. In fact, given the run-up in equity prices in recent years, we wouldn't be surprised if the looming bear market, if it indeed becomes one, will last at least as long as historic bear markets. Got gold?
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Got gold?
I own a gold gift card from Stockpile.com. Does that count?
Hey why the downvote? I was just trying to be funny...
A lot of whiners on ZH these days
They got their feelings hurt with your 'micro-aggression'
@ uSD BULLshit Paper Fiats POG...
In cANADA it's Already @ $1580. To buy An Ozs of GOLD...
In Cyprus, many people regret that they did not have time to buy gold, before their bank deposits were sudden robbed.
Many people from Cyprus, Greece and Israel are buying gold right now in KDG Gold Cyprus - the only one normal coin shop in Cyprus.
Is that canadian dollars?
headhunt the best from the belly laugh of the day
thank you
Their paper gold can't match the physical heft of your tangible, plastic card. Merely the value.
I would bet that the Fed considers the price of gold when they think about raising rates. When gold gets higher they are more likely to raise. They don't want a complete collapse of the dollar. At least not yet.
PM's are a great thing to have, but they aren't a magic cure or fix. Fixing the economic problem will reguire us to go back to square one. I've collected a lot of things that will have trade value when money starts requiring wheelbarrow's......
Whiskey/liquor, ammo, heirloom seeds, sugar, salt, dry beans , rice, painkillers, etc etc etc My PMs are my hedge fund.
There is lots to admire on the periodic table. :)
Fella could have himself a pretty good weekend in Vegas with all that stuff.
https://www.youtube.com/watch?v=F5qqfsQGYus
Don't forget friends and family since "lone wolf" types won't last long. All my neighbors know me as the nice guy down the road who always has time to stop and talk or give you a hand and can fix almost anything. I believe in society and civilization, but I've studied history and know it takes work to make it true.....
Have cabin 8 mile hike off the closest dirt road with 365 water supply,plentiful hunting and one hell of a view. My circle of community knows where to run.
Nice list; all with long shelf lives. I may nibble on the analgesics now and then...
Gold and silver are the most undervalued assets on the planet, at least in USD terms.
Gold is up sharply in Rubles, Rand, Real over the last decade. Like 400-500%.
That is because the belief in those currencies has fallen.
Their currency is worth significantly less, so in percentage terms it looks impressive but in real value not so much.
-1
That is a completely retarded comment.
Math
Jan 2014 Ruble was 33 to 1 US dollar, gold was 1200US/ounce, it took 39,000 rubles to buy an ounce
Today Ruble is 63 to 1 US dollar, gold is 1170US/ounce, it takes 73,000 rubles to buy an ounce
Unless you are trading FX, your comparison is meaningless
It will not be how much gold you get for your dollar, but how many FRN's you get for your gold.
Martin Armstrong says the complete opposite."Gold will go up with the markey or down with the markt"What gives?
See my comment below. I tend to agree with M.A. in the sense that gold is another form of fiat.
Physical gold is literally anti-thetical to fiat! Now if you're talking "paper gold" then yes. But that's just a financial instrument created to obfuscate price discovery and suppress gold prices.
what does gold do in a depression?
it shines!
Proven way to increase luck in trading https://www.youtube.com/watch?v=XGv2YIO1jZQ
Like it or not Gold is a commodity which acts as another form of fiat. Period. Those who tout gold in the face of a complete fiat meltdown are not looking at history. When fiat dies it takes ALL forms of fiat down, ALWAYS. In most periods the only form of currency left was food. You cannot wish for fiat to die and expect one form of it to retain it's worth, it doesn't work that way and never has. Unless THIS TIME IS DIFFERENT.
You misunderstand what a fiat currency is.
DEFINITION of 'Fiat Money' Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that themoney is made of.
So how can gold be a fiat if you are receiveing the commodity in hand?
So what history am I ignoring?
Every time a fiat has imploded, gold has held its psycological human value.
A currency is a medium of exchange used to represent LABOR. Nothing more, nothing less. A fiat currency is generally held to be a derivative of a monitary currency of exchange, i.e. a derivative of labor. Since gold has been used as a currency it is nothing more that another derivative of labor.
Please bee specific in instances where fiat has imloded and gold held it's "psychological value". Historically that is. (i.e. such as naming a gold/silver currency that was minted immediately after the roman empire emploded? or when the Ming dynasty crumbled in China? during the feudal age in Japan after the implosion of the monarchy?)
Ever hear of Weimar? What an idiot. What we have right now is in fact global Wiemar!
The entire world cannot deliver on all those paper/digital claims!
simple as that!
" Global Wiemar" WFT does that even mean? It's nonsenical on it's face. Are you saying that capital flight will cause global hyperinflation? How exactly would that work? Since debt is the basis of money (i.e. US Dollar.....US Treasury issues bonds -> Fed buys bonds -> Banks use bonds as collateral to create money out of thin air) and when said debt unwinds, dollars will evaporate since there is not enough real currency to cover said debt. How exactly will that cause hyperinflation? Hyperinflation is an excess of currency, would you not agree?
Read this whitepaper to understand what REALLY happened to Germany. You might actually learn something other than regurgitate what you've been told on Blogs.
http://eml.berkeley.edu/~webfac/gourinchas/e281_f03/adalet.pdf
"Hyperinflation is an excess of currency, would you not agree?"
No, it's a complete loss of confidence in the currency.
This guy doesnt understand that promises from liars (fiat currencies globally) are worthless and gold is gold.
Simple as that
RIPS
Excess currency-------->loss of confidence in value-------------->hyper inflation
Maybe he can see it better this way.
Every fiat collapse in history has resulted in gold going to infinity. This guys either a shill or a complete idiot! Look up the price of gold in Zimbabwe dollar terms for fucks sake it's quintillion a per ounce at least and really nobody would ever exchange gold for Zimbabwe dollars or Weimar marks etc etc!!
If all FIAT is doomed to fall to it's intrisic value of ZERO, then why express the worth of gold in FIAT? What is the commodity/industrial worth of gold? I'm not arguing that gold is worth nothing, but I'm also not arguing that it's worth everything. Intrinsically, copper and silver have more commodity/industrial "worth" than gold.
My utlimate point, is that if your ONLY hedge against FIAT COLLAPSE is gold, you may be sorely disappointed.
The short line for dimwits like you is this: in a collapse, gold & silver (i.e. elements that cannot be multiplied to infinity by some moron's simple wish) will retain some intrinsic value which will allow them to be exchanged for stuff that people need to live (like food, water, accomodation, tools, etc). Fiat money, stocks, bonds, and all paper products which can be generated in unlimited amounts with minimum effort, will see their value falling to ZERO. Enjoy your "investments" !
cannot be multiplied to infinity by some moron's simple wish
Wait.....what?
Rome did not have fiat currency, they had base metal coinage, which was still in use after the fall of the empire.
Like I said, you have no idea what FIAT is. And are confusing it with actual commodity made/backed MONEY.
Roman royals debased the currency over the course of years, removing increasing more gold and silver and replacing them with base metals. Why is anyone who doesn't even know this posting anything on this site?
Roman royals debased the currency over the course of years, removing increasing more gold and silver and replacing them with base metals. Why is anyone who doesn't even know this posting anything on this site?
When you attack gold as well as fiat you seem to attack the use of a medium of exchange for trading labor altogether. You attack the use of money. The frictional costs of barter are astronomical and render complex exchanges of labor seperated in time, space, and counterparties impossible to execute at all.
So the question is not whether people will use money. The question is what money they consider the best to use. You are right, gold has no magical power imbued by divine entity. Gold just makes for a vastly superior form of money in a context where fiat dollars are being printed.
If you think some other medium makes for a better money than gold, then make that case. People have tried many things over the millenia and the commodity more people have found to offer the best qualities for use as money is gold.
If you think people will stop using money altogether, and walk away from all the profits they can earn trading with money and revert to barter, that's contrary to human nature, and nuts. Read up on how inmates resort to using cigerrates as money in prisons because in that context cigarettes are the best available medium of exchange.
Fantastic reply. You are proof that it's not tenure at ZH that matters. It's knowledge and the ability to make a cogent argument. Thanks for providing both!
A generous and heartfelt compliment if I've ever received one. Thank you kindly, sir! And may I say, a reflection on your high caliber that you brave pen such amidst these snark-infested waters.
It refeshing in these dark times to see civility.
https://www.youtube.com/watch?v=WibmcsEGLKo
Actually I wholeheartedly agree with you. We're saying the same thing in a different way. In a barter society, which is what comes after FIAT failures, hard assets such as "cigarettes" become "money". I'm just tired of the "gold is the only money" meme, it's not.
What history books are you reading? Why don't you source something before spouting absolute nonsense. Ever heard of the Weimar Hyperinfatlion? Why don't you look that up and see if gold became "worthless". How about the first time fiat currency was ever introduced in human history in China during the Song Dynasty. They printed that currency into oblivion but gold and silver still held their value and was prefered.
Learn to read more closely, and take a look at the history of world coinage. BTW it was the Ming Dynasty that imploded China's currency, and when that happened, just in Japan, the common currency became food. After the fall of the Roman empire there were no newly minted coins for 100's of years. You are regurgitating gold seller's BS.
I can't source a lifetime of history, reading, and gathering knowledge. It seems you demand a source without providing one yourself?
The Weimar inflation was caused by capital flows, a nice whitepaper exists here: http://eml.berkeley.edu/~webfac/gourinchas/e281_f03/adalet.pdf
You can Google Weimar Hyperinflation and you can Google Jiaozi currency (the first iteration of Chinese fiat currency). Song Dynasty, Yuan Dynasty, Ming Dynasty all had their versions of fiat, they all died. So I don't see your point. None of the fiats issued during each dynasty had their value survive to the next. Only the value of gold and silver did.
Don't give me that bullshit of "After the fall of the Roman empire there were no newly minted coins for 100's of years". Rome didn't fall until Constantinople was conquered in 1453, and Constantinople became the new Roman capital after Constantine moved it there in 330AD. Rome would continue issuing the Gold Solidus as official money after the 4th century until it began to be debased in the 11th century.
You can't source anything because you have none.
If you are student of China's Ming Dynasty then you are well aware that the Gold/Silver ratio was 5 to 1 in the 16th and 17th century.
Gold is the ultimate money, but a smart man also owns silver. (I'm still on the fence about bit coin, I don't like the electronic aspect, but for digital currency I like the setup).
I'd trust it as a digital currency if it was backed by a physical commodity. Until then its fiat just like the rest. You can even mine it in imagination land, fiat. I prefer the new road to be actual money.
Coin clipping Bitchez
Got Silver...flagging
https://www.tradingview.com/x/mIXnDEhI/
Someone should mint a Gold Kardashian Koin. The demand pull from the Duck Lips crowd would be biblical.
Shape it like a big gold ass.
They will kill each other over it like a pair of new Jordans.
Someone mentioned the word duckface to me the other day. I didn't know what it meant and googled it, pretty funny stuff. A guy at work got divorced a while back and decided to throw his hat back in the ring and got a match.com account, said all the pics from the women on the site have that same look.
Silver price is very close to smack down resistance area. Will they do it again? Nobody is smacking down the premiums!
I think the slap down jar is getting empty.
Unlimited Naked Shorts isn't the name of a gay Porno Flick, and it's hard to 'empty a jar' when all you need is some paper and ink to print up some empty promises to something you don't even own.
Not a very useful article, IMO. Too big an effort to draw correlations where none exist to try and explain forward movements in gold, up or down that are impossibe to forecast. Its really much simpler. One's wealth should be spread out in various places; PMs being just one of those places. Having all your welath stored in PMs is akin to having all your wealth stored in stocks, or bonds, or property, and one sided bets like that never work. And if they do work, you're lucky.
PMs are an active hedge against currency debauchery and interest rate manipulation/suppression. Doesn't mean, however, that one should sell the farm and load up. But, at least have the presence of mind to recognize that diversification means protecting one's wealth not just within a particular asset class, but, across all asset classes.
I know - not the biggest revelation. But, keeping it simple, keeps the individual from losing their mind trying to figure the optimal investment strategy. Because, in a rigged market, which is what we are in, I don't think there is one.
Today while I was listening to the radio, the presentator was talking about the news.
Mostly that's the bullshit 15 minutes but suddenly he was quoting the zero interest rates and some talk about the fact that never happened before in the last 6000 years and that in ancient greece appolo would have punished the people if they ever would have tried to manipulate the demand and supply logic.
And then the funny part.... that if you made it non interesting for people to save and punish them that they will run to gold and hide their wealth which would implode the system.
And that's the first time that I've heard something like that on public radio! Ever!
I've noticed it also. Seems to creep up more and more.
Another Gold rant?
This re-pricing of expectations may have profound implications for the U.S. dollar, and with it, the price of gold.
When you Mises Monks try to take control after the reset and install your "gold is money" fiction, how are you going to answer the following two questions:
When you arbitrarily increase the value of gold several orders of magnitude and cut it into smaller and smaller pieces to get around the obvious "there is not enough of the stuff" argument:
Leprechauns love gold, that's good enough for me.
I think that gold has some bullish momentum for the short term. Especially now that gold broke out of the declining trend-channel that it has been in. Furthermore when gold is able to close above the previous top of $1,158.50 it will add to the bullish momentum. However, I myself am not a profound believer that gold will soar up a whole lot from this point onward, especially with potential negative revearsal on the RSI, and an expected wave down on the Elliott Wave in the near future.
tripstrading.com/2015/10/12/gold-brea...
Hey dumbfuck it already closed above $1158.50, today closed at $ 1168.90 up $5 bucks !
Here is why gold prices are so low:
http://michaelekelley.com/2015/07/20/dear-fed-plz-raise-gold-price/
http://www.zerohedge.com/news/2015-07-09/are-big-banks-using-derivatives-suppress-bullion-prices/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Yo gilnut.....
Cat got your tongue?
During the gas wars of 1963, you could buy a gallon for ~.25. Today, I can still buy that gallon of gas for the same quarter. What's up with that?
Yeah gilnut, I'm talking to you
Oh your gunna really confuse him if you try to tell him that a silver quarter isn't worth 25 cents but is $2.87 currently if we valued it by its commodity value which is its actual MONETARY value not its FIAT value.
JUST FOR FUN:
Marshall McLuhan (of 'Global Village fame) held that as a media speeded up, at some point it's Message (MASSAGE) flipped.
I was thinking of inflation as the speeding up of the velocity of fiat money...and at some point it hits 'hyperinflation', in which case the message flips and poof! ....its no longer a medium of exchange, cause no-one wants it.
...just sayin...
gold it always gets plenty of comments, I have a little, to me it's always going to be worth something, I also have a food stock, means of water, and power, anti-biotics. and other medical needs, for what I consider enough time for me, and mine to stay safe, and a means to protect it.
I really don't believe it's going to $5-10,000.00 per oz., UNLESS, the brics, aiib, erruo-asia, and other countries co-ordinate trade agreements, pacts, or treaties independent of the value of the fed. dollar.
the fed. dollar will never disappear, but it's advantages of being the petro-dollar is doomed, and it will only be the fed. dollar.
Germany went along with the international bankers m.o. same as forcing Americas default 10-12 yrs.later, and why Germany, nor america will never see any gold reserves they portably have. it was the first asset taken by the international bankers, also any currencies that were redeemable in gold were destroyed.
oh,the key factor to Weimar hyper-inflation was the boe, forcing Germany to pay their war reparations in gold, or fx, which meant usd's, they knew they had no gold, and buying usd's at an ever increasing inflated fx market, + 26% of their exports sales.
so if you want the truth, international bankers, "the fed., boe" created hitler, and the death of 80,000,000 humans.
if you think a few million dead in me bothers them, you're crazy.
for not being worth nothing it's always the first asset seized, or stolen in troubled countries.
I think that if/when presented with a viable alternative to the US dollar and US hegemony, half the world will stampede into the Yuan. Perhaps the dollar will linger as countries that are stuff with them try to recover value, but it will never be king dollar again.
_
A community of support and respect is worth more than gold, start growing a community in your neighborhood, right now.