Saturday, August 05, 2006

 

Weekend Topic: Will Gold Tank Before Soaring?

A couple of readers posted this as a topic for the weekend. "WILL GOLD TANK BEFORE SOARING?"

"Lots of people believe a deflationary depression will take the metals down to Y2K levels before heading for the stratosphere. Well...I believe it's very possible that the 'End of the Gold Basis' (as Fekete put it) will occur beforehand, effectively isolating PMs from a contraction. Jas Jain has stated much the same thing, in that when economic armageddon is realized all the Gold will already be tied up and no longer available to the common man at any price."

"I've previously made the point that there really isn't that much Gold (or Silver) in the world. OTOH, there's a hell of a lot more money out there, so it wouldn't take much of it to remove all PMs from the public domain rather quickly."

Another added, "My thought is we will see some wild swings as it is a thin market, BUT I don't think it will fall much relative to the price now..Certainly not pre Y2K prices...People are already rotating out of dollars. All the talking heads on CNBC are talking some gold in their positions. As the dollar unwinds just more interest in the PM's. Some minor shortages already showing up on silver...Russia, China, etc etc all increasing their reserves substantially."

"Italy was just shown to increase holdings of $sterling 25% thereby secretly? getting out of the dollar..I think it's similar to housing. People are whistling past the graveyard with their eye on the door....Time will tell. Long term ,nothing but up, at least that's where I have my blue chips."

Comments:
I'll forward this post through the weekend.
 
Govt's have confiscated gold in the past. Based on flow of information when it occurred, I don't think they could pull it off again. That isn't saying they won't try, but it'll be one heck of a lot harder to enforce.

I see gold and silver being the basis for money, but not from a gov't standpoint. I see people putting money in banks that actually back the money with gold. Yes, we've done that before, and it's been done in some form for thousands of years. So no, it won't be any different this time. I see people taking a lot more interest in who the banks are lending their gold. If my bank is giving their reserves to people making 30K for a house at 500K, I'll be moving it, period. It has become so convuluted, it is very difficult to tell where your money is being lent. I see that changing in the future after what is coming.

Hopefully, gov't will stay out of regulating it. Let the people regulate it by taking an interest in where their money is going. Otherwise, don't lend my money, and I'll actually pay a bank to store my savings. What a novel concept.

It's the concept of making money off of money that isn't your's to begin with that people are fighting over in the Middle East right now. If you look back far enough, that is the difference in religions that causes the hatred among Muslims, Christians, and Jews. I'm not a religious fanatic by any means, but wars are fought and people are killed for a reason. It is a sad state of affairs, but that reason is money, in one form or another. Always has, and probably always will be.

Christians have felt it immoral to lend money for interest. The Jews don't feel that way. I'm not saying whether it is right or wrong, but I have no problem paying to store what I have worked for. As long as someone isn't creating money out of thin air, it doesn't hurt/devalue my savings one bit. It only does that when you are playing by one set of rules, and everyone else is playing by another. We've seen how it plays out with a fiat currency based on thousands of years of history. I think we're in the process of reverting back to the mean on a grand scale.
 
Thanks, Ben!
 
The question of whether or not gold will tank before soaring is another way of saying, "will deflation give way to hyperinflation", which is really the $100,000 question.

Will the Fed be forced to return to a phase of interest rate reductions? Is the Fed simply "reloading the gun" with interest rate raises? Will the current rapid decrease in liquidity force an emergency increase in liquidity to save the banking system?

I'm of the mind that all the above questions are pretty closely tied to 3 other question:

1) How fast will the housing bubble collapse?

2) And what will the BoJ do re: interest rates?

3) Where are oil prices going?

Lots of questions. These are interesting times.
 
All fiat currencies eventual become worthless and with the massive deficits and debts the US is running, we may see that happen in our lifetimes.

The reason I think we'll see deflation before that happens is twofold: 1. debt levels should eventually force money supply to contract. In that scenario, the central banks would find themselves 'pushing on a string', meaning individuals and businesses won't borrow (much), even at zero interest. 2. IMO, there is a huge amount of over-capacity around the world. This has been caused by several rounds of liquidity creation to jump start the big economies; and the by-product of globalism.

How low could gold go? Will $500/oz be the low? Or $200? I have no idea. I intend to accumulate on dips, rather than time this market.
 
Prechter believes deflation will precede hyperinflation, thus commodities will fall hard first.

Given PMs status as the ultimate reserve currency -- even CBs are making friendly noises these days -- I foresee a mass flight-to-safety into PMs precluding much of a decline, even in a severe deflationary environment.
 
I don't see how you can have deflation in the current situation. Inflationary pressures are global (energy, global interest rates, etc). The US is buried in debt. Cutting off credit/money supply would be the fastest way to economic implosion. Perhaps the biggest reason to expect inflation is that the global financial system (Fed, fractional reserve banking, etc.) is designed to inflate, not deflate.
 
I see both deflation & hyperinflation; just don't know when and in what order. In the meantime, I'm buying physically on the dips, too -- no selling here.
 
I feel the inflation/deflation debate to not make much sense anymore.
Deflation/inflation in what? The CPI and other Gov. measures are now a farce! IMO the collapse of the credit bubble will deflate all assets in the US (things we don't buy from overseas--RE, Healtcare, Education, etc..) and inflate everything we import (Oil, Stuff, Gold, etc...).
We have not lost the ability to make anything in this country. We have just grown lazy in the face of other countries giving us stuff for free (our dollars). Ours is no longer the only mas market in the world. With the rising standard of living in China, Russia, India and others it won't take long for the "Stuff" to start flowing to them instead of us.

Energy cost (in US dollars) will crush our economy and only a mass move to other sources (nuclear, etc..) will get us back on track.

I see the dollar collapsing for 10-15 years after our credit bubble collapses until we can build and get on line a "New Deal" type of operation in the energy area. Just like the PWA and highways in the 30's, we will use huge Gov programs to build windmills, nuke plants, biodiesel, solar, etc. until we are independent on other countries for necessities in the US.

This will only happen after
 
Rich,
I feel the same with regards to inflation/deflation. How can it be any other way? As faith in the dollar erodes, things needed will cost more (people wanting more dollars for resources since dollar is crashing), and things nice to have falling in price. Not sure why such a hard concept to understand.

However, as for the repeat of the New Deal, I don't see that happening by the gov't. That will cost a lot of money. Right now, we are almost 10 trillion in debt. After the turmoil happens, what country is going to lend us money to build these things? It is going to have to come from private investments. Maybe from foreign holders of our debt investing in the US.

All these people saying debt doesn't matter are the same ones who don't understand what is coming. They surely don't grasp the concept of the US not being able to dictate our beliefs/isms on the rest of the world. The end to that is coming as our dollar declines.

We only have to look back to the collapse of the Soviet Union a mere 16 years ago to see how a crashing economy will effect a country. Why do people think that it can't happen here, just because we're Americans?
 
If there is hyper-inflation, why are interest rates so low?
 
If there will be deflation followed by hyper-inflation, will that include wage inflation?
 
Seem to have strayed from the "what will Gold do when" topic a bit, haven't we?

Who knows what deflation and/or hyperinflation will actually look or feel like. I believe we'll be finding out before too terribly long, though.
 
p.s.: I've long espoused the idea that we'll first experience "asset deflation" and "commodity inflation" before true monetary measures kick in. Looks like we're getting there now...
 
TJ,

Asset deflation plus commodity inflation = stagflation. Yes, we are there. Of course the government doesn't report accurate inflation numbers; that would not be in their interest. As for wage inflation, wages never keep up with inflation. Neither do rates paid to savers.

Of course, gold is a great hedge against inflation. We can easily take out the inflation-adjusted high of 1981. Like others, I am buying the gold dips.
 
'Italy's central bank has switched a quarter of its foreign currency reserves into sterling, dumping billions in US Treasury bonds, in the most dramatic move to date by a G7 country to slash exposure to the dollar.'

'An Italian official said the Banca d'Italia was taking action in advance of a dollar slide, widely expected as the US interest rate cycle peaks this summer and investors focus once again on the US's $800bn (£425bn) current account deficit.'

'The official said: 'There are not many places to go once you decide to get out of the dollar. Japan is always a question mark.'
 
My view is I think gold can sink to $620 (technically speaking) at the lowest in the near-term. And then finish the year at $850.

There is a chance that gold gets pulled down with other commodities in the CRB Index since there are many funds that now trade commodities. They see gold as commodity, when it really is only partially a commodity and more of an alternate currency. Personally, I sold all my commodities, including oil(except gold/silver), which I've held for 3 years, on this fear. I'm tempted to lighten up even more on gold/silver but I sense a change in psychology in that the dollar will tank soon and the "alternate currency" view will overpower the commodity view.
 
I'm sure will see more $100 swings. There will be lots of accumulation, profit taking, and manipulation.
 
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