Where Is Gold Going In This Market

[Naam]

papergold investor after demanding physical delivery of his nuggets:

[flying]

They do have what they are supposed to right?

and after the goodlooking prince was kissed he turned into an ugly frog.

I know...I know...but this forum does not have one of those cool dripping sarcasm icons. I would have used one if they did..... like this...

Maybe the mods will add it?

[chuenjit]

Catching a gold basher

Last week a financial journalist pinched off another one of those articles on gold that plops out of mainstream business press at least once a year. On the front page of the personal investing section of the Wall Street Journal, Larry Light published Catching The Gold Bug. Riddled with oft repeated disparaging characterizations and misrepresentations of fact, Larry didn't miss any of the dozens of gold bashing techniques I’ve seen over the years, including the obligatory invidious and inaccurate comparison of gold performance versus the stock market.

It’s as if the writers of these articles intend to make gold out to be a terrible investment so that investors will be inclined to buy more of the financial products that the Wall Street Journal sells for Wall Street—stocks, bonds, and real estate. Let’s set the record straight.

The article starts off well enough, with a quotation of a credible gold investor, a physician named Scott Van Steyn. Larry does Scott the favor of not painting him as an apocalypse freak hiding in a cabin in the deep woods with gold bars buried under the porch that he guards with a pack of pit bulls and an M14.

Worried about a harrowing, inflation-ridden future, Scott Van Steyn has found the answer in a batch of glittering one-ounce gold coins. In fact, they make up a large chunk of the physician’s assets.

“There’s 2,000 years of history to show that gold is the best thing to own during bad inflation,” says Dr. Van Steyn, a 45-year-old orthopedic surgeon in Columbus, Ohio. “People used to laugh at me for buying gold. They don’t anymore.”

I can relate to that. Back in 2001 when I wrote “Gold: Questioning Fashionable Investment Advice,” I caught holy hel_l from just about everyone. Friends, neighbors, business associates. Keeping in mind investors’ rule #1—buy cheap—I argued that 2001 was the right time to buy, after the collapse of the tech stock bubble when gold hit 20 year lows. A chorus of “deflation!” issued from central bankers at the time even as they turned the knob on the printing press from “Low” to “High” to “Crazy.” A 38% dollar devaluation ensued that took the dollar from over 110 in 2001 to under 70 by 2008. Some deflation.

continued ....

http://www.itulip.com/forums/showthread.ph...9998#post109998

[chuenjit]

http://www.marketoracle.co.uk/Article12088.html

Imminent Erosion of U.S. Dollar Seawall

The globe is losing patience with leadership and management of the USGovt ship at sea. They simple refuse to offer a credible solution to the primary keynote crack in the hull, falling housing prices and cratered mortgages, each of which work their destructive magic to wreck the banks. The home loan modifications are a farce, a travesty not designed to modify but rather to frame a series of loan forbearances. The motive for not fixing the mortgage mess is mysterious to the masses, but not here. Jackass claims have been consistent, that effective loan modifications would alter the underlying mortgage bonds drastically.

The Powerz wanted enough time delay to rejigger as many mortgage bonds as possible into new securities, thus rendering impossible any legal challenges to the original mortgage package process that was loaded with fraud to the hilt. Any drastic alteration of mortgage bonds would reveal vast fraud of two types. Many mortgage bonds did not have clearly certificate property titles with careful registrations. And then the coyote ugly part, that many mortgage bonds were simply counterfeits sold into a frenzy filled credit market designed to process the most vile vermin on paper. The USDollar is vulnerable here and now, as a new wave of bank losses is imminent from numerous types of mortgages along with some basic types. Let’s see if the grapevine is correct, that the USDollar will begin to see a trashing initiative starting this weekend, out of Asia. They must be impatient beyond description. This autumn is expected to see some rather tumultuous events unfold, as the US financial structures are breaking across most of its ramparts even as loyalty to it is fading like a mist. There will be no return to the US of yesteryear, only a tragic march.

continued ......

[Abrak]

A special report on gold from the Erste Group

From July 2009, it is a 55-page pdf:

http://www.bgmi.us/data/2009SpecialReportGOLD.pdf

On page 1, there is a rather confusing 'bullet point' namely - 'CoT Report indicates massive short concentration' - I assumed along with all the other points this was supposed to be a bullish indicator for gold. It makes sense - lots of shorts must buy back at some point pushing up the value of gold.

However, if you go to page 50 of the report they argue that it is a signal that in the short term gold will fall further.

1) That if you look at all types of traders the market is net long.

2) Commercial traders are heavily 'short' but they are 'smart' and usually get it 'right'.

3) Institutions are long but are momentum investors

4) The crowd is long and a good 'counter indicator'.

[flying]

4) The crowd is long and a good 'counter indicator'.

When I see the Cash 4 Gold commercials change to Gold 4 Cash I will know I have stayed too long

[churchill]

http://spot-gold-price.org/daily-gold-pric...t-21-july-2009/

[PCA]

from one of my subscriptions. Good and reliable source.

scan0001.pdf

[Abrak]

4) The crowd is long and a good 'counter indicator'.

When I see the Cash 4 Gold commercials change to Gold 4 Cash I will know I have stayed too long

Really? I am waiting for E News to run an item on how hip hop stars have renegotiated their contracts from Euros into Bling.

[churchill]

Gold and the U.S. Dollar: What's Next?

The question that seems to be the most common among investors lately is what is going to happen with gold and the U.S. dollar? We would like to address this question in a combined context.

Since the spot price for one ounce of gold is normally quoted in U.S. dollars, a further weakening of the U.S. dollar would cause the price of gold to increase, all other things being equal. Maybe that equation is simplified, but essentially for our analysis it’s sufficient.

The U.S. dollar has been trading in a very narrow range against major currencies and the volatility has been decreasing steadily. This is most obvious when one looks at the price graph EUR/USD below. The price of EUR/USD has moved back towards the 1.40 level which means the U.S. dollar is weakening again and is now forming a new price floor around current trading levels.

In our view, this is a very negative sign for the U.S. dollar. It shows that when financial markets are performing well, and therefore showing increasing optimism in the outlook for the global economy, the U.S. dollar tends to fall. The correlation on this is actually very high and stable. This highlights the fact that the U.S. dollar is the most liquid currency and used whenever investors seek liquidity temporarily.

However, as financial markets and global economic conditions are expected to normalize (which does not necessarily mean improve), capital is flowing away from the U.S. dollar. This comes on top of the fact that the U.S. economy has significant structural weaknesses and heavy debt burden which will take a long time to improve.

Thirdly, there is also a “chronic” sales pressure which might emerge as global investors and central banks will look to increase their foreign exchange holdings and currency reserves away from the U.S. dollar. Currently, around 62% of global currency reserves are invested in U.S. dollar; we think that number could drop to less than 50% in the coming three years.

Further confusion is caused by statements from politicians and foreign central bankers who have, on many occasions, stated their preference for a strong U.S. dollar. We think these statements are political whitewash and that there is an official version and an unofficial version here. All of these players have significant U.S. dollar reserves which they look to lower in coming months. It’s understandable that they do not want the U.S. dollar to weaken before they had a chance to lower their exposure.

Therefore, our view on the U.S. dollar remains negative and we expect a further devaluation in coming weeks and months. This will of course also have a direct impact on the gold price, which would reflect a weakening U.S. dollar and therefore show a higher U.S. dollar price indication.

We recently discussed the uncertainty of investors not knowing whether deflation or inflation is the more likely risk in coming months. We think that the market’s focus could shift quickly from a deflationary scenario to a discussion about emerging inflation pressures.

In such a case, gold would certainly benefit as it seems an ideal hedge against a weakening U.S. dollar - as well as inflation. Therefore, it makes sense for investors to hold some gold in their portfolio for strategic reasons.

We expect the following for the U.S. dollar and gold:

U.S. dollar to break out of its current trading pattern and to weaken further

Increasing selling pressure from strategic investors looking to diversify

Gold to move towards $1,000 level in coming weeks and months

Temporary price corrections very likely but long-term uptrend to continue

Increased demand for gold as a strategic hedge and normalizing trade demand

Gold to move towards $1,300 level in 2010

U.S. dollar to move toward 1.50/1.60 versus euro

http://seekingalpha.com/article/150747-gol...ext?source=feed

[Abrak]

Unlike Naam who keeps reminding us how miserable the returns from gold have been, I dont really understand why the returns have been so good.

In absolute terms, if you take a one to two year view then gold has outperformed cash, which is what it is supposed to do. It has also outperformed equities and property which is why you might be in cash anyways. (Bring bonds into the equation and I suspect this argument falls apart but they are not part of my worldview.)

The really important part of the performance is this. Just about every argument for actually buying gold that you might have had 18 months ago has proven to be wrong. And on that basis the price should have gone down.

For a start money supply growth was out of control with M3 growing at 18%.

Obviously this just makes you bearish of the dollar but not only was it oversold, every other country was expanding MS.

More to the point there was at least the possibility of things unraveling in such a way either deflationary or inflationary that would have been very good for the gold price (hopefully).

Clearly things havent turned out that way. Crisis has been averted, monetary growth is negligible, inflationary and deflationary risks have fallen. Gold looks to have serious outperformed its fundamentals even if it hasnt done that well in absolute terms. One thing I have learnt is that I dont understand the link between what I believe are gold's fundamentals and its price.

So leaving aside long term arguments, conspiracy theories and 'its nice and shiny' is there any good reason to think that gold will outperform cash over the next 18 months. Or put another way, why are people so bullish on gold?

[flying]

So leaving aside long term arguments, conspiracy theories and 'its nice and shiny' is there any good reason to think that gold will outperform cash over the next 18 months. Or put another way, why are people so bullish on gold?

Funny you post that pretty pic & still ask?

That aside did you see all the talking heads say today on TV the same as you just did? Basically Recession is over......Or as you said crisis has been averted

Do you really believe that or are you just saying it ?

And yet the honest money is holding its own.

Like I always say......We will see

Or like the Chinese curse....May you live in interesting times

Edited July 28, 2009 by flying

[Abrak]

Funny you post that pretty pic & still need to ask?

That aside did you see all the talking heads say today on TV the same as you just did? Basically Recession is over......Or as you said crisis has been averted

Do you really believe that or are you just saying it ?

Ok so I dont believe the recession is over but it does look like crisis has been averted. Even if you choose to differ I think it is fair to say that 'inflationary/deflationary outcomes' look less likely.

I do admit though that I think many people still hold gold as a hedge against things going wrong.

And yet the honest money is holding its own.

Yeah and this is exactly what worries me.

This says gold is in a bull market - not going down on the bad news and presumably going up on the good. People are holding onto it because it performs so well whatever the fundamentals. However, to the extent it is a bull position it needs new buyers to maintain it and presumably if that is all that is holding the price up, then it can fall without much support.

In fact gold is pretty well the only bull market left, so you have to worry that people are 'in' for the wrong reasons.

[flying]

I do admit though that I think many people still hold gold as a hedge against things going wrong.

In fact gold is pretty well the only bull market left, so you have to worry that people are 'in' for the wrong reasons.

These two are at odds with each other.

[Jake1]

The crisis has not been averted..we've thrown some paint over the huge cracks running through the $ based world financial system. Gold is not a hedge, paper instruments are a short position on gold

http://fofoa.blogspot.com/2009/03/all-pape...osition-on.html

Edited July 28, 2009 by Jake1

[Abrak]

I do admit though that I think many people still hold gold as a hedge against things going wrong.

In fact gold is pretty well the only bull market left, so you have to worry that people are 'in' for the wrong reasons.

These two are at odds with each other.

Ok admittedly. A valid reason to hold gold is that it is a good hedge against things going wrong but it just seems a more expensive hedge than say 18 months ago. And I cant really see who would buy it as a hedge who hasnt already bought it while I can see people selling it because they dont believe things will now go that badly wrong.

To me an invalid reason to hold something is because you simply 'believe' it is going up. I know people makes lots of money momentum investing and cut their losses early but it is not me. And the only way to guarantee to lose money is to be a fundamental investor at the top of the market and a momentum investor at the bottom. (P.S. I realize this statement and the whole concept of investing in gold is totally absurd)

[vedantafx]

Unlike Naam who keeps reminding us how miserable the returns from gold have been, I dont really understand why the returns have been so good.

In absolute terms, if you take a one to two year view then gold has outperformed cash, which is what it is supposed to do. It has also outperformed equities and property which is why you might be in cash anyways. (Bring bonds into the equation and I suspect this argument falls apart but they are not part of my worldview.)

The really important part of the performance is this. Just about every argument for actually buying gold that you might have had 18 months ago has proven to be wrong. And on that basis the price should have gone down.

For a start money supply growth was out of control with M3 growing at 18%.

Obviously this just makes you bearish of the dollar but not only was it oversold, every other country was expanding MS.

More to the point there was at least the possibility of things unraveling in such a way either deflationary or inflationary that would have been very good for the gold price (hopefully).

Clearly things havent turned out that way. Crisis has been averted, monetary growth is negligible, inflationary and deflationary risks have fallen. Gold looks to have serious outperformed its fundamentals even if it hasnt done that well in absolute terms. One thing I have learnt is that I dont understand the link between what I believe are gold's fundamentals and its price.

So leaving aside long term arguments, conspiracy theories and 'its nice and shiny' is there any good reason to think that gold will outperform cash over the next 18 months. Or put another way, why are people so bullish on gold?

Gold is used as money by many, myself included. You ask many questions.

Abrak, you mention gold performing better than cash, will it outperform cash over the next 18 months etc etc? Well, it depends what cash? Zimbabwee Dollars, USD, South African Rand, JPY, GBP, CAD...

Here is an idea which will show you well gold has performed over the last 18 months, even though in USD terms the price has been in a large range.

Convert gold into any currency 18 months ago, take Pound sterling for example...price of gold 18-24 months ago was between £350-£400, today it is £580. Now compare what an ounce of gold buys in terms of:

Oil

Wheat

Copper

Real Estate

The FTSE 100

The local Currency (ie sterling, 30% more sterling)

Corn...

Compare 18 months ago and today...It shows that gold has came into its true role as money, in a deflationary period, cash increases in value as assets fall, well, gold is a currency, a cash equivalent, so it maintained its purchasing power more than any other currency over the last 18 months. The point about bonds and interest would not really make any difference, as what is the interest on a 2 year T-Note? About 1%...You can buy much more oil, more food, more stocks, more real estate and any other currency with gold today than 18 months ago. It has played its role well.

I m not saying gold cannot correct by 20-40% over the coming months, but if gold goes down 40%, then it will mean that the economy has

again fallen off a cliff, and stocks will have taken out the March lows.

The money printing argument is used alot by many inflationists. The M3 growth etc etc. However, the true definition of money supply needs to take into account credit. Credit in the private sectors has been collapsing at a much faster rate than governments are creating new credit. They have not offset the deflationary forces. This volatility has been caused by the private sector contracting while the government is printing to offset. Looking at M3 growth alone does not tell the full story. Also, the money, velocity of money has to increase, and money actually has to be loant out to become inflationary. People are not borrowing, and banks are holding these reserves on their balance sheets, which means it is n ot having much of an influence on inflationary forces.

I m short term bullish on the USD, next 3-6 months, bullish on US treasuries short term, bearish on stocks 3-6 months, commodities could also correct.

It is important to distinguish between secular and cyclical markets. This is a longterm secular bull market in commodities and a longterm secular bear market in stocks, however, we can have cyclical bull and bear markets within each. We have a cyclical upturn in stocks with the larger secular bear trend, and vice versa with commodities.

Over the next 10-15 years, gold will go much higher, perhaps the bull run will last another 5-7 years. It just depends on how quickly the economy recovers. The danger for inflation is in the recovery, not the collapse. A currency crisis could also set inflation off very quickly, and I expect to see some major currency problems in the coming months and years. I feel sterling is very vunerable and I have bought Japanese yen, silver, gold. I like yen for the next while. I see a big move down coming in GBP/JPY, actually most yen pairs.

[Abrak]

Gold is used as money by many, myself included. You ask many questions.

Abrak, you mention gold performing better than cash, will it outperform cash over the next 18 months etc etc? Well, it depends what cash? Zimbabwee Dollars, USD, South African Rand, JPY, GBP, CAD...

Here is an idea which will show you well gold has performed over the last 18 months, even though in USD terms the price has been in a large range.

Convert gold into any currency 18 months ago, take Pound sterling for example...price of gold 18-24 months ago was between £350-£400, today it is £580. Now compare what an ounce of gold buys in terms of:

Oil

Wheat

Copper

Real Estate

The FTSE 100

The local Currency (ie sterling, 30% more sterling)

Corn...

Compare 18 months ago and today...It shows that gold has came into its true role as money, in a deflationary period, cash increases in value as assets fall, well, gold is a currency, a cash equivalent, so it maintained its purchasing power more than any other currency over the last 18 months. The point about bonds and interest would not really make any difference, as what is the interest on a 2 year T-Note? About 1%...You can buy much more oil, more food, more stocks, more real estate and any other currency with gold today than 18 months ago. It has played its role well.

I m not saying gold cannot correct by 20-40% over the coming months, but if gold goes down 40%, then it will mean that the economy has

again fallen off a cliff, and stocks will have taken out the March lows.

The money printing argument is used alot by many inflationists. The M3 growth etc etc. However, the true definition of money supply needs to take into account credit. Credit in the private sectors has been collapsing at a much faster rate than governments are creating new credit. They have not offset the deflationary forces. This volatility has been caused by the private sector contracting while the government is printing to offset. Looking at M3 growth alone does not tell the full story. Also, the money, velocity of money has to increase, and money actually has to be loant out to become inflationary. People are not borrowing, and banks are holding these reserves on their balance sheets, which means it is n ot having much of an influence on inflationary forces.

I m short term bullish on the USD, next 3-6 months, bullish on US treasuries short term, bearish on stocks 3-6 months, commodities could also correct.

It is important to distinguish between secular and cyclical markets. This is a longterm secular bull market in commodities and a longterm secular bear market in stocks, however, we can have cyclical bull and bear markets within each. We have a cyclical upturn in stocks with the larger secular bear trend, and vice versa with commodities.

Over the next 10-15 years, gold will go much higher, perhaps the bull run will last another 5-7 years. It just depends on how quickly the economy recovers. The danger for inflation is in the recovery, not the collapse. A currency crisis could also set inflation off very quickly, and I expect to see some major currency problems in the coming months and years. I feel sterling is very vunerable and I have bought Japanese yen, silver, gold. I like yen for the next while. I see a big move down coming in GBP/JPY, actually most yen pairs.

I dont disagree with any of your arguments really and they reflect probably why I hold gold.

To some extent what worries me is what you say about monetary policy - in that I think you are absolutely right. So if the price of gold has gone up because the Ron Paul's of this world have got confused between Fed Reserves and traditional bank reserves, shouldnt it go down. Inflation expectations should be lower and to the extent inflation should rise it should be controllable relative to where we were 18 months ago.

And, to some extent, you could have presented exactly the same argument 18 months ago. Given that you have no idea of the absolute value of gold (you are making a coherent arguement why it will outperform cash over a 10-15 year view). My view (which is probably worth less than yours) is that there is a bull position looking and expecting short term gains that might sell if they dont see it (by short term I mean 12 to 18 months JCON).

Ultimately the argument 'It shows that gold has came into its true role as money' amounts to saying its fundamental value has moved up in line with what I thought it was worth before - or is more expensive.

And you have made a an argument why you are holding it on a 5 year view. You havent explained why someone who hasnt bought it, would buy it now. Or why you wouldnt be surprised or bothered in the shortterm to see it back at US$800.

What would really make one buy it now that you hadnt already over the past 18 months.

Edited July 28, 2009 by Abrak

[teletiger]

Abrak wonders why Gold has de-coupled from fundamentals.

Other markets too.

Last week Microsoft announced a 30% drop in profits. 2 years ago, "enough to drop the Nasdaq 100 points". Result now? Nasdaq goes up. Western stock markets have all de-coupled from the reality of technicals and fundamentals.

We wonder why. Are they being propped up? No no. No conspiracy theories here, thank you.

Jake thinks " Gold is not a hedge, paper instruments are a short position on gold". So most big banks are short gold?

"Central banks are now net buyers of gold" (I'll dig the link out). 'and just after "authorizing the IMF to sell $400Billion in gold".

Maybe punters are proving more difficult to roll over.

Regards.

Edit. Good post there Vedantafx.

Edited July 28, 2009 by teletiger

[vedantafx]

Gold is used as money by many, myself included. You ask many questions.

Abrak, you mention gold performing better than cash, will it outperform cash over the next 18 months etc etc? Well, it depends what cash? Zimbabwee Dollars, USD, South African Rand, JPY, GBP, CAD...

Here is an idea which will show you well gold has performed over the last 18 months, even though in USD terms the price has been in a large range.

Convert gold into any currency 18 months ago, take Pound sterling for example...price of gold 18-24 months ago was between £350-£400, today it is £580. Now compare what an ounce of gold buys in terms of:

Oil

Wheat

Copper

Real Estate

The FTSE 100

The local Currency (ie sterling, 30% more sterling)

Corn...

Compare 18 months ago and today...It shows that gold has came into its true role as money, in a deflationary period, cash increases in value as assets fall, well, gold is a currency, a cash equivalent, so it maintained its purchasing power more than any other currency over the last 18 months. The point about bonds and interest would not really make any difference, as what is the interest on a 2 year T-Note? About 1%...You can buy much more oil, more food, more stocks, more real estate and any other currency with gold today than 18 months ago. It has played its role well.

I m not saying gold cannot correct by 20-40% over the coming months, but if gold goes down 40%, then it will mean that the economy has

again fallen off a cliff, and stocks will have taken out the March lows.

The money printing argument is used alot by many inflationists. The M3 growth etc etc. However, the true definition of money supply needs to take into account credit. Credit in the private sectors has been collapsing at a much faster rate than governments are creating new credit. They have not offset the deflationary forces. This volatility has been caused by the private sector contracting while the government is printing to offset. Looking at M3 growth alone does not tell the full story. Also, the money, velocity of money has to increase, and money actually has to be loant out to become inflationary. People are not borrowing, and banks are holding these reserves on their balance sheets, which means it is n ot having much of an influence on inflationary forces.

I m short term bullish on the USD, next 3-6 months, bullish on US treasuries short term, bearish on stocks 3-6 months, commodities could also correct.

It is important to distinguish between secular and cyclical markets. This is a longterm secular bull market in commodities and a longterm secular bear market in stocks, however, we can have cyclical bull and bear markets within each. We have a cyclical upturn in stocks with the larger secular bear trend, and vice versa with commodities.

Over the next 10-15 years, gold will go much higher, perhaps the bull run will last another 5-7 years. It just depends on how quickly the economy recovers. The danger for inflation is in the recovery, not the collapse. A currency crisis could also set inflation off very quickly, and I expect to see some major currency problems in the coming months and years. I feel sterling is very vunerable and I have bought Japanese yen, silver, gold. I like yen for the next while. I see a big move down coming in GBP/JPY, actually most yen pairs.

I dont disagree with any of your arguments really and they reflect probably why I hold gold.

To some extent what worries me is what you say about monetary policy - in that I think you are absolutely right. So if the price of gold has gone up because the Ron Paul's of this world have got confused between Fed Reserves and traditional bank reserves, shouldnt it go down. Inflation expectations should be lower and to the extent inflation should rise it should be controllable relative to where we were 18 months ago.

And, to some extent, you could have presented exactly the same argument 18 months ago. Given that you have no idea of the absolute value of gold (you are making a coherent arguement why it will outperform cash over a 10-15 year view). My view (which is probably worth less than yours) is that there is a bull position looking and expecting short term gains that might sell if they dont see it (by short term I mean 12 to 18 months JCON).

Ultimately the argument 'It shows that gold has came into its true role as money' amounts to saying its fundamental value has moved up in line with what I thought it was worth before - or is more expensive.

And you have made a an argument why you are holding it on a 5 year view. You havent explained why someone who hasnt bought it, would buy it now. Or why you wouldnt be surprised or bothered in the shortterm to see it back at US$800.

What would really make one buy it now that you hadnt already over the past 18 months.

HI Abrak, good questions.

I wouldnt necessarily buy gold right now today, from a trading perspective. However, it is something to accumulate. I actually prefer silver today. There are a few reasons why I think this bullmarket in gold has a long way to go.

This chart of shows the dow/gold ratio. History shows that the ratio bottoms out around 1-3. So in a deflationary environment that would mean stocks falling heavily. If that was to happen today that would mean the DOW going to between 950-3000. That seems unlikely, but a collapse in stocks cannot be ruled out to under 5000. I would go that stocks will not fall that far at least to the 2000 level, but even if the ratio does, it means gold will be 2000USD. I expect inflation to be a problem as house prices bottom out, sometime around 2011/12, perhaps after this bottoming out phase. I expect gold to rise sunstantially over the coming years...but I will use this ratio as a price guide rather than projecting a price.

The problems I forsee for the US are the huge deficits and entitlements. Many of the Keynesian economist argue that we won't get inflation as the economy is weak, the output gap as shrunk and job losses are increasing. This is interesting as these factors in and of themselves do not mean inflation can not happen. Inflation has always reared its head in a weak economy not a strong one. The output gap in Zimbabwee is something like 99% and employment near 80% not that I m comparing the two countries. The 1970s would be a better example, high unemployment, a very weak economy, high interest rates and high inflation, and falling currencies.

I also think that a gold chart does look like a bubble, but charts are always relative. If I post a chart of the price of gold 1971 to 1977 it will look like todays chart, and it would look like it has gone up too far, yet the major move in gold was still to come.

Gold went up from35USD in 1966 to 850 USD by 1981. A multiple of 24...This run up started at about 250 USD back 2000 and we have went up to 1050, which is a multiple of 3.5...I m not saying things will play out like this again, but it shows that markets can move much much further than anyone could believe. Bullmarkets also end with huge parabolic moves, I don't think we have seen this yet also.

I always like to look at markets from a historical valuation perspective. So just because something might seem expensive because it has moved up a few hundred percent does not mean it is expensive on a relative basis historically speaking. At the end of the last bullmarket at the beginning of the 1980's, I havent got the figures to hand, I think it was research by morgan stanley who said that the above ground gold in 1980 which could be marked to market was worth about 1.6 trillion and the value of stocks was something like 1.5 trillion on the NYSE...Today that ratio , or at least by 2008 the value of stocks was something like 20 trillion and gold was value at 1.4 trillions USD. Historically it is cheap.

We are in a secular commodity market upturn, which we are into the 8/9 year. Over 200 years these bullmarkets have last a minimum of 14 years and sometimes nearly 30 years. In the beginning stages of the bullmarket, gold will lag other commodities, but in the later stages gold will catch up and surpass commodities, at least this has the ways it been. However, true to form this situation has been playing out again. The bullmarket in commodities has still a long way to go, another 7-15 years.

Looking at other asset valuations stocks are still over valued. I m basing this on a longterm dividend yield wave valuation. Any true market bottom in stock markets, the yields have been north of 10%, and even as high as 13%, this is going back to 1860. The yields on stocks in the S+P 500 today is about 3% which still suggests over valued prices. USing the same method on stock PE's suggest the same conclusion as dividend yields.

So we are in two secular markets now, stocks in a bear, commodities in a bull. These two markets historically move inversely to each other. This is where the buy and hold investors get killed, by using buy and hold during a stock market bear market will cost anyone alot of money.

These are some of the fundamental reasons why I think gold is still undervalued and stocks over valued on a historical basis. And this is looking at some very large super cycles. These type of large structural components once in place don't change easily. They last for years.

Longer term I see the USD losing alot of value, as the FED will be unable to raise interest rates. Interest rates should go to GDP+Inflation (they use the flawed CPI), however, I don't see how the they can do this with the huge debt burden. So any pick up in the economy will be met with joy and green shoots brigade, but this will be the dangerous time as inflation then could start to show up quickly.

The reason I wouldnt mind gold going to 500-600USD is that I believe it will be much higher in the future anyway, in some ways I hope it does go that low as that will be a tremendous buying chance. It would also shake out alot of the weaker bulls who are unsure about holding gold. However gold may not fall that far, it could take off from here, and then the chance would be missed, so i d rather being on the boat than trying to time it as I want to hold it for the longrun.

One other point, instutional buying of commodities has not really happened on a m big scale yet, and no bubble has ever ended without this.

[Abrak]

One other point, instutional buying of commodities has not really happened on a m big scale yet, and no bubble has ever ended without this.

You Vedantafx you have explained why you bought gold a long time ago and why you still like it. You havent given any reason apart from possibly this last point why you would buy it now if you havent already.

And your last point I find highly debtatable. I have never seen more buy notes about something that people know next to nothing about. I can promise anyone that I usually know something pretty well before I buy it. So it is highly unusual that I make money on inherently 'intangible worth' assets. I can usually be used as a good contra-indicator when I buy this sort of thing.

[teletiger]

No conspiracy theories here, right?

Drive the DOW el al up to 11,000, gold down to 700, then drop the hammer. Lets see whats in the net. OOO....lots of (more) pension money. The military can deal with the fall-out.

See how silly these conspiracy nuts are. Will never happen.

Regards.

[vedantafx]

One other point, instutional buying of commodities has not really happened on a m big scale yet, and no bubble has ever ended without this.

You Vedantafx you have explained why you bought gold a long time ago and why you still like it. You havent given any reason apart from possibly this last point why you would buy it now if you havent already.

And your last point I find highly debtatable. I have never seen more buy notes about something that people know next to nothing about. I can promise anyone that I usually know something pretty well before I buy it. So it is highly unusual that I make money on inherently 'intangible worth' assets. I can usually be used as a good contra-indicator when I buy this sort of thing.

Really, I thought I had highlighted why gold is still a good buy today? To sum it up in a more concise way. I believe the price of gold over the next number of years will go to between 3000-5000 USD.

The reasons I mentioned were...Stocks still over valued, inverse relationship during secular bull/bear markets in commodities/stocks, gold undervalued, currency problems to come due to huge fiscal deficits, the bond market bubble, DOW/gold ratio etc etc. The simple reason why I think it is still a buy is that I think the price will be much higher in the future...

Again, there may be many buy notes on gold, but what are you comparing it to? The institutional buying of commodities has increased a few hundred percent, however, the institutional funds related to stocks is still about 30 times higher.

This ratio was near parity at the end of the 1980's when one looks at the holdings of commodities and stocks, today we are nowhere near that, even if we now see more buy notes issued.

[teletiger]

I'm too old to feel stupid.

'And the dollar index and gold price is where?

Regards.

[Abrak]

Again, there may be many buy notes on gold, but what are you comparing it to? The institutional buying of commodities has increased a few hundred percent, however, the institutional funds related to stocks is still about 30 times higher.

This ratio was near parity at the end of the 1980's when one looks at the holdings of commodities and stocks, today we are nowhere near that, even if we now see more buy notes issued.

If this were true... it would be significant.

But then company balance sheets would have looked very different anr ROA would have been lower, so it isnt.

Total commodity supply out of the ground doesnt equate to US$55trn I would guess.

[vedantafx]

Again, there may be many buy notes on gold, but what are you comparing it to? The institutional buying of commodities has increased a few hundred percent, however, the institutional funds related to stocks is still about 30 times higher.

This ratio was near parity at the end of the 1980's when one looks at the holdings of commodities and stocks, today we are nowhere near that, even if we now see more buy notes issued.

If this were true... it would be significant.

But then company balance sheets would have looked very different anr ROA would have been lower, so it isnt.

Total commodity supply out of the ground doesnt equate to US$55trn I would guess.

Your missing the point. I m not saying investment in commodities will reach 55 trillion USD. I m saying that this ratio will will close as time goes past. As it did at the beginning of the last bullmarket in stocks in 1982 and the end of the commodity bull ending around the same time, stocks and commodities were almost equal. Now what that means is that stocks can lose trillions in value, which they already have, and the value of commodities will increase, they will meet somewhere in between.

There are many supply problems related to commodities, and the only way these supply problems will be balanced or corrected is by much much higher prices. I have recently looked at the supply and demand fundamentals for wheat, and the supply, stock/usage ratios, beginning crops, ending stocks are at their lowest for decades. On the other hand demand has been increasing. 77 million new mouths to feed every year in the world, more erratic weather (commdities are more supply side driven so this can cause price spikes) all mean higher longterm prices. Falling demand now during this recession has led to falling prices, however lower prices now only mean prices will be higher in the future. Prices are too low for farmers to increase production, profitmargins are being squeezed, higher prices are needed for increased production which leads to increased supply. These things take years to correct not months. I know it is going to happen.

A drop in demand now

[flying]

while I can see people selling it because they dont believe things will now go that badly wrong.

Actually according to many cyclist/turn date types.....You will see a pullback starting today & going till 3rd week of August or so.

They are looking for 850-868 as a bottom. Setting the new higher low.

For myself I am not into these things ( as it matter very little in the larger term ) but have backed the truck up before during pullbacks

PS: I did not mean to imply the reason you stated as the reason for this pullback but it could be one of them.

Edited July 28, 2009 by flying

[Abrak]

Your missing the point. I m not saying investment in commodities will reach 55 trillion USD. I m saying that this ratio will will close as time goes past.

Actually I did get the general point which is a good one (I just thought the concept that managed commodities had ever equaled managed equities was ridiculous.)

But your underlying point that gold is not 'overowned' (which it probably will be at the end of a bull run) seems very fair. If you take a wild stab at what institutional holdings are - 2,000 tonnes - then that equates to US$80bn. So institutional holdings account for less than 0.2% of managed assets and could easily increase 5 fold.

Vedantafx, you do present some very good arguments for owning gold but none of them are 'new'.

A slightly different way of explaining most of the rise in the price of gold is this - gold is a dollar hedge so as the dollar has fallen from 120 to 72 or so gold has risen. At least a third (if not more of golds price movement can be explained this way.) At least another third can be explained by loose monetary policy - excess monetary growth leading to asset inflation (not reflected in CPI). (If dollar MS is growing at 18% then the gold price (whose supply is growing at 2%) must in all probability outperform it.)

So you can see that based on these two arguments gold should have declined. The dollar is no longer oversold and monetary growth has slowed to a crawl (the decline in monetary growth being very different to expectations 18 months ago). Gold is a straddle on prices, and boom/doom price scenarios are less likely. To me most bears remain bearish, they just see no significant growth or inflation as the most likely scenario.

So to me if you look at things while I agree that equities dont look great - my argument is flow of funds - you wouldnt sell equities to buy gold now because you would have done that a while back and other people might say buy property and sell gold given its decline. In the 'very long run' isnt the only reason to hold gold is that it is nice and shiny - afterall it is a non-productive asset? So I must have bought it for a trade and got vaguely lucky. I know it was an act of desperation.

[vedantafx]

Actually I did get the general point which is a good one (I just thought the concept that managed commodities had ever equaled managed equities was ridiculous.)

Hi Abrak,

It seems strange, but yet that was the way the end of the last bull comm and bear stock ended and began respectively.

Vedantafx, you do present some very good arguments for owning gold but none of them are 'new'.

I agree, I m just trying to quantify based on the evidence we have. There ain't much new under the sun, haha. However, as you say they are not "bad" reasons, which for me means it is better to own longer term than the alternatives, of course there will also come a day to sell gold again, but I don't think it is yet.

A slightly different way of explaining most of the rise in the price of gold is this - gold is a dollar hedge so as the dollar has fallen from 120 to 72 or so gold has risen. At least a third (if not more of golds price movement can be explained this way.) At least another third can be explained by loose monetary policy - excess monetary growth leading to asset inflation (not reflected in CPI). (If dollar MS is growing at 18% then the gold price (whose supply is growing at 2%) must in all probability outperform it.)

So you can see that based on these two arguments gold should have declined. The dollar is no longer oversold and monetary growth has slowed to a crawl (the decline in monetary growth being very different to expectations 18 months ago). Gold is a straddle on prices, and boom/doom price scenarios are less likely. To me most bears remain bearish, they just see no significant growth or inflation as the most likely scenario.

Again I agree I m actually bullish on the USD, for short to medium term, and also bullish on the Treasury market, where yields have been again falling for the last two days. I don't see any significant inflation pressures. However, without trying to put a fine point in time on it, it could be quicker or later on but I see sometime around 2011/12 inflation coming back. But that is for the next decade. The US cannot meet its obligations, the buying of US treasuries cannot go on forever that much is assured. The Chinese will have to take a hit at some point, they don't have to sell there holdings, but they can stop buying, which would not dollar bullish. Increasing taxes in the future could lead to civil unrest also, and infact i think it will.

So to me if you look at things while I agree that equities dont look great - my argument is flow of funds - you wouldnt sell equities to buy gold now because you would have done that a while back and other people might say buy property and sell gold given its decline. In the 'very long run' isnt the only reason to hold gold is that it is nice and shiny - afterall it is a non-productive asset? So I must have bought it for a trade and got vaguely lucky. I know it was an act of desperation.

If I look at equity valuations on a historical basis, they are still well over valued. Whether or not we get one these huge trading range markets like in the 1970's or a 1930 style collapse remains to be seen. This current rally could last 2 years, or it could unravel as we move through the summer. If we get a 1970's style market then in nominla terms stocks will be up, but in local currency terms, ie, USD they will have lost money in real terms.

The pattern has been, 2003-2007, stocks up 50%, USD down 120 to 72....2007-2009 stocks down, and the USD had a huge rise....Now we have had stocks rising from the November/March lows, but the USD has fallen. As USD liquidity increases stocks go up, the trade deficit stops shrinking as fast and perhaps starts to widen again, and we have rising asset markets. I m hedging for either situation, a 1930's style collapse by owning USD and betting on Treasuries...in this scenario gold will still holds its value relative to other assets and currencies. Also I m holding JPY for the same reason as the carry trade will continue to unwind...

If this rally doesn't role over, then gold will continue upwards and I expect it to be near 1200 by sometime next year...So I m going to hold dollars and yen short to medium term in the event of economy falling off cliff. But going to hold gold and commodities for longer run, including silver in the event that inflation kicks of earlier, there is social unrest, and supplys of commodities continue to decrease...

Even if we get another correction in commodities which is what would happen in the event of another collapse this year, it is very bullish longterm as production and investment will decrease in these areas, meaning less supply for when the economy does recover. Also Asia is adding to the demand for commodities, infact they are the most important player. The stimulus packages all over the world (which I m totally against by the way) will also cause an increase in demand.

If one looks at how commodities have performed in a very weak economy, how well will they perform in a recovery? Oil has doubled during one of the steepest recessions we have seen. I m siding on the side that USD will increase over the coming months, and stocks could fall hard. So yes, perhaps owning USD over gold is better right now, but perhaps not, so I ll hold both, the difference being one is longterm and the other is a short term hedge. Also in the event gold does go down and the USD goes up, I know then that my gold will still buy more oil, more wheat, more real estate, more baht than sterling will and many other currencies. Cheers.

[Jake1]

So to me if you look at things while I agree that equities dont look great - my argument is flow of funds - you wouldnt sell equities to buy gold now because you would have done that a while back and other people might say buy property and sell gold given its decline. In the 'very long run' isnt the only reason to hold gold is that it is nice and shiny - afterall it is a non-productive asset? So I must have bought it for a trade and got vaguely lucky. I know it was an act of desperation.

It is a wealth reserve with 0 counter-party risk..with Gold you are paid in full. You hold a claim on the production of the world. Gold is wealth that outlives companies and Government issued currency. I have a hard time understanding how people choose to store all of their wealth in paper "assets" instead of exchanging some "money" for the shiny metal.