I’m a long time follower of this thread, now with access to it due to the generosity of a friend, SI poster, lws.
The following is a somewhat length post, so consider yourself forewarned.
Slider and others have been chewing over a strategy of riding the upswing in oil patch prices, then moving into gold, currently at cyclic lows. Much about the plan has merit, but it needs to be thought about, tested, beat on a little to see how it stands up under pounding.
If the oil pessimists are right, economic difficulties triggered by rising oil prices will cause the oil-to-gold strategy to make sense. However, if they are wrong, and no oil supply problem emerges, then what?
Gold will be on its own, and gold on its on depends on 1) the carry trade; 2) balance of payment problems, 3) inflation.
The gold carry trade: sounds exotic, thrilling, slightly sinister, but I am not a believer. Why would central bankers, or bullion bankers, or anybody who controls gold, lend it out at a low rate? And if they did, and their doing so created a lucrative business, why would the gold loan rate not be bid up, thereby driving returns on the carry trade down to normal levels? I am not denying a gold carry trade, but I don’t see how it can amount to much. (Also: I cannot believe that anybody sophisticated enough to get into it, and expose himself to a substantial short position, would not seek protection by buying claims on future mine production.)
The balance of payments problem is more complicated. It hinges upon Americans’ receiving real goods from foreigners while giving back in return nothing more than pieces of paper. How long this can continue? As matters stand, positive feedback loops stabilize the trade imbalance. Foreigners, rather than turning the dollars they receive from us into local currency, instead use them to invest in our stock market, which helps those among us who own stock as well as those who want to raise capital. Foreigners also invest in our credit markets, producing another benefit in the form of lower interest rates. What is remarkable is how long these favorable loops have been going on -- NOT month after month, NOT year after year, but decade after decade. Foreigners like our money.
I know one has to be careful about anecdotal evidence but just how much they like our money was brought home to me a few years ago, when I was in Cafayate, a small town in the northwestern corner of Argentina. While walking across the plaza, I saw something that I wanted to buy from a street vendor, but upon opening my wallet, found that I had spent all of my local currency. I asked the vendor if he would take dollar bills. His eyes lit up. Of course he would.
I think we in the States underestimate how much America means to the world, and how much our money, besides being extremely liquid, is a source of security. This explains why a street vendor in a remote place was eager for U.S. dollars. It also explains why crises cause the dollar to get STRONGER, not weaker, as per gold bug ideology.
All of this is a round-about way of saying that those giving us goods are getting something of value in return, liquidity and security. I see no reason why this, these trade imbalances, in and of themselves, cannot continue indefinitely.
But nothing in an economy is ever “in and of itself.” There is, for example, the perennial possibility of inflation. Were the price level to rise at rates comparable to increases in the money supply over the last couple of years (around 7 per cent for m2, I think), the price of gold would surely go up. However, the problem of inflation occurs not in the economy but in the minds of men, and among men, one in particular has to watched: Alan Greenspan. His efforts to quell inflation could cause problems, as Stephen Leeb pointed out several months ago:
“The critical point is that the attempt to quell inflation is a losing battle [due to world wide growth, bidding up of commodities]. To tighten enough to quell commodity prices would be to tighten enough to short circuit the world and send us reeling into oblivion.”
The oblivion we would be sent reeling into would be one characterized by deflation, 1930s style, in which t-bills and good government paper would be the right investment, not gold.
My conclusion: the case for gold turns out to be weak, unless there is inflation. But if there is, one’s response hinges on Greenspan and other central bankers. In other words, gold is not an automatic answer. But there is something in us that wants it to be -- that wants there to BE an automatic answer -- and this something in us is the biggest threat that exists to our personal wealth. I am not saying that “black to yellow” will fail, but I am saying: watch out for a tendency to want to find a resting place, a sure-fire alternative, a plan not demanding that we be so damn attentive all the time.
What I come up with is that the oil-to-gold strategy is really an OIL STRATEGY.
Said another way: I don’t think that problems in the financial side of the economy will do us in. Somehow central bankers and the vast numbers who have a stake in the present system will do what they have to do in order to muddle through.
That leaves oil, about which most of you all have forgotten more than I’ll ever know. My layman’s view is that we may have a few more million barrels per day that we can get out of the earth without substantial investment in the Middle East. But I don’t know. I am just repeating the opinion of others. What I see is the price of crude up, and storage numbers low. If this continues -- prices up yet storage not swinging back towards the average -- then Campbell, Simmons, and the oil pessimists are right about that noise on the other side of the door: it’s the growl of a wolf. THEN gold is the place to be, but we go there as investors, taking advantage of, in control of, not driven by, a universal human tendency.
P.S.
One final comment about a topic that I thought this excellent board did not chew over sufficiently -- the erratic behavior of the Saudis. Remember how, after the last OPEC meeting, they broke ranks with the announcement of a decision to sell an additional 500,000 barrels per day. Then came a period of conflicting statements, then inconclusive evidence of increases. We know decision making in Saudi Arabia tends to be clumsy, but this last episode went beyond the normal, and left me wondering: do they have the oil?
My final, un-profound conclusion: watch the storage numbers. They will frame the next series of decisions, including a leap into gold. |
