Tell me what you think

[pinetree]

Thanks for a very informative post this week.  Those negative lease rates sure do raise a red flag.

I really like your options strategy, by the way.  I've been playing around with similar ideas.

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edit - I have some questions about that options strategy which I have posted in the options thread.  If anyone can clue me, please do! 

[Beginner]

Can anyone doubt the total decadence of our much vaunted Western Civilisation?

http://www.iht.com/articles/2007/08/17/opinion/edvarzi.php

The above URL is a prophetic view by Iranian Hamid Varzi published in the International Herald Tribune in August 2007.  But no one wanted to listen then and many still don’t want to listen even now.  Even with all this prophetic knowledge and foresight there are no easy solutions, no easy answers. 

Dr. Doom (Nouriel Roubini) is another prophet.  Now people are beginning to listen to him although someone belittled him recently by saying “even a stopped clock is right twice a day.”

Let’s hope our world leaders are in control and know what to do to save the world from being swallowed up by a mountain of debt.

It has been observed that war is the classic diversion at a time of economic meltdown.  After the 1929 economic meltdown it took ten years before the classic diversion of war occurred in 1939.

Meanwhile, in our present-day world, the drumbeat for war against Iran continues.  What can we say?  “Let he who is without sin cast the first stone. …Then the crowd melted away….”  But the drumbeat crowd for war against Iran does not melt away.  Let he who is without sin cast the first nuke.

Where do our stock market investments fit into all of this?  Physical bullion indeed seems to be the only safe haven.  But as someone has observed:  “You can’t take it with you.  It would melt.”



 

[richmanch]

I agree--a good post this week. I also agree with Pinetree about not completely understanding the options proposal--it seems that you are vulnerable to more risk. Hope you or someone else responds in the options section.

As for gold--I am not convinced. It looks like we might be entering into a deflationary period. Prices for goods and services are coming down. I'm holding some gold stocks, but am hardly assured by analysts who are crying foul. I don't see why no one talks about the very real prospect that we could see deflation for the next few years.

[Bottomfeeder]

Good post JDH.

Rich....I agree with you on the deflation.  Even though the world is printing money at an enormous rate, which by definition is inflation, those dollars are being hoarded, and I would expect them to continue to be for an extended period of time as the financial markets deleverage.

The result is that banks get cashed up, but the money does not get used for domestic consumption/spending, which keeps the results or effect of inflation from appearing in the economic data.

The end result will appear to be deflationary, whether real or not I think for an extended period of time.  Eventually those dollars WILL come back for domestic consumption, and we HOPEFULLY will have inflation, but I see no reason to try and get out in front of that one.

I like much better the idea of getting involved in beaten down stocks/trusts that provide a high yield like the harvest energy trust, mentioned earlier.  I would like to get some insight from those of you out there who might have a better understanding of the risk associated with those types of investments.

Maybe a "high yield" category?

[maxine]

What would an ultra high price for gold do for the economy?   How would other things play out such as basic food, shelter and heating costs?    If everyone's  money was in gold none would be in essential services.  I can see wanting to position ones self for prosperity but at the end of the day what good is it if there is nothing but anarchy?  I do own gold stocks and have not seen them appreciate much as yet, but I while I am hoping for the upside, I also am hoping for a reasonable resolution to the financial crisis eventually even if there has to be manipulation.. Maybe I can't have both.

[davidslane]

Here's what Steve Saville (www.speculative-investor.com) had to say about deflation in his most recent newsletter.

BTW: he is still very bullish on gold mining stocks going forward.

The anticipated "deflation scare" is here

We have warned a number of times over the past several months that a "deflation scare" was probably on the cards, with "deflation scare" being defined by us as a period of accelerating inflation (money supply growth) combined with rising fear of deflation. Accelerating money-supply growth can co-exist with rising fear of deflation because most people wrongly associate falling prices with deflation. Falling prices are, of course, a natural consequence of deflation, but prices can fall for reasons that have nothing to do with deflation. In fact, over the past 70 years there has never been a deflation-related price decline in the US because during this period the US has never experienced genuine deflation. There have, however, been several deflation scares.

Judging by an article published in the Wall Street Journal on 18th October, a deflation scare has arrived. Here are the opening paragraphs of this article:

"Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation -- generally falling prices across the economy, beyond volatile energy and food costs -- remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down to, and possibly even below, rates that I consider consistent with price stability."

Fed officials generally consider price stability to be an inflation rate between 1.5% and 2%. Their preferred measure of core inflation, which excludes food and energy, stands above 2% now, and is expected to remain above that mark as price increases from earlier this year advance through the product pipeline.

The economic slowdown and declining commodity prices have eased the nation's consumer inflation rate, which surged to 5.6% over the summer. Annual inflation in the U.S. is likely to turn negative for at least several months next year, on declining energy and food prices.

With the unemployment rate rising rapidly and capital markets in turmoil, "pretty much everything points toward deflation," said Paul Ashworth, chief U.S. economist at Capital Economics. "The only thing you can hope is that the prompt action of policy makers can maybe head this off first.""

The comment from the "chief US economist at Capital Economics" is funny because it implies that with the financial markets going haywire the only thing that can save us is more government-sponsored inflation.

Deflation scares always have inflationary consequences -- at least, they have always had inflationary consequences in the past -- because most chief economists and the makers of monetary policy seriously believe that more inflation is the appropriate response to the problems wrought by earlier inflation. This is why the rate of monetary inflation invariably ramps up whenever prices embark on a downward trend, and why the bigger the deflation scare the more bullish the long-term gold price outlook generally becomes.

Some commentators have posited that the amount of new money being created by the government and its central bank is tiny compared to the amount of market value being lost in the equity, real estate and bond markets. This is true, but irrelevant as far as the long-term inflation outlook is concerned because changes in market value don't directly affect the money supply. For example, the rise in the price of a house from $1M to $2M does not create new money and the fall in the price of a house from $2M to $1M does not eliminate any money; all that happens as a result of the up or down move in the house price is a change in the proportion of the EXISTING money supply that will get transferred from buyer to seller upon the sale of the house.

If policy makers attempt to offset asset price declines with new money the end result won't just be inflationary, it will be hyper-inflationary. Note, though, that we are not expecting hyper-inflation to occur within the next few years.

[yellowcaked]

I fully expect hyper-inflation to being within the next year.

[Bottomfeeder]

maxine....good post, and absolutely right, great, 5000 per oz for  gold, regardless of how much you own, and poverty and anarchary all around.  That is not what I am hoping for.

[pinetree]

I'll second that, good point Maxine.

I've been thinking the same myself lately.  Back in the summer when the dollar was still declining I was excitedly watching it fall when one day I started questioning what exactly I was rooting for.  Did I really want to see my country go down the drain?  Obviously not.  I guess I was blinded by greed from all the promises for the payday of a lifetime that had been made by gold gurus.  I'm slightly ashamed of myself for that.

I agree.  What's the point of getting rich if the country has gone down the drain?

If the manipulators are trying to suppress gold to drive people instread into dollars and treasuries and avoid mass panic and bank runs then maybe the manipulators are the good guys. 

[Depleted]

My 2 cents...The beloved gold that everyone is collecting so desperately is still in its downtrend, and will come to it's crossroads near March 2010 around the $800 level. Around that time, it must breakout higher, into a new uptrend, or continue it's current downtrend and move lower, way lower, period.
Stories, stories, stories. Conjure up all the stories we can to support gold, as it declines each week.
Gold is in a downtrend  people, since it's high over $1025 in March 2008. Period. It is entrenched in a downtrend.
Please don't tell me where gold is going to go. I can see it with my own eyes,      and it is going lower, period.
Got your gold? If you did, maybe you paid too much, because gold is still in a downtrend.  
Why buy now, when you can wait 6 months to a year and back up your truck for cheaper gold? The gold producers are down.
When the USD runs up after the election, I suspect gold will plummet, because all the mass fear out there about the global economy will have been built into the market, and now that the US election will be behind us, the mass fear about the economy will subside, as people get on with their lives.
Manipulation, whatever, if the powers that be have manipulated it this far, and got away with it, then post election can be no different. When the USD rallies, gold will fall, and it is looking more, and more like that scenario each day, and gold continues to stumble and wane each day also.
I guess the real question is how the world perceives Obama, once he takes the reins? The inital market reaction, if the USD really rallies,  could put gold on the back burner of everyone's portfolio for many years to come. Maybe have some, but not too much.
Good luck all with your trades this coming week...
Remember, Seeing is believing...cheers, d

[sidewinder]

The government can and has in the past confiscated gold.  Last time it was bring it in we give you $35.00 per ounce.  Don't bring it in and get arrested.

They just bought into the major banks and the banks had no say in the matter.

Should get interesting by next summer

[Uboat]

JDH… Fine research and argument about gold manipulation, Dual Asian gold market (it has surpassed the former London dominance) gold leasing and lease rates.

However, why wouldn’t the two controlling financial institutions or a new US government continue with the same practice for profit and to cover up dollar weakness, when it appears so easy to accomplish?

I like your arguments in favor of an increase in the price of gold but I am skeptical because:

Investors have always bought gold for various reasons and there will be enough gold mines to supply the demand as many can operate at much lower gold prices than at present.

Gold has not always kept its value and has traded in the 200’s just a few years ago. It took 30 years for gold to reach its previous high of around $800, during times where we also experienced inflation, recession and financial mismanagement.
Shorts seem to be just waiting for gold bugs to buy into traps.

With declining house prices, defaulting mortgages and uncontrolled credit card debt the chances of a short term deflation, like in Japan in the 90’s, are about as high as inflation.

So, why should gold explode, because of gold bugs and newsletter writers who propagate nothing but doom and gloom to keep a frightened readership?
When we learn how easily it is manipulated, when we know that its price was less than half just a few years ago and its current value of $800 is not more than 3 decades ago?     

[JDH]

Depleted: Last year at this time gold was $754.30, and it closed on Friday at $784, so over a period of one year or longer, gold is in an uptrend (although a very shallow uptrend).  You are correct that since March of this year gold is in a down trend; whether you think gold is rising or falling depends on your time frame.

Uboat: The number one reason I think gold will increase is that I don't believe the government can manipulate the market forever.  We know the "real" price on the street is higher than the Comex price, so at some point traders will see the arbitrage opportunity and start taking physical delivery of the contracts they are trading.  That may happen soon (in November or December), or it may take months or years.  Only time will tell.

That being said, I think having at least a third of the portfolio in cash at the moment is prudent, since we don't really know what's going to happen in the future.

[yellowcaked]

How do you think we got to this place in history in the first place?

We went off the gold and silver standards.  That's how.

Gold and silver are the only true stores of monetary value.

Copper is below them.

I'll second that, good point Maxine.

I've been thinking the same myself lately.  Back in the summer when the dollar was still declining I was excitedly watching it fall when one day I started questioning what exactly I was rooting for.  Did I really want to see my country go down the drain?  Obviously not.  I guess I was blinded by greed from all the promises for the payday of a lifetime that had been made by gold gurus.  I'm slightly ashamed of myself for that.

I agree.  What's the point of getting rich if the country has gone down the drain?

If the manipulators are trying to suppress gold to drive people instread into dollars and treasuries and avoid mass panic and bank runs then maybe the manipulators are the good guys. 

[yellowcaked]

And the more physical COMEX contracts that are taken delivery of the closer the COMEX gets to the point of defaulting.  It's extremely over extended now.

We know the "real" price on the street is higher than the Comex price, so at some point traders will see the arbitrage opportunity and start taking physical delivery of the contracts they are trading.  That may happen soon (in November or December), or it may take months or years.  Only time will tell.