Goldbugs are among the most devout of their kind, second only to Oakland Raider fans. They are not to be reasoned with. Don't even try. They have been saying for nearly 20 years the same thing, and now that is gold is still only half the value of what it was after 20 years of inflation, they beat the same old drum. That said, given they are not too bright, and very enthusiastic, they will convince others who are not too bright to jump on board the bandwagon with them. How to make money in the gold bubble? Trade gold stocks just like any other overvalued momo stock that is being squeezed up. Same rules apply that applied to overvalued tech stocks before the bubble crashed. The gold market is one of the most manipulated markets, and there is serious overhead resistance at higher price levels. Spend some time with the price charts. If you want a laugh, look at the 10K of many of these gold stocks, look deeply into the financials, number of employees, etc. and you will find the sham that so many of them really are. I try to tell people who are buying a gold stock, that you are buying one of the most speculative businesses there are. Look back historically to the pre and post bubble period in gold, and see how well these stocks did. Lots of momo due to fear, not fundamentals of a business generating an income based on growth. Gold was the leading sector last year, and it will the the worst sector to be in soon. Those looking for a top should watch CNBC and wait for Abbey Joseph Cohen to recommend gold, or see CNBC devote more an more time to focusing on gold as the "best and most secure" investment. When you see it in the newspapers, CNBC, and other mainstream publications being pumped, it is done.
Gold bullion is rallying because it's a hedge against the falling US dollar. The Asians are rotating out of dollar-denominated assets and into gold, at least according to Joe Quinlan, formerly an economist at Morgan Stanley. Don't believe any of the nonsense about gold being a hedge against inflation. Kuwlow and his kooky supply-side friends claim that rising gold prices signal reflation, and hence an economic recovery. If that were true, 10-yr treasury yields would not be hovering below 4%. Although the outlook for gold bullion is still positive, I'm concerned that gold stocks are in for a period of underperformance. They've attracted a lot of speculators in recent months, and now that the broad market is falling, these guys will probably want to bank some profits. That will damage gold's negative beta, and could cause gold stocks to (at least temporarily) decouple from bullion. Tycoon
Btw, here's a (somewhat dated) chart of gold bullion. There's some minor resistance at $375, which isn't too far from the current price of ~$368.
You guys heard of the k ratio? Its at 1.37 right now. That means that gold can rest or even correct a bit, but being in a bull market it has a LOT more room on the upside. I think that it will surprise the hell out of 99% of people out there. Just wait and see 2003 unfold. There are several reasons why I hold this opinion: 1] the k ratio 2] Weinstein's work on stocks that go on to have explosive moves 3] the mild/bearish outlook and sentiment most investors/traders have (contrarian wise this is bullish....just look at this thread!) 4] Malaysia's the gold dinar (to be followed by a few copycats) 5] China allowing its citizens to purchase and hold gold 6] the falling US$ 7] potential for US to invoke gold cover clause (see Jim Sinclair's articles) My point is this: if your outlook is in terms of weeks and months rather than days or hours gold and gold stocks will provide one of the best 2003 returns (perhaps along with Venezuelan bonds).
Well, I for one wouldn't consider myself a gold bug, I don't own any gold, I don't own any gold stocks. I do consider myself a pragmatist and a student of history. And history has shown that no currency but gold (and to a lesser extent other precious metals) has ever survived. That's not really a matter of opinion, just simple fact. Your friend's dissertation is flawed in several places, which I will elaborate upon. Do I believe that history can be rewritten? Absolutely, as I previously mentioned we recently rewrote history when for the first time in U.S. history a series of Fed cuts (let alone TWELVE!!!) did NOT result in higher equity markets or economic activity 9-12 months after the onset of said cuts. In fact, as previously mentioned we experienced a recession despite an unprecedented amount of rate cutting and an explosion of money supply. One would have to have their head in the sand to think that given this break from history that something different isn't going on this time around. Widespread unemployment? Deflation? Sound like exactly the kind of problems that are coming to the forefront today despite all that fiat money and not being on a gold standard. Clearly those situations are not directly correlated to a gold standard, and there is no clear cut cause/effect relationship there. Argentina? Their problem (among many) was tying their currency to another currency not on the gold standard. Japan a country with a long and sound reputation with fiat money???? Please let me have some of what your friend is smoking. The Yen is near worthless, the banks are at negative $1 trillion net worth, Japanese citizens have no confidence in the monetary system (is this a great example of fiat money enjoying a successful track record? YIKES!), and as for the U.S., well we so far are following the Japan model in lockstep. Overexpansion in credit and money supply? Check. Equity and real estate bubbles? Check. Rate cutting to the bone and more fiat money to try to stem the tide of economic malaise and unemployment to no effect? Check. On and on... The elimination of depressions? Says who? How do we know that other factors haven't influenced our lack of a depression in the past several decades? Again, there is no verifiable cause/effect correlation between the two. Since WWII there have been so many other factors accounting for our economic well being, including our industrial/manufacturing golden age, technology, et al. What the endless fiat money has done is create an endless expansion of credit, which we can begin to see today the consequences of. Could it be possible that all the inflation of money supply has not eliminated the possibility of depression, but rather simply delayed the inevitable consequences of such a policy? The reduction in the amount of available gold due to technology, global use, etc. does make it more difficult to establish a gold standard as before, which is why I don't necessarily say there IS an ideal definitive solution to where we stand today, it just is what it is, and IMO it doesn't bode well for the future. I'll finish with a quick history lesson, in fact it's the first story of "printed money" and the gold standard. The first paper money in history was made in China, in the 1200's. Kubla Khan, the Chinese ruler, manufactured paper money from mulberry bark. Marco Polo wrote, "All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver." The Kahn ordered his paper to be accepted, just as if it were gold or silver. The Kahn ordered all the gold and silver to be brought to the treasury...Ã -la-FDR in 1933. All foreign salesmen entering China with gold, silver, pearls, or other valuables, were ordered to turn them in to the Kahn, and receive mulberry bark paper money in exchange...hardly a great deal. One can only assume that "free trade" stopped right then and there. Eventually, the paper money in ancient China, became worthless, via the usual route. So as not to be absolutely evil, the Kahn, at first, backed the mulberry bark currency with gold and silver. It was soon discovered, that it was far easier to make mulberry bark paper, than to mine gold and silver, so the obvious happened, just as has happened in 100% of the cases of paper money issuance. Government orders its paper to be used, it becomes worth less and less, as more and more is printed. Eventually, government decrees and orders don't work any longer, and the paper becomes a laughing stock. Obviously, gold and silver money, are far heavier than fiat paper money, and more difficult to transport and carry. This posed a difficulty then, as it would now. The only solution was to print paper currency money that was BACKED BY SOMETHING VALUABLE. Whenever a paper currency is printed, always, at first, it is good and backed. Eventually, in 100% of the cases, the sponsors of it...government...falls into the trap of printing more and more of it, till it becomes worthless, and a laughing stock. Laughing stock to those who don't have to use it, that is, not the victims who are stuck with it. Thus ended the story of the first "fiat money" fiasco. Again, I'm not a gold bug, just a student of history, and it makes me sad when I constantly see history repeat over and over without any of the lessons learned.
In the final analysis you advocate nothing more than swapping one set of problems for another. The Gold Standard, while arguably possessing some inherit advantages, chiefly an arbitrary form of fiscal discipline, is hardly impervious to the ills of "fiat" currency as your concluding "history lesson" so clearly illustrates.
Can history be re-written? Happens all the time. Here is the gold bug argument in a nutshell: Fiat money is the devil. It says so in the bible. It has never lasted, hence it never can and never will. Hmmmmmm. Based on that logic, whatever happened in the past is bound to happen in the future. However, this is suggesting that there can be no lasting evolution or growth, either of a scientific nature or in the area of human development. If that was the case, that there can be no lasting technological growth or human evolution.... That the past must necessarily manifest in the future, get ready to: Start walking, as that was the way of transportation for thousands of years. Start peeing and shitting outside, as indoor plumbing is less than a couple of centuries old. Get used to mass poverty, short lifespans, no air conditioning, no central heating, no dentistry, no modern medicine, no internet, no industrial revolution, no electic lighting, a return to slavery, a return to women being treated as property, no bathing, no hot water, no representative democracy in which all citizens can vote, etc, etc, etc. That sure is an apocalyptic vision, isn't' it, but what would you expect from goldbugs who look to prophecy to decide what the future will bring?
Optional, you're making way too broad jumps in logic here, especially in terms of how history repeats itself. First, all the amenities you mentioned are not going away, because they are simply implements of humanity and nothing more. There's really no practical difference between, say candlelight and incandescent light other than how they work. The end result is that in the course of history both were used for the same purpose--illumination. Cars are used for the same basic purpose as walking--to get from point A to B. Human behavior hasn't changed, only how it's implemented. It's important to remember that what causes history to repeat itself and revert to the same situations over and over is human nature, not the inventions or discoveries of humanity. Human emotions and foibles have not changed throughout the course of human history, and THAT is what causes history to repeat. Along the way through every repetition, yes, there are incidental things that change such as the inventions and discoveries you mentioned, but they are immaterial in the big picture to altering human nature and therefore the repetition of macro-historical events. Take the stock market, for example. The internet has changed the way we participate in the markets, but did it stop an irrational market bubble from occurring, or crashing? Nope. Just like before in history. And I remember at the apex of the bubble people running around claiming the markets were different now and could never again crash (just like we can never again fall into a depression, right? ). Well, we know how the story ended, just as it ended every time there has been a bubble in history, whether the 29 crash or the tulip mania of the 1600's. Did the invention of the internet stop any of this pattern? Nope. Don't confuse human evolution with technological evolution. Yes, human ingenuity drives ever increasing development of "civilization", but in the end we're every bit as jealous, warlike, loving, fearful, greedy, etc. as any other civilization in history. Just look around the world today and you'll find an example of any other situation we've had in history, whether genocide, war, corruption, murder and so on. No inventions have changed that, only how we carry them out. And that's why the "fiat money" concept keeps playing out the same way in history. A currency starts out on a sound principle (i.e. backed by something tangible), but then those in power get either greedy or in an attempt to keep things rosy all the time (human emotion) find it easier to print endless money rather than face the normal ebb and flow of economics. And no, I don't think a gold standard prevents all ills, no financial system can do that. It's in recognizing that all economies go through ups and downs (again, economics being tied into human nature) that one must have the courage to stay the course. I don't believe in some apocalyptic scenario, as I didn't even know that most gold bugs were bible thumpers (I'm not a big bible aficionado). I don't look to prophecy or mythology to predict the future, I look to the cold hard facts of history, which is why I'm so fascinated by the recent break from history with regard to rate cuts not working as before (although I guess we now have the recent historical model of Japan to follow here). I do believe that because of us repeating the same course with regard to fiscal policy as has been done in history, we are destined to repeat the same fate, regardless of technology or whatever incidental amenites we live with. The end result? The same as China, or Germany or France (and currently Japan). The obsolescence of the current currency as we know it and a "starting over" with a new currency or system. In the process, the fortunes of a lot of people will be wiped out.
Umm. I've been in gold shares since $268/oz. Even then, it seemed like the mother of all short squeezes was on its way within 5-10 years. Although fairly speculative at the time, the idea that there is a 15k MT official sector short position (one way or another) is gaining some favor and legitimacy. When I was a wee lad, gold stopped tracking interest rates/inflation. That's the tipoff to official sector activity. Furthermore, when you have a buttload of derivatives written on a (relatively) small and thin market for the underlying, it becomes a counterparty default accident waiting to happen. Regardless of official sector activity, the bull case comes down to simple supply and demand. Yearly demand is bigger than production. Mines are closing anyway. Eventually gold prices will have to go high enough to support new exploration. QED. Foreign capital flows switching from a virtuous circle to the vicious sort, and the Iraq mess, are just icing on the cake. I doubt we will see $300/oz again within our lifetimes (unless we peso-ize the dollar and lop off 3 zeroes or something). Shorting gold now is like shorting QCOM at 19 (pre-split, pre-mania).