Mar

28

Gold, from Stefan Jovanovich

March 28, 2013 |

 When gold was money, its price was measured not in currency but in what it could buy. From the adoption of the Constitution to WWI, except during the Civil War and Reconstruction, the price of gold as currency remained the same — 1 ounce was $20; measured by what it could buy during crashes and depressions, gold's "price" went up. That was equally true during the periods when the dollar was not redeemable in gold at the Constitutional standard — 1873, after 1932; in all these panics what gold could buy in the world's markets has increased. That is to be expected; it is a tautology that, during panics, the prices of things other than money go down and the price of money goes up, and gold has been the world near-money even when it has not been legal tender in the U.S.

George Parkanyi writes: 

I think that gold is difficult to read. It's not a slam-dunk by any stretch. In a rapid deflationary scenario where credit markets seize up and no-one trusts counterparties it could get hammered with everything else - people having to liquidate to cover margin calls, just needing cash to meet other obligations and so-on. Also you wouldn't be able to finance it. There would be a complex interplay between flight to "quality" and scrambling to raise cash. And inflation seems to be mixed bag; specific pockets of it - there seems to be plenty in food and energy, but little wage inflation in a globalized economy with a lot of cheap labour still around. Consumer electronics still seem to be trending down.

On the other hand you do have seemingly unstoppable currency debasement underway (the main gold bug meme), and interest rates practically at zero. And bank runs could be good for gold since the issue will be about parking cash somewhere other than in a bank - gold would sop up some of that. Equities at the moment I believe are benefiting from a shift in the perception away from the "safety" of fixed income. Sovereign debt everywhere really does look like crap because of the unsustainable amount of it - why would you tie up your wealth in it? You see it with companies starting and/or increasing dividends because of investor demand for income they're not getting from debt. Debt markets dwarf equity markets, so if this is a real trend, equities, and commodities in the mix somewhere, could go a lot higher. But at some point all this selling of debt will increase interest rates, which will then work against the economy, equities, and commodities - including gold.

Then there are other dynamics. They say central banks are buying gold right now. Bullish or bearish? That's taking production off the market (bullish), but then they have all that more to turn around and dump on the market if the agenda changes again (bearish).

Gold itself hasn't been hit that hard recently - 16 or 17% perhaps from its high - but the miners have been massively hammered, mainly - and I find this ironic - because of high operating cost inflation. I'm thinking its overdone and a fairly old story, setting the stage for at least a bear market rally (the rationale for my current trade), but the market's not agreeing with me so far.

Larry Williams writes: 

You make some nice points. I see a strong 4 year cycle operating in gold that called the top real well 2 years ago and suggests a low yet to come.


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