Magpie

I've never suggested holding cash, so I can't think of anything especially useful to say in response to that question. Right now I think the immediate danger of total currency collapse has probably receded, only to be replaced by other dangers, such as high inflation, bond and currency crises etc. Gold may well be a good store of wealth in that situation. Personally I don't have a great deal of wealth to protect in any case, and most of it is tied up in my property. With respect to property, I bought knowing that it could go up or down, but the calculations compared to renting and my need for a place to live take precedent - so I hopefully don't really need an exit strategy. I'm not sure it will be that obvious when this mess is sorted to be honest, though. We know how desperate financial institutions, insurers and so on are to brush awkward facts under the carpet. I don't think there will suddenly be a day when we realise everything is sorted out. I think there could be a 5-10 year period when no-one is entirely confident and when there could be a new wave of new crises or not. Japan doesn't give us a very encouraging precedent in tht respect, though this crisis is a bit different in its scope.

Maybe. I'm not sure what I think about the 'gold is good in deflations' theory. It seems intuitively wrong, but on the other hand people do look to gold in times of crisis. Maybe in the event of deflation the price will fall, but not by as much other assets, so gold will prove its worth. But I would suggest that in a deflation the difference between holding gold and other assets is less likely to be a big difference, so for those who expect deflation I don't think gold is such a no-brainer. Anyway, I tend to think deflation is going to slip into inflation sooner or later as governments' only realistic option is to try to reflate the financial system, whatever the cost.

That's fair enough. I don't want a price that would trigger a sell as I don't think that would make sense - it's more about what conditions would indicate that the situation is no longer one in which you need the protection/insurance of gold. Sound monetary policy seems a reasonable enough demand on that front, though I don't see it happening any time soon. My feeling is that events last week marked a new phase of the banking crisis. Governments are out of denial about how severe the deleveraging and deflation threats are, and have basically promised to do whatever it takes to avoid a banking collapse. That makes it less likely that we have an immedaite meltdown of the banking sector, and more likely that the next phase will be inflationary. Might take a while to feed through though as a lot of the newly created money is in the first instance going into black holes in banks. Yes. In ten years time, perhaps we will look back and see this as only a preliminary crisis - "saving the system" this time might lead on to something even nastier later on.

The thing about that goldismoney thread is that it focuses on ways to spot when your successful strategy has reached its ultimate success. Do you have any thoughts on what indicators would suggest that holding gold now is a mistake and that you should get out before losing more? I'm not suggesting that this is true, but are there any indicators imaginable that would persuade you to reconsider the idea that gold is going back to higher real prices long term? It seems to me that one should have two exit strategies, one for success and one for failure. Or is the only exit strategy for failure to assume that success has merely been postponed?

You could probably get all the way to Z.

Absolutely. But there is a tendency for gold to inspire fervent belief so it is a fairly obvious danger. You know I'm a gold sceptic, so no need for any complex theory as to why I'd question whether people have too much faith in gold. It's an obvious question for me to ask. Funnily enough Sylvester didn't mind the question when I addressed it to hm, it's everyone else who's jumped in to slag me off. Anyway, off to the park with the little one, so I'll leave you to it.

Gah, I'm not sure you actually read what I said. Sylvester, who I responded to, understood my point perfectly well, not sure why it's so hard to grasp. All I'm saying is that there is a danger for someone who holds gold for the reasons you do of getting into a state of denial if the situation changes. If we don't end up with inflation, but have a long deflationary depression, surely it would be wise to reconsider your expectations? I'm not saying that that moment is now, in fact I think there is still significant danger of high inflation. But when I saw someone saying that there was no point at which they would sell gold because the price had fallen, it did make me think about the issue of denial. As Steve points out, one can hold gold for other reasons than wealth protection, but if wealth protection is the aim, one needs to respond to the economic situation as it develops. Gold may not be in a bubble now, but it is reasonably likely to get into one at some stage - it has happened in the past after all. That makes a comparison with the property bubble reasonable enough, even if one believes that we are at a very different stage of the cycle for gold.

Good for you. Bu cognitive dissonance and denial are extremely common in people holding all sorts of beliefs*. That's why I asserted it was likely. I certainly suffer from these faults in some of my decision making and try to remain on guard against them. No harm in pointing out the risk with regards to the gold question. (*For instance now is a great time to observe cognitive dissonance in those who believed property was a one-way bet...)

Let me put that one more way. Let's distinguish two reasons for holding gold (not the only possible reasons I know, just want to make this distinction...) A believes fiat is in danger of high inflation, hyperinflation, or a complete crash. So he holds gold as insurance against these possibilities. B believes fiat is a con, the tool of corrupt government, and a symptom of excessive state control. If the danger of high inflation, hyperinflation or currency crash recedes, it would be logical for A to reconsider the virtue of holding gold, whereas it would be logical for B not to reconsider. A's beliefs are based on possibilities that don't affect B's beliefs. However it is likely that denial and cognitive dissonance will lead A to find new reasons to justify their decision to hold gold if their original reasons fade. That is what I was talking about. B should only be expected to change their opinions if facts are presented that argue against the view that fiat is essentially wrong, immoral or whatever.

Touchy. Sorry to give offense, but I do understand the point you were trying to make. If someone genuinely owns gold for the reasons you give then it's absolutely fair. Nothing I'm saying would apply to you if that is your thinking. Apologies if suggesting you might be rationalising also is irritating. The danger I'm pointing to is a different one, where someone starts out buying gold because they expect it to be the best store of value in a predicted inflation, but then changes their rationale as the situation changes. On the other point you make, about people simply losing faith in fiat and wanting to opt out - that does make sense to me. I suppose that it is more of a moral judgment about the relative virtues of gold and fiat. I don't share that moral judgment but I do respect it in other people.

That all makes sense to me. I also bear in mind the possibility that a period of deflationary depression will tip over into a nasty inflation, so I'm certainly not arguing that the short to medium reasons for holding gold have disappeared. Only observing that one could end up in a state of denial if that finally happens.

I take your point. But also, your post seems to embody a similar piece of rationalisation. I really don't think most people view gold as similar to buying a classic painting. They mostly see it as insurance, or as a safety net. If the rationale is now being changed it's worth asking why. If I had an insurance policy and the facts changed in such a way that it became apparent it wouldn't pay out as I'd expected, I would certainly consider changing it. I'm not arguing that has happened. But I think it's worth mentioning the issue of denial - where people buy gold for perfectly valid reasons, but then find new reasons to justify keeping their gold when the original reasons no long apply. (As it happens, we still face significant danger of high inflation just now, so I'm a long way from thinking there's no reason to own gold. But historically there have been periods of history when owning gold wouldn't have been financially very smart, like 1980-1999. Of course it's not a matter of right and wrong, but when we're talking about wealth protection there are better and worse strategies.)

I see your point, but isn't there a danger of denial on this subject. It certainly has been making sense to have gold over the recent past, but if the situation really does change, then doesn't it make sense to adjust one's strategy rather than clinging to the old one? If, for the sake of argument, the problems in the financial system level out, and we just have a deflationary depression (just!) - then wouldn't it make sense to give up on one's expectations about gold? If not, why not? I agree, in an unprecedented situation like the current crisis this is pretty much all any of us can do. Do the best we can and hope for the best.

Medium term the price pressure is probably still upwards in spite of the general deflation, but no need to blame it on manipulation - there is a far simpler explanation: Everything this week has been driven by a scramble for cash. If someone (or in many cases a fund) has a money in gold, then it is one of the sources of cash they can liquidate. They may believe gold will go up medium term, but hat makes no difference if they are desperate for the cash to bil out another failed asset. So gold falls.

I have always wondered if the gold vaults might be less than fully backed by actual metal. I'm assued that they are totally kosher and audited and that the gold is allocated and all that, but I can't help but wonder if the truth is a bit more complex.

I might be wrong - others here will know far more than me on this point.

I have to say that I remembered BV as promising physical delivery on demand. That statement above is far more hedged than that, it only seems to guarantee delivery if you can prove special circumstances.

I think that's about right. I'm not saying that the unfunded liabilities theory is totally wrong, just that it tends to be stressed in a rather alarmist way by people whose agenda is to attack wealth redistribution.

That's a different issue, and one that also needs to be addressed. It's likely to mean people working till later in life for instance, if the continuing age and birth trends continue. And in the UK we are already seeing the kinds of issues about rationing in the health service that will be created by people living longer and expecting expensive treatments. If future generations can't make the redistribution then inevitably there will be structural changes in the future in terms of how income is redistributed, and how medical welfare is administered. The unfunded liabilities argument is different - it asserts that we can't possibly save up the $60 trillion needed to fund future commitments so we should cut or reduce Medicare and Social Security now. It is an intentional blurring of the future redistribution with current deficits in an attempt to attack the idea of redistribution. It also ignores the fact that we are likely to have inflation over time, by costing future commitments in current nominal prices in a misleading way. My feeling is that there are genuine issues about future funding for welfare programs, but they are not nearly as black and white as the 'unfunded liabilities' argument makes out.

I tend to think this theme about 'unfunded liabilities' is mainly appealed to by people who are violently opposed to any form of welfare and want to try to reverse even the small amount of wealth redistribution that exists in the US system. The thing about 'future commitments' is that they will constitute a redistribution of future income - the people paying tax now are funding current Medicare and Social Security, and the people paying tax in future will be funding future Medicare and Social Security. So talking of 'unfunded commitments' is a slightly hysterical red herring. Of course there may be problems with such redistribution if the economy collapses too badly, but there is no sense in adding those future commitments onto current debt and scaremongering about it.

I did say 'might'... At the minute I think high inflation is certainly likely as a result of all this. Although that's only if they actually succeed in averting the deflationary collapse first, which is far from certain at this point. The point is one needs to understand that this is a period of deflationary deleveraging first, and beyond that it is anyone's guess how the 'inflation cure' will work. It will either destroy or devalue the dollar for sure, but how rapidly all the consequences will play out is far from certain. But I would say the last week has shown how very determined they are to pump in as much money as it takes and in that respect the balance of probability has shifted towards high or hyper inflation in the medium term.

Of course it's deflation. It's just that it's deflation being fought with an "inflation cure", and you think that the inflation cure will end up as the dominant force.

Good morning New Zealand!

Same difference though isn't it. They've run out so they'll print some more. Thus devaluing all the existing dollars. I have to admit today is looking more hyperinfltionary than deflationary. I linked earlier to a crazy story suggesting that the US govt might set up a fund to buy toxic securities and exchange them for cash. Which would also presumably have to go on the credit card bill, along with FMx2, AIG and all the rest.

Basically it implies the Fed is running out of funds. No worries, the Treasury can create the money by selling bills. Except this risks devaluing the dollar massively. Basically this is real money printing, very inflationary.