Is Something About To Blow Up Big Time?

[Realistbear]

Jim Sinclair on gold -

You are witnessing the beginning of a period in the gold price that will be marked by totally outrageous volatility.

jsmineset.com

If (if) we are at a 1980 point when gold collapsed the dips may (may) signify the end of a very very long bull run. Unable to break out of a tight range, the other market fundamentals have caught up with it causing investors to look elsewhere. Its the CEFS* situation where metals & other commodities just drop for no other reason.

GOLD

10/21/2010

15:08

1322.70

1323.70

-23.40

-1.74%

____________________

*Chronic economic fatigue syndrome: end effect of an excessively long bull run without significant break outs after multiple tops are reached.

[Meat Puppet]

If (if) we are at a 1980 point when gold collapsed the dips may (may) signify the end of a very very long bull run.

Well you won't know the top until well after the fact. Look at how gold acted in 2008/9. That certainly looked like a top at the time.

Meanwhile, anyone invested in agricultural commodities? Looks like potential to go parabolic.

[JimDiGritz]

Gold options expiry isn't until next week... hmm

[Errol]

If (if) we are at a 1980 point when gold collapsed the dips may (may) signify the end of a very very long bull run. Unable to break out of a tight range, the other market fundamentals have caught up with it causing investors to look elsewhere. Its the CEFS* situation where metals & other commodities just drop for no other reason.

GOLD

10/21/2010

15:08

1322.70

1323.70

-23.40

-1.74%

____________________

*Chronic economic fatigue syndrome: end effect of an excessively long bull run without significant break outs after multiple tops are reached.

I honestly don't think you understand what is going on or the gold market at all. Perhaps you should consider giving constant price predictions on another asset or market?

[1929crash]

Can you check your source on the gold price, or is that a prediction? I make todays peak $1347.

The Giant Squid (GS) is forecasting $1650 an oz within 12 months, but of course if the dollar tanks . . .

[Georgia O'Keeffe]

I honestly don't think you understand what is going on or the gold market at all. Perhaps you should consider giving constant price predictions on another asset or market?

if i were Sibley id be mortally offended having been banned given the sheer number of comedy posts RB has managed to fire off

Edited October 21, 2010 by Tamara De Lempicka

[1929crash]

if i was Sibley id be mortally offended having been banned given the sheer number of comedy posts RB has managed to fire off

Not forgetting, of course, his famous prediction that Sarah palin would win the presidency for John McCain.

[OnionTerror]

http://urbansurvival.com/week.htm

The one constant in the SOTTC report - and something which has been hanging out there in modelspace for more than18-months, are arguably several years, is the notion that we're facing a kind of financial/world affairs version of Armageddon in the November 8-12 period (plus or minus a few days for timing, since language use is not exactly a watch with a second hand or digital read-out.

Nevertheless, we can see some some of the 'scene setting' behind the headlines with the report in the prestigious Financial Times which details for its readers how there are some severe austerity measures to be unveiled shortly by the UK government which is designed to shore up the UK's deteriorating balance sheet.

They apparently use "bots" which scan the web, looking for prominent keywords. Mind you, I think that these were the same chaps who predicted that "several leaders of the free world" would end up disappearing off the face of this earth..

Edited October 21, 2010 by Dave Beans

[Toto deVeer]

It's all in the hands of the USA at the moment.

It is the only country in the world that is assured to repay all it's foreign debt.

And the Federal Reserve (a separate legal entity from the United States) has become the second largest holder of US Treasuries on the planet. There is nothing to stop the FED from becoming by far the largest holder. This means that if China and Japan decide to dump their US Treasuries (which won't happen), the FED will happily buy them. This is a good thing as it moves foreign debt to US based ownership. As long as those purchases stay locked away at the FED then there is no risk to the stability of the dollar.

It should be remembered that there was massive dumping of US treasuries in the 1920's, reportedly on a scale as large as today in relative GDP terms and it had little, and short-lived, impact.

Where does this leave gold? Well it's a little bit like this: it sparkles brilliantly at the moment, and will continue to do so for a while longer, but eventually the buyers will realize that what they have bought is about as useful as iron pyrite, and it will end up at a similar price level. Especially when the HFT crew gets done with it.

The ideology of export your way to wealth is dying a painful death. Ultimately this will hit Asia hard. In the not too distant future, those countries of true strength will be the ones who can maintain a balanced economy. Again the US has an advantage here, provided they can agree to reign in their global defence posture.

I just don't see a 'shazaam' moment on the horizon any time soon. I think that the next few months, like the last few, are going to be utterly boring, from an economic perspective.

It will be when the new Congress takes shape in the US, around January 2011, that things will get interesting again.

[_w_]

If (if) we are at a 1980 point when gold collapsed the dips may (may) signify the end of a very very long bull run. Unable to break out of a tight range, the other market fundamentals have caught up with it causing investors to look elsewhere. Its the CEFS* situation where metals & other commodities just drop for no other reason.

GOLD

10/21/2010

15:08

1322.70

1323.70

-23.40

-1.74%

____________________

*Chronic economic fatigue syndrome: end effect of an excessively long bull run without significant break outs after multiple tops are reached.

RB, I know you are secretly curious about gold so here's a present for you. It's a piece that describes an attempt at understanding gold prices, I know I'm intrigued.

One of the most controversial topics in investing is the price of gold. Eleven years ago, gold dropped as low as $252 an ounce. Since then, the yellow metal has risen more than five-fold, easily outpacing the major stock market indexes—and it seems to move higher every day.

Some goldbugs say this is only the beginning and that gold will soon break $2,000, then $5,000 and then $10,000 an ounce.

But the question is, how can anyone reasonably calculate what the price of gold is? For stocks, we have all sorts of ratios. Sure, those ratios can be off…but at least it’s something. With gold, we have nothing. After all, gold is just a rock (ok ok, an element).

How the heck can we even begin to analyze its value? There’s an old joke that the price of gold is understand by exactly two people in the entire world. They both work for the Bank of England and they disagree.

In this post, I want to put forth a possible model for evaluating the price of gold. The purpose of the model isn’t to say where gold will go, but to look at the underlying factors that drive gold. Let me caution that with any model, this has its flaw, but that doesn’t mean a model isn’t useful.

The key to understanding the gold market is to understand that it’s not really about gold at all. Instead, it’s about currencies and in our case that means the dollar. Gold is really the anti-currency. It serves a valuable purpose in that it keeps all the other currencies honest (or exposes their dishonesty).

This may sound odd but every currency has an interest rate tied to it. In essence, that interest rate is what the currency is all about. All those dollar bills in your wallet have an interest rate tied to it. A euro, a pound, a yen; also all have interest rates tied to them.

Before I get to my model, I want to take a step back for a moment and discuss a strange paradox in economics known as Gibson’s Paradox. This is one the most puzzling topics in economics. Gibson’s Paradox is the observation that interest rates tend to follow the general price level, not the rate of inflation. That’s very strange because it seems obvious that as inflation rises, interest rates ought to keep up. And as inflation falls back, rates should move back as well. But historically, that’s not the case.

Instead, interest rates rose as prices rose, and rates only feel when there was deflation. This paradox has totally baffled economists for years. Yet, it really does exist. John Maynard Keynes called it “one of the most completely established empirical facts in the whole field of quantitative economics.” Milton Friedman and Anna Schwartz said that “the Gibsonian Paradox remains an empirical phenomenon without a theoretical explanation.”

Even many of today’s prominent economists have tried to tackle Gibson’s Paradox. In 1977, Robert Shiller and Jeremy Siegel wrote a paper on the topic. In 1988 Robert Barsky and none other than Larry Summers took on the paradox in their paper “Gibson’s Paradox and the Gold Standard,” and it’s this paper that I want to focus on. (By the way, in this paper the authors thank future econobloggers Greg Mankiw and Brad DeLong.)

Summers and Barsky explain that the Gibson Paradox does indeed exist. They also say that it’s not connected with nominal interest rates but with real (meaning after inflation) interest rates. The catch is that the paradox only works under a gold standard. Once the gold standard is gone, the Gibson Paradox fades away.

It’s my hypothesis that Summers and Barsky are on to something and that we can use their insight to build a model for the price of gold. The key is that gold is tied to real interest rates. Where I differ from them is that I use real short-term interest rates whereas they focused on long-term rates.

Here’s how it works. I’ve done some back-testing and found that the magic number is 2% (I’m dumbing this down for ease of explanation). Whenever the dollar’s real short-term interest rate is below 2%, gold rallies. Whenever the real short rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. It’s my contention that that was what the Gibson Paradox was all about since the price of gold was tied to the general price level.

Now here’s the kicker, there’s a lot of volatility in this relationship. According to my backtest, tor every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.

Here’s what the model looks like against gold over the past two decades:

The relationship isn’t perfect but it’s held up fairly well over the past 15 years or so. The same dynamic seems at work in the 15 years before that, but I think the ratios are different.

In effect, gold acts like a highly leverage short position in U.S. Treasury bills and the breakeven point is 2% (or more precisely, a short on short-term TIPs).

Let me make this clear that this is just a model and I’m not trying to explain 100% of gold’s movement. Gold is subject to a high degree of volatility and speculation. Geopolitical events, for example, can impact the price of gold. I would also imagine that at some point, gold can break a replacement price where it became so expensive that another commodity would replace its function in industry, and the price would suffer.

Instead of explaining all of gold, my aim is to pinpoint the underlying factors that are strongly correlated with gold. The number and ratios I used (2% break-even and 8-to-1 ratio) seem to have the strongest correlation for recent history. How’d I arrive at them? Simple trial and error. They true numbers may be off and I’ll leave the fine-tuning for someone else.

In my view, there are a few key takeaways.

The first and perhaps the most significant is that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation. Right now we have rising gold and low inflation. This isn’t a contradiction. (John Hempton wrote about this recently.)

The second point is that when real rates are low, the price of gold can rise very, very rapidly.

The third is that when real rates are high, gold can fall very, very quickly.

Fourth, there’s no reason for there to be a relationship between equity prices and gold (like the Dow-to-gold ratio).

Fifth, the TIPs yield curve indicates that low real rates may last for a few more years.

The final point is that the price of gold is essentially political. If a central banker has the will to raise real rates as Volcker did 30 years ago, then the price of gold can be crushed.

Technical note: If you want to see how the heck I got these numbers, please see this spreadsheet.

Column A is the date.

Column B is an index of real returns for T-bills I got from the latest Ibbotson Yearbook. It goes through the end of last year.

Column C is a 2% trendline.

Column D is adjusting B by C.

Column E is inverting Column D since we’re shorting.

Column F computes the monthly change the levered up 8-to-1.

Column G is the Model with a starting price of $275 (in red).

Column H is the price of gold. It goes up to last September.

[_w_]

_W_ you have just open my eyes. Since Poland joined Euro Zone, factories are being taken over by giant EU cartels (Bayer, IKB, Sudzuker etc, even Travel Agents!!!). Most of them are German based bussinesses. Only phew "big" companies still belong to Pols now. On the other side big deal has been done with Russia. Polish PM has just sign 27 year contract with Gazprom, who is the biggest energy/gas supplier to the EU. This "new deal" has been done quietly, behind the closed dors and details of it just start to sink through, i.e: 1. For the next 27 years Gazprom will charge Poland about 30% more than rest of the EU coutries. 2.Poland can not resell any surplus of gas, neither can import energy from another country. 3. Gazprom will not be charged for transiting gas to the EU, through Poland theritory (even though pipeline has been build and is maintenance by them) . It looks like they did it again. Like in 1939, Germans (EU) and Russians torn the country apart. With tanks back then and with "economic/political" tricks now. Worth to say is, that German industrial giants benefit from emigration. Pols can not find job at home and have to emigrate to "Fatherland" (i.e. there are 3 mayor power plant construction sites in Germany/Holland and all 3 are running by Pols (enginners, welders, you name it). Germans are simply too stupid and too expensive to do the job!

Funny though, 96 very influential people in Poland knew what is going on. I think they were ready to open their mouth and shake the nation. I am sure they were also ready to die for it. And on 10 April 2010 they did. Bussiness as usual.

From what I read this 'decapitating' of the polish leadership was most fortunate ... for the Russians. But that Gazprom deal you describes sounds extraordinary, do you have some references on this?

[_w_]

http://urbansurvival.com/week.htm

They apparently use "bots" which scan the web, looking for prominent keywords. Mind you, I think that these were the same chaps who predicted that "several leaders of the free world" would end up disappearing off the face of this earth..

The timing sounds good, I wish they would tell me whether I should buy more gold or not

[_w_]

Who wrote that fascinating post with the spreadsheet _w_? It reads like a chap called Warren Brussee, but that's just a guess based on the style.

Here's a link with source:

http://econompicdata.blogspot.com/2010/10/on-value-of-gold.html

Some chap called Edel Fenbein based on the URL at Crossing Wall Street.

[_w_]

If you view gold as money then it's a sensible long term purchase.

That's the one thing that really bugs me. I just don't see gold as money but market seems to behave as though it is. It's very frustrating.

[Tiger Woods?]

http://finance.yahoo.com/news/Gold-Drops-After-Geithner-bloomberg-767753105.html?x=0&sec=topStories&pos=7&asset=&ccode=

Gold Drops After Geithner Says Currencies `In Alignment,' Boosting Dollar

.

Wendy Pugh, On Thursday October 21, 2010, 2:10 am EDT

Gold declined after U.S. Treasury Secretary Timothy F. Geithner said that the major currencies are “roughly in alignment,” boosting the dollar and curbing demand for the precious metal as a haven.

What is disturbing is that you can be sure that no one actually believes Geithner's statement, rather they behave as if they believe others believe it, even though they know they don't. Quite interesting how false signals that everyone understands to be false can cause coordinated action.

[Errol]

I just don't see gold as money but market seems to behave as though it is. It's very frustrating.

Read a history book. Gold has been seen/used as money for thousands of years. You may find it frustrating, but it's true.

[50sQuiff]

That's the one thing that really bugs me. I just don't see gold as money but market seems to behave as though it is. It's very frustrating.

No wonder it bugs you. Do you financial brats actually read any history nowadays?

[Realistbear]

Read a history book. Gold has been seen/used as money for thousands of years. You may find it frustrating, but it's true.

This is a common misunderstanding as to the nature of gold. History shows ther purchasing power of gold is in a constant state of flux. Gold has no value apart from the value ascribed to it in relation to the price of the thing for which it is exchanged. A coin or banknote is no different as its value is also based on whatever the market ascribes to it. Sometimes gold values crash as in 1980 and so do currencies where GDP* has collapsed (Zimbabwe is a good recent example). The bottom line with all things that have value ascribed to them ( a "fiat" if you like) is that their value is determined by the market.

Gold has no intrinsic value as you cannot eat it, drink it of realistically build shelter with it. Therefore, it must be exchanged, like currency, for one or more of the basic and inescapable needs (food, clothing shelter). As the old adage goes: aman dying of thirst will give all of his gold for a glass of water. How much then, is gold worth per ounce in that micromarket? Intrinsicity is therefore relative and dependent upon ascribed value depending upon market forces--much like other forms of exchange such as money.

It is fascinating to see gold dropping for a third day in a row. Not yet a bear market though as we must first see a correction (10% from the top) and we are nowhere near that point yet. We should see more buying on every dip unless it gets close to the point at which the small investor panics or decides to preserve profits.

GOLD 10/22/2010 04:35 1318.70 1319.70 -7.00

-0.53%

______________________

* GDP is a large factor in determining the credibility of a nation's currency. Zimbabwe's GDP dropped to almost zero which was accurately reflected in the Zimbabwe currency. Many think the US $ will be worthless but as long as their GDP remains as high as it is it will not become worthless.

[Injin]

Read a history book. Gold has been seen/used as money for thousands of years. You may find it frustrating, but it's true.

Really read a history book.

Gold hasn't been used as money by most of humanity at any point.

It's for kings and princes, nobles and earls. Everyone else has been using copper, silver, fishheads, ciggies, beer and labour.

[sbn]

This is a common misunderstanding as to the nature of gold. History shows ther purchasing power of gold is in a constant state of flux. Gold has no value apart from the value ascribed to it in relation to the price of the thing for which it is exchanged. A coin or banknote is no different as its value is also based on whatever the market ascribes to it. Sometimes gold values crash as in 1980 and so do currencies where GDP* has collapsed (Zimbabwe is a good recent example). The bottom line with all things that have value ascribed to them ( a "fiat" if you like) is that their value is determined by the market.

Gold has no intrinsic value as you cannot eat it, drink it of realistically build shelter with it. Therefore, it must be exchanged, like currency, for one or more of the basic and inescapable needs (food, clothing shelter). As the old adage goes: aman dying of thirst will give all of his gold for a glass of water. How much then, is gold worth per ounce in that micromarket? Intrinsicity is therefore relative and dependent upon ascribed value depending upon market forces--much like other forms of exchange such as money.

Oh RB - what is this??

I'm no goldbug, and I think it is due for a good tanking, or at least some serious volatility, but some of what you wrote there is FUBAR!

Paragraph 1. Answer: You cant print gold

Paragraph 2. Answer: In that micro-environment 1 glass of water is worth one mans stock of gold. Presumably the water is in pretty short supply (otherwise the dehydrated chap would find a tap)! So the relevant fact is the price of the water, not the currency used to buy it. I bet either the gold or the water would buy a lot of something that was abundant and not needed in that microenvironment. Assuming its a desert, the water or the gold might be enough to buy the entire desert and all the sand it contains - it still says nothing about the value of the gold, but speaks volumes about the relative scarcity of things. And in the world we live in there is a lot more water and sand than there is gold

Edited October 22, 2010 by sbn

[Guest_FaFa!_*]

It is fascinating to see gold dropping for a third day in a row. Not yet a bear market though as we must first see a correction (10% from the top) and we are nowhere near that point yet. We should see more buying on every dip unless it gets close to the point at which the small investor panics or decides to preserve profits.

Gold is dropping for a second day in a row, Wednesday was an up day.

Test of 1300 is likely IMHO, it'll be interesting to see what happens at that point.

[_w_]

Read a history book. Gold has been seen/used as money for thousands of years. You may find it frustrating, but it's true.

Past performance is no guarantee of the future, etc. etc.

We also used caves as homes but it doesn't apply now. How about sea shells as money. Are they still money because they were in the past?

This argument is flawed IMO.

[_w_]

No wonder it bugs you. Do you financial brats actually read any history nowadays?

I do read history books. Have you? If you have could you tell me why copper, silver, sea shells, tobacco leaves, etc. shouldn't treated as money now?

Edited October 22, 2010 by _w_

[gravity always wins]

Really read a history book.

Gold hasn't been used as money by most of humanity at any point.

It's for kings and princes, nobles and earls. Everyone else has been using copper, silver, fishheads, ciggies, beer and labour.

Everyone else is stupid.

Edited October 22, 2010 by gravity always wins

[Timak]

Gold is an easily portable asset with global demand and therefore a good hedge against the collapse of a particular currency.

In that respect it is no different to a Picasso sketch or a boxed Star Wars figurine

The quasi-religious stuff about Gold is a bit creepy if you ask me.