Gold strategy in the current economy

[warpig]

I take your point [if] gold was only used in manufacturing, but it isn't. Gold is the ultimate currency, it trades on currency desks and is held in increasing volume by central banks, who refuse to hold copper, oil, silver or anything else to support their currencies. Now with that in mind, how can a currency become a bubble... it can't.

The reason it was different in 2008 was because there was a flight to the reserve currency, partly to settle dollar denominated debt and partly because it was seen as a safe haven. The "flight to quality" won't happen again, the USD is not a good store of value since the introduction of QE^X. Each successive dollar devalues it's predecessor, it's simple supply and demand.

Sine270 nailed it perfectly. Goldbugs don't use leverage, speculators do. When someone encourages you to spend beyond your means --> "Caveat Emptor!"

Perhaps that's the difference, I believe they'll try to solve the financial crisis in nominal terms and that gold is money, whereas you don't. Fair enough and that's the decision anyone thinking of buying some gold has to make.

Are you serious? Just google gold bubble.

Or look at the chart you posted.

Or look at any other bubble charts. I referenced Jeremy Grantham's work on 34 historical bubbles in a post above.

Or compare the 1980/1 bubble with the current parabola.

The only thing it's impossible to know is how far it will expand and when it will crash. I have no more idea on this that you do, but my opinion is set out above. This appears, based on the 80s bubble, my reading of Grantham's work i.e. bubbles avg duration is 3.5 yrs up and 3 years down, the duration of secular (as opposed to bubble) markets etc etc to indicate this is the final or penultimate phase of this bubble. In the absence of evidence to the contrary I'm going with final.

I've taken the '08 gold crash as the likely starting gun for the average 3.5 yrs upleg, which would take us to first half of 2012 for the top. Unlike the 'it's different this time' crowd I don't see any reason to expect that to be the case, and expect the parabola to steepen then blow off and crash with the immediate aftermath somewhere around 50-70% of the top. Meaning the risk of buying anywhere along that line is fairly high.

Since I don't see any difference between a gold bubble and any other bubble i.e. BTL/Houses I see no reason to urge people to buy gold like you do. The very fact of urging seems no different to the urging to buy houses during the house bubble or miss out forever.

Can you not see the problem?

Ultimately I see the trade imbalances being resolved, the capital and current accounts issue being resolved, the US debt issue being resolved and the reserve currency issue being resolved. Why wouldn't it be?

Ahh.....the old 'Disprove there's a god' argument. It's your religion, not mine. I don't have to prove anything.

Edited July 28, 2011 by warpig

[scrappycocco]

Is everyone selling before the decision on the US debt then buying back after?

[warpig]

No, when they increase the debt limit gold will rise in value.

Is everyone selling before the decision on the US debt then buying back after?

[Bruce Banner]

There is a difference. A big one.

No one is suggesting anyone spend 200k on gold bullion or borrow that much to become indebted for life to buy the shiny relic. Most gold bugs only suggest buying a bit of gold depending on what one can afford. No leverage or negative equity.

But you knew this without me having to say.

Just a few Krugerrands in your sock drawer then?

['Bart']

Are you serious? Just google gold bubble.

Or Google gold not in a bubble?

http://www.google.co.uk/search?hl=en&source=hp&biw=1137&bih=1017&q=gold+not+in+a+bubble&oq=gold+not+in+a+bubble&aq=f&aqi=g-v1&aql=1&gs_sm=e&gs_upl=2161l7404l0l7853l20l20l0l8l8l0l207l1586l4.5.3l12l0

[Unexpected]

Just a few Krugerrands in your sock drawer then?

Six years ago you'd have been spot on.

Start off small and work your way up. No pressure that way. My first purchase £1200 from Bairds.

[aardvark]

some people seem to equate: rising price = bubble

thats not what a bubble is and just because gold has increased so much in the last 11 years doesn't make it a bubble.

[R K]

I take your point [if] gold was only used in manufacturing, but it isn't. Gold is the ultimate currency, it trades on currency desks and is held in increasing volume by central banks, who refuse to hold copper, oil, silver or anything else to support their currencies. Now with that in mind, how can a currency become a bubble... it can't.

The reason it was different in 2008 was because there was a flight to the reserve currency, partly to settle dollar denominated debt and partly because it was seen as a safe haven. The "flight to quality" won't happen again, the USD is not a good store of value since the introduction of QE^X. Each successive dollar devalues it's predecessor, it's simple supply and demand.

Sine270 nailed it perfectly. Goldbugs don't use leverage, speculators do. When someone encourages you to spend beyond your means --> "Caveat Emptor!"

Perhaps that's the difference, I believe they'll try to solve the financial crisis in nominal terms and that gold is money, whereas you don't. Fair enough and that's the decision anyone thinking of buying some gold has to make.

So currencies can't be in a bubble, so gold can't be in a bubble, but the USD which is a currency can be in a bubble? I see.

Are you claiming gold wasn't in a bubble in the late 70s? Surely not. It crashed and burned and lost 95% of it's real value according to that shadowstats data on actual not reported inflation in the link above. If that doesn't stop and make you think then I'm not sure what would.

Leverage - Some of the biggest leveraged players on the planet are/have been in this gold bubble. Soros and Paulson. People can buy physical gold for cash, leveraging the cash. Quite apart from the leverage in the futures and ETF markets. It's simply not credible to pretend those markets don't influence price. They may not influence what bugs are prepared to buy and sell for but bugs are largely irrelevant in this discussion. They probably have virtually no influence on price either way. Eric Sprott admitted such to Keiser when Keiser was urging him to get people to join his anti JPM silver craze. He was only interested in the big players who control the market. I'm sure the vid is on youtube somewhere.

I used the word 'ponzi' before because any asset which requires new buyers at higher prices to enable holders to exit at a profit is a ponzi scheme. Gold only rises in price because new buyers buy it. It's thus a classic ponzi scheme. It generates no income or cash flow without new buyers (the reason they buy can be manifold)..

USD was in a bubble from '81 to '85. It's part of what crashed gold last time. So too was Sterling and subsequently according to Grantham's 34 bubble study, was the Yen in the late 80s and again in the mid 90s. My understanding is Grantham uses +>2 std devs from mean as the definition of a bubble. All bubbles have burst and returned to mean except UK and Aussie housing, so far. US housing being the most obvious recent example. The average bubble lasting 3.5 years up and 3 years down, measured in real terms relative to long term trend.

I'd recommend you read his bubble study article - Pavlov's Bulls, January '11. You'll have to register for free on gmo.com and find it under in the 'library'. His current newsletter is usually available without registration on the site.

When bugs talk about currencies not being a store of value they ignore savings rates because it suits their argument. During the 70s, cash outperformed both bonds and equities over the decade as a whole. (I put a chart up in the 'charts' thread showing this). So I don't pay much attention to the 'inflation' argument unless it includes compound interest. It would be like a chart of gold without including annual price increases. It's just silly.

[guitarman001]

What are you using? What ARE your storage, commission costs?

Be aware on bullionvault the commission fees are 0.8% IIRC and storage costs are 0.12% (all per annum). Minimum storage rate is $4 a month for gold and $8 a month for silver. I bought some gold and silver but am slightly re-thinking based on that silver storage cost.

[Errol]

Just a few Krugerrands in your sock drawer then?

Most financial advisors would say 5-10% of assets should be in precious metals. That figure can go up or down depending on personal views.

[Pent Up]

What are you using? What ARE your storage, commission costs?

Be aware on bullionvault the commission fees are 0.8% IIRC and storage costs are 0.12% (all per annum). Minimum storage rate is $4 a month for gold and $8 a month for silver. I bought some gold and silver but am slightly re-thinking based on that silver storage cost.

What's the attraction of bullion vault? Would it not be easier and cheaper to store it at home? Plus you have the added benefit of being able to get it out and play with it every now and then

[guitarman001]

Some people are lucky enough to save 5% of income never mind have it in precious metals (all due to insane housing costs, of course)

BV: it's just such easy access for me and although it's paper gold I'm probably more likely to get ripped off buying physical, and I think it'd be harder to get proper value for that physical in a sale, higher costs of transaction and so forth. The main point is, I can sit at my computer and buy the stuff with still relatively small fees imo.

[Pent Up]

Some people are lucky enough to save 5% of income never mind have it in precious metals (all due to insane housing costs, of course)

BV: it's just such easy access for me and although it's paper gold I'm probably more likely to get ripped off buying physical, and I think it'd be harder to get proper value for that physical in a sale, higher costs of transaction and so forth. The main point is, I can sit at my computer and buy the stuff with still relatively small fees imo.

I think I prefer physical although maybe it's something I should have looked into aswell. I just went straight to Hatton Garden Metals as they had the cheapest sovereigns.

I have about 2.5% off my savings in gold currently. May buy more if it pulls back when the US sort out a debt deal.

Edited July 30, 2011 by Pent Up

[guitarman001]

At some point I will buy physical, but for the next few months at least, bv meets my needs.

[Bruce Banner]

Most financial advisors would say 5-10% of assets should be in precious metals. That figure can go up or down depending on personal views.

I'm not sure that's correct.

I would say that most financial advisors, who recommend holding precious metals, may say 5-10% should be in PMs.

[Gigantic Purple Slug]

Just a few Krugerrands in your sock drawer then?

Shit I'm going to have to find a new hiding place now.

[sesim]

I can't wait for my Gold to be delivered on Tuesday, such fun awaits! Perhaps I was an ancient Inca in a previous life!

When you open it, be aware of the feelings that rush through your veins, and the thoughts that go through your head:

"I paid HOW much for this tiny piece of metal "

Then the next thought is:

"I'm such a mug "

And then immediately after that:

"I didn't realise how worthless paper money REALLY is.. .."

The 3 stages of gold appreciation that occur in 0.25 of second.

It's not just that metals have been stores of value for the last N 1000 years.

What's relevant now is that the newly rich Chinese and Indians will be buying metals on the dips.

China is furious with USA with their fiscal incontinance, and will not help them surpress metals prices.. quite the opposite.

It has already told it's citizens to buy gold as a store of wealth, and would want it's citizens to continue to feel rich.

The indians don't need to be told to buy gold - it's bleedin obvious (it's not to the Chinese, as holding gold was illegal till 2003)

Personally I trust the countries peoples who have has the nous to build up the wealth, and note what they are buying to preserve their wealth.

Not the countries who have built up debt to create the illusion of wealth, and whose only card left is to default on it via outright default or inflation.

Will gold go parabolic, then crash ? Of course.

But there will be much more support on the way down than people expect..

India and China make up for more than 50% of world gold jewelry, bar and coin demand.

They'll be the smart buyers on the parabolic smackdown - the panicky gold sellers will be buying back more worthless paper currency.

It's not all over, even after the parabolic bust and smackdown.

[duckwomanloulou]

Wow Haven't been on HPC for a while but was stunned to see this pinned at the top of the HPC general forum - 'times they are a changin'!'

http://youtu.be/xrIPQxrog8M

[Lepista]

When it's an overbought asset I'll say so.

When it's an oversold asset I'll say so.

I said it was overbought in '07/8. It was. It crashed (a real crash) from $1033 to $695. I was correct with that call.

I said I'd be a buyer (paper only of course) at that point and trade it into the next overbought phase. In the event I chose silver and SLV instead. I exited when silver around $18.5 which I was very satisfied with.

RK, what criteria do you use to decide whether something is oversold or not?

Cheers

[Pent Up]

"I paid HOW much for this tiny piece of metal "

I had that one!

But now I want more!

[warpig]

Yes that's exactly what I'm saying. The USD wasn't any more a bubble between 1980-1985 than gold was between 1979-1981. As I've said, they're contending currencies and trade inversely to one another.

People flocked to gold in the 70's because it was the safety play following the colapse of Bretton Woods in 1971. This was characterised by a period of low growth, high inflation/unemployment and an expansion of the money supply. Mixed in with the oil embargo, the Vietnam War, the Iranian revolution and the USSR’s invasion of Afghanistan, what were investors supposed to do? Look at the chart below, this is why gold lost value against the dollar in 1980.

In 1980 US inflation hit 13.5% and so Volcker reduced the growth rate of the US money supply and raised interest rates. The prime interest rate, (critical economic indicator), hit 21.5% in 1982. Volcker's actions were the only reason Gold fell and the USD rose in value. In 1985 it was the Plaza Accord that sent the dollar reeling, not the bottom of the ponzi scheme falling out as you suggest...

Gold's success is entirely linked to economic/geopolitical stability and negative interest rates. Is the world becoming a more friendly place and can you foresee IR's going up significantly in the short term?

So currencies can't be in a bubble, so gold can't be in a bubble, but the USD which is a currency can be in a bubble? I see.

Are you claiming gold wasn't in a bubble in the late 70s? Surely not. It crashed and burned and lost 95% of it's real value according to that shadowstats data on actual not reported inflation in the link above. If that doesn't stop and make you think then I'm not sure what would.

Leverage - Some of the biggest leveraged players on the planet are/have been in this gold bubble. Soros and Paulson. People can buy physical gold for cash, leveraging the cash. Quite apart from the leverage in the futures and ETF markets. It's simply not credible to pretend those markets don't influence price. They may not influence what bugs are prepared to buy and sell for but bugs are largely irrelevant in this discussion. They probably have virtually no influence on price either way. Eric Sprott admitted such to Keiser when Keiser was urging him to get people to join his anti JPM silver craze. He was only interested in the big players who control the market. I'm sure the vid is on youtube somewhere.

I used the word 'ponzi' before because any asset which requires new buyers at higher prices to enable holders to exit at a profit is a ponzi scheme. Gold only rises in price because new buyers buy it. It's thus a classic ponzi scheme. It generates no income or cash flow without new buyers (the reason they buy can be manifold)..

USD was in a bubble from '81 to '85. It's part of what crashed gold last time. So too was Sterling and subsequently according to Grantham's 34 bubble study, was the Yen in the late 80s and again in the mid 90s. My understanding is Grantham uses +>2 std devs from mean as the definition of a bubble. All bubbles have burst and returned to mean except UK and Aussie housing, so far. US housing being the most obvious recent example. The average bubble lasting 3.5 years up and 3 years down, measured in real terms relative to long term trend.

I'd recommend you read his bubble study article - Pavlov's Bulls, January '11. You'll have to register for free on gmo.com and find it under in the 'library'. His current newsletter is usually available without registration on the site.

When bugs talk about currencies not being a store of value they ignore savings rates because it suits their argument. During the 70s, cash outperformed both bonds and equities over the decade as a whole. (I put a chart up in the 'charts' thread showing this). So I don't pay much attention to the 'inflation' argument unless it includes compound interest. It would be like a chart of gold without including annual price increases. It's just silly.

Edited August 1, 2011 by warpig

[Lepista]

[quote Ooh, just popped its head back over the £1,000 / oz mark, if anybodies interested. And that's even with the $2,700,000 million that's been approved by the USA.

[Kilham]

Are we allowed to post rockets in this thread?

[Pent Up]

Brief buying oppotunity this morning. Didn't last long...

[Guest spp]

Are we allowed to post rockets in this thread?

No!!

I'd prefer it to go like this -

1. 10% down for G&S

2. RB comes out with some made up numbers in a red font.

3. We BTFD!