Tuesday, July 14, 2009

The Future for Gold

My comment that commodities might fall another 50%, if the Federal Reserve continues on its latest tight money program, resulted in a slew of emails asking if this applies for gold and silver.

The answer is complex because I believe their are crosswinds with gold that are very strong.

On the one hand you have slowed money growth in and of itself as a major negative. On the other, you have China as a major buyer. Also, on a very short-term basis, you have people who believe that gold is a safe haven during a downturn. This is false, but could result in some buying during early stages of a panic.

To make myself clear on the last point, gold does not generally go up during a downturn. During a downturn the desire is to hold cash (not generally gold). The belief that gold goes up during a downturn, I believe came about because of FDR's manipulation of the gold price during the Great Depression. He confiscated everyone's gold, then implemented a a buy program for gold above the market price, which benefited John Maynard Keynes and Bernard Baruch, who both loaded up on gold stocks while advising FDR to prop up the price.

Without the FDR support program, gold would have dropped in price, just like it did during previous panics, and just as it did when Paul Volcker tightened the money supply in the 1980's.

So we will have downward pressure from any downturn in the economy, some short-term buying from believers in gold as a haven during a panic, and buying from the Chinese.

At best to me, this suggests a period of sluggish upside activity in gold, with the possibility of a major downside break.

That said, the long term trend of all governments is to print money--which is of course highly price inflationary--this is a long term positive for gold. The best bet for your long term gold holdings is to, thus, ignore short-term declines, and if the declines are big enough, buy more. It will be too difficult for all but professional traders to catch all the short term ups and downs of gold.

(Note: all this also applies for silver)


  1. Wenzel,

    I think we've got a taste for which side of the aisle you stand in terms of the inflation/deflation debate as well as how gold and silver will perform accordingly that is currently ongoing with Murphy/North/Rogers/Faber/Schiff vs... Mish? And maybe Karl Denninger. But I am wondering if you might be able to comment more thoroughly in another post or something. Specifically, North had a list of "10 questions" deflationists need to answer.

    My head is starting to spin from all of this, truthfully.

    A few points/questions:
    -But "gold is money" so won't people try to hold it when they're seeking money? Or do you mean they go specifically for cash (dollars) in a panic? If this is the case, why did treasuries (near money) rally so strongly in the panic period last fall?
    -What time period do you see g/s falling? You say in short term they could be propped up by China/panic buying, and you say in long term inflation supports gold price, but in some indeterminate middle term g/s will fall?
    -The g/s ratio is out of wack according to historical precedent which I guess is like normally 12ozS:1ozG. It's currently around 70:1. This seems to argue for either massive collapse in gold price, with silver staying put, or massive surge in silver price. Same thing is going on with plat:gold right now, it was nearly 2:1 at the previous record highs but is now in the 1.3:1 range.
    -If USD collapses but other currencies don't, won't this mean gold will only appreciate in nominal US terms but will remain relatively unchanged in foreign currency terms/real terms?
    -Gold (and silver?) has closed higher the last like 7-8 yrs in a row. It last closed at something like 960/970 area (I forget... maybe even 980?!)... seems like it'd be psychologically devastating for gold to close this year below last year's close. Do you foresee such a close having any effect on the psychology of the gold market going forward? Or does this tidbit mitigate caution in terms of some "surprise" event that drives gold higher by the end of the year?

    That's all for now, I'm starting to get boggled up in my own mind.

  2. When on the subject - have you seen this? Fascinating...


  3. I'm not trying to be a jerk Wenzel, but it looks like you are totally covered here. You're saying gold will go up in the short term, stagnate or go way down in the mid-term, and go up in the very long term.

    Unless you give us specific time frames, you are automatically right. And I'm sure you will always be able to find a 3-month window (of varying distance in the past) of M2 NSA growth to point to, to explain why your prediction is right that particular day. :)

    (Not saying you're wrong, just that don't wait to see if the data "confirm" your predictions here; I can't see how you would be wrong.)

  4. This is unrelated to the post, but to what extent do you think the 45k-ish people attending tonights MLB all-star game represent a "random" sample of Americans? Is St. Louis a conservative city? I don't really know. Obama did win the two counties directly surrounding St. Louis.

    They had Obama throw out the ceremonial first pitch and as he trotted to the mound, while he was largely cheered, you could definitely hear many of the people booing. It's an interesting indication of the waning of his "honeymoon" affect and a growing feeling of unrest amongst normal Americans.

  5. Thanks for being so clear on the gold. That's why I have mine - it's my fire insurance. If I don't need it, fine - but at least I won't be in a situation where I would say "had I only..."

    Bob - by now I am of the mind that any economist making quantitative predictions is not an economist, but a quack.

    Nobody should put all their income in only one asset. Cash, preferrably two, three, or four different currencies (Euro, Canadian dollar, Russian ruble, and US$ in my case), and some physical gold - and going completely broke is probably impossible.

    Wenzel, any thoughts on that?