Inflation, deflation, gold and currencies

[Higgenbotham]

Dear RDRUNR,

If I could add to Higgie's points:

First of all you are watching prices, often in real time, on your computer screen. So you know the prices of all assets; equities, metals, debt instruments, etc

Secondly, all my trading outside of North America is done electronically, unless I want to talk to a broker to ask his opinion. I enter the buys or sells, including stop loss prices after purchase, everything, into my computer and 'click'.

Its only in North America that my broker wants voice confirmation of all buy and sell orders; so I telephone him which is a pleasure because he is just the nicest fellow and great to chat to; presumably there is some (legal?) reason for voice confirmation of orders in American?

Regards
Richard

As you state, when I called the metals dealers, I had the real time prices in front of me. Once the dealer knew I was selling (I made multiple sales) they started shaving a nickel off the price quote. This is understandable actually. I would first ask for their quote. I would hesitate and say, did you say X? Next I would ask how far under spot they were on the particular item I wanted to sell. One time, spot dropped 15 cents during the course of the conversation and then I said, OK, I'll lock in at X, which they agreed to do. It all evened out and I think the game is well understood on both sides.

I'm in North America and can place electronic trades on my platform. But I think you're right because the account agreements may not be enforceable outside of certain countries. I don't know this for a fact but it makes sense.

[richard5za]

I am going to sell out of my North American miners later when the NYSE opens

Investing is a funny game; I decided not to sell my North American miners at the last minute. My North American portfolio is half gold miners half bullion, a small part of which is silver. An emotion said to me "don't sell yet". For now I am following the emotion.
How are others invested?
Richard

[Higgenbotham]

How are others invested?
Richard

92% US T-bills, 4% US cash in safe deposit box, 3% bank deposits, 1% life insurance.
I'm looking to short a rebound in stocks over S&P 1260 via futures. Maybe a bit lower.
Or in the event of a stock market crash to buy some real estate.

[Higgenbotham]

Maybe good news for Richard and Vince - silver mining stocks are starting to move.

http://www.kitcosilver.com/equities.html

Which reminds me of something I was told a long time ago. When gold is rising and the cost of other commodities is falling gold mining shares are a good investment. The gold miners get more for their product while their costs go down.

It seems investors are recognizing that may apply to silver miners too.

[Oakwood]

The consequence is there will be deflation, not inflation.
Furthermore, gold is a very risky investment. Gold is in a bubble
and, at some point, its price will fall to well below $500 per ounce.
It may spike upward for a while, but at some point the Law of Mean
Reversion will push it way down. Thus, anyone who DOES invest in
gold today has to worry about selling at the right time.

Those were John's words. I'm still waiting for gold to crash, because, according to John, GD is the only predictive model that is 100% correct, and therefore logically, gold must go down in order for him to be correct. Perhaps he can give us a time frame--is this a good time to sell our gold (in contrast to last year)?

[vincecate]

The consequence is there will be deflation, not inflation.
Furthermore, gold is a very risky investment. Gold is in a bubble
and, at some point, its price will fall to well below $500 per ounce.
It may spike upward for a while, but at some point the Law of Mean
Reversion will push it way down. Thus, anyone who DOES invest in
gold today has to worry about selling at the right time.

Those were John's words. I'm still waiting for gold to crash, because, according to John, GD is the only predictive model that is 100% correct, and therefore logically, gold must go down in order for him to be correct. Perhaps he can give us a time frame--is this a good time to sell our gold (in contrast to last year)?

Most historical deflation was when things were priced in oz of gold. If you do that today we have deflation today. I think John is mistaken in projecting historical deflation under gold and expecting it under pure fiat money where they are printing $100 billion per month. Time will tell.

[richard5za]

Worse than a dart throwing chimp

Last Sunday evening, following the S&P downgrade I made 4 market predictions for the week ending Friday 12: Lets review the results

I got gold right: I predicted $ 1714 or higher, in fact gold rose 5% to 1746 confirming its curent safe haven status

I got silver wrong: It rose 2.4% to $ 39.12 but not anywhere close to to $ 42 I had called. I was genuinely surprised by the lack of safe haven status that the market gave to silver

I got the Dow wrong: I said it would fall 3% or more, it ended 1.5% down at 11269

I got the dollar index wrong: I said because of the down grade it would fall 2% to 3% - in fact it was unchanged at 74.6. In the circumstances I was also surprised at the strength of the safe haven status of the dollar.

If you had structured the questions in a way that a dart throwing chimp could also play, in theory there would be a random result and he would have got 50% right and 50% wrong

So my market predictions at only one right were worse than a dart throwing chimp

I am glad this happened because it illustrates the difficulty of calling the market.

Which brings me to the real point I want to make on generational theory:

I agree with the theory of the cycles and the tendency of human beings to behave in certain ways at various points of the cycle. There is enough evidence to make this very credible.

But the way in which the crisis will play itself out must surely be stongly influenced by prevailing circumstances, and massive difference in the USA between 1930 and now is that now the dollar is a fiat currency whereas previously it was pegged to gold.

The levels of global financial mess are such that I accept that something will in due course crash, but it may not be the stock market. The dollar could crash, bond markets, etc

Consider a crash of the dollar: Debt levels in real terms are much more manageable, imports would crash and put America back to work in manufacturing, PE ratios would crash making stocks cheap and the market would rise. The downside to this is that the rest of the world would be in turmoil and unless USA reneged on all its treaties it might be drawn into large scale wars.

John may well be right that a deflationery scenario will be played out, but I suspect that the USA authorities will try to inflate there way out.

We all need to be applying our minds not just to a deflationery hedge, namely cash and cash investmnets, but also to inflationery hedges and currency hedges.

If you examine Greece where the Euro is not a fiat currency, the whole deflationery scenario is being played out. Greece is doomed but less so if it gets out of the Euro and back into a fiat currency

Richard

[richard5za]

The current crisis is in Europe
A thought occurred to me today, since posting my note yesterday morning, that the nucleus of the current financial crisis is Europe, and its about sovereign debt which is altogether more difficult to deal with than bank debt.
If Europe implodes into a deflationery spiral, which is plausible since the Euro is not a fiat currency, that will pull others down with it, and it may not be possible for the USA to inflate their way out of things. The USA and others would probably also seriously deflate.
In this scenario John's deflationery prediction wins hands down!

The other thought I had is that China is the largest holder of USA government bonds, and if China wanted it could crash the USA bond market in a couple of hours! They would lose a lot of money in the process, of course, so in normal circumstances would'nt consider this option.
Richard

[vincecate]

The other thought I had is that China is the largest holder of USA government bonds, and if China wanted it could crash the USA bond market in a couple of hours! They would lose a lot of money in the process, of course, so in normal circumstances would'nt consider this option.
Richard

If they had a bunch of contracts to buy things in dollars, like say $500 billion worth of oil per year for the next 10 years at $100/barrel, then what they lost on their treasuries they could more than make up on other things. If you view things in terms of yuan, they would be buying things really cheap, and they print yuan. If they are the first to move they will lose less than others.

Also, if there is a war coming in the future it would be to their advantage to weaken the USA ahead of time. The US ability to just print money and buy things from all over the world is the secret source of their power. If the Chinese removed this power, the US would be much weaker relative to China than if the US keeps this power. I think from a Chinese point of view, the sooner the magic printing press is disabled the better.

[richard5za]

Difficult to read the markets at present

Gold has surprised me: I was expecting a perriod of consolidation around $ 1700 but it looks like it will be above $ 1800 soon. Lets see what happens

Silver is very interesting but hard to read. I have followed the daily price of gold for about 40 years now but only got interested in silver 6 months ago and that because of the massive drop in Comex warehouse stocks without any comment from the analysts!!! Not one analyst has put forward a thesis on the warehouse stocks drop.
One analyst put forward the thesis that silver is bouncing up from a longer term price repression of short selling. Examining the historical charts that looks like a reasonable view. But silver looks like a coiled spring ready to unleash itself upwards. Not that I have taken a big position: Only 0.5% of my investment funds are in silver.

And as regards reading the S&P 500? Well, I can't decide whether we are now entering a bear phase or not. We need a decisive break down or break up to clarify where things are heading in the short to medium term. Europe is very messy.

Currently I am 95% in cash waiting for more clarity on market direction. Any other views?

Richard