Friday, June 02, 2006

 

US Dollar Resumes Slide On Weak Data

The Associated Press has the currency numbers. "The dollar fell against most major currencies Friday after a jobs report came in below expectations, raising speculation that the Federal Reserve may pause its credit tightening policy. In afternoon New York trading, the euro bought $1.2917, up from $1.2797 in New York late Thursday. The British pound climbed to $1.8828 from $1.8643."

"The dollar dropped against the Japanese currency, falling to 111.62 yen from 112.68 yen late Thursday. The dollar bought 1.2073 Swiss francs, down from 1.2217 late Thursday, and 1.1007 Canadian dollars, down from 1.1021."

"The Labor Department reported that job growth in May faltered as employers added just 75,000 new jobs. Job gains for March and April turned out to be weaker than previously reported. At the same time, wage growth was found to have slowed, a development that could ease concerns about inflation gaining strength, and reduce the chances of the Federal Reserve continuing a campaign of interest rate increases."

"Gold was higher in U.S. afternoon trading on Friday, in a rollercoaster session that saw prices drop to a five-week low overnight, then rebound after weak U.S. jobs data triggered a big drop in the dollar. 'After falling by about $60 in the last few days, it looks like a natural bounce,' said John Meyer, analyst at Numis Securities."

"'Gold is following the dollar to some extent. I see a period of consolidation before the rise,' he added."

"Spot gold fell as low as $618.50 an ounce in Asia before rebounding to $638.60. It was quoted at $637.30/638.10 in New York, against $626.30/627.10 late on Thursday. The metal has fallen more than $110, or 15 percent, since hitting a 26-year high of $730 about three weeks ago. But gold is still up 22 percent this year."

"'Investors banking on gold as insurance against financial or geopolitical risk may have been disappointed by the metal's falls over the past few weeks,' John Reade, analyst at UBS Investment Bank, said in a note."

"'We do not believe that gold has permanently lost its safe-haven status, but we do recognise that with few shorts in the market and considerable positioning from commodity and trend-following investors, there are clear risks of further declines in gold should global growth expectations fall.'"

"Some dealers were optimistic. 'Gold is bouncing across the sector. We have been down, we have tested lows and now I am looking for a recovery from here,' said a precious metals dealer in London. Gold was also lifted by a rise in oil. U.S. crude rose more than $2 to $72.70 a barrel after news oil workers were kidnapped in Nigeria and Iran said its nuclear enrichment work was nonnegotiable."

"Elsewhere in the metals sector, silver finished up 18 cents at $12.09 an ounce and was up 5% on the week. Platinum closed up $15.10 to $1,244.90 an ounce. The metal lost 4.1% on the week. Palladium closed up $15.75 at $353.15 an ounce for a 0.5% decline on the week."

"Earlier, gold found support from reported comments by a Chinese central bank board member, who said the country should use its foreign-currency reserves, the world's biggest, to buy gold and oil as a hedge against further weakness in the dollar.
Yu Yongding later told Platts that the country is diversifying its reserves, but denied the reports in local and international news outlets that he recommends moving aggressively on gold."

Comments:
...with few shorts in the market and considerable positioning from commodity and trend-following investors, there are clear risks of further declines"

Further declines? I consider these bullish developments. Shorts have closed out positions meaning they don't expect further declines.

John, I don't buy the euro oil bourse argument for dollar destruction. I assume that is your position, although you post a link with no commentary. Anyone who wants to sell dollars/buy euros can do so immediately on receiving dollars, and can even sell the currencies forward. I think the dollar has plenty of historically-proven problems which are bringing it down.
 
I'm not sold on the bourse-euro theory just yet. however, I think it shows that people are troubled by the dollar. it show maybe they don't trust it. it has to have some effect on the level of the dollar.
 
I disagree with the idea that selling oil in anything (Euros in the Mid East and Rubles in Russia...reports say Russia is trying to begin on 1 Jul) other than the dollar won't have a tremendous impact. If I am traveling to Mexico, I would prefer if they would just accept dollars. By having to convert dollars to pesos and back to dollars after returning, someone is getting a cut on the transaction. When you're talking billions, that makes a fairly significant difference. Without having to hold dollars to buy oil (which every country I know of in the world needs) those dollars are coming back to the US. By having to purchase oil in dollars, we have had a free ride to tax the daylights out of foreigners holding those dollars (every time we up debt, cut our own taxes, up M3, whatever) someone is getting essentially taxed. Like I said in a previous post, it is a pretty good racket since a lot more subtle than taking it directly out of your pay, but still the same.

On another note, I still don't understand why people think putting money in a bank CD that is insured by the FDIC is "safe". OK, you'll get your 100K back alright. If everyone else is getting the same, you think prior to that happening foreigners won't see the jig is up and dump their holdings of $ prior to having them devalued? I don't. A lot (don't have a number...but from observation, I'd say more than a handful)of foreigners are educated right here in our best schools. While we're busy with ESPN, American Idol, Flip this and Flip that, they are actually studying sciences. Yeah, I'd say they'll see it coming long before we see who the next American Idol will be.

Do I think selling oil in other than the $ is important? We wouldn't have been able to sustain our debt without it.

It isn't referred to as black gold for nothing.
 
Given the instigators, I'd say it has little to do with the economics and everything to do with politics. If it flies however, THAT will be for economic reasons.
 
I totally disagree with the notion that FDIC insurance isn't safe. In fact, I believe it to be the ONLY 100% safe 'investment' out there. Well, there might be a .0008% chance of failure. But make no mistake, if it ever happens that will mean the US Gov't and probably every other ceases to exist...we're talking Mad Maxx or cave man days.
 
Chickenlittle,
You may very well be right. I don't think we purely fought the Revolutionary War because the tea/stamp/etc tax was breaking us financially. It was the principle behind it that torqued us off. Pure speculation, since I wasn't around then.

Anyway, it very well may be politics behind it, but the effects will certainly involve economics. The signs are all there. Russia, Iran, Venezuela, Norway, and who knows who else saying/taking steps to trade oil in other than $s. Gold/Silver may drop further. No one knows when or if, and I mean no one. Is having all assets in gold/silver good? I'd say depends on how sure you are of human nature. Is putting it all in CDs and Treasuries good? Same as above. However, gold/silver don't rely as heavily on faith.
 
jdog,
I'd agree with you if it weren't for the current debt situation we have. It has happened a lot throughout history, and it didn't end up in cave man days. Russia, Germany, Argentina to name a few recent ones had economies go south, and they're still around. I just wouldn't have wanted a majority of my money sitting in their banks when it went south. Debt needs to be paid back, and when it appears like the odds are against it, look out below. I just don't see steps being taken in our country to turn it around.
 
from the NY Times

June 2, 2006
Street Scene

A Commodities Bull Can Find No Reason to Pull In His Horns
By MICHAEL J. DE LA MERCED

James B. Rogers Jr. calls himself the world's worst market timer. It is an air of modesty he cultivates with sometimes folksy anecdotes and an ever-present drawl.

But market timing aside, as an avowed commodities bull, Mr. Rogers is undeterred even as less committed bulls suspect that the peak is past.

A fund manager, author, traveler and occasional television commentator, Mr. Rogers says he believes that the commodities market is less than a decade through a bull market that could last more than 20 years.

"Someday there will be 10,000 mutual funds that trade commodities," he said. "On Park Avenue, wives won't talk about flipping real estate. They'll be talking about soybeans and pork belly futures."

Of those critics who say commodities are only this year's dot-coms, he says, "Two or three years ago, they couldn't even spell commodities."

By contrast, Mr. Rogers says he has been trading commodities since the early 1970's, even before the commodities boom of that decade.

He also has a string of unique experiences in the markets. Mr. Rogers co-founded the Quantum Fund with George Soros in 1969, and retired in 1980 at the age of 37. After a stint at the Columbia Graduate School of Business, Mr. Rogers embarked on two global adventures, one by motorcycle, detailed in "Investment Biker," a book he published in 1995, and one in a custom "Millennium Mercedes" the size and color of Big Bird, the Sesame Street character. His adventures earned him the sobriquet "the Indiana Jones of finance" from Time magazine.

More important, he said, those adventures have given him some insight into the state of various markets around the world, from sweet-toothed Armani-clad youth in China to corruption-laden bureaucracies in Nigeria.

His faith in a commodities bull run seems ill-timed given the sharp declines metals have taken after recent spikes. The price of a gold futures contract for delivery in June, for instance, closed yesterday at $629.60 an ounce on the Commodity Exchange in New York, down from $728.60 last month.

"We'll always have big consolidations," Mr. Rogers conceded.

But as crude oil stays stubbornly above $70 a barrel, it is hard to dismiss him outright.

Though he concedes that energy and metals have hit a rough patch, with zinc and copper due for a correction, Mr. Rogers insists that commodities as a whole will continue to go up.

Look instead at agricultural products, especially sugar and coffee, he said, which currently trade far below their historical highs.

Coffee, which traded for more than $3.37 cents at one point in 1977, was trading at about $1 a pound this week. Sugar, which traded as high as 66 cents a pound in 1974, was trading for about 15 cents a pound this week.

Of course, Mr. Rogers has a stake in promoting that idea. He is the author of "Hot Commodities," a book about commodities investing he wrote in 2004.

And he is the creator of the Diapason Rogers Commodities Index Fund, an investment fund that buys commodities and is based on the Rogers International Commodities Index of 35 futures contracts, which Mr. Rogers also developed. From Jan. 1 through May 31, his commodities index fund rose 9.4 percent. The Standard & Poor's 500-stock index is up 1.7 percent over the same period.

He points to academic studies that show bull markets lasting anywhere from 15 to 23 years; given those figures, the commodities bull run that started in 1999 should last until 2022.

And more important, he says, commodities producers have failed to develop new sources of production.

Demand for lead has exploded, but the last new smelter built in the United States was opened in 1969. Oil companies have not opened significant new oil fields in more than 25 years. The story is the same with copper.

"I was with a couple of copper mining C.E.O.'s recently, and they said they were having a hard time finding labor, saying, 'We can't find engineers, we can't even find miners,' " Mr. Rogers said. "And I asked them if they even know the level of their reserves. And no one knew."

Couple that with voracious appetites for commodities in China and India, and the prices should continue to climb, he said.

"The last time we had a bull market, three billion people in Asia were closed off," Mr. Rogers said. "Now we have China, we have India looking for commodities. They've all seen Western TV."

Mr. Rogers has great faith in China as the bull to which the commodities market is yoked. He says he believes that China will fully float its currency, the yuan, in time for the 2008 Summer Olympics in Beijing, and that China's growing capitalist class will displace the Communist Party.

Mr. Rogers is bearish on the United States. To him, America's time has passed, with its $8.36 trillion in debt, a weak dollar and its dependence on imported oil. He recommends selling United States dollars.

He recommends investing in countries with well-managed commodities production, like Canada, Brazil and Argentina, as well as China.

Mr. Rogers believes in China so much that he hired a nanny who speaks only Mandarin to his 3-year-old daughter. Signs taped around the Rogers household name objects in English and in Mandarin: a panda statue bears one with the characters for "xiong mao." Hanging above the stainless steel stove is the word "zhao."

His wife, Paige Parker, who was his traveling partner in the Mercedes during the "Adventure Capitalist" journey, is learning Mandarin this summer. Mr. Rogers said he might try to pick it up, but he has few illusions about his chances for success. "I'm tone deaf," he said.
 
Kerk, do you really believe the euro is going to become some kind of global reserve currency? I don't, and I don't care if you price every commodity in the world in euros. A currency is backed by the economy it represents. Those noisy dictators who sell oil in euros will quickly find the euro, or peso, or whatever they want, to be more volatile and risky than the dollar. They will diversify out of euros into gold or dollars, or something. At least some of their holdings will still be dollars. Look at the performance of emerging market currencies lately. They are falling like dominoes. Would you want to hold your oil wealth in kroners, rand, or aussie dollars?
 
"A currency is backed by the economy it represents. Those noisy dictators who sell oil in euros will quickly find the euro, or peso, or whatever they want, to be more volatile and risky than the dollar."

why? the dollar is fading fast. the dollar index is terrible, that's why people are moving to the euro. the largest deficits in the history of the world are our twin deficits. there isn't much hope for the dollar.

many foreigners are awash in dollars, CBs all around the world talk on a monthly basis about how they have to diversify. CB after CB says that.
 
I totally disagree with the notion that FDIC insurance isn't safe. In fact, I believe it to be the ONLY 100% safe 'investment' out there.

Gotta disagree with you on this one, thejdog. Banks have high exposure to RE and very low reserves. The housing / credit bust will take out far more banks than FDIC has insurance to cover.

Another point I've made before is that even if you get it back, it won't be in a timely and useful manner. A banking crisis would see cash withdrawals severely curtailed for an extended period by federal mandate. Sure, they'd send you statements with numbers on it, but you'll have no real control. By the time it is released, a significant portion of it's original value will likely have been inflated away.
 
Oil sold in something other than dollars? Just another nail in the coffin for the USD (and there's a lot of them).
 
TJ-

"As Paulson prepares to move to Washington to serve as U.S. Treasury Secretary, Goldman shows no sign of easing up. Nor do its followers. This trading boom, fueled by cheap money, is fundamentally different from the ones of the past. When traders last ruled Wall Street, during the mid-'90s, few banks put much of their own balance sheets at risk; most acted mainly as brokers, arranging trades between clients. Now, virtually all banks are making huge bets with their own assets on many more fronts, and using vast sums of borrowed money to jack up the risk even more. They're shouldering risks for their clients to an unprecedented degree. They're dabbling in remote markets from Brasilia to Jakarta, and in arcane products like credit-default swaps and catastrophe bonds. Led by Goldman, many investment banks now do more trading than all but the biggest hedge funds, those lightly regulated investment pools that almost brought down the financial system in 1998 when one of them, Long-Term Capital Management, blew up.

What's more, banks are jumping into the realm of private equity, spending billions to buy struggling businesses as far afield as China that they hope to turn around and sell at a profit. With $25 billion of capital under management, Goldman's private equity arm itself is one of the largest buyout firms in the world, according to Thomson Venture Economics. The moves are not unrelated to trading. In both cases, banks are flocking to exotic and inaccessible markets where there aren't many others to fight for profit. Counterintuitively, they're seeking out the investments that would be the hardest to get rid of in the event of a disaster. They're betting, in other words, that handsome returns when times are good will make up for losses when things turn ugly."

Inside Wall Street's Culture Of Risk
 
Hmmm...Ok so lets say banks do indeed get crushed by a collapse in RE. I'm not denying that will not happen, it most likely will.

So in your scenario the US gov't sits by as millions of Americans try to withdraw money from their bank, only to find that the bank has no money. So at that point there is a panic, the stock market and bond market crashes, the dollar crashes and martial law is declared. Also in this scenario is a likely war with countries who wnat thier $$ back, possibly escalating in a world war.

I think this scenario makes more sense, assuming of course that LARGE financial institutions are at a risk of default. The US Gov't, facing a scenario like the above, bails out the banks. Where does the 'money' come from? They control the presses don't they? A possible doomsday is averted and instead, the country merely falls into a severe recession/ possible depression.

We've already been through this shit before back in the 80s. I'm shocked at how short some peoples memories are.

BTW - Read "Into the Buzzsaw. The Myth of a Free Press" EXCELLENT BOOK!....Oh yea Gov't controls the press too. Perception is two thirds reality. 95% of lemming Americans won't realize how WW3 was close we came to WW3
 
So in your scenario the US gov't sits by as millions of Americans try to withdraw money from their bank, only to find that the bank has no money.

Not mine. I'm saying that once they realize that can happen, they won't let you. Read about Argentina's recent history for a refresher.
 
Of those critics who say commodities are only this year's dot-coms, he says, "Two or three years ago, they couldn't even spell commodities."

That's the best rebuttal he can come up with??? Two or three years before the dot-com crash, most investors couldn't spell "Internet".

"Someday there will be 10,000 mutual funds that trade commodities," he said. "On Park Avenue, wives won't talk about flipping real estate. They'll be talking about soybeans and pork belly futures."

So he appears to be saying that it's not an irrational bubble like real estate today, but destined to become one. Of course, the world's worst market timer will get out right at the top and leave the suckers holding the bag, right?

Though he concedes that energy and metals have hit a rough patch, with zinc and copper due for a correction, Mr. Rogers insists that commodities as a whole will continue to go up.

This doesn't refute the argument that commodities are in a bubble. The NASDAQ "continued to go up" after a horrific crash, but it will still be many years before it gets back to 5,000.

Look instead at agricultural products, especially sugar and coffee, he said, which currently trade far below their historical highs.

There's a huge flaw in this argument, which I've heard stated over and over with respect to commodities. It doesn't make sense to compare today's price to yesteryear's bubble peak. The bubble peak was, by definition, an irrational price. Comparing gold prices, for example, to the 1980 peak is saying nothing more than, "today's price is less irrational than the most irrational it's ever been." Lucent today trades well below it's peak -- does that mean we're in a bull market for Lucent stock? Lucent could easily enter into another speculative bubble without getting anywhere near it's previous peak.

Couple that with voracious appetites for commodities in China and India, and the prices should continue to climb, he said.

A country in which 40% of all bank loans are estimated to be non-performing and many enterprises are still run by the communist government. No bubble there!

Mr. Rogers believes in China so much that he hired a nanny who speaks only Mandarin to his 3-year-old daughter. Signs taped around the Rogers household name objects in English and in Mandarin: a panda statue bears one with the characters for "xiong mao." Hanging above the stainless steel stove is the word "zhao."

This is a scary statement. This is not simple admiration -- this is obsessive China-worship that suggests to me he's lost his objectivity. If I heard that an analyst liked Nike so much that he tattood swoosh logos on his children, I'd discount as biased his opinions on Nike's business prospects.
 
Gofast
Unfortunately you don't understand why oil is traded in dollars.
It is purely political and military pressures by US which created this system.
Basically, dollar is backed by oil.
If you are Peruvian oil dealer and you want to buy oil, you have to get dollars somewhere to buy it. Same with Polish oil dealer, same with Costa rican, French, Australian , etc.
This is not question of converting dollars into other currency after transaction. It is the matter of having dollars before transaction. You want the oil? Get the dollars.
Who benefit directly from this arrangement? Answer :printers of the dollars and indirectly American citizens.
It is a big deal, if the oil stop to be traded in dollars.
If you think about it how Saddam was selling his oil, thru all those Food for Oil programs, it was one of the reasons to get him out of the picture. Now Iran.
Look for the pattern. I am sure if US and Iran get to agree on Iran's nuclear program, we will never hear about Iran's Euro oil bourse again.
If Chavez will be to aggressively promoting his euros concept Pat Robertson's idea come to life and he will be taken away.
Bottom line is: dollars is backed by gold, black gold.
 
Mike,
Bingo. Our deficits would have affected the value of our dollar a long time ago if not backed by something tangible. I'd say oil is tangible, wouldn't most? Rice says Iran must answer soon, within weeks. Yup, I'd say so. With Russia setting a date of 1 Jul for trading in Rubles, three weeks makes sense to me.

Again on the "safe" CD, when you are a debtor nation like us, how can you back anything monetary. It's the folks holding our debt who are guaranteeing it. Think about it. Would you park your money in a Delta, Northwest, Delphi, Visteon, GM, Ford CD/bond and think it's safe? I wouldn't. They have nothing to back it with other than selling their hard assets.
 
the dollar is fading fast. the dollar index is terrible, that's why people are moving to the euro."

I understand that. They mistakenly believe the euro is some kind of safety net. In fact, emerging market currencies are already falling, and the euro is also going to fall. There is no safe currency, including the dollar. It doesn't matter whether you trade oil in dollars, euros or pork bellies. The euro and the dollar are going to fall, period. Chavez and Ahmadinnerjacket will find this out quickly. Why do you think the Saudis are buying massive amounts of gold right now?

Mike, thanks for telling me what I don't understand. Good luck picking up the pieces, assuming you make a big euro bet based on your beliefs. I will stick with gold.
 
Our deficits would have affected the value of our dollar a long time ago if not backed by something tangible."

Kerk, if you think trading dollars in oil is what has supported the dollar for the last ten years, you are wrong. Asia has been supporting it so we can buy their products. It's that simple.
 
I read this quote recently:

“The commodities market is working off of a totally new economic model than any of us have ever experienced in the past. A limited supply of raw materials coupled with demand from China and emerging markets will prolong the boom indefinitely.”

Sounds reasonable and pretty in-line with a lot of the commodity bull arguments I've heard recently. Except that's not the actual quote. I made a few substitutions. Here's the original quote:

“South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” The realtor also predicted that “a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.” (March 2005)
 
VA John -

That is a BRILLIANT post!!

It's a point I tried to make back in march with TJ, but alas I lack the ability to say more with less words and I think my point was lost. The GLD bulls do sound much like the RE shills...er I mean bulls. That is why I liquidated....obviously I picked the wrong time to and I'm back until I see piles of gold bullion on the cover of Time magazine...PS did I also mention it was the ultimate hedge bet?
 
Heh heh heh, nice catch, John!

Always, ALWAYS gotta wonder about "new economic models".

thejdog, you did make your point before. There have always been rabid PM shills just as there have always been rabid RE shills. You & John in VA have simply misjudged the size of their relative audiences. The public still doesn't have a clue about PMs, whereas everyone knows about RE. When James Turk (or Jim Rogers) is as famous as Donald Trump or Robert Kiyosaki, then you'll have an argument.

/\/\/\/\/\/\/\/

That said, I do think the world is changing, and regardless of what happens China isn't simply going away (nor is India).

As for "petrodollars", I believe they have been just as much a factor in the strength of the dollar as have foreign purchases.
 
"There's a huge flaw in this argument, which I've heard stated over and over with respect to commodities. It doesn't make sense to compare today's price to yesteryear's bubble peak. The bubble peak was, by definition, an irrational price."

if you look at it from the scope of secular bull and bear markets. look at stocks, each secular bull market in stocks in the 1900s topped out higher than the last one, even in inflation adjusted terms. commodities are in a secular bull market, they will eclipse their inflation adjusted highs. they aren't even close yet. like rogers says, this will go on for a decade, maybe more

for commodities to be in a bubble, they'd have to be on the cover of magazines and people would be leaving their jobs to daytrade futures. they'd say in 5 years they'll retire on their silver mining stocks.

rogers is bullish on china. it's on the rise. yes it will have problems, but it's on the rise. that will push up commodity prices.
 
"Lucent today trades well below it's peak -- does that mean we're in a bull market for Lucent stock? Lucent could easily enter into another speculative bubble without getting anywhere near it's previous peak."

like I said before about amazon, the difference now is stocks are in a SECULAR bear market. they won't make new highs for decades. commodites on the other hand, are in a secular bull market.

you're missing the big difference, which is why the amazon and lucent examples don't work, which is that stocks on in a secular bear market.

you don't understand the whole commodities and switching switching places every 17 years or so?

this is from an article that I don't have the link for right now.

Over the past 200 years, commodities had five secular bull-markets between the following periods –

1st boom – 1823-1838 (15 years)
2nd boom – 1848-1865 (17 years)
3rd boom – 1878-1918 (40 years)
4th boom – 1929-1950 (21 years)
5th boom – 1963-1980 (17 years)

here are some great financialsense.com interviews with jim rogers.

Hot Commodities: How Anyone Can Invest Profitable in the World's Best Market

here are a few with marc faber

The Dollar's Fall & the Continuing Boom in Commodities, Especially Gold
The Long-Term Bull Market in Commodities FSN Roundtablewith Jim Rogers

Tomorrow's Gold: Asia's Age of Discovery


the crucial difference is commodities made their all-time highs 26 years ago, stocks made their all-time highs 6 years ago. less than a year ago everyone was bashing gold. they were clueless about silver. they knew nothing about any other commodity except oil.
 
"ounds reasonable and pretty in-line with a lot of the commodity bull arguments I've heard recently. Except that's not the actual quote. I made a few substitutions. Here's the original quote:"

totally different, real estate was 10 years into what is usually a 10 year real estate cycle. commodities are only 7(a little less or more depending on who you talk to and what commodity) into what is usually a 17+/- year cycle.

there aren't many people who even know you can invent in commodities.
 
1st boom – 1823-1838 (15 years)
2nd boom – 1848-1865 (17 years)
3rd boom – 1878-1918 (40 years)
4th boom – 1929-1950 (21 years)
5th boom – 1963-1980 (17 years)


john, all this demonstrates is that the duration of bull markets is highly unpredictable. These durations are all over the map -- the longest was almost 200% longer than the shortest.

And you need to help me understand why being in a secular bull market means it's reasonable to compare today's prices to the last irrational peak. The last peak was still an irrational price -- regardless of whether today's market is secular or not. Are you saying that if we were in a secular bull market for stocks right now then I could make a rational judgment about the attractiveness of LU by comparing the current price to the price at it's most irrational peak?
 
One more thing, for clarification. I've said this before, but it bears repeating (no pun intended): saying that commodities are in a bubble is not the same thing as saying that we're on the verge of a long-term bear market. In fact, I believe that the stock market's long-term bullish trends resumed shortly after the dot-com bubble burst. Both the Dow and the NASDAQ are significantly higher than they were in the mid-90's. The same could be said of commodities. If they do suffer a painful crash, it is quite possible that prices could resume a more reasonable rate of growth. But there's no way that the parabolic increases in price we've seen over the past year are explained by anything other than good old-fashioned speculative fever, IMO.
 
In fact, I believe that the stock market's long-term bullish trends resumed shortly after the dot-com bubble burst.

Come on John, you have got to be kidding!! This has been just your typical dead-cat bounce.

Whether or not you believe in KWs, EWs, etc., history shows that economic cycles mirror collective human emotions. One of those is the unwillingness to let go of good times; people refuse to believe it's over, and governments try everything to avoid the inevitable. This has been a cyclical bull within a secular bear, and I'm pretty sure the cyclical top is already in.

Housing's finally turning down, the jobs report is weak, consumer confidence is slipping, etc. A good portion of job slippage was in retail, too -- not a good sign in a consumer-driven economy. Finally, on a day when a "bad" jobs report should've triggered a rally -- due to the expectation of a "pause" by the Fed -- the market didn't go anywhere.
 
"This has been a cyclical bull within a secular bear, and I'm pretty sure the cyclical top is already in."

I totally agree. each bear market has it's rallies that bring in the last sucker to do the most damage.
 
"Are you saying that if we were in a secular bull market for stocks right now then I could make a rational judgment about the attractiveness of LU by comparing the current price to the price at it's most irrational peak?"

yes, but for stocks. in a bull market, stocks take out there old highs. it's happed in 1929, 1966-68 and 2000. each peak was higher than the last. each took out the old irrational high. that's what a bull market does, it takes out old highs, even if the last one was irrational.

LU is one of the stocks that could never come back, because it was such a leader. I don't know the specifics of the company though.

"john, all this demonstrates is that the duration of bull markets is highly unpredictable. These durations are all over the map -- the longest was almost 200% longer than the shortest."

no they aren't, 80% are around 17 years.

"If they do suffer a painful crash, it is quite possible that prices could resume a more reasonable rate of growth. But there's no way that the parabolic increases in price we've seen over the past year are explained by anything other than good old-fashioned speculative fever, IMO."

it's not possilbe to resume for a stocks because once they enter a bear market they go to levels of undervaluation. stocks are nowhere near undervalued, their still historically overvalued.

how many commodities do you think are parabolic? copper and zinc are the only one's I can think of, but there are many more commodities. the grains are still very depressed. silver is still well below it's old nominal highs. gold would have to rise 32% just to get to it's old nominal highs.

you could have said gold was going too far in the early 70s, but if you dumped gold early you missed the correction that sent gold to $100 from $200(which I'm sure people said was going parabolic from $35) and subsquently to $850.
 
"Mike, thanks for telling me what I don't understand. Good luck picking up the pieces, assuming you make a big euro bet based on your beliefs. I will stick with gold."
Gofast.
There is no need to be offended.
I will never going to bet on euro.
And I definitely bet on gold. I am in the same crowd you are. I just wanted to bring the aspect of dollar/oil relation.
I think its important, because, if dollar will loose the backing of oil, US currency will crash and the only alternative for the world will be gold.
Which will elevate gold price in every currency.
But even if it is not happen gold will reach unbelievable highs anyway, IMO.
 
That said, I do think the world is changing, and regardless of what happens China isn't simply going away (nor is India).


True, tj, but the market for tulip bulbs didn't go away either. Realtors will be around after the housing bubble burst is complete. As for India, this is the kind of thing you see at or near the top of a bubble:

Police on suicide watch after stocks slide

The Bombay Stock Exchange had a market value of $657 billion last week after falling 10 percent on Thursday and Friday. That dropped to $624 billion on Monday as the main index plunged another 10 percent before pulling back to end 4 percent down.

The meltdown left brokers and retail investors badly shaken and put policemen in at least two trading cities on alert against suicide by those facing severe losses.

Groups of brokers and investors burned a straw effigy of Finance Minister Palaniappam Chidambaram at Ahmedabad's stock exchange, holding him responsible for the market slide after months of a spectacular bull run.

"My investments were based on statements of the wellness of Indian economy. With such a huge crash what is the future of the economy, where has the faith in Indian markets gone?

Opposition politicians blamed "manipulators" and demanded Chidambaram resign.

"The stock market is in the hands of manipulators. We had never seen such a fall," said Yashwant Sinha, former Finance Minister and a main opposition Bharatiya Janata Party lawmaker.

 
tj, a three year dead cat bounce??? Come on, doesn't that stretch the definition of dead cat bounce just a bit? I don't want to turn this into a stock market debate, but I think you'd have a tough time getting most folks to agree that stocks have been in a bear market for the past few years. Over the past ten years, stocks have done great. Will this continue? Tough to say.
 
Secular bear, cyclical bull.

There are always bulls within bears, and bears within bulls. This is, as JL2 stated, the short-term sucker's rally within the inevitable long-term downtrend.

Yes, India & China are a mess. Does that mean they'll suddenly revert back to a self-contained, mostly agrarian society? No chance.
 
how many commodities do you think are parabolic? copper and zinc are the only one's I can think of, but there are many more commodities.

Agree with you on the grains. But how about gold through early May? Looks like the parabolas we used to have to draw in high school algebra (or was that trig?) Or sugar Jan 05 through early 06? Another parabola. Here's a really severe parabola: silver. What does the other side of the parabolic rise look like? Looks like palladium
 
john in va,

Go to Kitco and check out the charts on Rhodium. Man, I wish I had money on that one!
 
gold, silver and sugar aren't parabolic. gold and silver are probably just the big short position people getting SQUEEZED. palladium went parabolic because the main supplier, which was/is russia, went offline temporarily. companies had to scrample to get any palladium they could. it was an artificial shortage, with a huge supplier just waiting in the wings with stockpiles.

("The stock market is in the hands of manipulators. We had never seen such a fall,")

I don't know where India is in their stock market cycle. I can't tell if that's like a 1987 temporary setback like the US experience, or the sign of a secular top.
 
Wow - now that's a chart, tj! By the way, I really wasn't even sure what the hell rhodium was until I looked it up on wikipedia!
 
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john, there are statements of opinion and statements of fact. Many of the things I've posted are opinions, but my assertion that silver is parabolic is a statement of fact. A visual inspection of the chart proves it unequivocally.

in a bull market, stocks take out there old highs. it's happed in 1929, 1966-68 and 2000. each peak was higher than the last. each took out the old irrational high. that's what a bull market does, it takes out old highs, even if the last one was irrational.


Why doesn't this apply to silver? Look at the 600-year chart of real silver prices. Gold, in it's 1980 bubble, failed to take out its year 1492 price! In fact, all of the bull markets from the mid 1500's on -- with the exception of 1980 -- topped out around the same real price. Why would we believe that one aberrant price level in a 600-year period would be the new benchmark?
 
John,
I too appreciate the contrarian viewpoint. I've got another reason why I think we'll see gold rise further in the long term.

Would you agree that any attempt at a fiat currency has always failed to date? I can't think of one in history, but maybe I am missing one.

Assuming that there isn't one I missed, then folks saying this time is different are betting we can pull it off. I've heard the reports of deals made with Saudi back in '71 when we cut the gold standard. Essentially, we'd provide protection as long as they sold oil in dollars. I don't believe much I read or see on TV unless I've been privy to something to back it up. Well, Iraq invades Kuwait, we come to the rescue, and for the next 12 years or so, oil is the cheapest I've seen in my 35 years. Well, based on that, whether there was a deal or not, they were certainly willing to give up their natural resources for very cheap. The fall of Saddam, our massive increase in debt, and oil starts getting pretty expensive.

Essentially, no different that if the $ was backed by gold. If you're going to create massive amounts of money, gold is going to go a lot higher. Unfortunately for us, the world runs on oil, so the rest of the world is paying big time for our out of control debt/creating money. Unless it is backed by something else, expect oil to keep getting more expensive. Gold is a hedge against inflation. Since it is tough for me to store oil, I'll be looking to store a large portion in gold and silver. I could be wrong, and I hope I am in all honesty. From what I'm observing, I don't see any other logical explanation. I'm sure someone else has other explanations, and I'm certainly interested in hearing about something I've overlooked.
 
kerk, I think you make a very cogent argument for the underlying fundamentals. I've never disputed that there are acutal fundamentals supporting a rise in PMs. My position is best summed up by the recent words of Warren Buffet:

"But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant."

I don't dispute your statement, "If you're going to create massive amounts of money, gold is going to go a lot higher. "
But if you create massive amounts of money, everything is going to go higher: eggs, milk, bricks, gold, Ab Blasters, and so on. PMs should go higher, but roughly in line with everything else. The reason PMs have gone parabolic is that everyone thinks that everyone else is getting into them -- just like real estate (which also had solid fundamental reasons to rise moderately before the bubble). Keynes (and I'm no Keynsian) likened the stock market to a beauty contest in which everyone votes on whom he believes everyone else thinks is the prettiest. Same thing with PMs. Speculators (probably mostly hedge funds) rush in because they know that gold bugs are going to flock to PMs at the first sign of inflation or political instability -- just like real estate speculators dialed into the "buy now or be priced out forever" hysteria of first-time homebuyers.
 
But if you create massive amounts of money, everything is going to go higher: eggs, milk, bricks, gold, Ab Blasters, and so on.

Yes and no. Everything doesn't go up, only those things people really, really want or can't live without.

Inadvertently, you're making our argument for us. Eggs are fragile, milk goes bad, and bricks simply can't be carried around easily. Not everyone needs everything at any given moment either. So, what is strong, durable, has value in small quantities, and is acceptable as a common medium of exchange that never loses value? I'll give you two guesses!
 
(Why would we believe that one aberrant price level in a 600-year period would be the new benchmark?)

because in bull markets, old prices are taken out. previous price changes were the result of huge silver finds that took centuries to absorb, and the fact that human labor was increasingly taken out of the equation.

each major decline on that chart happens around the time of a great discovery, like the discovery of the Potosi mine. the Spainish brought back immense quantities of silver and discovered a new continent.
 
(just like real estate speculators dialed into the "buy now or be priced out forever" hysteria of first-time homebuyers.)

not even close. nobody is in silver. it JUST got it's first ETF. everyone is still trading homes. 6 months ago people didn't know about silver and the pundits were trashing gold. 1 year ago they thought oil was heading down to $40, after their $30 price target looked unreasonable. my god, silver barely went up 3X, what kind of mania is that?

everywhere you go on tv, some bigwig is saying inflation is dead. everyone knows the dollar will probably fall a little, but they say that's a good thing.

no mania yet.
 
So, what is strong, durable, has value in small quantities, and is acceptable as a common medium of exchange that never loses value? I'll give you two guesses!

Diamonds? Just kidding. If you're looking for something that's a common medium of exchange, it sure isn't gold. Ever bought a loaf of bread with gold? A car? A house? Anything? Try it. Go to the local gas station and ask them how many milligrams of gold for ten gallons of gas. My bet -- blank stare. Can I theoretically exchange gold for something else of value? Sure, but I could do that with any number of things. In the dot-com days, some commercial landlords took stock options in lieu of cash for rent. That didn't make stock options a common medium of exchange, however.

Never loses value -- tj, are you serious? Suppose we denominated something like cheese in grams of gold. Are you suggesting that a gram of gold would have been worth the same amount of cheese in 1985 as it was in 1979? Did gold lose all that value only versus U.S. dollars and nothing else? Gold lost a huge amount of value after the last bubble.
 
because in bull markets, old prices are taken out. previous price changes were the result of huge silver finds that took centuries to absorb, and the fact that human labor was increasingly taken out of the equation.

each major decline on that chart happens around the time of a great discovery, like the discovery of the Potosi mine. the Spainish brought back immense quantities of silver and discovered a new continent.


john, this argument takes the concept of "this time it's different" to a whole new level. So you're saying that all that stuff that's been going on for the past six hundred years is now about to reverse?

How do you explain the same failure of gold to rally beyond the peak set a number of centuries ago?
 
John in va, I don't believe the price of gold fluctuates. It's constant. The value of money fluctuates around it.
 
(How do you explain the same failure of gold to rally beyond the peak set a number of centuries ago?)

because a few centuries ago gold and silver were much more rare because it was a lot more tougher to mine. the Potosi mine and the Comstock loads were huge finds.

anyways, 600 years ago doesn't have much to do with the last inflation adjusted peak of the1980s.
 
"I don't believe the price of gold fluctuates. It's constant. The value of money fluctuates around it."

That is correct. I'm sure most of the people who post on this blog realise this, but 99% of the investing public do not, and it's key thing to keep in mind when investing in the stuff.

A wise realative told me years ago as a kid that "one ounce of gold will always be equivalent to the price of a new suit" I had to buy a suit
back in December and lo and behold I paid $485 plus tax.

For those that think deflation is around the corner, gold is one of the last places you want to be, armageddon be damned.

One more thing about deflation vs inflation. It's going to be heavily based on a barrel of oil. Ya think gas priced are going to go down pretty soon?
 
Cute parsing, John in VA.

My "never loses value" statement was intended in the absolute sense -- meaning that it will always be valuable.

Likewise, "common medium" was meant more in terms of recognition than convenience.

Regarding either expression, think of the circumstances anywhere in the world 100 or even 1000 years ago.

Of course, you knew what I meant. You're just playing with us! ;-)
 
Thejdog said:"I don't believe the price of gold fluctuates. It's constant. The value of money fluctuates around it."

That is correct. I'm sure most of the people who post on this blog realise this, but 99% of the investing public do not, and it's key thing to keep in mind when investing in the stuff.


You are dead on with the 99% line. I think the general public would go back in buying beenie babys or pet rocks, before investing in PM's.
 
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john in va said...
tj, I wasn't just being a wise guy. You can see from the posts of several others that some people think that gold does not fluctuate in value.

"I don't believe the price of gold fluctuates. It's constant. The value of money fluctuates around it."

That is correct. I'm sure most of the people who post on this blog realise this, but 99% of the investing public do not, and it's key thing to keep in mind when investing in the stuff.


That's just not true. By "price of gold", I'm sure you mean "value of gold" or "purchasing power of gold" (price would imply you're denominating it in dollars or some other currency). But "value" vs. what? Eggs? Silver? Plasma TVs? The proverbial men's suit? If gold were the medium of exchange, the prices of everything in terms of gold would remain fixed -- even when shortages occur? That would rewrite the laws of supply and demand. If we had a horrendous grain crop, for example, and there was a shortage of grain, the exchage rate of gold:grain would remain unchanged nevertheless - even though people would be willing to give up more gold for a pound of grain?

jdog, if this statement were true, it would have set up the biggest arbitrage opportunity in the history of the universe during and after the 1980 bubble. Let's say that at some point in time, gold is trading at $800/oz, and a car costs $8000. Then you could trade 10oz. of gold for a car (let's just forget the "medium of exchange" debate for now). Suddenly, the price of gold drops to $400, as it did following the 1980 bubble. But you're saying that the value of gold has remained unchanged except with respect to money. So those same ten ounces of gold can be exchanged for the same car or for $4000. BUT -- the price of cars in dollars didn't change that much in the same period of time, right (the price of bread, eggs, and cars in dollars didn't fall with gold's decline in 1980). So now, the people who held gold past the peak really didn't lose out, because even though they can't exchange their 10oz. of gold for $8000 directly, they can trade it for a car and then sell the car for $8000 in U.S. currency. You know what I'd do? I'd take $4,000 and buy 10 ounces of gold. Then I'd trade that gold for a car and sell the car for $8000, and pocket a cool $4000 in arbitrage profit. Then I'd do that a thousand times and be one rich dude. Except that no one in their right mind would sell me gold for $400 an ounce when they could do the same thing I want to do.

When the price of some thing "A" changes (in dollars) and the price of some thing "B" (in dollars) remains constant or doesn't change as much, then the exchange rate of A:B has changed, not just the exchange rates of A and B individually to dollars. Same thing with gold. If the price of gold doubles and the price of eggs remains unchanged, then what has really happened is that the value of gold in terms of eggs has doubled.

The saying about an ounce of gold being worth a men's suit has been around for a long time, and it refers to the long-term average price of gold. It doesn't necessarily hold true at any given point in time (unless you bastardize it to say that three years ago, it was worth a really cheap suit and today it buys a pretty good suit).

Likewise, there's no static "value of money" per se. Money simply denotes the relative exchange rates between any number of different things. Money can be "gaining value" against one thing (like plasma TVs) and simultaneously losing value against something else (like gasoline). What that really indicates is that plasma TVs are losing value relative to gasoline and other things that are rising in price.
 
john_in_va,

I think you make some valid points, and I don't think anyone can argue that in 1980, prior to the crash, gold was seriously overvalued. As the resident/default contrarian (what does being the contrarian amongst contarians make you?) I'd like your thoughts on some things I was thinking whilst perusing your post.

Anecdotal evidence from the 1980 bubble also suggests that prior to the crash that market had entered a (similar to the recent Internet/Real Estate bubbles) realm of public awareness where of all the cabbies/shoe shine boys/waitresses etc. were "going to strike it rich" through gold/silver.

As far as I can tell that has yet to happen in this day and age and you have yet to address that point (already made by several individuals more erudite then I above). If PM are truly in a bubble, then why does no-one outside of small (relatively) Internet communities seem to be arguing about it? To put it more bluntly, none of my friends who purchased over-priced homes in the last two years against my advice have started talking about PM yet ... when they start telling me they are getting into PM, that's when I'll know its time to get out.

Hypothetically assuming that PM are in a bubble, then where do you feel the true value of gold etc lies? It's one thing to be able to point to a graph of a certain shape and say "this type of curve = bubble" and another to say where it should be. If gold was seriously undervalued prior to 1999, then couldn't the recent runup be part of a correction to the proper value? What about the effect of paper futures contracts on gold?

Also even if gold is currently somewhat over-valued, wouldn't the only argument against putting some insurance money in it would be that a) it will revert to its correct value (a given of any over-valued item) AND b)you don't think there is any real chance of inflation (which would overtake the initial over-valued price you paid for it). I've only been self studying these financial matters for a short time, but the more I read about the current situation that the US finances have been led into by the Fed, rampant spending, etc ... the more I wonder if the question is merely how severe the inflation will be.

I look forward to your thoughts.
 
if the metals were in a bubble, that would mean EVERYONE would realize inflation is skyrocketing and seemed like it would never end. everyone would believe the dollar is toast. does that sound like the type of environment we're in now? now with interest rates taking forever to go up and they certainly don't signal a PM bubble.

silver and gold are rising quickly for two reason.

1. the large short positions by the institituions probably finally got caught on the wrong side of the trade.

2. institutions and hedge funds have finally discovered commodities as an asset class. the problem is there simply isn't a whole lot of physical gold and silver around, that's why silver and gold are rising. that's why the price needs to rise a lot higher, so we can open all those mines and get the silver candlesticks out of people's homes.

I think the global capitalization of gold stocks is still less than $150 billion dollars.
 
A few thoughts on john in va's post: "If gold were the medium of exchange, the prices of everything in terms of gold would remain fixed -"

Of course, gold is not the medium of exchange. It is the store of value, as far as I am concerned. We understand that the prices of plasma tvs fluctuates. Plasma tvs, cars, even houses are not stores of value. If I stand on the deck of a ship and look at the shore, the land appears to move. In fact, the ship is moving under me. I consider gold to be the land, and you consider it to be the ship.

John Law said: silver and gold are rising quickly for two reason."

I don't consider silver and gold to be very similar. I suspect some base metals are actually in a bubble. I agree that hedgies have discovered they can push PM markets around because of the size, but they are short-term traders. The big boys, nations, are buying and with the currency collapse already begun at the edges and moving toward the center, I wouldn't want to be short gold.
 
John in VA,

Of course things fluctuate. The "value" of something is exactly what people place on it at a specific point in time -- nothing more, nothing less.

However, I am again discussing PMs more in a long-term macro sense, ignoring shorter term gyrations.

Governments rise and fall; fiat currencies come and go; gold & silver remain. The U.S. itself rose on gold & silver currency. Now we're on the downside, and IMHO the purchasing power of PMs will increase dramatically as a result.
 
I'm in the minority here with big bets on the Euro (however, my biggest bets are on CAD and CanRoys). I estimate my Euro bets are twice as big as my PM bets.

Here are my views on the Euro:
Most of us agree that the USD will faulter at some point. Serious PM bugs want all unbacked paper currencies to fail, and logic might conclude that is what should happen.

I believe the marketplace is setting the stage for the Euro to be the next world's [paper] reserve. Pre-war Iraq attempted to switch to Petroeuros. Syria switched their savings to Euros. The Middle East in general has large European accounts. Iran is trying to switch to Oil Bourse (which will result in higher demand for the Euro). Venezula is proposing Petroeuros too. I believe this is a beginning of a shift not to be taken lightly.

People might argue that the fundamentals of the Euro are worse than the USD, but right now the psychology of world markets point to a fear of USD. We have all witnessed psychology overriding most market factors.

When USD crashes, perhaps it will take the other major currencies with it. But what damage does that really do? Only then emerging market currencies will be worth more. No one would consider that a crash. I believe if we have a currency crash, there will be one faulter or different tiers. USD would be it or faulter more than others and so I shall win my bet.

If I'm wrong and USD prevails over CAD, EUR, and JPY, then I should have just sticked to T-Bills.

Russia is on the right track for trading in gold. I can understand other countries hesitating to do this because of the high volatility of PMs (not to mention oil itself).

(I like this comment and I'll be reposting on my blog.)
 
if you like the euro, check out FXE.
 
what does being the contrarian amongst contarians make you?

Interesting question - either contrarian squared or a counter-revolutionary :-)

Anecdotal evidence from the 1980 bubble also suggests that prior to the crash that market had entered a (similar to the recent Internet/Real Estate bubbles) realm of public awareness where of all the cabbies/shoe shine boys/waitresses etc. were "going to strike it rich" through gold/silver.

As far as I can tell that has yet to happen in this day and age and you have yet to address that point


This presupposes that a bubble cannot exist without the involvement of cab drivers and the rest of the unwashed masses. But I just don't buy it. A bubble forms when the speculation becomes dominant (as Buffet aptly put it), and this may or may not involve Joe Sixpack. In fact, I think that the massive inflow of capital into hedge funds, along with their ability to use enormous leverage, makes it possible for hedge funds and traders to create bubbles, especially in relative thinly-traded markets, without the presence of retail investors en masse.

In fact, I'll tell you what I believe is happening - and this is just a hypothesis: for years, hedge funds have exploited various strategies -- shorting stocks, convertible arbitrage, currency arbitage, mortgage-backed securities, and most recently, the carry trade (btw, the books "Ugly Americans" and "Running Money" are great reads on hedge funds and how they operate).

Hedge fund investors expect huge returns -- greater than 25%, so there is enormous pressure on HF managers to perform. However, the explosion in the number of hedge funds and their capitalization has made it very difficult to find returns. Everyone is piling into the same strategies, diminishing returns and risk premiums.

For the past few years, hedge funds made huge money exploiting the carry trade. The spread between short-term and long-term rates made it possible to virtually print money. However, since the Fed began its tightening campaign, the yield curve has gone flat and the carry trade is all but dead.

So now we have all of this hot money floating around out there in search of outsized returns. Where do you go? Long in stocks? Nah, if investors wanted those kinds of returns, they'd invest in mutual funds. Convertible arbitrage? There aren't enough new convertible offerings out there. Mortgage-backed securities and REITs? Sucker bet in late 2005; the smart money's already gone. I know -- commodities! There's a fundamental reason for commodities to go up (global growth, inflation, etc), so we know that investors are going to be drawn to it; let's get there first! The problem is, everyone wants to "get there first", so they all pile in. And price gains draw in more speculators. Meanwhile, gold enthusiasts see the price gain as confirmation of their long-held beliefs and plow more money in, and prices spiral upward.

In fact, after I began wrote the foregoing, I found the following on the Web:

As the prices of oil, gold and metals such as copper have climbed ever higher, debate has raged about how much of this is due to supply and demand fundamentals, and how much to speculation. Speculation by pure financial investors, such as hedge funds, certainly became an increasing factor as prices spiralled.

Merrill Lynch reported last month that speculation in the commodity markets was now the highest in 10-15 years, and its models showed commodity prices always fell in the 12-month period subsequent to extreme commodity speculation. Merrill Lynch didn’t say by how much.

Even if we’re not looking at a crash though, it’s likely markets could be volatile for some time, in part because of who trades them and how they trade them. The rise of the derivatives industry over the past two decades or so has created unprecedented scope for investors to take price positions on commodities they could never physically trade, says Satyajit Das, who wrote the definitive text book on derivatives a few years ago and has just published a new book on the subject (his SA connection is a directorship at Rand Merchant Bank).

The biggest change in the past decade or so, however, has been the huge flows into these markets that’s come about as financial investors, specifically hedge funds, have moved into the markets. There is now more than $1-trillion kicking around in 8000-10000 hedge funds.

There always was some speculation in commodity markets but it used to be relatively modest, with prices driven more by users and producers and the balance between supply and demand. But the financial investors may have little notion of underlying supply and demand balances — they are trading oil futures to play the nuances of Middle East politics, or copper derivatives as a punt on the demand surge in China and India. The tail starts to wag the dog, says Das, and it becomes increasingly difficult for real producers and users to work out what the correct price might be.

It is all made a lot more volatile by the fact that hedge funds are so highly leveraged — small moves in the market can turn into big moves as funds find they have to liquidate their positions. Financial markets, in currencies, bonds and equities, have long ago learnt to live with high levels of speculative activity and their consequences. But it is relatively new in commodities. And the choppiness might continue for a while.

 
Hypothetically assuming that PM are in a bubble, then where do you feel the true value of gold etc lies? It's one thing to be able to point to a graph of a certain shape and say "this type of curve = bubble" and another to say where it should be.

silverhwk, to continue on my response (and I thought your post was very well-reasoned):
I have no flipping idea what the price of gold should be, on a fundamental basis, and that's why I'm neither long nor short the market. In fact, I can't find a solid fundamental analysis model that would indicate what the FMV would be. With stocks, I can do a discounted cash flow analysis of expected future cash flows (and this is part guesswork) to come with with a "fair value" for the stock in present dollars, plus or minus. How do you do that with gold? All of the gold enthusiasts say "gold's cheap!" and that generally means "cheap compared to the last bubble high", which was by definition irrational, or "cheap because there's inflation" without explaining why gold is going up much faster that the rate of inflation.

So that leaves me with the long-term average price as a best guess as to the fundamental value of gold. According to the chart, the 200-year average, inflation-adjusted, is $435/oz in 1999 dollars. According to this inflation calculator, $435 in 1999 dollars is worth $499 in 2005 (the highest year it covers). Incidentally, the multi-century peaks for gold appear to be in the $550-580 range, in 1999 dollars (with the single exception of the late-70's bubble). $580 in 1999 dollars equates to $661 in 2005 dollars (perhaps $675 in mid-2006). Gold, in it's most recent rally, shot a little beyond this mark and has now settled a little below it. Coincidence?

So why would you want to speculate long in an asset that now trades near it's multi-century average highs? Could it go higher? Sure it could. But it's not hard to see that the there's more downside risk than upside potential at these prices, if you use historical prices as a benchmark.
 
( But it's not hard to see that the there's more downside risk than upside potential at these prices, if you use historical prices as a benchmark.)

it's easy to see much higher gold prices when you take into account the fact that gold is in long-term bull market.
 
How much is gold, oil, house, food, whatever worth? How badly do you need it is the answer. As for the house, I'd say that is a mute point at this juncture. Sure, I need a place to live. Looking around, there are a lot of places I can choose from. Too many to choose from, so why pay a lot. Poof. Not worth that much anymore.

Oil. We need it, and so does everyone else. Well supplied? The only thing you hear from the media is what are stocks are compared to historical averages. Great, what is it with respect to current demand? Based on the price, I guess pretty tight. So I suppose it is worth pretty much. OK. Still not quite as costly per volume as beer, but I think it'll get there.

Gold? Not needed really at all, so not worth so much. However, as I look around, I don't see how it can't end badly for the dollar. There is no way that the FED can raise rates to the levels required to restore faith in the dollar. The outstanding debt on mortgages alone would absolutely crush a large portion of society. So, that isn't going to happen. People buying euros? I think I stand a better chance of having folks accept gold and silver at businesses in US that Euros. Am I going to trade dollars for Euros and back everytime I do a transaction? Not very cost-effective since someone getting a cut.

How much is gold worth? Time will tell, but our country hasn't ever been in this situation before, ever (currency unbacked and at never before seen levels of debt..OK maybe by oil but that is changing quickly). Yeah, this time for us in the US, it is different...and not in a good way at all.
 
John in VA,

You may be correct in that gold is near it's historic average. However, that only means that gold has achieved a "normal" value; that which is neither being artificially suppressed (e.g., 90's) nor extremely energized (e.g., late 80's). IOW, all things being equal, you could expect exactly zero returns.

That's just it, though... things are not equal! You've inadvertently made another of my points. Things are bad and getting worse, which means the fundamentals underlying PMs are improving dramatically. [In fact, things are apparently far worse than the late 80's.]

Government and/or fiat crises are extreme events; even the suggestion of same can result in rather extreme PM moves (beyond the effect of hyperinflation itself) due to the resulting fear.

IMHO, the die is cast; now it's only a question of timing. [Funny... same question we keep asking over on Ben's other blog. But of course, these issues are fundamentally intertwined, aren't they?]

p.s.: The weekend's almost over and I still have work to do, so Part III & IV have been delayed yet again. We'll get there!
 
john_in_va,


I have no flipping idea what the price of gold should be, on a fundamental basis, and that's why I'm neither long nor short the market.


Fair enough, I guess what intrigues me about PM so far as to whether or not we're in a peak or local maxima right now is when I compare it relatively to the real estate mania (apples and oranges I know ... but bear with me). When I started looking at real estate in early 2003 there was the one side claiming real estate always went up (regardless) and then the other side pointing to hard statistics on the number of exoticly financed mortgages, the diverging costs of housing and incomes, etc. What's staggering to me is how people could have looked at those kind of numbers and still jumped in, but I digress.

What's interesting about PM and I guess makes it much more difficult is that (as you pointed out) unlike some form of housing, people don't _need_ it. Although the last 3-4 years in RE and the Internet bubble before that have me convinced that if the "unwashed masses" ever do get turned onto gold/silver ... look out.

I agree that you can't pick the 1980 high as a guarenteed target, but the data from that bull market (being the most recent) shouldn't be completely ignored I would think. The fact that its peak value of $850 in 1980 translates to $2150 in 2005 (using the calculator you linked to) indicates that at the very least we're nowhere near the level of over-valuation they hit then. The other factor I find really compelling when considering 1980 is that (I've read in places) a large reason that bubble came crashing down was that Volcker went after it hard with a double digit interest rate. I think it was mentioned above that such an option is not even on the table today, due to the fact that they cut it down to the bone to inflate the RE bubble and people would be jumping off their McMansions when all their ARMs reset to 15%.

I guess that's where I'm sitting right now, I'm not putting any money in silver I couldn't do without. I think in the worse-case scenario the dollar will completely collapse and I'll be glad I have a sack of silver coins, second worse after that is I'll have to wait a _long_ time to make some profits (but I got time). I think most likely in my mind however, is that inflation is going to start winding up as the Fed prints its way out of debt, Joe-Sixpack will wake up to PM again and the combination of value preservation and investor flight-to-value are going to whip some hot air into this. So in the best case, yeah I'm a speculator, but the fact that in the worst case its pretty good insurance makes me feel pretty good about it.

Your point about the hedge funds are interesting, I don't know a lot about them. I'll look for one of those books you referenced, thanks for that. I do know a lot of people are claiming that if/when the dollar gets in trouble, a lot of the people laying paper claim to PM, are going to be left out in the cold when those obligations are defaulted on. Not sure where that would leave the hedge funds, (depends on how they are invested I suppose).

thanks for the detailed responses ... and btw, where in VA are you located?
 
(I think it was mentioned above that such an option is not even on the table today, due to the fact that they cut it down to the bone to inflate the RE bubble and people would be jumping off their McMansions when all their ARMs reset to 15%.)

exactly, I have a feeling they won't be hawkish on inflation, in part because they can't be. their debt leveraged financial monster will fall apart. they'll keep rates lower than they should be(heck, they already have) and for too long. this is bullish for gold.
 
OOPS! Obviously meant late 70's, not late 80's.

p.s.: Anyone note that we've got this thread over 70 posts??
 
You may be correct in that gold is near it's historic average.

tj, I think you misread my post. What I said was that gold is near it's historic average peaks. The 200-year historic average is around $499 (2005 dollars). We're well beyond that at $640. We're close to where gold has peaked out in nearly all of the bull runs over the past few hundred years: approximately $675 in today's dollars.

silverhwk, I'm in Leesburg (Northern VA), in the epicenter of one of the worst housing bubbles in history.

I don't disagree with your point that the 1980 peak can't be ignored, and I think that some posters may misinterpret my position as "we're at the top", when my position is, "we're in a bubble." I don't try to call the top in a bubble, because bubbles are inherently irrational. PMs may yet be in for a speculative blowoff that would take them to double today's price - I really can't say. What I am claiming is that speculation has become the dominant force in PM price movements, and as such, I would expect a lot of volatility going forward. Given the fact that gold is already well above it's inflation-adjusted 200-year average of roughly $499, I believe that the downside risk far outweighs the upside potential.
 
if gold is near it's peaks, why is that not the case for the dow/gold ratio? in fact, the dow/gold ratio still shows gold massively undervalued compared to the dow. it's at the levels seen at the tops in 1929 and 1980. the dow/gold ratio bottoms out under 5, we're not even close.

the gold bull market has barely begun.
 
Gold was definately topped out at $700 +...relative to todays current global economic conditions.

Gold needs a catalyst to retrace those highs and possibly go beyond. Fortunatley for Gold bugs there are about a dozen potential strong catalyst to make that happen.

NOBODY can deny that.
 
John in VA,

Okay, so I did read your post incorrectly. I'll pay better attention next time, I promise!

What I am claiming is that speculation has become the dominant force in PM price movements, and as such, I would expect a lot of volatility going forward.

Maybe we need to discuss the use of the term "speculation". I'd venture to say that all currency trades are speculative by their very nature, and PMs are simply the world's oldest currency.

Given the fact that gold is already well above it's inflation-adjusted 200-year average of roughly $499, I believe that the downside risk far outweighs the upside potential.

Sorry, don't buy it.
* 200 year time-frame? Gold was fixed at $20 until the Great Depression, then fixed at $35 until 1971. Uncle Sam forbid private possession in the interim.
* The CPI has been bogus since the early 90's.
* The dollar dropped from 1.20EU in 2001 to .75EU in 2005. Even accepting the 1999 $435 figure (which I don't), that would put gold around $730 in 2005 (which, coincidentally, was the recent 2006 peak).
 
John Law II,

Forget DJIA, how about that gold/oil ratio!!!

thejdog,

Only a dozen? Take your shoes off and try again! ;-)
 
I love those ratios, the more obscure the better. I remember they did ratios with gold/oil and oil/gold. same thing for silver. anyways, they showed that silver and gold was undervalued relative to where the price of oil was. damn if that ratio wasn't right!
 
john_law_the_ii,


Besides industrial uses, it's use in jewelry and it's history as a monetary metal, I guess it is worthless.


I was merely pointing out that unlike a roof over your head, billions of people get along everyday just fine (for now at least) without gold. I don't think anyone can argue that whatever industrial uses there are for gold justify even its current price. If I understand correctly silver has far more industrial uses then gold, and I'm not hanging my hat on that (although it does help the floor a bit).

Gold is valuable because there is a finite (relative to paper money) quantity of it and people have accepted it as the primary form of money for thousands of years, and I am fully confident that will continue for the next several thousands of years. The conversation here has just been about how much value should be assigned.

My thought was just that when comparing the RE bubble to whatever is happening in the PM market the need Joe-Sixpack currently perceives of the two entities is wildly different. Once again, I know its apples to oranges, but the psychology of these things piques my interest.
 
...but the psychology of these things piques my interest

No doubt psychology is the key to PMs. That's why I paid (pun intended) zero attention to PMs up until a few years back. I mean, really now, the value assigned defies logic... unless you consider human nature. Assigning value to PMs is as basic an instinct as sex. PMs are sexy, hence their use in jewelry.

Once you accept the fact that humans instinctively assign a relatively stable value to PMs, then you can start considering other factors:

* Supply.
* Normal non-industrial demand.
* Industrial demand.
* Perceived(!) inflation/deflation.
* "Full Faith & Credit".

The last two factors are the real wild cards that can cause PMs to "go ballistic". Once people's confidence in a government's ability or willingness to meet its obligations is shaken, that currency is toast. Now, if it's the world's largest economy and the de facto reserve currency, all fiat is toast... and PMs rule once again.

Euro? Yuan? Yen? Any one non-USD currency is simply incapable of replacing the USD without suffering an export-killing exchange rate. Remember too, when the U.S. sneezes, the world catches a cold.

Finally, the amount of "money" in the world since 1971 has grown (to borrow a term) parabolically compared to the total stock of PMs. All that money chasing such a little supply means the sky's the limit.
 
The dollar dropped from 1.20EU in 2001 to .75EU in 2005. Even accepting the 1999 $435 figure (which I don't), that would put gold around $730 in 2005 (which, coincidentally, was the recent 2006 peak).

That's an interesting observation, tj. But today's USD:Euro exchange rate is back to roughly where it was back in 1999. So why wasn't gold above $700 in 1999?
 
Probably because the U.S. "new economy" looked like an unstoppable juggernaut forever set to lead the world?

Killer economy (at least superficially), disciplined government (again, at least superficially), $10 oil, pre-9/11, pre-Iraq, no perceived inflation, and the last years of coordinated gold sales by CBs. It's no wonder gold languished.

I'll say it again and again and again... it's all psychology.
 
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