The money printing by the Fed and the $1.5 trillion deficits being run by the government will lead to inflation. Dr. Hussman anticipates the CPI to double in the next 10 years. This will lead to $200 a barrel oil and $2,000 an ounce gold, just due to inflation in the pipeline.
Inflation Myth and Reality
John P. Hussman, Ph.D.
The past two years have seen an enormous issuance of new government liabilities. During the two years ended September 30, 2009, the amount of U.S Treasury debt held by the public (outside of agencies such as the Social Security Administration and the Federal Reserve) surged by more than 50%, from $5.05 trillion to $7.55 trillion. During that time, the Fed's holdings of U.S. Treasuries actually shrank by about $10 billion, yet the Fed has explosively increased U.S. monetary base from $850 billion to $2.02 trillion, fueled by massive purchases of Fannie Mae and Freddie Mac's mortgage-backed securities. On Christmas eve, the Treasury quietly announced that it would be providing unlimited bailout funding for Fannie and Freddie over the next three years, since the underlying cash flows received by Fannie and Freddie on these mortgages are not sufficient to keep the agencies solvent.
In total, the quantity of U.S. government liabilities forced into the hands of the public has soared by $3.62 trillion - an increase of 61% since the third quarter of 2007. Keep this figure in mind as various pittances are reported to be returned from TARP funds provided to various financial institutions. Likewise, remember that any interest "earned" by the Federal Reserve on the assets it holds is interest that is either implicitly or explicitly paid by the Treasury, and is returned thereto. Of course, this figure will get progressively larger as government revenues fall substantially short of outlays, and can be expected to do so for years to come.
It is in this context that we should consider inflation risks over the coming decade. At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, my impression is that this complacency is probably well-founded, but only because we are likely to observe a second wave of credit losses that will create fresh "safe-haven" demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years. As exchange rates and commodity prices tend to be more forward-looking and less "sticky" than the prices of goods and services, it is likely that these markets will move substantially well before the eventual peak in CPI inflation.
I have not always held such concerns about inflation or commodities. A year-and-a-half ago, I argued that strong disinflationary pressures were likely to emerge, and I expressed a great deal of skepticism about the sustainability of the commodities surge, which had pushed the price of oil to $150 a barrel (see July 7, 2008 The Outlook for Inflation and the Likelihood of $60 Oil). At the time, the rush to commodities was not based on general inflation concerns, but instead on the view that demand from China and India would drive prices ever higher. Frankly, I'm still unconvinced that China will be capable of enjoying sustained economic growth without shooting itself in the foot as a result of its wholly undemocratic leadership and weakly-developed banking industry. It is not typical that free enterprise "growth miracles" thrive for long in economies in the constant grip of bureaucrats (witness Japan about 1988, and the awkward end of that growth miracle).
So although oil was pushing new highs in mid-2008, I argued that "the problem will emerge a few months from now, as a) economic demand softens further, b) planned production hikes actually emerge, and c) weakening price momentum encourages speculators to close long positions instead of rolling them forward. At that point, I expect that net speculative positions will plunge by 10-15% of open interest and we'll see a sudden glut on the market for spot delivery. It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year."
What is different now is that, over time, the massive expansion of government liabilities can ultimately do nothing but undermine the value of the U.S. dollar relative to real goods and services. Whether it undermines the U.S. dollar relative to other currencies depends on the relative propensity for other countries to go on a similar binge of fiscal recklessness. As John Mauldin says, "the dollar may be the worst currency in the world, except for all the others." Indeed, over the near term, credit concerns would likely have the effect of buoying the dollar and pressuring the dollar price of commodities thanks to a safe-haven rush for dollars. While oil has rebounded strongly from the mid-$30's, which it hit earlier this year, my impression is that a second wave of credit losses is likely to take a good deal of the recent progress back before we observe much more sustained gains several years out.
Nevertheless, longer term, the relative supply of U.S. government liabilities will become an overriding factor. To say that the value of the dollar is likely to decline relative to other goods and services is another way of saying that the dollar price of goods and services is likely to increase. Ultimately, crude oil above $200 and gold prices above $2000 will likely owe themselves far less to robust demand in China and elsewhere than to sheer deterioration in the purchasing power of the U.S. dollar a decade from now.
As for the stock market, it is desirable to believe that stocks will prove to be a good hedge against inflation, since they are after all a claim on nominal cash flows which grow over time as prices increase. This was certainly the expectation in the early 1970's, when inflation risks were dismissed by investors in the belief that earnings would keep up with general prices.
Unfortunately, the view that inflation pressures are benign runs opposite to historical evidence. Specifically, there is a relatively high correlation between inflation rates and earnings yields. Investors tend to systematically elevate P/E ratios when inflation rates are low and depress P/E ratios when inflation rates are high. Which is not at all to say that this behavior is rational. To the contrary, the high P/E multiples that coincide with low inflation are also associated with unusually poor subsequent nominal and real returns. Conversely, the low multiples that coincide with high inflation tend to be associated with unusually high subsequent nominal and real returns.
The implication is that (barring actual deflation) investors view low inflation as a "feel-good" indicator and drive stock valuations excessively high in response. Conversely, they tend to punish stock valuations so much when inflation is high and variable that stocks actually tend to deliver very good subsequent returns. Transitions between low inflation to high inflation, then, tend to be quite painful for equity investors, while transitions from high inflation to low inflation tend to be unusually pleasant.
Fortunately, we have enough data both domestically and internationally to analyze inflation-prone environments with the expectation of dealing with them effectively from an investment standpoint. To understand the investment environment is to know how to respond. Presently, the greatest uncertainty for us continues to be the dichotomy between typical post-recession market dynamics and the much more difficult environment that we may very well actually be in, if previous credit crises in history are any guide. We share none of Wall Street's confidence that the more difficult possibility should be dismissed, and suspect that it is premature to declare the credit crisis over.
Inflation Myth and Reality
Will Rogers once said "It ain't what people don't know that hurts them. It's what they do know that ain't true." That observation certainly applies to the myths and realities about inflation.
Mainstream economists and Wall Street analysts hold two very specific views about inflation almost without exception. The first is that inflation is caused by monetary policy, and specifically by excessive money creation. That view is often accompanied by a slight modification that inflation can also be caused by excessive economic growth. The second view is that there is a predictable relationship between inflation and unemployment, known as the Phillips Curve, such that high unemployment is associated with low inflation, and low unemployment is associated with high inflation.
These views are either incomplete or inconsistent with actual economic data. But what's more interesting is that they're actually misinterpretations of economic theory. In order to fully understand this, you have to briefly suspend what you know, and carefully walk through a little bit of economic theory and what it implies about reality. Reality, as it turns out, behaves very much as theory suggests ... and not much as Wall Street believes (a few portions below are reprinted from the July 7, 2008 weekly comment).
To understand inflation, it helps to know a little bit about “marginal utility.” The typical way I used to teach my economics undergraduates was to get them thinking about ice cream. The first cone might give you a lot of happiness. But if you eat a second cone, you'll get a little less enjoyment. The third cone might be just slightly enjoyable. You might be indifferent toward the fourth, and are likely to be averse (negative marginal utility) to eating a fifth. So as you increase the availability of a good, the “marginal utility” – the value you place on an additional unit – declines.
The same basic principle holds for the economy as a whole. Suppose that given the economy-wide supply of ice cream, the marginal utility of ice cream is six smiley faces, and the marginal utility of a pencil is two smiley faces. Given that, the price of an ice cream cone, in terms of pencils, will be just the ratio of the marginal utilities, so an ice cream cone will cost you 3 pencils.
Exactly the same holds true for money itself. If you hold a dollar in your wallet, you might be giving up some potential interest earnings, but you're willing to hold it anyway because that dollar of currency provides certain usefulness in terms of making day-to-day transactions and so forth. If that dollar is held as reserves against checking accounts at a bank, that dollar is implicitly providing a certain amount of banking services. So a dollar bill has a certain amount of marginal utility, by virtue of legal factors like reserve requirements on checking accounts, and convenience factors like the ability to buy a nutty sundae with cash at the ice cream truck.
As a result, the prices of various goods and services in the economy, in terms of dollars, will reflect the ratios of marginal utilities between “stuff” and money.
The dollar price of good X is just the marginal utility of X divided by the marginal utility of a dollar.
So how do you get inflation? Simple.
1) Increase the marginal utility of “stuff”: This happens either if the supply of goods and services becomes more scarce, or if the demand for goods and services becomes more eager
2) Reduce the marginal utility of dollars: This happens either if the supply of dollars becomes more abundant, or if the demand to hold dollars becomes weaker.
Consider how this worked during the Great Depression. Output declined enormously, but the reason was that demand collapsed. The marginal utility of goods and services most likely declined during that period even though production itself was down. At the same time, despite a rapid increase in the monetary base during the Depression, people were frantic to convert their bank deposits into currency, so even the monetary growth that occurred wasn't nearly enough. The frantic demand for currency, resulting from credit fears, translated into a major increase in the marginal utility of money.
So what happened to prices during the Great Depression? Think in terms of the marginal utilities: the marginal utility of “stuff” dropped, while the marginal utility of money soared. The result was rapid price deflation.
In short, inflation results from an increase in the marginal utility of goods and services, relative to the marginal utility of money. It can reflect supply constraints, unsatisfied demand, excessive growth of government liabilities, or a reduction in the willingness of people to hold those liabilities.
This forces us to think twice about the idea that economic growth causes inflation. As it happens, faster economic growth is correlated with lower, not higher inflation. Inflation does tend to become a problem in the later stage of economic booms, but not because the economy is growing too fast. Rather, inflation accelerates because the economy begins to hit capacity constraints and is therefore not able to grow fast enough. The marginal utility of goods rises at the same time that speculation in risky assets encourages people to abandon cash balances, so that the marginal utility of government liabilities declines.
The present situation is mixed. Demand has collapsed, so the marginal utility of goods is depressed. At the same time, there is enough residual risk aversion to keep the marginal utility of money elevated. For that reason, inflation has been contained despite a monstrous increase in the quantity of government liabilities. This situation is likely to endure for a while in the likely event that we get further credit difficulties and sustained unemployment. But it will not endure an eventual economic recovery a few years out. At that point, the huge stock of government liabilities will weigh on the marginal utility of money, while recovering demand presses upward on the marginal utility of goods and services. The result will be a very large and probably sustained inflation in the U.S. in the second half of the coming decade.
Fiscal Policy versus Monetary Policy
The importance of fiscal policy in determining inflation is immediately apparent if we think in terms of the full or “general” equilibrium imposed by a government budget constraint.
See, if you're a banana republic and want to run a huge government spending program, you're not likely to go through the etiquette of issuing government bonds or setting a proper marginal tax policy. You'll just print up pieces of paper. Friedman's first dictum that “inflation is always an everywhere a monetary phenomenon” is largely a reflection of a long history across many countries that heavy government spending financed by printing money predictably leads to inflation. In particularly unproductive economies, it leads to hyperinflation.
But what if the government spending is financed by issuing bonds? It's tempting to think that somehow printing money means an increase in spending power, while issuing bonds means that the government is taking something in return for what it spends, but it's important to focus on the general equilibrium. In both cases, regardless of whether government finances its spending by printing money or issuing bonds, the end result is that the government has appropriated some amount of goods and services, and has issued a piece of paper – a government liability – in return, which has to be held by somebody. Moreover, both of those pieces of paper – currency and Treasury securities – compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government securities are not set independently of each other, but in tight competition. That is particularly true today, when bank balances are regularly swept into interest earning vehicles as often as every night.
To the extent that real goods and services are being appropriated by government in return for an increasing supply of paper receipts, whatever the form, aggressive government spending results in a relative scarcity of goods and services outside of government control, and a relative abundance of government liabilities. The marginal utility of goods and services tends to rise, the marginal utility of government liabilities of all types tends to fall, and you get inflation.
This is important, because it means that the primary determinant of inflation is not monetary policy but fiscal policy .
The chart below presents the historical relationship between U.S. CPI inflation and the U.S. monetary base (4-year growth rates)
Contrast the preceding chart with the relationship between CPI inflation and the growth of U.S. government spending.
Milton Friedman is widely known for two phrases, one which is half right, and one which is exact. The half-right dictum is that “inflation is always and everywhere a monetary phenomenon.” It's half right because a government spending expansion, regardless of the form, will tend to raise the marginal utility of goods and services while lowering the marginal utility of government liabilities. It's very true that the major hyperinflations in history have been triggered by currency expansion, but as long as a government appropriates goods and services to itself in return for pieces of paper that compete as stores of value and means of exchange in the portfolios of investors, you'll get inflation.
The completely correct dictum from Milton Friedman is this: “the burden of government is not measured by how much it taxes, but by how much it spends.”
50 Comments
Anonymous
200 dollar oil and 2K gold will look cheap as "QE" will never cease.
HansGruber
If the author is right about his timing on when inflation hits, then we all have a few more years to accumulate commodities before they skyrocket out of our reach. That's good news for those of us small-time investors/savers!
ReverseEngineer
OK, let us say for argument's purposes that Oil will go to $200/bar and Gold goes to $2000/oz.
For Oil, at this price gas should come in somewhere around $8/gal I think. Who exactly will HAVE $8 to buy a Gallon of Gas? Demand destruction already occurs in the $3-$4 range here in the FSofA. How can OPEC charge this price when consumers cannot afford to buy it at that price?
Gas at least has a function people need, so they might scrimp and save to be able to keep driving to work to afford the gas it takes to get to work. However, I cannot see why anyone making minimum wage would be taking his last fiat dollar and buying Gold with it. The only people who might be buying Gold would be those who still have a large surplus of fiat dollars. So OK, they all drive up the price of Gold as they try to convert Fiat into Gold here before the Fiat goes worthless. Once the Fiat has gone worthless though, is the Gas station going to take Gold Coins for Gas? Remarkbly few people will have Gold coins with which to buy Gas. Exactly how many Gold coins will it take for you to buy a gallon of Gas?
It seems unlikely to me that people will be paid in Gold here to buy Gas, even infinitessimally divisible weights of Gold. So it is irrelevant what nominal value Gold wil end up trading at here. Most people simly will not have either Gold or enough money to buy gas once the price rises that high. It cannot be sold at those prices.
If/when these commodities are priced out this way, commerce will stop entirely. Its beyond the means of the consumer to pay such prices. Such a skyrocketing is merely the indication tht the monetary system has completely collapsed. It means the value of fiat has gone to near zero, and nothing can be priced out correctly. Its another way of defining the Zero Point. We would hve catastrophic failure of all commerce at such levels. None of the prices would mean anything. People would not be able to pay the prices.
RE
Kill Bill
Kill Bill
Anonymous
$200 and $2,000 are very good nunmbers, but they will probably over shoot those numbers at some point.
2008 was peak non OPEC oil
2011 will be the peak of top 50 listed co.'s
2013 will be the peak for black crude
2015 will be the peak for all liquids
The US and the world economy will be held hostage for at least 10 to 12 years by an energy crisis, starting in 2013.
It's to late in the game to stop it. We should should have started in 1971 when we (the US) started importing oil.
GOOD NIGHT AND GOOD LUCK
crazycanuck
The main conclusion of this article seems to be:
"The result will be a very large and probably sustained inflation in the U.S. in the SECOND HALF of the coming decade."
That I can agree with - that is the SECOND HALF of the coming decade! He forgets to mention that the first half (2010-2015) will bring major deflation and depression. It is amazing how the more reasonable inflationists like Hussman are finally lining up with the most consistent deflationist, Robert Prechter, on the future of the next 10 years. Prechter still sees inflation happening (as most deflationists) - but not until after the deleveraging and depression is over - in about 5-7 years.
However, Hussman still seems to be mesmerized by that shiny metal and believes gold will double in 10 years. If over the next 5-7 years we have a deflationary depression with stocks, real estate, bonds, commodities including oil, and all other assets falling - then prices in general will fail as well. Gold - if it is "real" money - will have to fall as well. I can see gold falling to $500/oz (or maybe $250) by 2015 when the depression bottoms.
So I will keep my $1100 today in cash. In 2015 I will buy 2-4 oz of Hussman's gold when he needs to cash it in to eat - and if gold goes to $2000 by 2010 (which it will not) and my $1100 turns into $4400-$8800 I will have made a nice profit.
Anonymous
A fundamental projection of gold reaching $2000 is based on viewing gold as a commodity/store of value and doesn't consider how the market is monetizing gold. Monetization will put demand beyond current perceptions. Now that gold can be made so liquid and easy to distribute, its demand fundametals will change greatly.
ReverseEngineer
From Crazy Canuck:
@ReverseEngineer:
I do not necessarily see all fiat currency (especailly the US dollar) going bust - but I do see after this current deflationary period is over - the start of a new infationary period - when the debt overhang is downsized and the economy may recover very slowly. At that point it is more likely that gold will be $250/oz or less and gas will be under a $1 (where people can afford it). Prices will then go up slowly unless some scared politician panics and actually fires up Ben's helicopters just as the economy bottoms - when the most panic and stupidity will abound.
It ceases to amaze me how all gold-bugs will insist that the US dollar is going to 0 but their gold is going to be worth $2000-$3000. In that situtation I would hold out for at least $10,000 for my gold :)
Obviously we have a fundamental disagreement CC, since I do see all fiat currencies being rendered worthless here over time. Exactly how long this process takes and which currencies go down the fastest remains an open question, along with the possibility that a new Fiat currency will be implemented at some point to attempt to bring some order to the deleveraging process. This also could slow the process somewhat, possibly making it take decades to unwind. I look at the end result mainly, not the machinations that will take place in the interim to try to maintain some order and also to try to keep the same set of Oligarchs running the monetary system.
The consequences of Peak Oil and the limits to growth are precisely why fiat is failing now, interest cannot be paid on debt when there is no growth. There will be no further growth until such time as a replacement source of energy is found, and this remains a long way off if it ever happens at all. There are some possibilities that over time might work, but actually getting them to replace the myriad of functions oil performs in our society is a very long term proposition.
In the short term, the industrial production model will fail because of the absolute cost of oil, which is measured not in Dollars but in its EROEI, or Energy Returned on Energy Invested. There is plenty of Oil around still, but its extraction costs in energy rises all the time. 50 years ago, Oil flowed easily and freely from shallow wells and returned 100:1 EROEI. Today, you find that most sources such as Tar Sands at best operate at 5:1 EROEI ratios, and that is at the point of production. You have further energy costs in transport and refinement and maintenance of infrastructure. It doesn’t matter how you structure your currency once the EROEI ratio drops low enough that it costs more energy to produce and distribute out a gallon of gasoline than there is energy to produce that gallon.
In terms of the nominal price of oil here, it can go up or down deending on how the deleveraging process is handled and whether money gets taken out of circulation through the deflationary mechanism or more money gets into circulation through inflationary attempts by the CBs. The CBs can print all the money they want of whatever flavor, but unless and until they can get it into circulation it doesn’t have the power to affect the pump price of gas past a certain point, though it can create large speculative bubbles. The real problem for getting oil to hold value is in getting money to the consumers of the oil to buy it. This so far is a problem TPTB in NO country has solved at the moment. The Chinese cannot make Consumers of oil out of factory workers they pay $1 a day to. They would have to vastly increase the payment to labor, which would raise the real price of their goods, which then nobody would be able to afford to buy.
You will as a result here see quite a bit of volatility in the price of Oil, it will go up and down here relative to the perceived value of different fiat currencies as each country pursues its own means of trying to negotiate the deleveraging process. In the end here, all the debtor nations will go into default, and as a result all the creditor nations will also. Just like BofA is rendered insolvent by the fact all its CC holders are insolvent and won’t pay back their debt. Same process, just on the scale of the Sovereign State, which is just a form of a very large bank from the monetary point of view.
The chaos which ensues as a result of all this deleveraging will bring commerce to a grinding halt here over time, though of course Goobermints will slow it down some by themselves taking on more debt to try and replace the deleveraging debt of private industry. Without Goobermints doing this, under a fiat regime and really any monetary system at all the money will disappear from the marketplace, and placing a monetary value on anything will become increasingly more difficult. This is the fundamental reason you get Wars as a result of a crashing monetary system.
We may see deflation, inflation or stagflation in varying degrees and in different ways, but what we really will see in the end is War to wipe the slate clean, attempt to steal what you can and then exert dominance once again if you are the victor. Because of the absolute cost of Oil in EROEI, this war in mechanized fashion will likely be the last such large war. The war process will consume even more Oil, while at the same time the War process destroys the infrastructure for producing and refining it.
How long this takes to play out remains an open question. I do think however we will see most of it play out over the next 20 years.
RE
therooster
CC @ReverseEngineer:
I do not necessarily see all fiat currency (especailly the US dollar) going bust - but I do see after this current deflationary period is over - the start of a new infationary period - when the debt overhang is downsized and the economy may recover very slowly. At that point it is more likely that gold will be $250/oz or less and gas will be under a $1 (where people can afford it). Prices will then go up slowly unless some scared politician panics and actually fires up Ben's helicopters just as the economy bottoms - when the most panic and stupidity will abound.
It ceases to amaze me how all gold-bugs will insist that the US dollar is going to 0 but their gold is going to be worth $2000-$3000. In that situtation I would hold out for at least $10,000 for my gold :)
The USD will not go bust. It will be devalued on the basis of massive dollar debt that the world can no longer support. The presses will roll and the government will turn inward by financing via QE and printing dollars. The FED is already supporting the bond market. Deflation and inflation will co-exist. Large ticket items such as capital goods & real estate that carry high degrees of dollar based debt will demand dollars for debt servicing and liquidity. That debt burdened area of assets will see price declines. Consumables that sustain day to day life, such as food and energy, will have a different experience, altogether.
RE @ CC:
Obviously we have a fundamental disagreement CC, since I do see all fiat currencies being rendered worthless here over time. Exactly how long this process takes and which currencies go down the fastest remains an open question, along with the possibility that a new Fiat currency will be implemented at some point to attempt to bring some order to the deleveraging process.
A new fiat currency may be developed but it is dangerous to focus on a non-solution when a market currency is within the market's grasp. It's already here, as a matter of fact. Why not focus on pro-active solutions rather than honor the beast ? If you focus on "the stick", that's what you'll get. If you focus on "carrots", that's what you may discover.
The consequences of Peak Oil and the limits to growth are precisely why fiat is failing now, interest cannot be paid on debt when there is no growth. There will be no further growth until such time as a replacement source of energy is found, and this remains a long way off if it ever happens at all. There are some possibilities that over time might work, but actually getting them to replace the myriad of functions oil performs in our society is a very long term proposition.
The energy challenge will be solved on the basis of a balanced relationship in the power between supply and demand. It cannot be solved yet because we have a supply driven imbalance where greed keeps getting in the way. We will always have a supply driven economy as long as we have an exclusively supply driven currency system. It needs a complement , a "counter-weight" that is asset based. That's our job, a market endevour.
In summary, as long as you both see the USD as a currency , only, your perceptive paradigms are apt to remain where they are. The USD has a dual role, one being the currency we are all so familiar with, while the other is simply as a real-time measure for precious metals where the precious metals act as the weighted money. If there is no appreciation for the real-time, unpegged, floating relationship between dollars and precious metals, then you will not see a monetary solution and you are apt to spin round and round on the karmic wheel. I consider it to be irresponsible (or just plain lazy) not to consider these real-time dynamics and what has been made possible.
Heads is tails.
crazycanuck
@ReverseEngineer:
You make some very good points. However, my response was to Hussman's prediction that this would happen over the next 10 years. I do not think we will be near the "end game" in 10 years, and it seems neither do you. This great build up of leverage and debt has taken place over a couple of centuries - not just a few decades - so it will take several decades to fully play out.
I also said I do not NECESSARILY expect an end to all fiat curencies (over the next 10 years). There is always a danger some fool politicians will panic and actually print themsleves into oblivion towards the bottom of this current deflationary wave (when they might be able to produce inflation). I agree a "new" replacement fiat currency may be a better bet at that point - but there is always the chance the transition will fail at that point.
Where we significantly differ is that I care very little about forecasts of how this plays out over the next decades and I care even less about the end result. I and my family live in the here and now - 2010 - and my planning horizon is 5-10 years. My main concern is how I can negogiate the next few turbulent years so that my family can have a chance of survival in the future. I will monitor the situation and adjust as it unfolds.
I believe we are looking at a large deflationary wave for at least five years so I will hold mostly cash (USD and CND) with some PM I already have in reserve. I also live in a semi-rural subdivision (1 acre lot) outside of a small city (50K) where I know most of my neighbours (who all can hunt and fish and fight if necessary) and I have an expanding garden. I also own farm and woodland about an hour away in an area my ancestors were farmers for 5 generations - and I plan to retreat there as a backup plan if my current situation gets too tenuous.
Theoretical debates on the merits and ills of capitalism and socialism are fine for intellectual stimulation - but my main interest is the survival of my family. I come to sites like these to get useful information and debate the near term future - so hopefully somebody can show me the error of my ways. I still have not seen a convincing argument that gold is a good investment in the next 5 years.
therooster
I still have not seen a convincing argument that gold is a good investment in the next 5 years.
Gold's current appeal is not solely based on it being an investment, as you put it, but also as a currency. They are very different roles.
Gold's appeal as a currency is based on the classical debt-free store of value qualities, but added to that is the recent ability to distribute exact payment with gold in the "twinkling of an eye", anywhere on the globe. Instant liquidity is something gold has never experienced before the information age.
When debt-free store of value marries with instant global liquidity, how can a currency be improved ? It can't. That's the appeal.
Gold is in an investment leg, however, in order to come up to find its "monetary value" as a form of money. It is still far too low.
The trucks are being backed up, currently, for those in the know.
therooster
I still have not seen a convincing argument as to why gold is not a good form of money.
I know the historical reasons which are all based on logistical/distribution issues that served to inhibit liquidity. They don't apply today, however.
llamma
For some reason I cannot reply to the comment from CRAZYCANUCK directly...
However:
2 days in a row I have seen crazycanuck make some absolutely crazy claims that are simply not true:
1.) That gold/silver is not legal tender in the US: FALSE. We have Gold and Silver Eagles (and Kruggerands, Maples, Pandas and more in other countries). The fact that I may or may not be able to trade them for a pizza (red herring) is irrelevant regarding it being legal tender and shows that you have no familiarity with what the legal tender laws actually state - you spread the myth that legal tender laws mean "something you are required to accept as payment" . That said, the only question that really matters is has it been deemed legal tender, meaning: can it be used to settle debts in court and PAY TAXES? YES. Not whether or not it mandates acceptance in trade for pizzas or if any individual has to accept in trade for anything. Just as there is no law forcing a retailer/individual to take FRN's as "legal tender" (despite the perpetuated myth), there is no law forcing anyone to accept the legal tender gold/silver eagles - they still have value regardless, except one is based on a promise to do work in the future (in a world full of liars and criminals, a bad bet) and one is based on work already completed.
Any good/service can act as money, but some are much better than others and a few get LEGAL TENDER status in multiple countries (via state mandate/monopoly for tax collection purposes - at one time I could have paid taxes in HEMP, for it was legal tender in many states pre-1900). Gold, silver, bronze, and copper have done this for thousands of years. All fiats, historically, go to zero value. That has never happened for PM's, yet you claim they can to to zero value - that is false, although they may diminish or rise in value greatly depending on marginal utility comparisons, as stated in the article.
I think you are just bitter about your poor call when you bought silver at the peak a couple decades back. In another thread you gave a specific window on Silver and then whined about that window showing how silver is a poor investment. Can't I take any window on any investment and make that investment look good or poor depending on timing? If I bought gold in 1990, I have seen 9% return annually since - If I move this window, I can make the picture appear differently. In your silver example, I can make silver look very poor based on your window, but really you just bought at the wrong time (peak-price driven by emotion maybe?) - that makes you a bad investor, but doesn't mean silver is a bad investment. Over hundreds of years, I can buy roughly the same things in the same amounts with one ounce of gold/silver now as at any time in the past. I cannot make the same statement about fiat currencies, stocks, bonds, etc.
2.) "No one" will want gold/silver coins. Really? That is an amazing assertion/OPINION! Even in a mad max scenario there will be demand for refined metals for all kinds of purposes whether circulated as money or not - it will be able to be traded for something (fiat would be tinder and toilet paper). Of course, the "mad max" thing is a red-herring too. No one buys gold/silver because they envision a mad max scenario - they buy because they believe (and we get it - you don't believe) gold/silver and other PM's will hold value better than paper money or things backed by promises and liabilities. It has nothing to do with envisioning a mad max scenario - more like an Argentina Scenario (which you seem to be oblivious to with regards to occurrence and information). Bringing up mad max can not only be interpreted as a "red-herring", but could be seen as an attempt to associate the picture(s) mad max conjures up with those who are touting ownership and use of PM's. Gold/silver is crazy/mad, anti-social, something equated to anarchy and violence, etc...
3.) Not necessarily claimed here, today, but claimed often enough by the anti-PM crowd is this logical-fallacy: "There isn't enough gold to use as money". I believe RE made this claim yesterday in a different thread.
Of course this assumes that price is not dynamic (and digital) and that no other PM's will be utilized. However, history shows that the price of gold is dynamic (even when manipulated by the banking cartel) - will there be "enough" gold (RE - but canuck too) when gold is 5k per ounce...10K...50K per ounce? What is "enough" when price and quantity are dynamic? Also, this would be like claiming that since only 1000 dollar bills (gold) will circulate, that monetary system cannot be viable. That there are also 100, 50, 20, 10, 5, 2, 1, and fractions circulating (Silver,copper, nickel, brass, etc. coins) is conveniently ignored.
therooster
Why Soros Is Probably Buying Gold Now
by Peter Cooper
Given the moves by rival hedge fund managers like John Paulson into the yellow metal, it would be surprising if that living trading legend George Soros is not buying gold at the moment.
Indeed, you should always buy when this man hints he might be selling. His comments at the World Economic Forum in Davos this week seem classic trader double-speak. What does Soros mean when he says gold is the ‘ultimate bubble’ asset class?False prophetsNewspapers like the normally sensible Daily Telegraph fell for his ruse, immediately jumping the gun to a prediction about a massive tumble for the yellow metal. Yet Soros said no such thing.
He merely pointed out what even the most ardent gold bug would concede, namely, that if you study the history of financial crises, then the credit-induced asset price inflation causes them moves from…
more ......http://seekingalpha.com/article/185447-why-soros-is-probably-buying-gold-now?source=email
HansGruber
The Fed's mission: transfer the blame, transfer the toxic assets, keep the Ponzi scheme going, keep stealing our purchasing power and cover their tracks!