Tuesday 23 August 2011

Gold bubbles away to $1900 and ruins the economy

Dubai Gold Futures twelve month chart

Gold marches onwards as the markets march down. There is plenty to be fearful of in the current world as far as investments are concerned.

However, Silver also experienced a massive run up earlier in the year and that did not end well. The issue is the short-term nature of the trades. Gold is popular as it goes up and markets down - the reverse can happen too when the hot money leaves gold for pastures new.

Now sharp minded investors like our own Nick Drew have done very well from Gold thus far, well enough that even a 205 or 30% pull back is not really going to trouble them. Longer -term though there is an unsustainable trend, with money pouring into low yielding Gilts and Treasuries and of course into Gold.

None of these investments is generating a yield or return above zero, in fact treasuries and gilts are loser as they sit below inflation in terms of returns. For now, with market risk seen as a big threat, that is OK - but long-term this must unwind as even the rich get poorer. Also, by denying money to productive investments the world will be denuded of growth and opportunities - it is in no ones interest to have this huge flight to safety continue ad infinitum. Stopping it is another thing though....


Mr Ecks said...

There would be no need of a "flight to safety" (where can I book my seat?) if the antics of the political shite world wwide had not created an enourmous amount of danger.

Budgie said...

Yeah, guess the future. I look back and think: why didn't I do this, or thank goodness I did that. Yet we really don't know, it is just a guess.

I remember when QE started there were numerous predictions of death by roaring inflation: it never happened. I have no doubt that gold is in a bubble. But it is a bubble that could go on a lot longer. Shares and land are actually productive. Food, guns, knives etc, are the pre-requisites for collapse. But I do not think we are there yet.

There is life in our civilisation still, but I am thinking that it is beginning to break down. And the reason is simple but difficult: we don't tell the truth anymore. We each have our own "truth" which is as valid as anyone else's apparently. You only have to look at our politicians, our scientists even, to see this.

cosmic said...

The question is whether there will be currency collapses and chaos, or serious inflation to get rid of the huge debts we have. It isn't off the cards that the Euro will end in a disorderly way, in which case there will be an even bigger rush to gold. Even an orderly abandonment of the Euro would cause a rush to gold.

James Higham said...

Keeping my eye on your updates.

Old BE said...

Gold is the ultimate unproductive investment. Even houses have a secondary use!! Even governments can produce returns if they invest their borrowed money wisely.

Not sure if we should be too impressed that the Fed is about to start printing more money though.

hovis said...

Hmm yes this is a bubble how long a bubble? The last property buble was well over 15 years.

As to unprofitability - so what? I am now of the opinion that this is a crisis of political economy ( in the modern meaning). There crisisi is in legitimacy and even philosophical (i.e. money is what we beleive it to be) , hence the flee to gold - it has value but also talks to us at a primitive level.

Things will NOT continue as they have, and I believe the standard analysis of left / right is now wrong.

This is more existental.

Our political systems have lost legitimacy, and the corporates that have been supported are long term eating themselves. Asia will not rise to the extent expected, all is brittle. Hence gold - we all can't own land ...

Final thought and veering O/T here in the UK we have teh unwind of the political/religious/social settlement of the last what, 120 (Chartists / other reformers) - 300(Glorious revolution) years So yes land, beans, guns, gold, take tyour pick.

CityUnslicker said...

Cosmic - doubt it in the event of a disorderly Euro default there will be a flight from everything as margin calls are made. Just like in the Lehman crisis, even gold fell nearly 50% in 2008 for a few months.

in a crash even fundamentals don't matter.

Anonymous said...

City unslicker.

I don't know why you even bother metioning gold in your blog/

It's obvious you haven't a f'in clue!

I expect better from a so-called professional.

Demetrius said...

My teeth are now worth more than the rest of me. Oh dear.

cosmic said...


These are times of great uncertainty and Hovis makes good points. I would say that what we have now in the Euro and huge government debts is unworkable despite attempts to prop it up. This isn't like a normal limited crisis, it's a problem which has been brewing for decades and kicking the can down the road will make for a bigger problem down the line. No one knows how far down the line but there's an inevitability about it.

So if you accept that this is the case and major planks of the world economy are rotten and will have to be replaced, the question for the individual is how to preserve one's wealth, as growing it in such circumstances seems more than usually risky.

I can see objections to it, but gold seems like a reasonable solution. What else would you propose, property, defensive stocks, Swiss Francs......?

Of course, if you think this is a passing storm and things will sort themselves out, the present gold price is indeed a bubble.

andrew said...

The thing is that if equities are not really worth much that means that you will have trouble exchanging your gold for something else that has had value added (manufactured goods) in the long run.

CityUnslicker said...

Cosmic, thanks for the comments. easy answer, buy things that are cheap or hedge in multiple asset classes. Gold will die in a bad crash, we saw that last time. In desperate times you need to have things that are real too. Property, cars, computers etc.

Anonymous said...

Cosmic: ".. currency collapses and chaos, or serious inflation to get rid of the huge debts we have."

This is a credit contraction, deflationary by its nature. The amount of credit that will never be repaid is a couple of times larger than world GDP.

The Sovereigns are tapped out, and the incestuous relationship between the large international banks* who finance their operations by lending to the sovereigns then collecting interest from them will sometime soon come to an end.

*which are also f****d.

CityUnslicker said...

Anon- which is why one solution is massive inflation to get rid of the debt. Will gold hold its value then - possibly, but it still gets whacked in the collpase before the inflation.

Phil said...

It's getting whacked right now...back down to 1770 as I type (yeah, that's not a big deal if you bought in when Mr Drew did, but bad luck those people who bough in at 1900 or so...)

cosmic said...

I find the gold bandwagon a bit unsettling. There are two shops in the shopping centre near where I live offering to buy gold for cash. It reminds me of the gold bubble of 1980 when similar shops opened and closed and around 2000 when I heard old blokes in pubs talking about having made £30,000 on the stock market in a week.

That said, even if you accept that the current currency arrangements are not sustainable, and gold is at least one route to avoiding the turmoil and the price will increase over the next few years, that doesn't mean the rise will be monotonic and there won't be sharp bouts of profit taking.

I'm aware that arguing the current currency arrangements are fundamentally unstable as a justification for buying gold has a ring of "it's different this time" which has been trotted out to justify all sorts of bubbles and shown to be hollow.