Wednesday, July 15, 2009

More on the Future For Gold

A few have commented on my post on The Future For Gold, rather than address them in the comments section, I will do so here, seeing that the answers should be of interest too many.

First up Taylor, who asks a series of questions. His questions are in italics (as will be the questions and posts of the other commenters)

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.

I'm not sure what you mean by which side I stand on. I just watch the numbers (money supply) and let them tell me what the next turn in gold will be. I may have a long term bias expecting more inflation, but trading on such long term thinking could have gotten you killed in the markets---say duringthe major downtrend in gold during a good part of the 1980's, for example.

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?

Gold is a money, just as the dollar is money. The late Harry Browne made the point a long time ago that there seems to be a ying and yang (I don't believe he actually used the term ying and yang) between the dollar and gold. At times when people fear infaltion they move out of dollars and into gold. When the inflation fear subsides, they move into dollars, away from gold.

Treasuries are a very close substitute for physical dollars. I would consider a move into Treasuries as a move into dollars.

-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?

This is way too difficult to forecast. I just know that if present trends continue, at some point the likelihood of a gold/silver crash is very strong. That said, you really have to watch Bernanke because he could reverse engines again.

-The g/s ratio is out of whack 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.

Agh!! Mises and Hayek are rolling in their graves. Their are no mathematical forecasting equations in the science of economics. Not for Long Term Capital Management which was taken down by historical relationships, not by buyers of sub-prime paper who were taken down by historical default rates that didn't hold and not for historical gold-silver ratios.

-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?

Yes, if other currencies don't collapse, but most others are printing tons of money also. It's a case by case situation.

-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?

You are talking technical chart activity here, which I think certain parts have validity. Technically, a close below last year's low would be a negative. That said, a technical breakdown is not the be all and end all of price activity. It is very possibly for a strong gold driving event to push gold in a countervailing direction and cause it to break through a technical chart ceiling.

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

When your mind gets boggled, take a walk.

Next up Bob Murphy, who writes:

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.)

Bob, I just don't see what else you would expect me to do under current conditions. What I am doing is warning that there a number of countervailing trends buffeting the gold price. I could go out and be absolutely bullish or bearish, but I don't think it is the time to be such. My goal is to impart to my readers what I see the potential trends to be. And right now, gold holders need to aware there is the potential for a lot of whipsaw action, caused mostly by Bernanke whipsaw money printing policies.

I am not looking at this as some kind of a parlor game trying to win a prize by being the closest to some impossible to determine final end year gold price.

In the past when I was convinced that gold was heading higher or lower, I was not afraid to say so. I was very bearish in the late 1980's and thought I was going to be pelted with tomatoes in stating so during a speech to a very bullish gold crowd. I have written many bullish reports on gold during the early part of this decade.

I think the next commenter, James Rothfeld gets it:

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, preferably 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?

Well said, James. When readers email me to ask how they should invest, I refer them to Harry Browne's book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes

Browne's book will get you through most times. Obviously, if it is clear that hyper-inflation, or on the opposite end, a depression is near, I would veer away from Browne's balanced portfolio, but for most periods, especially now Browne's strategy makes the most sense--which falls in line with your diversification in various currencies---but he advances it further. Right now the only part of his balanced portfolio advice that I would ignore is the long term bond sector that he makes part of his portfolio.

1 comment:

  1. Wenzel,

    Thanks for your response. I'll have to rethink some of this stuff now. I appreciate the elucidation.