Gold Speculation During the Great Correction

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Yesterday was a good day for stock market investors. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions.

Of course, we’re always uncertain. But sometimes we’re more uncertain than others. What seems certain to us is that stocks are a bad bet.

You might find this interesting, dear reader:

Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today?

Well, we haven’t done the calculation ourselves, but we’ve heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don’t.

But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to “risk on” mode.

Back and forth…to and fro…

Mr. Market is making us wait. But for what?

We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn’t happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us…because it is not behind us.

Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what’s the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn’t want to invest in them anyway…

But where…how…are we going to make some money in the next seven years? That is a good question, dear reader. We’re so glad you asked.

Do you have a good answer? Hope so, because we don’t.

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we’ve been watching Bernanke, Jackson Hole, and stocks – gold has been quietly creeping up…

..stocks go down; stocks go up – and gold keeps moving up…

..fiscal stimulus, monetary stimulus, quantitative easing – and gold keeps moving up…

..recovery…no recovery – gold keeps moving up…

..inflation…deflation – and gold keeps moving up…

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we’re right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here’s the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you’ll probably succeed. When the Bernanke Fed loses its grip – which it will – and when the public gets on board the gold bull market – which it will – gold speculators will probably make a lot of money.

We’ve been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative…not inherent. When we bought gold in ’99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another “stimulus” effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We’re happy with our gold holdings and don’t really care if the price drops. Heck, we’d be happy to see the price back below $1,000; we’d buy more.

But speculating on a rising gold price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

And more thoughts…

Wolf, Stiglitz, Krugman – we love these guys!

They pushed the world’s governments to undertake huge “stimulus” programs. Of course, the stimulus programs didn’t work. They couldn’t work. All they could do was to disguise the facts and delay the necessary adjustments.

But these fellows don’t care about that. They are the technicians, scientists, and engineers of finance. They have measures of financial health – GDP, employment, inflation, etc. They may not be able to make anyone better off…but they can damned sure move those indicators. At least, they believe they can.

Spend enough money and you can move the GDP up. Hire enough people and you can get unemployment down. It’s not that complicated.

So, the engineers went to work two years ago. You know the rest of the story. That is how we got where we are. They turned valves. They connected wires. They adjusted dials and switches. They put at risk nearly an entire year’s worth of US GDP – on the idea that an economy can be controlled and managed, just as if it were a brewery.

How many cans do you want? Just work backward to figure out what inputs you need – how much grain, how much sugar, how many cans, how much electricity… It’s not rocket science, for Pete’s sake.

The trouble is…managing an economy is not science at all. And these guys are not scientists. They have no controlled experiments. They have no test panels nor test results. They have no peer reviews. They have no proper theories – none that can be disproven or confirmed. They just have crackpot ideas and quack treatments.

And now, Paul Krugman is on television in the US calling for another $800 billion program of boondoggles, bailouts and bumph. “Stimulus,” he calls it. Claptrap is what it is.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. You have overlooked a recent development that has stopped the rapid drops and uncertainty in the price of gold.

    Quote:
    JPMorgan has plans to shut down all of its prop trading desks, says Bloomberg.

    Congress passed restrictions on financial firms this year designed to prevent a recurrence of the 2008 credit crisis, which almost caused the banking system to collapse. Proprietary trading involves transactions made on behalf of the bank rather than its customers. The curbs are known as the Volcker rule, designed to place limits on direct risk-taking by lenders.

    These restrictions should make it impossible for the big players like J.P.Morgan, HSBC, Goldman Sachs etc etc to flood the market with short contracts preceeding contract expirey and bring down the price. This manipulation has been going on for decades and has kept the bulk of traders out of the market by virtually guaranting that their contracts will finish out of the money and not be carried through to delivery or at least has made the gold and silver price look unstable and appear to be a risky investment.

    This return of stability and certainty may mean that gold will reach its true unmanipulated value and very quickly.
    My mining share are skyrocketing at the moment. :)

    ChrisPCruncy
    September 3, 2010
    Reply
  2. US house prices down; Global stock prices down; Gold prices up – To lots more than it costs to produce. Sorry, I’m still not a true believer?

    Reply
  3. Some companies claim to be producing gold for a third its current price, Ned.
    Wish I could build a house for a third its current value!~ ;)

    Reply
  4. “Wish I could build a house for a third its current value!” – Even half like any respectable gold producer would be nice Biker. But hey, we could get high inflation. But in that scenario what I struggle to see is why house and stock prices wouldn’t go up at least as much. I must be missing something?

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  5. Fear reigns supreme in the NH right now, Ned. In that scenario, we can expect gold to reach at least A$1300 per ounce. ;)

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  6. “A$1300 per ounce” – You ARE a BAD egg Biker – Many have disliked you because of it and I like you because of it – No accounting for taste hey! :)

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  7. A bad egg? Nay, like a good egg I have a heart of _pure gold,_ Ned.

    I’d argue there’s very little fear down here in the Oz, other than our stock market coupling to the US. We have it so good in Oz (maybe for another quarter-century, or more) mate. ;)

    Only the NH coming totally unstuck could push gold much higher. In that sense, perhaps gold is also shackled to NH fear and dramas.

    But if gold _does_ bubble-up into the big bucks, I have developed a highly original plan of attack, which involves escaping at high speed in a highly mobile form of accommodation; packing the same with musical fruit… and buzzing off to mum’n’dad’s rural location, until the flatulence dissipates!

    You heard it* here, first, Ned!~ :D

    * The flatulence, I mean… . ;)

    Reply
  8. “Wish I could build a house for a third its current value!”

    you can wish as much as you want Ned but

    “its different here”

    Didn’t you know that?
    Get with the times

    Reply
  9. HaHa… A bad egg?! Talk of the devil and his angel appears!-

    G’day, Steven, we were missing you. You mustn’t skulk off after having your ears boxed, son. Stick around. We miss ‘Steve’s Quote of the Weak’… . ;)

    Reply
  10. yes biker you have a heart of pure gold

    Keep telling yourself that over and over again and eventually even you will believe it

    Reply
  11. I’m surprised you do not ever mention silver. It seems to me it is trade-able in smaller denominations than gold.

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  12. “its different here”

    So does that mean you HAVE invested in bullion Steve?

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  13. Steve’s Quote of the Week is “its different here” and it is.
    Oh… and “Mum, I’m hungry. Did you wash my overalls?”

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  14. Tim: “I’m surprised you do not ever mention silver. It seems to me it is trade-able in smaller denominations than gold.”

    And silver is in short supply, globally!

    Uhhh, wait-a-bit, Money Morning (3/09/’10) just discovered a _little_ more:

    “Deep in the remote foothills beneath the Great Wall of China…
    an American junior mining company has made an amazing discovery.
    This silver strike stretches 186 miles. It could contain, by our estimates, 30.2 billion ounces of silver. That’s enough to feed world demand for the next 32 years, according to the World Silver Survey…
    Enough to double current global stockpiles… 214 times.”

    Hmmmm…. . :(

    Reply
  15. I’m sticking to land Biker – Apart from the Dutch reclamation efforts and a few canal developments in Oz which just could flood if the scientists have it right this time, they aren’t making any more of it my grandaddy reckoned.

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  16. I was trying to make more of it, Ned, but my brother-in-law pinched my cement-mixer!~

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  17. We all try to do our bit hey mate! :D

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  18. http://www.news.com.au/homebuyers-have-spring-in-their-step/story-e6freuy9-1225913984380?from=public_rss

    Isn’t this great I am so ecstatic by such good news I can hardly hold back my excitement.
    Apparently Housing is going to become even more unaffordable for me, but
    The real estate industry is telling me this is a good thing, so naturally I am so excited.
    I am going to have a drink to celebrate.
    I am over the moon.

    Reply
  19. Don’t believe everything you read in the media Steve. Seems to be a bit of a correction happening up Brissy way. You’ll just need need to watch your own market though I guess.

    Reply
  20. “The build-up of buyers is like a coiled spring, Sam White from Ray White told The Daily Telegraph.

    He said agents were anticipating more than 100,000 Sydneysiders would go head-to-head for limited property in the next three months, with roughly 24,000 homes expected to change hands.

    Read more: http://www.news.com.au/homebuyers-have-spring-in-their-step/story-e6freuy9-1225913984380?from=public_rss#ixzz0yVGuOd5M

    Yeeeee…HAAAAAAAAAAA!!!!!!

    Send the leftovers to Brissy!

    Reply
  21. “…naturally I am so excited.
    I am going to have a drink to celebrate.
    I am over the moon.”

    That’s better, Steven. Knew we could cheer you up!~ :D

    Reply
  22. Confirmation bias (http://en.wikipedia.org/wiki/Confirmation_bias) is a big factor in the real estate debate. I have read articles which suggest another housing price boom (with supporting statistics) and others suggesting there is a final desperate bid to generate turnover through auctions because of fears the next six months are going to be difficult times for real estate agents (with supporting statistics).

    I can say that for a lot of areas properties are sitting around for weeks or months (and then not selling .. usually they are put ‘under contract’ before they disappear, creating the impression of a sale) and are being re-advertised as “new” at lower prices – say, 10% or so less, which to me looks like a buyer’s market if ever there was one. How long this favourable situation will continue is anyone’s guess but I don’t see signs of it turning around just yet.

    Reply
  23. Confirmation bias applies equally to all asset classes, Dan.

    If I claimed that we’d soon see a doubling of the price of homes, there’d be an outcry… but I continually hear that same prediction for gold. ;)
    As wiki notes, wishful thinking biases investment. All investment.

    Unlike gold, there’s an immense variation in housing, across Australia. Not just in the type of home, or location, but even in sales dynamics.
    This is affected by employment, by people’s aspirations, and by Aussies’ determination to live where _they_ want to live.

    Right now, prices are cool, falling slightly, in two states; and three states are experiencing rising prices. Home construction is down in most states and sales are slow.

    In the industry there’s a perception of immense ‘unfulfilled demand’… ie., a large number of potential buyers who don’t have sufficient confidence (or, in some cases, sufficient capital) to enter the market. That unfulfilled demand, if it actually exists, doesn’t go away… it simply _builds_. Meantime actual building has slowed.

    Demand for rentals is high. Rents remain high. Our latest vacancy didn’t last a week, even though the rent is our second highest. To be frank, we thought the FHOG had reduced rental demand for at least _two_ years.
    Apparently not… . :)

    Reply
  24. I tend to agree with you Biker, but the unfulfilled demand phenomenon of the real estate market does not necessarily turn into a surge of buyers. That aspect of it depends almost entirely on the banks and to what degree they decide to issue new loans.

    I rather interpret this unmet demand (yet sluggish prices and new building) as evidence that prices are out of step with ability to pay for the time being. Do you predict a wage hike any time soon, Biker?

    Sure, if the houses were cheap enough, they’d all sell in a second. But they are not.

    Reply
  25. Blocking my responses, fellas? I take it as a compliment!~ :D

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  26. I’ve attempted, over a dozen times, to respond to Dan’s 6th September comment, above. DRA has ‘lost’ that comment repeatedly. DD’s reassurance means nothing. It’s B* S…

    * Bear ;)

    Reply
  27. “Duplicate comment detected; it looks as though you’ve already said that!”

    Yes 15 times now! Censorship rules at DRA… . :D

    Reply
  28. I don’t know about the censorship thing Biker, you have a lot of comments on here and I doubt they’d go to the trouble of vetting each and every one. Try rephrasing substantially so it gets published? I am happy to be wrong!

    Any way if you’re right Biker then it’s good because rent rises are to my own advantage, but I was more thinking about the presence of realistic home buyers who have managed to secure finance. As one agent (trying to sell a house) told me the other week “people are not exactly walking around with wads of cash like they were”.

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  29. Yes, I’m a little puzzled by it all, Dan. I’ve rephrased, changed words… all to no effect. Analysis of the content indicates nothing at all threatening to DRA’s agenda.

    Perhaps I’ve unwittingly made a point they don’t want considered… . :)

    Your statement “…people are not exactly walking around with wads of cash like they were” is correct, particularly as a result of the sharemarket and Super crashes. Two couples we get around with sold family homes to cover share losses… and a third couple was forced to sell their family home to top up their Super, when that went bust… .

    But we also know couples in _our_ position, who can afford to invest… and, like us at present, they’re doing nothing… .

    Reply
  30. “like us at present, they’re doing nothing” – Amen brother; And as always we won’t be greedy. A little correction is good. Be happy. Hang out for Prof Keen’s 40% collapse and a bloke’s on a hiding to nowhere. Unless he has a 20 or 30 year timeframe and is thinking in ‘real’ terms. Although that’s only IMO!!!

    Reply
  31. Once I’d fully realised the ‘FHOG Effect’ on rentals, I saw _that_ as the greatest threat to property, Ned. It appears I shouldn’t have worried, if present demand is anything to go by. With quite a few rentals, we’re in a better position than most to gauge what’s happening here.

    The FHOG effect _appears_ to have lasted half as long as we’d anticipated. :)

    Reply
  32. As we discussed recently Biker, a correction to house prices may very well increase rents. (And about time if one’s an owner!)

    Re your post problems:

    DRA doesn’t seem to like Wiki links I suspect? And there could very well be others. But dump the http_:_//_www at the front and tell people that what follows is an intentionally destroyed link and most of us will be able to work it out I’d guess?

    Then Yep, words like Suss*x will get you nailed every time I imagine – This IS a family friendly site! :)

    Cheers!

    Reply
  33. Just don’t say H_o_m_o sapiens or Jaguar will pop round and confiscate their car Biker! ;)

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  34. HaHaHa… No, I checked that post over, letter-by-letter… nothing offensive, Ned. Wait-a-bit… I did use the g*ld word. But only once!~ :D

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  35. Well I see it as a better time to buy than it has been recently. I’ve not seen the real estate agents as willing to negotiate downwards for a fair while :)

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  36. We’d agree it may be the time to find a bargain, Dan. We get a few calls, letters and emails from realtors each week, probably because we’ve played real-life-monopoly in one suburb. We also get the occasional private call; but, like the realtors, they’re seeking folk in distress… and firesales.

    There’s very little of that happening in suburbs with high rental demand, great rents and zero vacancy rates!~ :)

    We’ve seen realtors attempt to talk prices down (they figure volume is the key) but ask them to drop their fees by a similar percentage and they pull their heads in faster than a tortoise!~ :D

    Reply

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