How IN is Gold, huh?
A: You gotta love it. Gold is clearly outperforming all other asset classes at a time when deflation is becoming a household name. It seems to be the only trade that doesn't have that 'big worry' or liability attached to it. The only other asset class I can think of that is even close is US Treasuries, and even that trade has its valid bear arguments. The only word on the street that I am hearing to bring down the gold trade, is that it's getting 'crowded'; a trading term based on too many players holding/buying the asset raising the concern that a 'rush for the exits' sell order may be looming. My deep down opinion is that gold is performing how it should, at a time when general confidence in fiat currency is declining. In my humble opinion, the gold trade is not a hyper-inflation trade right now, but more of a lack of faith in paper money/fiat currency trade that ultimately could test its inflation adjusted high. Those in it now for the inflation hedge, are along for the ride as the world united battles deflationary forces. Lets discuss.
For those new to UrbanDigs, this may sound like I'm only now jumping on the gold bandwagon. So, before you read this please consider that I have publicly stated how 'I am very bullish on gold' in my 2008 predictions written DEC 2007, 'loved gold' in my JAN 2008 discussion on fed policy/ratings downgrades, and that I expected 'precious metals to outperform' in my 2009 predictions written DEC 2008. This streeteasy discussion forum has some tasty arguments supporting the gold trade as well.
Right now, this is a global debasement of fiat currency trade, way more than it is an inflation trade; as gold is being viewed as money without the debasement of government interference. Below is a chart of the nominal and inflation adjusted (in SEPT 2007 dollars) price of gold since 1913; courtesy of InflationData.com:
For the next few years while global fiat currencies are systematically debased, via central bank printing to counteract local slowdowns, the future whiplash-inflation trade (maybe 2012-2013) will be slowly building as the Kondratieff Winter plays out. It seems logical that the gold trade is a multi-year trade; if it doesn't get parabolic too early.
THE CORE OF THE GOLD TRADE LIES IN THE DEBASEMENT OF ALL FIAT CURRENCIES TO COUNTERACT THE GREATEST WAVE OF CREDIT DEFLATION SEEN SINCE THE GREAT DEPRESSION
That's how I think. That's how sick I am. Somebody heeeeeelp meeee!
Look at how gold has performed in other currencies, if you question this statement. One big fear I have right now, which happens to fit as a texas hedge with my gold trade, is a sharp selloff in some bond market, in some country, somewhere, at some point down the road. Its a very possible event that could spark a global equity selloff that ultimately earns a color to depict the day it happens on! This is part of the gold trade.
Our fed, and I'm sure ultimately other central banks, have a period of quantitative easing ahead of them - pure money printing. They are purchasing agency debt now right, $115Bln so far, and may have to fill the void and buy longer term treasuries down the road, should our friendly foreign funders decide to lay low, and focus on their own slowdowns for while.
Ray Dalio, chief investment officer of Bridgewater Associates, discussed this in a recent Barron's interview that is a very worthwhile read:
"The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.I've discussed the process in which the fed 'prints money' by purchasing assets from primary dealers in exchange for electronic credits - virtual money printing. If your into this stuff, you also may want to read about the Mandrake Mechanism, our fractional reserve banking system, and how our money is multiplied.
You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So the first wave of currency devaluation will be very much like England in 1992, with its currency re-alignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot."
Keep your eyes on foreign purchases of US Treasury bonds, as well as purchases internally by the fed. If outside demand wanes, for whatever reason, the fed will be forced to pick up the slack and that is very dollar negative. As Mr. Dalio states so clearly, it will 'drive assets to gold'.
There is no quick solution to the process of debt deflation. It has to just play out. Bad debts need to default and be written down. Leverage needs to come in. Business models tied directly to the old system of credit, need to be completely restructured. Bad models must die out and declare bankruptcy. Consumers need to delever and repair their balance sheets by increased saving and lowering debt load. This has to happen. Purge the excess. And when its done, most of us will be dizzy and wobbly from the multi-year pounding given to us by....in the right corner, and still reigning champion of the world,...De - "Upper Cut" - Flation.................!
Posted by David
Thu Feb 19th, 2009 11:23 AM
How do you feel about the possibility of sovereign governments selling some of their gold on the open markets? It is clearly a rish in Eastern Europe where they have little chance of raising funds elsewhere. What about the US? Isn't it possible that after all of the money printing that we will be doing, that we will need to find other sources of capital?
Posted by David
Thu Feb 19th, 2009 11:23 AM
How do you feel about the possibility of sovereign governments selling some of their gold on the open markets? It is clearly a risk in Eastern Europe where they have little chance of raising funds elsewhere. What about the US? Isn't it possible that after all of the money printing that we will be doing, that we will need to find other sources of capital?
Posted by AvUWS
Thu Feb 19th, 2009 11:37 AM
Good point. Noah, just like you look at the reasons NY RE shouldn't go up forever, and reasons that might support the RE, discipline dictates looking at what might hold gold from rising. After all, if conventional wisdom is that it must rise then one needs to be prepared for what might counter conventional wisdom. That turned out to be the case with oil too after all.
Possible negatives:
- drop in industrial demand.
- increased mining even at higher costs.
- increased supply by people selling personal gold in a recession/depression.
- government sales.
Also, at what point in the cycle do investors sell their gold to buy back depreciated commodities/assets?
Posted by anon
Thu Feb 19th, 2009 12:18 PM
I'm actually thinking about an exit from gold at this point. I first bought when the Fed initially started lowering rates, in the belief that it would be inflationary. Of course, it didn't quite turn out that way.
Now gold is simply a bubble play. No more, no less. The majority of posts I read extolling the virtues of gold are so woefully ignorant of economic theory and issues that I'm convinced that the buyers now are for the most part idiots (Noah, present company excluded, of course). That's why I'm thinkin it's nearly time to bail.
Noah - be careful. If you don't understand your own explanations, maybe it's time to rethink. Your "debasement of currency" argument makes no sense at all unless you mean hyperinflation (which you say you don't). How exactly are they different?
Look, I think the bubble still has legs, and I wouldn't be surprised to see it hit $1200. But when I see "debasement of currency" mentioned without a clear understanding or explanation for what that means, I know the buyside is driven by emotion and dumb money. Soon it'll be time to sell.
Posted by Noah
Thu Feb 19th, 2009 01:03 PM
anon - you pose great question with 'your' statement:
"Noah - be careful. If you don't understand your own explanations, maybe it's time to rethink. Your "debasement of currency" argument makes no sense at all unless you mean hyperinflation (which you say you don't)"
Let me explain my view, with both of those dynamics included.
Many people I talked to about the gold trade, which was 8-12 months ago, argued that it was as an inflation hedge for 2009. They for the most part argued against deflation at the time, and were more concerned that we will have an inflation problem in the near future (which is now, since 8-12 months passed and that was their argument for this latest gold rise) because of all stimulus.
I partially agreed, but I did not think that was what the gold trade was about. I argued that we would have deflation now, that would last a long while. They then questioned why I would want to own gold - normally an inflation hedge.
My argument for the current rise in gold lies in global gov't interference and debasement of all fiat currency in response to worldwide deflationary forces.
I think there is a better definition of inflation, especially when it pertains to the current mess we all face; and Mish nails it. Inflation is an expansion of money & credit; emphasis on credit. Now years ago I thought differently, and argued that commodity inflation and a general rise in cost of living through decrease in the dollars purchasing power was inflation - seemed like a good definition, and a widely shared one. But I tweaked that over the past 24 months as I educated myself more on the physics of money, the multiplier effect of money, the role of the federal reserve, how our fractional reserve banking system works, etc. I agree with Mish for some time now, and view inflation as an expansion of money/credit.
So, I have been in the deflation camp for a while now, not fearing inflation at all and therefore not applying inflation as the reason gold will rise. Credit is clearly contracting big time, and the destruction of wealth in the shadow banking system is enormous. The destruction of wealth in general is quite amazing, when you add in contract of housing wealth, equity wealth, etc.. Guys like John Williams argued for hyperinflation in 2009, years ago. But this is not the case, is it?
With the fiercest deleveraging phases of deflation behind us, it is the global debasement of currencies and CB printing that is making gold rise as an alternative form of money. Are currencies being debased, YES! Is there global inflation, NO! Gold is rising now and close to breaking highs. Is it because of inflation, or near term inflation fears? I dont think so. Im sure many are in it for those reasons. But I think the real reason is a declining confidence in fiat currency, and a rush to gold as it is viewed as money. Thats the trade.
Now, because of debt deflation and the fact that this process will play out longer because of govt interference, than it normally might have, I see years of lagging side effects from this deflationary episode. I dont see inflation, but I expect gold to rise.
As time goes on, we might have a buildup of inflationary forces as credit deflation nears completion, and perhaps reverses. Maybe it will spike up, more than likely it won't due to over-regulation. But perception of future inflation, or hyperinflation Zimbabwe style, may power gold further.
The point is this, if you bought gold 12 months ago because you knew we would see hyperinflation by 2009 due to collapsing dollar, and bet gold would rise, you got lucky. Your bet won, but it is not because its the Weimer Republic. Which means your definition of inflation, or hyperinflation, should be adjusted and theory on why gold is rising, rethought.
Thoughts? And thanks for great comment!
Posted by imdumb
Thu Feb 19th, 2009 01:36 PM
okay, I am completely lost here but I must say that I look forward to see where this comment thread goes!
Why is gold really rising?
Posted by ann
Thu Feb 19th, 2009 01:47 PM
what does this have to do with real estate??
Posted by lars
Thu Feb 19th, 2009 01:56 PM
I have to tell you, I have never been able to get my mind wrapped around the modern day notion of gold as a store of value beyond its industrial worth, which at these levels is not relevant.
It is only by convention of acceptance that it is used as "currency" (the same principle behind fiat currencies). Might as well be designating black pearls or green sea shells, which are limited by nature as well.
I cannot shake the "Emperor has no clothes" feeling. Obviously a lot of people disagree with me, but I just don't get it.
Posted by anon
Thu Feb 19th, 2009 02:46 PM
Lars - that is correct. The emperor has no clothes. The notion that gold is a "currency" or a "store of wealth" is no more valid than saying the pound or dollar (or wood, or peanuts) is a currency or store of wealth. And again, saying that all fiat currencies will be debased is equivalent to saying that there will be hyperinflation, so the gold bet is a bet on hyperinflation.
Looking at gold's historical performance, you see that it goes up-down-up-down-up-down.
In other words, it is no better a "store of wealth" than any speculative investment. It goes up, it goes down. You make money, you lose money. It's a bet.
You want to hedge against oil prices going up? Buy oil. You want to hedge against ag commodity prices going up? Buy ag commodities/seeds/a farm.
Posted by ben
Thu Feb 19th, 2009 03:43 PM
Hey there Noah,
I have been holding gold (AU)for 5 months and it has been increasing since mid November. Do you think it will continue to increase through till the summer or is it going to level? I think once people start learning how to live in a recessed economy they will begin to have faith in the dollar again and budget better. This might lead to gold leveling off, do you agree?
Posted by jeff
Thu Feb 19th, 2009 04:11 PM
I'm long gold and I am going to hang in there for a while. Noah's post raises some great points and the truth is very few people understand global capital flows well enough to really make a call here....everyone has an uneducated opinion so here is mine. Global capital is flowing from the Canadian $, Euro, Ruble, Shekel and other various and sundry somewhat free trading currencies into the Japanese yen and US dollar. Why? because there were bubbles worldwide, whether it was the Tar Sands bubble in Canada, oil and property bubble in Russia, Capital Goods/Infrastructure/Real estate investment in China or whatever else. Whose bubbles were the worst? is very hard to say, because in part a lot is going to depend on what governments do to react to the bubbles popping and how really bad the underwriting, over-investment and debtors balance sheets were. I may be a minority in believing that ultimately China's bubble will be shown to be massively worse than anyone else's....but some smart guys are starting to lean my way. Money is flowing into the Yen because the Japanese people have a mountain of personal savings, so even though their government is more in debt than the U.S. they actually have real taxing power to fall back on, and the yen is super liquid. People want to own the dollar for liquidity, and because we have one of the most transparent and most proactive governments, biggest bond market and the strongest military etc. Most all countries will be taking on huge debt to paper over the losses from their bubbles and fight deflation and their will be social strife as well. In this environment interest rates are super low, so the opportunity cost of holding a (non yielding) commodity isn't that bad. Foolishly or not people believe gold is a store of value (if you ever had to run from your home it was). Now the world's annual production of gold could be absorbed by one month of China's foreign exchange earnings, so I don't see gold becoming the "currency standard" ever again or a haven for any government's monies. But as long as we have worry in the world about deflation gold should hold its value or increase, better yet if all the stimulus in the world finally starts working and we end up with inflation, gold should participate from a jewelry/industrial standpoint, though it will do far less well than ags or energy commodities that are far more cyclical.
Posted by Noah
Thu Feb 19th, 2009 04:49 PM
anon - that is exactly the arguments I got into in early 2008 with a bunch of friends, exactly! The problem is they said by this time in 2009, we will have hyperinflation (or at least drastically rising inflation) and that gold will rise as a result.
So, do we have hyperinflation right now? Will we have hyperinflation in 2010? 2011? Okay, maybe we will see inflation return with a vengeance in 2-3 years from now, but that is NOT the reason gold is rising right now while global economies face deflation.
Look, Im not denying the possibility of inflation, and I even mentioned it in the piece very clearly:
"...the future whiplash-inflation trade (maybe 2012-2013) will be slowly building as the Kondratieff Winter plays out. It seems logical that the gold trade is a multi-year trade; if it doesn't get parabolic too early."
Im just saying that right now gold is rising because of a decline in confidence in fiat currencies globally as a result of deflationary forces from a parabolic credit boom gone bust. Not the most inflationary environment! Who trusts who? People want a new store of value, and they are looking to gold. Its not that I see gold as a currency, where we will trade gold bits for bread. Not at all. But confidence in paper money when the whole world is printing, is declining and currency valuations are all relative anyway. People also argued that if the US dollar strengthened, as it should in deflationary times, gold priced in dollars will fall drastically - yet the disconnect between gold and the US dollar seems at hand. The discussion explains the gold move right now, not in 2010, 2011, now. Why is gold rising now, when clearly the threat of hyperinflation in our near future is silly?
This is all great stuff. Lets keep this going and I hope we all still respect each other no matter where this goes, or our view on gold.
Posted by Noah
Thu Feb 19th, 2009 05:02 PM
Last thing, there is no hyperinflation now, and there wont be for a long while. Will it come, very very possible. Who knows when. Will it be out of control? Also possible. I dont like looking out more than 6 months or so with the instability out there right now. You can have a great trade on, or bet as you say, and a new round of deleveraging comes and sends your asset class plunging.
For now we have deflation, and gold is about to bust out. Why? Nobody trusts fiat money / governments / banks, and everybody is scrambling to cut rate cuts, perform rescues, bailouts, draft insane stimulus packages, and begin quantitative easing; which prevented a systemic collapse so far, but one can still happen at any time.
If you don't have this fear in your mind, then I think you are either in seriously denial or you don't quite 'get it'. That fear, is also part of the gold trade and results from a lack of confidence in fiat money.
Posted by anon
Thu Feb 19th, 2009 05:10 PM
Noah - completely agree, it is a good discussion.
The fact that gold has disconnected from the dollar, however, is precisely what gives me pause. The argument that people are losing faith in the currency only makes sense if the dollar weakens dramatically (inflation) or is expected to. In other words, by definition the gold play is an inflation play. It doesn't make any sense that people would "lose confidence in fiat currencies globally as a result of deflationary forces" - quite the contrary, cash is king.
Posted by anon
Thu Feb 19th, 2009 05:23 PM
Again, Noah, you point to this "fear" or "lack of trust" as the reason for flocking to gold, but then say that hyperinflation is not likely.
Then please explain what, exactly, you are afraid of. If hyperinflation (or severe inflation) is unlikely, what exactly is the risk of holding cash? Will the dollars spontaneously combust? Will they turn on us and choke us in our sleep?
You talk about "fear" but you cannot articulate what you are afraid of. If it is that the dollar will lose its value, well that is the exact definition of inflation/hyperinflation. Yet you say you doubt that will occur. So what is it that has you so scared?
Again, deflation is a reason NOT to hold gold. Because gold is performing well now doesn't prove that deflation causes gold to go up (there's no logic for a causal relationship) so you need to ask yourself why it's going up.
Nobody I've spoken to, including the goldbugs, has a good answer. The answers that come off of all the technical websites make zero economic sense. Therefore, the only answer I can come up with is simply that it's a bubble.
Posted by Noah
Thu Feb 19th, 2009 05:37 PM
lovin this discussion...
anon 5:23PM - Im confused by some points you made. "Again, deflation is a reason NOT to hold gold". Where is that a written law? And I think you greatly underestimate and have a different interpretation of 'fear', when it comes to investing; especially speculative investing.
What am I afraid of? Umm, how about The Great Depression 2? 25% U6 unemployment. Crime. A systemic banking collapse. Runs on Citibank worldwide. Money Market Funds breaking the buck when governments dont have capacity to intervene at the required levels. China dumping US treasuries. Bond market selloff sending rates surging, GE failing AIG style, Protectionism, Over-Regulation, Bond market plunge, etc....in this world, anything can happen. Hence gold.
These are fears. Am I walking around, hoarding nutz and scotch? No. Im living my life. But I own gold because of my fears and because most fiat currencies, are being devalued, and at the same time in response to the same crisis.
I really think gold can surge to 1500, and if it does, I do not expect there to be a threat of inflation at the time or in the near future. I think it will happen in response to an event. I never said deflation CAUSES gold to rise, I said I believe we are facing deflationary forces, and I own gold because I view it as money, capital preservation, a safe haven as the financial system and therefore the credit system implode, unleashing a deflationary winter on the world.
Posted by anon
Thu Feb 19th, 2009 05:50 PM
I hear ya Noah. I hear the fear. But, again, unless you think there will be significant inflation, there's no reason not to hold cash. If you're holding gold because you think cash will be worth less due to inflation, that I can understand. I may not agree with you that there will be inflation, but I'd understand where you're coming from.
So you hold gold because of fear. Implicitly, it is a fear of inflation. My question is, why do you differentiate between "currency debasement" and inflation? How exactly are they different?
Posted by Noah
Thu Feb 19th, 2009 06:29 PM
because I view inflation as an expansion of credit/money. Plus I view the gold trade as being powered by many fiat currencies being debased at same time in response to same deflationary crisis.
If asset prices, commodities, and credit all deflate, any inflation from debasing of currencies will be offset by outside deflationary forces. Yet gold will rise as fiat currencies are printed and worth less. At some point, credit will expand again, and that might fuel the gold trade higher at that stage, or likely, a period of months before. I think it will get silly, and wall street could use a new bubble.
Like Ray Dalio said: "Not much in the way of inflation is produced, because what you are doing actually is negating deflation"
This is the best I can describe my view.
Posted by sang
Thu Feb 19th, 2009 06:53 PM
Hi Noah,
So here we are talking about our good old friend Gold again...
I'm sort of busy right now, so I'll keep it brief.
There are two fundamental reasons with regards to being long Gold.
1. Inflation hedge- we all know this argument. Today, we saw an increase in PPI which surprised many. The hard part of this analysis is the timing. When will velocity of money skyrocket to reflect the money supply explosion? Not right now. This is the longer term (as in multi-year) investment angle.
2. Loss of confidence in fiat monetary system- this is what's driving the price up right now. Eastern European countries are on "default watch" with the Germans ready to step in and bail countries out. Nobody wants to buy government debt anymore. Nouriel came out today with an analysis that a 'sovereign' entity may go bust. The implications are severe if that were to occur. Speculation is that Europeans are driving Gold prices up. GLD holdings are at record levels. The severe drop in jewelry demand has done nothing to offset the massive influx of investment demand.
In the end, both fundamental analysis point to an increase in Gold prices due to Investment demand. Expect the 5th and final wave in the Elliot wave supercycle to continue as we test, and then eventually break previous highs.
A correction is due soon, barring some serious collapse of some European country. This will provide a great entry opportunity for those who are relatively late to the game.
Gold may very well blow up into a bubble, but we are not there yet. The market cap is so small that if large Funds were to allocated a tiny percentage into Gold, it would blow past $1,500 and even $2,000.
Once we start to see the signs of a mania in Gold, then my friend, is the time to realize gains and sell. That time is still far away from now.
Posted by Noah
Thu Feb 19th, 2009 08:16 PM
anon - excellent MISH piece today, happens to be very relevent to our discussion. Please take 10 min to read, and Im curious to your thoughts?
I totally agree with the theme of his argument.
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html
Posted by Bolek
Thu Feb 19th, 2009 11:08 PM
I've been reading your blog for quite a while because it provides me with a unique (very good) perspective of the world than what I get from other internet links (or my world in Detroit). I really appreciate your opinion and the comments from your readers.
My opinion on why Gold is strong:
- People are afraid that our government and other governments will screw up and that we will all fall into a financial pit. There is fear that we will wake up on a Monday with a new "system" which negates decades of savings.
- Gold is an insurance policy. An investment of 5 or 10% of your wealth in gold may give you some survival "chips" if the rules are changed.
Posted by Bolek
Thu Feb 19th, 2009 11:09 PM
I've been reading your blog for quite a while because it provides me with a unique (very good) perspective of the world than what I get from other internet links (or my world in Detroit). I really appreciate your opinion and the comments from your readers.
My opinion on why Gold is strong:
- People are afraid that our government and other governments will screw up and that we will all fall into a financial pit. There is fear that we will wake up on a Monday with a new "system" which negates decades of savings.
- Gold is an insurance policy. An investment of 5 or 10% of your wealth in gold may give you some survival "chips" if the rules are changed.
Posted by anon2
Thu Feb 19th, 2009 11:18 PM
I agree with anon. Inflation by definition is the decrease in the buying power of money - or an increase in the price of goods that the money can buy. The debasement of currency that you talk about is exactly what inflation is.
Inflation does not have to happen now for gold to increase in price. If a govt is clearly pursuing policies to prevent deflation, they will cause inflation at some point in the future. This is the the 'debasement of currency' that you talk about, so gold can rally now in expectation of this fact much before the actual inflation occurs and shows up in measures such as CPI etc.
Posted by anon
Thu Feb 19th, 2009 11:23 PM
Noah - I read the Mish piece, thanks.
What he starts out saying is exactly what I have been saying for some time, using different words. That in order to understand "inflation", one needs to have a proper understanding of money supply/velocity and the role of credit as well as the shadow banking system (securitization).
Mish also emphasizes the unwillingness of banks to lend, but the real problem now (and this was the problem in Japan) is that individuals and corporations are not willing to borrow. It's a demand-side issue.
Every day in my work I review and talk to companies that have tabled their discretionary cap ex and expansion plans because the returns don't make sense given the economic outlook. What that means is that companies are not borrowing. In fact, they are focused on reducing debt and preserving cash.
Similarly, every day I talk to individuals (as I'm sure you do) who are doing the same thing on a micro level - not eating out as much, not taking cabs as much, and - of course - not buying apartments.
Bringing this into the context of inflation, this is against the backdrop of the vast destruction of credit that has decimated the money supply.
OF COURSE this is why I cannot fathom anything but deflation at this point in time. Even in late 2007 as I struggled with the Fed's policies, I came to the conclusion that the wipe-out of credit was massively deflationary and that the Fed could barely cover the bottom of the bucket, let alone refill it. Only after reading more about Japan's situation did it become clear to me that really short of a colossal fiscal stimulus (a la Krugman), we will not see anything resembling solid inflation for a very very long time.
In fact I believe the inflation that everyone fears will happen has already occurred. It occurred with the rapid rise of commodity, real estate, security and other asset prices from 2001-2007, and was driven by the credit bubble (Mish's MV(Fc)). What we're seeing is a deflation of those asset prices along with the decline of MV(Fc). Until Fb compensates for the trillions lost in MV(Fc), we can't even get back up to prior asset/commodity prices, correct?
He is ABSOLUTELY correct in dismissing comparisons to Weimar/Zimbabwe. Every time I hear a goldbug talk about Zimbabwe, I laugh my ass off and think about selling gold.
As he says, the issue ultimately is psychology, and the cat is out of the bag there. We are now mired in what some call a "Balance Sheet Recession" in which corps and individuals do exactly what they should do individually (deleverage) but which in the aggregate is an economic disaster. We can put a gun to lenders' heads and try to force them to lend, but it won't work if borrowers won't borrow.
Also, if you saw the hearings with the eight banks you heard them say that their lending has actually gone up since the TARP was implemented. But the problem is that the shadow banking system (securitizations) is gone, and that's a much bigger problem.
Posted by Noah
Fri Feb 20th, 2009 08:34 AM
so we got some differing definitions of inflation here, and this is not a new debate. So, here people say inflation is:
1) debasement of currency - purchasing power of US dollar declines
2) expansion of money/credit
3) too much money chasing too few goods
Of course some of these definitions are interconnected and have causal relationships with one another. My argument is that #1 / #3 are not applicable right now, or in the near future.
#1/#3 is NOT happening! It doesnt apply here today or in near future. #2 in reverse is EXACTLY what is happening - hence deflation, or a contraction of credit. Now you look at the base money supply and see a huge surge, but that is because of printing that is trying to fill a void of the huge destruction of wealth in the shadow banking system. Money is being hoarded in excess reserves, not lent, and Jeff & I argued this over and over again using St. Louis Fed data for months. You can see it. Its not in the system. As far as Im concerned, there is a huge contraction of wealth out there, whether it be from the housing bust, equity bust, or commodity bust that hurt those in these asset classes. Certainly people do not have MORE money right now, they have far LESS net worth's. When you see multiplier effect spike back up, then you start worrying about this money that was printed entering the system in out of control ways. Its a 1-2 punch, with inflation being the latter. Right now, the initial punch is global fiat money debasement and loss of confidence in paper money.
So what applies right now, or to stay on topic, those that bought gold a year ago because of inflation fears only to see gold rise now.
You guys must understand, inflation is a threat, yes, but that is a far away threat! Deflation is here now and gold is rising because:
1) fear
2) global debasing of fiat currencies
Money is relative right, and this proven by the US dollar surge as foreign currencies reflect their local economies severe slowdown. People are rushing to the dollar as a safe haven, even with our dollar destructive policies, 0% rates, and QE in full force right now. The purchasing power of your dollar is HIGHER than a year ago! YET gold rises!
Put it this way, if I told my friends a year ago, who argued gold would rise because of inflation and dollar demise, that the US dollar in FEB 2009 would be HIGHER than in FEB 2009, they would tell me that gold would go down - because of the inverse relationship of the gold to the debased US dollar causing inflation. That would be wrong! Look at today.
To say you are buying gold OR that the rise of gold right now is because of hyperinflation threats in 2-3 years, is crazy! Markets dont look that far out, and IM sure this statement will cause a stir. If they did, oil would not be at $36! Markets, especially unstable markets with little confidence, look more near term! Nobody knows what will happen 6 months from now, let alone 3 years from now.
Its not that the US is debasing, everyone is; well maybe not China so much who we claim to manipulate their currency to stay low for their exports. Its global destruction of fiat currency, the lack of confidence in financial system, and worldwide printing in response to credit deflation that is causing a rush to gold, as an alternative form of money unencumbered by central bank interference or debasement. A store of value. That is the gold trade. And the best part of understanding this, is that in 2-3 years, yes, we could see the whiplash inflation trade bully gold higher.
But I dont think that is what is powering gold right now - after all, look at the US dollar! It disconnected.
I agree with SANG above, that gold is rising now due to a global lack of confidence in fiat money system - and failure of gov't to raise debt in future is a BIG concern as they rush to stem their local slowdowns. Gold is finite
GREAT discussion!
Posted by anon
Fri Feb 20th, 2009 08:55 AM
Noah - you talk about "global fiat money debasement" as if it's something completely different than the loss of purchasing power of a currency.
Again, I will ask you the same very simple question:
If you do not fear a loss in purchasing power by the dollar, what do you mean by "currency debasement"? What is "currency debasement" if not a loss in purchasing power?
Not to be a smart-ass, but what the hell else does "currency debasement" mean besides loss of purchasing power? Does it mean the currency will start insulting your sister? Does it mean currency will behave badly at parties? WHAT ELSE IS CURRENCY BESIDES PURCHASING POWER??????
Look, I've studied economics for years and I have still have no idea what the difference is that you're talking about. I do like, however, the fixation on many blogs with the terms "fiat currencies" and "global currency debasement" as if they're self-legitimizing terms for something far crazier and complicated than simple loss of purchasing power.
So, to sum up, you are missing two key points:
(1) "currency debasement/destruction/etc." = inflation. If you disagree, you haven't explained what you mean by currency debasement, or what the effect of this currency debasement will be (aside from inflation).
(2) You use faulty logic to justify a causal relationship that does not exit. Your argument is "we're not experiencing inflation, but gold is going up, therefore gold going up is a hedge against currency destruction, even in deflation". Where do I start, Noah? First of all, if the price is going up in anticipation of inflation, that I understand. I don't necessarily agree we'll see inflation, but I get it. But you don't seem concerned about inflation, and instead seem to be trying to back into an argument to support gold that simply makes no sense - that gold is a hedge against this so-called "fiat currency debasement that is not inflation."
Posted by anon
Fri Feb 20th, 2009 09:49 AM
Sorry Noah - just feel I'm banging my head against the wall in this debate.
Btw - jumbo loan defaults are up significantly, per Bloomberg. A huge one-two punch to NYC: (1) cost of jumbos will stay high, possibly rise and availability tighten to reflect greater risk and (2) the govt is doing nothing outside the land of conformings.
Posted by Seller
Fri Feb 20th, 2009 09:53 AM
Compared to you guys I'm an economics ignoramus, but I understand anon's point because it's very straightforward. I think I MAY understand what Noah's point. Let's see whether I've been following it correctly- or need to put my dunce cap on and go sit in the corner.
I think Noah's argument for gold is that it's an alternative to the global financial system in general- meaning that even though the dollar has increased purchasing power due to deflation right now, the forces that regulate it are in flux, making hoarding of it potentially dangerous. On the contrary the value of gold is and always will be completely market driven. Therefore, a loss of confidence in the "system" that regulates global fiat currencies will drive people to gold because it for the most part is immune to the actions of governments and financial entities thus making it a reliable hedge against any anomalies that would cause the hoarding of dollars (or any other fiat currency) to be dangerous (ex. runs on banks, a depresssion, etc.)
Am I close on this?
Again, just an economically uneducated observer trying to see if I'm getting what's being debated here.
Posted by Noah
Fri Feb 20th, 2009 09:59 AM
anon - Dont worry, this is not personal so lets be openminded. Second, your faulty logic you mention is not what I said. Use a direct quote from me if you are to claim my logic is faulty.
I believe I am in gold for the right reasons - viewing gold as money as confidence is lost in fiat monetary system; paper money.
You are stuck on only one definition of inflation, as a reason gold is rising, when that exact definition is occurring in reverse today! So I have every right to be asking you questions. The US dollar is rising. You say inflation is currency destruction/debasement. I do agree with that, to a point but I say inflation is better defined as an overall expansion of money/credit. I couldn't be clearer.
Its NOT a fear of a loss of dollar purchasing power I am afraid of right now (2-3 years from now is a diff story - but that is the tail-end of the gold trade as I mentioned in the discussion), its a fear of loss of general confidence in paper money globally causing a systemic banking/financial collapse. Look at Antigua right now after the latest fraudster. You dont seem to grasp your mind around this - and are stuck with only one textbook definition of inflation - CURRENCY DESTRUCTION. Economists have been debating the best applicable definition of inflation for years, and fact is there are different interpretations of inflation.
YES, currency debasement is monetary inflation, but does this really apply today as the best definition for inflation? There are those who bought gold 12 months ago ONLY because of the expected price inflation as a result of a weaker, destroyed dollar. Turns out they were partially correct as the US dollar rallied about 20% since that time. That logic saw the desired outcome in gold prices, without the destruction in the US dollar they originally called for? So I ask you, what is missing? The dollar is strong in relation to a currency that is depreciating faster. GLOBAL PRINTING at the same time for the same crisis.
But what happens when the currency is debased, a form of inflation, and CREDIT IS CONTRACTING AT INSANE LEVELS causing a severe global slowdown unseen for 70 years - i.e., a form of deflation? What happens if currency is debased and asset/commodity prices fall? Is this inflation?
So, lets be open minded here. Is inflation really a threat right now? NO! Is deflation? YES! Does the fed desire a weaker dollar? YES! Is the fed debasing our currency via policy and micromanagement of interest rates? YES, policies are dollar negative! For heavens sake, they are buying up agency debt and will likely buy treasuries from primary dealers to directly try to re-inflate us OUT of a deflationary spiral. Is the dollar weakening? NO, as called for in Fisher's debt-deflation theory! But inflation is a hope for them, and its no where to be seen for now. So lets stay on topic and figure out why gold is really rising here?
Gold is rising now because of a loss of confidence in paper money, as every CB prints at the same time to counteract the same crisis. Its a loss of faith in fiat, oops I mean, paper money. They want something tangible, but that is also viewed as money, that is not tied to debasing that will prove a store of value over time against paper money. Don't use the term FIAT as if it is something magical, and complex. Its not. I get it. Just because the US government, or the Icelandic government, or the EU declares their paper money can be used to pay taxes and all debts, public and private, doesn't mean people will trust the governments that print them. Dollar strength/weakness is a relative thing. Gold is money, and right now it is proving valuable as we experience deflation.
Posted by Noah
Fri Feb 20th, 2009 10:06 AM
Seller - yes, you got it except add in 'ALTERNATIVE form of money...to the global financial system in general-"
Posted by Noah
Fri Feb 20th, 2009 10:31 AM
I just realized a mis-stake in my writing in the A: section:
This: but more of a debasement of paper money/fiat currency trade that ultimately could test its inflation adjusted high
Should READ: but more of a lack of faith of paper money/fiat currency trade that ultimately could test its inflation adjusted high
I think this may have caused some issues here. Ill correct. Sorry.
Posted by sang
Fri Feb 20th, 2009 10:38 AM
Looks like a good discussion going on here!
What's the difference between Gold and Fiat Paper money?
1.
Supply of Gold is essentially static. Fiat Paper money can be created out of thin air.
2.
Gold has no liabilities or counterparty risk. Fiat Paper is backed by the Central Banks of nations.
3.
Gold has been around as a form of currency, either direct or indirect, for over four thousand years and has never ever 'failed'. Fiat Paper money, on the other hand, has failed countless of times all over the world. Even in this country, the US, used to have the Continental before the Dollar was introduced- the Continental failed.
4.
Paper is easier to carry around that Gold coins.
Circle back to the two fundamental reasons for Gold's ascent in price:
A. Inflation Hedge
B. Dwindling faith in the 'backers' of Fiat Paper money
"A" is not happening right now, but the rubber may eventually hit the road.
"B" is what is driving prices up right now. The contagion is beginning to spread in Eastern Europe.
The KEY point here is that those fleeing the local currencies aren't all going into US dollars or Treasuries as they did late last year during the crash. A lot are going into Gold, hence the reason why both Gold and the Dollar are rising.
This is very important. Why would investors not all flock to the Dollar and US Treasuries?
The answer: some are beginning to doubt the validity of the Dollar and US Treasuries... people are beginning to question their legitimacy.
The seed has not only been planted, but is now beginning to sprout. Now, we will see if it actually grows.
Posted by Noah
Fri Feb 20th, 2009 10:43 AM
anon - in regards to JUMBO loan defaults rising, it shows the depth of this crisis and how subprime will expand to alt-a, prime, jumbo, cmbs, credit card, auto loan, lbo loans, etc..!! The list goes on. I discussed this ad nasuem over a year ago and on a number of different occasions.
This is why nationalization is only way, because as time goes on, the distress spreads to higher quality debt classes and higher levels of debt! Can our system withstand the shock of all these writedowns? How will banks be recapitalized? Why lend in an environment of rising unemployment, deteriorating credit quality, slowdown - when your bank is seeing performing assets start to non-perform?
This deflationary episode is crazy dangerous and I think nationalizations of banking system are near
Posted by Noah
Fri Feb 20th, 2009 10:47 AM
SANG - I completely agree! 100%
A. Inflation Hedge
B. Dwindling faith in the 'backers' of Fiat Paper money
"A" is not happening right now, but the rubber may eventually hit the road.
"B" is what is driving prices up right now. The contagion is beginning to spread in Eastern Europe.
The topic of the post was what is driving gold right now, and in my opinion, its B as you state above.
Posted by Seller
Fri Feb 20th, 2009 12:41 PM
Would I be making a valid point if I said that the argument summed up by Sang's "B" is really at best informed speculation? It seems plausible; on the one hand I agree that the global economic crisis is driven primarily by an overall lack of investor confidence in the financial system.
However, it seems to me that the world economy changes in an organic way and the forces affecting it are way too complex to identify any given investment strategy (in this case a very pessimistic one) as the most prudent.
I'm just trying to imagine the scenario where confidence in fiat currencies (especially the US dollar) has crumbled so badly that my well being can only be preserved by accumulating gold now. Should I also be stocking up on canned food and water as well?
Call me an optimist (or maybe instead far less of a pessimist), but I still have some faith that collective human ingenuity can find a way to correct the current cycle and gradually reverse it, as we always have historically.
Posted by anon
Fri Feb 20th, 2009 12:59 PM
Seller - you are spot on, just drop the "informed." :)
Posted by johnny
Fri Feb 20th, 2009 01:00 PM
spot gold just traded 1007 - 1006.90 to be exact
April gold 1007.70 high for all u gold bugs out there... and experts here say were going higher..
range today approx 970 - 1006 so big day !!!
Posted by johnny
Fri Feb 20th, 2009 01:01 PM
spot gold just traded 1007 - 1006.90 to be exact
April gold 1007.70 high for all u gold bugs out there... and experts here say were going higher..
range today approx 970 - 1006 so big day !!!
Posted by Noah
Fri Feb 20th, 2009 01:04 PM
Seller - yes I think you do have a valid point. My discussion was my opinion after all. Its not like we can go, 'Hey Mr. Gold, why are you really rising?'
People believe what they want to believe, whether its right or wrong. You think gold will rise because of inflation, then in your mind you will be right if gold rises.
I have faith too Seller, you have to. But as a trader, who views the world as a trade, I take a very short term horizon with my investments/money/assets, whatever you want to call it. Thats me.
Am I as bearish as I was 18 months ago? HELL NO! Signifcantly LESS bearish because its happening, and we have seen a great deal of pain so far. But the govt'/fed must stop meddling and interfering and let this process play out or risk serious unintended consequences in the years to come, not quarters to come, years to come. The markets are looking quarters ahead AT MOST!
Thats how I view things. Time is our ally, and we need to take the medicine to cure what ails us, save, repair balance sheets, puke up debt, defaults, speculators hurt, common shareholders of insolvent banks wiped out, preferred wiped out, bondholders take big haircut, management OUT, bad assets sold off, restructuring, bad models to DIE, and innovation to emerge, revitalizing private investment!
In meantime, we have to deal with domino effect of pain as one dynamic leads to the next, and so on! The interwoven system of credit we had that powered the boom, is gone, forever. A new world will be upon us, a new normal, but that world right now is in the midst of the adjustment/change. Let it happen, with as few unintended consequences later.
After all, how can we recover in 12-24 months if the bond market has a big reversal, and sends rates soaring, as a consequence of actions taken to stem the deflationary spiral?
Posted by johnny
Fri Feb 20th, 2009 01:05 PM
and the reason is ........... the stock market is going to 0 ..... thanks and good weekend to all!!
by the way crude is down 2 bucks ...go figure : )
Posted by johnny
Fri Feb 20th, 2009 01:17 PM
CITI ATM fees 2.50 - CITI Share price 2.00
Got gold ??
Posted by Noah
Sun Feb 22nd, 2009 10:04 AM
ANON - take a peak at this FT article, and what ALAN RUSKIN of RBS stated:
http://www.ft.com/cms/s/0/4b4a6330-ff57-11dd-b3f8-000077b07658.html?nclick_check=1
"Alan Ruskin of the Royal Bank of Scotland said that unlike last year, the run-up in gold was much less a direct consequence of the US dollar weakness than “a general flight from paper currencies”."
A GENERAL FLIGHT FROM PAPER CURRENCIES! That is what is driving gold prices right now, as all fiat currencies are being debased at same time in response to the same crisis, and confidence in paper money is declining.
Posted by anon
Sun Feb 22nd, 2009 12:33 PM
Noah - I understand what you're saying, and I'm very aware that a lot of other people are saying the exact same thing. I understand that the reason for the run-up is a flight from paper currencies. That's obvious, at least to me. My point is, if you're fleeing from paper currencies, you must be assuming that paper currencies are going to lose purchasing power. Otherwise, your actions make no sense.
In other words, I'm simply taking it a step further and asking:
What specifically do people not like about paper currency? What is it they fear?
You need to peel the onion further. Fear for fear's sake is meaningless, unless you know what it is down the road you're afraid of.
The only answer that makes any sense whatsoever is that they fear paper currency will lose its purchasing power (i.e., inflation). There's no other possible explanation. Which gets back to my original points above.
Also, with all due respect, by defining "inflation" as expansion of money/credit rather than decline in purchasing power, you're confusing cause with outcome. It's like you're saying the definition of rain is the "condensation of humidity at a high altitude" and my definition is "water falling from the sky that gets me wet so I need an umbrella". So it's not helpful to the discussion to define inflation as "expansion of money/credit" in a vacuum, when the outcome, which is loss of purchasing power, is what we are all worried about. In other words, if you define inflation as "expansion of money/credit" but don't discuss the real-life effects of that expansion (my definition of inflation), then why even care about your inflation?
All I or anyone really fears is loss of purchasing power, now or later.
Posted by Noah
Sun Feb 22nd, 2009 02:47 PM
anon - i hear you! Again, thanks for commenting. I feel that defining inflation as a loss of purchasing power, and thats it, in a time like this, is not really very practical. But that is just me. The US dollar is rising and my dollars are going further now than they did a year ago. Granted its relative to another, weaker currency, and the dollar destruction may very well come down the road. Time will tell. For now, Im in gold because of a declining faith in all fiat currencies, not just US dollars, and I think this view is growing across the globe.
Posted by Noah
Sun Feb 22nd, 2009 04:21 PM
Anon - I would go as far as to say it this way. The gold rise is NOT a US dollar hedge here. Gold is finite, and paper is unlimited. In a world of printing presses, they cant print more gold. When I argued for the rise of gold a year ago, the main reason was not a fear of dollar collapse. What will the US dollar collapse relative to? Plus, do we see wage inflation going rampant in the near future? I see reverse for a while ahead, yet gold will rise. Something else is at play here. Can gold rise at the same time your dollars gain purchasing power? Yes.
My biggest fear is government defaults on debts, I guess. Is it possible? Hard to say its not possible, I guess.
Worldwide Govt's/CB's are facing the same severe deflationary winter; and reacting in same way. Runaway Inflation is a dream ways off. If I told those who bought gold a year ago (high 800s), that the US dollar would rally 20% over the course of the next 12 months, they would probably predict a sharp decline for price of gold and never had the position on. Yet gold rises. Not a dollar hedge here.
A strong US dollar may last for a while (Fisher debt deflation theory) relative to the perceived condition of other major currencies. And I think gold will rise. Cause, outcome, reality. I guess I view the world with too much of a trading mentality.
Love this topic.
Posted by anon
Mon Feb 23rd, 2009 12:02 AM
I agree with you on that, Noah. If I buy gold as a hedge, it's as a hedge against USD since most of my assets are denominated in USD. So I personally compare it to USD cash. That's why I don't feel the need to buy (more) gold, because I'm really not worried about a collapse of the dollar.
I understand the argument that if other currencies struggle (i.e., Eastern Europe), investors holding those other currencies may move to gold, thereby pushing the price up.
In fact, those currency holders may be moving to USD as well as gold. That makes perfect sense to me. It's a hedge for people in those countries or holding those currencies/sovereign notes. But if you are a USD holder, I view it as more of an investment decision, a speculative trade.
Posted by Wall Street
Tue Feb 24th, 2009 12:40 PM
All this Gold talk is interesting. But do most of you guys who are "long gold" own physical gold or GLD? If what all the gold bugs cite as reasons for holding gold actually plays out (debasement of currency, elevated counterparty risk, failure of banks and the FDIC, etc) isn't it then logical to expect the GLD etf to also fail. Sure, the prospectus says it invests mostly in physical bullion and then futures, etc....but why can't an exchange fail, why can't the site where the gold is stored for the fund fail? Talk about counterparty risk. It seems to me the only way you are "long gold" is to have it in your basement. But then you are stuck with some hunk of Gold that you need to pay huge bid / ask on and also worry about protecting it. All you gold bugs should stop trying to make money -- just hold Cash -- Yes, Noah -- Prechter. His argument makes sense. Hold cash and wait.