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."
"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."
# posted by Ben Jones @ 6:19 PM 
Comments:
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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.
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.
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.
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 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.
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.
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...
'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.'
'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.'
I'm sure will see more $100 swings. There will be lots of accumulation, profit taking, and manipulation.
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