Where is US equity going One way of successful investing is to isolate and identify a trend that is easiest to predict and with a high enough return over time. It may be bonds,equity, silver, gold, oil or properties. Fractional Reserve Banking is considered a ponzi scheme by Austrians who are also gold bugs. The simplest reasons given is gold is "true" money, paper is not...FRB enabled a central bank to "print money out of thin air". Taking the US running yearly deficits, the shortfall is covered through the Treasury selling debts in TBills/notes. Every dollar sold adds 1 dollar "reserve money" to the US (FRB) commercial banking system. Banks can then lend out this "1 dollar reserve money" to create a total credit of 10 dollars ( = debt owe by borrowers to bankers with interest). So debt is money !. Intuitively, we prefer money to mean something good - prosperity, feeling rich, ... but now money means someone got bonded with debts! The 5% interest is earned through a mere combination of keyboard strokes! That's what troubles Ron Paul. Say we are in the year Y2K before the Nasdaq bubble burst and there is a conversation between goldbug and doubter :- Goldbug: FRB is just a ponzi scheme...thin air... paper money... what we're seeing the past 20years is a ponzi economic and stock market bubble... it will come crashing down. Doubter: How can a ponzi scheme last 20 years! We're are having jobs, stock rising, profits for every one..It's a new era of prosperity from human ingenuity... Goldbug: Well, there's a study that an average ponzi scheme last 30 and also these people who start them have above average intelligence. Doubter: I don't believe! Ponzi schemes lasting 30 years! Goldbug: Eh...I mean 30 months. One month in an ordinary ponzi scheme is one year for a ponzi scheme started by reputable and well connected agencies. In the 30 months, participants regularly receives interest/profits. Every month for 30 months when they tally their wealth, it's healthy and increasing - much better than those who miss out on the opportunity. Thing's rosy until the 30th month when it collapsed. Then every participant redo their tally and realized they have to restart anew - tighten their belts, save more, eat less to rebuild their loss wealth. That a debt-driven economic bubble can last 20 years is not the matter - what matter is that it is a ponzi bubble. Doubter: Now I know (conversation ends). Many people predicted that 1980 - 2000 was a debt-driven bubble and not "why no one sees it coming". FRB alone was not sufficient to drive an economy at the exponential rate non stop for 20 years. Another important factor was 1971 when Nixon reneged on gold convertibility. After this, money can be created with nothing to restrain it. All's well until Nasdaq burst which is a sign of the limit of where stocks can go. Austrians' analysis is that debt-driven bubble always cause misallocation of resources, etc.. and Y2K was the sign that things had come to a head and had to be unwound before economic health could be restored. Pushing the bubble into subprime, etc.. did not change the fact of serious structural imbalances in the US as well as the global economy. "Looser loose credit" enabled some counties like China to build up its 2 trillion reserve, ie exporting imbalances globally. Every economy worldwide is now unbalanced viz every other - this is the current global crisis. Stock market movements have an underpinning fundamental factor with a speculative factor superimposed. The rate of exponential rise from 1980 to 2000 is not sustainable except through debt explosion. Now in 2009, the prospect of fundamental support is not better then in Y2K which should mean a flat longer term or downward trend. Until global imbalances are restored, global stock markets cannot rise "normally". I don't see how longer term US stock could repeat the rate of increase as from 1980-2000. For the next 10 years it is one of the easiest trend to predict. If the bubble is again pushed to other sectors, stocks, when it reaches the 2000/2007 peak, will again crash. This trend is one of the easiest to predict - which means one down. Then things would be worst then in 2008. Which may mean outright global social outrage and unrest with countries being pushed by their citizen to adopt "a tooth for a tooth, an eye for an eye" policy. "Raise tariffs!"...the citizens wanting and demanding a full trade war which, when everyone gets poorer, war cries of "stop them! " may force elected politicians no options but to go to war. Few can claim they can see the future with certainty.
A crude model of the Dynamics Of The Gold Price A crude model can be formulated using very basic informations and some simplest of principles. The basic data we need are the following macro aggregates: World Gold Total Market Capitalization: An estimate by the World Gold Council is that all the gold ever mined totaled 158,000 tonnes which, when valued at USD1000/oz, is worth USD5.1 trillion. This is about the current estimate of all above ground gold. Central banks and other similar agencies takes 20% of it or 1 million. Of the 80%, many would be as jewelry which may not enter the gold market in the next 10/20 years whatever the price. In our crude model, only the "total market capitalization" is needed - which is USD5 trillion. World Equity Total Market Capitalization: The total world stock market currently may be taken to be about USD50 trillion. World Bond Total Market Capitalization: As of 2008, the size of the international bond market is an estimated $67.0 trillion. From the above figures, we have the alternative investment market of equity and bonds combined to be about 20 times the size of the gold market. We know that for the real market only part of the total gold participates in gold transaction volumes that cause gold price movements. This does not matter as it is also the same with equity and bonds. A portion of a company's stock may be permanently held in which case only a part participates in the volumes in the stock exchanges. With bonds, the USD2 trillion reserve of China too cannot all be sold. Our crude model works with total aggregates for comparison purposes only. Gold prices can only go up, but not down. This of course assumes a long term price trend. We will prove or derive this hypotheses. At any one time, there will be investment money which may move among the different alternative markets to seek the best return. We limit our markets only to equity, bonds and gold. If investment sentiment is that gold is now best, money from equity and bonds would move to gold driving up the gold price. Because equity and bonds is 20 times the size of the gold market, we can conclude that money leaving equity and bonds for gold always cause a "pronounced and significant" rise in the gold price. How do we have a practical interpretation of a "pronounced and significant" rise in the price of gold? A 1% per year rise for gold might be "pronounced and significant". But it doesn't give much profit putting money in gold! The only practical meaning is that when gold is attractive and its price rises, it will rise at a rate that will give a return that would be very much greater than the rate of return that could have been made from equity or bonds. So the critical principle is that when money could be made in gold, the profit potential is great. "Great" is still not practical enough. We need a real number in rise in the gold price as percentage per year. Can we put in a real number as a plausible percentage per year rise in gold price when in rises. I don't know much about the possible true rate of returns attainable in good times for equity or bonds. But I have a very recent rate of rise in gold when gold started to rise from Y2K. Gold was USD300/oz in year 2000 and USD1000/oz in 2009 - a rate of about 15% per year. Because gold price rise is volatile as explained above, 15% may turn to 30%. we have : At a 15 % rise, the price of gold in 10 years (2019) is USD4000/oz. At 30%, it would be USD14,000/oz. The above is for gold when it rises. Now we analyze if and when gold prices go down. Let's assume gold is no more attractive and the winning market is equity. When equity is hot, money would move from bonds to stocks. The market for equity and bonds are about equal. The bond market is 10 times that of the gold market. An investor with money in both bonds and gold would not pay much attention to his money invested in gold. Liquidating gold would not release much "significant" money. So gold price is basically "sticky downwards". But this is valid only if the equity+bonds to gold is 20 to 1, i.e it is valid at the current price of USD1000/oz. But if the current price of gold (2009) is already at USD10,000/oz, we have a ratio of only about 2 to 1 and the reasoning of gold price being "sticky downwards" would be invalid. Do we have any evidence that "gold price does not go down"? Yes we have! The only time price move down was a drop from USD800/oz to USD300/oz within a year - a sharp spike up and down in 1980. Anyone who pays some attention to gold would know it was manipulated. From about 1981 to 2001, gold traded in a band around USD300/oz, i.e a full 20 years. With central banks' manipulation to cap the price and with an exponential stock market boom in the same 20 years period, the gold price did not go down (as some could have expected money to leave gold). This may be evidence that gold do not trade down. If gold were to reach USD10,000/oz in 2020 and the gold bull market end, gold might also not trade down. This would be so only if the gold capitalization is still small as compared to the equity and bond markets. This 20 to 1 ratio might still apply if there were large debt monetization that blew up the market capitalization of both equity and bonds for the same 10 years period.
Remember. Fighting deflation is a lost war in such overleveraged overborrowed world. A warning for all gold-bugs out there from one very talented russian caricaturist Part one is in this post Part two is in the next one
China Pushing for Gold Standard By observing signs and changes, the future could be predicted. There have been some minor talks about ending the Fed, but it would not happen anytime soon unless there is a world catastrophe many times greater than that of World War II which make people lose their usual habitual sense. It is only after losing their senses could people acquire something known as human sense when they finally would sit down and accept the consequence of not acting responsibly - which could well be the end of civilization as we now know it. So the more likely scenario is one less violent and destructive than a world war. Gradually, the powers of western banking would be slowly reduced over time and the dollar will be very much reduced as a reserve currency. Currently, about 90% of global reserves are in US dollar or Euro - 64% dollars and 26% Euro. Countries would be looking for a way to hold reserves that could preserve values instead of just putting them in foreign money and having others having a unilateral influence over them. The only long term option seems to be Gold (Silver?) and the Gold Standard will gradually make a comeback. In 2002, "Gold bullion became available to Chinese individuals as an investment option for the first time since 1949 as the small gold bars...". China holds about 20% of the world's reserve and will be an influence if the government decides to push Gold as a competing reserve option, but gradually. When China supports Gold, it will put a floor on its price. Gradually, other countries would be more confident and the central banks of the surplus countries would shift towards Gold. When this momentum is built, then no central bank would want to sell Gold, including all the countries with the Central Bank Gold Agreement (CBGA), 1999. Every central bank would only buy or protect their Gold, not sell as some central banks did in the past decades to control the Gold price. As the capitalization of reserves in Gold rises and gets closer to that in US dollars and Euro, its status would be "entrenched" just as, after Bretton Woods in 1941, the US dollar became entrenched as the reserve currency. When Gold is finally "forced on and recognized" as a legitimate reserve option, national currencies can no longer ignore the price of Gold. In this manner, the ability to monetized debt without limit (as what the US government is having) would no longer be readily available. Gold would act as an anchor in international finance and could no longer be ignored.
Seeing as euphoric Gold Bugs have only recently climbed out of their holes and invaded the forums, I can only wonder what that might suggest about the actual future of Gold's trajectory.
The line "Gold bullion became available to Chinese individuals as an investment option for the first time since 1949 as the small gold bars..." comes from :- "Personal Gold Investment Emerges in China's Capital", 12/19/2002. Copyright by People's Daily Online Cannot trace author as link don't appear properly, only in html source format