Aug

23

People are lining up in Wesport, CT to sell gold coins, according to a report on Seeking Alpha .

Has anyone ever reliably made profits from bubbles? If so, their existence can be prospectively determined, if not there is no clear answer. It's true that there may be people who know a bubble with 100% certainty, but they don't know where they are in the cycle so they are too worried about shorting them. This is pretty morally equivalent to having no idea about the existence of a bubble, although not quite. I'd say if someone can reliably predict that within a "reasonable" time the bubble will deflate below the current level, and are willing to bet on that, they "know" the bubble exists.

Jeff Watson writes: 

Look at the 1980s Hunt Brothers silver debacle. Despite the big move in silver, I never knew anyone that made a boatload of money off of that huge move. I heard lots of tales of people getting rich off the silver market, pyramiding $5,000 into millions, but those people were always friends of friends twice removed, and nobody in my clearing firm, none of my buddies ever nailed silver. I suspect those people who got rich off of the silver market are as elusive or mythical as the Yeti. I also suspect that if you were long that silver market with a $5,000 account that you would have stood a better than even chance going bust.

Rocky Humbert comments: 

The Hunt Brothers episode was a corner in an overleveraged market. I'd argue that the gold story today is totally different. Importantly, it's not a leverage-fed, euphoric or happy bull market. It's a funereal bull market. Because if gold is right, and it keeps going and going and going (?5,000? ?10,000 ?20,000 +++) all of one's paper assets will be worth what they are printed on, and the Chair will find out exactly what 2008/09 would have looked like without massive central bank liquidity infusions. (And being short stocks won't help either, since there won't be anyone left to pay you back.)

Hey Gary — for someone who thought total financial collapse was the "ONLY" outcome, how can you NOT be massively long gold??? That's not a bubble! Or is it? As I've been writing for two years now, gold's ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law; etc. The CME can raise margin requirements all they want; but there needs to be a change in the underlying fundamentals (and/or perception of the fundamentals) to end this period. What will that change look like? Shouldn't that be the question on the table ….

Gary asks, "Can anyone reliably make profits from a bubble?" Hmmmm. Warren Buffett keeps a sealed envelope in his desk drawer with the name of his successor. In contrast, I keep a sealed envelope in my desk drawer with the EXACT high price in gold. Neither of us allow any peeking (or peaking.)

Note to Anatoly: You recently wrote that you think gold won't go all the way back down. If you believe that this is a genuine bubble, then you'll have been wrong on the way up. And on the way down. See Jeremy Gratham's extensive work on bubbles — and his observation that they retrace >100% of the parabolic extension.

Stefan Jovanovich says:

The U.S. Treasury had enough gold to be able to promise to redeem the customer balances of every member bank of the Federal Reserve in the United States in 1930; had that step been taken, the U.S. would not have suffered the extraordinary collapse in demand that created the death spiral of world trade

Tyler McClellan asks: 

Stefan,

Just for fun, how would you have lowered real interest rates in the US, without dramatically widening the gold points, or say just abandon them all together.

Stefan Jovanovich replies: 

Why would I want to administer interest rates at all? The problem with the Federal Reserve system is that its underlying premise is that the government should do so. Nothing can prevent speculation from having a component of folly and ruin — like all of life. The idea that the government — which is itself an interest group of the employees and beneficiaries of government borrowing and spending — can somehow avoid the same folly and ruin in its speculations seems to me to be the funniest of all the lunar illusions. Remove the notion that somehow banking is a special kind of business that requires absolute government guarantee (which, as we have seen, the government cannot afford any more than anyone else) and a great deal of the folly and ruin disappears because the truth — that everyone in commerce works without a net — is transparent. As someone once said, the illusion of safety is the most dangerous of all ideas.


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