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Waiting for the train wreck
The rise in the gold price above US$1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world's central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck.
At most times, the gold price is not an economically significant indicator. In 1980-2000, it declined irregularly from $850 to around $280, and movements in it seemed to have had little or no effect on the global economy. That's what you'd expect; even at $1,000 per ounce, the global production of gold is only around $100 billion annually, which would put the entire world's gold extraction industry only 17th on the Fortune 500.
However, in relatively few periods, gold becomes of immense importance. When investors lose trust in conventional currencies, because monetary policy appears set to debauch them, gold is the immediately available safe haven. During such periods, gold's former importance as a store of value becomes uppermost in the public mind, and its price becomes a major economic indicator.
Gold became important from about July 1978 to early 1980, during which period its price rose from $185 to $850 per ounce. For that 18-month period, the price of gold was the most important factor in day-to-day market fluctuations. The gold price, more than the inflation rate directly, moved markets and by extension moved monetary and to some extent fiscal policy in the major economies. Only after Paul Volcker took over at the US Federal Reserve in late 1979 did M3, a broad measure of money supply, begin to supplant it in investors' analyses.
We now appear to be at the beginning of another such period. The exceptional monetary stimulus entered into around the world during the financial crisis last year has prevented a downward liquidity spiral, but at the cost of destabilizing markets. Both monetary and fiscal policy dials are stuck at settings that would have been unimaginable two years ago.
Wall Street Journal, NOVEMBER 20, 2009.
As frothy as gold has been lately, by some measures it has only just begun to bubble.
Bucking Thursday's broad market selloff, Comex gold futures rose to a record-high $1,141.40.
Up 62% since last November, gold is enjoying a moment that is either the start of an amazing bull run or one of those magazine-cover episodes that precedes a fall.
In recent weeks, everybody from hedge-fund wizard John Paulson to the central bank of India has made a show of buying gold.
They may be on to something. Gold is still well below its inflation-adjusted record high, set in January 1980, of $2,290 an ounce.
Wall Street Journal, NOVEMBER 20, 2009.
PRECIOUS METALS: Gold Ends Higher Despite Dollar Rise
Nearby gold futures posted a record settlement as a stronger dollar failed to pierce the bullish momentum that has pushed the metal into uncharted territory this week.
Investor speculation that prices will continue rising has primarily been behind gold's gains of late. But support is broad, with central banks buying and retail investors snapping up gold bars and coins. Any price pullbacks have been brief and shallow.
Fed chairman Ben Bernanke and his team are ignoring this. It insists that it will maintain interest rates at the current near-zero level for an extended period, regardless of what the gold price does. By this, it is ensuring that the present bubble in gold and commodities will play out to its full extent.
With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now.
What's more, although 1980's peak seemed madness at the time, and was equivalent to nearly $2,400 today, there is no reason why gold cannot go much higher if it is given another year or so to get there. The supply of gold from new mining is around 1 million ounces per year LESS than in 1980, and the supply of speculative capital that could flow into gold is many times greater. Hence, a $5,000 gold price is possible though not certain, if present monetary policy is continued or only modestly modified - and that price could be reached by the end of 2010.
As was demonstrated by the housing bubble of 2004-06, modest rises in interest rates are not sufficient to stop a bubble once it is well under way....
Hence the bubble will inexorably move to its denouement, at which point gold will probably be north of $3,000 an ounce and oil well north of $150 per barrel. Even though there will be no supply/demand reason why oil should get to those levels, and gold has almost no genuine demand at all, the weight of money behind those commodities in a speculative situation will push their prices inexorably upwards, beyond all reason until something intervenes to stop it.
At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the US economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing.
In the next downturn, the Fed will not be able to cut interest rates because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the US will become still more difficult to come by, and unemployment will approach 15%.
Not far ahead, 2011 and 2012 will be very unpleasant years...
The danger in those years will be that Bernanke will attempt yet again to refloat the US economy through inflation, buying government debt to fund the deficit and forcing short-term rates well below the inflation rate. This danger is exacerbated by the Obama administration's insouciance about deficits.
Bernanke and his predecessor, Alan Greenspan, on their own, bear a large share of responsibility for the 2008 crash, but the Bernanke/Obama combination is potentially even more dangerous. If expansionary monetary and fiscal policies are pursued regardless of market signals, the US will head towards Weimar-style trillion-percent inflation. That would make the government's position easier as its mountain of Treasury debt became worthless, but devastate everybody else's savings and impoverish the American people as Weimar impoverished 1920s Germany.
As I said, a train wreck. Probability of arrival: close to 100%. Time of arrival: around the end of 2010, or possibly a bit earlier. And at this stage, there's very little anyone can do about it; the definitive rise of gold above $1,000 marked the point of no return.
"It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system."
So, why IS silver so cheap? I mean the earth's crust, on average, contains 19 units of silver for every one unit of gold according to the U.S. Geological Survey. If gold and silver were equally accessible, that makes gold three times more expensive than it "ought" to be.
Annual silver demand has exceeded annual planetary production for many of the past 50 years. Until the last 2-3 years, monetary silver investment has been less than zero, due to silver coin melting and other recycling making up the industrial deficit. Yet, the shortfall is unsustainable at current silver prices, because silver in electronics often cannot be recycled economically, so it is simply thrown away. Also, every time the US military explodes a smart bomb, 100’s of ounces of silver are vaporized. Vast stockpiles of silver accumulated over many centuries have now been “consumed” in the last few decades, and it is unclear how much is left. For example, after World War II ended the US Government had stockpiled billions of ounces of silver. As of 2002, this stockpile is completely gone, as are all other official world government stockpiles. In many expert opinions, at least 50% of all silver mined in history is now gone, unrecoverable by any means, while at least 80% of all gold probably remains. So, the current ratio of existing silver to existing gold is probably more like 5:1, and not 10:1. On top of this, most of the remaining silver exists in things like jewelry, silverware, or coins hoarded by people wearing “tinfoil hats,” and I doubt that the “tinfoils” will relinquish their silver at anywhere near current price levels. Therefore, in regards to world bullion stockpiles the 5:1 ratio is flipped, with gold bullion actually being around 5 times more plentiful than silver bullion. So, we now have a price ratio of 70:1, but an availability ratio at current prices of 1:5. In this light, remember that silver (not gold) is the metal that is indispensible for modern society. Can you say “unstable?”
Gold hits fresh record high on safe-haven buying
Gold hit fresh record highs on Monday as economic uncertainty and the potential for inflation drew investors to the relative stability of the asset.
U.S. COMEX December gold rose $10.20 or 0.9 percent to $1,157.00 an ounce on the NYMEX by 2325 GMT (6:25 p.m. EST), in thin Asian trade with Japanese traders sidelined for a public holiday.
Spot gold was bid at $1,156.25 an ounce, above a record $1,152.75 struck last Wednesday.
The metal's price on Friday ended higher for the sixth consecutive session. India's acquisition of 200 tonnes of bullion from the IMF had also boosted interest in gold earlier this month.
Originally posted by FortAnthem
Loam, you need to take a few days off, I'm starting to run low on antacid!
Seriously thought, another great thread, as usual. Don't know where you find the time to dig all this stuff up, but keep up the good work.
Gold, which has a strong inverse relationship to the dollar, rocketed. Late Monday in London, spot gold was trading at $1,170.5 a troy ounce, up 2.1%. The metal hit a record high of $1,174 an ounce on the Comex division of the New York Mercantile Exchange earlier in the day. Gold is up nearly 12% this month and analysts said while the metal is increasingly susceptible to a correction, the rally still has legs. Platinum, silver and copper also touched fresh highs.
Gold surges to a fresh record: The precious metal continues its run on concerns about the dollar and economic jitters. Analysts see $1,200 an ounce before year's end.
Gold rallied to an all-time high Monday, climbing ever closer to $1,200 an ounce, as the U.S. dollar slid and investors showed nervousness about the economy.
December gold rose $18 to settle at an all-time high of $1,164.80 an ounce, after climbing as high as $1,173.50 earlier in the session.
"We're seeing significant dollar weakness, and I think that's the main driver today," said Joe Foster, portfolio manager for the Van Eck Global International Investors Gold Fund.
The weak dollar has sent gold surging more than 10% this month as investors flocked to a safe-haven investment. bDemand for gold and other so-called tangible assets, which tend to store value better than equity-based investments, often rises in times of economic uncertainty.
Gold is also being supported by a growing expectation in the market that central banks around the world will move to increase their hoards.
India's central bank bought 200 metric tones of gold from the International Monetary Fund earlier this month, and the central bank of Mauritius bought a smaller amount last week.
"We believe the activity of central banks and seasonal weakness in the U.S. dollar in the final four weeks of the year will sustain the strong rally in gold prices," analysts at Deutsche Bank wrote in a recent research report.
Meanwhile, gold is benefiting from a "break-down of confidence" as investors fret about growing fiscal deficits and the ability of governments around the world to oversee the financial system, Foster said.
Given the current momentum in the gold market, and the growing interest from big investment funds, analysts expect prices to continue rising.
"We might have a bit of a pull-back, but the long-term trend is higher," Foster said. Gold will probably top $1,200 some time in December and could climb to $1,300 early next year, he added.