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Gold

Discussion in 'Sports and News' started by The Big Ragu, Sep 9, 2009.

  1. The Big Ragu

    The Big Ragu Moderator Staff Member

    Short version of a post I just lost. Gold hit an all-time high of $1,045 an ounce today. (When I started this thread a few weeks ago, it had crossed the $1,000 threshold. The fiscal and monetary mess the U.S. has created is weakening the dollar to very low levels and the inflation fears continue to drive investors to gold.

    Today there was a new catalyst, something else I have posted about here. As the dollar has weakened, the rest of the world -- forced to trade in dollars, because it is the global currency, and countries that haven't monetized ridiculous amounts of debt the way we have (Russia and China, which are back to growing and without debt) that have dollar holdings are getting slaughtered. So there have been calls all year for a new global currency to replace the dollar.

    The problem for us is that the fact that we are the global currency has propped up the dollar and it has been the major factor that has allowed us to monetize so much debt without the currency losing even more value than it has. If that changes, we are screwed. We screwed ourselves--no one wanted to abandon the dollar as the global currency, until our behavior ruined the dollar's value.

    There was a report in The Independent (UK newspaper) today that the Saudis have been secretly scheming with the Chinese, Russians, French and Japanese to come up with a new world currency or a basket of currencies to replace the dollar as the currency oil is traded in. The denials from those countries have been so plastic that it is a certainty the story is factual.

    My guess is, even if they are serious, it would take them years to get it together and actually agree on a new central bank for whatever currency they come up with. But this is everything I have been talking about on various threads. The dollar is weakening to scary low levels despite these overtures and if it gets abandoned as the global currency, it will destroy the value of the dollar and spur even worse inflation than I have been talking in the U.S. If that happens, we have no one to blame but ourselves. Our currency was given a preferable position in the world and we squandered it by monetizing more debt than we should have. The fact that everyone trades in dollars props up our currency and is a major factor that has allowed us to put ourselves in so much debt. We took it too far. Take away the gift advantage we have, and our credit worthiness takes a hit, and the amount of debt we have been messing around with will take treasuries from AAA gold standard investments to an investment that gets a rating that reflects risk in investing in the U.S.

    Here is the Independent story:
    http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

    Here is a video report on Al Jazeera, of all places, that talks about the Saudi maneuvering and what the implications would be for the U.S.:


    And here are some of the stories about the new high in the gold price. It's been a good place to have had money, and may continue to be, but the things making the price go up spell horrible and unprecedented news for the U.S. as the dollar continues to weaken, inflation becomes a real concern and the economy remains stagnant. Stagflation can prove to be an impossible death spiral to escape.

    http://www.forbes.com/2009/10/06/briefing-americas-afternoon-markets-commodities-gold.html
    http://www.bloomberg.com/apps/news?pid=20601091&sid=afn0rKDXu3Hw
     
  2. slytiger

    slytiger Member

    TBR do you read Barry Rithotlz's blog the Big Picture? He had a sharp post on today discussing the price of Gold

    http://www.ritholtz.com/blog/2009/10/gold-market-report/
     
  3. The Big Ragu

    The Big Ragu Moderator Staff Member

    Sly, He is right. It's all about the dollar. If the dollar continues to weaken, gold can and will go much higher than this. If the report about those countries getting together to find an alternative currency to trade oil in actually leads to some action, it will be disastrous for the dollar, and inflation will be a sure thing. At that point, overexuberance or not, the factors driving demand for gold will be fundamentally sound. This is also the time of year that gold typically performs well. Consumer demand ticks up. There is a holiday in India, in which gold presents are given, and the Christmas season in the Western world gives the spot market a boost. This doesn't feel like 1980. The U.S. wasn't monetizing debt at this rate in 1980 and the rest of the world wasn't grumbling about abandoning the dollar. You can't look at price moves in a vacuum and make reasonable comparisons like that. The fundamentals are completely different. The price of gold may come down, but right now there is no denying that people are concerned about a weakening dollar, the world fears about the dollar and the prospect of inflation. If we somehow avoid inflation brought on by the the debt our government has been monetizing, then yeah, this price is heading too high. But there has been nothing signaling that yet.
     
  4. Football_Bat

    Football_Bat Well-Known Member

    The inflation won't hit until we start rising out of the bottom. Right now there is virtually nothing in the marketplace to drive prices up. Oil went up on the world market and yet, gas prices have been dropping. The housing market is still flooded with foreclosures. Oversupply and lack of demand account for both.

    Now once we start a strong recovery, it's gonna be nasty. I can see the 1970s happening again.
     
  5. The Big Ragu

    The Big Ragu Moderator Staff Member

    Unfortunately, the inflation script doesn't have to play out on just a recovery. If too many countries have cheapened the value of their currencies with debt and monetary policy that keeps interest rates at 0, we could see a muted recovery in the U.S., and still get hammered by inflation. That would look something like the 1970s, but the stagflation of the 1970s.

    As I type this, gold is hitting a new all-time high of $1,060 an ounce (I think it is because people see what has happened and the market is getting flooded by clueless people chasing the momentum, which drives the price too high too soon. ... but the price moved in the first place for fundamental reasons).

    At the same time, the dollar has weakened even further today. Unemployment is near 10 percent, so the Fed being what it is, is going to keep monetary policy loose despite a weak dollar.

    This is now political. We have accumulated a large amount of debt and this administration is committed to compiling even more debt. The only way they can do that is to try to inflate away the debt by devaluing the dollar.

    This actually seems to be their plan, as disastrous as it will be in the long term. The stated policy is always a strong dollar, but what they are actually doing is trying to devalue the dollar slowly. The result is that rest of the world will catch up to us a bit in terms of standard of living and wealth. The Fed will end up chasing inflation, brought on by the sinking dollar. But it won't be able to raise rates too high too soon, because it won't be able to risk stopping a recovery--one that is probably going to be weak and take a while. More capital is going to move abroad (and into hard commodities) and that is going to hurt economic growth in the U.S. and keep unemployment in the U.S. relatively high for a while. That is what a weak dollar does--it makes money flow elsewhere to the detriment of economic growth here. But that is the course they seem committed to.
     
  6. cranberry

    cranberry Well-Known Member

    It seems like there's a lot of global pressure for the U.S. to take steps to strengthen the dollar. Even Bernanke can feel it at this point. The Fed will have to reign it in pretty soon, which will slow the recovery, but that might be best medicine longterm. We're probably looking at a "W" recovery.

    Ragu, won't gold drop like a rock when interest rates begin to go up?
     
  7. The Big Ragu

    The Big Ragu Moderator Staff Member

    cran, Interest rates alone won't have the effect. The higher interest rates have to stem any inflation they are designed to curb.

    They have put themselves in a no-win situation. They are not raising rates anytime soon. They can't. Between TARP (and the resulting $2 trillion sitting on the Fed's balance sheet) and the $12 trillion in debt our country as a whole has racked up, the administration needs a friendly FED to inflate away the debt as much as possible. This is what happens when you put yourself into that kind of debt situation and the central bank is a politicized institution.

    Plus, it is Central Banking 101 (and as you know, my problems with how shortsighted central bankers are); right now the political problem is high unemployment. As long as the unemployment rate is 10 percent, they will keep monetary policy loose and not think beyond that. They won't worry about the effects until it is too late. By then, the dollar will totally be in the crapper (they know this, and their policy is to devalue it anyhow, because decisions are made based on what is politically expedient today) and in addition to possible inflation, capital will be heading out of the country (because of the weak dollar), which is bad for economic activity here and will have the effect they want the least -- our actions if continued actually have the potential to stunt what would have been a natural recovery by sending money that could stimulate growth elsewhere.

    My money has really been where my mouth is on this. Honest. I really did anticipate all this from the minute Bush announced the first financial bailouts. Then when I saw that huge spending bill, and that 10-year debt-ridden budget Obama put out there, I held steady. I have been sitting on gold (as well trading on dips) since $734 an ounce. Right now, I think the market is getting ahead of itself. I wouldn't be surprised if it runs away a bit, corrects (probably sometime in the next few weeks) and then finds support at around $1,050 an ounce. Beyond that, it really depends on what happens with the dollar. It really is all about the dollar. If they keep doing things that devalue it, which I suspect they will (including loose monetary policy; and rates are not going anywhere anytime soon), gold should benefit and could benefit quite a bit. If we somehow find a way to create dollar stability, gold will trade sideways or decline in value. They'd have to actually have the balls to face a mob with pitchforks (for doing the right thing) for that to happen.
     
  8. cranberry

    cranberry Well-Known Member

    I don't think monetary policy is going to stay as loose as you seem to think it will. It's a delicate balancing act, of course, and high unemployment makes it even trickier, but the only smart thing to do now is to begin pushing interest rates higher even though it will take some air out of the recovery and, eventually, probably another (milder) recession. But the weakening of the dollar isn't going unnoticed.
     
  9. The Big Ragu

    The Big Ragu Moderator Staff Member

  10. cranberry

    cranberry Well-Known Member

    Too cynical for me but that's pretty much what I'd expect from a guy like Malpass. I guess we'll see soon enough how it plays out. Like I said, it's delicate balancing act. If we can get a strong jobs program, gradually push up interest rates and strengthen the dollar, maybe we've seen the worst of it. Tax revenues will increase with growth.
     
  11. The Big Ragu

    The Big Ragu Moderator Staff Member

    http://www.financialpost.com/most-popular/story.html?id=2176782

    All-time high today. ... just passed $1,080 an ounce on the IMF selling a boatload (200 tons) of its reserves to the Indian central bank. The Indians are still claiming they like the dollar, even though they are willing to stock up on gold at such a high price.

    The IMF is supposedly looking to sell another 200 metric tons and there are rumors the Chinese might be ready to buy, even with the run up in price.

    What is wild is that the dollar is relatively strong right now. Which means this has taken on a life of its own. A strong dollar should make gold less attractive, but demand is really high -- you have the central banks trying to boost their reserves because they don't trust the dollar due to our debt, and at the same time you have the gold producers trying to buy back gold to pay off their hedges. And you have skittish investors who see low interest rates and the U.S. racking up debt, and still have future inflation on the brain.

    Interesting times. When I started this thread less than two months ago, the commodity was trying to find support at $1,000 an ounce. $1,100 is a certainty now.
     
  12. The Big Ragu

    The Big Ragu Moderator Staff Member

    I know no one has cared much about this thread. But gold hit $1,170 an ounce this morning (to put it in perspective, I started buying it personally a little more than a year ago at $734 an ounce; this is an all-time price high, although inflation-adjusted it isn't near where it was in the late 1970s yet).

    The dollar is continuing its plummet, today (bad news for the US and it's small debt problem).

    There are a whole bunch of related interesting phenomenon occurring. One reason a lot of money is flowing into gold is that our interest rate policy is beating the heck out of treasuries. The three-month T-bill is yielding just .01 percent right now. It actually traded at a negative interest rate last week, which meant that banks had to pay the government to hold their money. I am not sure that has ever occurred. It's ass backward.

    It is also amusing watching the Fed pull their hair out right now. They have interest rates artificially being kept near 0 because unemployment is so high. Even with that interest rate policy, the unemployment rate has been rising, well into double digits, and who knows where the true number is (not their scrubbed number). Using everything they know (which isn't as much as they think, unfortunately), such low rates should stimulate lending and investment, but that has not been the case. So their policy is having no effect on what it is intended to, but it is having the effect of slaughtering the U.S. dollar. And I still contend you can't embark on this kind of dangerous policy without sparking the kind of inflation that you don't realize you have sparked until it is running away from you and you can't do anything about it. I actually wonder if they are doing it on purpose, for politicized reasons. They know that our lawmakers have accumulated a ridiculous amount of debt. When you can't pay your debt, one way to deal with it is to inflate the currency, which in effect reduces the debt (but of course creates much bigger problems that get spread out across the population).

    But because the unemployment rate is the biggest political concern, the Fed has signaled it is going to continue doing what they have been doing. In a speech last week, the St. Louis Fed Chairman strongly hinted that the Fed may not raise rates until 2012. The battering the dollar will take if that is the case, makes you wonder where the price of gold could head. I have read stuff in the last week with talk of it now being a bubble, because the price rise ($35 to $40 dollars in the last week alone) is not being driven by demand. And that may be true. But if government bond yields remain so low (a negative yield on a short-term treasury?!?!?!?) that kind of investment flow makes sense.
     
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