The recent announcement by the FED to pull back on its latest round of QE (which was highly unprecedented and extremely accommodative by all measures) has sent markets tumbling. This recent tribulation is a response to the mere intent of simply slowing down the rate of monetary expansion. The FED has not announced any plans to halt open-market purchases or to engage in open-market sales. The next couple of months, therefore, will constitute a serious test for the soundness of our monetary system.
Will Bernanke allow the real economy to stand on its own two feet and begin to unwind the asset bubble that he has inflated in the bond market, or will he (or his successor) decide to pursue banana-republic style monetary policy? Will Obama jeopardize the political position of his party in the upcoming elections by allowing a correction in securities markets?
If you've been paying attention at all over the last 6 years then the answers to these questions should be quite obvious.
Now, I don't want to get into a discussion/debate about the efficacy of Bernanke's monetary policy over the past few years. Some say that he saved the economy, others claim that he merely replaced one bubble with another ala Greenspan, and others simply assert that QE2 and QE3 has had no noticeable effect on the real economy. Getting bogged down in this sort of discussion is very tempting but ultimately barren/irrelevant to the discussion at hand.
I just want to highlight some facts about gold and silver:
1. The recent pull back in commodities makes them very cheap relative to the S&P and DJIA
2. Bernanke will most likely be replaced by a dove
3. The supply conditions for both gold and silver have remained fairly stable (world-wide silver shortage and demand for gold on the part of central banks is still on the rise)
4. The bubble in the bond market will eventually end, and when yields rise investors will turn to alternate asset classes
Therefore, and for the reasons above, I think this is a good time to get back into commodities.
I recently chance upon this chart. Maybe that would put some perspective into our analysis of gold.
http://3.bp.blogspot.com/-ITm1zjCw3Mg/T58L9o-098I/AAAAAAAABTw/JjqPz8OGD…
Lol
I don't get the banana republic reference. Elaborate..?
Arent you the day trader that is able to generate a profit?
The "bubble" in the bond market appears like it's ending and it's the reason for the selloff in gold and other stuff. It's just a function of higher real rates, so you got your point 4 completely backwards.
That chart is over a year old, which means that it entirely ignores my argument/my rationale for getting back into gold at this particular moment. Also, it appears to severely understate the actual inflation rate. Thank you for your contribution to this thread though.
Perpetual monetary expansion and debt monetization for political purposes. In other words, a central bank that is not politically independent.
Can you please elaborate? Are you saying that inflation and high interest rates cannot coexist? If so, then I would recommend you buy any basic monetary economic textbook and read the chapter on interest rates and Milton Friedman's contribution to the issue. Also, inflation doesn't affect real interest rates.
The main reason why point 4 isn't 'completely backwards' is because while it is true that higher interest rates will certainly have an adverse affect on the real economy and therefore the stock market, funds will go somewhere; they will chase the highest ROR. The asset class with the highest ROR will be commodities.
Uhm no, gold will fall below $1,000 within a year, my guess is by December, and then that's it until the next crisis. Wait until it hits $600 to buy, or at least until it stops falling...this bubble was a fear trade and now it's deflating. How someone like Paulson is getting hosed on gold a la odd lot theory, I have no idea, but people aren't buying gold out of fear of the world ending anymore....you missed this party
Short the fuck out of everything gold
Barrick just announced some layoffs, I hope you're right OP
Huh? When did I say anything about inflation and high interest rates coexisting? If inflation doesn't affect real interest rates, maybe you can tell me exactly what real interest rates are, in your definition?
Like I said, real rates in the US are going up. 10y TIPS real yield has gone nearly 120bps in a straight line in 2 months, from -60bps to +60bps. Given the pretty universally accepted existence of a relationship between low real rates and high prices of gold, what is happening to gold is perfectly reasonable and easily explained. I advise you to use Google and find a lot written on the subject.
In the meantime, I leave you with this here image: http://s.wsj.net/public/resources/images/OB-XY561_Goldra_P_201306241115… (sorry, I don't know how to embed an image)
Google 'real interest rates', or the the 'fisher effect.'
The relationship is spurious, and I'm pretty sure that you're conflating interest rates in general with real interest rates. Also, I'm not sure that the correlation even exists. Silver reached a global maximum when real interest rates were at all-time highs (1981-82). Gold also hit an all-time high, in real terms, during this period.
Can you please explain the logic behind the relationship? Why are commodity prices inversely related to real interest rates? I have heard this theory before, but it always had to do with the idea that high interest rates mean low inflation and low interest rates mean high inflation--which is simply incorrect.
If you want a more in depth discussion of the subject, including a debate about the point I mentioned above (the authors aren't as convinced of this as I am, but that's 'cause they're academics), check this out: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
You dont seem to get the point. The point is that Gold is still at a very highly 'overvalued' level. If it can drop from an inflation adjusted 1800 to 750 in 4 years, and continue its downtrend for the next 15 years, it is highly likely that the same scenario will play out in gold.
I would set a target for gold of at least 1100 over the next few months. It could probably drop to sub-1000, but I think it will certainly encounter some resistance at the 1000 level.
Rising yields + Low inflation + stronger USD = DO NOT BUY GOLD
It's based on the commonly understood scientific definition that you will find in any basic text. From google:
I understand the notion of arbitrage but I don't see how it applies. The empirical evidence that you cite is extremely limited, and you have failed to demonstrate causation. You simply state that there is a correlation for 'x' amount of time (which is limited) and conclude that this is how it's going to be in the future. This is textbook cum hoc ergo propter hoc fallacy.
Interesting
The point is that it's not overvalued, and for the reasons I raise in this thread. You're comparing an asset class in one period to the very same asset class in another period. This is ridiculous; it's like saying that the DJIA is 'clearly overpriced' because 'it was at 1,000 in 1986 and is at 14,000 today.' The DJIA also suffered very dramatic declines in previous periods. The point is that gold and silver are still cheap relative to stocks and definitely cheap relative to bonds (based on historical trends).
Why, and based on what?
Well for DJIA, the metric I guess would be trailing PE.
But for gold, what is the metric? What is the point for gold? It is mainly a hedge against inflation isn't it? So analogically against the DJIA trailing PE, gold was at its peak and could be in a secular decline.
And why gold can go down, there are no basis..except it is extremely overcrowded. But the same can be said with your argument.
And you also said that the bond bubble is about the burst. Granted that might be true, but what makes you think it will flow into gold, which is just a piece of metal? Why not equity? Also, what metric did you use to evalute that gold is cheap to the benchmark?
OP, what exactly are you founding your thesis that commodities will have the highest return in the coming months/years on?
Respectfully, I think a lot of "analysis" currently floating around is more a projection of how people either think the world should be or how they wish it would be. People are looking for simple correlations that often manifest in a more stable environment, but the overarching mechanics of the system we function within require more thought than simply plugging in a ratio. Figuratively speaking, the automatic transmission mindset is falling behind those who know how to drive stick, but there's still plenty of money to be made.
Also, the institutions such as Goldman who are predicting gold price declines take a cautious outlook because they have to. I am not currently an analyst, so I am more free to speak my mind: gold is falling an average of roughly $10 a day depending on what period you look at, just project those numbers forward. Given how WRONG everyone's been, that's as good a methodology as any LOL. Gold's average price stayed at a couple of hundred bucks for decades, so once it approaches that level it becomes a good long term investment. Psychologically, the $1,000.00 point is significant, so I agree with poster above who expects resistance, but once it falls through the $900 range I'm thinking the decline will accelerate. My honest guess is that it will stop at between $450 and $600.
If gold prices start rising again on some other driver, then buy, but why people are pouring money into a declining asset baffles me....they might have to wait decades for another gold bubble, maybe longer.
Historically, the DJIA to gold ratio has been 11-1, which is where it’s at right now. While this does not support my argument, it does indicate that gold isn’t as ‘extremely overvalued’ as others have asserted. Also, if you ignore the early-to-mid 2000s, this average falls to 9-1, indicating some room for growth. The point I’m emphasizing, though, is that while historical trends/averages are useful, it’s only one variable among many, most of which are pointing to higher gold prices (though in the immediate future prices seem likely to continue their decline).
The reason why I think higher yields (a deflating bond bubble) will benefit commodities more than equity is two-fold. First, higher yields (in excess of what Bernanke is paying banks to ‘park’ reserves at the FED) will increase lending and therefore increase the supply of money in circulation. This will set-off the money multiplication process and therefore constitute a natural, monetary expansion which, in my opinion, will be yield inflation (due to the magnitude of Bernanke’s monetary injections over the last 5 years). Inflation, as everyone knows, (1) hurts fixed income, including bonds and preferred stock and (2) helps commodities traditionally viewed as inflation hedges, such as gold and silver. Higher yields will also hurt the real economy, which will translate into additional pressure on the stock market.
This is merely one factor. Here are a few others that I have highlighted in my attempt to justify my long-term bullish position on gold/silver:
Real interest rates are determined by (a) the interplay of the supply and demand for loanable funds, as determined by time preference and the productivity of capital at the margin and (b) risk considerations, primarily default risk. It deals with 'real' economic conditions.
Nominal interest rates are real interest rates + an inflation premium that lenders demand in order to protect their real return. It has nothing to do with real, underlying macroeconomic fundamentals in capital markets. It is an adjustment made. This is how economists have categorized and defined two separate phenomena.
I will not discuss this any longer. If you want to know more about it, please read Mishkin's monetary economics text, or do some online research.
Please, go right ahead.
I fundamentally disagree with this statement.
State B: I have $1000 in my portfolio; gold is trading in the mkt at a price of $1000/oz; real yield over my investment horizon is 1%. Now, if I were to invest my $1000 into the same TIPS, my gross real return per annum will be 1%.
So my question to you is the following. Given the above and all else being equal between the two states, in which of them, A or B, am I more likely to spend $1000 to buy 1 oz of gold?
Dupe, sorry, pls delete... This friggin' H-T-M-f*ckin'-L is doin' my head in!
Maybe because you were a math major?
I wanna say A, but all other things are not equal. The analysis is oversimplified. The fundamentals for gold are changing (supply/demand conditions are favorable), high interest rates will put pressure on earnings and on real incomes, and inflation expectations are entirely ignored in your analysis. Again, if this relationship were true, then gold/silver prices wouldn't have reached their peak in real terms (and even nominal terms for silver) when real interest rates were at an all-time high (of over 10%).
Though I wont deny the logic of your argument under the ceteris paribus condition.
Lots of intellectual dick measuring in this thread (you need to have grown up in ancient Rome or be a devout Catholic to understand half of what Esuric is referring to).
I don't listen to anyone with an opinion on gold because I have never really heard a convincing argument for or against (except Glenn Beck, of course). The fact of the matter is that gold prices are completely irrational - the gold thesis changes seemingly every 5 years.
Gold is tricky.
Burn. So you're telling me that higher yields increase the money supply?
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