What Is Gold Trying To Tell Us?
A: Who the hell cares about the price of GOLD on a real estate site? Well, sometimes if we take a step back, we can get a clearer picture of what is going on. As more financial firms release updates regarding the mess on their books, and stocks seem to be pricing in a recession, gold is soaring! But not to inflation adjusted highs! You see, gold is typically a safe haven investment that gets plenty of attention when economic times become uncertain. So, to be backwards analyzing, one cold interpret the rise in gold to a deteriorating and uncertain economy, which then could explain why wall street is struggling right now. Add in comparisons to the mid/late 70's stagflation and gold surging, and it paints a disturbing similarity to today's environment.
According to Zeal Gold Investing 101:
The primary reason to own physical gold is to protect a core portion of your portfolio from all kinds of nonlinear contingencies.Now, Im not telling you to dump everything in your portfolio and load up on Gold stocks or ETF's. The point of today's post is to explain to you that rising gold is on some level the street telling us that they are uncomfortable with the economic environment, expects further rate cuts that will weaken the US dollar, and are seeking a safe haven investment for possible turbulent times. Gold could also rally in major bull markets, but to see what it is doing right now compared to stocks, its clear that we are not in a major bull market. So lets exclude that reasoning altogether. So when did gold last rally huge; IN THE MID 70s WHEN STAGFLATION WAS THE KEY WORD & THE US WAS IN THE WORST ECONOMIC DOWNTURN SINCE THE GREAT DEPRESSION! See this historical chart below showing you the rise of gold in this era of uncertainty and economic distress:We humans generally become complacent as investors and assume that tomorrow will be just like today. History has proven that linear assumptions are one of the most dangerous and lethal errors that investors can make. Even in fairly normal life we are all aware of local nonlinearities including hurricanes, tornadoes, and earthquakes. Financial nonlinearities also abound, such as the implosion of the great NASDAQ bubble in early 2000. Gold is the perfect investment to protect a foundational portion of your portfolio from an inherently unpredictable future.
Owning physical gold in your own possession is like having fire insurance on your house. Gold protects against all kinds of nonlinearities, from the insidious to the geopolitical to the bizarre. Gold protects against insidious nonlinearities like the gradual erosion of paper currency values through inflation. Untold financial havoc has occurred in history because people made foolish linear assumptions that the value of paper currency is sustainable.
According to an old US News & World Report article, being sure to put yourself back into time & place when it was written in August 2006:
Ben Bernanke may be facing a nasty relic of the disco era. It's called stagflation. The U.S. economy seems to be experiencing a bout of stagflation. It's a rare, worst-of-both-worlds situation where economic growth and employment stagnate yet inflation rises. In 1974, for instance, the U.S. economy shrunk 0.5 percent and unemployment rose to 7.2 percent, even though prices skyrocketed 11 percent. Oil shocks, loose Federal Reserve monetary policy, and out-of-control government spending have all been blamed for the stagflation. The economic mess culminated in America's worst economic downturn since the Great Depression.The uncertainty today continues to lie in the credit markets, the financial institutions, and the housing sector. As housing falls, financials lose billions in their toxic asset backed securities on their books, which cripples balance sheets and starts a chain reaction on wall street. You are seeing it right now. As I noted previously here on UrbanDigs.com, we are yet to see significant defaults of alt-a, prime, option arms, credit cards, auto loans, etc.. although we are getting the warning signs! Believe it or not, even those loans/debts were securitized on wall street and what we saw with subprime could very well spread to other areas of debt as well. Thats the uncertainty! Thats why we need a recession to fix these problems; I just don't see any other way.
If the fed acts aggressively by cutting rates, it will re-inflate the asset bubble, not allow the system to correct itself on its own, and will result in runaway inflation as gold will likely rise to $1,500 and oil to $125+. It will also hurt the US dollar as the world's currency. Remember, foreign governments own tons of US debt in the forms of treasuries; if the fed eases aggressively those foreigners may unwind those treasuries leaving us to pay off our deficit at much higher rates!
Right now I am seeing asset deflation (housing prices falling) and commodity inflation (food, energy, gold rising). Not a good scenario any way you slice it and one that puts our fed in a very tough spot! Although its a far line, if you connect the dots it is worthwhile to keep an eye on gold for any clues about how uncertain wall street is. As we all know, wall street sentiment and the positive or negative wealth effect that results, is a strong force to be reckoned with here in Manhattan real estate! Hence, its worth a discussion!
Comments (8)
It is interesting to note that TIPs yields are not reflecting any real change in the bond markets perception of the inflation outlook. I think the bond market, as typified by guys like Bill Gross at Pimco, believe that significant economic weakness will hold back wages and therefore inflation expectations. I think they must also factor into their calculus that US economic weakness will spill over to the commodity ravenous emerging BRIC nations, easing the upward pressure here. Note that oil consumption has already begun to stagnate and fall in OECD nations, only the BRICs are holding the overall figure up slightly. My guess is that gold prices reflect more flight to quality than anything, increasingly extreme retail investor negative sentiment on the US dollar/economy and expanded access to Gold investments due to ETFs. But its looking like a good port in a storm right now.
Posted by jeff | January 15, 2008 11:31 AM
I believe TIP prices use government supplied inflation data...
seriously, does anyone believe the published government inflation numbers anymore? The government simply cannot afford to admit to the 'real' inflation number as social security/medicare costs would skkkkyyyyrocket!
Posted by uwsider | January 15, 2008 11:51 AM
It is true that the indexation of TIPs is based on Gov't inflation indexes and therefore TIPs may be more sensitive to "headline" inflation numbers...which aren't that bad, vs. reality inflation of how much does a paycheck buy. But the relationship should not be zero. I was just reading Barron's round table and some real smarties like Pimco's Bill Gross, who has been talking debt debacle for a long time, believe world growth will slow enough to tamp down inflation....unfortunately I kind of agree. I think TIPs reflect bond market thinking and gold and commodities reflects retail investor and commodity fund thinking.
Posted by jefF | January 15, 2008 2:22 PM
Also, don't forget that a big portion of consumer inflation is rent/housing and that these are likely to be disinflationary over the next year or two.
The beautiful thing about markets is that they provide the greatest cure for high prices: high prices.
Posted by AvnerUWS | January 15, 2008 3:21 PM
Noah..agree with u, and have been long gold for a while... just want to poise one for thought.. will US or dollar denominated consumers pay double for gold products than they did in 04... Is this surge in price only investor demand and speculation ( could this be a little bubble forming)....Will the commodities prices be sustainable at these levels.????.remember back in the 80's ..the gold price was up here for a very short time and shortly corrected it self back to 200 an oz... It will go higher...913 was the high in spot gold today...just be carefull!! Its a long way down from here!!
Posted by johnny | January 15, 2008 6:47 PM
johnny - yes, but lets not forget inflation adjusted gold price for today is about 2000! We are at same levels in late 70's except without ANY inflation! Kind of crazy!
Oil is at inflation adjusted records..not so with gold so I dont think its overbought. Also, I think central banks will start to hedge against a weak dollar and buy gold. Of course anything is possible, but if the fed cuts aggressively like most expect, I just dont see how that is not bullish for gold and other commodities. Also, gold generally doesnt fall in a slowdown like oil would on decreasing demand. In times of uncertainty, gold is usually looked to as a hedge and safe haven. Too many things in golds favor and I think a must have in anyones portfolio right now. You just cant day trade it or look at it everyday! It may fall to 800 before it goes to 1000!
Posted by Noah | January 15, 2008 10:22 PM
agreed!
Posted by johnny | January 16, 2008 8:35 AM
Noah..Key reversal yesterday higher highs then close below previous open... down $20 + at the momment. Day trading is very tricky in these markets..like you said ..but it technical terms this shows the beggining of an opposite trend..also RSI's (relative Strenght Index) is not extremely high..but to my knowledge showed Feb Gold to be slightly overbought as of yesterday. Right now its just a little below 70 and falling , but next few days will be crucial.. Now, just like any other market Fundamentals must be in tact... it costs (approx / avg) $300 to get the metal out of the mines and into the whses...thats it...and to use a term u know very well...whats all the FROTH about!!
Rgds
Posted by johnny | January 16, 2008 1:13 PM