Monday, March 8, 2010

Subtlety alert not for many of the regulars

Gold as an asset class

Some excellent thoughts on gold from an excellent blog. The comments afterwards also worth a read.

Posted by bellwether @ 11:15 AM (1355 views)
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15 thoughts on “Subtlety alert not for many of the regulars

  • Rich Kightley says:

    If you lost money in the house price bubble, why not loose another packet speculating on gold…….

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  • Silence so far from the “Death of the dollar, hyperinflation, gold will shoot to the moon” guys.

    Good sense at the end too: “I believe the current print and spend policy will do little to fix the long-term structural problems in the real economy. The real problem in the U.S. economy is that we remain in a stranglehold by a banking sector that is too large, too powerful, unproductive and poorly allocates capital”.

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  • awful read. I don’t consider myself in any way an expert, but I find teh way he writes as highly dubious. For example:

    “The fact of the matter is, the fiat currency system is here to stay.The odds of reverting back to a purely gold based system is next to zero in my opinion.” – he offers nothing to back this up.

    “The global economy has become too complex and too intertwined to be constrained by the gold standard” – why? do different currencies have a different understanding of what gold is? no? so where the problem?

    “Famous examples of the break-down of the gold standard and its inflexibility to meet trade demands …” – then there is no explanation. No justification. He implies that “the gold standard broke down” as opposed to “the gold standard was removed so that governments could rip people off easier”

    “under sound stewardship the fiat currency system is no more potentially destructive than a gold standard” – so what he is saying is that at the most extreme optimist view, the fiat standard might be as good as gold? So why not just have gold then? and as for “sound stewardship” I can’t help but remember the question posed on HPC numerous times – “Gordon or Gold?”

    ” the restrictions of the gold standard have resulted in more government defaults than any flexible exchange rate fiat currency” I’m not convinced that the truth isnt closer to the gold standard preventing bankrupt governments hiding behind a fiat currency and dodgy accounting (e.e Greece and GS?). No how is it in anyones interests (sic) to keep the truthfulness of a situation hidden but not going away?

    The comment about the man with lead being able to buy more food than the man with gold was entirely lost on me. I can’t even tell if he has a valid point to make and just cannot communicate it well.

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  • I wish I could edit that post to remove all the spelling mistakes…

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  • Inbreda read the comments and the responses quite alot of what you ask is addressed.

    Author has also written elsewhere on the stability and flexibilty that free floating currencies give, which gold don’t.

    Agree there is an element of absolutism but that always has to be the case when making macro statements, where nothing can be defintively proven, it becomes at best a matter of informed opinion.

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  • TC
    5. You wouldn’t really enjoy, the first drag would be horrible, so you’d have some more in the hope it would start to feel better. Just as it did, you’d realise you’re addicted agin and feel awful.
    It’s just a test, don’t give in. Especially keep off the booze, because that will diminish you’re willpower 10 fold.

    Then with all the money you’ve saved, £2k per year, buy Gold.

    That way if Gold does plummit you’re still better off than if you’d smoked it as you’ll still have your health.

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  • I think these gold vs fiat arguments miss the point. The point is not that gold has some sort of historic magical qualities making it the ultimate solution, but that fiat which is not constrained is susceptible to becoming a mathematical plaything. Without the (resource?) constraint the world of finance will end up with the same abstract properties as string theory. Fiat flexibility is currently the ability to pretend we have more wealth than we do.

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  • There is a very interesting post from one of the commentators which I found helps explain why gold is so difficult to understand – I quote at length:-

    “i think you have to distinguish between real asset inflation and financial asset inflation. we have cycled between these, with financial asset inflation (stocks) hitting its peak around 2000, and real asset inflation (real estate) hitting its peak around 2006. gold is a hybrid bearing qualities both as a real and financial asset. at times, so has oil and real estate (in the sense that they have been bought not just as a store of intrinsic value but also as a vehicle of speculative value).

    as a hybrid, you are never going to be able to analyze its value solely in terms of real asset inflation (its value as a hybrid won’t seemlessly track commodity asset values generally), or solely in terms of financial asset inflation (its value as a hybrid won’t seemlessly track financial asset values). because of this duality (think the movie, chinatown, “she’s my sister, she’s my daughter”), it will confound anyone who wants to “understand” it, which leads gold investors to become more faith-based than anything else…but in this regard is gold really that different from many other asset classes. i think you can develop a feel for it, but i haven’t and so i have stayed away from it.

    you will note that gld had a high in 2006 (i am a real asset), but then continued to new highs in 2008 (i am a financial asset), only to continue to new highs thereafter (i am a life preserver). too much going on there for me to get a handle on.

    the real interesting development on the next ten year horizon which you do not mention is whether the IMF actually proceeds with its announced plan to consider the creation of special drawing rights as an alternative reserve currency. the chinese seem to interested. if SDRs as a basket of currencies, and perhaps commodities and whatever else they put in there, on reserve at the IMF can serve the basis for the creation of a new reserve currency (really an index of currencies and whatever else goes in the basket), then the value of gold in my opinion as an alternative to fiat currencies is weakened

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  • I’ve always thought that there was some possibility that I might make a loss on gold, although it would have to fall by about 30% before I made a nominal loss, having bought early last year …

    Also the whole point of a properly diversified portfolio to hedge against large scale money movement between major asset classes by having some of your wealth in each. If gold tanks I’ll make up the loss in my $ assets.

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  • Still holding. 🙂

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  • @10 Rumble

    spot on comment ” Fiat flexibility is currently the ability to pretend we have more wealth than we do.”

    and that kind of flexibility isn’t going to conceal the ugly truth for ever.

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  • You have to ask yourself, is gold going up or is the currency going down ?

    The yen price increased through a deflationary period, so whats all this inflation talk about ?

    The dollar and it’s reserve status…. lets digest these facts:

    1) – On a medium- and long-term basis, China, India, Japan, and the Middle Eastern countries are exiting their USD positions.

    2) – The percentage of foreign reserves held in dollars has declined from 56% in 2000 to 41% today. China is using its dollars to buy natural resources across the globe. India used its dollars to buy $200 billion of gold from the IMF.

    3) – The Federal Reserve policies since its inception in 1913 have resulted in a 95% decline in the purchasing power of the U.S. dollar.

    4) – The dollar has declined by 17% versus a basket of other fiat currencies just in the last year.

    5) – The 2009 budget deficit of $1.4 trillion was the worst in history — more than three times larger than the previous record.

    6) – Just two years ago, the Congressional Budget Office (CBO) said the 2010 deficit would be $241 billion. Now it’s likely to be at least $1.6 TRILLION — or over SIX TIMES MORE.

    7) – Total issuance of government debt already hit a stunning $922 billion in 2008. It then surged even higher to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year. The size of just ONE WEEK’s debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

    How can you seriously expect the dollar to recover ?

    Its game over for obvious reasons.

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  • The problem with fiat currencies is that so often they become political tools…this is why politicians love paper money. Gold will always remain real wealth – look at china, they have just bought more…and look at Soros, he has been buying gold stocks.

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  • Gold also has no debt attached to it, so the saying

    “he is rich who owes nothing”

    doesn’t really take a genius to work out why the dollar is going down the pan.

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  • tenyearstogetmymoneyback says:

    I think the difference with Gold is that it is relatively easy to hold.

    Compare this with something like oil where you need an oil tanker moored off the coast somewhere.

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