Wednesday, September 2, 2009

Golden Avalanche

I had a LONG day at work then I had to remove the air conditioners from the windows because it is doubtful any hot temperatures are coming back and I wanted to turn the heat on. Yes, it is that cold here overnight already! Suffice to say, I am short on time, so just a couple of quick hits.

Home Prices in the UK: Already on the Way Back Up?
I have enough on my hands trying to follow issues in the United States, never mind other countries. Thankfully, there is always somebody with an eye of things all over the world. I stumbled across the following article that amazed me, as I repeatedly hear how much worse off Europe is than the United States when it comes to things financial.

From the blog UK Bubble:
The House Price Guarantee

It is painful admission, but UK house prices are beginning to recover. In fact, the monthly increases look very much like those recorded during the bubble years. If present trends continue, then within about 15 months, the UK housing market will have recaptured all the losses recorded since October 2007.

That line really hit me as impossible, but going on:
The bubble might be back, but its return is due to the implicit guarantee that the Bank of England and the Treasury have put in place as a response to the financial crisis. The government has given home owners now have an implicit insurance policy that the taxpayer will make up any losses on property speculation. It was a guarantee that was easily granted, and will prove virtually impossible to remove.

What? No Exit strategy like our own FED has for such things?:
It is tempting to think that within a few years time, that another financial crisis, similar to the recent one will take place, with its dramatic bank failures and dropping asset prices. However, I see another scenario. The UK will drift into an extended period of increased government intervention, stagnant growth, and asset inflation. The state and the financial system are welded together, the interests of finance dominating the policy stance of the government.

In reality, neither the Bank of England nor the Treasury have any clue how to disentangle the financial system from the taxpayer. They have no idea how to remove the tangled web of guarantees, liquidity support and capital injections.

Since they don't have an effective exit strategy, the support will continue indefinitely. Just watch what happens next to house prices.

Now I am not going to offer a commentary on UK house prices here. I am highlighting this article because yoy could easily swap "US" for "UK" in every single section above without editing.

I firmly believe we are in deflation right now. Where I differ with many is that see governments the world over asset price obsessed and hell bent on inflation in assets. Can we have inflation in home prices, health care, and the stock market and still print a benign CPI? Of course we can, it has been so over the last decade, no problem there.

As more fake fiat money is printed to support asset prices, all fiat money will lose real credibility and value. What this may mean going forward is the topic of the next section.

Golden Avalanche
With the above phenomena in mind, Mish Shedlock has a must read article on Gold today which attacks many notions about gold prices that will surely test the gold bugs thinking (excerpts):
So What's Behind Moves in Gold?
Gold collapsed from over $850 to just above $250 during one of the biggest expansionary periods in history. That is the reality and the charts show it perfectly well. Thus the statement "all of gold's gains were in expansions" is very misleading, at best.

Please see the article for all the charts, they are great and there are too many to excerpt. More:
What's Behind Moves In Gold?
1) What was behind gold's move in the Great Depression?
2) What was behind gold soaring to $850 in the 80's?
3) What is behind gold collapsing to $250?
4) What is behind gold soaring again now?
Clearly it is not expansion or contraction driving the price of gold, but rather something else. That "something else" is credit issues.
The great depression sported a massive contraction in credit. Gold rose by force when Roosevelt confiscated, and re-pegged it. Nixon taking the US off the gold standard was also a massive credit event. The difference is that gold, allowed to float, soared.

From the $850 high, gold then plunged to $250 even though there was inflation every step of the way. What happened? Credit fears collapsed. Psychology changed (more on psychology and attitudes below). Moreover, gold's reaction to Long Term Capital Management (LTCM) was a big yawn suggesting that the crisis would be contained.

In general, Gold, like Fiat money does poorly when economic conditions are generally rosy, credit worries are non-existent, and interest rates are falling. In simple terms, cash (and gold) are trash, and assets are where you want to be. Free to float, gold is apt to do worse as Prechter notes.

In 2002 when Greenspan stepped on the gas to fight deflation. Gold started reacting in advance to the pending credit event, an event that blew sky high in 2008. Gold's reaction now suggests the crisis is still not over.

In the early 30's even before Roosevelt stole the citizens' gold, it value in relative terms soared, just as one would expect.

This go around, gold sunk in the initial credit collapse as leverage everywhere was forcibly repudiated. Unlike other commodities however, gold quickly regained its composure, as I surmised.

I think Mish really nails things here. Gold is at its best when doubts about credit (and debt) quality are strong. Gold can do poorly in inflation, if money is seen as sound, because other assets will outpace gold in price escalation.

I am a huge fan of gold and silver because I see the world (see the UK piece above) trying desperately to support asset prices by money creation. To me this is defacto devaluation. This may or may not be the technical definition, but it is how I best see it. I think a time is coming when UK and US home prices are supported by central bank agency debt buying done with printed money. I think creditors are not going to want to hold currencies that carry an open ended commitment to printing. I think a move towards gold (and a much lesser degree, silver) will become a major safety net for currencies gone wild.

Of course, most readers know I think along these lines, and in full disclosure I own gold, silver, and some metal miners so one could say I have a horse or two in this race.

After that lead in, I am going to offer some market observations that may not seem to jibe with everything I just wrote, but bear with me.

Today gold kissed an area that I have clearly marked for a breakout, $980. Gold closed a touch below that level. I had silver at $15 for a breakout and it clearly passed that today. So what's my problem?

Gold and silver do their best work when they can work quietly. If too much attention is payed to the metals, things tend to ease off. Call it central bank dumping (Greenspan was a huge gold price watcher), conspiracy, or whatever. The mythical $1000 an ounce mark for gold has taken on a life of its own it seems. With that in mind, here is a sample of articles (in addition to the Mish one) I picked out just TODAY ALONE!:
Guest Post: Yves On Gold Panic via Zero Hedge

Protecting Your Wealth in Volatile Markets (Hennecke)
Hennecke stressed that investors should go for physical forms of gold and other precious metals rather than "paper gold investment scheme where there isn't full backing, where the metal might be leased out or used for derivatives. That's crucial because there is 80 times more paper gold in the market than actual
physical metal in existence in the planet."
via Jesses' Cafe

And even a usual chart based shorter of Gold, Slope of Hope, pens this entry:
Getting on the Gold Train

Fundamentally I am a firm believer in gold and silver and I am looking to add all the time. In light of all the attention the metals are getting right now, I would say odds of more room to the upside will be limited.

What we need right is for credit to lose quality again (think commercial real estate) and for some kind of a market correction (long overdue) to occur. Then all eyes will be elsewhere and the real move in gold and silver will take place.

Of course, this may be the moment in time when metals begin take their rightful place as an asset allocation across the investment public. Should that ever occur, picking a spot within a few dollars is not going to make any difference. None at all.

Have a good night.


Jeff said...


Great info on the gold move today.

There are so many people that want gold to fail. Banks, deflationists etc.

The fact its rising tells me that people are panicking and looking for something of value.

I am sure the banks will do anything they can to slow this move down. If gold breaks 1000 look out!

GawainsGhost said...

While I am not a big fan of precious metals, I understand the rationale behind investing in them. It's just that I prefer safety of principal and adequacy of return to sepeculative buying.

Prices go up, prices go down. It's that simple, and it's always been that way. Gold may very well reach the mythical $1000/oz peak, but those who buy at that point are going to be in a world of hurt when the price inevitably plunges.

It's the same with real estate and everything else. Group think and herd mentality are real phenomena. People buy into trends and bubbles, thinking they're making sound investments, but they're not.

The secret to having money is in protecting it.

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ana said...

It's the said with sincere realty and everything else. Radical judge and move mentality are existent phenomena. Fill buy into trends and bubbles, thought they're making quantify investments,
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