Where Is Gold Going In This Market

[Abrak]

1. i agree that energy depletion of fossile fuels is not infinite but the time till all of them are exhausted is way beyond the lifespan of any living TV-member.

On this point I entirely agree with Naam. If you ever look at say oil, you will find that proven and probable oil supply is almost always equivalent to 30 years demand. This is true of 2010 and was also true when OPEC ramped the price of oil in the early 1980s. The reason is simple - when there is 30 years supply of oil available then the chances are that finding new reserves isnt really worth a lot of cost.

[cloudhopper]

1. i agree that energy depletion of fossile fuels is not infinite but the time till all of them are exhausted is way beyond the lifespan of any living TV-member.

On this point I entirely agree with Naam. If you ever look at say oil, you will find that proven and probable oil supply is almost always equivalent to 30 years demand. This is true of 2010 and was also true when OPEC ramped the price of oil in the early 1980s. The reason is simple - when there is 30 years supply of oil available then the chances are that finding new reserves isnt really worth a lot of cost.

A brilliant geo-economic synthesis Abrak. Now I can stop worrying and learn to love the petro dollar.

[Abrak]

1. i agree that energy depletion of fossile fuels is not infinite but the time till all of them are exhausted is way beyond the lifespan of any living TV-member.

On this point I entirely agree with Naam. If you ever look at say oil, you will find that proven and probable oil supply is almost always equivalent to 30 years demand. This is true of 2010 and was also true when OPEC ramped the price of oil in the early 1980s. The reason is simple - when there is 30 years supply of oil available then the chances are that finding new reserves isnt really worth a lot of cost.

A brilliant geo-economic synthesis Abrak. Now I can stop worrying and learn to love the petro dollar.

Yeah buy yourself a new Hummer!

[flying]

Without going too far off gold topic....Anyone who thinks there is always going to be new oil finds when needed is very optimistic..

Secondly yes the exhaustion of oil is probably a ways beyond most posters lifetime but....

Exhaustion is not what worries most. Instead the cost of extracting what is left.

energy return on energy invested, or EROEI

Lastly, Who would wait till exhaustion to act? Long ago was the time to react. Because what oil is left needs to be used for more infrastructure towards a world that does not rely so heavily on oil. It will always be needed but should not be squandered even now.

Edited July 24, 2010 by flying

[badge]

All fiat based currencies are a zero-sum game; ones loss is anothers gain.

Purchasing-power, Inflation, Money supply etc are discounted by all asset classes, giving Gold no edge. Incidentally, if Leverage is Credit, then De-leveraging is clearly Deflationary. Discuss.

I havent read any argument for holding Gold that wasnt presented in the late 1970's, after a similar era of economic malaise, and which was ultimately flawed, as they always are.

The successful speculator does not extrapolate anything beyond the foreseeable future as it is an entirely pointless process. Ignore this at your peril.

Id refer back to my previous post - that ultimately its the perceptions of people one has to bet on in any speculation and those perceptions are sadly saddled with our innate human condition and always follow the same path - but I fear it would be again lost on the majority.

[SiamRose]

Anyone who thinks there is always going to be new oil finds when needed is very optimistic..

Coal can be converted into oil. Its dirty and expensive, but the technology is well understood and more than 50 years old. There's at least 300 year's worth of coal in known reserves alone.

[flying]

Anyone who thinks there is always going to be new oil finds when needed is very optimistic..

Coal can be converted into oil. Its dirty and expensive, but the technology is well understood and more than 50 years old. There's at least 300 year's worth of coal in known reserves alone.

Yes hence my remark about EROEI

[Abrak]

Purchasing-power, Inflation, Money supply etc are discounted by all asset classes, giving Gold no edge. Incidentally, if Leverage is Credit, then De-leveraging is clearly Deflationary. Discuss.

'De-leveraging is clearly Deflationary'.

Well it is a slightly complicated argument. On the one hand money of any sort cannot create value or effect productivity. So to the extent leverage is inflationary in terms of both asset prices and GDP, credit is becoming increasingly worthless because asset prices increase more than the value of cash. Unfortunately when leveraging stops and is reversed credit deflation means that credit becomes increasingly worthless because it cannot be repaid.

What people find difficult to grasp is that say banking is simply an intermediary.

Financial innovation that appears as value creation through diversification is inherently destructive. For instance consider say an etf for a commodity such as 'paper'. A supply shortage of paper relative to demand will encourage people to buy 'paper' in an ETF so as to 'speculate' on the price of 'paper'. This will push up the price of paper while the ETFs holding in paper will be unproductive. This will encourage paper producers to borrow more to increase production of paper. At some point the ETF will start selling 'paper' which will mean that the price of paper will fall and risks the borrowing on paper becoming going bad.

From an economic value perspective, there is destruction in value in five different ways.

(1) The inherent storage rather than use of a productive asset.

(2) The increased volatility in the price of that asset

(3) The concept of returns based on speculation on a productive asset must reduce the productive returns. And the leverage simply increases the incentive to speculate which is compounded by the reduction on productive returns, due to the increasing capital employed.

(4) The fees generated from the financial process that has destroyed value without while not increasing productivity.

(5) Ultimately your most productive labour resources can make more money shuffling paper than being productive.

A very simple product like an MBS must inherently be destructive to the extent that it divorces risk from the ultimate borrower. The concept that it diversifies risk is a nonsense because the inherent success of the concept of the product must when 'aggregated' increase risk through leverage.

The problem with money is that it creeps up on people as productive and ends up as being destructive. For instance if you are a good 'pin maker' it makes sense to simply make pins but to do that you need money so that you can meet liabilities. For instance the more the best 'banana producer' cncentrates on simply producing bananas and nothing else the more value he is add ing through trade but the more 'money' he needs to store in order to meet liabilities that might arise due to the fall in the price of 'bananas' which is the only thing he does.

So money supply has to increase to maximize value creation through specialization. If the supply of money is actually fixed the value creation of trade will tend to flow into money and therefore reduce trade which would also reduce economic benefit. Ultimately finance should simply be an intermediary. Derivatives should be deliverable, speculation should be highly taxed as it is inherently destructive and inherently borrowing should be an intermediary process between lender and depositor not a leveraged process. In other words money should expand via trade and commerce rather than financialisation.

As far as I can see there is no incentive for an intelligent person to either work or own a business. And leverage and deleverage are inherently destructive. Ultimately money simply becomes a game of transfer of wealth in an increasingly destructive process.

[Abrak]

Without going too far off gold topic....Anyone who thinks there is always going to be new oil finds when needed is very optimistic..

Clearly there is a finite amount of oil so anyone who thinks it will not run out is very optimistic. But incidentally he does have an advantage over a goldbug on the basis that the consumption of the finite resource means that the cost of finding new oil and new oil production will inherently rise through consumption while gold does not tend to be consumed. So both products are finite while one has the advantage of being consumed.

Secondly yes the exhaustion of oil is probably a ways beyond most posters lifetime but....

Exhaustion is not what worries most. Instead the cost of extracting what is left.

energy return on energy invested, or EROEI

That is simply demand and supply. Clearly if the cost of extracting what is left is too high it will not be extracted. But the good news is that extracted oil is consumed so the price of oil is likely to rise because of the increasing cost of extraction (although whether it is reflected in the price already is debatable. The price of gold is simply determined by the level of speculation.

Lastly, Who would wait till exhaustion to act? Long ago was the time to react. Because what oil is left needs to be used for more infrastructure towards a world that does not rely so heavily on oil. It will always be needed but should not be squandered even now.

Well as we are both agreed that we will be dead before exhaustion, waiting before acting is a very long wait. I dont have a Hummer. No oil is not a good use of replacing oil, that cannot be productive in essence (well ok fumes etc.) Third party costs of oil would be taxed - if Obama was serious about reducing oil dependency he would simply add US$2 to the price of oil then do something productive with the proceeds and leave the market to destroy Hummer sales. Taxing oil to subsidise alternatives is a ridiculous concept.

[sokal]

Fewer Banknotes ! Lower gold Gold prices ?

Quite possibly lower prices for everything if the pace of a deflationary credit contraction (as outstanding credit is repaid or defaulted on) overcomes CB QE reflation efforts. A shortage of banknotes won't make life for the masses any easier either.

There will be absolutely no demand pull inflation, only currency crisis inflation.

Just look at the trouble the Euro has been going through. Was there any demand pull inflation in the Euro zone ? No, but gold did make all time highs in Euro's. That is classic crisis inflation.

People are getting this whole inflation/deflation argument wrong.

[sokal]

"Fewer Banknotes ! Lower gold Gold prices ?"

and perhaps less global warming? i can only shake my head

Yes Naam !- Central banks are not helping - One Tree = How Much Paper? http://www.greenatwo...t/special2.html

the question "one tree how much paper?" is not really relevant Churchill. only for the increased cash money supply virgin raw materials for paper production are needed. and it is not always trees as a number of countries do not use paper to produce banknotes but textile fibres and anorganic material.

how a glitch in the banknote production of an insignificant currency like GBP can influence the price of Gold is beyond my comprehension.

In the digital age, the currency in your bank account is not worth the paper that it is not printed on.

[sokal]

"Gold hasn't even started its real upward climb yet. Just wait until the "gold as currency" paradigm really gets recognized by the masses. Then we might even see a bubble. We're a long way from that right now. We're very much still in solid fundamentals territory."

as already mentioned "just wait until..." is what i hear since decades. i don't see anything solid in an asset that has not yielded a single penny but caused losses over a period of 30 years. goldbugs might blame me that i keep referring to the last three decades. but let's look at the facts. these are the decades which were important to me and these are the decades in which i made the money which enabled me to quit the rat race more than a decade ago. if i had invested exclusively in gold i'd live a rather mediocre life in my home country, would have worked a full decade longer and my assets would be a fraction of what they are today.

but whatever the future holds, gold will not appreciate multiple times over night. the value of gold is expressed in "fiat" money, id est i can -anytime i please- exchange whatever "fiat" i hold into gold or any other suitable commodity and as long i can beat gold's appreciation with "fiat" investments i see no valid reason to hold more gold than we do presently. it goes of course without saying that my stubborn and pigheaded Old Lady disagrees. whether i like it or not she will keep on buying gold or adding to our real estate holdings which do not really add any significant income. but it does not really matter as long as we can afford that kind of luxury which seems to make her happy. after all we are all into an elusive pursue of "happiness".

So if she was buying junk bonds that would make you happier ?

[SiamRose]

Yes hence my remark about EROEI

Energy return will decline but it's not going to be an exponential trend as some peak oilers like to imply. Oil will get more expensive but its not going to run out in any of our lifetimes.

[cloudhopper]

There will be absolutely no demand pull inflation, only currency crisis inflation.

Just look at the trouble the Euro has been going through. Was there any demand pull inflation in the Euro zone ? No, but gold did make all time highs in Euro's. That is classic crisis inflation.

People are getting this whole inflation/deflation argument wrong.

I agree completely with this. However if CBs go QE crazy and there is a regional or global currency crisis it will be resolved by yet another fiat currency IMO. Or they could actually (be forced to) let it all deflate naturally and let the TBTFs to actually F. And the effects on gold price in those two (of many) scenarios is far from certain. That said, I like bank notes and bullion for all the reasons previously espoused regardless of how this unfolds. In interesting times it's better to return a fuzzy image to as many radar screens as possible. Not to mention being essentially autonomous as possible which will be far more important anyway.

[Naam]

"Gold hasn't even started its real upward climb yet. Just wait until the "gold as currency" paradigm really gets recognized by the masses. Then we might even see a bubble. We're a long way from that right now. We're very much still in solid fundamentals territory."

but whatever the future holds, gold will not appreciate multiple times over night. the value of gold is expressed in "fiat" money, id est i can -anytime i please- exchange whatever "fiat" i hold into gold or any other suitable commodity and as long i can beat gold's appreciation with "fiat" investments i see no valid reason to hold more gold than we do presently. it goes of course without saying that my stubborn and pigheaded Old Lady disagrees. whether i like it or not she will keep on buying gold or adding to our real estate holdings which do not really add any significant income. but it does not really matter as long as we can afford that kind of luxury which seems to make her happy. after all we are all into an elusive pursue of "happiness".

So if she was buying junk bonds that would make you happier ?

irrelevant question.

[Naam]

"Fewer Banknotes ! Lower gold Gold prices ?"

and perhaps less global warming? i can only shake my head

Yes Naam !- Central banks are not helping - One Tree = How Much Paper? http://www.greenatwo...t/special2.html

the question "one tree how much paper?" is not really relevant Churchill. only for the increased cash money supply virgin raw materials for paper production are needed. and it is not always trees as a number of countries do not use paper to produce banknotes but textile fibres and anorganic material.

how a glitch in the banknote production of an insignificant currency like GBP can influence the price of Gold is beyond my comprehension.

In the digital age, the currency in your bank account is not worth the paper that it is not printed on.

the fact that i can buy with the various currencies in my bank account any time i please the equivalent value of Gold or any other commodity is obviously too difficult for you to comprehend. two € 500 notes buy an ounce of gold plus i get some change back to buy a good bottle of wine. worthless paper indeed!

[Naam]

There will be absolutely no demand pull inflation, only currency crisis inflation.

Just look at the trouble the Euro has been going through. Was there any demand pull inflation in the Euro zone ? No, but gold did make all time highs in Euro's. That is classic crisis inflation.

People are getting this whole inflation/deflation argument wrong.

you are getting it wrong as the EUR does not go through any trouble. more than half of EURoland's exports are shipped to countries which have USD-pegged currencies or free floating ones and the majority of continental Europe's industries is praying for a further lower exchange rates vs. a bunch of currencies.

[flying]

Yes hence my remark about EROEI

Energy return will decline but it's not going to be an exponential trend as some peak oilers like to imply. Oil will get more expensive but its not going to run out in any of our lifetimes.

Having children as I do & grand children for others... will make a person think a little beyond their own short life span.

Not unlike eating at a table of limited food knowing others have not yet even arrived at the table.

At times it is nice to think we should leave this world at least as nice as we found it.

Yet this current generation has probably used more resources than any before & to top that off they/we have destroyed the futures use of those or adjoining resources in many ways.

Looking at the gulf as an example ...or the wastelands of Vietnam now full of toxic agent orange that continues to deform generations of newborns & on & on the list could go.

Makes me a bit ashamed of my own I-ME-MINE generation. So for me whether it is slated to last just my lifetime is not that important.

Edited July 25, 2010 by flying

[Naam]

Yes hence my remark about EROEI

Energy return will decline but it's not going to be an exponential trend as some peak oilers like to imply. Oil will get more expensive but its not going to run out in any of our lifetimes.

Having children as I do & grand children for others... will make a person think a little beyond their own short life span.

lucky you! (you know what i mean).

[flying]

Having children as I do & grand children for others... will make a person think a little beyond their own short life span.

lucky you! (you know what i mean).

Yes thanks !

Good on you & thanks to you too as I have read of your generosity to children through charity.

Edited July 25, 2010 by flying

[Abrak]

I wish we would stop this 'currency' argument because it is inherently pointless. Gold is not a currency and its very clear appreciation in value is a clear indication of that. I am not absolutely sure it is a commodity as it has very little use.

This is how I see things.

Currency has 4 uses.

(1) Medium of exchange.

(2) Deferred payment

(3) Unit of accounting

(4) Store of value

Given that gold will never be an actual currency, fiat money is inherently better at 1, 2, 3.

Given that both fiat money and gold are intrinsically worthless (in that both have no productive use), gold is increasingly seen as a better 'store of value' because it cannot be debased. I understand the bull argument to be that gold will increasingly be seen as a better store of value.

Clearly cash is not productive so it doesnt earn anything and its interest rate is tied to 1, 2, 3. Where I do absolutely agree with gold investors is that if you compare it in terms of value to a 10 year UST yielding 3%, I would rather die than buy that UST. Given that I think 3% 10 year bonds are complete lunacy and I guarantee that I can do better in value terms and that I perceive bonds as overvalued you might think that my argument is circular.

However it is an incredibly dodgy argument because gold has no intrinsic value, so to the extent it is a better store of value than fiat my argument is based on my 'perception' that 10 year USTs are lousy value. And this is the big problem. I think that 10 year USTs are a lousy investment and inherently have a negative value. So my 'perception' is that gold is better value than USTs inherently in that I would rather buy gold than 10 year USTs. Given that both are inherently worthless and the value of the bond is fixed my 'perception' must be wrong in which case gold must be overvalued or I am wrong in believing that I can make 3% p.a. over 10 years.

Anyway the point of my argument is this. To the extent people see gold as a better store of value than USTs goes without saying. The value of a UST is fixed and final. Whatever happens in my view - interest rates go 0 inflation to -5% I will never believe that lending to the US government at 3% over 10 years is anything but a bad investment. Simply put, for gold to go up people must think that 3% 10 year returns are a store of value and that is a big assumption. The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

[flying]

The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

I cannot help but notice the fair amount of time you spend trying to convince yourself

[cloudhopper]

The value of a UST is fixed and final.

Value is never fixed and final for anything, it will always be subjective and contextual.

The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

<deleted>??? Anyone buying gold with cash must think otherwise. Those advocating that increasing the money supply is equivalent to increasing wealth are the mad ones.

[Abrak]

I cannot help but notice the fair amount of time you spend trying to convince yourself

Now Flying you are absolutely right there. I keep having these urges to sort of 'buy' gold. Now I did at one point think that gold had some inherent value due to its inverse correlation with risk but that has disappeared. Ultimately the value of gold is 100% determined by peoples perception of its value. It is non-productive, has no real yield, is not a currency as people suggest, has a lot of people who buy it because it goes up etc.. So in my view it is a very risky asset with virtually no fundamentals, doesnt even give a decent return against that risk in my view. So why do I have these urges to buy it.

I know it is tied to its total lack of fundamentals rather than its underlying fundamentals.

[Abrak]

The value of a UST is fixed and final.

Value is never fixed and final for anything, it will always be subjective and contextual.

I was refering to its underlying value in nominal dollar terms. Its price is clearly subjective and contextual.

The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

<deleted>??? Anyone buying gold with cash must think otherwise. Those advocating that increasing the money supply is equivalent to increasing wealth are the mad ones.

No you totally miss my point. To the extent that increasing the money supply to increase wealth is madness and to the extent that people who believed that cash which is paper yielding nothing think that cash is a store of value, I believe they are mad. So someone who switches from cash to gold as a better store of value must be mad on the basis it implies that he thought cash was a good store of value. So I am not arguing that mad people who use cash to buy gold as a better store of value are not correct in their thinking as to why it is, I am simply arguing that they were mad to think of cash as a store of value in the first place.

[lannarebirth]

So, did Jim Sinclair ever find a counterparty for his million dollar wager that Gold would be trading at $1650 the second week of January 2011? That's a 39% rise over the next 5 1/2 months. Nice.

[cloudhopper]

So, did Jim Sinclair ever find a counterparty for his million dollar wager that Gold would be trading at $1650 the second week of January 2011? That's a 39% rise over the next 5 1/2 months. Nice.

I hope so. If he loses it will only be due to "dark forces".

[flying]

I cannot help but notice the fair amount of time you spend trying to convince yourself

Now Flying you are absolutely right there. I keep having these urges to sort of 'buy' gold. Now I did at one point think that gold had some inherent value due to its inverse correlation with risk but that has disappeared. Ultimately the value of gold is 100% determined by peoples perception of its value. It is non-productive, has no real yield, is not a currency as people suggest, has a lot of people who buy it because it goes up etc.. So in my view it is a very risky asset with virtually no fundamentals, doesnt even give a decent return against that risk in my view. So why do I have these urges to buy it.

I know it is tied to its total lack of fundamentals rather than its underlying fundamentals.

Well I feel for you bro

I am happily un-conflicted on such matters & have stated my 50/50 position & holdings in the past.

But I think none will find posts by me decrying anyone for not jumping on board. Nor will they find me saying it is silly notion to remain 100% faithful to fiat nor find that I have tried to sell metals as hard as you seem to try to decry it.

Lastly I am pretty sure with any luck most of us will still be around in say 2016 although as early as the end of 2011 & early 2012 will leave no doubts for most & see where it has all gone direction wise.

All just IMHO of course & not a recommendation DYODD

Edited July 25, 2010 by flying

[Abrak]

Well I feel for you bro

I am happily un-conflicted on such matters & have stated my 50/50 position & holdings in the past.

But I think none will find posts by me decrying anyone for not jumping on board. Nor will they find me saying it is silly notion to remain 100% faithful to fiat nor find that I have tried to sell metals as hard as you seem to try to decry it.

Lastly I am pretty sure with any luck most of us will still be around in say 2016 although as early as the end of 2011 & early 2012 will leave no doubts for most & see where it has all gone direction wise.

All just IMHO of course & not a recommendation DYODD

I like to think that this thread would be boring if it just consisted of people saying how brilliant Gold is.

I do not believe I have ever stated that I believe the you should sell gold or short it, I have merely questioned the investment logic of buying it. Some of your arguments are not even logical. The concept like above that you know gold is going up is implicit in the fact that you own gold, it does not mean you actually 'know' gold is going up. And your underlying certainty that gold is going up is inherently bearish because you do not.

The concept you mentioned before about my desire for investments being productive you simply didnt understand the concept which is a very fundamental misunderstanding of investment.

The fact that I will not own gold is not going to make the price go up nor is your inherent belief that it will. For the price to outperform there needs to be something that is not discounted already by the market. A belief that will go up in the future because it has gone up in the past, is more likely to make it go down.

As I say you will never persuade me to buy gold again so my inherent negative approach does not imply you are right in thinking the gold price will go up.

You should understand an underlying faith in the future price of gold rising is incredibly difficult as a concept to get to grips with considering its lack of use and its fundamentals. If I buy a business that makes 100,000 dollars a year for 500,000 dollars at least I have 100,000 dollars a year of income. If I buy a lump of gold for 500,000 dollars all I have is a lump of gold and a belief it is going up.

To the extent that logically I cannot predict the price, I cannot predict the price. But I would suggest that there is far more 'faith' in gold than there is logical investment theory. The fact you are so certain that gold is going up when it has so few fundamentals should lead you to question your judgment as to why you hold it more than question mine as to why I dont. Logically gold goes up because of the lack of fundamentals rather than the fundamentals.

[flying]

I like to think that this thread would be boring if it just consisted of people saying how brilliant Gold is.

I do not believe I have ever stated that I believe the you should sell gold or short it, I have merely questioned the investment logic of buying it. Some of your arguments are not even logical. The concept like above that you know gold is going up is implicit in the fact that you own gold, it does not mean you actually 'know' gold is going up.

Sometimes ....& I know I have written this before but I feel you confuse me with another.

My post never said I thought gold would go up. I did in fact say

will leave no doubts for most & see where it has all gone direction wise

You even quoted it so I am surprised that you assume it as anything else.

Yes I agree the thread would be boring if it was one sided but many times I see your posts & wonder who you are talking to or referring to because like one of the previous posts it starts with something like....

I wish we would stop this 'currency' argument because it is inherently pointless.

Yet I do not recall seeing any claiming that. Yes I see some say it is acting/trading like a currency but most myself included have always said t is not possible nor wanted as a currency & will do far better as it stands as unfettered free gold.

But in any case it is a discussion...carry on

But as I said in my last line of my last post as always not a recommendation

PS: You do realize yours is just as flawed a logic as any dont you?

If I buy a business that makes 100,000 dollars a year for 500,000 dollars at least I have 100,000 dollars a year of income

Just a faith in a rear view mirror is not Fact

All you have is a reflection of what was not a guarantee of what will be.

Edited July 25, 2010 by flying