It's difficult to time the end of a bull market, but I think gold needs to atleast take a breather here. At $650/oz, the metal is a little lofty. The further it rises from here, the harder it will fall. I suggest lightening up for the short-term and buy a correction.
jezza888
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- HONG KONG (AFX) -- Gold futures pushed to their highest levels since 1980 on Monday, with capital flowing to the precious metal as a weak U.S. dollar sent investors in search of a safe haven.
The June contract climbed to $660.90 an ounce during Asian trading, up $6.40 from its Friday finish in New York. In April, gold prices swelled by almost 12%.
The dollar Monday fell to a seven-month low against the Japanese yen, dropping to 113.05 before bouncing back to 113.25.
Hunter Hillcoat, a resources analyst at Austock Ltd in Melbourne, said gold prices depend more on the metal's function as a play against the dollar than on geopolitical factors, such as the ongoing standoff over Iran's nuclear program.
"Everything depends on U.S. economic weakness," Hillcoat said. "A perceived weakness in the dollar sends capital into alternate sources of wealth. It only takes a small move in reallocation of capital to have an exponential impact on metals prices."
Hillcoat believes gold and gold-related stocks are a smart play. "Anyone who doesn't have at least some exposure to gold is leaving themselves short," he said.
The closure of key Asian markets, including Hong Kong, for the May 1 public holiday did not slow gold's rise in Asian trading hours. European markets were also shuttered for the break.
The surge in gold lifted Australia's benchmark stock index as mining and resource companies gained.
Other analysts attributed the rally to a range of factors, including politics, supply limitations and inflation fears.
"There's a vast variety of bull factors and they've all come together," said Martin Hennecke, senior manager for private clients at Bridgewater Ltd in Hong Kong.
"Global debt is out of control in many countries. On the other hand, you have the possibility of war in Iran. The U.S. Geological Survey says there are only 50 more years of proven reserves left underground, and above ground stockpiles are also almost exhausted."
"We think that anything is possible," he said. "There's no limit for gold to rise."
South Africa-based mining company Gold Fields predicted in April that bullion prices would reach $800 to $850 an ounce in the next 12 to 18 months. Goldman Sachs, J.P. Morgan and UBS have all raised their gold price forecasts in recent months. In an April report, Goldman cited the rising U.S. current account deficit, inflationary pressures and a weakening dollar among the factors making gold a desirable buy
The June contract climbed to $660.90 an ounce during Asian trading, up $6.40 from its Friday finish in New York. In April, gold prices swelled by almost 12%.
The dollar Monday fell to a seven-month low against the Japanese yen, dropping to 113.05 before bouncing back to 113.25.
Hunter Hillcoat, a resources analyst at Austock Ltd in Melbourne, said gold prices depend more on the metal's function as a play against the dollar than on geopolitical factors, such as the ongoing standoff over Iran's nuclear program.
"Everything depends on U.S. economic weakness," Hillcoat said. "A perceived weakness in the dollar sends capital into alternate sources of wealth. It only takes a small move in reallocation of capital to have an exponential impact on metals prices."
Hillcoat believes gold and gold-related stocks are a smart play. "Anyone who doesn't have at least some exposure to gold is leaving themselves short," he said.
The closure of key Asian markets, including Hong Kong, for the May 1 public holiday did not slow gold's rise in Asian trading hours. European markets were also shuttered for the break.
The surge in gold lifted Australia's benchmark stock index as mining and resource companies gained.
Other analysts attributed the rally to a range of factors, including politics, supply limitations and inflation fears.
"There's a vast variety of bull factors and they've all come together," said Martin Hennecke, senior manager for private clients at Bridgewater Ltd in Hong Kong.
"Global debt is out of control in many countries. On the other hand, you have the possibility of war in Iran. The U.S. Geological Survey says there are only 50 more years of proven reserves left underground, and above ground stockpiles are also almost exhausted."
"We think that anything is possible," he said. "There's no limit for gold to rise."
South Africa-based mining company Gold Fields predicted in April that bullion prices would reach $800 to $850 an ounce in the next 12 to 18 months. Goldman Sachs, J.P. Morgan and UBS have all raised their gold price forecasts in recent months. In an April report, Goldman cited the rising U.S. current account deficit, inflationary pressures and a weakening dollar among the factors making gold a desirable buy
peto
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gugaplex said:
Quote from another board:-
In THE DAY THE BUBBLE BURST: A SOCIAL HISTORY OF THE WALL STREET CRASH OF
1929 by Gordon Thomas and Max Morgan-Witts (Doubleday: 1979) p. 223,
Kennedy is getting his shoes shined. The shoeblack gives him a stock
tip.
"That night, he told his wife, Rose, that a market everyone could
play, and a shoeshine boy predict, was no market for Joe Kennedy."
I don't hear my friends and neighbours rushing to buy gold bars (yet), in the way they did in '99 with tech stocks. When they do I'm out!
TWI
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There will be pull backs but I am pretty confident we will see Gold well over $1000 before this is over. It must be regarded in two ways now. Firstly it is a bet against the dollar and in that respect being long gold is similar to shorting dollar index but in addition gold scores because it has a supply/demand that has been running in deficit for the past 5-6 years and looks to continue to do so. It is something physical as oppose to being a piece of paper with some promise written on it by somebody who we are supposed to trust.
If you understand that Bernanke is continuing to print his "helicopter" money in order to continue to pump liquidity in the system then which would you prefer to hold, dollars or gold?
If you understand that Bernanke is continuing to print his "helicopter" money in order to continue to pump liquidity in the system then which would you prefer to hold, dollars or gold?
TWI
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gugaplex,
Inflation is already far worse than the financial releases suggest. Any commodity index shows this clearly. The only reason that the illusion of low inflation persists is because M3 has been growing at an astronomic rate, this is why M3 is no longer published, it is too risky. Have to keep the illusion of low inflation by flooding the market with liquidity or all those long bond holders will reach for the sell button and then the house of cards comes down.
Gold is not only an inflation play it is a flight to something real as oppose to something which is esentially and unbacked fiat currency in the form of a piece of paper with somebodies signature on it.
I would not disagree that there may be a correction and I will not be the one to predict at what price or when this will occur BUT it will only present an opportunity to buy more.
Inflation is already far worse than the financial releases suggest. Any commodity index shows this clearly. The only reason that the illusion of low inflation persists is because M3 has been growing at an astronomic rate, this is why M3 is no longer published, it is too risky. Have to keep the illusion of low inflation by flooding the market with liquidity or all those long bond holders will reach for the sell button and then the house of cards comes down.
Gold is not only an inflation play it is a flight to something real as oppose to something which is esentially and unbacked fiat currency in the form of a piece of paper with somebodies signature on it.
I would not disagree that there may be a correction and I will not be the one to predict at what price or when this will occur BUT it will only present an opportunity to buy more.
fxmarkets
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gugaplex said:
March 20th 2006...
the dollar or rather the US will do all they can to stop the dollar meltdown , but I think they took out Iraq because they were trading oil linked to euros and surprise surprise its gone back to uncle sams notes,
Now lookie at Iran, kicking off their oil bourse this year and guess what ? they will be trading that to euros, hmmm double guess what? WMD nonsense just as iraq, yet will the US simply take out Iran because of the oil and euros? kick up some notion about nukes as the green go for alpha attack . seems to be playing out that way doesn't it..... of course the US will use the Irans down to earth language to the rest of the world expressing their right to progress to develop themselves as a nation and put uncle sams Spin factor on top and pump it out there to the rest of the planet I guess. you know, nukes, fear, death etc.......
I think that a ****t storm is underway in the building the likes that none of the current generations have lived through yet.....
I think the oil price is psychological basing that on a shell bod stating world demand is not or does not warrant oil at these price levels, so perhaps its more to do maybe with Iran and maintaining petro-us-dollars at ALL costs.
gugaplex what do you read or how do the US put Iran across to you whats the main message being pumped out?
fxmarkets said:
There are many different views in the U.S. regarding Iran. Many folks believe that one of the biggest reasons for going into Iraq was to set up shop for an attack on Iran. I'm not so sure who to believe because politicians on either side of the aisle are full of you know what. My take on how the Iran issue will affect gold is that most of the move has already been realised. If there is an agreement of sorts, gold would likely tank. Therefore, you need a pretty big escalation in the Iran situation to push gold up significantly from here. I also find it to be pretty foolish for Iran to stop exporting oil due to the fact that their government receives roughly 90% of revenues from oil. They would be chopping off their own hands. Good luck....
The Baptist
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gugaplex said:
I am with Twalker and still long Gold.
I think their will be a move away from the dollar (US relations with Russia, China, EMEA hardly going to find much support for Dollar based pricing, thanks to Bush's appraoch to foreign policy).
With this volatility a move away from paper to hard assets, will follow ie. out other currencies as well as dollar although USD to cop it the hardest.
Plus plenty of spin in inflation on both sides of the atlantic, Gordon Browns switch in inflation measure mighty handy to get restated new lower numbers to work with.
Good luck I let the pricing tell me when its done while a steep climb like this won't go on for ever it has certainly paid to top up at each consolidation in this move and I will continue to do so until deep trailing fall back stops are triggered.
Good luck
Inflation;
The Bureau of Labour Statistics, in the compilation of the CPI, overstate by 30% the prices tracked by the CPI.
This 30% overstatement mitigates to an uncalculated % the effect of monetary inflation.
Rather, the *inflation* has been redirected.
Has it been redirected into assets?
Housing, Equity?
The surge in commodity prices more accurately represents the level of monetary inflation, as of course the demand for product has risen with the money supply. This traditionally results in *price inflation* as more money chases the same goods, profit margins rise faster than the costs of production. This has not happened. In fact the opposite has happened, price has fallen. Purchasing power has increased. The very antithesis of the definition of inflation.
China, far from being an economic giant, has become the manufacturing base for US and world consumption within the commodity based product market. The price that they can manufacture at is of course an artificial price.
It is a price devoid of ethical costs.
Therefore, should US and world consumption falter, the economic growth of China would crater. Taking steel as an example. Without government subsidy, the steel industry in China would be bankrupt. This is true for many products, where the margins are nonexistent, and no capital expenditure is possible.
This cratering of business in China would nigh on bankrupt the banks that have made the loans to the various industries, and the financial sector could come under extreme pressure.
The revaluation of the Yuan is a very problematic issue. Should the Yuan revalue upwards against the US$, then Chinese goods become more expensive in the US and world, thus dampening demand.........and cratering the Chinese economy whose margins are so thin, that they can only be maintained on huge volume, should the unit costs be spread over lower gross revenues.........disaster.
Should China blow up it's economy, then prices in the West will start to show very high inflation.........as the effects of ethical costs are priced back into the margins.
Therefore the US economy, with it's trade imbalance with China, is in no immediate danger, as China is addicted to US consumption in the same way as the US is addicted to the low price of commodity items from China etc.
You would expect therefore with the removal of liquidity, not a crash in asset prices, but a crash in commodity prices......and or an increase in inflation dependant on demand for commodity items.
M3 looks at the money supply.(The measure that has been removed) Money supply as measured has been increasing.
Which is in effect monetary inflation, and drives inflation across the board.
Thus in effect, you would expect inflation to be UNDERSTATED when measured by the CPI
Unfortunately, this is at least partially incorrect as inflation has been OVERSTATED by approximately 30% as measured by the CPI This is due to the Bureau of Labour Statistics systematically overstating inflation.
The reason for this is China exporting deflation thus offsetting the inflation generated by monetrist policy.
The US & China currently are locked at the hip. The US is addicted to deflationary consumer goods, China is addicted to the unit volume generated by the US consumer.
This is no longer in control of the Politicians.
Mega-Corporations wield ever increasing power over the market. The old laws of supply/demand do not apply in quite the same way anymore.
China, communist as it is, has progressed too far down the Western capitalist model and now is inexorably being sucked into the capitalist paradigm.
China's consumption is a mere 42% of it's output.
Therefore it cannot self-sustain if demand is curtailed from the West. Therefore it will, and must contribute to the US savings deficit.
By the same reasoning, the US must continue to run CAD deficits with the East, or risk the house of cards collapsing in the short term.
I would agree that Tax increases are the start.
Medicare & Medicaid need some serious revisions.
Pensions reform completes the trifecta.
The liquidity that has created the potential for inflation has taken a new twist this time.
Usually a rise in price via the CPI drives an increase in job creation within the manufacturing sector, and a concurrent increase in nominal wages to compensate for increases in nominal and real inflation.
Wage inflation is being sqashed via China et al.
Price inflation has been squashed via China et al
The manufacturing base has been exported to China
Instead, the inflation has bled into asset classes........Real property, Commodities, Stocks, Bonds & Currency that have created massively outsized gains. Some of this gain will be intrinsic, and justifiable, the aggregate expected return on capital if you will, and a component that is highly speculative in nature.
Assets with high speculative values could crash, and crash very badly should the inflationary stimuli be removed, or even the suspicion of it being removed may trigger a collapse, however balanced against this will be the global uncertainity of where to reinvest the capital.
A Communist government moving into a capitalistic economic model. They will experience all the usual booms and busts that all the more mature capitalistic economies have encountered.........can't happen, Japan, an economic giant in the 1980's suffered deflation for the best part of 20yrs.
Area's of the Chinese economy are already bankruptcies waiting to happen. Steel is one major industry that reports losses quarter after quarter......propped up by government subsidy.
Why do you think the Chinese are fighting tooth and nail to keep the yuan "cheap"?
1....Will a further slide in the US$ push up interest rates? Not really, barring a rise in "protectionism" bills from Congress. Thus the cost of imported goods as evidenced by the CPI, are not going to scare away foregin investment.
2...Will make US exports increasingly competitive in the global marketplace. Exports grew at 10%+ in 2005, and are growing at 11.8% in the first two months of 2006. The US exports $100 billion a month, India doesn't even export $100 billion in a year. Thus US Corporate foreign earnings will take a good bump. (50% of foreign earnings are in Europe 25% from Japan)
3....When China & India open their countries to FDI, the US will be all over them like a rash.
The potential to the US is large.
4...A weaker dollar, will change unit costs, thus placing emphasis on corporate structure, Europe may well have a wave of restructurings, that the US has already been through.
5....A second divergence; the US$ has fallen in the face of rising oil prices.
Odd?
It would imply that the oil producing nations are diversifying out of the US$ into non-dollar investments. Interest rates of the nominal variety have risen with the inflation premium.
What has happened to the "real rate"? The one that indicates economic strength or weakness?
Which is not to imply all is rosy in camp USA.
There are three major area's of concern.
Medicare/Medicaid
Social Security & Pensions
Taxes
Of course a weaker dollar helps these as well.
It is a very short-term view however, and structural reform is urgently needed.
Therefore, holding cash, not an attractive proposition, holding equity, much more attractive.
It would seem that Dr Faber is being cited, as providing the argument for "the death of the greenback" and the long term potential of gold in particular, and commodities in general.
My first issue would be in his listing cash as an asset class Cash is a medium of transaction, as such it is a commodity, and open to price fluctuation based on supply and demand dynamics. Hence, as he argues, money in the form of a fiat currency that exceeds the growth of GDP will devalue.
It would also seem that he is quite happy to embrace the theory of equilibrium, and the law of large numbers.
Into that philosophy, he interjects the phenomenon of speculation.
Therefore, under equilibrium theory we have the central value or intrinsic value, that is distorted to the upside and the downside by speculation.
The key therefore must be in either "timing" or "pricing" or of course just roll 'em and hope for the best.
His argument regarding the purchasing power of the US$ would seemingly hinge upon the expansion of the money supply, exceeding that of the GDP, causing a massive devaluation, or more accurately a loss of purchasing power.
His argument for gold is based on this assumption. That the US$ loses so much purchasing power as to become in essence worthless, therefore, prudent investors & speculators will migrate to gold, or possibly silver to protect themselves from this imminent disaster.
Let's examine the numbers;
CPI from 1921 to 2006 = 2.8% inflation rate
CPI from 2000 to 2006 = 2.8% inflation rate
CPI from 1980 to 1999 = 4.1% inflation rate
PPI from 1921 to 2006 = 2.4% inflation rate
PPI from 2000 to 2006 = 4.5% inflation rate
PPI from 1980 to 1999 = 2.1% inflation rate
Gold from 1921 to 2006 = 3.5% inflation rate
Gold from 2000 to 2006 = 16.1% inflation rate
Gold from 1980 to 1999 = (-4.5%) deflation rate
DJIA from 1921 to 2006 = 6.32 inflation rate
DJIA from 2000 to 2006 = 0.0% inflation rate
DJIA from 1980 to 1999 = 14.5% inflation rate
GDP from 1947 to 2005 = 7.11% inflation rate
GDP from 1999 to 2005 = 7.08 inflation rate
GDP from 1980 to 1999 = 6.8% inflation rate
M1 from 1959 to 2006 = 4.8% inflation rate
M1 from 2000 to 2006 = 3.6% inflation rate
M1 from 1980 to 2006 = 5.8% inflation rate
The long term series best illustrate the central value, or intrinsic value of the asset class.
Under equilibrium theory, fluctuations above and below will over a long enough period of time return, due to the law of large numbers and equilibrium theory thus returning to the central value.
We as investors, obviously cannot invest in 85yr time horizons if we plan to reap the reward.
Therefore, 10yr to 20yr horizons may be closer to the norm.
Speculators are operating in shorter again time frames, and thus lose the benefits of time to a certain degree (the degree of accuracy)
We can see that currently;
Gold is far above it's central value, after falling far below it's central value in 1980 to 1999. Obviously speculation is rife. Investment value is non-existant at these valuations.
We can also see that the argument of buying gold in times of inflation, are just nonsense.
In the 1980 to 1999 time series;
CPI was above the central value....inflationary
PPI was slightly below.
M1 money supply was expansionary....inflationary
GDP was below central value,....stagnant
Gold.......dived into the grave.
Currently,
CPI is on it's central value, the fear being that it will fluctuate above this value.
PPI is far above it's central value, and should be inflationary to the economy, but currently it is not. This point I believe is central to the explanation of the current environment. The increase in the PPI should drive an increase to the CPI thus offsetting the price increase to the producer to the consumer.
If the PPI increases are not passed to the consumer via the CPI, then profitability of industry must fall, as profit margins are by definition contracting
Currently through the reporting of Q1, the earnings have increased on aggregate in the US by 13%
The increase in PPI (commodity prices) has not impacted profit margins. That is simply because the US is operating a monopsony, and China is absorbing the increases in PPI, but is unable to pass them forward into the CPI.
The result is a reallocation of capital from low margin commodity manufacturing in the US to China, with an increase in high margin products and services to the US.
This switch from manufacturing to a service based economy has been underway for some time, but until it becomes fully integrated, may run deficits, hence the Current account deficit.
GDP is pretty much on target.
Interestingly, M1 money supply is actually below central value. Therefore the arguments put forward regarding the Fed printing money to devalue the currency are incorrect.
The large increase in world M1 originates in large part from Japan, and is responsible for the asset class speculation prevalent particularly in gold and currency.
The US$ as the world reserve currency, will always be on one side of speculative operations, and thus will fluctuate quite violently.
jog on
d998
The Bureau of Labour Statistics, in the compilation of the CPI, overstate by 30% the prices tracked by the CPI.
This 30% overstatement mitigates to an uncalculated % the effect of monetary inflation.
Rather, the *inflation* has been redirected.
Has it been redirected into assets?
Housing, Equity?
The surge in commodity prices more accurately represents the level of monetary inflation, as of course the demand for product has risen with the money supply. This traditionally results in *price inflation* as more money chases the same goods, profit margins rise faster than the costs of production. This has not happened. In fact the opposite has happened, price has fallen. Purchasing power has increased. The very antithesis of the definition of inflation.
China, far from being an economic giant, has become the manufacturing base for US and world consumption within the commodity based product market. The price that they can manufacture at is of course an artificial price.
It is a price devoid of ethical costs.
Therefore, should US and world consumption falter, the economic growth of China would crater. Taking steel as an example. Without government subsidy, the steel industry in China would be bankrupt. This is true for many products, where the margins are nonexistent, and no capital expenditure is possible.
This cratering of business in China would nigh on bankrupt the banks that have made the loans to the various industries, and the financial sector could come under extreme pressure.
The revaluation of the Yuan is a very problematic issue. Should the Yuan revalue upwards against the US$, then Chinese goods become more expensive in the US and world, thus dampening demand.........and cratering the Chinese economy whose margins are so thin, that they can only be maintained on huge volume, should the unit costs be spread over lower gross revenues.........disaster.
Should China blow up it's economy, then prices in the West will start to show very high inflation.........as the effects of ethical costs are priced back into the margins.
Therefore the US economy, with it's trade imbalance with China, is in no immediate danger, as China is addicted to US consumption in the same way as the US is addicted to the low price of commodity items from China etc.
You would expect therefore with the removal of liquidity, not a crash in asset prices, but a crash in commodity prices......and or an increase in inflation dependant on demand for commodity items.
M3 looks at the money supply.(The measure that has been removed) Money supply as measured has been increasing.
Which is in effect monetary inflation, and drives inflation across the board.
Thus in effect, you would expect inflation to be UNDERSTATED when measured by the CPI
Unfortunately, this is at least partially incorrect as inflation has been OVERSTATED by approximately 30% as measured by the CPI This is due to the Bureau of Labour Statistics systematically overstating inflation.
The reason for this is China exporting deflation thus offsetting the inflation generated by monetrist policy.
The US & China currently are locked at the hip. The US is addicted to deflationary consumer goods, China is addicted to the unit volume generated by the US consumer.
This is no longer in control of the Politicians.
Mega-Corporations wield ever increasing power over the market. The old laws of supply/demand do not apply in quite the same way anymore.
China, communist as it is, has progressed too far down the Western capitalist model and now is inexorably being sucked into the capitalist paradigm.
China's consumption is a mere 42% of it's output.
Therefore it cannot self-sustain if demand is curtailed from the West. Therefore it will, and must contribute to the US savings deficit.
By the same reasoning, the US must continue to run CAD deficits with the East, or risk the house of cards collapsing in the short term.
I would agree that Tax increases are the start.
Medicare & Medicaid need some serious revisions.
Pensions reform completes the trifecta.
The liquidity that has created the potential for inflation has taken a new twist this time.
Usually a rise in price via the CPI drives an increase in job creation within the manufacturing sector, and a concurrent increase in nominal wages to compensate for increases in nominal and real inflation.
Wage inflation is being sqashed via China et al.
Price inflation has been squashed via China et al
The manufacturing base has been exported to China
Instead, the inflation has bled into asset classes........Real property, Commodities, Stocks, Bonds & Currency that have created massively outsized gains. Some of this gain will be intrinsic, and justifiable, the aggregate expected return on capital if you will, and a component that is highly speculative in nature.
Assets with high speculative values could crash, and crash very badly should the inflationary stimuli be removed, or even the suspicion of it being removed may trigger a collapse, however balanced against this will be the global uncertainity of where to reinvest the capital.
A Communist government moving into a capitalistic economic model. They will experience all the usual booms and busts that all the more mature capitalistic economies have encountered.........can't happen, Japan, an economic giant in the 1980's suffered deflation for the best part of 20yrs.
Area's of the Chinese economy are already bankruptcies waiting to happen. Steel is one major industry that reports losses quarter after quarter......propped up by government subsidy.
Why do you think the Chinese are fighting tooth and nail to keep the yuan "cheap"?
1....Will a further slide in the US$ push up interest rates? Not really, barring a rise in "protectionism" bills from Congress. Thus the cost of imported goods as evidenced by the CPI, are not going to scare away foregin investment.
2...Will make US exports increasingly competitive in the global marketplace. Exports grew at 10%+ in 2005, and are growing at 11.8% in the first two months of 2006. The US exports $100 billion a month, India doesn't even export $100 billion in a year. Thus US Corporate foreign earnings will take a good bump. (50% of foreign earnings are in Europe 25% from Japan)
3....When China & India open their countries to FDI, the US will be all over them like a rash.
The potential to the US is large.
4...A weaker dollar, will change unit costs, thus placing emphasis on corporate structure, Europe may well have a wave of restructurings, that the US has already been through.
5....A second divergence; the US$ has fallen in the face of rising oil prices.
Odd?
It would imply that the oil producing nations are diversifying out of the US$ into non-dollar investments. Interest rates of the nominal variety have risen with the inflation premium.
What has happened to the "real rate"? The one that indicates economic strength or weakness?
Which is not to imply all is rosy in camp USA.
There are three major area's of concern.
Medicare/Medicaid
Social Security & Pensions
Taxes
Of course a weaker dollar helps these as well.
It is a very short-term view however, and structural reform is urgently needed.
Therefore, holding cash, not an attractive proposition, holding equity, much more attractive.
It would seem that Dr Faber is being cited, as providing the argument for "the death of the greenback" and the long term potential of gold in particular, and commodities in general.
My first issue would be in his listing cash as an asset class Cash is a medium of transaction, as such it is a commodity, and open to price fluctuation based on supply and demand dynamics. Hence, as he argues, money in the form of a fiat currency that exceeds the growth of GDP will devalue.
It would also seem that he is quite happy to embrace the theory of equilibrium, and the law of large numbers.
Into that philosophy, he interjects the phenomenon of speculation.
Therefore, under equilibrium theory we have the central value or intrinsic value, that is distorted to the upside and the downside by speculation.
The key therefore must be in either "timing" or "pricing" or of course just roll 'em and hope for the best.
His argument regarding the purchasing power of the US$ would seemingly hinge upon the expansion of the money supply, exceeding that of the GDP, causing a massive devaluation, or more accurately a loss of purchasing power.
His argument for gold is based on this assumption. That the US$ loses so much purchasing power as to become in essence worthless, therefore, prudent investors & speculators will migrate to gold, or possibly silver to protect themselves from this imminent disaster.
Let's examine the numbers;
CPI from 1921 to 2006 = 2.8% inflation rate
CPI from 2000 to 2006 = 2.8% inflation rate
CPI from 1980 to 1999 = 4.1% inflation rate
PPI from 1921 to 2006 = 2.4% inflation rate
PPI from 2000 to 2006 = 4.5% inflation rate
PPI from 1980 to 1999 = 2.1% inflation rate
Gold from 1921 to 2006 = 3.5% inflation rate
Gold from 2000 to 2006 = 16.1% inflation rate
Gold from 1980 to 1999 = (-4.5%) deflation rate
DJIA from 1921 to 2006 = 6.32 inflation rate
DJIA from 2000 to 2006 = 0.0% inflation rate
DJIA from 1980 to 1999 = 14.5% inflation rate
GDP from 1947 to 2005 = 7.11% inflation rate
GDP from 1999 to 2005 = 7.08 inflation rate
GDP from 1980 to 1999 = 6.8% inflation rate
M1 from 1959 to 2006 = 4.8% inflation rate
M1 from 2000 to 2006 = 3.6% inflation rate
M1 from 1980 to 2006 = 5.8% inflation rate
The long term series best illustrate the central value, or intrinsic value of the asset class.
Under equilibrium theory, fluctuations above and below will over a long enough period of time return, due to the law of large numbers and equilibrium theory thus returning to the central value.
We as investors, obviously cannot invest in 85yr time horizons if we plan to reap the reward.
Therefore, 10yr to 20yr horizons may be closer to the norm.
Speculators are operating in shorter again time frames, and thus lose the benefits of time to a certain degree (the degree of accuracy)
We can see that currently;
Gold is far above it's central value, after falling far below it's central value in 1980 to 1999. Obviously speculation is rife. Investment value is non-existant at these valuations.
We can also see that the argument of buying gold in times of inflation, are just nonsense.
In the 1980 to 1999 time series;
CPI was above the central value....inflationary
PPI was slightly below.
M1 money supply was expansionary....inflationary
GDP was below central value,....stagnant
Gold.......dived into the grave.
Currently,
CPI is on it's central value, the fear being that it will fluctuate above this value.
PPI is far above it's central value, and should be inflationary to the economy, but currently it is not. This point I believe is central to the explanation of the current environment. The increase in the PPI should drive an increase to the CPI thus offsetting the price increase to the producer to the consumer.
If the PPI increases are not passed to the consumer via the CPI, then profitability of industry must fall, as profit margins are by definition contracting
Currently through the reporting of Q1, the earnings have increased on aggregate in the US by 13%
The increase in PPI (commodity prices) has not impacted profit margins. That is simply because the US is operating a monopsony, and China is absorbing the increases in PPI, but is unable to pass them forward into the CPI.
The result is a reallocation of capital from low margin commodity manufacturing in the US to China, with an increase in high margin products and services to the US.
This switch from manufacturing to a service based economy has been underway for some time, but until it becomes fully integrated, may run deficits, hence the Current account deficit.
GDP is pretty much on target.
Interestingly, M1 money supply is actually below central value. Therefore the arguments put forward regarding the Fed printing money to devalue the currency are incorrect.
The large increase in world M1 originates in large part from Japan, and is responsible for the asset class speculation prevalent particularly in gold and currency.
The US$ as the world reserve currency, will always be on one side of speculative operations, and thus will fluctuate quite violently.
jog on
d998
No Dollar crash from current a/c deficit...
taken from thebusinessonline.com
Don’t bet your bottom dollar on a crash By Allister Heath
07 May 2006
IT is the dominant question for the foreign exchange markets: what will happen to the dollar? While most analysis tends to follow one of a handful of well-trodden paths, every so often an economist produces a new way of looking at the great dollar question. One such new approach is the dollar zone analysis developed by Stephen Jen, an economist at Morgan Stanley.
Jen first mooted the idea in a paper in April 2002; he updated it in a report last week. His starting point is the fact that many countries operate as if they are a part of the dollar area.
Unlike the separate Bretton Woods II idea, Jen’s framework includes not only econ-omies whose currencies are de jure or de facto pegged to the dollar, but also those that don’t yet have full capital account convertibility and are reliant on the dollar for all accounting, invoicing and settlement purposes.
As a result, Jen’s definition of the dollar zone is very expansive. It includes obviously the US but also much of Asia and the countries of the Gulf Co-operation Council: Japan, China, Korea, Hong Kong, Singapore, Indonesia, Philippines, Thailand and Malaysia, as well as Bahrain, Kuwait, Oman, Saudi Arabia, the United Arab Emirates and Qatar.
The six members of the Gulf Co-operation Council operate strong pegs with the greenback. Hong Kong’s currency is formally pegged to the greenback. The reason for Japan’s inclusion is that even though the yen is obviously fully convertible, most of its trade is still settled in dollars.
Jen also points out that it has long been extremely sensitive to the relative competitiveness vis-à-vis the rest of Asia. The rest of Asia, including China, operates managed floating currencies but virtually all of its ex- ternal trade and capital flows are in dollars. With the exception of yen-denominated loans from multilateral institutions such as the World Bank, the bulk of those countries’ foreign national debt is also denominated in greenbacks.
Regional trade in Asia-ex Japan is now worth about 50% of total trade, a figure which rises to 60% when Japan is included, similar proportions as seen in the euro zone and EU. Crucially, almost all of Asia’s intra-regional trade is priced, invoiced and settled in dollars.
Jen’s next step is to calculate the dollar zone’s trade deficit. He does this by netting out intra-dollar zone trade. Including the US and the Asian countries, the trade deficit of the dollar zone falls from 6.6% of GDP for the US alone to 2.7% for the zone. If the Gulf countries are also included, the zone-wide deficit falls to 1.9% of GDP.
As Jen puts it: “The obvious question now is, while the US trade deficit of 6.6% of GDP sounds high, with globalisation, shouldn’t 1.9% of GDP’s worth of trade deficit for the dollar zone be sustainable?”
If so, this would suggest that much-feared current account deficit induced dollar crash may not be just round the corner after all – simply because the wrong current account deficit has been used.
Instead of just focusing on the US, Jen’s argument suggests that economists should treat the dollar as an international currency and focus on the trade position of all those countries that use it.
The dollar has almost certainly further to fall; at the very least, however, Jen’s paper raises intriguing questions about the true extent of global imbalances.
taken from thebusinessonline.com
Don’t bet your bottom dollar on a crash By Allister Heath
07 May 2006
IT is the dominant question for the foreign exchange markets: what will happen to the dollar? While most analysis tends to follow one of a handful of well-trodden paths, every so often an economist produces a new way of looking at the great dollar question. One such new approach is the dollar zone analysis developed by Stephen Jen, an economist at Morgan Stanley.
Jen first mooted the idea in a paper in April 2002; he updated it in a report last week. His starting point is the fact that many countries operate as if they are a part of the dollar area.
Unlike the separate Bretton Woods II idea, Jen’s framework includes not only econ-omies whose currencies are de jure or de facto pegged to the dollar, but also those that don’t yet have full capital account convertibility and are reliant on the dollar for all accounting, invoicing and settlement purposes.
As a result, Jen’s definition of the dollar zone is very expansive. It includes obviously the US but also much of Asia and the countries of the Gulf Co-operation Council: Japan, China, Korea, Hong Kong, Singapore, Indonesia, Philippines, Thailand and Malaysia, as well as Bahrain, Kuwait, Oman, Saudi Arabia, the United Arab Emirates and Qatar.
The six members of the Gulf Co-operation Council operate strong pegs with the greenback. Hong Kong’s currency is formally pegged to the greenback. The reason for Japan’s inclusion is that even though the yen is obviously fully convertible, most of its trade is still settled in dollars.
Jen also points out that it has long been extremely sensitive to the relative competitiveness vis-à-vis the rest of Asia. The rest of Asia, including China, operates managed floating currencies but virtually all of its ex- ternal trade and capital flows are in dollars. With the exception of yen-denominated loans from multilateral institutions such as the World Bank, the bulk of those countries’ foreign national debt is also denominated in greenbacks.
Regional trade in Asia-ex Japan is now worth about 50% of total trade, a figure which rises to 60% when Japan is included, similar proportions as seen in the euro zone and EU. Crucially, almost all of Asia’s intra-regional trade is priced, invoiced and settled in dollars.
Jen’s next step is to calculate the dollar zone’s trade deficit. He does this by netting out intra-dollar zone trade. Including the US and the Asian countries, the trade deficit of the dollar zone falls from 6.6% of GDP for the US alone to 2.7% for the zone. If the Gulf countries are also included, the zone-wide deficit falls to 1.9% of GDP.
As Jen puts it: “The obvious question now is, while the US trade deficit of 6.6% of GDP sounds high, with globalisation, shouldn’t 1.9% of GDP’s worth of trade deficit for the dollar zone be sustainable?”
If so, this would suggest that much-feared current account deficit induced dollar crash may not be just round the corner after all – simply because the wrong current account deficit has been used.
Instead of just focusing on the US, Jen’s argument suggests that economists should treat the dollar as an international currency and focus on the trade position of all those countries that use it.
The dollar has almost certainly further to fall; at the very least, however, Jen’s paper raises intriguing questions about the true extent of global imbalances.
