Reading the News; In Gold We Trust; Value lags

Market Phases

…We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways.”–Barton Biggs

“….there is no record in the economic history of the whole world, anywhere or at any time, of a serious and prolonged inflation which has not been accompanied and made possible, if not directly caused, by a large increase in the quantity of money”–Gottfried Haberler

Reading the news

Wall Street Journal Thursday, June 27, 2013 : Commodities: Gold Falls to Near Three-Year Low

Plunge at the start of trading in Asia triggered automatic sell orders, creating a ‘Domino Effect’.

Reasons for the Federal Reserve to end its economic-stimulus efforts are piling up, putting gold investors on shaky ground. The Fed’s loose monetary policy helped drive prices toward $1,900 an ounce, as gold bulls wagered that the stimulus measures would stoke inflation, enhancing gold’s allure as a hedge against rising prices. Instead, inflation has remained tepid.

“Gold is not going to be a major attraction when there is no inflation and interest rates are rising,” said Bill Baruch, a market strategist with iiTraders, a Chicago based brokerage.

Ok, guess I should sell gold then? I am on SHAKY ground.

…but now I read about stocks on the same page (C-4):

Another 100-Point Dow Day

FADING FEARS ABOUT A PULLBACK IN CENTRAL-BANK SUPPORT HELPED PUSH STOCKS HIGHER.  The Dow Jones Industrial Average advanced 149.83 points, or 1% to 14910.14.

Ok, now I should buy stocks because the Fed has my back.  Which is it?

Lesson: the press simply makes up or quotes a source for the reasons behind any price movement. On the same page (C4 of the WSJ) you read that fears of the Fed tapering hit gold while an inch over on the other column, you read that stocks rose due to FADING fears over Fed tapering. Simply ignore and do your own thinking.

In Gold We Trust-June 27, 2013 (55 page report)

In-GOLD-we-TRUST-2013-Incrementum-Extended-Version A historical study of the gold market.

Another view:

Value lagging–for now



Pawn Star Discusses Gold and Dollars


13 responses to “Reading the News; In Gold We Trust; Value lags

  1. Reading the news is never a way to make an investment decision, but it is true that reading the headlines can give you good insight to a market sentiment, particularly at the extremes. However, when it comes to gold, I would have to argue that while the current sentiment seems extremely bearish, looking at the gold market from a 10 year horizon makes it seem as if we’re simply in the beginning of this bear market, not the end.

    When I see value investors like Seth Klarman and David Einhorn owning gold, it tells me that way too many people still own the metal. I remember reading articles from Klarman back in 2011 that said gold and all the traditional inflation hedges were very expensive, yet the price kept going up. That was the time to own gold, when doubters were giving in and buying.

    Now, the exact reverse is true. These people have bought gold over the past 2 years, thinking that it was a good “value” simply because it had declined a bit from its peak, but now the price is consistently dropping on them. They are all steadfast in their views, and have allowed no leeway for the fact that gold prices may not reflect monetary conditions anymore, simply because it is a massively overowned asset. While it is true that historically gold prices have risen in response to monetary easing, this has clearly not been the case for nearly 2 years now, so why is it impossible that this historical relationship has not changed?

    I believe we make our greatest mistakes as investors (especially macro investors) when we fail to recognize that inter-asset correlations have changed, or that the world around us has changed as well. In my estimation, today’s world sees QE as the norm, rather than extraordinary. This makes sense considering that nearly every other major economy is also printing money. In such a world, the removal of QE is actually extraordinary, and that is why we are seeing such an increase in volatility in the last week. The market is responding to an extraordinary situation, in that it had gotten addicted to perpetual easing, and now that it is being removed, it does not know what to do with itself.

    Whether this is bullish or bearish for equities, I do not know just yet (my guess is highly bearish), but it seems just another reason to sell gold. If gold falls when the long bond falls, falls when the long bond rises, falls when the dollar falls and falls when the dollar rises, what exactly is going to make people “realize” that gold is a good investment? I believe gold investors are in the hope and pray stage of the bear market, a position I do not envy.

  2. ^^^ This

  3. So in a world of massive fiat currency debasement, don’t you want to own the only money that can’t be created out of thin air? It should be obvious to all the the Central Banks have no clue as to what is going on. The have to keep the fire hoses on forever or else the house of cards collapses. It is wrong, but they only know one thing–buy government debt and create money. This will not end well.

    P.S. I hope gold drops further. $300 would be fantastic for buyers, which–at the rate the price in dollars that cold is falling–we should hit in late July.

    Let’s see over the next few years which declines further–paper money or gold. I choose gold–it is not an investment–it is money.

    • I agree with everything you said, except for the fact that it will be bullish for gold. If you really are worried about the value of paper money, there are a multitude of hard assets you can diversify into: real estate, including multifamily, commercial, farmland or other use, or even crude oil wells or other commodity extractive assets. The last one I would want to own at this point is gold. While markets can be enamored with fads for quite some time, I do believe that the “Fed is printing, buy gold!” one is over.

      There is no gold bull alive that can answer the question: why has gold gone down for the past 2 years even as the Fed and nearly every other central bank has announced monetary debasement initiatives? Until they realize that the answer to that question is that the legacy investment hypothesis concerning gold is broken and gone, gold bulls will continue to lose money. Historical asset correlations change all the time, and quite clearly monetary debasement no longer equals precious metals rise.

  4. Gold bulls have been calling for hyperinflation for years. Not only did that not happen, the opposite occurred – inflation is falling around the world. How did that happen? Even if gold bulls turn out to be right but early, this multi-year “delay” is not something they anticipated, and it should make them question their entire view on gold and inflation. Clearly they were wrong about something, or possibly everything.

  5. I think EVERYONE agrees that gold will go down and down–there is no bottom–except at $0.00.


    “When the market gets into a trend, people just want to follow it, and now we’re in a severe downtrend, so the psychology has become terrible,” Donald Selkin, who helps manage $3 billion of assets as chief market strategist at National Securities Corp. in New York, said in a telephone interview. “If any of the big holders that are still in the ETF start getting forced to sell, it could be big a wild card.”

    Gold futures for August delivery dropped 1.5 percent to close at $1,211.60 at 1:46 p.m. on the Comex in New York. After the settlement, the metal touched $1,196.10, the lowest since August 2010.

    This quarter, the price headed for a record slump, partly because gains in the economy have boosted speculation that the Federal Reserve will scale back U.S. monetary stimulus that helped drive gold higher last year.

    ‘Panic Selling’
    The metal may fall as low as $800 “in panic selling,” Selkin said. That would mark the cheapest since December 2008.
    The Fed said on June 19 that asset purchases may be scaled back if the economy continues to improve. Gold has tumbled 28 percent in 2013 after posting 12 straight annual gains.
    Billionaire John Paulson is the largest holder in the SPDR, which has plunged $35.2 billion in value this year.
    Gold more than doubled from the end of 2008 to a record $1,923.70 in September 2011 as the Fed cut interest rates to a record. The metal fell into a bear market in April, and the decline has “shattered” the confidence of investors betting on an extended rally, according to Credit Suisse Group AG. Morgan Stanley and Goldman Sachs Group Inc. trimmed price forecasts this week.
    This quarter, gold has slumped 24 percent. The Dow Jones Industrial Average gained 3.1 percent.
    ‘Grind Down’
    “Nobody wants to own gold anymore,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “We’re getting a continuous grind down with heavy liquidation. All the news about the U.S. is not helping, and the markets are looking forward” to better prospects for the economy, he said.
    Silver futures for September delivery dropped 0.3 percent to close at $18.553 an ounce on the Comex. The metal has plunged 39 percent this year.
    On the New York Mercantile Exchange, platinum futures for October delivery rose 1.7 percent to $1,329.10 an ounce, the biggest gain since June 3, amid labor unrest in South Africa, the world’s biggest producer.
    “Supply-side concerns in South Africa remain,” Michael Smith, the president of T&K Futures & Options in Port St. Lucie, Florida, said in a telephone interview. “Strong economic data out of the U.S. is providing support to precious metals that have industrial use.”
    Palladium futures for September delivery gained 2.8 percent to $650.70 an ounce on the Nymex, the biggest gain since May 28.

  6. The key question –Why did gold go up for 10 years with no hyperinflation?

    Fed will have to increase QE or face collapse since QE is making the economy weaker. Ditto ECB- Banks close to collapse over there. Esp. Italy.

  7. For a supposed inflation hedge, gold prices have not correlated very well with inflation in the past. It may hedge against inflation in the long run, and against hyperinflation, but so do stocks, real estate, farmland, art, wine, jewelry, and basically anything that lasts a long time and is not cash or fixed income. So gold is not really all that unique as an inflation hedge, yet it is unique in that no other asset has such a fanatical and devoted following. I wonder why?


    • gold does NOT correlate well with inflation. It is the reciprocal of Central Bankers’ competence.

      Read the report In Gold We Trust. Study the past 100 years–check out the links.

      The current inflation rate has nothing to do with gold going up or down–it is expectations of change in inflation rates that is one aspect of the the demand for gold.

      Also, as a buyer of gold THIS is the perfect market–you want prices to DROP and DROP. It doesn’t get any better than this.

    • Dear Walter:

      I hate gold bugs; they say everything is manipulated. Now the gold price is being manipulated down by “paper” shorts while physical demand is strong. They might be right but who “manipulated the price of gold up for 10 years in a row through deflation, inflation disinflation, increasing inflation stocks going up and down?

      Hopefully this blog teaches you to find out the answer yourself. Follow the links, read history. Study Rothbard.

      People get emotional about gold because gold is money. Art, land, etc. is not as marketable and fungible as gold. Gold is the perfect money–it doesn’t create wealth; it can be exchanged for wealth.

      All I know is that the laws of supply and demand work like this–when the quantity supplied of an item like fiat currency can be produced at the marginal cost of $0.00 then that is the price it will go to. So I swap my dollars for gold at the best prices I can find. Otherwise, if I can find a great franchise selling at a discount, I would prefer that.

      • John, I respect your writings, and I think you are a very smart guy, but I really think you’re grabbing for straws here. Gold is not money. As much as you and every other gold owner wants to think it is, it is not. You cannot exchange gold for goods and services. Period. End of story. If this changes in the future, I will change my stance, but it is not happening any time soon.

        Gold is an investment similar to others, with the massive caveat being that it has no intrinsic value whatsoever. It is simply a widget put out there for buyers and sellers to bid on, yet when the lucky buyer wins, he has won the right to own a useless piece of metal. If aliens came down and saw us paying huge amounts of money for useless pieces of metal, what would they think?

        It is true that gold went up for a decade straight. I was a buyer in 2008, and I added to positions heavily until the summer of 2011 when I turned into a bear because I realized that the gold market was massively overowned, and that it was a bubble likely to collapse soon.

        The reason why I turned from a bull to a bear was because I realized everyone else around me was singing the same tune as I had been for the past 3 years. When everyone is bullish on an asset and loves it, there is no one left to buy. I was in France at the time, and markets were very volatile. I remember turning on the TV, and the CNBC live camera showed Dow, S&P, Nasdaq and gold. The fact that gold was included next to these other assets convinced me that it was owned by the mainstream, and its run was likely finished.

        While gold went up for a decade, the “reasons” behind it differed at numerous points during the stretch. What gold bulls fail to realize is that these reasons are all psychological, and the old reason of money printing = gold goes up does not apply anymore. Buying gold at this point in time because you think the Fed will print more money is tantamount to buying real estate in the Rust Belt of the US because it once was a bustling economic center. Just because something was true in the past does not mean it will be true in the future, especially when it is based on nothing more than fickle human emotion.

        Gold goes against every notion of being a value investor. This is why I am shocked by its widespread acceptance by supposed valued investors like Klarman and Einhorn. Quite frankly, the fact that these guys own gold makes me question the entire segment of investors who claim to be investing for value, when they can so easily be seduced by the most non-value investment to ever exist.

  8. It’s really hard to debate productively about gold, because of the politics, morals, emotions, etc. involved, and there are not a whole lot of widely agreed upon facts to base rational arguments on. But there are a few things I think we can agree on. Gold is not a value investment. The value of gold is determined solely by what someone else is willing to pay for it. If I buy a good stock and nobody is willing to pay a fair price, I can still receive dividends and make money over time. I don’t fully understand what makes gold go up and down and I don’t think anyone really does. And clearly you can’t calculate an “intrinsic value” for gold. So honestly there’s no margin of safety in any sense. If you want to buy a little to hedge yourself, fine. But can you give me a good example where gold goes to the moon but good value stocks get left behind? The only situation I can think of is maybe a gold bubble, and I’m fine with missing upside in bubbles. It just seems like gold has a lot more downside risk and the upside is not much better in any case.

  9. Well we agree that gold is NOT an investment. It doesn’t throw off income unless you lease it. You can’t value it from its future cash flows.

    But then what is a dollar? Can you put a value on a dollar? And if you can’t then why accept it?

    How did money come into existence?

    I travelled all through Asia and the Middle East and in every market I saw gold and silver coins and wafers being used in some transactions. I bet if you offered a gram of gold without exchanging it for currency, you could buy whatever you wanted in Indonesia.

    And if gold is not money then why do central banks bother to buy and sell it? Why not land or stocks?

    The reason gold and silver are not used as money in the US is because of government coercion against using those metals as money. However, certain states are changing those laws.

    Specie is the only constitutional money in the USA.

    I think the key to understanding gold is to answer the question–HOW DID MONEY COME INTO EXISTENCE? Hint, the government had nothing to do with it.

    Authored by Alasdair Macleod via,
    It is clear that Western capital markets no longer generally regard gold as money. It has been relegated to the status of a risk asset, useful collateral, or simply a commodity with a history of being used as money. This is a mistake.
    The great Austrian economist, von Mises, wrote that true money had to survive the regression test. Put simply, it must be established whether or not money had value before it was used as money; otherwise it is only a money-substitute which ultimately depends for its value on confidence. So we need to ask ourselves two questions: what value did gold have before it was used as money, and what value did modern currencies have before they were used as money?
    The answer to the first question is clear. Anyone who has seen the Alfred jewel in the Ashmolean Museum in Oxford (over 1,000 years old), the Snettisham torc in the British Museum (over 2,000 years old), or Tutankhamen’s gold mask in the Cairo Museum (over 3,000 years old), regard these fabulous items with astonishment. They are simply priceless, being desirable beyond reckoning. There is therefore no doubt that gold, the major element in all these objects, survives von Mises’s regression test. Furthermore the Aztecs and Incas in the New World, completely isolated from Eurasian values, held the same human view.
    Paper currencies do not survive this test. They started as money-substitutes for gold or silver and over time lost all their convertibility. As a result they now depend for their value on confidence alone.
    Traders and investors in capital markets are unconcerned about this distinction. Instead of realising that Gresham’s Law applies, that bad money has driven out the good, they regard currency as the only money for modern times. This is understandable, because they draw up their accounts and pay their taxes in currency. They invest to make a profit in currency. And so long as they can hedge currency risk by acquiring capital assets, they can manage investment portfolios without recourse to gold.
    For these practical reasons mainstream opinion holds that gold is no longer money; but this complacency is likely to be undermined by events. We already see the four major central banks committed to issuing their confidence-based currency in increasing quantities, to finance their governments and to prop up the banks. We have yet to see how they intend to stop doing so.
    The effect of monetary inflation was usually predictable. It raised asset prices first, which we are already seeing. It then raised prices of raw materials and manufactured goods, as people started to spend encouraged by low interest rates, leading inevitably to rising prices and rising interest rates. The sequence of credit-fuelled economic cycles is all too familiar.
    This time, given the likelihood of a financial and collateral crisis from falling asset prices, the economic cycle is in grave danger of a short circuit. Rising prices for raw materials and goods are likely to be driven by falling confidence in fiat currencies, instead of rising confidence in the economic outlook.
    It will be the ultimate test for unbacked currencies. Everyone wedded to modern currencies will then wish they had been aware of von Mises’s regression theorem.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.