Investing in precious metals 101

Gold bubble?

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  • Fri, Feb 20, 2009 - 06:48pm

    #1
    mihaibarsan

    mihaibarsan

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    Gold bubble?

What makes gold so reliable as currency?

Does it really have so much intrinsic value as to be used instead of money?

How much of the gold price is value and how much is vested confidence?

Doesn’t seem much more different to me than the housing –> people buying it in order to invest or protect assets

  • Fri, Feb 20, 2009 - 07:27pm

    #2
    Peak Prosperity Admin

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    Re: Gold bubble?

question 1 – the fact that it can’t be abused by government like the debt money we have now because it has a finite supply, or at least a very limited slow growth supply

question 2 –  yes, because of the confidence in it (though there have been better systems and some people are saying we should avoid a gold system today since it would still be controlled by the Rothschilds

question 3 – same thing…the value is driven by the confidence…the confidence is driven by the value

question 4 – gold is constant.  the supply of housing is manipulatable, the quality of housing is variable, etc.

 

  • Fri, Feb 20, 2009 - 09:25pm

    #3
    Peak Prosperity Admin

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    Re: Gold bubble?

Dear Strabes

Would it be possible for the existence of exchange traded funds in gold bullion, as are seen on the London Stock Exchange, to bring an over investment of cash equivalence against physical reserves, thereby artificially boosting price?

Thanks

Bill

  • Fri, Feb 20, 2009 - 09:57pm

    #4
    Peak Prosperity Admin

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    Re: Gold bubble?

The sentiment measures for the PM markets, gold in particular, were 94% Bullish last week. The last time we saw 94% bullish gold sentiment was at the high of $1000+/oz (almost broke that high today). Whatever the fundamentals are for valuing gold are pretty insignificant in the short term, given the fact that so many people are bullish on gold right now. Expect a significant decline based on human nature alone. It should be a good buying opportunity for the longer term ride.

Though the idea of a longer term gold bubble might be invalidated by the rumor that the Fed will cap the price of gold if inflation comes roaring back. I hope they don’t resort to that, but it looks like they will do just about anything to prevent people from preserving their wealth or saving their money. 

Sorry for the negativity, 

Jeff 

  • Fri, Feb 20, 2009 - 09:58pm

    #5
    Peak Prosperity Admin

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    Re: Gold bubble?

Gold ETFs are increasing their holdings of gold bullion, as this Jan. 20th MarketWatch article indicates.

NEW YORK – Gold held by exchange-traded funds reached a record level in
2008, as investors bought the metal as a safe haven against economic
troubles, the World Gold Council said Tuesday in a report. At 1,190
tons, ETF gold holdings are now higher than central bank holdings in
Switzerland, the fifth last official gold holder in the world.
Investors bought ETFs representing 96 tons of gold in the fourth
quarter, following the purchase of an unprecedented 145 tons in the
previous quarter, the WGC said.

However, the effect of ETF buying on price is not necessarily
‘artificial.’ When any scarce item is subject to higher demand, its
price goes up to clear the market.

The distinction between gold and housing is that 99 percent of the global population believed that house prices would rise forever,
and were not capable of falling. If gold rises to $2,000 an ounce, and
99 percent of people believe it will go to $5,000 an ounce, then I will
sell it.

In 2005-6, I made six figures from a couple of bear raids on silver.
I am more than happy to trade precious metals from either side.
Precious metals absolutely sucked as an investment for 21 years, from
1980 to 2001. However, the current government panic is favorable for
gold, because the dollar needs to be drastically devalued in order to
reduce the debt load in real terms. After the dollar devaluation
occurs, gold will not be particuarly attractive as an investment.

The thing to watch for is ‘gold mania.’ I saw gold mania in Jan.
1980, and we aren’t there yet. When ‘everybody’ believes in gold the
way they used to believe in real estate, it will be time to head for
the exit.

  • Fri, Feb 20, 2009 - 10:25pm

    #6
    Peak Prosperity Admin

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    Re: Gold bubble?

[quote=Bill]Would it be possible for the existence of exchange traded funds in gold bullion, as are seen on the London Stock Exchange, to bring an over investment of cash equivalence against physical reserves, thereby artificially boosting price?[/quote]

I would think in a pure gold standard that debt instruments based on gold, like ETFs (they generate massive liabilities…a demand for payment) would not be allowed.  Fundamentally an ETF is just a simple derivative…its value is derived from the underlying asset.  I’m no monetary expert but I don’t think that could be allowed under a gold standard.

  • Fri, Feb 20, 2009 - 10:44pm

    #7
    Peak Prosperity Admin

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    Re: Gold bubble?

Under the former U.S. gold standard, in which gold was fixed at
$35.00 an ounce, there was no incentive for a gold ETF. If gold were
priced at $35.00 an ounce today, tomorrow, next month and next year,
one would only be giving up interest by owning gold instead of
short-term interest-paying debt.

On the other hand, gold mining
stocks DID exist under the U.S. gold standard. Homestake is legendary
example of a stock which rose by nearly an order of magnitude during
the 1930s.

Gold, which bears no interest, is a near-perfect
circulating money. We don’t expect the coins in our pocket to bear
interest, because we’re going to spend them soon. Gold as an
‘investment’ only makes sense in the inverted, Alice in Wonderland
world of fiat currencies. If fiat currencies were abolished, no one
would consider gold an investment.

  • Sat, Feb 21, 2009 - 12:41am

    #8
    Peak Prosperity Admin

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    Re: Gold bubble?

Hello mihaibarsan:

Q=What makes gold so reliable as currency?

A=There were only 20 lifeboats on the Titanic. There are only about 140,000 tonnes of gold above ground. Ben Bernanke is NOT an alchemist and can’t turn lead, or anything else into gold, 2%+/- per year is the most they can increase its mining. 

 

  • Sat, Feb 21, 2009 - 12:41am

    #9
    Peak Prosperity Admin

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    Re: Gold bubble?

Q=Does it really have so much intrinsic value as to be used instead of money?

A=Intrinsic to me is buying some assett, like a piece of land, for say 46k and being able to immediatly sell it for 152k, and Marsh and I can make, or later say that it had an intrinsic value of 106k (less a butload of CG tax for not wanting to hang onto it in a bubble market.) Intrinsic value to be used instead of money – I don’t get. Money to me is purchased, vis a vis labor, the sale of an assett or the sale of one currency for another. Chris explains that gold is a currency, not an assett. 

 

Q=How much of the gold price is value and how much is vested confidence?

A= Sorry, I’m not certain I understand what is being asked.

 

Observation=Doesn’t seem much more different to me than the housing –> people buying it in order to invest or protect assets

My Observation=Last time gold ran up the run up lasted for what 2 days?!?!  Having said that I think this game could have several outcomes, and I want to clarify, I’m not trying to light up the bubble warning annunciator light, I’m not saying, "It will be different this time.":

 

  • Personally, I’m not convinced gold goes up, I look at it more like it takes more dollars to buy things as our dollar and most other currencies get debased
  • It think the more of anything they make the less value it holds and when it comes to making money I see a lot of hockey sticks
  • That said I don’t look at the charts as much as I look at what Soros says, this is a period of wealth destruction, I think I don’t quite agree, could it be a period of perception destruction? Are we insolvent and just don’t know it yet. Happened at Enron,happened with millions of homeowners, think it is happening with many of the banks now and I think it will happen with countries. Every street sign I see says insolvent on it.
  • I don’t think this is a credit crisis, I don’t think that this is a housing crisis, I think it is a solvency crisis. When someone puts down that they make 200k and they make 50k and or their loan resets and or they can’t tap their HELOC their insolvency becomes apparent, their perceived wealth disappears when they loose "their" MacMansion
  • I also question the paper Comex market. A lot of gold isn’t owned, it is leased. I seriously doubt there is enough physical gold to cover the paper that is traded. Which of course, for me begs the question to be asked, if one bank or one currency or one market tanks and there is a run on gold will investors try to take delivery?
Chris says that he believes they will avoid a total devaluation/debasement and re-denomination, at least that is what I think he was getting at on the PBS show? I pray he is correct. That said, I have played this through in my mind 9 ways to Sunday. I don’t see how there is any escaping some 11+++ trillion of debt, and another 53++ trillion of obligations.
 
Hope I’m wrong, very, very, very wrong! 

 

  • Sat, Feb 21, 2009 - 01:42am

    #10
    Peak Prosperity Admin

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    Re: Gold bubble?

[quote=machinehead]

The thing to watch for is ‘gold mania.’ I saw gold mania in Jan.
1980, and we aren’t there yet. When ‘everybody’ believes in gold the
way they used to believe in real estate, it will be time to head for
the exit.

[/quote]

I agree completely.  I wonder how far away we are from that.  I’m already seeing articles lately claiming that gold is the next bubble.  I’m also curious about why bullion is outperforming the mining stocks.  Historically that hasn’t been a good sign for bullion:

[quote]In fact, the gap between gold mining shares and bullion
prices carries an implicit warning about the prospect for gold prices,
say analysts at RBC Capital Markets.
 
"Historically, when stocks begin to underperform gold, that’s a sign
that gold is running out of steam," said Ray Hanson, a technical
analyst at RBC.
 
Source: Marketwatch
[/quote]
 
Any thoughts?

 

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