With gold around US$1,400, I am curious to know your thoughts on whether it is still a safe store of value. With so many investors running to it for fear of inflation, currency movements, ‘risky’ equity or bonds, or for whatever other reason, the value of gold appears to have become the product of a risky bubble itself. It reminds me when oil was at nearly US$150 a barrel before collapsing. However, at least oil has a productive purpose and associated demand supporting the price. Once investors have some more confidence, will the gold price not collapse as with other bubbles?
However, I remember thinking the same thing when gold was at US$1,000, and now it’s 40% higher.
As long as the supply of money is growing so much faster than the supply of gold, I do not see why we would not see $2K/oz in 2-3 years. I'm in DGP and AGQ right now.
But I don't think inflation/monetary expansion would be so great as to warrant such a rapid increase in the gold price. If the base price of gold were to be US$1000 and the US$ depreciated 10%, then the price of gold would be around US$1100, all else held equal, etc. Even though the market is expecting the US$ to decline, I can't imagine it taking that much of a dive.
Although I'm not a trader and don't even deal with "the market" too much in my M&A role, my idea is to short gold, convert to yuan (if possible), wait for things to settle, then convert back to a likely-cheaper dollar at that later date, then buy back likely-cheaper gold to settle the short. But, as I said, I thought gold was overvalued at US$1,000, so I am not looking too bright at the moment.
Looking at all the countries that have been running massive trade deficits with the US over the past 10 years (China, Brazil, Germany, etc.) and their huge dollar hoards, I don't see how it can be a good idea to short any commodity right now as Bernanke has just dropped the other shoe and unleashed QE2 to the tune of $900B with a QE3 not ruled out. I don't see how this would not trigger a global race to swap out of dollars into commodities, gold, silver and otherwise.
Read the Short View on 1st page of Markets page of FT yesterday and decide for yourself. The fact that Zoellnick even mentioned returning to a gold-denominated currency is frightening. The value of an ounce of gold would be 10k at that point. I personally would never hold gold because of the fact we have a fiat currency. Just think, can you take your troy ounce of gold to the grocery store and buy a six pack? No, you can't, so while some might say it is an inflationary hedge, I see it ultimately to be worthless. It comes from the ground, and since our currency is not tied to it, the only value we place on it is completely psychological. The dollar inflates, generally causing gold to skyrocket. However, gold is still denominated in dollars, so it's not like you'll be able to flip the gold you hold when it's at the peak anyway. Thoughts?
Just because one can't take gold to the grocery store to buy beer, one can't make the conclusion that it's "ultimately useless." I do concede that worth can be subjective, but gold, like many other objects of "psychological value" hold value simply because everyone else thinks they are valuable. I am curious as to how one determines the actual nominal value of an ounce of gold though.
Isn't the value of our dollar completely psychological as well?
Regards
I think gold will continue to go up right now, but when (if) the economy starts to really rebound I think it will sell off some. QE2 is driving the dollar down which is further supporting gold. The demand for gold is pretty strong also. Gold has gas still left in the tank.
buy a six pack i'm happy you have your priorities straight :)
I'm not even getting into the gold trade long or short is to much risk i'll stick to shorting treasuries ty
Yes, one of my points is that gold has become very risky asset to hold, which means that it may no longer be a safe store of value, but instead a bet or speculation. Also, I doubt that the G20 can pull themselves together enough to agree on anything meaningful.
Additionally, the gold supply and the gold market are different than the oil supply and oil market, in that oil exploration and production is feeding oil consumption. As there is no major productive use for gold and no great demand for it on par with oil, it is a commodity almost entirely for financial purposes, and the purpose being a safe haven for value, which I argue is not the case given its volatility
I know most people on here don't care to hear what Jim Cramer has to say, but I caught a couple minutes of Mad Money the other day and he addressed the topic...and I think he did an okay job.
As ivoteforthatguy pointed out, it's a commodity and it would seem silly to bet against it at this point. Additionally, Cramer talked about the level of gold mining and that the lack of supply at this point, with gold at or above $1400 which is very telling in his opinion. At the current price, companies should be pulling it our of the ground at breakneck speeds, but his research (I did not verify it) seems to suggest that the supply is, well, in short supply and that newly mined gold isn't coming into the market as fast as one would suspect given the outrageously high price.
At the end of the day gold is a commodity that is not infinite in supply, much like oil, unless new reserves are being found or their are promising new metals that could viably replace it (not likely) then the demand is likely to outweigh the supply. Not only is it used in the commercial space for production, etc. it is also valued among consumers as a precious metal to own/wear and it is a safe haven for investors in uncertain times...which is now.
In my mind, something has to give at some point, and I don't see it being gold. The glut of houses on the market in the US is astonishing and they don't seem to be diminishing at a pace that is reflective of 30 year mortgages sitting at 4% interest rate. There is speculation (probably rather accurate) that there is still a significant amount of bad debt sitting on bank balance sheets which only adds fuel to the possible fire. That, coupled with a growing deficit in the US (elsewhere too) and uncertainty in the private sector due to unclear and unproductive legislation only makes the matter worse. The only potential silver lining may be the recent shift in party majority in the House and the gains made in the Senate and in the Governor races across the country, but as previously expressed in other threads, most people feel a legitimate change is not likely, which will delay the effects of the recession even longer. Which will make people even more unsettled and likely fuel continued investments in the precious metals.
Personally, I think that the US could potentially see a rapid recovery if we experienced a perfect storm of situations (not likely to happen). With so much cash sitting on corporate BS, if private sector companies felt a bit more certain that taxes wouldn't be raised and that they won't have a potentially huge health care expense, we could see expansion and mergers and acquisitions which would fuel job growth, which would likely fuel spending and encourage people to purchase houses again...which again, as state above, is one of our biggest issues. Of course, this could lead to inflation which would continue to prop up the price of precious metals. The US government is going to be caught in a catch 22. Either you keep rates low as the economy eventually begins it's recovery (in an effort to diminish the number of empty houses on the market) which will likely cause inflation or you jack the rates up (in an effort to curb inflation) which will discourage the purchasing of homes and drag out the recovery time...either way it looks as if the safe haven of gold, silver, etc. do rather well.
Regards
I would also say that the gold that had been produced and sold 50 years ago is still floating around in the market while oil is burnt and done with. There might be a finite supply in the ground, but gold doesn't disappear like other commodities.
The day you need to exchange a gold earning for a loaf of bread you aren't going to want to have gold bars at your house. You are going to want to have hand guns.
I would also say that the gold that had been produced and sold 50 years ago is still floating around in the market while oil is burnt and done with. There might be a finite supply in the ground, but gold doesn't disappear like other commodities.
The day you need to exchange a gold earning for a loaf of bread you aren't going to want to have gold bars at your house. You are going to want to have hand guns.
Gold still has upside left. Take a look at gold vs other currencies besides the dollar. It is in a full breadth bull market. Not to mention, I wouldn't say it is in a bubble yet. Take a look at investor sentiment surveys about gold and you will see it is not nearly at the level that tech stocks or real estate were in during their bubble phases. Same goes with treasuries (I strongly disagree with Squirtlez that treasuries should be shorted right now, but if we all agreed investing would not be fun, now would it).
On a slightly tangential point: as much as Bernanke is pilloried right now for his money printing, perhaps his rationale of "too low inflation" is just a cover for the real purpose of the monetary expansion, which is some combination of (1) competitive devaluation and (2) the treasury is facing increasingly difficult auctions, for which the Fed needs to take up the slack. The CBs of Germany and China have already spoke to (1), but why is no one talking about (2)?
On a slightly tangential point: as much as Bernanke is pilloried right now for his money printing, perhaps his rationale of "too low inflation" is just a cover for the real purpose of the monetary expansion, which is some combination of (1) competitive devaluation and (2) the treasury is facing increasingly difficult auctions, for which the Fed needs to take up the slack. The CBs of Germany and China have already spoke to (1), but why is no one talking about (2)?
Gold is attractive because of the low rates. When you own gold in a low interest rate environment, you aren't "penalized" for owning it. When rates begin to move, that's when gold loses it's steam.
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