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Guest Post: Gold and Economic Decline
Submitted by Gregor Macdonald by way of Chris Martenson
Gold and Economic Decline
Reminiscent of the media's coverage of oil in the 2000-2008 period, gold has produced a multi-year stream of thoughtless op-eds and repetitive storytelling. If readers can recall how many times the bull market in oil was dubbed "over" leading up to the crisis of 2008, then gold has been in a "bubble" for at least as many years, if not longer.
The seminal piece to this genre was Willem Buiter's November 2009 Financial Times of London essay, Gold - A Six Thousand Year Bubble. That piece would be used as a template by other, lesser writers in the two years that followed. Consider this 2010 tracker-chart of opinion, emanating this time from New York:
By 2011, one wondered if the large, national newspapers were capable of offering something more thoughtful on gold. This autumn, we were finally treated to an intelligent, non-derivative analysis, from an unlikely source: Paul Krugman of the New York Times.
Gold and Hotelling
Paul Krugman's partisan columns in the NYT have been a great disappointment to me in the years since he took the job. However, I encourage readers to read Krugman's earlier work. An easy entry to Krugman's theoretical view would be to simply watch the video of his 2008 Nobel Prize acceptance speech. His work on Trade was (and remains) brilliant. By contrast, his newspaper work as a columnist has been a constant source of frustration. Krugman has used his NYT column regularly in service to a political partisan cause, forgiving liberal figures for the same transgressions with which he has attacked conservative figures. Moreover, his advocacy of a generalized, untargeted Keynesian response to the ongoing economic crisis has become quite tedious.
But that is a subject I wish to handle in a future report. For today, I want to address Krugman's ability to blow past most of his peers when he chooses, freely addressing just about any issue that captures his attention. His recent posts on gold and economic decline offer a clarifying portrait of our current dilemma. Also, I suspect that fewer have paid attention to these partisan-free -- or as Krugman calls them, "wonkish" -- postings, and frankly, I'm grateful to have his valuable insights.
A source of constant disagreement with regards to gold's price behavior is whether the overall condition of inflation or deflation provides the most fertile ground for the yellow metal. By creatively using the work of Harold Hotelling, however, Krugman is able to tease out of gold's decade-long run -- and also its post-2008 run -- a rather different interpretation for gold's strength.
But first, a word on Hotelling. In an essay at The Oil Drum earlier this year, I addressed the implications that Harold Hotelling's views had for gold and the overall environment for investment in a post-credit-bubble world. The following is from my March 2011 post, Gold, Infinite Debt, and the Problem of Capital Storage: Has the Hotelling Moment Arrived?:
The migration of capital, between the world of natural resources and the world of finance, has been addressed by any number of thinkers, one of the more compelling being Harold Hotelling. Writing in the Journal of Political Economy in 1931, Hotelling proposed that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds were greater than simply leaving that resource to appreciate in the ground. So, given Hotelling’s theory of resource extraction, what has happened to gold production since the year 2000? Does the chart (the decline of gold production in the face of strong prices) reflect geological and cost limits to increasing gold production, even as the price rose from $250.00 to $1000.00 per ounce? Or, has there been some moderate yet gathering decision on the part of global gold producers to extract gold more slowly? After all, why extract gold to merely convert gold into paper currency, beyond the need to pay for the cost of production and provide, say, a dividend to shareholders? In other words, at the rate at which the price has been rising, why hurry to extract the gold?
In contrast to my take on Hotelling's theory, in which I consider the prospect of gold from a producer's point of view, Krugman's recent post looked at the price of gold from an investor's point of view. By doing so, I think Krugman is broadening Hotelling's theory, possibly beyond Hotelling's specific intent. But I don't mind. I think Krugman is spot-on in his analysis. In his terrific September 6, 2011 post, Treasuries, Tips and Gold, Krugman writes:
So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resource because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest, so you get a price path that looks like this:
Krugman probes further, after considering the drop in real interest rates:
Now ask the question, "What has changed recently that should affect this equilibrium path?" The answer is obvious: There has been a dramatic plunge in real interest rates, as investors have come to perceive that the Lesser Depression will depress returns on investment for a long time to come... What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter. Investors need less price appreciation to have an incentive to hold gold.
But if the price path is going to be flatter while still leading to consumption of the existing stock — and no more — by the time it hits the choke price, it’s going to have to start from a higher initial level. So the change in the path should look like this:
For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation.
While there may be a time when gold becomes protection against hyperinflation -- indeed, the nature of hyperinflation is ultimately behavioral, triggers quickly, and is hard to forecast, in my opinion -- I think Krugman is quite correct in pegging the outperformance of gold to the dearth of other investment opportunities. The present dearth of other investment options is illustrated by very low interest rates in nominal terms, negative interest rates in real terms, and a highly volatile environment, not only for equities but for most global currencies, thus rendering gold a least-worst investment option.
Krugman's view matches my own that gold is a winning investment in a period of economic -- nay, systemic -- decline. Contrary to the misguided view that gold is in a bubble, gold actually becomes, and is continuing to become, the more stable asset in an investment universe that has entered secular contraction. It is the deflating of the credit bubble and the instability this presents on a chronic basis to the financial system that have attracted capital to gold.
Gold, meanwhile, also has flaws. Primarily, it continues to travel and exist in a dollarized world. As we witness every so often, speculators and traders in gold often have to sell their gold positions as they retreat into their own respective currencies. Usually this is to cover other obligations, often denominated in US dollars. Until gold, not the US dollar, becomes the marker or the numeraire for transactions and trade, this oscillation in gold's price behavior will continue. That oscillation will be large enough, understandably, to make many observers conclude that gold is merely a speculative asset and (once again) nothing more than another bubble. As always, misunderstanding provides opportunity, and I marvel at how little commentary has been made on Krugman's lucid insight. He has clearly explained a very solid thesis for why gold will likely outperform -- and again, for free.
Betting on Decline
It is probably less the case, however, that Krugman and other Keynesians fully accept a resource-constrained model of the economy. Accordingly, I suspect Krugman, while currently frustrated with a political process that won't stimulate enough through government spending, does not foresee long-term decline for Western economies. I, however, do.
In contrast to the Keynesian view, I don't believe further stimulus programs will have anything other than a humanistic impact on Western economies, reducing the pains of adjustment. Pain reduction is not to be dismissed, just recognized. Equally, austerity programs suffer from the same analytical failure (or hope) because they, too, rest upon the idea that new resources -- energy, mainly -- can be brought forth cheaply enough to kick-start economic growth in the OECD. Also, austerity programs propose that the system can endure a liquidation phase and then recover. I'm not so sure. In fact, I doubt it very much.
Regardless of which model of decline we choose to employ, I think it makes sense just to mention a few here. There is Joseph Tainter's concept of diminishing returns to complexity, in which cultures and economies eventually have to devote so many resources just to maintain their elevated level of complexity that they enter decline. There is Frederick Soddy's concept of debt growth that outpaces the ability of the economy to repay it because it can no longer convert natural resources fast enough. I would also reference Jared Diamond's work on collapse, which probes history for real-world examples of systemic breakdown. And finally, there is the more mainstream work of Reinhart and Rogoff, which, using a comprehensive study of financial crises, suggests that the Western world is in for a long, tough slog.
That our current moment in the West maps so well to these models is fairly clear now to me, though this is still news to most. However, if one accepts these decline models, then the efficacy of gold is crystallized as a wager on further decline.
And that is the subject I take up in Part II: What to Expect for Gold in 2012, in which I update the chart of gold production over the past century, further explain my interpretation of Krugman's view, and suggest some ways to hedge or partly protect one's self during a time when a destabilizing transition has taken hold over the financial system.
Click here to access Part II of this report (free executive summary, enrollment required for full access).
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Yeah — Krugman is a sad case — the new economic geography does a lot to explain the eastward drift. It's a shame Krugman drinks the Kool-Aid on virtually everything else, starting with IS/LM ("rates will NEVER rise without recovery"), continuing through "goldbuggery" and ending with alien invasions.
The real bubble is the US Treasury bond — and (by proxy) Paul Krugman's ego.
http://azizonomics.com/2011/10/14/the-great-treasury-dumping-game-begins/
I hate to agree with Krugman, but his point is somewhat valid.
There are many people out there that are buying gold for less then the right reasons, i.e., only price appreciation.
But as a "gold bug?" I'm OK with that.
However, the truely smart money does not buy gold to make money but because they have money!
This recent war drum over Iran tells me OweBummer is applying Paul Krugman's "alien invasion" theory to jump start this economy.
This explains why Krugman is full of shit: Why the State Demands Control of Money
The statists can rationalize in a million ways why a statist monopoly on fiat currency benefits society. So can pedophiles too. Paul Krugman, nobel-prize winning pedophile for the state.
Krugman fails again. Like the typical liberal, he is congenitally blinkered and short-sighted (not to mention just plain short), and refuses to see the big picture.
Sure, Krugman's academic analysis may partially explain gold's price rise today --- but what about the period from 2001 to 2007, when gold rose MORE (in percentage terms) than it has since 2007, prior to the falling interest rates? Just how do you explain THAT period of rising gold prices, caveman Krugman?
+1 akak...
In addition, although the long flat-lining of the Japanese economy is mentioned, Krugman didn't explain why gold was not rising when priced in Yen during this period.
Of course, no mention is made of how PMs have been constantly manipulated downward by highly levered paper PM trading...and what the prices of PMs and other commodities might be if the downward pressure were to be removed.
Of interest also is the fact that the purchases of gold by central banks was completely left out of this 'explanation'.
I could add more but in the interests of mixing another J&B on rocks...
Interest rates did start falling after the dot com bust. They went up again from 2005 - 2008 but then went down again to the current rate of near zero.
Krugman's still a dick though.
gold bug, silver bug, pm bug
Krugman = irrelevant
Gold = priceless
This article is really only for those who price Au in dollars, so... not me. Please include people like me who hold Au as insurance in part two. You don't sell your insurance just because you wake up feeling good one day.
Wealth preservation,wealth insurance and the fact that there are 100 x as much paper gold vs. physical... What's NOT to like?
Gold as the next numeraire is explored thoroughly by FOFOA:
fofoa.blogspot.com
Gold is the wealth preservation regardless what Euro-FreeGold fantasy popping outta the FOA camp.
Krugman needs a quiet dark corner to cry in.
... or a tall lamp post and a short rope...
Or maybe it is because people understand the fiat born of bad paper debt needs an asset to balance it just as much as printed unbacked fiat needs an asset to back it. And the people that realize that realize gold is the only financial asset that has ever worked for that backing. We have been on and off the gold standard countless times. Ths is not America's first failed paper currency. No matter how much unbacked paper you print or don't print, it will continue to lose value and there will never be enough of it.
We don't need or want a gold standard, we just need the de-commoditiztion of gold in the minds of the majority of savers. That process is ongoing.
http://freegoldobserver.blogspot.com/2011/10/asian-crisis-follow-up.html
Keep writing your blog Spitzer. I enjoy reading all that I can about freegold, a concept that is severely not understood in the investment world.
60% of mortgage holders have less than 10% equity..so when housing declines another 10%, then? 60%+ mortgage holders will be underwater which is too much and the dollar game will be over. Housing will decline 70%-80% from here in real terms and silver will rise 2,000%-20,000% from here in real terms so sell your house and buy silver before everyone else does.
You have to admire the infallibility of his uber-Keynesian argument, tho. If $2 trillion fails "Well, we didn't do enough." If $3 trillion fails, "See, I told you. We needed more." If $4 trillion fails, well, you get the picture. Hardly a testable, rational scientific approach when you cannot be proven wrong, but Krugman is hardly rational, so it fits him well...
Go Go Go, Fee Fee Fee - Gold Fever!
My friends ask me at what price I will see my PM and I explain to them that I am not holding it to make a profit in current dollars, but as insurance against the coming collapse. Then their eyes glaze over and they stop asking me those kinds of questions. Yikes!
I get the same response. They have not yet made the jump from Planet Stupid.
Re friends and family looking at (thinking of) buying gold but not doing so, I think what may happen is that the rush to gold when the price reaches a very high level (say $3000 - $5000). They will have missed out on getting gold at bargain prices and will have to pay so much that it will hurt.
They wont buy - they will look for a cheep alternative - SILVER!
Diversification in precious metals is a good thing. So is buying some lead and lead delivery systems.
And, of course, bearings are OK with 52100 steel...
Depending upon the application, I find hybrid ceramic steel to be much better performing than 52100, but hey Do, lets keep this site to basic PM's and their shine.
DoChen my Friend.(<;
Had this EXACT conversation with a Major air carrier pilot today.
He makes out very well, and he said I DO NOT KNOW WHERE TO PUT MY MONEY!!!!
I said, XCDSD, HOW many times have I TOLD you over the past 5yrs, what you MUST do.(even if it's just 10%)
His pat answer and the same one I get from everyone that I USED to try and convert, is GOLD is too expensive!!, I stated, you said the same thing when it was $975.00,$1100,etc,etc,etc.
IF you think it's high at $1650's,wait till it hits $5,000+. You know I am right,you have missed out on a substantial increase in profit (if you were to sell).And you still have 100% of your wealth at risk.
And your still arguing with me over the same thing..
He said, it's too expensive, I think I will start buying Silver.....................I said, GREAT!!,at least you will not wind up totally broke(if you have enough time to buy enough to REALLY save your bacon).
"His pat answer and the same one I get from everyone that I USED to try and convert, is GOLD is too expensive!!,"
So tell him to buy gold miners; they're cheap.
You just discovered another economic function for gold: a hedge against gullible questions (and the fun that comes with it)
Dear IC - I hate to point this out, but are you sure all those friends who know you have PMs are going to stay friendly when the economy collapses and their families are hungry? May I suggest that you keep it to yourself my friend.
Friends whose eyes glaze over when you start to talk about something as personal and important as the coming collapse seem to me the kind of friends whose eyes would glaze over as they stab you repeatedly as you stand between them and your stash on a dark and stormy night...
Not only gold. Suppose we place all possible investment alternatives in a basket. Returns on investment items that are easily & cheaply produced would start from the left of graph. Such things as paper money, firewood, hay, financial derivatives, fresh water and, as we progress toward the right items more difficult to find: metals, oil, certain food items, manufactured products in demand and finally GOLD. Investment returns have been depressed, as the article states, on all these items but gold is not the only beneficiary. Gold is, however, perhaps the most scarce and difficult to produce of these. Even so, what about returns on copper, rhodium, neon sign makers, choice real estate, luxury watches and jewelery or rare collectibles? I venture to say that these also will outperform most other asset classes for the same reason Krugman's analysis says gold will do so...
Regarding ancient coins (rare collectibles), you are correct. I have seen the more common, quality Roman issues increase 150% in their dollar value in the past few years.
bullshit on the collectables; i have nice watches, JLC Reverso, 1999 Brietling Chronomat (two tone) and neither has went up in price; new ones are more expensive, but the price on my used watches is less than I paid for them.
I love watches.
I collect stamps too; and they only ones that have went up in value are the chinese stamps. American values have leveled off; the will probably fall in value.
I use to collect Morgans, and silver dollars; they haven't really went up in price; not compared to rarity. melt-value is about what they went up on. they only coins that have went up in value for me are my rare 1999 panda (now values at 3k) and my 2000 panda (now values at 2k). but those were new when I bought them.
I also have ancient roman coins; same price as when I bought them.
Patience...they are long-term value holders and nicer things to keep than paper dollars. I have a lot of coins too - old H.K. silver, many Morgans, Canadian 5 cent silvers and a lot of 19th-century stamps - good scarcities bought at auction. I honestly cannot say what they would sell for now because I don't intend to sell any of them anytime soon. They are long-term. That said, this melt-up in quality assets is supposed to be happening NOW...maybe I was thinking multi-million-dollar artworks, which HAVE done well.
0
There is a big difference between collectibles and investment grade rareties. I have noticed the increase in ancient coin prices as well over the last few years. It is dramatic on higher end pieces. The common ancient coins haven't realized a fraction of the gains seen in true rareties.
Just because something is collectible does not mean it is rare or will go up in value. My coin collection has apreciated considerably but I bought only a few coins in the best condition I could afford. My shop brings in lots of mint product which we buy basically for melt. We don't even attempt to resell it as it is cleaned out and sent straight to the refinery.
I am told that most postage stamps haven't seen much appreciation. We had a Tissot 14K pocket watch, 1876 with alarm, pristine condition and it sold for $2100. A few years ago that watch would have easily fetched $5000-$6000. Goodness knows what sport cards are worth these days. I know several antique vendors and they are realizing less and less on their goods which, paradoxically; are increasingly difficult to source.
In the case of the watch, it is a shrinking market (as far as new buyers go). Not sure why postage stamps and cards aren't doing so well.
Buy "collectibles" for their intangible value. You might get lucky and see them appreciate. Investment collectibles is an oxymoron.
PhD. Be Damned.
Not buying it.
http://stockcharts.com/freecharts/perf.html?[COMM]
Maybe Krugman is indeed brilliant re economics, but less so at the nexus of politics and economics. I am surpised that Krugman makes a positive case for gold, convoluted that it is.
Physical gold is a great investment for three main reasons:
1) It is the thousands-years old wealth preservation.
2) There are approximately 100 x paper claims on gold vs. the actual amount of gold.
3) Gold is the best insurance against bad policies and behavior by .gov.
EDIT:
It also is very portable, in that a handful represents a lot of value.
No, I am not selling mine, maybe GIVE it away at the right time.
Gold is......................Golden.
I completely disagree with your reason #2. That's completely irrelevant, and you missed the most important reason: gold is honest money.
It's cool! Gold IS honest money too.
DCRB... " I am surpised that Krugman makes a positive case for gold, convoluted that it is."
I believe that Krugman is attempting to make this particular case to avoid the much more frightening case; ie, people are scared of fiat currencies and the soverign bonds issued by central banks.
Krugman damn sure doesn't want to say that!
Somehow, I see gold, maybe even less than an ounce in physical form.. being worth more than Paul Krugman himself
To many it already is!
Anybody else notice that on down days, zh commentary falls off a cliff? Would like to see Tylers revisit the subject of ip addresses. Pretty sure that at this point ZH is required reading at all the major banks and that most of the readership now is comprised of MSM affiliated trolls checking in to see if their lies are going to stick....
A fun thing to do is average the account age of posters on up days vs down days.
fuu... I'm not sure that I believe the 'account ages' of some recent posters on ZH...
Some of the 'account ages' are 2 yrs 24 weeks and yet I have never seen a post by them before... and, some are obnoxious azz hats that have to have the last word on any subject... even when it's obvious that they don't know what they are talking about.
Somehow there are some 'new trolls' that seem to have account ages that make them appear to be long term posters here.
I found a comment in the iDied thread by a 69 week old account with only the one post.
Hmmmmm........fascinating. It sounds like you may have discovered somebody's stash of shill/interloper accounts.
It would be interesting to learn:
1) if there are a lot of accounts that have existed for a year or longer and have not yet posted a comment and, if so, how many of these end up posting as shills/interlopers;
2) if any patterns exist regarding the age of shill/interloper accounts when first used to post a comment;
3) any correlations between topics and shill/interloper activity.
Please note that my interpretation of shill/interloper does not include comments from entertaining and, yes, valuable contributors like Hamy Wanger, Million Dollar Bonus, etc., but rather pertains to those nauseating toadies whose posts display just how threatened they feel by the information revealed on ZeroHedge.
fuu, the fourth stooge...
"Hmmmmm........fascinating. It sounds like you may have discovered somebody's stash of shill/interloper accounts."... Plus the 50 week old account with ONE post...
.........................................................
Maintaining the integrity of ZH isn't our job. If there are posters here with fudged account ages it is the responsibility of ZH to ferret them out and take what action they (ZH) deem necessary. Or, as the old saying goes...'I didn't cause this problem and it's not my job to fix it.' If ZH does nothing about this it will effect them in the long run by loss of long term posters seeing themselves suddenly overwhelmed by a flood of new posters with old account ages... and definite agendas.
One action we might consider taking is to call out some of the older account ages with no posts until recently and ask them why they have not posted before... and why they suddenly post numerous time on a single thread when they have never posted before. At minimum that will cause them to pause to fabricate an excuse.
Thanks for responding...
Gold seems to be following its 31-year commodity cycle and it appears to have peaked, for a while. Credit defaults can chew up money faster than the Fed can print. The Fed is at a juncture: should it attempt to keep turning a deflationary deprssion into a hyperinflationary crack-up risking government instability, as usually happens historically with hypernflation? My cycle model chart tells me no, not yet. 2015-2016 +/- is a likely turning point.
http://econocasts.blogspot.com/2011/10/cycle-models-gold-long-short-term...
If you are suggesting that this 31 year commodity cycle will turn smoothly through the destruction of the currency then I caution you, because it doesn't look good for that trade. Cycle investing is a valid approch, but every trader who uses cycles is aware that they don't always work. The destruction of our global economy just might be one of those times.
If you read the other comments, you will see a recurring theme. People are holding gold for insurance because history shows that paper always goes to zero and gold will never, ever, go to zero. You can short gold now and make money from the trade, but you have to steal from your insurance stash, and you never know when that insurance is going to be suddenly, and without warning, needed.
Beware the Fimbulwinter!
OK Thought experiment: If Herman Cain were elected president and 9-9-9 went into effect, it would seem that a black market would develop to avoid sales taxes. Would people trade in this way with USD cash? Would people use gold and silver coins?
No more than they do today to avoid sales taxes. Remember, they will have substantially more to spend due to no withholding on their monthly pay. Anyone avoiding the 9% national sales tax would be in the same boat as someone today who avoids paying his income tax. This 9-9-9 is an interim measure along the way to the Fair Tax, which has been mischaracterised by virtually all of its critics.
Gold/silver coin usage is a separate issue.
Titan Uranus
This 9-9-9 is an interim measure along the way to the Fair Tax, which has been mischaracterised by virtually all of its critics.
Is a Trojan Horse.It will cost everyone more much more than Cain has said.
Once you go black, you never go back.
"once you go black, you never go back"
"once you go black, you lose your credit."
Once you go black, you forswear credit.
it is of a verity that the ascendance of gold is a sign of economic decline and instability. as a grand champion of gold, i am so largely for the reason that it is in severe and permanent backwardation contrary to the paper price of gold. just look around at all of the dancing bears on street corners offering to buy gold. backwardation is a sign of serious economic collapse. the fiat world - not gold - are in a bubble.
on the positive side, gold (plus silver) are proper disciplines on fiat systems, and in fact should replace such infantile relics.
... er ... economist PhD. blather? - Ned
My plumber says China's RMB will be the next rereve currency or RMB + some basket back by silver, gold, platinum, oil and a tad of copper.
I told him, "you can't eat gold"...he invited me to his weekley BBQ of steak, lobster, Mahi Mahi resulting from selling 1/25th oz gold every two weeks.
Will the Chinese RMB replace the Almighty Dollar?
See:
http://www.youtube.com/watch?v=YPXncTuwFIEWhy the f*ck would anyone 'replace' one failed paper reserve currency with another... unless they had to? Let alone the currency of China, which has done everything it can to reduce the purchasing power of its fiat.
The USD got where it did mainly through two happenings: Bretton Woods in 1944 where they essentially told all the non-axis powers - 'You peg to us, and we peg to gold' and, in the '70s, the establishment of the USD as the currency to pay for oil when the US made Saudi Arabia (and various other oil producing states) protectorates.
It's extremely unlikely that similar circumstances will favor China in the same way. Once the USD is history, we're onto gold... unless the NWO wraiths manage to enslave us with SDRs.
Triffin Dilemna, bitchez!
BigJim
Once the USD is history, we're onto gold.
Impossible, the quanities needed are simply not avilable, and will never be availble for that purpose.
(IF your talking actual phy use).
There will be, must be a paper/digital currency to replace the USD,or your likely more correct on the SDR's.
Whoever has phys, after the shithouse burns, (unless black marketed), will never get to use it,or profit from it.
No way we get a shot at by being wise, and prudent, we will get a ticket on the ELITE train.
1% Club, won't ever let it happen, bcause it has always been about control, and always will be.
An artificial value will be put on them, and you will have a choice............turn in for NEW monetary units, or keep them and pass down to the gens ahead of you.( it would/could work, IF they put a reasonable value on it),and we had a bullet proof STABLE system again.
The reason for a Gold Eagle having $50.00 on it, is if they called it in, they only have to reimburse you face value.
(They tax you differently of course, but hey, that's THEM).
IMHO, and FWIW.
Where does your plumber shop to get deals like that?
Where I'm from that steak, lobster and mahi-mahi would cost a fuck pile more than $66.00
What's it gonna be?
Revolution 2.0 (UP arrow )
zionista WWIII (Down arrow).
I give you one of each.
Yep, they will try to use WWIII to delay Revolution 2.0. I don't think they comprehend that it could hasten the occurrence of Revolution 2.0 as much as it could delay it.
People are idiots.
In a real economy, not a keynesian joke of an economy, the price of oil FALLS as the economy grows. Because not only is there an increase in demand for oil, there is also an increase in supply.
http://freegoldobserver.blogspot.com/2011/10/asian-crisis-follow-up.html
I'm guessing you don't buy into all that 'complex' peak-oil sorcery, then?
No. With all due respect to allot of gold bugs that are.
You can even make plastic from natural gas.
he writes of: "...the overall environment for investment in a post-credit-bubble world..."
on zH? Hahahaha!
Krugman is like Dave Kingman. He can hot many, huge homeruns. But his batting avergae is .200.
Kong...those were some fun years...before the steroid cheaters.
Gold has always been the premier store of wealth regardless of interest rates.
When you use volumetric gains as a store of value, you are left with more money that you have to re-invest. So even if there is no inflation, you are competing with everyone elses aggregate savings.
http://freegoldobserver.blogspot.com/2011/10/asian-crisis-follow-up.html
Today is evidence that "Paper" controls the gold price, not "Physical"
The amount of "Short Gold at Market" order tickets is unlimited.
The amount of people interested in physical gold is finite.
Wasnt that also true when gold was at $250/oz?????????????????????????????????
There was a far greater deficit for silver when it was < $5 an ounce.
http://www.investmenttools.com/futures/metals/index.htm#silver_net_surplus_deficit
@ Robot
The amount of physical gold is finite. And, perhaps the key, is that the FLOW of gold (how much physical gold is moved around by purchases/sales) is very low compared to the stock of gold.
The amount of "paper gold" is estimated to be 100 x that of physical gold.
At some point, the paper gold markets will break, and gold will soar... Wait and see!
---
Of course I DO recognize that you are trading oriented / short-term, which is fine, while most of us who LIKE gold are thinking longer term.
And the number of people interested in your hyper-short-term, pro-status-quo, pro-corruption, pro-fiat blatherings, RobotLemming, is infinitesimally small.
Its cheap credit that controls the price of commodities. Buying and selling what isn't there and never will be effects what is and will always be.
Its cheap money and easy access to money thats the problem.
Those with easy access to credit compete for goods with those who do not.
Its not inflation of money its the inflation of credit. A cash first and only world is better then one of credit.
It doesnt matter if ithat money is gold, silver or printed paper it must be rare and hard to come by so those with it will make better disisions.
Companies should not be allowed to offer more then a base number of shares, debt or credit. As should all government if you want stibility of the market place.
Maybe after a hard crash and liquidity drys up to nothing people will realise its better that way. Or maybe they will just continue to create endless liquidity, credit and the stupid that goes with them.
" These are the children of man: Need is the girl and Want is the boy. Beware them, but expecially this boy for on his brow is doom."
-Ghost of Christmas presant.
What a fitting, kick-ass quote
+1
Robot Trader,
The amount of people interested in physical gold is finite.
Agreed, but when the tide turns, and it will............your point will be moot.
The corrupt oligarchy has left us no choice but to prepare for both shortages and hyper-inflated prices, as well as a financial and income collapse resulting in goods prices down perhaps 90%.
Maybe the hidden downside benefit of gold could be that goods prices collapse 90%, while AU $ value only drops 45%: gold drops to $800 say, but buys five times as much.
Perhaps that's all that's left: Buy gold, and be careful what you pray for.
I've told my hard working children how sad it is for them to have been given such a dilemma by the decades old, corporatized, greed-oriented elected leadership.
Yes Franz, and not many people bring up that point. We very well might see the paper price of gold drop as we hurtle towards the precipice where fiat dollars suddenly drop to zero. That will be painful to everyone who doesn't realize that their gold will retain more value than anything else, thereby making one wealthier. By way of example: If you could return to pre-Fed days before a dollar was depreciated by 98%, but you but you could only take 50% of your 2011 dollars with you, you would have only half as much paper, but would be exponentially wealthier. The worst case scenario for gold is watching paper prices plummet and experiencing that pain prior to paper prices decoupling from physical. It's worth that pain in my estimation because this system cannot withstand such pressures.
That was the worse case scenario. The best case scenario is that central banks are buying gold and have every incentive in the world to ramp prices to the sky when they have completed their plans for the new system. Every fiat system in history has failed, to be replaced with a PM backed system. The only thing that is different this time is the failure of all major currencies at once in a global system awash in a Sargasso Sea of interlocked derivatives. That changes everything. To populate their reserves with gold rather than USDs, central banks are going to need more gold than is physically available, so they will have to ramp gold prices to the moon. That means anyone with gold will be wealthy, and anyone without will take a haircut.
Good luck telling every union and organization who recives a dollar salary and benifits, they have to accept a 90% cut.
No one would want to the messenger. So it will be unannounced.
Good article. Where has the New York Times and its business section been as gold has gone from under $300 to over $1900? Krugman occasionally makes honest statements, but as a Princeton alum, he will always be loyal to Bernanke and other such alums and the elitist biases that are certainly part of that tradition.
I'd include "The Economist" rag in there too.
So Krugman's "gold is the least shitty thing to own" thesis is called demand for money. People are demanding a better store of value. Even if you believe it's not about inflation expectations, gold can be held on to if you're looking for a superior money unit. It's the re-monetization of gold. It's highly liquid, uniform, not easily diluted and maintains a relative store of value. For those parking cash on the sidelines because they don't have inflation expectations, would just as likely stick excess cash into gold.
Of course, quality of money is such a foreign concept to the Keynesians that it's difficult for them to fully grasp why people would ever want to purchase it. Then again, savings is the enemy to them so who knows.
"Lesser depression"? It aint' over til it's over.
Thoughtful article Mr. Macdonald. Well done. I agree with your point that Mr. Krugman does not see the limits of his emphasis on 'pump priming'. The banking system needs a reset. There is simply too much debt, and as we all know, that which can't be repaid, won't.
Nothing new in this article. The charts and introduction of hotelling is nothing more than the 80's re-play where Volker set "real interest rates" above inflation, tamed the bond market and subdued gold.
And today Krugman is getting so called "insights"
The great thing about gold (I have a massive bias with about 25% of my assets in gold) is that you can buy it for any number of reasons. In fact some of the best reason to own gold is those fat tails and black swans that can be inflationary or deflationary. Alternatively you may just simply like gold and percentages, PE, rate of return etc... simply stop being a factor.
You are correct - there are indeed many reasons for owning gold. There is certainly nothing wrong with simply liking it:
http://www.dilbert.com/2011-10-01/
Sometimes what you don't hear is as telling as what you do. Why have there not been more mentions of central banks purchasing gold? Why hasn't the IMF continued its sales of gold or started another round if they are complete with the last?
I'd guess it has something to do with not wanting to drive the price up too high to fast and possibly so the short players have time to drive the price down and make their "money" killing longs.
Sometimes what you don't hear is as telling as what you do.
The dog that didn't bark?
Paul Krugman can eat a bag of dicks.
After they have been left out in the hot, hot sun for a few days.
Floating in a Haitian cesspool. With a migraine. During a cholera epidemic.
In the middle of a swarm of angry wasps.
Hey Mr. A... I saw your response! Good to hear from you. So what is my prognosis?
Well... apart from we're #ucked, and we should be listening to every gold bug and tin-foil hat owner out there, I think the situation is pretty ominous, but I'm more ready than most people for what's coming.
European banks have stopped lending to each other... similar to pre-Lehman days... and the US said they would not support the IMF for any European bailout. Germany and France are on again, off again... The United States of Europe is done, it's only a matter of time. If you haven't already, Google Nigel Farage - we need politicians like this over here. We're looking at a collection of countries that have gone to war for centuries... so you know what's coming shortly.
Web bot ALTA analysis is reporting a massive collapse coming near the end of October. The collapse is to be so massive that there will be loss of life of those working in the financial community. The analysis is saying that the collapse will originate in the derivatives market.
If you want something interesting (and you may get a chuckle out of this), here's something that I posted several days ago... and it's not a joke:
"For the record, I don't take meds, hear voices in my head or am delusional. I hold an MBA from one of the top 10 Bschools in the world and for the most part, am a sane person. So hear goes...
I just had lunch with a friend. She is Aboriginal and does fasting and sweat lodges as part of her tradition.
She told me that she has a spiritual Elder. This is akin to a Spiritual Director in the Catholic sense. This woman has an ability to see into the future. She spoke of a great wave washing over parts of Asia that would kill many, many lives. She said this 3 days before the 2004 Tsunami.
My friend told me that her spiritual Elder, who is 80 years old, who does not have a computer, who does not understand the Internet told her the following statement, based on a vision she recently had:
"Within the next 6 weeks, the money system of the world will collapse and end. It will not be the end of the world, but it will be the end of the world money system and how we are use to living our lives."
Do with this as you wish. Not investment advice.""
My guess is that the collapse will start with one or more European banks, resulting in a run on deposits and a collapse in stock and bond prices in an attempt to get liquidity and a temporary collapse in PMs. Within hours, several US banks will be pulled down and at some point the cascade effect will be so severe that we'll see a run on the US dollar because the world will recognize that the entire global financial system is in the process of collapsing... then we'll see people trying to access their worthless, non-bullion backed Blackrock spider paper and then we'll see a slingshot in PMs to the moon, followed within about 2 weeks, hyperinflation in food and commodities (velocity of money) and deflation in most other asset classes. Within 18 months, we'll see the top 20 economies do a general reset and start over... likely with a global currency fiat currency which may be tied to some formula with gold as a component.
I know that I probably sound like a nut to be saying these things, but compared to the elegant intellectual shit that I've seen coming out of Wall Street and the msm, I think I'm more legitimate.
Krugman's theory that lower interest rates mean owners of gold would be seeking lower returns is a temporary thing. If lower interest rates have their natural effect on prices, the gains would suddenly be fantastically high.
What Krugman SHOULD be saying is they hold it because low interest rates mean they don't have to have large returns, but they expect outsized returns while interest rates are kept artificially low.
As a result, Krugman is once again wrong. Not surprising, though.
Anyone who cares, http://gainesvillecoins.com is doing a sale on silver buffalos. Was at less than $0.60 over spot last I checked.
That's a better premium than if you were buying a generic 100oz bar.
I bought some.
Balmyone
Anyone who cares, http://gainesvillecoins.com is doing a sale on silver buffalos. Was at less than $0.60 over spot last I checked.
NO MORE................$1.50ish.
Gold is a little too expensive for us to spray into the upper atmosphere to help protect the earth from warming excessively as we pass through the belt of radiation (how this will protect us for the next 2000 years, I have no clue) ... so for the time being we will have to make do with aluminum, strontium and barium for all of our weather modification needs.
Gold and Silver daily charts revert to bearish/neutral.
Weeklies remain neutral.
http://stockmarket618.wordpress.com
If real interest rates are actually negative and approximate returns generally, then the second chart should actually show a slightly downward-sloping "new path". In other words, the gold price could gradually decline and still outpace the return on Treasuries and other "risk-free" assets.
wrong place.
Right time?
Hotelling proposed that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds were greater than simply leaving that resource to appreciate in the ground
WRONG. This is why i dont read what economist have to sey. Complete stupidity.
People dont live forever.
People have political choices to make.
People are not rational.
A producer? As in what, a logic argument proving and adding nothing.
PHDs try to offer a false aguments that cant exist anywhere but in there own minds as a "proof" to dis prove some other non-sence for reaons of funding and ego.
Just because someone hasn't "proven" your stupidity dosen't make you brilliant.
Why disprove what nature will, in her own sweet time.
well come on. There ARE other resources that have value regardless of what happens to fiat currencies. Arable farm land - we all gotta eat. Clean water source - we all gotta drink. Keep going, a beer producer will never find his product out of demand, even if he has to trade for chickens. So, while I hold some small amount of gold, I should would like a small vegetable farm with surface water, etc.
Quality.
Not all land is the same nor the water or air.
Careful what you think.
"its not what people know that gets them into trouble; its what they thought they knew, that just an't so."
- Mark Twain
Look at a 1-year gold chart - it looks sickly and with what I think is coming, I don't think there is much upside and could be considerable (<$1500) downside by year's end.
I have a permanent physical position, atop of and separate from which I trade paper. This works for me and many others I know. I won't be adding a paper long anywhere north of 1500, this year.
A lot of the guys flogging gold week-in/week-out, the bulls who always seem to see an imminent spike - they are dealers and traders or closely connected thereto. They rarely issue sell signals to their loyal fans.
Thus they are constantly trying to gin up excitement where there is none.
Right now, in this market, there is nothing to do in gold but sit on your hands or sell.
"The surest why to get into a fight is to tell a man, he's dead wrong when he knows he' right."
- Chick Bowldrey
Ever told a gambler they are wrong? Want to tell a billion Asians they are?
It doesn't matter, like a bullet untill it does.
http://www.youtube.com/watch?v=lWDdcD-1xoo&feature=related
"I'll take a fast nickel over a slow dime, anyday." -- Carnival Barker.
The Hotelling thesis is a puzzler to ponder. But academia and the real world are two different things so how about a real world contrarian point of view just to be onry? If I'm a miner I would start with Hoelling's premise, but then layer on top of that some of the following real world considerations which would steepen the curve again and make me dig faster:
-future prospects of nationalizations of mines, partial or otherwise (Australia)
-Prospects of civil unrest, instability (Malaysia, S. America)
-future environmental regulations, shutdowns, and increased costs (USA)
-my lack of asset and geographical diversity (make other investments)
-prospects of miners strikes, labor costs, delays, as the workers of the world unite ("OWS," Obamacare)
-gun to my head to keep digging (China)
I would basically do what the Saudi's are doing with oil -- lie and exaggerate about the remaining resources in the ground while extracting as much as I can, while I can (like the OPEC cheaters). Can always buy back shares, or other mines for location diversity, etc. If pressed, governments and central banks can/will do strange things like the 1960s "Gold Pool" when they kept South African gold prices suppressed. Texas Hold 'em analogy: I don't want to be holding a full house at the turn, and have someone pull a 4 of a kind out of their ass on the river. Never underestimate fear and loathing.
Net-net I think it's a zero sum game.
Krugman is an idiot.
Saying that you buy gold to protect yourself from the possible coming global financial collapse has nothing to do with Hotelling, curves and Fed rates.
Why the author here bothers to connect these is beyond me...
"By doing so, I think Krugman is broadening Hotelling's theory, possibly beyond Hotelling's specific intent."
No, I would say that Krugman is confused (as in confused as a drunk person is, or a mad man) and conjures up metaphors that have only a vague resemblance to reality.
Gold was probably the first metal known to man, and highly attractive in its bright yellow color and shiny appearance. The value of gold increased also because it is the most easily worked of all metals. A nugget of gold is easily hammered thin and is flexible enough to bend without breaking. This means that gold can be fashioned into any shape desired. Combining its value as one of the most commonly used components of jewellery, and itself inherently owning huge and increasingly better economical value, gold would continue to be highly sought after. Consumer demand and perceived consumer demand by the market will also continue to push prices higher.
Rachel London@http://www.collinsonjewellers.com