Wednesday, July 6, 2011

Gold's Stagnationary Path?

July 6, 2011
The Path to $5,000 Gold

The author lays out 2 scenarios. One shows how gold gets to $5,000. The other shows how gold gets to $500.

I offer a 3rd scenario. It is a combination of the two extremes he's offered. It is what you get when you multiply the gold price by three and divide it by three. Let's call it investment stagnation.

1. U.S. bonds do not lose status. Rates do not rise.
2. There will continue to be a lender of last resort.
3. The big banks continue to be too big to fail.
4. The majority of investors do not become desperate to own hard assets at any price.
5. The U.S. government does not address its fiscal problems.
6. The U.S. economy does not achieve escape velocity.
7. Employment does not meaningfully improve.
8. China does not engineer a soft landing.
9. Global macro imbalances continue.
10. Richly priced gold struggles to track moderately rising inflation. New investors are disappointed that gold ceases to become a money making venture and those shorting it also find disappointment.

I don't wish to place odds on this outcome but I do think it is much more likely than either of the two extreme scenarios that the author has offered.

10 comments:

getyourselfconnected said...

11. TZOO and LNKD go to $10,000 each and no one needs gold or an economy!
Maybe the way things are going.....

Good to read you.

Mr Slippery said...

The article talks about a drop in Greek bank deposits and links to an article that talks about depositors "converting their deposits into gold coins". Both the author and article miss the obvious point that you don't "convert" euros into gold because the person you bought from now has euros, and that person must not be putting the money back into the banks. That's like saying people are taking their money out and converting it into hamburgers. It doesn't explain a drop in deposits. Sticking cash in a safety-box does.

The US is not just technically insolvent because of future liabilities, it cannot pay it's current bills with current revenues, much less roll over the $14 trillion debt without borrowing more to cover each maturing issue. Treasuries are by every definition a ponzi scheme.

Look at the Treasury cash flows starting August 3, 2011 in this research paper.

The US can't sustain spending double it's revenue plus have any hope of paying down the $14 trillion in debt plus wage multiple wars plus pay for future liabilities plus deal with a looming energy shortage.

The author's Scenario 2 (US fiscal position is put on sound footing) is simply not possible without cutting federal spending in half. Probability small to zero.

I don't know if gold prices are going up or down, but I know the current system broke in 2008 and has been on life support since then. It has not been fixed and is not healing.

Stagflationary Mark said...

GYSC,

To infinity and beyond! We're going to have a buzzed light growth year, lol. ;)

Stagflationary Mark said...

Mr Slippery,

I agree with you on dumping deposits for gold and I would also argue the same when it comes to dumping treasuries. If China no longer wants our treasuries then they have two choices.

1. Physically destroy them and/or bury them in a landfill.

2. Sell them to someone else.

If they do #2 then treasuries aren't exactly being dumped.

As you point out, more treasuries keep showing up and are likely to keep showing up though. That is a concern.

I would also argue that using two extreme scenarios to try to determine what will likely happen is a bit like trying to plan a moon landing by calculating trajectories to both Jupiter and the Sun and then averaging the results, lol.

Wisdom Seeker said...

I see I'm a little late to this thread, but given three so-called assets with essentially zero yield, I'm becoming a lot more interested in the one that somebody had to work to produce, rather than the one generated by Bernanke's keyboard or the one generated by Congressional voting. Not that I would own any of the three exclusively yet, since it's hard to tell whether we're going to choose the inflationary exit, the deflationary doom, or find some miraculous third way out, but it now seems prudent to own some of each. And to watch how markets react in a pinch!

I'm also realizing I'm more interested in living in a future world where investors reward hard work by purchasing the fruits of productive labor, rather than seeking rents from less-wealthy debt-servants. Perhaps it is better to buy stuff than to lend to the bankrupt, hoping to pick up a few interest pennies before the inflation/default steamroller arrives...

P.S. The arguments about dumping should consider the impact on asset valuation for the entire stock of both euros and gold, as the price shifts due to the change in supply and demand. Allthough the total number of euros may not change, when Greeks, Portuguese, Irish, Spaniards, Belgians and Italians all start to prefer gold over Euros, ceteris paribus, that diminishes the value of all Euros and raises the value of all gold worldwide. Banks and money market funds that have "assets" in European debts and deposits in other currencies take a hit (or else their hedge partners do) but in either case I think there's an impact on the supply of credit even if not in the supply of cash.

Stagflationary Mark said...

Wisdom Seeker,

I see I'm a little late to this thread, but given three so-called assets with essentially zero yield, I'm becoming a lot more interested in the one that somebody had to work to produce, rather than the one generated by Bernanke's keyboard or the one generated by Congressional voting.

Two words: "toilet paper" ;)

No speculative bubble. Definitely took work to produce. I expect it to at least hold its value no matter what happens. Sigh.

Once you've hoarded that, the world is your oyster (as are paper towels, canned goods, extra clothing, and so on, and so on).

I only half-joke of course. Sigh.

Wisdom Seeker said...

I hear you with the toilet paper.

Actually, if we tack on that pesky energy problem (peak oil plus antinuclear anxiety?), on top of the debt and employment/population problems, then those durable products which represent the greatest energy investment (per unit volume) will hold value even better than average consumer goods. I wonder what the data shows for "manufactured" energy consumed per unit (mass, volume, dollars?) for various typical products. Biomass-derived products benefit from ambient solar energy and may not be the best choices. But that Aluminum foil you've got comes to mind as potentially a very good choice! Wonder what else fits that bill. Batteries would be good but they have a shelf life. Tools would be good but the types of tools in use change every couple of decades... I'd be interested in what you've come up with and how it fits. Ready-to-fab silicon wafers? Hmm.

Stagflationary Mark said...

Wisdom Seeker,

Actually, if we tack on that pesky energy problem (peak oil plus antinuclear anxiety?), on top of the debt and employment/population problems, then those durable products which represent the greatest energy investment (per unit volume) will hold value even better than average consumer goods.

Garbage bags have been my top performer in recent years due to their oil content no doubt. I have about 2,400 bags (many years worth clearly).

What was $9.99 is now $12.99.

That said, I'm fairly sure aluminum foil is energy intensive too. Not seeing much happen there yet. (Aluminum prices did move much higher in the 1970s though.)

Stagflationary Mark said...

I should add that I've hoarded about all I can based on shelf life.

Another big win is Pyrex storage containers to make my own TV dinners. Those prices have moved up significantly. I'm guessing they are relatively energy intensive to produce too (glass and plastic).

I bought about all I would ever need (enough to freeze 40 TV dinners).

Stagflationary Mark said...

As a side note, the restaurant industry does not want to see me making my own TV dinners no doubt.