09/30/10 Baltimore, Maryland – What ho!
The price of gold just keeps going up. It rose $2 again yesterday, to close at $1,310. The Dow fell 22 points.
We’ve been waiting for a sell-off…for a downturn…for a resumption of the “risk off,” fear-driven markets of 2008-2009. It should be coming. People are still unemployed. Stocks still aren’t cheap. And houses are still getting cheaper.
The latest Case-Shiller reading signals renewed weakness in the housing market. Prices are falling again. How much farther will they go? Maybe 10% down. Maybe 20%. As we discovered on a recent trip to Florida, you can already get properties discounted 75% off their peaks. How much more is left?
Probably not much on that one. But most houses are down only about 20%. They’ve got a ways to go.
And stocks? We should see them selling at P/Es close to 5…not the 15-20 that they’re at today. So stocks have a long way to go too.
But Mr. Market always has his tricks. What if he’s preparing a run on the dollar…and a big blow-off in the gold market…BEFORE the sell-off in other assets? We expected stocks to go down…then, gold to go up. What if it happens the other way around?
What if the final stage of the bull market in gold has already begun? What if investors and speculators begin to panic out of the dollar now? What if they sell the rumor of quantitative easing…rather than wait for the real thing? What if they drive the price of gold up to the moon, without giving us another chance to buy more at a lower price?
Anything is possible. Mr. Market is a cagey, son of a gun. He could do anything. We wouldn’t put it past him.
Still, we wouldn’t bet the farm on it either.
Investment pros seem to be turning bullish on gold.
“Gold forecast to hit $1,450 an ounce,” says a headline in The Financial Times.
That’s the consensus view from the precious metals industry.
“It’s hard to be pessimistic about gold in the short term,” said Kevin Crisp, chairman of the London Bullion Market Association. “At worst, you’re neutral.”
We’re seeing more and more bullish forecasts for gold. But so far, actual gold holdings by institutional investors attending the aforementioned LBMA conference are still tiny…less than 5% of their portfolios.
As for individual investors, they’ve scarcely even heard of gold. Few own any at all. When they get on board – it will mean huge new demand for the metal.
And there are the central banks. They have been net sellers of gold for many years. Typically, bankers are the worst investors in the world. They buy high and sell low. Someone should tip them off; that’s not the way it’s done. But they dumped beaucoup gold just as it was hitting all-time lows in 1998-99. And now that it’s 5 times as expensive, they’re beginning to buy again.
When they really start buying, we’ll know the game is over; it’s time to get out of gold. But for the moment, they’ve barely begun.
The biggest buyers will probably be the emerging economies. Why? Because they don’t have much gold. China has only 1.6% of its reserves in gold, for example. And because they’ve got the paper cash to buy it.
China could be a major buyer for 10-20 years…and still have a relatively small percentage of its reserves in gold. So could India. And Brazil. And Russia.
So, maybe Crisp is right. Maybe it is hard to pessimistic. But so many people are so optimistic…we can’t help but wonder: what’s Mr. Market up to? What devious, devilish, infernal brew is he concocting?
We’re not pessimistic on gold. Far from it. We expect the price to go to $3,000…or $5,000 before this is over. But it bothers us that so many others think so too.
It would be just like Mr. Market. Get the Johnny-come-latelies into gold. Whack them hard. Then, take gold much higher.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Seeing no response from Bill I repeat my Gold question of yesterday.
Speaking of Gold…
Let’s say it is the one true money…
So its value could be calculated as the grand total of the value of everything in the world divided by the number of ounces of gold in the world (counting reserves in the ground at say half an ounce since it costs money to extract it).
What is that value? $100 per ounce? $1000, $10,000, $100,000
And what are the implications of that value?
Bill, have you what it takes to make this calculation and reckon its meaning?
If 0.0001% of all the gold in the world fails to buy that same 0.0001% of all the stuff in the world, then does that suggest that the market is not valluing Gold as if it is the one true money, or even money at all?
Bill, are you up to the challenge of answering?
Bill is busy right now. Thanks.
Every time we are in a bubble we fail to see it until its to late. Be it DotComs, Housing, or Gold. And every time people are saying it will be different this time. No one ever learns. Have fun.
Gold and silver are both stable element, oxidation hardly scratches their surface.
I am talking history of thousand years of adventurism instead of decades of intermittent short trips to our workplace.
Unlike stock that had frequently ventured into land of Waterloo in our memory, gold
hasn’t even get somewhre near the 38th parallel, discreet and reserved. Despite centuries of turbulence, up-and-then-down, roll-and-then-bent-under, gold still reserves its 9999.99 purity; and, more distinctively still certified virgin.
I suppose one could add up all the GNPs (i.e., leave out bullpoo government spending and only include actual goods & services), then divide that by above-ground ounces for a sort of a rough sketch…
Hey investorsfriend this will answer most, if not all of your questions:
http://www.fofoa.blogspot.com/2010/09/shoeshine-boy.html
Enjoy.
Hi fred,
fofoa is just another story. I do share a portion of his view. But, that only slightly explains. Thousand-year metal is not going to be pampered by a mere essay.
Abrupt economic death is the outcome if fresh fiat ceased to be created. Don’t you think gold will shine again? It is the 13+ trillion mountain!!!
Efforts to demonstrate that gold cannot be priced according to supply & demand in fofoa’s article seem pointless to me. Wouldn’t it apply to just any good or service then ? Just because something doesn’t give you a cash return doesn’t mean you don’t have a thousand potential good reasons to want to hold it. I admit however that I haven’t read it to the end by lack of time and motivation.
Hi devils advocate
Are you sure there is no difference?
In 1970, debt position was negative. Today, I don’t really know the accuracy of the atomic debt clock that clocks 13+ trillions. Is the difference good enough as an eye opener? Only a pentium processor is able to handle the streaming gigadebt.