GOLD

[romans holiday]

Anyway shouldn't you guys move on to the stage 2 goldbug argument where you assure me that deflation is also good for the price of gold?

 

Early on, before this latest correction, I was questioning the simplicity of the inflation story in the face of obvious deflationary forces. For me, the justification for a rising value in gold [lets bracket the price as this will become a lot more complicated in a "bi"flationary environment] has always been an economy in CRISIS.

 

I agree with you that the inflation story [though part of the puzzle] is too simplistic, too hermetically sealed, as the rationale for holding gold. If this is the way in which you justify holding gold then you will be inevitably disillusioned if the gold price fails to follow the one way street of inflation.

 

My justification for being a gold bull [not a gold bug] is that it will become more valuable as a safe haven in a time of economic crisis. Both inflation and deflation are among the forces fomenting that crisis.

[Magpie]

Early on, before this latest correction, I was questioning the simplicity of the inflation story in the face of obvious deflationary forces. For me, the justification for a rising value in gold [lets bracket the price as this will become a lot more complicated in a "bi"flationary environment] has always been an economy in CRISIS.

 

The inflation story, though part of the puzzle, is too simplistic, too hermetically sealed, as to why you should hold gold. If this is the way in which you justify holding gold then you will be inevitably disillusioned if the gold price fails to follow the one way street of inflation.

 

My justification for being a gold bull [not a gold bug] is it is a safe haven in a time of economic crisis. Both inflation and deflation are among the forces fomenting that crisis.

 

Excellent post, and I tend to agree. Gold as a defensive measure (as other things will fall by more) and as insurance against the hyperinflationary possibility makes perfect sense to me.

 

The simplistic inflation > gold argument doesn't. Though I do know many here are making more complicated arguments also.

[romans holiday]

Excellent post, and I tend to agree. Gold as a defensive measure (as other things will fall by more) and as insurance against the hyperinflationary possibility makes perfect sense to me.

 

The simplistic inflation > gold argument doesn't. Though I do know many here are making more complicated arguments also.

 

Yet, I would also want to argue that buying gold may be more than an insurance policy. The classic insurance argument is that you put say 5% of your worth in and hope it never actually pays off. My strategy, as a gold bull, relies on putting a lot more than that into gold and by waiting for a future increase in its value be able to use it for the purchase of property. Gold is many things to me; an alternative currency, an investment and insurance.

[Magpie]

Yet, I would also want to argue that investing in gold may be more than "insurance". The classic insurance argument is that you put say 5% of your worth in and hope it never actually pays off. My strategy relies on putting more than that into gold and by waiting for a future increase in the value of gold be able to use it for the purchase of property. Gold is many things to me; an alternative currency, an investment and insurance.

 

It could work. I have to say I can still see more room to the upside than downside for gold. A big spike is certainly possible if the global economy keeps going pear-shaped. And most of the bull run so far was just correction after years in the doldrums. So while it could drop from here I don't think it is at all likely to go back to 1990s prices. And there is plenty of room for it to go back up again.

 

 

 

[wren]

This is happenning today, but now where near enough to cancel the new money creation, as proven by the act the creation minus destruction = M3 which is at 15% today!

I'm not that sure of the outcome, I just tend to challenge lazy inflationist arguments. I agree with many here that the outcome will be a messy combination. A few points:

 

Bear in mind that a lot of wealth destruction is disguised, at least in the short term. Businesses and assets become unsaleable. Banks have stuff on their balance sheets that they can't sell but that still count as assets. The writedowns take years to be fully revealed.

bigtbigt in the top quote, which you were responding to, is presumably referring to the money supply.

 

"Wealth destruction" (I suppose by that you mean a drop in the price of some asset?) and writedowns do not involve the destruction of money and do not therefore reduce the money supply.

 

You could do your point of view a favour by not confounding different things. The lack of reasonable precision makes your posts seem vague and meandering, and brings your position into doubt for that reason alone.

 

I'm not trying to flame you, but I think you do yourself a disfavour.

[romans holiday]

It could work. I have to say I can still see more room to the upside than downside for gold. A big spike is certainly possible if the global economy keeps going pear-shaped. And most of the bull run so far was just correction after years in the doldrums. So while it could drop from here I don't think it is at all likely to go back to 1990s prices. And there is plenty of room for it to go back up again.

 

Yeah, with all the monetary problems we are all so well aware of, I do not even focus on the price anymore. With deflationary forces in the mix, with a debased currency, with all in flux, POG may fail to give us any meaningful criteria of value. It is once again too simplistic to think higher prices equal higher value and vice versa. Rather, I will focus on ratios such as gold to the DOW, or again gold to the average house.

 

Of course, this is all reliant on my macro- economic view of things. No certainties in life.

[alexreeve]

Yet, I would also want to argue that investing in gold may be more than "insurance". The classic insurance argument is that you put say 5% of your worth in and hope it never actually pays off. My strategy, as a gold bull, relies on putting a lot more than that into gold and by waiting for a future increase in the value of gold be able to use it for the purchase of property. Gold is many things to me; an alternative currency, an investment and insurance.

That's a key point. Being UK based I really worry about Sterling doing a death dive, I don't trust Euros or Dollars %100 either. Gold seems like a good way of guarding against catastrophic loss, with the possibility of a serious gain (against a house in 4 years or so).

[romans holiday]

That's a key point. Being UK based I really worry about Sterling doing a death dive, I don't trust Euros or Dollars %100 either. Gold seems like a good way of guarding against catastrophic loss, with the possibility of a serious gain (against a house in 4 years or so).

 

By telling friends, colleagues and family to think of gold as an alternative currency, I have seen some become open minded towards buying a little. I am guessing that once they learn about gold a little more and become comfortable with it, they will buy more. There is a lot of unease out there with currencies at the moment.

[bitbigt]

bigtbigt in the top quote, which you were responding to, is presumably referring to the money supply.

"Wealth destruction" (I suppose by that you mean a drop in the price of some asset?) and writedowns do not involve the destruction of money and do not therefore reduce the money supply.

Thanks wren - that was precisely my main overall conclusion from magpies point by point response to my long posting (which was intended to help tease out the basis for our different interpretations).

 

Asset valuation changes (houses, stocks) have no direct effect on money supply!

 

Magpie, are you perhaps may be seeing 'money supply plus credit contraction' as a combined barometer for judging the balance of deflation / inflation pressures? My view is that it is only the money supply that will determine inflation in the longer term, and that plays a big part in setting and justifying my time frame for holding gold. Short term the drying up of credit is surely a major factor behind the deflationary forces in the 'fact' list I constructed, and so I have some sympathy with your views over that time frame. But even having said that, I think the short term inflationary pressures will outweight the deflationary ones (and I doubt we'll ever agree on that - but at least we'll see who's right over the next year or so).

 

Finally, let me be clear that all my recent discussion points have been about inflation vs deflation. What inflation will do to the gold price is a separate question! My view is that the distorted inflation statistics will blind most people to real inflation rates, and so not result in as much gold buying as there would otherwise have been. But it will become a significant driver of golds price if it starts to get obviously out of control (which it may). Plus, the twin of inflation will be a falling dollar ...IF the PPT don't manage to keep manipulating it up of course (and I don't think they can do that indefinately). That's actually what I suspect will provide the biggest push up for gold prices. Thirdly there's good old fashioned panick! Gold really took off last August when the credit crunch became apparent to everyone. I can't imagine us getting to a point 5-10 years away where everything is ticking along nicely again without some additional intermediate period(s) of major generalised economic fear (many black swans imaginable, plus panick will result if/when inflation goes sky high or the dollar tanks), and that will also boost golds price. And finally - just to be clear - other than a panick component I don't yet agree that deflation would be good for golds price (but I don't care anyway as I don't think there will be much or any deflation)

 

So on a balance of likelihood calculation, I see many reasons to hold gold.

 

And I was pleased to see magpie's statement:

"Stagflation, biflation very likely. Hyperinflation less so, although if there is a sufficiently awful economic collapse I wouldn't rule it out"

which is as good an agreement between us as I could have hoped to achieve

[marmite]

Hold on to your hats guys, have you seen those unemployment figures, especially the revisions

[mattyboy]

Hold on to your hats guys, have you seen those unemployment figures, especially the revisions

 

small point but worth mentioning just before I hit the hay - gold is now back above $1000AUD. Good night all!

[Magpie]

bigtbigt in the top quote, which you were responding to, is presumably referring to the money supply.

 

"Wealth destruction" (I suppose by that you mean a drop in the price of some asset?) and writedowns do not involve the destruction of money and do not therefore reduce the money supply.

 

You could do your point of view a favour by not confounding different things. The lack of reasonable precision makes your posts seem vague and meandering, and brings your position into doubt for that reason alone.

 

I'm not trying to flame you, but I think you do yourself a disfavour.

 

There's two points here.

 

I) I'm not as narrowly focused on the money supply as some, since I believe there can be significant deflationary pressure even within a situation where the money supply is growing. This is because the overall amount of money may not be shrinking, but the flows are having to go into banks to rebuild balance sheets. So for instance, businesses and individuals pay more of their money in debt servicing rather than into the economy, the banks don't lend that interest back out as they are rebuilding balance sheets. Money supply doesn't fall but the effect is deflationary.

 

2) Secondly, some of the effects of what I refer to as wealth destruction take a long time to show up. Assets lose value and become hard to sell or unsaleable. Their value is still listed on balance sheets (including banks') but they can no longer be used to generate money and credit and sooner or later will have to be written down. Another angle on this is the huge amount of bad debt in the system. A lot of the money out there will not be repaid. At this stage banks haven't written it all off, but it is doomed to be written off because of the destruction of wealth in businesses and assets. All of this tightens credit conditions now without making money supply fall.

 

The proof will be in the pudding of course, but remember that my main point in this thread was that the central bank money that was being referred to as massively inflationary is far less so than pictured, since it is merely rebuilding banks' ravaged balance sheets as they are forced to deleverage. No-one has addressed that point, you've just found different ways to argue that there are still inflationary pressures - I happily acknowledge those other inflationary pressures, such as the money reservoirs abroad. I just want to assert that the inflationary role of the CB money propping up banks is being vastly overstated.

 

[bitbigt]

Hold on to your hats guys, have you seen those unemployment figures, especially the revisions

*AUG UNEMPLOYMENT RATE: 6.1% V 5.7%e

- No Revision to prior 5.7%

- Rate is the highest since September of 2003

- note: unrounded Employment was 6.055%

 

[bitbigt]

...my main point in this thread was that the central bank money that was being referred to as massively inflationary is far less so than pictured, since it is merely rebuilding banks' ravaged balance sheets as they are forced to deleverage. No-one has addressed that point, you've just found different ways to argue that there are still inflationary pressures - I happily acknowledge those other inflationary pressures, such as the money reservoirs abroad. I just want to assert that the inflationary role of the CB money propping up banks is being vastly overstated.

"No-one has addressed that point" - I certainly have not 'addressed it', because I largely agree with you!

 

But its not as extreme as you imply, and its just one part of the overall picture.

 

What I've tried to do is fill in the complete picture, and address the all important question of time frames in that.

 

[Magpie]

"No-one has addressed that point" - I certainly have not 'addressed it', because I largely agree with you!

 

But its not as extreme as you imply, and its just one part of the overall picture.

 

What I've tried to do is fill in the complete picture, and address the all important question of time frames in that.

 

True enough. It will be interesting to see. Bill Gross's quote today implied a tsunami of deleveraging, which might mean a deflationary crash or it might mean hyperinflation.

 

A lot of it depends on how the central banks and institutions manage to drag out the deleveraging, which is a time issue.

 

[ziknik]

...

The proof will be in the pudding of course, but remember that my main point in this thread was that the central bank money that was being referred to as massively inflationary is far less so than pictured, since it is merely rebuilding banks' ravaged balance sheets as they are forced to deleverage. No-one has addressed that point, you've just found different ways to argue that there are still inflationary pressures - I happily acknowledge those other inflationary pressures, such as the money reservoirs abroad. I just want to assert that the inflationary role of the CB money propping up banks is being vastly overstated.

 

G0ldfinger addressed that point above and you said, “That's a decent statement of the inflationary argument…….”

 

http://www.greenenergyinvestors.com/index....ost&p=56916

[rgleeson]

There's two points here.

 

I) I'm not as narrowly focused on the money supply as some, since I believe there can be significant deflationary pressure even within a situation where the money supply is growing. This is because the overall amount of money may not be shrinking, but the flows are having to go into banks to rebuild balance sheets. So for instance, businesses and individuals pay more of their money in debt servicing rather than into the economy, the banks don't lend that interest back out as they are rebuilding balance sheets. Money supply doesn't fall but the effect is deflationary.

 

2) Secondly, some of the effects of what I refer to as wealth destruction take a long time to show up. Assets lose value and become hard to sell or unsaleable. Their value is still listed on balance sheets (including banks') but they can no longer be used to generate money and credit and sooner or later will have to be written down. Another angle on this is the huge amount of bad debt in the system. A lot of the money out there will not be repaid. At this stage banks haven't written it all off, but it is doomed to be written off because of the destruction of wealth in businesses and assets. All of this tightens credit conditions now without making money supply fall.

 

The proof will be in the pudding of course, but remember that my main point in this thread was that the central bank money that was being referred to as massively inflationary is far less so than pictured, since it is merely rebuilding banks' ravaged balance sheets as they are forced to deleverage. No-one has addressed that point, you've just found different ways to argue that there are still inflationary pressures - I happily acknowledge those other inflationary pressures, such as the money reservoirs abroad. I just want to assert that the inflationary role of the CB money propping up banks is being vastly overstated.

 

 

Bank lending is inflationary.

 

Debt payment is deflationary.

 

Default = no change (i assume)

 

When we talk about people hunkering down and paying back debts, that sure sounds deflationary... and if populations were able to pay back debts tomorrow through some miracle, then I would feel more confident siding with this arguement. However, the banks are in problems because such a large proportion of people, companies and other banks have v. large & long term debt which cannot be paid back quickly, or perhaps at all. So does the deflationary actions of the people paying back long term debt in tiny increments outwiegh the inflationary support of defaults????

 

 

 

 

 

[rgleeson]

Perhaps it does in the case of hedge funds unwinding and paying back their loans...

[ziknik]

Bank lending is inflationary.

 

Debt payment is deflationary.

 

Default = no change (i assume)

...

 

 

Default is more deflationary because the bank must re-pay the loan on their balance sheet out of their profits/capital

[rgleeson]

And if through weight of default they collapse or obtain capital from a central bank?

[bitbigt]

why did the PoG and PoS just do what they just did this last hour?

[wrongmove]

why did the PoG and PoS just do what they just did this last hour?

 

US employment numbers worse that expected.

 

 

[bitbigt]

Bank lending is inflationary.

Debt payment is deflationary.

Default = no change (i assume)

 

Any and all lending creates new money (its being borrowed from the future)

Any and all forms of loan termination (paying it back or defaulting on it) destroys that money (returns it to the future)

 

So these things (loans, paybacks, defaults) are affecting Money Supply.

 

Long term inflation is determined only by Money Supply, but short term a range of other factors can exert inflationary and deflationary pressures

 

Unless you have a clear understanding and accurate data regarding all of those 'other factors', then it is impossible to know what level of inflation or deflation will occur over a specific time frame of interest.

 

I think the lack of a clear understanding and accurate data regarding all those 'other factors' may explain why we've got so many different expectations of inflation/deflation over the next year or two. But that's not so surprising - even the CBs aren't being certain with their predictions. Indeed, I note merv has gone from being quite certain that inflation would rise to perhaps 4% or more and then fall later in 2008, to it staying above 5% well into 2009 with cautious optimism that it will then fall to acceptable levels. And these people are being advised by the same experts that 2 years ago said the UK would definitely not go into a period of recession or stagflation.

 

spin, lies, ignorance, inexperience, wishful thinking ...go figure!

[hotairmail]

FT article re demand surge:

 

http://www.ft.com/cms/s/0/89cfe296-7aba-11...0077b07658.html

 

Gold demand in India is booming as retail consumers in the yellow metal’s biggest importer return to the market after a 20 per cent fall in the price of bullion.

 

The arrival of the festival season in India – when it is traditional to buy the precious metal – is helping demand rebound sharply after a lacklustre start to the year, but traders said a similar trend was emerging in Turkey and Abu Dhabi, supported by the fall in prices.

 

The surge, after global retail demand fell 18 per cent in the first six months of 2008, is helping to sustain gold prices at about $800 an ounce in spite of the strength of the dollar, which traditionally hurts precious metal prices.

 

Traders said that bullion imports in Abu Dhabi – a key Middle East gold hub – surged 300 per cent in August compared with the same month last year. Turkey saw the highest ever monthly imports last month, while the past five weeks have seen the busiest gold demand from India in 20 years.

 

Ashok Minawala, chairman of All India Gems and Jewellery Trade Federation, a trade body in Mumbai, says he has witnessed a “tremendous” increase in consumption.

 

“The buying period usually starts in August and September, for the festival of Divali in October, but this has been unprecedented,” Mr Minawala says.

 

UBS, one of the largest gold exporters to India, says it has seen a spike in sales. John Reade, UBS metals strategist, says that the near-absence of jewellery demand in India between August 2007 and July left the local market largely de-stocked, “hence the tremendous pick-up in demand over the past five weeks”.

 

As a result, prices in India have moved up to $5 above London quotes.

 

etc

[bitbigt]

QUOTE (bigtbigt @ Sep 5 2008, 02:59 PM)

"why did the PoG and PoS just do what they just did this last hour?"

 

QUOTE (wrongmove @ Sep 5 2008, 03:00 PM)

"US employment numbers worse that expected."

 

Eeerrrr... OK??

 

You're probably right. But I'd have thought that in most peoples minds bad employment => implied recession => implied deflation => drop in gold price

 

Perhaps the reaction is instead therefore one of growing panick (as I spkoe of a few posts back). If so great! People are getting nervous and likley to be increasingly easily pannicked. Good time for a black swan as far as gold bulls are concerned.

 

This marks a very clear divergence from price of oil!!!