Gold Standard: The Long-Run Value

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“Gold-backed money retained its real value for 350 years in the United States and Great Britain. It’s only just clawed back to that level for investors today…”

BY THE TIME the War of the Spanish Succession was finished in 1715, the French King – who admitted that he “loved war too much” – owed the equivalent of £300 million.

Across the Channel, Great Britain owed only £49 million. Which might have looked a little like financial victory. But then, the United Kingdom’s population was only one-third the size of the French. And those debts – priced in “hard money” weights of gold or silver, both in even tighter supply than they are today – were almost 20 times the sum England had defaulted on four decades before.

But hey, that’s inflation for you! Or more properly, that’s inflation as it’s commonly understood – an absolute rise in the price level. In this case, the cost of running the state and murdering Frenchmen.

Whereas in 2009, three centuries later, the UK Treasury will extend its debts by £118 billion this year alone. That’s not only 2,500 times what it owed in 1715 in nominal pounds. It’s also twice the entire national debt that forced the last Labour government to beg an emergency loan from the International Monetary Fund (IMF) thirty-three years ago.

Now that’s real inflation for you! And for everyone else too, unfortunately.

“From the time the United States went off the Gold Standard in 1933 the wholesale price level has gone up by 760%,” noted Professor Roy Jastram, author of The Golden Constant, in December 1981.

“Since England abrogated the Gold Standard in 1931, her price index number has risen by over 2,000%.”

Both in the US and UK, the general price level since Jastram spoke to the Security Analysts Society of San Francisco has more than tripled again. All told, here in London, the British Pound has lost 98% of its purchasing power since that fateful September day when the UK government lost its nerve, and the The World Lost Sterling’s Gold Standard forever.

“Before that, the two countries had a combined history of 350 years of long-run price stability,” Jastram went on. “The price level was the same in the United States in 1930 as it had been in 1800. In England the price index stood at 100.0 in 1717 (the first year of her gold standard) and it was at that figure again in 1930.”

And all thanks to the magic of gold – that “golden constant”. Right?

To be sure, the gold-backed Pound did a phenomenal job of preserving its purchasing power for the 200 years starting when Sir Isaac Newton – he of the Laws of the Motion, but also Master of the Royal Mint in 1717 – established the Pound Sterling as a certain weight of silver.

Newton thus, since the two were interchangeable as cash payment, also set the Pound as a smaller weight of gold (“a pound weight of fine gold is worth fifteen pounds weight six ounces seventeen pennyweight & five grains of fine silver” to be precise) which over time, won out over silver as the arbiter of currency value worldwide.

As our chart shows (hat tip to Statistics.gov.uk for the long-run inflation data), tying money to gold delivered ups and downs in the price level. But overall, costs stayed remarkably steady for the 70 years starting in 1844 – back when the Bank of England was granted monopoly power to issue the currency.

Then the guns of August blew a hole in the Pound’s convertibility. Despite a brief rally after the ill-advised move to restore the old Gold Standard in 1926, Sterling’s long-run value just continued to tumble, as Jastram points out.

As for gold, its purchasing power also suffered during Europe’s second “Thirty Years War” (in Winston Churchill’s phrase), at least when held outside of government hands. Banned from owning it in the United States, private individuals could scarcely trade it for profit in London. Pretty much all of Britain’s bullion had already been nationalized long before (right as the Gold Standard Reached Its Zenith, in fact) and now it was needed to buy arms and munitions from across the water.

Don’t you know there was a war on? Or as Marc Faber put it in his Gloom, Boom & Doom Report last fall (Is there a way to preserve wealth?, Oct. 08), “I can see the gold bugs jumping off their seats and protesting that gold has kept its value (purchasing power) over the course of history. But the problem is that the owners of the gold also changed over time.

“So, when Timur sacked Aleppo and Damascus in A.D. 1400, it didn’t help to have your savings in gold,” the Swiss private-client fund manager adds. “You lost your life and your gold. Women had a better chance of survival and got a one-way ticket to Samarkand.”

Luckily for investors and savers with something less than their lives or liberty to lose 500 years later, the US and UK governments liberalized gold ownership just in time for Gold Prices to shoot higher on a tide of government-wrought inflation in the 1970s. (It’s also worth noting that, in line with how gold owners could survive the four-decade US ban starting at the depths of the Great Depression – and actually benefit from the revaluation of gold that accompanied it – Marc Faber advises holding physical gold overseas, free from the political and/or social risks of your own domestic jurisdiction.)

Finally cut free from artificial government values by Richard Nixon in 1971, gold broke back above its old Gold Standard par in terms of UK purchasing power in 1973. It then spent almost 16 years – after accounting for inflation and changes in gold prices – worth more than it had been throughout the late 19th century, the high-water mark of gold’s international power as the only true, single, irrefutable currency.

And amid the current bull market in gold, its real value for UK investors only just broke back above that level again, just as 2008 turned into 2009. For US investors, gold recovered its 1900 value at the start of 2007.

That’s the nature of a mean-reverting asset, of course. It reverts, if given time (and free ownership, priced in a free market) to its long-run average value. But that does also mean that the average itself will have to revert as well.

Because the starting point of any particular data series – not least if pegged by mankind, even the genius brain of Sir Isaac Newton way back in 1717 – might not necessarily be “correct” for the long run that follows. We can’t judge the “true” value of gold simply from its historical start.

Adrian Ash

for The Daily Reckoning Australia

Adrian Ash
City correspondent for The Daily Reckoning in London and formerly head of editorial at Fleet Street Publications Ltd, Adrian Ash has been studying and writing about the investment markets for the last 9 years. He is now head of research at BullionVault - giving you direct access to investment gold, vaulted in Zurich, on US$3 spreads and 0.8% dealing fees.
Adrian Ash

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Comments

  1. “Because the starting point of any particular data series – not least if pegged by mankind, even the genius brain of Sir Isaac Newton way back in 1717 – might not necessarily be “correct” for the long run that follows. We can’t judge the “true” value of gold simply from its historical start.”

    Ah, so houses might currently be at their longterm mean value too?

    ;)

    Personally I would expect that the mean value of gold (relative to inflation) would increase slightly based on how much investment gold there is in the world vs. the population of the world that uses it (everyone?).
    If population increase rate is higher than the gold production rate minus inflation rate then the gold value would increase over time?

    Maybe my maths is flawed

    Reply
  2. Gold and silver in the 1700’s and 1800’s were used as currency when traveling between countries. In today’s world of paper currency your relevant comparison of 1B in population in the early 1800’s compared to today’s 7B seems to indicate golds value at $700 to $800. It does not take into account the active use of gold and silver as a currency in the 1700’s and 1800’s and the non use as an active currency now.

    I would suggest there is a difference today and should it become and active currency because of the failure of paper, it’s value should be closer to $2,000/oz. because there will be no more dollars should dramatic hyper-inflation occur (see Wiemar Republic early 1900’s), therefore the raw metal value would greatly appreciate over the population differential alone.

    Thanks,
    Matt

    Matthew Burns
    May 3, 2009
    Reply
  3. I think after pro-gold article number 157 we have got the message from DR. Now can we please get a little more diversity? It seems of late every second article is basically a buy gold infomercial. How about someone from DR outlines the bear case for gold?

    Remember there are market forces that work to keep gold prices subdued. If gold prices head higher then the following factors can come into play:

    1. More gold mining operations become profitable and thus supply can, in theory, be increased.
    2. It becomes more viable to recover/recycle gold. There are vast amounts of gold sitting in industrial tips. It is expensive to recover this gold now but people in white coats are trying to work out a viable way to tap into these reserves.
    3. People stop buying jewellery because it costs too much. (as is happening now) and actually start selling the stuff to cash in on high gold prices.
    4. People move into other similar assets..i.e. silver.

    The gold bulls are now sounding like the oil bulls of last year. I recall we were suppose to be paying over $200 USD a barrel for the black stuff by now!

    Personally when everyone seems to be bullish on gold I get nervous. Isn’t this how bubbles are formed? Anyone want to buy a tulip?

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  4. Spoken like a man who only thinks in short term trends. When I wrote on May 3rd oil was at $40 a barrel, where is it now? Look at the long trends, not just the short ones. We are headed into a very inflationary spiral. We have produced 300% more paper globally than the total GDP’s. I understand under post Keynesian philosophy that there is no limitation to the issuance of a government chit that being currency, however, there is a predicate value resulting from that and there is an inflationary cost then to a currency replacement. That being gold and silver. Think long term.

    You saw a pull back in gold and took it seriously. You saw a short term pull back in oil and took it seriously. That was just a good buying point for long term move. Look long term.

    Matt Burns
    June 4, 2009
    Reply
  5. Greg we could also mention Comex shorts as a negative for gold which are punishing gold as we speak (last few days).
    However Comex might blow up this month if they get caught way short(June delivery). Goodness me, how high will gold go then?
    This month is a great chance for gold to blast into orbit as the bulls and bears battle through June. Its worthy of note that India imported zero gold in Jan,Feb,March but started to buy again in April. I hear their economy is on the up since a change in government. The best in jewelery demand this year, may be yet to come…I’m betting.
    Go bulls!

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  6. Lachlan I actually expected the combination of Swine Flu and that crazy guy in North Korea to send gold well over US$1000 but it hasn’t so it is quite possible that gold has seen it’s peak of this crisis. This does not mean gold is not something to own but at current prices I think there are simply better things to put money into: oil and gas spring to mind. Yes jewellery demand will pick up again but if the stock markets stabilises then demand for investment gold will slip back from the current record highs I would imagine….or is it possible we enter a perfect storm where demand for gold keeps surging higher?

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  7. Hi Greg. There will be a massive global business cost associated with Swine Flu overreaction and confusion.

    My view is that it should be business as usual in most work places along with some plans to keep the doors open if 30% of staff are off sick (for a week) at the same time. Mind you I wouldn’t want the guys I once saw setting fuses at the Peak Gold Mine in Cobar to be coughing and sneezing while doing their work.

    Yeah, I understand that Kim Jong Il has had a significant stroke and signed off on the nuclear test to win favour with the Generals as a precurser to handing the top (puppet) job over to his son. It’s entirely for the domestic (military) audience. My gut feel is that China will sort the situation out and that any action they take will be invisible to outside observers.

    Cheers

    Coffee Addict
    June 5, 2009
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  8. CA I hear you about the Swine Flu. They were closing schools and getting quite worked up here in Japan over this but have since backed down and worked out that it is no worse than the seasonal flu. It did however impact business especially in Osaka and I guess the companies that make the face masks did well! But it just shows how quickly a virus can spread around the world these days. I tend to be more worried about the outbreak of disease than global warming.

    As for North Korea…I ranted on about this a few weeks back. (see: North Korea, Japan and the illogical nature of U.S. foreign policy.) I do not know how to resolve the North Korea problem but I do reckon it is best left to the countries in the region to sort out and that the U.S is part of the problem not the solution. Let China take a leading role and have them show the world how they can be a force for good…that would help calm everyone down.

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  9. Greg. The (mild) flu mania and stupidity continues. The NSW Government is even excluding from school, those kids who travelled to the State of Origin game in Melbourne. Such action is known to be useless.

    The key difference with seasonable flu is that it has double the transmissibility. That means that everyone who could get it will get it regardless of how many time they wash their hands or what colour mask they choose. Yeah those cheap surgical masks don’t stop you from catching it but they may somewhat limit your ability to spread it.

    I’ve currently got my forth tiny sniffle for the season here – not much – and so has just about everyone else I work with. Influenza A is a different kettle of fish completely and it does require a week in bed.

    If everyone with a winter time sniffle quarantines themselves for two weeks exery time they get a touch of a sore throat (as recommended) EVERYTHING would stop for 3 to 4 months. Absenteeism is about to go through the roof here and it will have a big GDP impact. Shopping malls and retailers may suffer.

    From the US experience we know that people with severe respiratory illness, compromised immune function and pregnant women are at risk. If they get a sore throat they should take Tami flu or Relenza immediately. For everyone else it’s not a big issue and unnecessary recourse to these drugs will render them useless should a strengthened version hit the northern hemisphere next season.

    The only reliable source of information around (in my view) is:

    http://www.cidrap.umn.edu/cidrap/content/influenza/panflu/biofacts/panflu.html

    Coffee Addict
    June 5, 2009
    Reply
  10. Gidday Greg
    Thanks for your reply. OK Im keen on gold. Ive had a ten year love affair with it first as amateur prospector and now as an investor. But oil and gas too seems like another inflation play (as the USD weakens) and Ive had a tinker with these too of late. Its such a very exciting time to be alive despite the crisis. In fact the crisis is making people think and keeping us all on our toes. Just look at the enthusiasm on this forum. For the time being, here, we’re still the lucky country.
    I regard to gas. The last few weeks have been slow for my stocks. I have noticed that gas prices are at a low low. Surely they will rocket up soon. Im hoping that will bode well for my stocks but to be honest I am not sure what to expect. Theres both danger and opportunity everywhere I look. Cant complain about being bored but.

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  11. Did anyone ever track that info back to source where The Mogambo Guru reckoned that “Mr. Ash notes that Stephen Harmston … wrote that” blah-blah, blah-blah-blah (heresay?) that ” … across 2,500 years, gold has retained its purchasing power, relative to bread at least” which is seemingly proved when one considers that “It is said – SOME MORE HERESAY! BUT FROM WHOM??? NED S REMAINS IN HIS USUAL STATE OF CONFUSION? SMILE – that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC” (With the implication being that as it still buys 350 loaves of bread, it is a reliable long term store of wealth – In spite of the fact it has only gone up an average of 2.7% pa since starting to trade freely in USD in 1971 according to another read.)

    Reason I ask is that the closest I got when I googled “gold bread price” was a bloke called Dr. Claude Mariottini who reckons he is a Bible buff (read Baptist Old Testament Professor) and that the good book says no such thing. Maybe King Neb did have some rocks chiselled with such marks for our future enlightenment? But in the absence of an Old Testament Book, Chapter and Verse reference, such a rock reference would be handy. The Mogambo Guru omitted to give these either.

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  12. Lachlan I reckon gold as a long term play is not a bad thing to get into. As for gas I saw Marc Faber a while back saying he reckoned natural gas was undervalued and so that got me looking into it a little more.

    The last few weeks have been much more interesting than the previous few months, always nice to have a least a few stocks heading up :)

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  13. Ned S – that rant about gold and bread prices is pure fiction. Just another one of those crazy statements that gets tossed around, a bit like waiting for the water going down the drain to change directions when you cross the equator :)

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  14. One more – Those graphs say the purchasing power of gold crashed in WWI – Compared to the paper currency it backed????? And remained flat (and real low!) throughout the Roaring 20’s. And WWII wasn’t at all kind to its purchasing power either. (It isn’t Ned S saying this – The graphs are – Look at them! Or tell me I can’t read a graph by all means please?) And things just basically got worse for gold’s purchasing power up until Nixon cut the peg in 1971 – Or at least that is what the graphs are saying. (I’m not at all sure if I believe them; Or not?)

    Then gold went ballistic for 8 or 10 years. Then it crashed. Now it is a bit “peakish” looking again maybe? And could go ballistic (in USD) thanks to Uncle Ben of the Fed Fiddlers and his mate Tim the Treasury Tamperer – maybe? When we simply don’t have enough reliable free market history on this stuff to know how it reacts in a truly global crisis. (The Chinese seem smart – And they’ve bought a bit over the last few years. Wonder if it was more like genuine industrial type usage levels or more along the lines of gold is really really valuable and they want lots?)

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  15. Jim Rogers is saying the Dow is going to 30,000 to 40,000. A lot of people are starting to agree with him. He has no shorts in place on anything. Maybe the megamonster bubble is coming!
    He’s big on gas too.

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  16. A gas bubble?

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  17. Greg – Gold, Bread and Price comparisons seperated by 2,500 years do sound a bit suspicious. One would have to suspect that King Neb’s definition of a loaf might have been a bit different to ours – Wonder if his taste ran to light and fluffy white or if he was more your flat black lump type of bloke? And that the production costs of a loaf just could have been a bit different – The slave’s annual leave plus holiday loading, baby bonus and superannuation conditions might have been a bit different to ours? As might the OH&S standards, international trade agreements, Medicare levy and a few other things.

    But why spoil a good story with too much detail? Some of these sites that quote it, also contain links to ads that reckon they can tell me how to turn $500 into $500K in three trades and such like – And it wouldn’t do to miss an opportunity like that through being a bit of a doubting Thomas.

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  18. Ned S – Just three trades, wow where do I sigh up? lol. It is a bit like all those people who knew the stock market was going to crash. Of course they did not back up their infinite wisdom with plenty of hard cash otherwise they would have shot into the BRW rich list :) Actually the list of the world’s richest people only has a few investors types on it..so this should tell us all something.

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  19. Interesting posts, Greg and Ned. Some points drawn at random: The Top Five richest in Oz have two-out-of-five in Property; in WA one-out-of-five in Property. As you’d expect, miners predominate. Greg, if you go back a year in these forums, you’ll find folk like our own Coffee Addict called the Crash correctly… and made exactly the right moves. So did I. Now it would be nice to believe that those of us who acted did so as a result of higher intelligence, remarkable insight, etc.,; but the fact is that what Bonner was saying (combined with other sources) led us to go cash-before-crash. We then reversed that and _almost_ picked the high. We did pick the low.) Yes, I’ll grant you we picked up under half a mil… so your point that we won’t make the Top Ten IS correct. I didn’t even commit ANY of my own funds in our latest online gamble with Super, figuring that if I’d got it wrong, my wife’s fund has much longer to recover. ;)

    What DR says about gold is true. We know it is at its best during periods of extreme fear. That applies in the US now. But as Dan warns, it’s not guaranteed. I related the sad but true story of the AFL footballer who committed suicide a couple of decades ago, to my young sons. Gold had literally dropped outa the sky… and this poor soul, figuring he’d lost everything, ended his life. Gold quickly recovered… went to $1000.00 an ounce!! I let them draw their own conclusions from this story… but I’m sure that it has helped their resilience when their timing has not been perfect and they’ve lost major sums in a single transaction… .

    Biker Pete
    June 6, 2009
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  20. It would be nice to get DR’s (or readers’) take on the history of the gold industry in the 20th and 21st centuries, such as who runs it, who owns the mines around the world, and so forth. Is it anything like the diamond industry?

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  21. Ned, I’m intrigued that gold stayed flat during two world wars. I guess employment rose(!); munitions thrived; and the citizenry united in purpose. The movement of precious metals away from war zones may have been a major priority! Bill’s recent description of the US scene “The Grandest of Larcenies” in the latest US DR, leads me to believe that the collapsing USD must create immense fear in Europe and Asia. It’s possible most Americans may still be unaware of their buck’s imminent collapse. Long ago we jettisoned our American Express cards. They were unacceptable in over half the countries in which we travelled. How long before US dollars, once deemed the most desirable of currencies in eastern Europe, are shunned with the same contempt?!

    Biker Pete
    June 6, 2009
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  22. Biker Pete – glad you done well. But if DR or anyone else truly believed they were spotting the crash correctly then they would have used the cash from sold stocks to short everything. Moving simply into cash before the market fell might have been a good move, but it was a cautious one. To play the crash correctly we would have had to sell out of stocks at the top, short the right stocks, grab more cash and then be taking positions at the bottom of the market. (and possibly now selling into the rally) I have not seen anyone clearly detail in real time how they have executed the perfect crash strategy. If I have been clever enough to work out a nice plan like that I would be having drinks with little umbrellas in them now :) One of the few major players who I know has made money during this market mess is George Soros.

    Of course there is a big assumption here, and that is that selling out of stocks was the right thing to do? Remember if you are not holding stocks then you have missed out on all the retail share offerings and this means you have missed buying into a whole heap of blue-chips at “crazy” prices. Many people talk about how they have lost money in the stock market, but you only lose when you sell and you only lose a lot if you buy high and sell low. There are plenty of ASX listed companies that are still ahead if you jumped in during the last bear market in around 2002. Remember the market went down over 40% from the 2007 highs, not down 40% from any high.

    As for gold, yes it is always a good play when fear is around. But the question is..will the gold bugs hang on forever or will they sell? What prices are they buying at? What price will they sell at? I always get a little cautious when few details are revealed. Not that I dislike gold…as I have said many times I just don’t love it at over $900 USD.

    Anyway where are the “sucker’s rally” people gone…is it still a sucker’s rally now? Why do bears hide when stocks are heading up? :)
    Maybe they are worried the bulls are on a roll? :)

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  23. You’re right Greg… again! People who sold yesterday on the stock market’s relative high would be smiling, albeit wiping a sweaty brow. Finding the correct balance of pessimism and optimism is an art like no other, but it is tempered by information/intelligence, and completely blown out of the water by foreknowledge, however it is come by (Hi Mr. Soros, if you’re reading this). Stocks are up in Australia, true, but it can still be a sucker’s rally if you fail to pick the next crash. My cynical side (which is dominating lately) suggests that, as at a dodgy casino, the rigged games are set to favour customers until everybody gets his confidence up and starts placing nice, juicy bets again. The downturn doesn’t happen until the time is ripe – when the right amount of money is on the table and the little possums lose their fear again. It has to be a sudden dip, otherwise the profits are less.

    I think the bears are reading widely and thinking what to make of it all, but personally I’m staying the pessimistic course until I see green shoots that I can myself recognise not to be noxious weeds.

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  24. You’re not wrong, Greg. My investment courage is tempered by my wife’s firm grasp of my leash. One of her mother’s admonitions was that she _not_ marry a broker, BTW. (Her mother was a Rand.) Yes, if one had picked the right stocks during the blow-up, then Ned’s three quick trades might have put one well into the seven-figure club. To answer your question: Many bears remain in property when stocks are rising. Unlike a lot of property bulls,our positive gearing, offsets, super and cash will allow us to _expand_ if property did ever crash. You’ve asked if “…it is still a sucker’s rally now…?” Well, I don’t share the view that the Dow will hit 40,000; nor that gold will hit $2000.00+! I think gold is a great hedge against the impending US dollar demise. I also believe that we are due for a second, very large global shakeout, one in which America’s financial dentures are rattled. We’re tied to that, unless China develops her domestic markets, expands international markets and reduces her reliance on US consumerism. If we knew what all that really meant, of course, more adventurous and aggressive capitalists might back the hunches with cash. Woof! ;)

    Biker Pete
    June 6, 2009
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  25. Dan, Pete. I think we are all on the same wavelength. I am so bad at timing the market that I just do not bother to try…I simply sell a bit when things are going well and buy a bit when it looks like the sky if falling. I often sell below the highs and buy above the lows …such is life :) The only damage the market caused me this time around was to punish me for buying shares in 2007 because I thought the sub-prime crisis would not be this bad. Oh..and I got smacked down for buying into Babcock and Brown because I thought they were oversold! That was my attempt to be George Soros like..I failed..lol :)

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  26. Greg – Stocks aren’t my thing at all (yet) as you know. But the only book I’ve ever read on it basically reckoned that if a person can learn to spot a bear market and bail until it turns, that is way good enough. The author seemed to be of the opinion that shorting is really a rather different game altogether and not something they’d recommend for anyone but the most skilled of players perhaps?

    The nasty governments banning shorting of those stocks people probably most wanted to short just reinforced the point to me that the game can obviously be “different”.

    As for staying in stocks during a crash, I’ve got to admit that my big worry would be a company going bankrupt?

    Gold – I think you are asking the right questions.

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  27. Don’t feel too bad about B & B, Greg. Marcus Padley was amping it at its high…! Neither T Boone nor Buffett really withstood the winds of change too well, either. Ned, I’ve experienced the trauma of backing a rapidly-expanding company which went bankrupt about five years ago. Thought I’d done due diligence, knew and used their products, knew their holdings intimately… but knew little about their board; or their board’s true intentions. The company went down, then quickly morphed into another company, which transformed into a third…! Difficult to prove intent, I was advised… . Fortunately we made a much larger capital gain on a property sale that financial year, greatly minimising the pain. This has been my only real loss in over thirty years of continuous investing, so I guess both luck and caution have worked in my favour. On the other hand, I should have acted on both NDO and TAP two months ago… and missed the boat both times… dammit…! :)

    Biker Pete
    June 6, 2009
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  28. The suckers rally does seem to be forgotten about Greg. I thought I would have sold up by now. There is just so much talk of inflation now and a currency crisis (USD or other major)seems to be eminent. Im still not sure whether stocks are a good place to be even with the inflation scenario. Maybe day traders will do well providing they are managing risk. Despite inflation Im not sure what might happen to stocks in a currency crisis (in particular the USD or other majors) because so many dangers lay hidden….I wouldn’t know where to start but just broadly hmmmm social and political changes. Id probably be better off going long on an indice like gas than a gas stock but I havent got that far with my investing yet.
    Although I’m learning fast.
    Some facts about gold I found out recently:
    *Production has been steadily declining since 2000.
    *Hedging has been reduced more than three fold which represents a drop in supply since there is now no guarantee of this gold ever getting sold.
    A negative or two from my experience
    *Exchange rates going against you
    *Storage

    I suppose production would rise again with a real increase in gold prices….but Im not sure.

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  29. Dan – The best argument for US “green shoots” coming I’ve seen is actually that recent DR article on the Subprimes having reset and the other ARMs that are coming up for reset. As the author says “Once the carnage begins, will it be as bad as the subprime crisis? That’s the $64K question.”

    The good news either way would seem to be that by the end of 2011 latest, that mess should be over with one way or the other. How much other and collateral damage has been done and will be done is another question. But even some cause to see an end to at least one major problem sounds good.

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  30. Ned, they are interesting thoughts. 2011 will be about the time the Australian deposit guarantee ends, the mortgage support schemes end, and, I guess, the US currency will have adjusted to closer to its true value, whatever that may be (or it may not even exist any more). It’s also safely into the time where China is predicted to have completed its submarine fleet (mutually assured destruction). Perhaps the Aussie Government is thinking the same as you say, in that it is not making assurances beyond around that time. I also agree with you that by 2011 we will be coming to a more stable phase in the world economy, provided that nothing else happens in the meantime. That said, I still don’t think, though, that we’ve reached the bottom of the economic crisis, or the markets – but for the moment that’s become an unpopular opinion.

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  31. Maybe Ned the carnage to be made worse by rising interest rates on US mortgages?

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  32. “That said, I still don’t think, though, that we’ve reached the bottom of the economic crisis”
    I’m with you Dan. I reckon if this inflation thing goes off and the bubble is reflated it’s actually just going to be a lot worse than it needed to be. I think the near term catastrophe will be US dollar dumping on a grand scale. Who needs TV. Real life is entertainment enough.

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  33. Lachlan – I’d guess the Fed is real keen to keep interest rates low for lots of reasons. With the rates those ARMs reset at, being one of them. It will be interesting to see how/if they can achieve it given their walk down QE lane. Being a Pollyanna doesn’t come easily to me, but again, quite intentionally going out of my way to look for a positive, I guess we can at least say they are well and truly awake now after after a long and dozy decade.

    And while they may not be yelling it to the public, a bit of commonsense regarding allowing businesses to “restructure” and seeing living standards “moderate” (including getting some efficiencies into healthcare) and raising taxes anywhere they figure they can without damaging the economy overall etc, etc, etc will all be fair game. Plus push the debt out. Politically difficult – Yes – But just maybe not so much now as for a nation that has realized even the likes of GM can cease to be a part of the Dow.

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  34. Maybe the years 2012 and 2039 will be more significant than 2011. 2012 for the BBs… and 2039 for Gen X. Hope to be here for 2012… odds against 2039… . Theoretically, Genexxers will nearly ALL be SFRs… (But who knows?)

    Biker Pete
    June 7, 2009
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  35. Matt Burns: Good points. It is interesting how a rally changes people’s opinions so quickly. Just like wild mood swings, happy, sad, happy, sad. Can’t we just be rational and look at the logic? I wonder if some gold bears will be reading these articles in a few years and wonder what they were thinking.

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  36. Dan in regard to diamonds/gold. I know little about diamonds but am assuming the following
    *the supply and demand fundamentals of diamonds differ from gold because there is much greater supply relative to gold and the respective markets for both
    *there is some type of market monopoly? Therefore if you produce them you’ll encouter difficulties at the marketing end.

    What I do know about gold is that anybody can mine it and sell it. Thousands of small claims in Australia are testimony to that. I have friends who spent most of their time in the eighties detecting gold in WA full time (300-400oz/year) although that easy stuff is now mostly gone. They when on from there to set up a mechanised, alluvial claim in the north of that state for twenty ounces per day. They then moved to the east coast and bought land, built a house and a couple of small businesses, had a family etc. I always say they had the knack of being in the right place at the right time. More recently this mate of mine sold his business and headed back off prospecting although I dont think he’s under any pressure this time to succeed.
    I know plenty of other people who have had small claims and never had any trouble selling their gold at spot price (minus assay and refining costs…about 5%).
    The last time I sold gold I was paid similarly and within two working days.
    It is my observation also that many small mines fail quickly.

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  37. There is a lot of debate in US concerning the purchase of PMs by ordinary citizens concerned about hyperinflation. A main concern is, who would except it as a medium of exchange. However in Germany some weeks ago a company announced plans to install 500 machines which will distribute 1/20 oz gold coins. They even put a prototype in a shopping mall. In the US a story came out about a car dealership who will trade cars for gold and silver. Things do change as history confirms but just never fast enough for the nervous human disposition.

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  38. Biker – I still can’t get my head around those graphs. In the search for a bit of clarity, I did dig up a related 11 Feb 2009 article by the same author. (Have tried four times now to send this comment with a link to the article in and it always ceases to exist – Strange?)

    Nevermind; google “Long Run Value Gold Part II” if interested.

    I thought it was worth the read.

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  39. Lachlan, that’s very interesting re: gold miners/prospectors. As for issuing real gold money, it seems to me that such a practice would make money less secure than paper cash, as coins are more easily forged than paper money. I’m not aware of a method that guarantees the gold content of a lump of metal which doesn’t involve harming the object in some way (melting down, etc). There might be a solution to this problem, such as using x-ray radiation or portable MRI or something, but it’s yet to be invented as far as I know.

    For this reason I don’t think gold will enter currency in its traditional form, but will continue to be an “investment”. On the other hand, now that central banks have shown their complete lack of discipline (or morals) with the issuance of fiat money, why should we trust them to reliably issue money based on a gold standard without similarly diluting supply?

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  40. Well worth the read, Ned. Thanks. I remember during my childhood and late teens, that private ownership of gold was banned in WA, possibly so that possession alone might be grounds for conviction of any miner who had been able to ferret away a nugget or three. I remember too reading about some fairly major goldfields heists in very remote, less-policed desert locations. Not sure if the rest of Australia had this prohibition(?) The US prohibited/severely limited private ownership of gold for forty years last century. Which other countries prohibited ownership, I wonder? Certainly the flat periods on the graph coincide with the bans in the US and Australia. After Ford’s and Nixon’s removal of the bans, gold takes off. And it may all just be coincidence…

    Biker Pete
    June 7, 2009
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  41. Prohibition of gold mining in WA has also occurred in WA during settlement. James Mitchell, state premier, prohibited British group settlers from mining, even after they had located gold in the state’s south west, for fear they’d abandon agricultural pursuits in favour of the precious metal. Whether that was the real reason, or whether a new field might have weakened the ‘possession criteria’ I’m not sure!

    Biker Pete
    June 7, 2009
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  42. Biker Pete its amazing then what a contentious substance gold has been even not that long ago in our own history…and yet now, few people except some of our oldtimers have any experience with gold. I dont think the east here has seen prohibition, just the Eureka incident which was something to do with tax or other mining regulations ..not sure.
    Dan I cant see gold currency (hard currency) becoming a world wide reality but I can understand this German companies idea may work due to the past history there ie hyperinflation. People there already know the drill so to speak. Regardless its bound to be a positive for gold.
    To be fair minded, although Russia and China have made indications for gold backed currency I’m still perplexed as to why such governments would opt away from the wealth control they can excersize with unbacked fiat.

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  43. Sorry dan i missed your point about diluting the value of gold backed fiat. Can they do that?….then again apparently naked shorting is looking more like a proven case all the time not to mention naked ETF’s why not naked issuing of fiat. Hmmmm why am I feeling cold all of a sudden (insert smiley face).

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  44. Lachlan, you implied it yourself – why would central banks want to shy away from the control they exercised through fiat money? The answer is that people have lost faith in it. Instead the money issuers will stand, hand on heart, swearing by the gold standard, hoping that everyone will believe them, one last time. But fool me once, shame on you, fool me twice, shame on me, right?

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  45. Yes, Greg I think we all should be bears and bulls why be one or the other that is emotional like betting on your favorite team to always win

    Maybe we should all be
    Bullish bear (yes I think this bear market will last for years) at the same time
    Bearish bull (yes I think it is starting to turn into a bull market)

    The end of the day is to make money egos aside

    Bear market rally for me is as Bill said when the alt-a expire which will be 2010, 2011
    Or when all countries stop trusting each other as eventually everyone will have a strong currency and a AAA rating
    That’s why the world will not peg money to gold. That’s when people will stave around the world as the government will have no money to subsidize for food, health, jobs, and pensions, as artificial stimulus will now become subsidy this that other?

    On the good side of it at least we do not need a war to print money?

    Can you imagine when Gabriel looks at history of currency charts and compares them with future currency charts saying how can everyone have a strong dollar against each other, there will be massive distortions coming due to printing money?

    Also if you have a new currency then nothing will change as everyone will want a AAA rating, and only the US will gain as it rights off its losses.

    The cats out of the bag and every country will have a back do to printing money?

    This recovery happened to fast for me, it reminds me of the movie alien, when the guy woke up out of a coma and started eating saying he was fine and then the alien exploded out of his stomach ;)

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  46. Lachlan: Yes, gold’s persistence is impressive, but its attributes have been universally accepted thru’ time. Interestingly, when my grandfather and my great uncles trekked the Holland Track from Coolgardie at the turn of the century, with horsedrawn drays, taking up five large acreages to the west along the way, one of the six properties they bought (from Alexander Forrest, Twiggy’s great, great uncle) was Golden Valley. A little stream still crosses its northern boundary… and near the stream, my great uncle picked up a nugget the size of his thumb. To this day, the family argues whether this nugget was carried there and discarded by an Aboriginal on walkabout, carried by a flood eons before… or if some other explanation exists. (It was the least attractive property of the six!) The property was renamed in the mid-forties… and recently sold for many, many more millions than my uncle paid… naturally. The question remains: Our Aboriginal people must have, hundreds of times, picked up nuggets of such allure that they were kept as interesting tokens, perhaps to be discarded for one reason or another… . What did they make of it? We know, as stone-age people, it probably had the most minimal value… a mere curiosity, perhaps.

    My own experience with gold so far is minimal. I could relate a half dozen interesting anecdotes from my six years in the goldfields; but the most interesting may yet be to come. Twenty years ago, when we bought our rural holding, we realised we were in a communication dead zone. This interfered with every aspect of telecommunications, but particularly with telephone, radio, TV and (later) internet. Two satellite dishes are still necessary. About 2004, I was advised that aerial surveys had identified the primary cause of this greyout as ‘mineralisation’ in the hillside above us. Then two years ago I learned that in our part of the state, the occurrence of gold is often adjacent rose quartz. Guess what the north-west of our property is composed of?! I haven’t had time to do more than amass a few bucketfuls of promising quartz exposed by heavy rain, for hand dolly-crushing at some future time, but I figure I’ll run another road up into our property at that very location in the future; citing the need for a second fire exit. Fossicking the cutting’s debris should keep me busy and fit for the next coupla decades. Maybe the missus will give me a good metal detector as a retirement present next year(?) More excitement than digging another sixty soakwells for her!! :) (Type a colon, then a bracket…) Result :) Cheers!

    Biker Pete
    June 7, 2009
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  47. Rick e…hard to say where will be in 2010-2011. The thing about the global economy is that it is not that efficient in terms of getting stuff to where it is needed. I mean we have no shortage of food actually, yet people starve. You often hear people say that there will be a food crisis in the years ahead but what this really means is that there will be a food distribution crisis. In many developed countries people are getting ill from being fat when in other countries people cannot get enough food to eat and die…doesn’t this sort of say something? (even in Australia we have people that go hungry and yet we throw away vast amounts of food)

    My point is in a rather roundabout way, that there is plenty of room for improvement in terms of how the global economy operates. So while I can appreciate the view that suggests the markets will slump again I also see plenty of areas where if we get things sorted, global growth can return and the free market can deliver a better standard of living to many more people.

    Oh my goodness, I am starting to sound like a G20 protester ;)

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  48. Gidday Biker Pete
    A metal detecting trip to WA will possibly become a reality for me over the next couple years. Lucky you to live where you do. Another friend of mine returned from WA recently with a beautiful 4 1/2oz nugget.Crumbs, for me, even if it doesnt work out theres its a plenty good reason to travel the continent (something Ive done little of). I see gold prospecting kinda like the stock market. Lots of downside risk so better to choose a course of action with high upside ie prospecting fields with a history of large nuggets OR in your case probable virgin ground with the right geology. If you do stumble on to something, and your the first there…..its payday!
    We have some highly mineralised areas over here in Qld. I have managed to find some beatifull small nuggets with (sub 15g) with a low cost VLF detector. However in those mineralised areas it is mostly too noisy to use. In contrast I have also an expensive machine (GP 3000) which is dead quiet in the same ground.
    I hope you do get a break to try out your own ground someday. Good luck if you do :)

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  49. Thanks, Lachlan. I have two close friends whose passion is prospecting. They do fairly well. One, a plumber, did so well while digging trenches, etc., he now prospects more than he plumbs. The other is a chalkie who retired early.

    What is interesting on my patch is that I can actually see where someone has already been looking for colour near the cutting on the road which passes our property. Don’t know how they went… . The cutting is already shedding promising material… rose quartz everywhere. The hillside on the northwest side is substantial… and I need an earthmover to carve decent section out, so I can see more.

    I may combine that job with construction of a second pool on my creek. Hands full at the moment… .

    Biker Pete
    June 8, 2009
    Reply

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