# Gold Bubble goes POP?

Discussion in 'Business & Economics' started by Believe, Apr 15, 2013.

1. ### joepistoleDeacon BluesValued Senior Member

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22,910
It's the greater fool theory of investing in action.

Well that is just it, there are several people here who are not aware of the risks, nor do they want to be aware of those risks; it is far better for them to lose their money and then blame an imaginary conspiracy hatched by some secret cabal.

3. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

Messages:
23,198
Why now is good time to buy gold, (I like GLD version) Part 2:
I.e. only the vertical gap between the two green shaded area is available for delivery. Now 8 - 6.6 = 1.4 is less than half what it was half a year ago 11.2 – 8.3 = 2.9, so another 6 months like that will leave Comex’s vault “deliverable gold” as bare as Mother Hubbard’s Cupboard! All the lighter green is registered gold – owned by some specific person or firm. Some of them will sell to let Comex replinish the Eligible gold, but not many before gold sets a new all time high in price. Nothing like being slammed in the head by the 2 by 4 called the law of supply and demand to make those whose contract calls for delivery pay dearly to avoid going to jail.
As the old timers once said: “He who sells what, isn’t hisen, must buy it back or go to prison.”

Of course there is DUMBIE. They are selling at a premium to the buyers in Asia!
----- Oh I’m sorry. I just needed to skip your shooting down other reasons why gold might be leaving Comex at an increasingly faster rate. You have it correct after all when you tell your POV:
Yes you got it!

For the benefit of TV addicted, ignorant, young English & Americans or foreigners reading: The lyrics of Old Mother Hubbard originally published in 1805 have remained largely unchanged. Here the 1889 UK version:

Old Mother Hubbard
Went to the cupboard,
To give the poor dog a bone;
When she came there,
The cupboard was bare,
And so the poor dog had none.

She went to the baker's
When she came back

She went to the undertaker's
When she came back
The dog was laughing.

She took a clean dish
to get him some tripe; .... See * footnote
When she came back
He was smoking his pipe.

She went to the alehouse
To get him some beer; .....200 years ago, beer was pronounced Bear. When at a bar, tell the "keep" you want a bear. If he is an English lit Ph.D., you're being kind. That will be the first time he used any of his education.
When she came back
The dog sat in a chair.

She went to the tavern
For white wine and red;
When she came back
The dog stood on his head.

She went to the fruiterer's ..... I'm tempted, but won't comment on this and alternate meaning for a flute.
When she came back
He was playing the flute.

She went to the tailor's
When she came back
He was riding a goat.

She went to the hatter's
When she came back
He was feeding her cat.

She went to the barber's
When she came back
He was dancing a jig.

She went to the cobbler's
When she came back

She went to the sempstress
When she came back
The dog was spinning.

She went to the hosier's
When she came back
He was dressed in his clothes.

The dog said, Bow-wow.

This wonderful dog
Was Dame Hubbard's delight,
He could read, he could dance,
He could sing, he could write;
She gave him rich dainties
Whenever he fed,
And erected this monument

------------------------A reward for reading this far:

10. ### joepistoleDeacon BluesValued Senior Member

Messages:
22,910
Well you are going to have get Billy T to explain it to you, because I don’t understand it either.

11. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

Messages:
23,198
Yes hoarding (or anything that removes gold from the trading market such as buying gold rings, etc. and industrial use) tends to raise the price.

I would not describe my POV as "ideological." It is more a result of my long term analysis of changes happening already in the world. Dollar debts are too large to pay the lenders back the purchasing power they lent but the US will not default so dollar will continue, even accelerate, it multi-decade decline in purchasing power. Thus, the question becomes: How to protect the purchasing power you have?

For a young guy who typically does not have a lot of assets to protect, the best choice is to get a good education in area where there will be high paying jobs in the future. For an old guy, like me, who retired 20 years ago best diversified choice includes some gold, bought when most think it will lose still more value and assets in other countries with better long term prospects.

I have been a permanent resident of Brazil for 19+ years now and can live on the assets I have invested here. Currently a Brazil is big exporter of oil, and produces at least twice (possible 4 times) more food than it can eat as it has large fertile agriculture lands with plentiful rain and, about 1/4 of the world's liquid fresh water (more than 80% of its electric power is hydro-electric) It is extremely rich in all minerals (one large state's name translates as "minerals in general" - from designation of that region on early maps, I think.) Also Brazil has a young population with rapidly improving education levels the world's fourth largest central banks reserves and other asserts including fresh fruits etc. with three times the US variety, year round.

Now for the transitory bad side:
(1) Current talk of “taper” is accelerating US interest rates that were already changing (increasing on prior month) at 2% / month for last year. Thus, the carry trade to emerging countries, especially Brazil, which has the most liquid and well regulated of all, is reversing. I.e. foreign investor are selling, taking their profits in Brazilian Real and converting them back into dollars. I.e. “negative FDI” weakening the Real, which will aid Brazilian exporters and me – I get more Real, and based on the fundamentals mentioned above, when this passes, the Real will be strong again.

(2) The current Brazilian government is trying to please the people with foolish measure. It is socialistic so mandated no increase in gasoline prices for last five years and recently mandated a reduction in rates charged for residential electricity. – That is making more “negative FDI.” Under this government taxes have gone up and GDP fell to only 0.6% in 1Q13. You may have seen on your TV that large demonstrations, basically peaceful, except for a few looters are taking place now. Biggest one will be tomorrow. The government is spinning this discontent as “this is democracy in action, their voices will be heard – Brazil is stronger now.” This foolish anti-business government will probably be replaced in the next election. Soon it may be time to buy Brazilian ADRs again - in six months or so.

Last edited by a moderator: Jun 19, 2013
12. ### joepistoleDeacon BluesValued Senior Member

Messages:
22,910
Gold closed at $1286.50/troy ounce today. Better buy quickly, you wouldn’t want to miss the opportunity to sell it later at$1,000/troy ounce or less.

Messages:
23,198

Messages:
22,910
If you bought shares in the GLD at $132.32 you don’t have a gain to worry about. You have a loss, a$7+/share loss. And shares of the GLD are real gold. It is not paper. It is gold held in a trust and in a secured vault. Gold went to $1,800/troy ounce for several reasons, but chiefly because of inflation expectations of folks like you. As I have told you many times over the years, what the Fed giveth, the Fed can taketh away. We are now witnessing the market reaction to a possible Fed monetary policy reversal down the road. Those inflation expectations which have been so popular with you and those like you over the course of the last 4 years are collapsing. That is why spot gold, not paper gold, is trading down almost$600/troy ounce. Gold didn’t go from $1,800 per troy ounce to 1,256 per troy ounce because of all that demand for gold you are seeing. 15. ### EconomisterRegistered Member Messages: 51 Joepistole nailed it. There was a threshold for gold to rise, between the start of QE and the actual stabilization of capital markets (which began in late 2011). However, now that QE may be unwound, there really is nowhere for gold to go except down--tight money = strong dollar = weak gold. Very few hedge funds and investment companies are holding onto gold for those reasons. It'll be the retail investors, who do not understand correlation or risk, who will feel the axe, lol. 16. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member Messages: 23,198 I know GLD is "real gold" - I would not buy paper gold. I have a paper loss now, but plan to sell in first couple of months of 2015 - only then will we know if I have gain or loss. I admit that inflation is good for gold and that because of the extremely low velocity of money that there is no current sign of inflation. I don't believe that Fed can end QE infinity. - I like to say "The Fed has a tiger by the tail." You say that Fed can remove the thin -air assets as easily as it can make them. That may technically be true, but IMO it is impossible to do without great damage to the only part of the economy that seems healthy. (stocks). We see that even a vague hint that someday it will be necessary to at least reduce the 85 billion / month life giving transfusion, is making the patient sick. I also think it is impossible, without doing great damage to the economy to continue with even most of QEinfinity. I.e. faith in the only "full faith and credit" will collapse. Then US nearly 18 trillion in debt will be forced to pay off the maturing bonds no one but insurance companies and Fed will buy with the Fed's thin-air money. You see a hint of this now too - Ten year treasury bond interest averaged over last 11 months has been increasing at >10% (not adding 10%, the rate now 2.5% going to 2.75% is an example of what I am saying.) That even if continued only at 5% for another 11 months is a disaster. The "carrying cost" is the product of two growing factors ( total debt not rolled when it matures and the then current interest rates) This problem would be manageable if the average time to maturity were not only 5.5 years. I.e. every year now Fed may need to pay off 1.5 trillion of maturing bonds. -Worse really but math gets complex and I don't have the needed data so will just illustrate the effect with all$10,000 bonds: One of which is maturing in 25 year (a 30 year bond issued 5 years ago). How may one year bonds do you need to mix in with that one to get the average maturity date = 5.5 years. Quite a few $10,000 payments to make in next few year if they are not rolled. These one year bonds are already with higher rate and even if some do roll, in a rising interest rate era, the new bond issued cost the government more. I.e. that one 30 year bond will keep the low interest rate for 25 years more, but that will not stop the cost of carrying the debt from rapidly climbing as the shorter term bonds roll are even worse, don't roll. I'm not sure I doing this illustration correctly but you should get my point - US has a lot of paper to roll or pay off each year now + the growing debt needs new bonds to issue at the then current rate. Perhaps you will get the needed data and assume interest rates are climbing at only half the rate they have for the last year (i.e. at 0.05% / month) with annual deficits of only 0.5 Trillion dollars needing new financing. Anyway, I'm still believing in my "on or before Halloween 2014 there will be a run on dollar" is reasonable for a ~7 year old prediction. We will just need to wait and see, if the Fed can turn loose of the tiger's tail and what happens if it does. (Or equally scary in the same time frame - What happens if it does not turn loose but keep printing more than$50 billion thin-air dollars each month).
I think the smartest thing Ben will be remembered for is his decision to get someone else to hold the tiger's tail in January 2014. He once a few years ago said “I’m not going to make the same mistakes* as were made trying to end the great depression – I’ll make my own mistakes.” – I’ll remember that one too.

*too tight money too soon.

17. ### joepistoleDeacon BluesValued Senior Member

Messages:
22,910
You are relying on the greater fool theory of investment to bail you out of your gold investment. There is no reason to believe that gold will be higher in 2015 than it is now. And if by some chance gold should be higher in 2015, you need to factor in opportunity costs in order to access the profitability of the investment and that is going to be a significant challenge to the profitability of your gold investment.

Well for starters, there is no QE Infinity, there never was. QE Infinity is a political fiction developed to advance a conservative political agenda through misinformation and fear. QE was never intended to be permanent. The Fed has been very straight forward about its intention and plans to end QE when warranted by economic conditions. Two, there are no “thin air assets”. That too is more political fiction invented to advance a “conservative” political agenda through fear and misinformation. The Fed buys real assets with real money, and it sells real assets for real money.

As has been pointed out to you numerous times before, you are laboring under a myth. QE Infinity is fiction. The Fed and the markets very clearly understand that fact. Your prognostication about the eventual collapse of the dollar is based on a myth. The only way there can be a collapse is if Republicans in congress actually do fail to raise the debt ceiling as they threatened to do in 2011 and create a national default.

A couple of things, first there is nothing magical about the national debt. Two, your national debt numbers are wrong. According to the US Treasury, the national debt as of today is 16.7 trillion and not the 18 trillion you claimed. And of that amount, almost 5 trillion is debt the government owes to itself - a byproduct of the government’s accounting method. So when you look at the real national debt, it is more like 11 trillion. When you consider that the US GDP is 16 trillion, the US debt burden as a percent of GDP is far better than most industrial countries. Further, US debt to GDP has been much higher in the past (e.g. post WWII). While the US debt is of concern, it is not time to turn out the lights and head for the hills. It is still manageable, providing we can act rationally and prudently to address our ills.

http://www.treasurydirect.gov/NP/debt/current

And like I have said before, I am sure you will revise your doom and gloom date again. The Fed is not tightening the money supply yet. What we are seeing is speculation…something the markets are well known for doing. The Fed’s message has been consistent and it has been rational. Bernanke’s message has been consistently rational. Bernanke was a little slow on the uptake. But once he understood the magnitude of the problem he has acted splendidly. Given the Republican penchant for fiscal profligacy and ineptitude, Bernanke and his Fed are in large part responsible for the economic growth we have witnessed over the course of the last 4+ years.

We have seen higher interest rates in the past. We have seen double digit interest rates in the past. We have seen higher real debt levels in the past. And we have recovered and our economy has grown. How well the Fed executes its QE exit plan remains to be seen. But doom is not etched in stone.

BTW, Joe I did not say US was 18 Billion in debt now. I said in 2015 it would be. I said: "Then US nearly 18 trillion in debt will be forced to pay off the maturing bonds as no one but insurance companies and Fed will buy with the Fed's thin-air money. You see a hint of this now too."
In context my "Then" is mid 2015 after dollar collapsed near end of 2014.

Last edited by a moderator: Jun 25, 2013
18. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

Messages:
23,198
That is true of ANY asset with little productive use, such as the paintings by well known dead artist. They are setting record high prices as you can take several million dollars in your suit case, when you flee the US, but not in gold. Gold has a few "productive uses", but the dollar has NONE (expect to wipe your ass or build a fire). All assets used for purchases do depend on there being someone else (call them a "greater fool" if you like) who values them. Such people have existed continuously for gold since man learned how to record history and not very long for fiat money. The rest of the world, especially China, seems to now be waking up to how foolish they were to send TVs, etc. to US for mere pieces of paper. From memory, only 14% of China's export earnings are from sales to the US now and more than half of their bilateral trade imbalances do not even use dollars to settle (pay off). The US can only buy, if China will lend the money and China is growing very tired of doing that but must until nearly all of their factory production is sold to others who are a rapidly growing percent of the buyers as US becomes less important.
Yes the opportunity cost, I expect will force me to sell when the treasury’s interest rates return to their long term average. But I expect there will be great financial chaos in the world in by 2015 with only Gold and the RMB not depending on “greater fools” thinking they should accept US Treasury’s printed paper for goods of real value.
On (1) I agree that is just a name to express how difficult to stop this third QE is. On (2) ”real money” has taken many physical forms: rare metal coins, gems, cows, even large stones that were a ship’s ballast left on coral islands, with no stones, etc. but all of its forms have one common characteristic – No one, not even a government, can create that “money” without limit. US is now creating “money” from thin air and no one can force them to stop. What ends the printing of thin-air money is usually the destruction of “greater fools” – I.e. people who will give things of real value for the newly printed paper. Call this truth a right wing conservative POV if you like, but it is just historical fact.
Myths are things believed that are not facts. We can’t be sure whose POV about the future is myth . I think you hold a myth telling that the Fed can end QE3 by phasing down the 85 billion of thin-air money buying without sending US into severe recession, if not into a depression. I agree that my POV may be my myth – we will just need to wait and see. My myth is mainly based on the history of prior experiments like the US is doing now. I.e. government just printing “money” when they could not pay their bills from tax revenues, duties, etc. Of course this action is wrapped in terms like “for stimulus” (which does not work)* etc. but I see no evidence for US tax payers voting for representatives who say: "We need to stop giving out so many “goodies” just because we can just send the bills to the yet un-born."
I agree large debts can and have been paid. For example England’s Debt to GDP ratio at the start of the industrial revolution was much higher than the US’s is now. WWII debt is as large and was quickly paid down, when war ended. What is different now is the US is borrowing for goodies, not to protect itself from a brief danger that ends or for productive machines, like England’s steam engines and power looms. US has been enjoying a couple decades long dance while the fiddler played, but he is packing his fiddle now. Many US factories are closed, smallest ever fraction of population works*, and many of them are not well enough educated to be competitive in the modern world, even with a job.
I have asked you to stop with the “again” in prior post, unless you can cite a post of mine where I moved the date further into the future. You can’t as it has been unchanged as: “on or before Halloween 2014” for at least seven years now. Now for the fourth time: If I am not less than 10% of 7x12 months in error, I will feel that I was basically correct, if not precise. If more than that I will still not change the date – just admit that the future developed differently from my forecast for it 7+ years ago.
*
- See more at: http://www.economonitor.com/blog/20...ighlights: The Good Life#sthash.7hElyrty.dpuf PS to Joe - Try to find fault with the msg, not the messenger.

BTW, Joe I never said US debt 18 Billion. I said: "Then US nearly 18 trillion in debt will be forced to pay off the maturing bonds no one but insurance companies and Fed will buy with the Fed's thin-air money. You see a hint of this now too." You have removed the contex which clearly has "Then" as in mid 2015, after the dollar collapsed.

Last edited by a moderator: Jun 25, 2013
19. ### EconomisterRegistered Member

Messages:
51
Billy T, your position seems to be that: the US is in or near a recession, that low GDP growth coupled with "Fed Money Printing" will "debase" the USD which will then collapse (H'ween 2014 or in that range), that the US economy will not recover and that it will face persistent unemployment, which will result in a collapsed US economy, of which the US will no longer be a competitive economic force.

How do you reconcile the economic data which suggests that, fundamentally, the US economy is on a recovery, that debt is falling, the USD is strengthening, and that the fate of the global economy seems even more reliant upon a strong US, while gold prices have fallen?

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22. ### joepistoleDeacon BluesValued Senior Member

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22,910
BTW, Joe I did not say US was 18 Billion in debt now. I said in 2015 it would be. I said: "Then US nearly 18 trillion in debt will be forced to pay off the maturing bonds as no one but insurance companies and Fed will buy with the Fed's thin-air money. You see a hint of this now too."
In context my "Then" is mid 2015 after dollar collapsed near end of 2014.

What are you doing Billy T adding additional commentary to my posts without disclosing same?

23. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

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23,198
I don't understand what you refer to; The "BTW... " is the last footnote paragraph of MY post 55. In your post 54 you had said: "... your {Billy T} national debt numbers are wrong. According to the US Treasury, the national debt as of today is 16.7 trillion and not the 18 trillion you claimed."

Instead of complaining that you were again sticking worlds in my mouth, as I never claimed that; I just called attention the "Then" at start of my statement:
"Then US is nearly 18 trillion in debt ... You see a hint of this now too."
From the context it is clear that "then" is mid 2015, AFTER the dollar haws crashed, and also the "You see a hint of this now too." indicates statement is not about now/today, but some future date.

Later by edit: Post 54 has YOU quoting my "BTW, Joe ..." statememt without noting it is from me but the context makes it clear it is a quote.