Reader Mail: Predicting a ‘Super Bubble’ in Gold

It should be a quiet one in the markets today. North American markets are in repose, with the celebration of the Thanksgiving holiday in the United States. Stocks in Europe and Asia were up overnight. There's some hope percolating that the bailout of Citigroup draws a line under the $30 trillion in global equity market losses since the credit bubble burst.

The Australian market looks like it will spend the day doing some much needed housekeeping and navel gazing. BHP may not want to swallow Rio whole any longer. But according to Barry Fitzgerald in today's Age, there are some choice Rio cuts that BHP is probably still interested in. "Low cost, long life, and environmentally sound," was how BHP chief Marius Kloppers described BHP's wish list.

In other domestic matters, the two Aussie grain heavies-ABB and AWB-are reportedly in merger talks. It seems like a good match on the surface. Both companies have similar market caps, so it's a marriage of peers. It's also less likely to run into regulatory approval issues from overseas. That was just one of the obstacles to the BHP-Rio affair.

The word for the day, then, is consolidation. Having survived the first wave of the bursting of the global credit bubble, the Aussie market is surveying the damage. Firms are looking to partner up, matching strengths and offsetting weaknesses. Business goes on, though the conditions are still challenging.

But let's take a break from the end-of-the-worldism for the day, shall we? We forgot to pause yesterday and tell you what we are thankful for. We are thankful to have a job, a roof, a full belly and a stack of unread books. We are thankful that you make time to read us every day. And we are thankful for bacon, red wine, good running shoes, and the last few albums by Johnny Cash.

However, the DR inbox today was full of letters from readers concerned about our mental and spiritual health. It caught us a bit off guard. So we'll turn today's letter over to you, and pen some responses that may help explain our real reason for being here at the Old Hat Factory. We suspect that if you could see how much fun we have writing the DR every day, you'd probably be less concerned about the dire tone of our daily reckonings.

Dear DR,

I've read a lot from both yourselves, Rothbard, Von Mises and others on how the US Fed expands the money supply by buying government bonds (open market operations) but I struggle to apply the same principles to the RBA when the Australian Federal Government runs a budget surplus (albeit not for much longer)?

Does this mean the RBA buys other assets instead of Australian government bonds to increase reserves on its balance sheet or can there exist old (immature) government bonds in the absence of a budget deficit?

Many thanks in anticipation of your response. Keep up the fantastic work with the DR. I always look forward to getting my daily dose!

Kind regards,

Matt

Thanks Matt. The Fed buys Treasury bonds in its open market operations, as far as we know, because it's the easiest (most liquid) way to put cash on bank balance sheets, which the banks then lend to businesses and consumers (creating new money). There is a market for government debt in Australia. But as you pointed out, it's not nearly as deep and liquid as the U.S. Treasury market, partly because Australia doesn't run systemic, chronic budget deficits like America (yet).

Have a look at the RBA's balance sheet in its annual report. The largest item in the asset column is "Australian dollar securities." Through repurchase agreements, the RBA can pump cash into the economy by adding more of these securities to its balance sheet in exchange for new cash.

What are Australian dollar securities? According to the footnotes, they are: Treasury Fixed Coupon Bonds and Treasury Capital Indexed Bonds, and securities issued by the central borrowing authorities of State and Territory Governments...also bank bills, certificates of deposit and debt securities of authorised deposit taking institutions licensed in Australia; Australian dollar denominated securities issued by foreign governments, foreign government agencies that have an explicit government guarantee (or equivalent support) and by certain highly-rated supranational organisations; and selected Australian dollar domestic residential mortgage backed securities and asset-backed commercial paper.

A simpler question:

I'm interested to know what the precise technical explanation for a Depression is. I mean is there an equivalent to a Recession meaning two negative quarters of growth. Is there such a thing as a mild depression or does it mean massive unemployment and soup queues?

Just interested in better definition as it does get spoken about a lot in these circles.

Regards,

Mark N.

There is probably some technical definition of a depression somewhere. But we reckon the simplest one is that a recession is when your neighbour loses his job. A depression is when you lose yours.

A prediction on gold:

Hi guys,

I think Gold will be the next bubble. And it will be a super bubble. People will look to rising prices & value - something stocks and housing will not give - they have burnt badly by those two assets.

1980 - Gold spiked to $850US.

2008 - Gold is now $810US.

Errr that is like 28 YEARS later!!!!!!!!! Helloooo? Anyone home?

Once the Fed loses the manipulation on it and it is just about to - LOOKOUT! I see it going to $2000 next year and anywhere over $5000 - possible $10,000.Maybe higher? Gold and Silver markets are tiny and some of this bailout will find its way into it - spiking it to unknown heights.

They should have let it go - without manipulation Gold would $6,000 today. So big deal - the world would still spin - a precious metal should be expensive. The key is we have never had a US currency crisis like this - and so it all could be sped up a lot.

I was 50%cash 50% pms and NO debt. Now I am now 85% pms and cash and NO debt. Cash is only a currency - it is not money. Gold & Silver are both a currency and money. Just look at the high prices on eBay for pms.

Keep it up.

Dom

Dear Daily Reckoning,

What a gloomy mob of catastrophists you seem to be. I'd like to suggest a new subheading for your publication: "The Counterweight to Hope." There's no denying the accuracy and insightfulness of your observations but you have a gift for casting events in the gloomiest possible light. I have a mental image of you all hiding deep in the woods, writing your newsletter in a fort made of gold bullion, batteries and canned food. I wish you'd go outside, take a deep breath and say: "The world is having a deep recession and everything's going to be ok."

I mean, the fact that previous large-scale economic implosions have resulted in war, pestilence and bad folk music doesn't mean this one will. As any scientist will tell you, the past is the key to the present - except when it isn't. I admit that I'm a recent subscriber to The Daily Reckoning and I apologise if I'm doing you a disservice - I'm sure your dire predictions are heartfelt and perhaps you've been more cheerful in the past - but your report has recently been low on the constructive type of criticism. This brings me, in a roundabout and rather insulting way, to the reason for my writing.

What do you think the world should do, in a practical sense, to address this problem - starting now? Let's just say that I represent the Illuminati and I can give The Daily Reckoning complete godlike control of the entire world economy. Will you stand back and let it fail, with all the human misery that implies, or will you act? Please, oh powerful The Daily Reckoning, use your superpowers for good! What will you do?

Yours in shock and awe,

Trent A.

The Daily Reckoning aims to live at the fat tail end of a bell curve, where the outliers, miscreants, demagogues, and rogues hang out. There are plenty of people who can tell you what happened yesterday. We have nothing especially valuable to add when it comes to reporting the news. That's because we don't have any advantage or any special knowledge. We use the Interwebs just like you do.

But out at the fat tail end of a statistical distribution is where interesting things happen in markets. They are the ones that no one plans for because it is embarrassing to bring them up in polite company and take them seriously. Or, they seem just too far-fetched for the conventional wisdom to cope with. To us, it seems constructive to deconstruct conventional wisdom.

That's where we make our living, or at least try to. Hence the general gloom. There's a lot of deconstructing to do these days. But don't think we aren't cheerful! There are more guffaws and belly laughs that go into each Daily Reckoning than you can shake a stick at.

What should the world do? How about mind its own business? The world needs more modest ambition. It is easier to march for a change in the world than to actually make one in your own life. We spend most of our time trying to be a good son, brother, uncle, neighbour, and correspondent. That's change we can believe in and actually accomplish.

The essential virtues in life require constant practice to become habit. We've yet to master any of them. It's hard enough for us to keep our own life ordered, much less worry about the planet. Trying to change the world is a distraction.

The best way to save the world is to save yourself. Sweep your own doorstep. Tend your own garden. Always do what you've agreed to do. Never take anything that's not yours. Be generous, but sceptical, kind, but not naive.

"Economics is not about goods and services; it is about human choice and action," said Ludwig Von Mises. So you're right. It's not really about what you say. Words are cheap. It's about what you do. It never hurts to call your mother and tell her you love her, either.

Dear DR,

Gloominess begetting even more gloominess. It is a downward spiral. Snap out of it my mother would say. Okay I accept that things are rough and will get rougher, real rough. And somehow from the wreckage of this debacle a new phoenix will appear (the original film is great). It has risen before and will rise again. Form yet unknown. I detect at the back of our consciousness, this unwritten thought is there, ready and waiting for its time.

However while you are successfully championing the destruction of myths such as fiat currency, paper-generated wealth based on mathematical modelling and the lack of common sense in our governments, can you start debunking the 'climate change' modelling that has governments around the world girding the loins of the taxpayer for more spurious spending. Is that outside your remit?

With Kind Regards,

Robert S.

The science behind climate change is beyond the scope of your editor's knowledge of this e-mail's daily purpose. But cheerful scepticism is always a good way to approach any large theory.

Until next week!

Dan Denning
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

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