Tuesday, August 25, 2009

Is gold saying deflation is a comin’

'Inflate or die': Not an accident that gold is falling alongside stocks

Stocks weren't the only asset class that was a casualty of Friday & Monday 17th big down days. Gold was, too...Nor was Monday's action a fluke. More and more recently, the two asset classes have been rising and falling more or less in unison. It isn't supposed to be this way, of course. Financial planners have told us for decades that equities and precious metals aren't very highly correlated. What's going on? When there is a real worry about a deflationary collapse, then both gold and stocks will tend to become more correlated. That's because gold will go down in price during a period of deflation, just as stocks will also suffer because of the prospect of an economic collapse that the deflation makes more likely. A visit to $700 beckons when the stock market bull goes to bed.

Posted by mountain goat @ 11:28 AM (2013 views)
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40 thoughts on “Is gold saying deflation is a comin’

  • I always thought that the gold story had been overstated. World Governments have deleveraged from gold in recent years and are therefore unlikely to turn back to it as a hedge against deflation. Only those who make things from the stuff are interested in its price.

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  • But “experts” have told me to convert £’s into Gold…. what now?

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  • Will and Bluebeach – actually being in gold the past 18months have served me well. But I could have been served as well being in the dollar. I am not trying to “have a go” at gold investing here. I think at the end of the day that gold is money, real money that can’t be abused like fiat money. I will no doubt return to it when things get messy for the dollar. It’s just that it is going down with the next deflationary wave, because it is not in short supply, whereas dollars and GB pounds are.

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  • Gold has always maintained its value in a deflationary enviroment so dont take any notice of this article .

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  • The price of gold in Yen shot up during Japans deflationary period.

    Explain that.

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  • There are a number of reasons why I advise against gold:

    1) It doesn’t actually make money, unlike stocks or bonds, it just sits there.

    2) Spreads are greater than for other investment classes.

    3) It has to be looked after – it is easily stolen.

    4) It’s cultural role in Asia is on the wane

    5) It’s monetary role is historic now.

    6) Despite (5), central banks are still sitting on hundreds of tons, even though no-one now gives a monkeys about how much gold a country has.

    7) If the global financial crisis was going to cause a spike in the gold price, that would have happened already.

    8) Despite the global financial crisis, the price, though historically fairly high; is not excessively so.

    9) When the markets call time on QE and other stimulus packages, and force up interest rates; governments will start looking to liquidate assets to cover their deficits – and gold will be one of them.

    10) The gold market is very vulnerable to flooding. The sale of a single central bank’s reserves could collapse the market.

    In short, the upside possibilities look very lean, while the downside risks look substantial. Not a good bet.

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  • Debtfree @4 – I must claim ignorance about Japan. However, perhaps that was different because Japanese had a lot of savings and indulged in currency speculation on a huge scale.

    The situation we and USA have is that people have huge debts and these must be paid back in dollars and pounds, not gold. This is why I said they are in short supply but gold isn’t. The money has been spent and now we as a country must pay it back. Gold doesn’t help us do that. So if the system holds up we will have deflation (despite Central Bank printing efforts). Of course there is also the option of default. If this happens then gold is the place to be, because as I said I view gold as real money.

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  • To clarify my point #8 – this indicates that people are no longer rushing to buy gold as a defensive investment. That hasn’t really happened since the 70’s oil crisis. The price spike at the end of the seventies was a speculative bubble, and during the recession of the early nineties, the price slid slightly, but was otherwise unresponsive to economic events.

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  • Due to the massive amount of debt…would deflation lead to the financial system imploding?

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  • Uncle Tom,

    excellent post @5

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  • uncle tom…

    1) It doesn’t actually make money, unlike stocks or bonds, it just sits there.

    I have trebled my savings, recently bought a car that cost me 15 ounces of gold, saved myself £6500 in the process.

    2) Spreads are greater than for other investment classes.

    This also helps you when selling in the right market.

    3) It has to be looked after – it is easily stolen.

    have you lost any then?

    4) It’s cultural role in Asia is on the wane

    Vitenam, currency crisis, everyone started buying gold.

    5) It’s monetary role is historic now.

    No, the dollars monetary role will soon be historic

    6) Despite (5), central banks are still sitting on hundreds of tons, even though no-one now gives a monkeys about how much gold a country has.

    Russia and China have been increasing holdings.

    7) If the global financial crisis was going to cause a spike in the gold price, that would have happened already.

    The crisis has only just begun

    8) Despite the global financial crisis, the price, though historically fairly high; is not excessively so.

    That’s because it’s being held down at great cost to those who want it held down.

    9) When the markets call time on QE and other stimulus packages, and force up interest rates; governments will start looking to liquidate assets to cover their deficits – and gold will be one of them.

    When they call time on QE and raise interest rates the amount of debt will implode the currency in question.

    10) The gold market is very vulnerable to flooding. The sale of a single central bank’s reserves could collapse the market.

    The sale of central banks gold never hits the open market.

    Good day to you :o)

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  • There seems to be something about gold that brings out extreme opinions/positions in people. I don’t claim to have any special insite into the future currency trends but I do suggest that hedging against a screwup by central banks with some gold might make sense. Overall, if gold slumped 50% and stayed there, I’d lose some money but (hopefully) my pension and other savings might still be worth something – in fact if I think that gold performs badly when fiat currencies thrive, perhaps that would be best for me overall. For me, It’s all a matter of trust in the central banks, speaking of which it appears that Bernanke’s future role in the Fed is safe:

    http://www.nytimes.com/2009/08/25/business/25bernanke.html?_r=2&src=twt&twt=nytimes

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  • High caramba! Nice one debtfree.

    uncle tom: are you an ostrich farmer?

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  • Debtfree,

    If you were fortunate enough to buy gold eight years ago, at the bottom of the market, and equally fortunate to pick the top of the market when you sold, then you might just have bagged a threefold gain. Well done.

    I have some shares that have trebled in the last six months; more than enough to buy a very nice car – so there!

    In 2001 the gold price did seem very low, but even then there was still the risk that it might go lower, having been on a steady slide for several years.

    You would be a silly billy to gamble on gold now..

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  • Debtfree – i have no axe to grind either way on the gold front -i bought years ago, i sold a fair bit around the 2008 highs, hold some now and still will hold on to that as an insurance policy if you like.

    My point is this – the other day i watched TV and saw a company http://www.cashmygold.co.uk/. I was reminded of the history of silver – the Bunker Hunts tried to corner the market and were eventually met by silver being melted to satisfy the “demand” which collapsed and the bunker hunts billions were lost….

    Therefore my view is that any spike in demand will be just that – much like oil last year (IF there is a spike it may be a big spike but it wont hold at a new level). As i said yes hold SOME gold but dont assume for the reasons you state that it should be your core asset class. It may be or it may not.

    As for how well its done …. well that really is irrelevant isnt it? I mean the home builders did well until 2007 here! The CDS market thrived for many years….

    You could argue that both of these were bubbles (actually the same underlying bubble) and, on that basis, gold MIGHT be the next mania. If thats the case then the important question is when to get out.

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  • I’m with debt free @9.

    Gordon or gold.

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  • “2) Spreads are greater than for other investment classes.

    This also helps you when selling in the right market.”

    – Wrong. Broad spreads never benefit the investor.

    “4) It’s cultural role in Asia is on the wane

    Vitenam, currency crisis, everyone started buying gold.”

    – Wrong again. During the asian financial crisis, the price fell sharply.

    “8) Despite the global financial crisis, the price, though historically fairly high; is not excessively so.

    That’s because it’s being held down at great cost to those who want it held down.”

    – Like who, why?

    “10) The gold market is very vulnerable to flooding. The sale of a single central bank’s reserves could collapse the market.

    The sale of central banks gold never hits the open market.”

    – What utter rubbish!

    There’s loads of people with a vested interest peddling ridiculous myths about gold – but you don’t have to believe them!

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  • The point is that gold is the traditional antithesis of whatever currency one’s cash is in. If I have 10% of my liquid assets in gold, I don’t give a toss if it falls apart in a deflationary scenario – the extra buying power of the 90% of my assets in cash will more than make up for any fall in gold. The real question is whether 10% in gold is enough if the powers-that-be decide that any price is worth paying to avoid meaningful ongoing deflation – with currency “devaluations” a highly likely eventual outcome in a one-by-one race to the bottom. This may welll mean all major developed currencies just end up at similar relative price-levels to each other in the long run, with inflation showing through in elevated prices for gold and farmland and commodities generally.

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  • mountain goat says:

    To contradict myself now because there must be other arguments apart from inflation to support gold. Bullish for gold is that the Chinese Government is encouraging its citizens to buy gold and silver bars. Not, put it in our banks. Nor, go spend it. This may be an attempt to stop a speculative frenzy in housing or stock market. But it may also mean the Chinese have no intention at all of allowing its currency to appreciate against western currencies. Basically admitting you are better off not holding your savings in Yuan, because we will do our level best to keep it weak to keep winning the manufacturer game.

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  • I remember posting something on stealth bull market back in March by Nadeem Walayat which sounded totally plausible to me. I however still really backed the notion that the rally would last a several of months and then provide new lows. I had a real emotional attachment to that idea, and did not just want to make money but actually wanted to make money a certain way, by being right by my definition ie by shorting the market.

    The strategy was totally flawed, I should have bought some long positions on the indices and sat it out but incrdibly only recently have I stepped back from it and have sort of realised that I really lack patience and the ability to think in more than one direction at once.

    I see alot of thinking like that on this site and gold seems to be an investment that really sets it off.

    Incidentally I agree with Icarus on this one, although given the foregoing diclosures that’s probably mroe of a curse than anything.

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  • “the Chinese Government is encouraging its citizens to buy gold and silver bars. Not, put it in our banks. Nor, go spend it. ”

    Have you got a good source for that story MG?

    I’ve just spent half an hour searching the China Daily archive for stories that contain the world ‘gold’ and found very little – a note that the Chinese public bought fifty tons last year, a caution from a treasury advisor that the price is too high and will likely fall, and warnings about rogue dealers..

    ..there is so much fiction being peddled about gold, one needs to go to the horse’s mouth..

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  • bellwether I’m with you on the apparently unfounded belief that this rally is overdone, and stepped back from taking advantage of the lows, especially in financials that occurred in March, but them’s the breaks and if there is a retracement then I will make the most of it, but this fabled double dip seems to be dissappearing like a morning mist. The 1930’s recession suffered a terrible secondary drop from what I have read and heard on this site and others, but maybe it is ‘different this time’.

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  • Bystander I guess I should elaborate that I still believe that the bears are fundemetally right, it is just that their timing can be lousy. Even Walayat, who has in been incredibly prescient, sees a double dip in 2011 spelling trouble for stocks in 2010. The fundementals do matter,and the fundementals are lousy, but then markets don’t seem to run on fundementals most of the time.

    I kind of feel I’ve missed out now, and chaisng it would be compounding the problem, so will more or less sit out for now and wish the market higher, so I can short the bejesus out of it later.

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  • I wish you luck bellwether and will enjoy the ride if/ when it comes.

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  • I git sick of the gold discussions on this blog a year or so ago when I realised that the opinion-formers on the subject either had some sort of idealogical attachment to it or were simply looking for the next thing to cash in on. Neither fills me with confidence and the other popular idea at the time that gold might be useful in some sort of total financial collapse is beyond ridiculous to me.

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  • mountain goat says:

    Sorry UT was busy with my proper job! I remember seeing a you tube video of some Chinese officials rolling out their new silver bars with some pomp and reading about it. References below. The web is full of sites showing that video. There was another article but can’t find it.

    YouTube http://www.youtube.com/watch?v=PqFpl31UwPI&e
    http://seekingalpha.com/article/155095-who-let-china-s-silver-bulls-out?source=yahoo
    FT http://www.ft.com/cms/s/0/fa274b14-8bef-11de-b14f-00144feabdc0.html

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  • Thanks for that MG,

    Nothing about them pushing gold though, only silver. Nor can you automatically assume that the Chinese government is actively promoting this. The Chinese govt does not appear to micro-manage every TV news story; and commercial interests can and do plant stories in the media in much the same way as they do here.

    Political stories remain heavily controlled though..

    That said, there is much less chance of the silver price falling through the floor, and the Chinese govt might feel it prudent to wean their people off the habit of hoarding US dollars.

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  • mountain goat says:

    UT – yes maybe I read too much into what the Chinese authorities are thinking. The FT article was about gold buying by Chinese, second half of article.

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  • seems from opinions on here that gold is a bit like marmite :o)

    whatever happens, lets hope we all come though this and manage to buy a property without sinking ourselves in debt.

    good luck to you all.

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  • Thanks MG. I guess I try and rationalise it on the basis that even if I’m wrong and the global economy does truly recover and all the problems that I see are solved or were not real in the first place, then there will be investment opportunties aplenty in any event.

    To invest now however on the hope of a recovery that I don’t understand seems not just risky, but contrary to the notion that you should back your hunches.

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  • MG – a few years ago (1987) i had a conversation with someone in July who said he had sold (well actually out bought of the money puts) twelve times that year and been hit each time. He said he had worked out he’d lost 22% of his net worth doing it.

    When are you going to throw in the towel i asked? Well he said….. when i lose 70% of my net worth (each time he was increasing his bet). For those of you that know he started with 50 Footsie contracts (each was £25 a point), and had gone up from there – each time he was spending more as he bought less out of the moneys from the previous time and kept selling the higher series. He did nothing else in 87 just kept selling the FTSE…. He never panicked and when he was eventually on the right side he got most out and his net worth went up to 4 times where he was before he started selling the market. This guy was very well respected but people started to take the p1ss, at that time he smiled because HE KNEW he was close to being right.

    Conversely a few years later there was a young trader who kept taking out of the money option premiums in short sterling. He kept making money and kept increasing his size, until he had bought the lary car and lary house. BUT then Lawson cut the rates and the options he had sold went to the moon.

    So the first trader had a 5% success (in terms of winning positions) and the second probably 98% success rate….. but which of the two wants to recount the story? [and by the way both of them are true].

    A Salutary tale?

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  • mountain goat says:

    TM – nice story. It takes a special kind discipline and strength of mind to be able to keep ignoring the direction of the masses, and keep losing money. It’s the last bit I find hardest. The losses undermine your resolve, make you lose confidence, panic.

    Debtfree – well said. I would add lets hope we don’t lose our shirts with our dodgy investments waiting for the hpc to do what it has to do.

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  • MG – Agreed. It doesn’t always pay to go with the flow, but nor is it wise to be contrarian just for the hell of it.

    The golden rule is never to gamble what you can’t afford to lose.

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  • TM – and then there was Nick Leeson who made a bit, made a bit more, made a lot more ( 10% of Bearings yearly profit in ’92 ), lost & doubled up ( hiding his loss in an “error account” ), lost & doubled up, lost & doubled up again …and again until he’d taken down the bank.

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  • debtfree you seem to know your stuff with gold if you know of any sites for advice that would be great thanks

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  • MG – yes that’s the emotion that all of us have to overcome. That’s why some traders seem to have enormous Schmacher type Egos. They have to. When you are young you have no real fear, when you get older for you to stay in the game you have to use other methods to be comfortable with the risk. I have said before sometimes you have to grit your teeth to enable you to pull the trigger. Which is why i try to get confirmation of a trend before jumping in – now sometimes what i think is confirmation isnt. I had no confirmation when you told me you had shorted Eurostoxx which is why i said that you should quickly get your stops to breakeven or get out of some if it did go your way – although that was just my opinion and not a recommendation.

    UT is sort of right – you must always manage your losses because the profit(able trades) take care of themselves (to a certain extent).

    666 – Re Leeson. “Mr 888” You are of course right but basically he wasn’t a proper trader in my book. You cant double up ad infinitum, like my example you have to eventually have a stop! In my example the stop was 70% of his net worth, which you will probably realise is still about 80 times my net worth! – And i wouldn’t consider myself as poor.

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  • At the risk of being boring – say at the moment – my style and say on FTSE. Is this – i look at it as if i were long. I then say right where would i get out? The answer is if it goes above a certain technical level, i would then looko at what i consider to be the next technical level. I then look at that level in terms of the momentum it has to get there.

    Alot of work is done whilst not having a position. When i was younger i would always have a position, but now i prefer to be on the sidelines quite often and trying to work out these levels. Of course i dont always get it right, but the really difficult thing i think is this :

    You think the market is about to turn say to the downside and yet you dont get in – or you see the initial move and wait for a pullback to get it and it doesn’t quite hit your pullback and then goes in the direction you thought in a big way!! Particularly after you have taken a few hits by going to the downside previously. In my example there was no way this guy was not going to have a position and that is why he used options (which were getting cheaper as he went on).

    Now you should be comfortable if you take say a short position, the market goes your way initially and then comes back, stops you out at b/even or a small profit (better still you have taken some profit on some of your position where you perceive the first bit of resistance to be) AND then goes on to make new highs.

    What happens if you get stopped by a few points then the market reverses to where you got stopped???!!! Do you pull the trigger again? Not so easy init – never said it was!

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  • @ 38. dgj

    There is alot to be said for Jim Sinclair, whilst others are losing their shirts he never seems to get distracted from the real issues.

    http://www.jsmineset.com

    For buying bullion, pop into Baird & Co http://www.goldline.co.uk

    As others have said on here, now maybe not the best time to jump in, but, it really does depend on your own circumstances and what you feel is best to do. You shouldn’t be buying because you want to make a wad of cash, you should be looking to protect your wealth because you have lost faith in the central banks and governments ability to handle the current financial situation.

    Also the following sites are good for articles and live prices, but I do tend to listen to Jim Sinclair above all else.

    http://www.goldseek.com/
    http://www.kitco.com/

    Hope this helps.

    Cheers
    Debtfree

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