wrongmove

I should also add that I'm not sure where the authors are getting their M2 number from, but it doesn't seem to be the FED I tried to link to the st louis fed, but got this message "You have entered a link to a website that the administrator does not allow links to"

On many measures (paticularly 'narrow money') contraction is very evident: from Which inflation is it, anyway? "........... Monetarists have different views on which money supply figures matter, and often disagree violently on the import of statistics. Nonetheless, few would argue that the changes in “narrow” money supply (M1 and M2) over the past few months speak to a scary trend, though a different one than you might have read in the headlines. In the US, M2 (cash, current account deposits, and short-term savings deposits) began falling off a cliff earlier this year. Growth in M2 spiked earlier in the credit crisis, reaching16% near the end of the first quarter. It has since reversed course with a vengeance - M2 contracted in the latest month. Each month brings more negativity in the banking sector and tighter lending conditions. Changes in bank credit, a broad proxy for lending and money supply changes make for grim reading lately. Those too have dived, going from a growth of 12% last year to an 8% contraction (so far) this year. If you can’t borrow, you spend what you have, and “what you have to spend right now” would be another way of defining M2. This 8% contraction in bank credit is the steepest fall for it in 40 years. This doesn’t bode well for growth figures given credit creation (lending) in a fractional banking system is a main conduit for money creation. The underlying cause of the contraction is, presumably, that banks are worried about having even the fraction of deposits required of them to be considered solvent. Some monetary purists, we know, will point to the broader M3 measure (which the US no longer publishes) that rose rapidly last quarter. We think observers that view the recent surge in this measure as temporary are right. Most of the growth probably represents companies fully drawing down lines of credit before the banks cut back on them. It’s not “new” lending in the strict sense of the word, and does not therefore represent new stashes in longer term accounts being put to use. ................" I can't really comment on the M3 theory, but the "thin end of the wedge" is deflating at 8% YoY. Pretty dramatic stuff.

Falling prices also inhibit further lending, while the old mortgages still cost the same and have to be paid. So while the falling price itself does not constrict money supply, it maybe gives a hint as to what might happen next.

Thanks for that UTK. You are probably right that I am too pessimistic. Especially when posting - I'm certainly not trying to play devil's advocate - I post what I think, but on a board like this, being non-pro gold can come across as being very bearish, which I am not either (I am not short gold, and certainly not planning to be, just not long either). In the "real world" I am considered a massively economic bearish by my peers, it is only here my views are considered bullish! I am suspicious of gold as money, I could see it being a useful part of a barter system, but just a part. This makes me very skeptical of the rockets and forecasts of 10K gold etc. I'm basically a 5-10%er, whereas you are a 10-20%er, not that far apart. I probably assign a slightly risk of deflation than you, and this would adjust the holding. Fiat is actually some form of 'protection' in deflation. (At the moment, i have other things to worry about, so I have no speculative money available and not much to protect.) Thanks again for the reply. I'll check out the link when I get time.

So you are bullish Euro now? And the correlation will stay intact? Sorry, I'm a bit slow tonight. I think I get the message though. "gold will go up".

So you don't think 1.65 anymore? What about the dollar/gold correlation then? History not going to repeat after all? confused.com

My main conclusion (for myself, based on my own research) is that gold is certainly not a farm bet. I am not convinced by the "gold is money" theory (as discussed elsewhere) and without that, gold has a certain amount of physiacl demand for jewelry, which should keep prices ablove the cost of production, but beyond that it is all just speculation. Speculation is fine and good, but they are some here who seem to have muddled the two strategies for gold into one. i.e. they are playing the market like a speculator, yet they think they are just trying to preserve their wealth. To me, this is a dangerous muddling. I am just trying to seperate "gold as insurance" and "gold as speculative instrument". But it seems to me that with gold so far above the cost of production, gold is now more speculative than wealth preserving. Who has ever really made a big stack with gold? That tiny handful that managed to buy 40 years ago (before the last extermely short lived bubble), and hold and hold and hold and then mange to press the sell button in that week or so it peaked.

If I am suggesting anything, it is a balanced, diversified approach. I'm not suggesting "putting everything" into anything. And as a UK citizen wishing to move to Eurozone, dollars are not even on my radar. Thanks for the advice GF, but I'll do my own research thanks. Disclosure - I am not, nor have I ever have been, either long or short gold. I'm certainly not worrying about anything gold related.

Of course that is your shout. I'm not going to argue with you. But the last few days price action should give you a hint. How can an asset this volitile preserve anything? Some people have lost 10% (nominal) in just a few days? Hardly a "safe haven" at the moment.

But you are "going for the moon", not using gold as an insurance policy? Good luck, but to me, that is not the same thing. That is pure speculation, and as generation after generation never seems to learn, getting rich is the easy way is rarely easy.

Indeed - the old saying goes "put 10% into gold and hope it does badly". That, IMHO, is using gold as an insurance policy. If you are 100% gold, and hoping it will do well, apart from the cognitive dissonance caused by actually hoping for war and disaster, you have nothing left to insure.

The perception of fundamentals seems to have changed. The market seems to be to be betting on a somewhat resurgent US (first into trouble, first out again type theory) and the slowdown in Asia and Europe, plus the credit crunch in the West, seems to have switched fears from inflation to deflation. Markets price for 6-24 months ahead. Everyone knows what the situation is now, i.e. expanding money, rising inflation etc. and to some extent this was priced into $1000 gold. Now the market is seeing a different future (for now) (IMHO)

May be of interest to some - written by a gold bull, but more balanced article than some, IMHO Who is Really Printing Money? "A popular mantra among many gold bugs is: "the Fed is printing money." Any actions by the Fed to support liquidity in the markets are touted as "money creation" and consequently "monetary inflation" which causes gold appreciation. If gold does not rise, they proclaim that there is "manipulation" and "conspiracy". It is fair to say that we do not see the picture in such black and white colors. The main source of new money in the economy is not the Fed but the commercial banks. It is the private banks that increase money supply through debt (new credit) creation. During a credit crisis which is characterized by a steep slowdown of credit creation, growth of money supply in the financial system slows as well. It is silly to think that the Fed can replace the whole system of commercial banks by creating money itself from thin air. What the Fed can do is influence money supply by adjusting interest rates creating more or less incentive for the fractional-reserve lending by the commercial banks. Lately, the Fed has expanded its sphere of influence but these actions still do not directly cause increases in money supply. The Fed began swapping poor performing assets on the banks’ balance sheets for the high quality treasuries on the Fed’s balance sheet in an effort to improve the financial situation of the banking sector and restore liquidity................." He goes on to say gold will hit the moon, but is cautious (to say the least) about timescales: "Today, the biggest fear that the Fed has is the fear of deflation. The monetary policymakers understand that (a) sound banking system is a foundation of US economic prosperity and ( the failure to support the banking system will inevitably cause deflation. We are, therefore, confident that the Fed, headed by Chairman B. Bernanke, will continue to support the banks by creating the best possible environment for the return to a normal cycle of debt/money creation and use everything in its arsenal to prevent deflation. Going forward, gold will likely resume its up-trend due to one of two reasons: 1. Another spell of problems in the financial system will cause gold (and the US treasuries) to once again take the place of safe haven investments, as was the case in the second half of 2007. 2. Fear of deflation and a further slowdown in the US will spread around the world. As a result, a vicious wave of competitive devaluation will cause not only price shocks (oil, food, etc.) but also spiraling monetary inflation, eventually raising long-term bond yields. This will be the beginning of a real gold bull market when gold outperforms all other major classes of assets including most hard assets. The second outcome, in our opinion, is inevitable but no one knows when it will come and what path it will take. Gold Price Action In the middle of July, gold touched its upper Bollinger Band (see weekly chart below). At that time a large wave of profit-taking and commodity liquidation began, causing gold to plunge by over $100/oz. Gold held its May low of $946, which was critically important for the near term. Most technical analysts now see this support will eventually be breached and gold will touch its 65-week moving average in the low $800s. Unfortunately, this outcome is now quite likely, meaning that the duration of the correction could be extended by an unknown length of time, from a couple of months to as long as a year. One outcome that we feel we have to mention is the worst case scenario. The current commodity correction could extend for a few more months, easily pulling gold to below $800. If gold stabilizes in the $700s, lower $800s would become new resistance levels, causing precious metals to stall for a longer period of time. Although this will in no way cancel the secular gold bull market, it will, however, likely lead to a cyclical bear market. The chart below shows that gold can fall to the lower $600s and still keep the long-run gold bull alive. During the seventies’ bull market gold lost about half of its value in a period of two years, just before embarking on an unprecedented run that took the price to $850/oz. One more point. Gold ended 2007 at $838 per ounce. Is it so outrageous to expect 2008 to be a down year for gold, after seven straight years of gains? We think not. While this bearish outcome for gold is not unreasonable, how would gold stocks react in this scenario?"

Maybe you could just open your mind a little to the possibility that playing the gold market isn't as simple as just trying to second guess the "PPT"? I'm just throwing a little suggestion out there, thats all. Several successful traders here rarely if ever mention the "PPT" when explaining their stategy.

I'm impressed! Usually folk get risk averse by the time they are drawing a pension, but if your pension income is safe, then what the heck! Good luck then, from a fellow peasant.

Then you need to think very carefully, IMHO. This is great board, but it is not made up of financial advisors, or anyone else you can sue if they give poor advice. Betting several hundred K on the back of forum tipsters is a pretty risky strategy IMHO.

Indeed. Else we risk a nasty deflationary spiral (cf Japan). Everything goes down. Oh, except fiat!

e.g. Dramatic cut seen in mortgage lending (FT) "........Building societies have so dramatically slashed their mortgage lending that repayments outstripped new loans by almost £700m in June, according to the latest data from the Building Societies Association. According to data from the Bank of England, the net withdrawal of mortgage lending by building societies is unprecedented; not even in the darkest days of the last property recession did net lending become negative................." Net lending in UK has actually gone negative, not merely slowed it's rate of growth.

The central banks are certainly lending more, but it doesn't seem to be nearly enough to cover the drop off in non-CRB lending - or at least the property markets don't think so. Is total lending really accelerating? I do not see much evidence of this.

It sounds plausible, but there seems to be a bit of self-inconsistency about the argument, or rather, it only makes sense if you are American. A rising dollar (which seemed to start several weeks after commodities began their fall) is going to wipe out all the "benefits" for everyone else. So why would the central banks (outside of US) collude?

What do you mean by REAL inflation? Money supply growth or the rise in price of a particular basket of goods? I have no idea if the quote is accurate, and it is impossible to say unless more clearly defined what you mean - the most currently widely used definition, or another one. The quote is from this article: US dollar rallies as extent of worldwide recession becomes clearer "..........The psychology of global markets has shifted hugely over recent days as it becomes clear that Europe, Australasia and parts of Asia are sliding into recession. The US dollar has launched its best rally in half a decade, reflecting a recognition that half the world is in even worse shape than the US. In fact, America is the only G7 country to eke out modest growth this summer. The US dollar index - currencies watched closely by traders - smashed through resistance yesterday in the biggest one-day move since the long dollar slide began seven years ago............." More talk of key resistance breakthroughs in the FT: US stocks surge on ‘watershed’ dollar jump "US stocks soared on Friday as the dollar saw its biggest one-day jump against the euro in eight years and oil prices plunged. The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak. The dollar reached its highest in five months against a trade-weighted basket of currencies, while oil fell more than $5 to $114.87, 22 per cent below its record high of $147.27 last month. The S&P 500 closed 2.4 per cent higher in New York. The shift in sentiment was triggered by Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that third-quarter eurozone growth would be “particularly weak”. This sparked talk that the ECB would be forced to abandon its hawkish policy stance and start cutting interest rates, thereby weakening the euro. “This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”................." I don't know how they can read all that into a couple of days' trading, but I guess that is the job of journos!

I'm not quite sure what you mean here, but you seem to be implying that movement in gold has driven movements in the USD/EUR, rather than the other way around? The straight forward explanation (usually a good place to start) is that weak data from Europe (and Asia) has shown that the US, in relative terms, is not the basket case it was a year ago. i.e Europe and Asia are dropping down to the same level, so it no longer makes sense to simply punish the dollar. In fact USA is only G7 country showing growth at the moment (or so I have read). If the above is true, you would expect gold to do well, i.e. all "fiat" should devalue together against gold. Clearly this hasn't happened, as of now. However, some of the optimism is being driven by falling commodity prices, in particluar oil. This is considered "good" for everyone. It is puzzling that gold has gone the way of commodities/EUR (at this point in time), rather than decoupled as it "should". Early days, I guess.

:lol: Now there are three words I never expected to see in such close proximetry! And from you of all people! ;)

Apologies RH. I was making a general point in what I thought was a light hearted and understandable way. I can't think why you considered my post to be aimed at you.

Hi GF - no offense was meant in my post, and from the tone of yours, I am pleased to see that none seems to been taken. I sometimes forget when I am sat at home, relaxed, with a smile on my face, that this doesn't always come across in text form. Face to face, it is easy to judge tone. I see from above I need to more careful perhaps on paper. I was just trying to make a point about the amount of emotion that seems to be involved with PMs. I read and post on several assets, but the emotional content on PMs is even more than property, it seems. I know your 'core' reasons for investing because I have been reading your posts for a long time, but it is less obvious with newer posters, and less obvious to newer readers. And I never even said if I thought gold was the nice one or the bad one! Almost certainly a complex blend of the two, IHMO!!