Germans and Greeks Buying Gold

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A Fabulous Performance

The importance of goals cannot be overstated. Companies that consistently fail to achieve them will disappear (or get bailed out). But apparently, failure is not so bad if you are a politician. Bloomberg News reports that Eurozone countries failed fiscal goals 57% of the time.

There aren’t many people who can keep their job on that sort of performance. But Governments have these handy things called bonds to finance their failures. And people have been naive enough to buy them because they are supposed to be a risk free investment. At least the past few years of financial theory says they are. Academics from the history department would have said otherwise. But history is just stuff that has already happened…

Anyway, there is obviously quite a demand for risk free returns. Largely because regulatory requirements encourage holding safe assets. That is a polite way of saying they require it. And so Europe’s budgetary indiscretions became the bedrock of banks’ capital bases.

Now it seems the lack of discipline is coming back to bite. And not just for Governments, but also for the banks built on supposedly safe sovereign bond holdings.

The difference this time is that there is nowhere to go for a bailout. Nobody stands on the sidelines, ready to save Europe. The only two contenders for that sort of role are the US and the ECB. More on them later.

Orderly State Insolvency

Angela Merkel, the German Chancellor, has been out of the news recently. Compared to the past few weeks anyway. She used to be a shining beacon of economic logic, only to have ridiculous speculative regulations put in place by her government. But now it turns out she has been busy making provisions for the real problem Germany faces:

“Merkel, in the same speech in which she said ‘the euro is in danger’, called last week for the euro zone to develop ‘a process for an orderly state insolvency.'”

So there you have it – Merkel is back. She has quietly been working hard on a contingency plan for Europe. Only it’s less of a contingency than many believe. And she just needs the other European leaders to continue their wishful thinking for a little longer, while she puts in place the mechanism to save Germany from oblivion. Oblivion being the rest of Europe.

Ok, so maybe that is a bit romantic, but remember that it’s the Germans that are buying the gold. Enough of them know what is coming in Europe. It stands to reason that Merkel does too.

Her mistake lies in the assumption that European nations will stick to their “orderly state insolvency” rules. When it comes to agreements between European nations, the irony here need not be mentioned.

Going for Gold

Recent news from Coinupdate.com points out that it’s not just the Germans buying gold coins. The Greeks are too. At prices 40% over the spot price of gold! What this implies for the price of gold is clear. Paper prices on large exchanges can be manipulated, but real transactions are another thing entirely. And gold is all about the physical asset not its paper claim.

Hangover Finance

Marc Faber has called for a short term rally on Bloomberg TV in another one of his increasingly amusing appearances. Strangely enough, his hosts still don’t have a grasp on what Marc is all about, or why he spends most of the interview laughing.

The highlight of the 14 minute set of snapshots was when one of the hosts pointed out that the Greek bailout had “bought time” to find a solution… even if there was no solution. Marc agreed emphatically, much to the distress of his regular followers, before rounding off his sarcasm with the old alcohol analogy: The best way to forestall a hangover is to keep on drinking and drinking through the next day… until you collapse.

Marc’s metaphor was probably lost on most of the audience (again), but the TV host did pick up on the indirect insult. All he could do was give a sheepish grin. But how does the metaphor apply to the world we live in? Well, those poor old politicians find themselves in the pickle of having inherited an economic hangover. They are desperately trying to get the party started again. But every day, more and more people wake up with the headache. So now they turn to the central bankers Bernanke and Trichet to bring out the hard drugs. The printing press has never failed to get a party started, but things tend to go wrong rather quickly.

Bouncing Around

Watching markets during the week was like watching dodge ball. The only indicator that made sense was the VIX, which showed volatility remained. That in turn shows nothing else is making much sense.

Meanwhile, our technical analyst Murray Dawes continues his remarkable run of picking market moves. After a quiet period for his trading in the past months, he has gone into hyperdrive and consistently picked winning trades.

The market is a traders one, no doubt. But what of the long term?

A feedback session here at our editorial conference in the Normandy countryside of France revealed a concept worth mentioning. The session was about writing, but Bill Bonner and your editor got rather side tracked with the theme of one of the essays.

Its argument was that the potential for both China and the US to collapse simultaneously is underestimated in terms of probability and consequences. Part of this is that the situation in Europe is stealing the limelight, but consider for a moment the state of the global economy.

To say it is fragile is an understatement. At the moment, it resembles some sort of Keynesian laboratory experiment. Can governments truly turn the world economy around, or are they delaying the inevitable?

Many would say they haven’t even managed to delay the inevitable, only drawn out its effects.

Regardless, it is worth taking a moment to project the possibility of a collapse of both the US and China and what it means for the average investor. It may be unlikely, but the financial crisis was considered impossible a short while ago.

The underlying question is whether it’s worth having a plan B for such an outcome. Dan’s humpy portfolio came up in past Daily Reckonings. Maybe it’s time to revive the concept properly?

Political Risk

North Korea’s Dear Leader decided the S&P had rallied enough and sunk a South Korean ship to get back into the headlines. His involvement in the sinking was however only recently discovered. Much of the markets fall early in the week was attributed to the potential for the Korean situation to get out of hand.

Political risk is one of those concepts that wasn’t supposed to apply to investing in developed nations. That’s changed substantially. Even close to home.

Taking inspiration from her (former?) favourite political system, Queensland Premier Anna Bligh has decided to build three new cities in South East Queensland. Hopefully these will not remain empty as so many of those in China do. But we can assume the QLD government will be rezoning and not building the cities themselves. Still, the infrastructure boost alone must have caused excitement in the building industry.

Comrade Stephen Conroy, the Minister for Communications, is providing a prime example of how government infrastructure projects work. Or don’t work, to be precise. The NBN network is turning into another troubled policy for the government. Another $52 million are being coughed up by the government to keep the cogs turning. Small increments bring up less taxpayer outrage.

And the mining tax continues to be the topic on everyone’s lips. Its transition to the “bad policy bin” seems to be faster than most of Rudd’s other policies, but pride has kept it alive so far. One flaw is that the Treasury rate (suggested as the point from which “super profits” kick in) is in fact lower than the cost of capital for many mining companies. That causes some major issues for the financing structure of resource development.

Then there are the various traditional government blunders of using the wrong data and misusing the data. More appropriate data was compiled at RMIT by Professor Sinclair Davidson, who stated the following:

“Through ignorance or indifference, the Rudd government is attempting to introduce a tax based on an argument that is demonstrably wrong.”

Ignorance or indifference? Your call.

But despite all this, the tax may yet go ahead in some form. It seems to be assumed that the tax is a good idea. Few people understand the reasons why it isn’t. They take the view that the government won’t get it right, but they are on the right track, so let them do it.

Dan and the few economists with any credibility left argue otherwise. But losing credibility doesn’t stop many economists from pretending they know better – shortly after missing the most important economic event of their lifetime. So, they issued a statement in support of the tax.

Many subscribers remind us that we are not in fact climate change scientists, nor mining executives. Sticking to what we know supposedly gives us credibility. But what do we know? Well, central banks and currencies are a favourite topic, so surely the following story is within the Daily Reckoning’s realm: “Reserve Bank in link to graft and hookers”.

It’s probably best to leave the story itself for the reader, but it must be mentioned that it involves our old nemesis fiat currency and its printing.

House prices always rise…

Take a stab at how much UK house prices have fallen since 2005.

Any ideas? 10% … 20% …?

Nope, 70%.

That’s in real terms. And this isn’t some stupid abstract calculation. It is in fact the only valid one. The metric is real terms. In other words, the value of the Pound has fallen dramatically as well.

Apart from the implications for UK homeowners, consider the way house prices have covertly fallen so much without much public outrage.

Measured in real terms, who knows how other asset classes have really been performing?

Ticking away

The US debt level has passed 13 Trillion. Newsworthy, but not a genuinely meaningful milestone. It will probably get worse.

Until next week,

Nickolai Hubble.
The Daily Reckoning Week in Review

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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Comments

  1. The 70% house price decline int he UK seems a little dramatic compared to the first hand accounts of market players. What is you source for this number?

    Reply
  2. I agree, Cameron. This is nonsense.
    We spent some time in the UK back in 2005, checking out property markets while enjoying the UK weather. :)

    Prices _were_ too high… and a good friend forecast a crash, which didn’t surprise us at all.

    We went back in 2009, for a month, travelling from London to Edinburgh.
    Yes, prices had fallen. From what we saw:

    * They were still (too) high…
    * Asking prices were 15% – 20% lower than five years previously.

    Our friend, a vocal critic of UK property prices (despite his ownership of land and homes) agreed this was about right, but noted that some areas had been down as much as 30% in the interim.

    Hubble is using the wrong end of his telescope!~ ;)

    Biker Pete
    May 31, 2010
    Reply
  3. They are valuing houses in ounces of gold! (I kid you not … Have a look at the link residing under the “70%” figure … :) )

    Reply
  4. Best laugh I’ve had in years, Ned. I didn’t even notice the 70% _was_ a link, but sure enough:

    http://www.moneyweek.com/investments/property/uk-house-prices-in-ounces-of-gold-02110.aspx

    And they talk about _property_ spruikers!!! :)

    The author’s name is fairly apt, isn’t it? Up in the clouds!! ;)

    Biker Pete
    May 31, 2010
    Reply
  5. Great article Nick, the above comments just go to show how very few people can not get their heads around valuing assets in real money terms (gold) rather than paper monopoly money which is increasing exponentially in quantity (or as the Feds like to say QE). We have a long way to go on this bull run, until people wake up and see what is really happening to their purchasing power.

    To put it another way, if property prices stay the same in paper money terms for the next 5 years, and the cost of living (including gold) double, then properties have effectively just halved in price, a simple formula. Think about that for a minute.

    Reply
  6. Shaf: “..very few people can not get their heads around valuing assets in real money terms (gold) rather than paper monopoly money…”

    Happy to accept any of that useless paper currency you have just happen to have lying around, mate!~ ;)

    Biker Pete
    June 1, 2010
    Reply
  7. “..very few people can not get their heads around valuing assets in real money terms (gold) rather than paper monopoly money…”

    Which is how the leprechauns speak, BP. If you delete the ‘not’ from his statement, it’s closer to English. I’ll also have a wad or two of that worthless paper money if there’s any left, Mr Shaf.

    Reply
  8. Thanks for the offer BP and John, but I need my paper money to comply with legal tender laws and cover my cost of living. As for my savings, its where you will find the smart money, in metals.

    Anyway the point Nick is making in his article is that by saving in gold/silver rather than paper money, you could have purchased a house for much less gold now than you could have 10 years ago, hence the price of housing has dropped in gold terms.

    The value of paper is constantly fluctuating depending on how much governments print (with bailouts, stimulus programs, bond etc), the number of banks defaults, and what the interest rates are.

    Hence because the value of paper money is constantly changing due these variances, its not a reliable way to value an asset.

    Comparing the price of an asset to something more stable in price such as gold is a more precise way to value an asset because it has an intrinsic value and takes a certain amount of labour, time, and effort, to dig a hole, extract from a mine and convert into a useful and tangible form rather than just print it off a printing press or add more electronic digits to a balance sheet.

    Reply
  9. Astonished that you still need that paper currency, Shaf. Just went back to your post and, sure enough, there it was: “…paper monopoly money…”
    You need it “..to comply with legal tender laws and cover (your) cost of living”. Remarkable admission that you need monopoly money… . ;)

    I think that reader comments which assessed Frisby’s flight of fancy summed up the article pretty well. Cherry-picking dates and locations, one can show that gold has risen less than property. That doesn’t mean that gold is a poor investment, it simply demonstrates Disraeli’s old adage about ‘lies, damn lies and statistics’.

    It’s amusing that goldbugs feel a pressing need to attack housing as an investment, yet property bulls feel no necessity to attack bullion.
    Why is that? :)

    Reply
  10. You sure know your stuff John, you should post as often as the ‘Man of Platinum’, BIKER Pete

    Reply
  11. HaHa, good one, Justin. Y’know when Don directed a response to Sweet Bruce, I nearly invoked the old sugar crack, but decided to spare the crew that tired old stuff. Guess you have nothing else, eh?!~

    I know you’ve taken a caning with sugar, so I’ll spare you the obvious quip about how many shiploads it might take to buy a house these days… .

    Reply
  12. I think I will lay off Cairns from now on. Bad for my teeth :)

    Reply
  13. John,

    I did not have any intention of putting property down as an investment, so please don’t be so sensitive. I think the article represented a good view into how property is dropping in value for those who save in metals rather than paper.

    Unfortunately I do need my monopoly money to pay for things, hence it has a purpose because the law forces its usage.

    For the record, there is plenty of ways to make money with property if you know what your doing, I hope that makes you feel better John.

    Shaf

    Reply
  14. “For the record, there is (sic) plenty of ways to make money with property if you know what your (sic) doing, I hope that makes you feel better John.”

    Which is how the leprechauns speak.

    Good luck with your pot o’ gold, Shaf. Remember, there’s nothing wrong with a game plan which includes buying a row of real houses with ‘worthless’ monopoly money.

    Reply
  15. John,

    Your taking the term “worthless monopoly paper money” out of context, what this means is that is costs almost nothing for a government to print the money on a piece of plastic or paper, which is also why the money supply is decreasing in value and the cost of living is going up at a faster rate these days. In comparison, gold requires a lot of effort, resources and time to extract and convert to a usable form of saving.

    If you like property and your making a great profit good for you, your probably smarter than most in the property market, consider writing a book.

    I doubt the traditional buy and hold strategy will work over the next 5-10 but thats just my opinion and my investment strategy.

    It does not mean I hate property investors or anyone who preaches about property been a great investment, I just disagree with the strategy and was putting the authors article into context when it was either deliberately or naively misinterpreted.

    Everyone is entitled to their own opinion mate so grow up and for goodness sake, get over the name calling.

    The purpose of these forums is constructive discussions, not trying to make yourself sound smarter than everyone else by trying to belittle others so you can talk yourself up as some sort of an expert.

    Im the 1st to admit that I know very little about anything, which is why I am flexible and always seeking new ideas, answers and concepts as opposed to those who are married to the same investment strategy and closed train of though because it has worked in the past. Not talking about you here, just giving an example, so please don’t take it personal mate once again.

    Shaf

    Reply
  16. If the value of real property doesn’t hold, then we ARE screwed – ‘Cause there is NO value in stocks or bonds! :)

    Reply
  17. While there’s a fortnightly dividend paying property off fortnightly, I think we’re on a pretty safe bet, Ned. And while creative mathematicians like John’s mate, above, argue that ‘properties have effectively just halved in price, a simple formula’ it’s probably safe to say Keen’s mates in the UK will be buying them hand-over-fist next week! ;)

    There’s nothing simple about economics, as the financial statements of US universities’ brightest business houses demonstrated during the GFC. Having ridden out just three flat periods in over three decades, we believe property will weather the storm. It’s hard to believe we’ve just been lucky, when you consider that other asset classes have suffered immense falls during those 32 years of continual buying and selling.

    Reply
  18. Off topic… however Biker will this impact on you?

    http://money.ninemsn.com.au/Blog.aspx?blogentryid=653491&showcomments=true

    Take note the FINAL bit not in discussion…

    Stillgotshoeson
    June 4, 2010
    Reply
  19. Thanks for that, Shoes. No, we’re unaffected. The retrospectivity aspect is an interesting component, isn’t it?
    Noted the same applies to foreign commercial property investment, in the business pages of today’s Australian… .

    How quickly things can change in a few short months. Here’s a set of predictions from the SMH 3rd January 2010:

    http://www.smh.com.au/business/financial-crisis-may-yet-have-a-sting-in-its-tail-20100102-lmka.html

    May reinforce the view that there’s nothing simple about economics, when expert forecasts can be so out-of-whack with reality so quickly… an old democracy flounders, flying PIIGS crash to earth, a new tax bites, a busted oil-rig chucks a wobbly…. . Who ya gonna call?!~

    Biker Pete
    June 4, 2010
    Reply
  20. I never fiddled around with any of that company stuff – Jeez, too high risk – Beware calling your missus what does two hours of secretarial stuff a month a “Company Director” – She can develop an extraordinarily overrated recollection of her corporate significance cum your divorce! :)

    Reply
  21. Well that stuffs me! And pour another billion in accounting fees to restructure into “the economy”, another executive government tilt at their idea of stimulus.

    Reply
  22. Another blockbuster coming to a monitor near you: Jaime Levy Moreno’s analysis of Spain, in DR(US), today. And we think _we_ have problems?!~

    Reply

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