finally gold getting some respect

[CruNKinTILT]

gonebroke - would you care to elaborate on exactly how you have invested into gold?

Stocks? Options? Real gold bars?


Also, if you are betting on gold to rise mainly based on the fact that you think the dollar will weaken, why not just short the dollar?

[DcifrThs]

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markets hammered again and gold is green, up over 1%.
i think the divergence between the general market and gold will be here soon. Gold going to $2000/ounce. Gold stocks are going to go bonkers. For those in it, I hope you enjoy the ride. I know I will.

I also stated at beginning of year that if gold doesn't outperform the general market, I would quit posting here. 5 more months to go. See you at gold 800.

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- what has caused the demand for gold in this market?

- what will cause that demand to increase many times over to cause gold to go to 2k?

- what will happen when the US recovers and dollar becomes relatively more attractive again?

- will gold still be highly demanded when the US recovers? why?

- what are the major demand factors you see for gold in the near term(months) and long term (many years)?

Barron

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I've also been bullish on gold for a long time. It's price when traded in $US is relative though. Gold may well go to $2k/ounce but if gold were traded in Zimbabwe Dollars and it's price skyrocketed it wouldn't be such a big deal. I think measuring gold against a basket of global currencies is more appropriate here are some graphs in global currencies back to 1971 .

A case can always be made for the bears and bulls of every market. I think the demand for gold is going to increase due to a number of factors. I've listed a few less discussed factors that some gold-bugs believe to be drivers of the future price of gold.

Global central banks have been playing around with fiat currencies for some time now and people are realising how their currencies are becomming debased and slowly turning to gold as a medium for exchange (such as electronic gold grammes), as a safe haven, a store of wealth and real money. The premium of money in the price of gold has been eroded with our 'experiment' with fiat curencies and this monetary premium might return to the price of gold.

Governements will always resist this as it forces financial discipline and prevents them from defecit spending their way through short-term situations. If gold functions as money then governments will not be able to print more. They'll have to reduce spending, raise taxes or acquire more gold.

Central banks are starting to buy rather than sell gold. When Gordon Brown (the new UKPM) was Chancellor of the Exchequer, he sold 200 tonnes of British gold (this was around the turn of the Millenuim) and bought Euros with the proceeds. The price of gold increased 40% and Euros decreased 20%(against GBP) in the months following the sale, and the gold price has continued to rise ever since. Central banks may start to compete with one another to replenish their gold reserves.

Mining companies also keep substancial hedge positions that were required in order for them to obtain financing. Due to the 2-decade long slump in prices, miners were required to place short positions in the gold market to gain financing from banks. The unwinding of these positions can privide substancial upward pressure on the gold price since covering shorts is the most cost-effective way for mining companies to increase their effective gold reserves.

Before the Yen & Kiwi dollar carry trade, gold was often used as it could be borrowed and sold as an 'interest free loan' and the proceeds used to buy debt or other interest-bearing vehicles. I'm not sure how much of this carry trade still exists after golds' ascent over the last few years, but further rises can result in further unwinding of these positions. If gold were to increase rapidly, this short-squeeze could bust some carry-traders meaning the investors and banks who lent their gold won't get it back and will have to buy more.

I also think gold will return as a standard portion of a balanced portfolio for Wall Street money managers. The long underperformance of gold embarrased managers who advised a 10% holding of gold and miners. Gold may return as a standard part of asset allocation, along with the traditional stocks/bonds/cash mix used by the majority of retail and pension investors.

Gold didn't provide the hedge people thought is would during the 1987 crash. Gold was already 6 or 7 years into an established bear market at that point, but the fundamentals and technicals of gold are very different today should a similar financial crisis happen. The increasing popularity of derivatives also provided alternative ways of hedging your portfolio. These alternative hedges are only as good as the counter-party's ability to pay up. Gold is not anyone else's liability as it has its own intrinsic value.

Asia's increasing wealth in this century can also provide substantial upside. China's governent only recently legalised the ownership of investment gold for its citizens (I think it was 2 years ago or so). With their burdening middle class and almost perverted admiration of gold, Asian retail buying of gold can only increase.

I wouldn't be surprised if the Asian exporters began to refuse the payment of a US currency constantly being devalued and demanded gold as payment for future exports.

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great post.

i think the most compelling arguments are:

1) asian demand for gold
2) institutional, endowment etc. investor demands for gold as an allocation in their portfolio
3) limited ability to generate more gold

the problem with non-fiat systems (that use something like gold as a base) is that volatility in the business cycle becomes a huge problem.

when the world was using USD backed by gold at a set price ($35/oz i think), the US eventually gave out claims that far exceeded its gold stocks. france was the first one to say "give me the gold" in 65-66 i think and then in '68 there was a dual system for purchases of gold.

having a currency backed by gold as a fixed resource is unsustainable. a government will always choose the happiness and prosperity of its citizens over some type of peg or policy. there is not one case where the opposite has occured. every single one evenutally fell apart.

the reason is that X-backed money, where X is fixed or slowly growing, does not allow a very flexible monetary policy so the downswings become almost unbearable and the govt doesn't like that.

however, fiat systems are also susceptible. fiat systems pegged to other fiat systems are even worse and those have fallen apart many times in the past few decades (i.e. something pegged to the dollar).

anywyas, the main points you made about the expected demand for gold are pretty strong.

thanks,
Barron

[DcifrThs]

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case for gold:
I believe that gold is going to go to $2000/ounce because of an inevitable currency crisis. The USD used to be backed by gold until Richard Nixon ended that on August 15th 1971.

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you act like it was his choice rather than a long buildup of fundamental problems with bretton woods that ended the gold-backed dollar. it wasn't nixon's fault lol.

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Now the USD is backed by nothing; the only thing that it is backed by now is faith. Throughout history, all fiat money (paper backed by nothing) has returned its intrinsic value which is nothing.

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and all money systems backed by a fixed commodity have also fallen apart.

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I believe the USD will suffer the same fate but this is over a very long time period, maybe not in our lifetime.

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yes, once the desire to hold US dollar claims on the revenue generating ability of our govt fall, we'll be in for a massive problem. it will likely eventually happen.

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First a little background on the USD. The current world reserve currency is the USD. It achieved world reserve currency status because the most important commodity in the world today, oil, is traded in USD.

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now, come on...you don't seriously believe that, do you?

the USD became the reserve currency as a direct result of the agreements in the aftermath of world war II. oil had nothing to do with it. i mean, literally nothing. all the countries agreed that it would be best to move back to a gold-backed system and the united states at the time had something like 85% of the entire world's stock of gold in its vaults. that, combined with the fact it was the only country left standing when the dust settled made it the obvious choice for the base of the bretton woods system.

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I don't want to turn this into a political thread but some of the following is necessary to say. I believe the US made deals with certain Middle Eastern countries to offer them military protection in exchange for cheap oil and a promise to trade oil solely in USD. Saddam Hussein threatened to trade Oil in alternative currencies and we all know what happened to him. Iran has threatened the same thing and who knows what will happen to them. My point so far is that the USD has been able to survive so far because it was indirectly linked to oil.

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the answers to these questions should settle that hash:

- what is the chronological history of oil traded in the world?

- when was it first sold in dollars?

- were there other options?

- was it traded in other currencies and then switched entirely to dollars after WWII?

clearly if it was traded in many currencies and then all of a sudden w/ no apparant reason, everybody (all producers) demanded dolalrs for their oil, then some of what you say may be correct. otherwise, what you state is likely hooey.

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It wasn't backed by oil directly, but indirectly in the sense that it was necessary to own dollars to buy oil.

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that certainly helps the dollar. i don't think it would kill the dollar though if oil was traded instead in Euros. what would kill the dollar would be if the desire to hold claims on US govt fell and everybody flooded out of treasureis.

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This is one of the main reasons a bankrupt country like America has been able to keep the USD in demand.

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nah, probably not one of the main reasons. even if oil was denominated in euros, the demand of oil producers to invest proceeds in the debt generated by the US govt would offset the decline in the demand for the dollar by a massive amount resulting in a net change in demand for dollars that isn't catastrophic (though still likely huge) for the dollar.

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Now on to why I think gold is going to go bonkers and the dollar is going down the drain.

First, I would like to say Kimchi (few posts up) did a great job stating his case for gold and I hold very similar beliefs. My original post was basically going to reiterate his case. Read his post first. Below are some of my own comments.

If America traded as a corporation on the stock market it would have already been delisted years ago. America as a corporation is broke. America has been printing unlimited amounts of paper money for years and it is finally going to bite them in the ass. Most of that printed money is now in the hands of foreign nations. China and Japan have about 2 trillion USD in their reserves. They have already lost a ton of money just holding their reserves because the USD is being devalued and they are looking for a way out. Like Kimchi said, they might start refusing to accept USD. The demand for the USD is going to go down and this will add further upward pressure to gold.

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some of your facts are off but the general point is sound imo. the demand for dollars will eventually tank and gold will likely run up huge as a result.

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The inflation rate as reported by the CPI is bogus. Inflation is an increase in the money supply, not an increase in prices. Inflation causes an increase in prices, not the reverse. I believe that the correct way to calculate the true inflation rate is by measuring M3 growth. Nowandfutures.com & shadowstats.com believe that M3 growth is 10-13%. So the inflation rate is 10-13%, not the 3% the bogus CPI figures tell you. Ask yourself why the Federal Reserve stopped printing M3 figures last year. On the other hand, gold cannot be printed out of thin air. There is a finite amount of gold in the ground and on average, the amount of gold mined each year only adds about 1% to the existing supply of gold worldwide. Therefore, the inflation rate of gold is approximately 1%. So if gold is currently fairly priced, then it should theoretically move up in percentage terms the difference between the growth of paper money vs the growth of gold 13%-1% = 12%. This will allow holders of gold to maintain purchasing power. That is assuming gold is fairly valued today and I don't think it is. I think it is extremely undervalued.

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again, your gold argument may be correct, but some of what you say is garbage.

first, lets define our terms:

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M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, small denomination time deposits and certificate of deposit accounts (CDs) of under $100,000.
M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

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now, why do you think large denomination dollar based deposit growth rates cause inflation? let's think about this logically. if russia has R$5bln and feels that it wants instead to hold it in dollars, it can drop that money in a eurodollar account in london (or wherever) and M3 would jump by the conversion rate of R:USD.

so how would this impact the rise of prices in the US? please to be explaining why M3 is the best measure of inflation.

as for how it why it isn't printed anymore, it is simply (most logically) because the additional info gleaned is a) hard to get, and b) doesn't give us any more info than M2 and M1.

official reasoning as to why the US stopped releasing M3:

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On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.


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after looking at what is contained in M3, i have no reason to disbelieve that statement.

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Most bull markets are driven by greed. The beauty about this gold bull market is that it is going to be driven by greed & fear. The fear coming from a fear of a currency collapse. The market for gold is so small relative to the general stock markets of the world, that if only a handful of investors jump into gold it is going to go ballastic. If you look at the historic gold bull runs, some of the shares went from below 1 dollar to triple digits. I think that history is going to repeat itself, but on a much grander scale. I am putting my money where my mouth is and I am placing relatively huge bets on the gold sector. I like to take plunges in the stock market and pick a handful of stocks and bet heavily on them. In my opinion, that is the only way to play the game.

Conclusion:
1. The USD is going down the drain because of excessive money supply growth.
2. Foreign countries are becoming less willing to hold dollars.
3. Sub-prime mess is going to spread to ALT-A and Prime and the derivatives exposure might bring down the entire financial system. I expect 50% of current hedge funds to go broke or close up shop within 5 yrs.
4. If the Federal Reserve lowers interest rates in an attempt to save the economy and the housing market, the demand for USD will sink as foreign currencies will offer better yields. This will be super bullish for gold.
5. If the Federal Reserve raises rates, that will temporarily save the dollar but crash the stock and housing market. This will also be bullish for gold because M3 growth will rise to over 20%. This will be necessary to avoid a depression. Gold in the late 70's increased dramatically during a period of rising interest rates because the real interest rate was negative. Interest rates went to 20% during that time.
6. Best way to play the sector is by buying the stocks as they tend to rise more relative to the physical metal.

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i agree with your overall conclusions and think that my previous opinion of being short gold is wrong. i think there are times to be short gold (when demand for dollar denominated assets rise relative to other assets) and that the whole "gold going ballistic" cycle will probably take a long time to play out. when US rates start going up relative to global rates (we are behind in terms of business cycle timing of the rest of the world), taht will be a good time to short gold.

anyways, this gold discussion has been enlightening. i wish there were fewer "insane theories."

i forget where it's from but some cartoon(simpsons probably, or futurama) had the main character who believed in something insane say:

"TAKE THAT! insane theories 1, regular theories 1billion!!"

Barron

[gonebroke2]

Barron,

My case for gold was basically Kimchi's post. I couldn't have said it better. I didn't want to reiterate it. I just added a few more comments.

[gull]

One point:

The idea that gold is a good investment because the dollar will devalue is bunk. It will do well nominally, but so will any asset denominated in dollars.

[gonebroke2]

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gonebroke - would you care to elaborate on exactly how you have invested into gold?

Stocks? Options? Real gold bars?


Also, if you are betting on gold to rise mainly based on the fact that you think the dollar will weaken, why not just short the dollar?

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My current living situation makes it impossible to safely store physical gold. So I do have money in the gold and silver ETF's, although if there is a complete meltdown of the USD, I doubt you can exchange them in for the real stuff. But the big money will be made in the stocks. I have 2010 Call Options on RGLD with strike prices of 30,35, 40. I think that stock will be 100+ before the expiration date. Then I have positions in some of the junior exploration stocks and near term producers. I have positions in AAU, MRDDF.OB, GORO.OB, TBLC.OB, and a few Canadian ones.

If you want a little exposure to the gold sector and only want to speculate (gamble) on one investment vehicle, then I would say GORO.OB.
- Great management team. Founders of GORO are the Reid brothers who founded US Gold (UXG) and sold it to the Warren Buffet of the gold world, Rob McEwen.
- Tight share structure. 30 million shares outstanding. They are looking to do a 5 million share private placement to cap the shares off at 35M. That is to pay for a 20 million dollar mill to produce gold in late 2008.
- Projected to produce 70,000 ounces in 2008 and 100,000 ounces by 2010.
- Low cost gold producer. Should cost them about $100 or less to extract each ounce of gold out of the ground. Gold is currently trading at 672.

At current gold prices and if the management team stays on track, I believe this is a 20 dollar stock within 24 months. This number is based on comparing it to other low cost gold producers. Low cost gold producers trade at a premium in the market.
If gold goes bonkers, like I think it will, it has potential to be a $50/share stock once we pass 4 digits for gold. That is where the leverage is at, in the shares.

GORO.OB is my #1 holding and about 25% of my portfolio. Average cost is about $2.75. #2 holding is TBLC.OB (applied for AMEX listing). The rest I own are about equal in weight.

[gonebroke2]

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One point:

The idea that gold is a good investment because the dollar will devalue is bunk. It will do well nominally, but so will any asset denominated in dollars.

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Tell that to the bagholders holding real estate they can't sell.

But you are also right. That is why the stock market went to 14,000. Because the dollar was tanking. The gains you made in the stock market were offset by the loss of purchasing power in the USD. But guess what outperformed the stock market these past few years? Gold. It is about even on the year with the SP500, but will beat it bigtime by year end. Why would I want to put my money in the risky inflated stock market when I can buy gold instead? I think it is the safest investment in the world right now. Not the shares, but the physical stuff. Besides, I believe that the end game will be deflation and gold will be the only thing you will want to own.

[gonebroke2]

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having a currency backed by gold as a fixed resource is unsustainable. a government will always choose the happiness and prosperity of its citizens over some type of peg or policy. there is not one case where the opposite has occured. every single one evenutally fell apart.

the reason is that X-backed money, where X is fixed or slowly growing, does not allow a very flexible monetary policy so the downswings become almost unbearable and the govt doesn't like that.

however, fiat systems are also susceptible. fiat systems pegged to other fiat systems are even worse and those have fallen apart many times in the past few decades (i.e. something pegged to the dollar).


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I disagree. Having a currency that is backed by nothing is unsustainable. History has proven that over and over. Furthermore, the lack of any backing allows the central banks to have a loose monetary policy which fuels the booms/bubbles which inevitably end up in busts. This is evident in the housing market debacle today. The Federal Reserve is 90% responsible for that bubble. I blame the other 10% on the mortgage brokers who would do anything for a dollar and the homebuyers who lied on their applications.

[gonebroke2]

Here is an article written by an economist who believes that the virtual reality world, Second Life, is going to experience a recession/bust due to the excessive growth of the virtual money supply. I am posting it here because it is similar to what I believe will happen in the non-virtual USA:
http://mises.org/story/2640

[DcifrThs]

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having a currency backed by gold as a fixed resource is unsustainable. a government will always choose the happiness and prosperity of its citizens over some type of peg or policy. there is not one case where the opposite has occured. every single one evenutally fell apart.

the reason is that X-backed money, where X is fixed or slowly growing, does not allow a very flexible monetary policy so the downswings become almost unbearable and the govt doesn't like that.

however, fiat systems are also susceptible. fiat systems pegged to other fiat systems are even worse and those have fallen apart many times in the past few decades (i.e. something pegged to the dollar).


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I disagree. Having a currency that is backed by nothing is unsustainable. History has proven that over and over. Furthermore, the lack of any backing allows the central banks to have a loose monetary policy which fuels the booms/bubbles which inevitably end up in busts.

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did you not read the post you quoted?

did you read it but miss my main point?

my point isn't that gold-backed system is worse than a fiat system, my point instead is that BOTH suck and always fall apart. i'll repeat, EVERY SINGLE COMMODITY BACKED MONETARY SYSTEM HAS FAILED!!!! this is an undisputable fact. the fact that so has every fiat system shows that there is no "stable" monetary policy due to one major flaws human beings have: we are unable NOT to extrapolate recent occurrances into the future.

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This is evident in the housing market debacle today. The Federal Reserve is 90% responsible for that bubble.

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insane theories again. this isn't like the queen saying "i like flowers, bring me flowers."

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I blame the other 10% on the mortgage brokers who would do anything for a dollar and the homebuyers who lied on their applications.

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finally, rationality!!! yea, greedy mortgage brokers pushing more and more debt on the general public had an impact. and you think that impact was only 10%? look at the subprime mortgage debacle right now, what percent of housing price gains will be lost due to this segment of house buyers? probably more than 10%, which is at least a rudimentary proof that the fed wasn't responsible for 90% of the housing price gain.

Barron