Gold futures again flirted with an all-time high over the weekend near US$1,260. But thank goodness we read Michael Pascoe's article in today's Age before again pointing out that gold is a good hedge against stupid monetary policy. Not so! Gold, according to Pascoe and Macquarie Group interest rate strategist Rory Robertson, is in a bubble. Also, it has no yield, and so therefore is impossible to value.
With short-term real interest rates on U.S. government bonds effectively negative, we've wondered lately why so many people complain that gold doesn't have a yield (either). But it's true. It doesn't. It just sits there looking pretty and yellow and heavy - preserving value and capital better than other kinds of money in which you can choose to denominate your wealth.
But maybe we just begged the question. Our contention is that gold is being remonetised in the global financial system as the fiat money system falls apart. Yeah. Totally kooky. We know. Because so many paper currencies have lasted forever instead of returning to their intrinsic value.
In any event, we can let the cat out of the bag and say we're delighted to be debating Mr. Robertson next Tuesday night in Sydney at an undisclosed location. Actually, the location is disclosed. But if you want to know where the event is, you'll have to RSVP to thoughtbroker@gmail.com
The debate - and it's not about gold, it's about whether Australia has a house price bubble or not - has been organised by Parnell McGuinness and Leonie Phillips of www.thoughtbroker.com.au . We had the pleasure of meeting both ladies in Perth at the Mannkal Foundation's Freedom Factory conference in April.
It should be a good debate. And fair warning to Mr. Robertson - we also own hiking boots and will not be intimated by bets. Having grown up in the Rocky Mountains of Colorado and twice summitted Longs Peak, we're not afraid of hitting the trail.
But in all seriousness, Australia deserves a good debate about whether its housing market really IS different - supported by high immigration, low interest rates, constrained supply, prudent bank lending, and a national desire for home ownership...or whether the nation's lenders have overinvested in housing as an asset class, fuelling a price boom but saddling millions of Australians with debt that will be painful to carry and hard to repay if and when interest rates ever rise again.
On the subject of gold, here is a bonus contention: you'll know there's a gold price bubble when Macquarie Group uses equity raised from its own clients to borrow lots of money, overpay for gold mines (sold to them by the government), and manufacture a yield on those gold assets, perhaps paid out of capital. That sounds more or less like a familiar model and a sure indication an asset class is in a bubble.
Macquarie isn't involved in gold yet, therefore we contend that gold can't be in a bubble. It is, however, recently involved in housing. Go figure.
But what about mining stocks? Is it time to buy them? We had a chance to ask just that question to our colleague Greg Canavan this weekend. And we recorded it on video! You can find part one here and part two here.
Greg is a value investor with an understanding of what makes sound money, hence the name of his publication Sound Money.Sound Investments. If you haven't read any of his previous Daily Reckoning articles, the video is a good introduction into his investment philosophy and his current thinking on the market. Each half runs about twenty minutes. And yes, we know we have a face made for radio.
For the record, Greg has an end-of-year special on for new subscribers to his letter. If you're a serious value investor in Australia, you should be reading Greg's weekly reports. And in the interests of full transparency, yes, we get a commission every time Greg sells a subscription. It's the only active deal like that we currently have with any third party - because Greg's writing the only newsletter in Australia that we like to read but don't already publish.
Back to the bigger picture. It is hard to know which is the more dangerous group gathered in Toronto for this weekend's G-20 meeting. Is it the balaclava-wearing, black-shirted vandals who destroy public property and break windows to bring down "the system"? Or is it the men in suits behind the security fences deciding how to cut spending and raise taxes in order to repair the broken debt-based funding model of the Welfare State and then shove that deal down everyone's throats?
Hmmm.
On the one hand, the balaclava wearers have a point: why should the G20 leaders meet in private to devise and impose a global financial regulatory regime that benefits, primarily, the banks themselves? You could argue that the G-20 leaders are the democratically elected representatives of their people. But still, it feels a bit like a private party to which you're not invited.
Our sympathy for the bomb-throwers ends at their wanton destruction of private property and vandalism. The truth is - in our experience - there is always a small group of people at these gathering who just want to break and burn stuff. They are criminals and vandals. And if we believed in capital punishment - we don't because we don't support the power of the State to take life - all property crime would be capital crime.
By the way, the only good thing about burning cop cars and broken windows is that you have what the PC class refers to as "a teaching moment." That is, if breaking stuff were really good for the economy because it created jobs (lots of windows to repair, new cop cars to buy), then the most sensible economic strategy to create the most growth would be to break everything.
This must be what people mean when they say that war is good for the economy. It stimulates production and jobs. Taken to its logical conclusion, the best strategy for the strongest growth is perpetual war - which funnily enough seems an awful lot like the strategy of the American Welfare/Warfare State.
Of course anyone smarter than a fifth grader intuitively knows that you can't destroy your way to wealth - unless you're a war financier and profiteer, and most of those jobs are already taken. Is it any coincidence that governments are so often declaring "war" on social issues and then borrowing from large money centre banks (often in the form of a cartel with monopoly powers like the Fed) to pay for those wars. Isn't this war profiteering too?
The only real difference in substance between Toronto's street vandals and the government suits is that vandals are destroying tangible value in front of your eyes while the Keynesian inflationists are travelling forward in time to destroy value. "Pump priming" deficit stimulus spending robs from future demand and misallocates current resources to create the illusion of growth - a political motive for people like former Prime Minister Kevin Rudd to hang his hat on (attached the head Labor loyalists recently cut off).
Of course all of this goes "unseen," which is the great observation of Frederic Bastiat. The money spent repairing the baker's broken window is not spent buying a new mixer to make more dough. The money spent on the new cop car is taken as taxes from the pocket of the family that would have gone to Disneyworld.
Everything has a cost, which is often unseen. Compared to the benefit - which is often trotted out on camera, the hidden cost doesn't seem real. And in a way, that which can now never happen is an aborted possibility, killed by the policy of refusing to live within your means (stimulus spending). To the extent that the suits in Toronto want to spend money they don't have, they are as equally destructive as the vandals in the Streets.
Maybe they should all break bread together and discover they have common cause: a fundamental disrespect for private property and personal freedom. It would probably be a tax-payer catered lunch though. And you would be the main course.
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by wasabu on 29 June 2010:
Your articles normally flow down my throat like a hot totty with whiskey but there seems something a little odd about this one. I ... can't quite put my finger on it but hmm...
Lets put it this way: On the one hand you have the white collar money junkies and political power junkies who for 50 years have paved the road to hell, a brand of summary violence against the masses which clearly is leading to global hyperinflation and WW3. On the other, you have literally a handful of protesters losing it, probably a few of which just like a good bit of disorder. Perhaps the only kind of disorder that has a chance of unseating the despots (ask the French!).
In any case, the 'wanton destruction of private property and vandalism', of exactly 3 police cars and 1 baker is hardly going to lead to the destruction of the middle class, revolt and war, is it?
Wanton meaning: "without regard for what is right, just, humane, etc.; careless; reckless."
Surely some of these protesters are not simply into breaking sh*t, but may be the first victims of the destructive economic and fiscal policies of their re-presentatives? Perhaps the first of millions according to your own analysis! Surely one has the wisdom to see into the root of their despair instead of taking their most superficial outward actions in isolation and applying some schismatic moral to it without the benefit of the big picture?
Come on Dan, what happened? Did someone scratch your car?
Comment by Stillgotshoeson on 29 June 2010:
RE: Michael Pascoe's article in today's Age
I find links to newspaper articles informative.. not just the article itself but the comments readers leave to these articles are eye opening at times....
Comment by Justin on 29 June 2010:
"Gold, according to Pascoe and Macquarie Group interest rate strategist Rory Robertson, is in a bubble. Also, it has no yield, and so therefore is impossible to value."
The bullion traders at Macquarie must be deliberately keeping Rory in the dark. Doesn't earn a yield my arse.
Comment by wasabu on 29 June 2010:
Pascoe's brand of tabloid punditry almost uniformly receives a barage of sardonic abuse from the bears who are now waking from their Winter slumber and smelling the absundance of Spring that inevitably follows the cruel blizards of creative destruction.
Kondratiev wave, anyone?
http://en.wikipedia.org/wiki/Kondratiev_wave
Comment by Ross on 29 June 2010:
@ wasabu, the timing is interesting. The Supreme Court just reaffirmed second amendment rights to bear arms unambiguously and struck down State Laws like those in Chicago on handguns. The second amendment and the founding fathers both validated and beseeched armed militias to be vigilent and go after those not upholding the consitution.
It may or may not sit plainly with Dan.
However anti G20 protesters are never what they seem. The "anti globalisation campaigns" and Seattle riots were down to the unions and protectionists and the farm lobby and executive government. Big subsidy, big arms, big government and the grooming of a few socialist student activist fools.
Comment by Realist on 29 June 2010:
Stillgotshoeson : Fairfax and other media outlets are very strong wen it comes to backing the real estate industry, some of their actions and comments (such as Pascoe's about Gold, siting Robertson for what are shared views) or vested interests) are signaling a bias.
6 months ago auction results were headline articles, boasting that the shortage was sending clearance rates sky high. This was then reiterated in the nightly news and again throughout the weekly papers with median price jumps, best suburbs to buy and articles on personal stories of instant wealth.
The market slumps and the clearance rates are all but ignored by every major news centre, Chris Zappone put an article on the online Domain section of the age today and low and behold it had been pulled by 1pm. The article talked about Melbourne and Sydney registering 2 weeks of poor results and this signaled an over supply. He felt it was the catalyst to a market correction, he received around 24 comments agreeing with him and then the article was removed from the papers main page.
It was aptly replaced with an article on Melbourne's best performing median suburbs
If i wasn't a conspiracy theorist before all this they are certainly converting me now!!
Comment by Biker on 29 June 2010:
Such interest in property!~ I ignored Pascoe's stuff on gold (well before DD picked it up.*) Who cares? What's this obsession about, son? You're doing well with your discrete, sustained focus on mining shares. Why the continual reference back to property all the time?
And who really cares about a bias, one way or another? DRA clearly pushes gold... and its links are anti-property, but we bulls don't scream conspiracy... .
* I can prove that, if you like... .
Comment by Stillgotshoeson on 30 June 2010:
@Realist
This article?
http://news.domain.com.au/domain/real-estate-news/clearance-rates-under-60-per-cent-point-to-correction-to-come-20100628-zcx0.html