Friday, November 27, 2009

Amazing Recoveries

As I write this, gold's almost at $1180. The three major averages have partially shrugged off their 2+% drops.

So, by the looks of things now, the early morning plummet was only a panic-induced spill creating a buying opportunity.

We can still hope...

The Financial Post's Trading Desk has a short list of gold stocks that would be undervalued, at today's trading prices, if gold goes to $1500. It got me wondering if it was placed in the hopper last night, and mechanically posted at its post time of 8:50 AM ET.

That kind of thinking, I have to say, is speculative. Although I think it likely, gold isn't destined to go to $1500. There are lots of fully-valued industrial stocks that would be undervalued at today's prices if we get 3-4% economic growth in 2010.

However, the post does show, in its own way, that "$1500 is the new $1200."

A Gold Bug That's Still Undaunted

Adam over at Gold Versus Paper has this to say about this morning's gold plummet:
This is a normal and healthy correction that has begun in Gold. If you haven't been here before, Gold corrections are not for the faint of heart. This one's starting out sharp and nasty. I think the stock bear has awoken from his/her slumber. Gold is different than the stock market. Gold is not just an anti-dollar play. Gold is a safe currency that yields the exact same as U.S. T-Bills (i.e. zero) but without the built-in depreciation risk.
The rest of his post looks at corrections in late '05 and late '07, and estimates that the current drop could push gold down to around $1050 or so and take 1-2 weeks. This estimate is based upon the assumption that this drop will resemble the two previous corrections.

Gold skeptic shows good timing

Jane Foley, of Reuters U.K., averred that Gold rally could start to tire. Her piece was web-published yesterday afternoon, and it starts off with a recent gold-skeptic talking point:
Spot gold prices are up over 40 percent year on year. Yet, according to the World Gold Council, demand for gold in the third quarter of 2009, dropped by 34 percent year on year. Of course, demand in the third quarter of 2008 was exceptionally high due to the financial crisis. As well, relative to the third quarter average of the five years to 2007, demand for gold in Q3 2009 was down 4 percent.
Her timing proved to be good: gold took a plummet early this morning.

Treasury Securities Still Have That Allure...

...when a debt crisis threatens. The recent Dubai rescheduling of its Dubai World debt has pushed stock futures down about 2%, and the price of Treasury securities and the U.S. dollar up. The fear that Dubai might reschedule [default on] its sovereign debt is helping push down everything except for T-securities and the greenback.

"Everything" includes gold. The price of gold went into a veritiable freefall early this morning, plunging more than $60/oz before the bottom kicked in. It can indeed be said that gold was overbought earlier this week.

But, subsequent to the plummet, gold's recovered to above $1160. The midnight to 3 AM ET drop - yes, it was that fast - proved to have a bit of panic to it. The gold-stocks link is still there, as Wall Street will find out shortly.

Thursday, November 26, 2009

Happy Thanksgiving To Americans

Try not to eat too much...otherwise, people will think you're poor :)

Gold Bull Proclaims Gold Will Reach "Mind-Boggling Levels"

That gold bull is Arnold Bock, who came up with six bullish factors for gold: currency traders pushing down the U.S. dollar; the influence of the carry trade; declines in mine production meeting expanded demand; the greenback becoming impugned as a safe haven; the U.S. budget deficit encouraging a rise in the U.S. money supply; an increase in investment demand.

Near the end is a clear statement of a vital plank in the goldbug mindset:
Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election.

Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch. If the politician in office today is in office after the next election, a shrug of the shoulder indicates that worries of that kind can be dismissed for now to be dealt with later.

So major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. Aren’t those elected officials doing what we elected them to do? It certainly looks as if they are.

More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge.

Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.

What all this means is that there is no discipline or inclination to do anything of real value in fixing the core economic and financial problems....
The full article, with an explanation for each factor, is here.

The only quarrel I have with his list is his claim that "[c]urrency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants." The yen's performance during the days of the yen carry trade show that it is possible for the carry-trade borrowing currency to rise. Such rises tend to be sharp because carry traders scramble to cover their shorts in the currency. [Effectively, a carry trade borrow is a short sale of the currency being borrowed in. Smart carry traders hedge the short with forward or futures contracts, but not all do.]

The United States Is Not China, But...

...demand for gold is strong in the States as well. The Business Insider reports that the U.S. Mint has run out of 22-kt gold eagles.

Thankfully for gold buyers, used really is as good as new. Thankfully for the U.S. mint, there'll be a resumption of Eagle sales in mid-December.

This Time, It's The Central Bank Of Sri Lanka

As the Wall Street Journal Online reports, Sri Lanka's bought 10 metric tons of gold from the IMF.

212 sold, 191.3 to go.

This report goes into why the purchase was made: "Sri Lanka's reserves had fallen to dangerously low levels as security forces pushed their final offensive against separatist Tamil Tiger rebels." As for the reason why the Sri Lankan bank picked gold, I'm sure you can guess at it.

Chinese Demand For Gold Officially Encouraged By PRC Government

This article, written by gold bull Jeff Clark, points to new demand from China:
As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?...
The author has a point, even if his case is easy to laugh at as yet another "vast market in China" fantasy. The PRC government is mercantilistic, which means that it has assumed responsibility for its subjects' well-being. I don't see how this official exhortation can be shot down as a mere ploy. At the very least, it taps into Chinese resentment at the U.S. government devaluing away its massive obligations, much of which is held by "China."

The rest of the article is here: "Gold, silver investment frenzy sweeps China."

Gold skeptic acknowledges that goldbugs may be right this time

Said skeptic is Eric Reguly, who believes that gold is shifting from a mere commodity to a kind of money. His piece is entitled "This time, the gold bugs might be right." He goes from
Every few decades, maybe less often, gold seems to detach its shiny self from the greater economy and go berserk. Prices went vertical in the early 1860s (American Civil War) and again in the early 1930s (Depression). They're taking off again, this time in the absence of war or depression or a genuine crisis, like the end of Oprah's show.
Governments may try to inflate the debt away. If it doesn't work, they will have only two choices - service the debt or default. The chances of a default are very slim, of course. But note that the volume of credit default swaps linked to the United States, Japan and Britain, which measure the cost of insuring against bond defaults in those countries, has doubled in the past year.

Defaults, real or potential, are not kind to currencies. The rise in gold prices may be just getting started.
As the gold bubble continues to form, more and more skeptics are going to be joining the party. They'll be holding their noses like Mr. Reguly, but they'll be joining.

It was close...

As MarketWatch reports, gold made another record yesterday but has sunk so far today. As I write, gold's now $1183. $1200's still within reach, but it's proving to be elusive.

Interestingly, gold's still positively correclated with the stock market. 'Tisn't just gold that's down: so are U.S. stock futures. As long as that correlation holds up, I have to say that things look good for gold overall. The market still seems to be convinced that a falling greenback, and/or what else makes for a gold bull, is good for stocks (and vice-versa.)

Of course, the question remains: if that correlation be broken, then which market will suffer? Will gold sag, or will the stock market?

Wednesday, November 25, 2009

New book predicting collapse of U.S. dollar

The book is Aftershock: Protect yourself and profit in the next global financial meltdown, and it's by two analysts who predicted the subprime meltdown earlier. Reuters has a review of it here.

The authors predict:
...The euro will rise to about $2 over the next two to three years, before surging rapidly above $3, [according to] Wiedemer, whose risk assessment firm advises hedge funds and businesses.

At first, Treasuries will keep their safe haven status. A year or two of double-digit inflation and interest rates will then trigger a sell off in U.S. government bonds and batter stocks, says the book published by John Wiley & Sons.

This view is extreme even among those economists who expect the dollar to decline in coming years....

Extreme indeed. The greenback's being bashed an awful lot lately; given that the Euro's breached the $1.50 resistance level, that bashing makes some short-term sense. On the other hand, markets are notoriously refractory. Consider: if I can secure a foreign-exchange account that offers 3% overnight leverage, and if my timing is superb enough to win a gains cushion for the account, I can sit back and expect to make more than ten-and-a-half times my initial capital. [32% gain * 33.3-to-1 leverage.] That seems way too good to be true.

If the Euro rises above its previous record of $1.60 and stays there, we have more fuel for the emerging gold bubble.

A Short-Term Gold Skeptic: Pierre DuPlessis

Pierre DuPlessis of Investment Postcards is not a goldbug, but he could be pegged as a fellow traveler. (I remember his work being posted regularly at a now-defunct goldbug forum.) His latest Postcard contains a lengthy quote from one of the giants of the market-letter field, Richard Russell. Mr. Russell's in a bit of a quandrary over gold, as he seems to believe that gold's about to go into the speculative third stage of its bull market. In the third stage, which becomes increasingly momentum-driven, "overvalued" becomes less meaningful.

M. DuPlessis, however, is more skeptical. He thinks that gold is due for a pullback, which will create a buying opportunity.

Bill Bonner Shows Misgivings

Bill Bonner of the Daily Reckoning is an old-style goldbug, who was consistently bullish from about 2000. Gold's more than quadrupled in that time, which has led Mr. Bonner to profess a little angst. He doesn't say to quit gold, and indeed discloses that a sharp hedge-fund manager is now a gold bull. That manager, David Einhorn, made a mint shorting shaky U.S. banks in 2007.

I can't place Mr. Bonner as one of the durable gold bulls who fears a bubble, as he still is bullish - but his misgiving show how others of his stripe may shy away from gold due to its huge run-up.

Vietnam Jumps On The Gold Bandwagon

According to Reuters, "Vietnam grants quotas for 10 tonnes gold imports":
HANOI, Nov 25 (Reuters) - Vietnam's central bank has granted quotas for the import of 10 tonnes of gold since lifting an import ban earlier this month and 6.8 tonnes had already come in, state broadcaster VTV said on Wednesday....
And, as Vincent Fernando reports in the Business Insider, "Panicked Gold Buying Forces Vietnam To Devalue Currency":
...The dong has been under substantial pressure all year due to Vietnam's rapidly expanding trade deficit, which hit $8.7 billion during the first ten months of 2009. Inflation has also been picking up, hitting 4.35% in November.

Yet it appears that gold arbitrage may have been the straw that finally broke this currency's back:
NYT: The immediate reason for the dong’s weakness, traders say, is that demand for dollars has risen because the spread between gold prices in Vietnam and in foreign markets has widened. Vietnam lifted an 18-month old ban on gold imports Nov. 12 in a bid to curb panic buying that had sent the dong plummeting.
How long before we see a conspiracy theory floating around that casts goldbugs as the conspirators?

Brief History Of The Charge Card

Since debt-fueled fiat money expansion is germane to the gold bull, I'm including this brief timeline showing the history of the first charge card: Diner's Club. It's been webbed by the Globe and Mail.

Diner's Club, then being a charge card, required the holder to pay the balance at the end of the month. (So was the American Express card back in the days of old.) Frank McNamara invented the first charge card, but another fellow came up with the first credit card.

Mike Phillips got the idea when he was still with Bank of America. Originally known as the BankAmeriCard, it quickly became MasterCharge and now MasterCard. Through one of the market's ironies, the later entrant (Visa) became the dominant name.

Mr. Phillips actually "dropped out," and became a member of a hippie-type commune. Along with his buds, one of which sported the name "Jug O' Candles," he threw together the "Seven Laws of Money" in the 1970s. They're here on this Webpage.

Calls For $1500 Gold, From Two Different Strategists

The first once comes courtesy of John Embry, Chief Investment Strategist of Sprott Asset Management, calls for US$1500/oz by "'early next spring.'"

In and of itself, this forecast isn't that surprising because Sprott has long been associated with the goldbug world. More surprising, at least to me, was a report from Bank of America/Merrill Lynch with the same number (although with no specific timetable.) According to this report, available as a .pdf file, gold's in three stages of a bull run. The first stage was caused by the credit crisis, and the current (second) stage is being driven by greenback devaluation. The target for the second stage is $1200, which has almost been reached. The third stage, according to the report, will be driven by commodity gains resulting from global recovery. That stage should push gold up to $1500.

It looks like $1500 is becoming the new $1200. On a ratio basis, using $1180 gold as today's price, $1500 is as optimistic now as $1200 was when gold was at $944.

[h/t: I got the report from a download link on this FreeRepublic thread, which cites a goldbug-compatible phrase therein: "The point of fiat currencies is to debase them as needed."]

Gold Reaches Record High Again...

...and a report on it has reached the front page of Marketwatch again. This time, it's rumors that the central bank of India is going to buy more gold from the IMF:
FRANKFURT (MarketWatch) -- Gold futures climbed to a fresh record of $1,180 an ounce Wednesday, after a report that India is open to buying more gold from the International Monetary Fund drew even more investors into the bullion market.

The U.S. dollar fell against other major currencies, further boosting gold's appeal as a hedge against inflation.

Gold for December delivery rose to a fresh contract high of $1,180 an ounce in electronic trading on Globex. It was last up $10.70 at $1,176.50 an ounce.

"The move higher was boosted by fund names and good interest from [Tokyo Commodity Exchange] buyers after the market responded to reports that India is open to buying more gold from the IMF," said analysts at Action Economics....
Another report, from the Financial Chronicle, speculates that the Indian central bank may buy the remaining 201.3 tonnes of gold that the IMF is offering for sale.

'Tis the season, and the rally makes sense given that demand. However, I'm old-fashioned enough to remember when IMF sales brough trepidation to gold bugs and a drop in the price. Here's an early 2007 piece from noted goldbug Doug Casey making light of proposed IMF gold sales. No need for hand-holding now...

Update: The Wall Street Journal's MarketBeat blog ascribes last night's rise to "an increase in Australian interest [rates] next week," which caused the U.S. dollar to fall. The Indian central bank isn't mentioned in the post.

Tuesday, November 24, 2009

BNN's Mark Bunting Has Some Cautionary Words

Over at BNN's blog, Mark Bunting points out that gold is quite overbought right now and could well take a tumble. The Relative Strength index is at 83, well above the 70 that indicates overbought. For this reason, we could see a backtrack soon.

He adds this caveat, though:
I remember a Market Call guest telling me that a stock, or gold in this case, can sail along at overbought positions for several weeks before it eventually corrects.
He includes the now-widespread possibility of gold going back down to US$1000/oz, but also notes that the retreat from overbought could mean a decline to about $1120-30. He also mentions a similarity between gold's price now and oil's when it spiked to $147, but is too cautious to claim an outright similarity:
I’m not saying that’s about to happen to gold seeing the long-term environment for the precious metal is bullish due to a number of factors including a weakening U.S. dollar, central bank buying and other forces. But, simply based on the RSI and the shape of gold’s chart, bullion is likely to lose altitude at some point soon.
The entire post is here.

A bearish forecast

Marc Faber's conditional forecast of US$800-900 gold seems to have gone viral. Marketwatch has reported that a U.K. shop, Capital Economics, has forecast that gold will shoot down to below $1000 by the end of the year, and as low as $800 in 2010.

It wasn't that long ago that forecasts of $1200 gold were considered pie-in-the-sky. It was only a year ago that a forecast for $800 gold would have been bullish! Now, gold's just $30-40 below the 1200 point and a forecast of 800 is very bearish Even below 1000 is quite bearish.

This kind of flip-flop is characteristic of an incipient bubble. If Capital Economics proves to be right, the bubble's likely been euchred out. By my reading of the gold chart, the CapEc guys are gold bears. Should their forecast pan out, they'll probably follow up with an even lower target once gold recovers.

However, I don't think they'll be correct. If gold laughs off all such bearish forecasts, particularly short-term bearish forecasts by long-term gold bulls, then the stage will be set for a real gold bubble.

Update, and h/t: "Tyler Durden" of Zero Hedge has posted a Scribd copy of the forecast. It actually says below $1000 by the end of the year, and as low as $800 in 2010. I've changed the original link to Zero Hedge's psot.'s Michael Rozeff Says Gold's Not In A Bubble

He says so on the basis of his Zero Discount Value (ZDV) model, which assumes that gold will be remonetized. According to the ZDV model, gold should be selling at about US$7,725/oz: that would be the price if every dollar in the U.S. monetary base is backed by gold in the U.S. Treasury's hands. The divergence between the ZDV forecast and gold's current price is ascribed to "[t]he vagaries of the market."

Near the end of the article, he mentions central bank buying:
In the present situation, a tipping point seems to have been reached in which major players like India and China are moving away from dollars. Japan has not done this. Japan is still buying dollars. The momentum is shifting away from the dollar. Central banks have started to buy gold. There has been a turn in the tide. There is no tidal wave, although one could develop. Reversing the tide seems increasingly unlikely.

If you believe in the premise behind the ZDV model, or are just curious, Prof. Rozeff's explanation of it is worth a read.

Cold Water From WSJ's Market Beat

Matt Phillips of the Wall Street Journal's Market Beat blog points out something that's intended to cool hard-core goldbugs' hyperinflation ardor. If hyperinflation's around the corner, he notes, someone's forgotten to tell the bond market: the price of inflation-protected TIPS bonds gives an implied inflation forecast of 2.21%.

This point ties in with my own bubble hypothesis in this way: neo-goldbugs ascribe gold's bull market to the fall of the U.S. dollar and gold's utility as a crisis hedge. This double causation explains why gold's been marching up in a low-inflation environment. Add the likely New-Era story - which hasn't achieved general circulation (as of yet) - and you get a bubble which would be amplified by a return of inflation. For those who don't already know, my guess at the New-Era story is: a dethronement of the greenback as reserve currency, and its (at least partial) replacemrnt by gold. I've pegged it as a New-Era story because I don't think an all-out dethronement is that likely.

Aden Sisters Up Forecast Slightly

The Aden sisters are long-time goldbugs. Back in 1981 or so, after the 1970s gold bubble popped, they forecasted that gold would ratchet back up to US$5000/oz. In fact, gold never bettered its early-1980 peak of $850 until late 2007.

Nowadays, they're far more measured. They were one of the prognosticators who had a $1200 target for the yellow metal, a price that's been almost reached. Their latest report, as webbed by the Market Oracle, bumps up their $1200 target to a possible $1350.

HSBC Tells Goldbugs To Take A Hike

This item comes courtesy of the Business Insider's Joe Wiesenthal. HSBC Bank has told its safety-deposit customers to stop using their vaults to store gold.

It's made clear in the story that this decision was on a business basis - the vault space is being earmarked for institutional gold clients - but it touches on one of the hardcore goldbugs' bugaboos. As many know, President Roosevelt confiscated U.S. citizens' gold in 1933. There are more than a few goldbugs who think that the U.S. government will do so again. For curiosity's sake, here's a guide to protecting gold holdings from possible government confiscation.

(The author of it considers such a contingency to be "unlikely," by the way.)

A Measured Report On Gold

If you want to get the skinny on what moves gold, this report from Proactive Investors will get you up to speed. It's notable because of its neutral tone: it's not bearish, and the most bullish it gets is: "Some are predicting a short term dollar recovery which will pressure any further gains while elsewhere others have more bullish views for future gold prices, with some considering $1,200 gold in 2009 as a real possibility."

It's called "Gold Remains Poised above US$1,170 Amid Dollar Rebound And Central Bank Speculation."

Gold Doesn't Do Much, But Doesn't Fall

The gold price, after a U-shaped dip last night, has recovered to about US$1170/ounce. According to this Globe and Mail report, there's a fair bit of buying on dips - both real and planned. Including from Indians:
Gold's slight correction from record highs led to a pick-up in wholesale demand for the metal in major bullion consumer India, traders said.

Any further dips are likely to be met by strong buying, they added. “People are asking for $1,150, we have a few orders at that level,” said a dealer with a state-run bank in Mumbai.
The story ends with a forecast from Standard Chartered:
“The investment case for gold has become increasingly compelling, with central bank buying and a structural change in interest in gold as an investment at the retail level,” said Standard Chartered in a note.

The bank said although pockets of dollar strength would likely check gold's progress in the first half of next year, by the fourth quarter it is set to average $1,300 an ounce.
Yep, the old $1200 forecast has become too conservative...

Monday, November 23, 2009

Straw Poll From Goldman Sachs

Jon D. Markman over at Money Morning believes much the same as I do: gold is on the cusp of a bubble, but hasn't taken off into the ozone yet. In his article "Don’t Miss Out on the Looming Gold Bubble," he passes on this straw poll of hedge-fund managers done by Goldman, Sachs:
On Wednesday night, a friend in the hedge fund business told me about a dinner hosted by Goldman Sachs Group Inc. (NYSE: GS) in London last week where the subject of gold’s value came up. Goldman asked the room full of 15 or so major hedge fund managers to mark down on a piece of paper the price at which they thought gold would trade over the next two years. The consensus answer was an astonishing $4,000 per ounce.
Astonishing indeed. These people aren't gold-stock punters, they're hedge-fund managers. If they see that kind of a rise - more than triple today's already-elevated price - then they likely smell bubble too. To keep the memory green, it was only about six months ago that a forecast of $1,200 by the end of this year was considered daring.


Money Morning is in the gold-bull camp. Also published there is "7 Reasons Gold Will Surpass $2,500 - And Inflation Isn’t One of Them." Those reasons are: gold-mine production is going down; huge deposits are getting harder to find; investment demand keeps climbing; so is central-bank demand; there's a campaign for gold-backed currencies developing; Asian demand for gold has leapt up; and, gold is in a continuing secular bull market.

Bill Fleckensten Debunks End-Of-Bubble Forecasts

He makes some good points in his article, "How much longer can gold rise?" Mr. Fleckenstein's tongue-in-cheek five-point list of what the gold market'll be like when the bubble tops is more truthful than it may sound.

For the long-gold trade to really become too crowded, certain events will need to occur:
  1. Goldman Sachs (GS, news, msgs) will have had "bus tours" to a bunch of mines, like the tours it and other companies have arranged for different industries, particularly technology.

  2. The public will have to be involved in a major way, and we'll see ads on Bubblevision encouraging people to buy gold instead of prodding them to sell their jewelry, as is the case these days.

  3. Banks will need to find a way to put money into gold -- because no modern mania has ever ended without the banks finding a way to lose money in it.

  4. We will most likely need to see a frenzy of mergers and acquisitions, and a leveraged buyout or two.

  5. Last, BusinessWeek will have to put gold on the cover, telling us how it's the wave of the future, or some variation of that theme.

He's right, particularly about the media exposure. Also, gold will be featured on the regular MSM [SRM for some]. Back in 1981, I bought a 1/10 oz. gold Krugerrand with some of my paper-route money because gold had been mentioned in the regular Canadian media. The line-up was the longest I had seen for a bank or trust company.

So, I can add a sixth item: huge line-ups at gold retailers, particularly banks and trust companies that sell gold, with at least one myopic kid waiting to buy. Those line-ups are noticeable enough to make the non-business media think gold is newsworthy.

[Note: I got this item courtesy of the Free Republic. The post thread's here, with a comment I left. It's #13.]

Thoughtful Piece Discussing The Gold-Bubble Question

It's by Robert Blumen, and it's been webbed over at After pointing out that the same people who are saying "gold bubble" missed the ones that popped last year, he says that it's a matter of one's model. Since a bubble means that an asset is way above its fair value, the determination of said value is crucial.

He ends, however, with this call: "If I am correct, then the next phase of monetary history would almost certainly involve an informal or formal recognition of gold as a monetary reserve asset by central banks. Gold would then be revalued at a much higher level of purchasing power relative to recent history."

My own "model" is based upon market psychology, not fundamental value. As Mr. Blumen himself pointed out, it may be impossible to determine a proper fundamental value for gold because it's not used as money anymore. The main driver for its fundamental value is demand, which is unmeasurable except for past buys. There's no income derived from gold that can be used as a gauge.

Market psychology is more pragmatic: an asset or asset class is in a bubble because it acts like it's in a bubble. Central to my own model is a New-Era story making gold look undervalued despite its spectacular rise. In gold's case the hoped-for "New Era" features the U.S. dollar being dethroned as the world's reserve currency and being replaced (at least partially) by gold at the central-bank level. To me, it counts as a New Era story because the greenback is too ensconced as a reserve currency, and the United States itself is too ensconced as the world's only superpower and major market.

I should also make clear that I believe that gold's at the beginning of a bubble, not the end of one. The New-Era story hasn't kicked in, and gold's only beginning to move into the mainstream. (When an normally alternate investment moves into the mainstream, like gold did in the late 1970s, it's a good sign that a bubble's forming. Alternate investments typically stay alternate.) My own reasoning is explained here.

MarketWatch Article Counsels Caution, But...

...still has an embedded video featuring Frank Holmes, CEO of U.S. Global Investors, saying that gold could go to US$2,300/oz. The article says that the biggest risk to the gold bull is the Federal Reserve unwinding the excess-reserve swelling on its balance sheet before those reserves are lent on, causing a huge increase in the money supply. It's a good discussion of the future-inflation argument, and the deficits-sinking-the-greenback argument. The usual counterexample, Japan, is brought in.

Interestingly, there are two titles as of the time of this post. The most-read link, the URL and the title bar have "Gold fears hinge on unfettered Fed, U.S. spending" The title to the article itself, evidently a re-title, is "Deficits and loose money should lead to higher gold." It's by Laura Mandaro.

Also worth looking at is the sidebar-linked special report, "The New Gold Bugs." One piece in the series, "Are new hedge fund gold bugs getting in at the top?," points out that sentiment is worryingly bullish right now, especially considering that bullion's gone up more than four times since 2001. If I'm right about the gold bubble, the gold market will either shrug those concerns off or else dip down slightly and resume the upward climb.

Another article in the series profiles mainstream insitutional investors, such as Paul Tudor Jones and John Paulson, plowing into gold: "New gold bugs making gold investments mainstream."

Sunday, November 22, 2009

Welcome To Enter Stage Right Readers

If you came from the gold article, you can see that I'm following through on it...

Jonathan Davis Says Not Yet Time For Gold Bubble

Jonathan Davis of the Independent Investor blog opines that gold isn't in a bubble as of yet, because it's not that widely owned:
While the seeds of a future bubble in gold are being sown, and the gold price will remain volatile, if only to relieve momentum-chasers of some of their money, on most measures we are a long way away from any kind of climax. Despite growing media attention, gold remains surprisingly underowned by private investors. More people talk about it than actually own it in volume. Every trend-following speculator who is buying gold today for bandwagon reasons is, I suspect, comfortably matched by seasoned wealthy and professional investors accumulating gold for traditional defensive reasons, not to mention central banks desperate to reduce their dollar dependency.
This point jibes with a now-notorious video by Mark Dice:

First Post

As the title of this blog indicates, I believe that gold is now entering a bubble. Gold bullion's been in a bull market since 2001, and has gone up quite a bit. Until the financial crisis, this bull market has taken place in a background of rising inflation.

Last year, gold took a pounding like almost all other investment classes - but, unlike all other investment classes save one, it ended with a gain for the calendar year 2008. The other class was Treasury securities, or comparable government bonds.

As of now, gold is the only asset class to sport a gain for the calendar year 2008 and a large gain for 2009 year-to-date. The approximately 27% gain in gold YTD has been in a low-inflation environment.

Central to my belief in an emerging gold bubble is a "New Era" assumption. Gold's been going up in large part because the U.S. dollar has been falling, but it's been rising in other currencies as well. Central banks are buying gold too; the Peoples' Republic of China government has been urging Chinese people to buy gold. The "New Era" assumption, I believe, will claim that the U.S. dollar is losing its status as a world reserve currency, and that gold will (at least partially) fill the gap.

I also believe that inflation is coming back. Since the crisis, several central banks have been pumping new money into the respective economies. It's only a matter of time before this money-pumping translates into higher prices - particularly, in the United States. Despite excess reserves piling up and the money multiplier plummeting, M1 money supply growth in the United States has been at double-digit levels for almost a year now. (M2 has grown more modestly.) The Federal Reserve has all-but committed to keep interest rates near zero until 2011. They'll have to, because the residential real-estate crisis is being followed by a commercial real-estate crisis and will likely be followed by an option-ARM mortgage refunding crisis. The last is due to hit its peak in 2011. Given that the residential-real-estate bubble burst came close to wrecking the financial system, the Fed will err on the side of inflationary bias for the time being. To paraphrase H.G. Wells, the U.S. economy is in a race between inflation and catastrophe.

This (politically) necessary bias will add a double-whammy to the "greenback sunset" story, and will amplify it. Given both, conditions are well ripe for a gold bubble.

This blog will track news stories on gold, post items of interest from the goldbug world, mention gold stocks from time to time, and sometimes pass on some wilder items from the hardcore goldbug scene. Special notice will be made of ultra-bullish predictions that rate mention in the business media.

Unless the gold bubble gets pinpricked early, it'll be a wild ride over the next few years. Thanks for stopping by.