Sunday, May 9, 2010

Gold Gets Special Mention In Financial Sense Newshour

The Financial Sense Newshour podcast had four segments this week; the first half of one of them [.mp3 file] was an interview with James Dines. It's wide ranging - gold was only one of the subjects discussed - but Dines is the "Original Gold Bug." He had some tidbits of little-known information about the gold standard and its breakdown, which are in his book Goldbug!

The second part of the second segment [.mp3 file] was an interview with James Turk, who is one of those people who believes that the gold market is manipulated downwards. He expects the onset of an Argentine-style inflationary crisis to begin in months. He also expects gold to reach $1,800 this year, but not because of incipient hyperinflation; he expects a short squeeze, as caused by the paucity of physical gold relative to paper claims on the metal in the commodity exchanges. Jim Puplava mentioned that, in an investment conference, nine out of ten people there were concerned about deflation.

And that's really the trouble with Turk's timeframe. It's based upon the velocity of money shooting up because ordinary people are losing confidence in fiat money. That kind of sea change doesn't happen overnight, and it depends upon a widespread belief that the currency is being hollowed out by inflating. In order for it to take place, ordinary folks have to be inflationists. If bond funds (particularly government bond funds) are popular, then Joe and Jane Average aren't.

The trouble with forecasting hyperinflation, or any economic change based upon a mass movement, is that it's not enough to be in opposition to popular opinion. One has to be ahead of popular opinion. In ordinary investment analysis, there's no need to outguess the crowd: value investing has never been popular, but it usually works. All that's needed is enough investors coming in to push the investment up to (or above) its fundamental value. A value investor can makes good money without his or her stocks ever becoming crowd favourites.

With respect to an economy-wide tectonic shift, though, the crowd itself has to come around. Most everyone has to act like the currency is rotting away. Since the crowd is more on the opposite side of the divide, there has to be a lot of habit-shifting before even a mild hyperinflation can set in. So, I have to demur regarding the timing of Turk's forecast. By my reckoning, it would take years for such a sea-change to take place.

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