romans holiday

I posted this on another site in reply to deflationists who see no need for owning gold. Thought it would perhaps be of some interest here. Most deflationary theory is based on what happened in the 30s. When you consider that the dollar was backed by the real asset of gold, conventional deflationary theory, and what it entails for prices, is limited. Prices may fall due to less money in the system, and again due to less demand as consumers seek to pay down debt. However, besides downward pressure on prices there may also be upward pressure as currencies depreciate which we have already seen happening in some countries. Theoretically, we could see a situation where you had an asset/credit/debt deflation, yet prices remained in a relative equilibrium. Prices in this situation would become deceptive as the currency loses one of the classic functions of money, that is, to be a measure of value. Potentially static prices would mask the fact that the currency is losing value as it would also be the case in an inflation. In this respect inflation is much less complicated than deflation; you can see nominal prices going up.... therefore inflation. The profligate bankers look to have really damaged the money system [fractional reserve banking] this time round. With the governments decision to try to prop up this system and reflate the bubble in asset prices, they run a real risk with the currency itself; with a shrinking economy and a growing debt burden, the value of the currency could be called into question. It will at some time most probably devalue. Conveniently, the depreciation of currency can be equally achieved in a deflation as well as an inflation although a deflation is worse; at least in an inflation there is a "surplus" of money. Which comes back to your question of how we value gold. The problem becomes how we value anything. If we take the classic functions of money where it is a store and measure of value besides a medium of exchange, we get into a right pickle when money loses one or more of these functions. Most people pretty much agree that our system of money is not an effective store of value, hence the world of investment and chasing after gains and outwitting the bogey of inflation. Yet over and above this, I think money's function as a measure of value will also become increasingly problematic. When investors finally realise this and they see prices as all out to sea without a compass they will look for some firm basis in which to protect their capital. At that time, it is likely we will see a massive capital flight from assets and currencies to gold and silver which remain the most powerful symbols of money.

The market is just a bit..... slow.

Yes, long term investors agree that gold will perform exceedingly well. But if you want to know what will happen in the meantime you also need to envisage how main stream investors think [impersonally, the market]. This is perhaps the very definition of an investor. The market has not yet arrived at the conclusions that many here have. Whereas investors can see a certain logic and predict events that might follow, the market like a dumb beast has to see with its own senses these events unfold, and then reacts to them. This is to our advantage. We can predict gold may go lower because the market is being fooled into the rally and once again chasing after risk and returns. We can also predict that at a later date, economic reality will bite sending the market back looking for a safe haven. The investor should never be too surprised or alarmed at what the market does, but should rather take advantage of it.

A premuim of fear is already priced into gold. In US dollar terms, it might only come down slowly as both safe havens weaken with investors taking on risk. Other currencies might provide a better opportunity for buying gold at the moment. Silver looks the better buy [if you have US dollars] as it should pick up with inflation concerns. Wait for the ratio to fall to 40-50 then swap back to gold.

Anyone considering swapping a little gold for silver?

With a resurgent kiwi dollar [gone from 0.50 to nearly 0.59 against the US.... 15% gain], gold as priced in those dollars has fallen from $1800 to $1500. I am hoping to buy at around $1300. Go kiwi! Gold looks to be very resilient against the US dollar at the moment as they are both considered safe haven currencies at the moment. Investors are looking for a little risk and will no doubt get more than they bargain for.

Yep, currencies are all over the place. Too many variables and imponderables. The approach I have settled on - besides having a core position in bullion of course - is to "juggle" a few currencies in super slo-mo; be positioned in a few currencies, wait and only buy weakness from strength with the proviso of accumulating the more desirable currencies, ie metal. Why chase the market when it may come to you.

Great news if you have some dry powder and are convinced of the medium/long term performance of gold. I mean if gold just went straight up I wouldn't be able to increase my holding. Not being greedy.... just need enough for a house. No harm in wearing a traders hat using the Jim Sinclair "fishing line" method at times.

Confluence of factors I guess. Possibly the biggest factor is G20. Here they are prancing around posing and putting on a show of unity. Couldn't believe my ears when a newscaster stated: "World leaders have arrived at the following solutions".... as if they had solved all the problems. All about appearances... which the market is happy to buy into.... for now.

Yep, could be wrong but I get the feeling that once the key psychological support of 900 is taken out it could carry on correcting through the 800s. Especially if the DOW rally continues... soon to go through 8000.

Good news if you are a buyer.

just short time... could be a few months out.... the catalyst for the next up move in my opinion will not be a feel-good inflation-hedging spending spree in the markets but another bout of trouble with the banks, further deterioration in the economy and unemployment and a sell-off in the markets which would see the DOW test the lowest low. I see another deflation scare... and with it further currency crises as the factors by which gold will go through 1000 and stay there.

Post QE could ironically see gold go a little lower. Gold previously went up on concerns of a collapse of the banking system. When the market was worried about deflation the premium in the price was due to fear. Now with inflation concerns in the ascendency, investors are thinking about other inflation hedges besides gold. Keep an eye on the commodity currencies as they look to have taken the place of the dollar's "anti-gold" role for the time being. I doubt we will see a massive sell-off in gold as QE and inflationary concerns will have put a bottom under it. Though that bottom could be a little lower than here. All good in the long run. No alarms, no surprises.

Keep in mind also that a lot of currencies are all over the place at the moment as investors are first risk averse, then willing to take on risk, depending on the news of the day. My purchasing currency is the US dollar. Gold as priced in the dollar is relatively stable now which seems to be a period of consolidation. I would consider buying at around 850 or 800... and then keep some powder dry just in case. http://financialsense.com/fsu/editorials/t.../2009/0401.html

Not exactly a picture of health for the US dollar.

Good call HPCS! But will it go up $50?

Enjoy Boredom While It Lasts By: Rick Ackerman, Rick's Picks http://news.goldseek.com/RickAckerman/1238408553.php

Don't worry... gold will have another good day and the last laugh no doubt. In the meantime, I might be able to afford to buy more. Honestly, it surprises me that more here are not wishing for a big dip in pog. Looks like lucky dip to me.

Good buying op coming up!

At least something happened. It just does not feel right when gold gets stuck in the doldrums as the financial world melts down.

It is said to be the most impregnable vault on Earth: No doubt to keep people from peering in.... and keeping up appearances.

WOW. Euro has retraced back to 1.31 against the dollar [where it was before news of QE]. Kiwi, Aussie down.

I think Ambrose is quite measured on gold. He asks whether we are at the beginning of a bigger mania or at the end of a run? He sees gold a little toppy now but also reckons we have not seen the end of this crisis. He believes that the politicians can not allow a disastrous debt deflation so the policy will be all about inflation. This he sees as obviously benefitting gold. In a nutshell, he expects a bit of volatility before gold goes on another leg upward. I tend to agree.

Yeah... but some types of cash are a bit dampish these days. Get yourself some decent ammo.