Keith, methinks gold issues are deeper than you give credit
we have some big differences in our apprecation (if not understanding) of multi-faceted gold relationships with respect to dollar, other currencies, TBonds, credit markets, and stocks. You are a very bright guy, so I would like to continue this discussion. I believe we are all going to face these Paper VS Hard Asset issues soon.
I would like to comment point by point, but first off...
CBSMarketWatch Thom Calandra reports some early cracks in the currency dam
(he is probably the one guy on CBSMW whom I pay attention to)
marketwatch.com
1) I dont think central banks care so much for cash flow, as they do in warding off inflation forces and threats to their local currencies. Sure, they buy USTBonds and earn a return yield, as opposed to owning gold bullion and having it sit in the vaults (not working) losing money in the 1990's. All currencies are pegged to the USdollar, not crude oil. Trouble is, the US$ is not pegged to anything except world confidence in our system, our leaders, our economy. If anything, the US$ is pegged to future expected returns on the USTBond yield. And those yields might be reversing soon, perhaps already.
2) World deflation is happening for a reason, not just a random storm. The 1990's were the decade of "paper", as bonds rose in value, stocks rose in value, debt rose in value. But it was an orgy whose feast brought on a hangover that will haunt us for several more months. As capital has been destroyed at historical levels recently, in stock markets and debt markets, the US treasury bond market has been spared. At least so far, and I think this bubble will be pierced soon. Paper assets are under seige. Argentine debt is worthless. Enron stock and debt is worthless. Cisco paper dropped $440 billion in value. Heck, QCOM is down 30% since Thanksgiving. Nasdaq is $2 trillion lower in value than mid-1999. What has changed is the confidence of held "paper". The preference in 1990's was for hard assets only when leveraged by paper assets (see mortgages and property). Now that paper seige has hit the currency markets. Asian currencies have lost about 15-30% in value depending on the country. As confidence in paper assets dwindles, people turn to hard assets whose value seems not to fluctuate like the weather. A neat metaphor is that paper assets are like a newspaper on your porch, which might blow away unless a nice bar of metal secures it. Institutions would abuse paper less if they had to part with their gold afterwards.
3) Poor demand of gold went hand in hand with the paper asset orgy, which led to lower gold prices. Simple supply and demand. This paper asset preference is recent in history, limited to post-WW2. As the price of gold dropped, so did budgets for mining production and actual mine output. Simple. Or is it? Mine production is also a function of actual ore and grade. The world consume one major copper mine per year. We might be running lower in some metals than oil. Supply might be an issue for certain key metals, like platinum, whose price versus gold is now 50% greater than in 1994. The end result is that mines must produce what sellers will not part with, and mines are not in full swing for budget or mine quality reasons. But demand for gold could easily change.
A) Production shortage is a problem "ONLY IF" demand doesnt decline. My point is that mining is not prepared for a rise in price. Now mining firms have tied their own hands with overdone forward selling. They will stand to forego large profits if & when their forward selling is below market. GenlMotors has sold forward recently, to their own peril. The same works for mining. By the way, almost no mining firm mines ONLY gold. It often comes with nickel and other precious metals. All production is down. The excessive nature of forward selling is a potential time bomb. Can you imagine mining firms joining speculators in buying futures contracts, as gold rises in value? It could happen very easily, as you and others dismiss. A rise in farout distant future gold prices would signal an expected continued uptrend in gold price. Right now, Calandra points out how the Japanese institutions and people are buying gold. They are doing so since their paper assets have declined 20% in the last year, their "safe paper assets" in banks. It doesnt take much to cause a gold stampede, and conditions are ripe.
B) The US Federal Reserve has not devalued the USdollar 11 times. It devalued bond yields, prime rate interest, and consequently many other rates 11 times. If the US$ has been devalued, then why is it unchanged versus the Euro for the last two years? Still around 86 cents/euro. My point is that Europeans still regard US tech products and other products as very expensive. Asians regard US products as out of sight. Even Chinese leaders recently called US pricing "hegemenous". They stated in surprising fashion their intention to purchase Euro currency. Even after the dust cleared from all these rate cuts, US exporters are still handing high prices to foreign buyers. This continues to hurt our economic recovery. If foreign buyers expect the US$ to slide somewhat, they will wait for more favorable prices later. A lower dollar would favor some of those big Chinese Qualcomm contracts that seem to happen then dont then happen then dont. Could be the skyhigh dollar is a problem even there?
C) Agreed, the main threat to the dollar now is the Euro. China has announced plans to back the Euro more, and others might easily follow. In 1998 the Euro was staged into existence, and so far it has passed the credibility tests. It was a staged phase-in that has succeeded. Now new coins and paper money will see transactions. Many Europeans and Asians and Arabs have deferred away from the Euro during this transition period. That is now ending, as of March 1st. The last bubble in the financial world is the Mighty Dollar. Its high value will soon be addressed. Morgan Stanley Dean Witter's Roache is a bright guy, perhaps among the best in his profession. He expects the Euro to gain 5-15% versus the dollar this year. I expect more, as things unwind. Others think 10-20% over the next two years. Bush is in favor of the dollar weakening, but states so only in private. Public utterances meet with disdain, except by corporate exporters.
E) People might turn to gold to stem the storm experienced in their Paper Asset losses. Gold has gained in dollar terms since mid-2001, check for yourself, a stealth first leg. What paper asset group can claim that? The world in my opinion is turning from attempting to find gains to attempting to stem losses. The tide has turned in favor of asset protection. Recent losers are Argentina, Enron, JPMorgan, Global Crossing, KMart, Asian currencies, US 401k's, JunkBond holders. The threat is to Paper Assets. I find it funny that the paper asset turbulence began since 1972, when Nixon abandoned the gold standard at Bretton Woods. Inflation skyrocketed immediately. We sanctioned this to finance the VietNam war and to screw the OPEC Arabs on debt.
F) If gold hits $1000, that is a 300% gain, a 4-bagger. You use the word "speculator" like a dirty name. In 1998-2000 we speculated with Nazdaq stocks. In 1994-2000 the world has speculated with the USdollar. Since June2k, the world has speculated with USTBonds. One man's speculation is another's investment. It is all about asset accumulation, and now asset preservation. And recent years have brought us a new phenomenon: demand for platinum group metals in car catalytic converters and fuelcells. This only adds fuel to the gold fire.
G) You miss my point about Japan's death throes. As they experience paper asset destruction on a scale unseen in human history, they are likely to dispose of hundreds of billion$ worth of USTBonds to fight debt collapse. "No friggin way they buy gold"??? It is happening now, as Calandra reports. Their citizens are buying gold, since their bonds earn 0.5% interest and their banks (holding paper) are failing. Gold in JYen terms has gained 20% since mid-2001. Their govt leaders are soon to sell TBonds, which will push our interest rates up. Even if they buy little gold, the effect on interest rates and the USdollar is my main issue here. The USTBond is now forming a bottom. Any dispute defies the charts. Higher rates mean TBonds lose their appeal, which lowers the dollar, which accentuates the return on investment loss for bonds. Thus a vicious cycle starts. That is why currency has a 10-12 year cycle -- it feeds upon itself. Every day the US needs foreigners to finance $2 billion in trade deficit. They is a mind numbing figure!
H) You miss my point about Arabs buying gold. They have no intention of converting to oil, providing energy. Saudi Arabia alone has several dozen multi-billionaire$ who hold USTBonds and will want to prevent asset losses. Their corner of the world is the least secure it has been in decades. They hold USTBonds in store; sopme hold stocks. They hate the US and all it stands for, except their source of income. As instability has risen since September, the price of gold has risen. This part of the world has favored gold more than Westerners historically. We screwed them in the late 1970's with untethered currency and debt. They remember. They might easily turn to the Euro, which offers not only higher yields, but higher prospect of favorable currency trend.
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What will start the process?
simple
the US Govt will now be selling bonds to finance deficits
for 3-4 years the US Govt was a buyer with surplus
no more
with the war on terrorism, and efforts to stimulate the economy will come a few years of deficits at least
watch the USTBond yields rise over the next year
watch its effect on US property values, as mortgage rates rise
We have scoffed at so many who cite the strong likelihood of changes in the wind. Tech stocks, internet stocks, telecom stocks, fiberoptic stocks. Some scoffed at pundits who warned that pricking our bubble in 2000 might win us a redux of Japan's problems. And now lower interest rates have failed to reward us with a "2ndHalf Recovery". I thought all last year we would see one, only it would happen in 2002 at the earliest. Now I think it will happen in 2003, with a few stuttered starts in 2002.
Paper assets are in trouble, in all forms. This decade is likely to transfigure the world terrain. The orgy of the 1990's is now giving way to the chaos of the 2000's. Watch in wonder as gold finds favor in this turmoil, in search of stability in asset holdings.
"[gold is] a short term fix"? More like untethered currency was a failed short term attempt, since 1972. Was it 25 centuries that gold worked well? How well is unbacked currency doing since 1972?
sorry for length, but I just got going
I respect your views
damn, Keith, you responded so fast last time
take more time and give it more thought
this is difficult multi-dimensional stuff
dollar - bonds - debt - stocks - gold
/ JW |
