Late gold rally, New Year's Eve

15 posts / 0 new
Last post
machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Late gold rally, New Year's Eve

After starting the day down, gold turned around at mid-morning and
cranked to a good gain by mid-afternoon ... DESPITE strength in the
U.S. dollar. This seems unusual and significant, since on most days
'gold is the mirror of the dollar.'

Crude oil also raged ahead.
One possibility is that insiders know something we don't, about another
horrendous escalation of the Gaza crisis on New Year's Day. But let's
hope that the reasons are economic, not war-related.

I subscribe
to the notion that market movements during the first few days of the
new year are more significant than usual. Often, new asset allocations
are being implemented, in ways that can foreshadow the remainder of the
year. Let's see whether this unusual commodity strength on Dec. 31st
carries through into 2009.

I'm on record as forecasting an eventual gold peak of $2,222. Cool

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: Late gold rally, New Year's Eve

I'm glad that gold passed $880 but the big event with Comex never materialized. I'm sure you followed the story, many said Comex couldn't deliver and that gold would skyrocket (Dec 29-31). This may be part of the reason for the bump. I don't need for gold to skyrocket but it will be great if it continues to protect my savings. I'm going to sell off some gold as I am holding a high percentage in my portfolio (unless something quickly develops) - but will maintain a significant holding.

Karl Denninger had two interesting predictions with respect to gold & oil:

Karl Denninger wrote:
  • Precious metals will not be a safe haven.  The callers for $1600 and above on gold will be wrong, unless
    there is a major military conflict.  I do not rate that
    probability as particularly high, but it is an event (along with a
    major terrorism incident - nuclear or biochemical - that would cause a
    rocket shot in Gold prices), so I am hedging that call.  The risk
    of this sort of "response" to the economic crisis is, however, real,
    and will rise significantly going into 2010 and beyond.  We'll revisit
    this one (a major war) next year.

  • Commodities will appear to be headed for a new bull market
    but this will turn out to be a false hope as demand continues to
    collapse.  Attempts to manage oil output to prop up the price will fail.
     
    Several oil-producing nations will find themselves in serious economic
    trouble, with Russia being in the lead but by no means alone.

 

By saying "callers for $1600 and above on gold will be wrong" I hope he is really saying that gold may rise to $1,500 - I'd be content with that!

The oil prediction is troubling. If the price of oil remains down, there will be less incentive for anyone to do anything about the bigger problem of peak oil. This happened before in the late 70s, when people got serious about alternative solutions and then the price dropped and quickly all was forgotten.

kelvinator's picture
kelvinator
Status: Silver Member (Offline)
Joined: Dec 25 2008
Posts: 202
Re: Late gold rally, New Year's Eve

I manage investments for a living, and as you can imagine, 2008 was an intense year.  I had prepared clients for a major hit to the stock market by getting them largely out of the broad market at the end of 2007 beginning '08, and focused more on potential inflation hedges like gold, energy and other commodities.   Of course, these took hits in the last half of the year as well.  Overall, we avoided the remarkable mayhem of the typical buy-and-hold portfolio, while suffering lesser losses in the last half of '08.

One thing that has impressed me for the many years I've followed markets is how difficult they are to predict in the short term, even by the most experienced hands.  As I understand it, George Soros took personal charge once again of his vast investment funds in the last part of 2007 (as he said in his book which I read, A New Paradigm for Financial Markets) as he saw danger arising from the credit crisis in summer '07.  Nonetheless, my understanding is that to this point, he has not fared so well, as he (correctly) shorted the US markets, but then more than lost back those gains by also shorting against the strong dollar (perhaps it was US Treasuries) and going long some foreign markets.  I liked one of the main points of his book, which, paraphrased, is that your ability at investing will be improved if you realize that any theories you have about the market not just "may" be wrong, but are "bound" to be wrong, and must constantly be corrected because of the complexity of forces involved and their interaction with the very theories investors have about what markets will do.  He published the book in April, 2008, and said it underlined his point that his investments were a little down when the book went to press.

Regarding Denninger's comments on gold and oil, the question for investors who have believed that a market debacle was probable, as I and many others have for the last 18 months or so, is whether the ultimate hit would be deflation or inflation.  Denninger seems to be saying that he believes it will be deflation will prevail - that the hit to the global economy will be so bad that energy prices don't recover for a long time (actually, the time frame isn't clear in that excerpt).  I've tended to err on the side (as Chris Martenson seems to) that inflation will be the ultimate story.  This is because my intuition (supported by some history, as Martenson has pointed out), is that when push comes to shove, as people lose jobs and economies seize up, gov't's will print like there's no tomorrow to try to smooth the waters, keep people happy politically, and jump start the global economy.   

Bernanke has used the image of dropping cash directly to citizens from a helicopter to avoid his arch enemy, deflation.  To me, that and the extraordinary actions he's implementing one after another make me believe that he will, in the end, succeed in making inflation the problem rather than deflation.  When you print money and give it to people, at some point inflation is happening, regardless of what's going on with employment, etc.  That's why I personally am betting that Denninger, in the end will be wrong.  Gold will ultimately go up.  Given the supply constraints on energy and other commodities, they seem even more likely to go up in the long haul, too, because people actually need them more than gold.

What'll happen in the short term is less predictable - and the more exact our ideas, the more they are bound to be wrong ;-)

 

 

 

 

 

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Another straw in the wind

Here is another straw in the wind, from a Bloomberg article
bemoaning the worst annual commodity smash since the CRB index started
being compiled in 1956:

Jan. 1 (Bloomberg) -- Commodity prices in 2008 plunged the
most in five decades as demand for energy, metals and grains
tumbled in the second half because of the recession. In 2008, the Reuters/Jefferies CRB Index of 19 raw
materials fell 36 percent, the most since the gauge debuted in
1956, to 229.54. On Dec.
5, the measure dropped to the lowest since August 2002.

In 2008, 15 prices dropped in the CRB, led by gasoline and
nickel. Only four climbed, paced by cocoa. Cocoa climbed 31 percent, the biggest increase.
Sugar, gold and hogs were the only other commodities to post
gains.

http://bloomberg.com/apps/news?pid=20601087&sid=a_oih_J0oMWg&refer=home

So, amid a hard smash, gold actually gained on the year. Ms. Market may be telling us something.

 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Your nerves must be shot!

kelvinator wrote:
I manage investments for a living, and as you can imagine, 2008 was an intense year.

Just when I think my life can be tough...someone comes along to make me feel like I have it made.

I can't imagine how tough this year must have been - and it's been unfair in that our markets have been manipulated and the information has been less than accurate.

Sounds like you did a great job for your clients despite it all.

kelvinator's picture
kelvinator
Status: Silver Member (Offline)
Joined: Dec 25 2008
Posts: 202
Re: Your nerves must be shot!

Well, DrKrbyLuv, I do like my work alot - very interesting and challenging - but there were a few times that trying to navigate such huge economic waves was indeed unnerving.   It actually was very helpful to have put together a perspective with many elements of the one Chris describes in The Crash Course from experience and a variety of sources over time - I knew from the get-go that inflation figures from the gov't were baloney, that gov't and "financial expert" reassurances on the wisdom of the central bankers and the soundness of the US economy and institutions were baloney.  Afew years ago, I used to work at one of the large financial institutions that a few months back almost went bankrupt after Lehman went down. I had long ago come to the conclusion that the "buy and hold" mantra repeated endlessly by the financial services industry is self-serving baloney also, so that made it easier to get out of the market while the getting was good. 

I made the mistake of buying a new issue of Fannie Mae preferred stock for my family and some clients that were paying over 8%, thinking the gov't would back them up.  Then, a couple of weeks later, I read more detail about Fannie and Freddie's situation and immediately managed to sell them back at breakeven - just before they collapsed, eventually to be completely wiped out in the gov't takeover of the institutions.  Also, I and some clients held a few "structured notes" (debt) from the big wall st company I used to work for.  At the peak of the crisis, no one would even bid *anything*
for those notes, which represented many thousands of dollars - I was amazed, but have learned to be calm about these things. Now that the gov't is a shareholder in my former employer, the notes are once again a "good" investment which I expect will be repaid when the mature shortly.  So, yes, there were some hair-raisers, and I consider myself lucky, as well as doing my best to be smart.   I read recently that Dodge & Cox, generally thought of as a great stock picking investment (mutual fund) firm, bought up over 12% of Fannie Mae stock, also thinking that it was undervalued and the outstanding stock would be backed by the gov't - but they guessed wrong, and apparently they held the stock till it tanked, and that took a massive hit on their mutual fund.  A tough time to be in the investing markets.

Here are competing views on the immediate future of gold from Minionville, a good investment site. I agree with the bullish view, but worry that the other one might be right ;-)  Reading opposing views and worrying that I could be wrong seems to help me make better decisions - I just try not to *really* worry, and have done pretty well, at least on that score, for such a tough year...

deflation view:

http://www.minyanville.com/articles/WMT-TGT-GE-C-djia-gm/index/a/20445

inflation view:

http://www.minyanville.com/articles/gold-Greenspan-spx-inflation-3M-roya...

 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Fannie & Freddie

The Fannie and Freddie thing was very badly managed. The rating agencies mislead the public with "creative" AAAs and the whole thing was confusing - were they gov't backed or not? I read that many foreign bond investors were repaid because of the implied guarantee but shareholders were left to hang.

I skimmed your links and more than before, I wonder if we are continuing with deflation or quickly moving towards hyperinflation. How can these apparent opposites both have such compelling and opposing accounts? 

My suspicion, and it is just a guess, is that deflation will continue as liquidity is sopped up by debt like a dry sponge. Would it be safe to say that gold might have its run through at least the first several months of the year?

I think there will be opportunities for those who are adept at shorting bonds and the market (I don't include myself as being adept or even close to it). The buy and hold is easier - and dividends can be great - but I think you're absolutely right in saying this is not the time for that strategy. 

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Late gold rally, New Year's Eve

DrKrbyLuv,

I skimmed your links and more than before, I wonder if we are
continuing with deflation or quickly moving towards hyperinflation. How
can these apparent opposites both have such compelling and opposing
accounts?

After having read both links, I find myself as confused as you.

 

kelvinator,

So there you have it. Only 366 days until 2010. That's the good news.
When all is said and done, perhaps the best thing that will be said of
2009 is that it only lasted a year.

I did quite enjoy the above comment, although I'm bracing for the ride!  Surprised

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Late gold rally, New Year's Eve
DrKrbyLuv wrote:

I skimmed your links and more than before, I wonder if we are
continuing with deflation or quickly moving towards hyperinflation. How
can these apparent opposites both have such compelling and opposing
accounts?

It certainly is hard to understand how two apparently opposite things (inflation and deflation) could both be "threats" at the same moment! Here's an analogy I like to use to explain this:

Imagine a place like California's Hollywood Hills, where mudslides have famously destroyed homes and taken lives. Everyone there gets nervous every time it rains, fearing that just a little extra moisture in the soil could cause all those multi-million dollar houses built on stilts to come crashing down. The government is very strict about controling outside water use, to make sure human use of water doesn't contribute to the problem.

But then one day, there's a fire (deflation) that threatens the safety of women and children. All caution is thrown to the wind, and officials start ordering fire departments to spray as much water as they possibly can on the fire to save the women and children. If Ben Bernanke was on the fire department, helicopters would be used to drop the water!

Everyone knows that there is a huge danger of causing mudslides (inflation) when you spray even a little bit of water around in the hills. But the prevailing mentality is "Hey, the hell with that - there are children at risk!" (risk of deflationary spiral), so the response is to call upon fire departments from three surrounding counties to send every fire truck they have to pump as much water as they possibly can onto the blaze (increasing money supply by printing money and reducing interest rates to zero). They all know that this is exactly the wrong thing to do in any normal circumstance, but the panic of fire (deflationary spiral) is so extreme that mudslides (inflation risk) seem insignificant.

Will they put out the fire (prevent deflationary collapse)? Seems like they're hell bent on doing whatever it takes, and I think they will succeed at extinguising the flames. Will this result longer-term in some serious mudslides (inflation)? You bet. Guaranteed, no matter what. Will the mudslides be so extreme as to kill more people and cause the loss of more homes than any fire ever could have (hyperinflationary currency collapse and sovereignty risk)? Maybe, but it's too early to tell.

Hope this helps,

Erik

 

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Late gold rally, New Year's Eve
ErikTownsend wrote:
DrKrbyLuv wrote:

I skimmed your links and more than before, I wonder if we are
continuing with deflation or quickly moving towards hyperinflation. How
can these apparent opposites both have such compelling and opposing
accounts?

It certainly is hard to understand how two apparently opposite things (inflation and deflation) could both be "threats" at the same moment! Here's an analogy I like to use to explain this:

Imagine a place like California's Hollywood Hills, where mudslides have famously destroyed homes and taken lives. Everyone there gets nervous every time it rains, fearing that just a little extra moisture in the soil could cause all those multi-million dollar houses built on stilts to come crashing down. The government is very strict about controling outside water use, to make sure human use of water doesn't contribute to the problem.

But then one day, there's a fire (deflation) that threatens the safety of women and children. All caution is thrown to the wind, and officials start ordering fire departments to spray as much water as they possibly can on the fire to save the women and children. If Ben Bernanke was on the fire department, helicopters would be used to drop the water!

Everyone knows that there is a huge danger of causing mudslides (inflation) when you spray even a little bit of water around in the hills. But the prevailing mentality is "Hey, the hell with that - there are children at risk!" (risk of deflationary spiral), so the response is to call upon fire departments from three surrounding counties to send every fire truck they have to pump as much water as they possibly can onto the blaze (increasing money supply by printing money and reducing interest rates to zero). They all know that this is exactly the wrong thing to do in any normal circumstance, but the panic of fire (deflationary spiral) is so extreme that mudslides (inflation risk) seem insignificant.

Will they put out the fire (prevent deflationary collapse)? Seems like they're hell bent on doing whatever it takes, and I think they will succeed at extinguising the flames. Will this result longer-term in some serious mudslides (inflation)? You bet. Guaranteed, no matter what. Will the mudslides be so extreme as to kill more people and cause the loss of more homes than any fire ever could have (hyperinflationary currency collapse and sovereignty risk)? Maybe, but it's too early to tell.

Hope this helps,

Erik

Great analogy, Erik. However, from this I take it that you first expect a period of deflation (how long?) followed inevitably by hyperinflation - is that a correct read of your post?

Also, I've been wondering about the variations in posts on this site. Some seem to be heading for the hills and returning to an agrarian society and jettisoning all financial instruments except some gold (Damnthematrix is an example). Others, like yourself, seem to be more inclined to stay and try to maintain their financial well-being by investing in various paper instruments. (Please correct me if I have misinterpreted your remarks)

If things go to hell in a hand-basket, what confidence level do you have that your paper instruments will have value? E.g., if you have invested in gold but haven't taken actual physical delivery, how do you know it will be there if you try to redeem your paper certificates when the world goes awry? We've already seen how companies once thought to be solid as a rock turned out to be hollow shells and billions were lost by investors! In todays climate, it really makes you wonder - who can you trust?

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Late gold rally, New Year's Eve
SamLinder wrote:

Great analogy, Erik. However, from this I take it that you first expect a period of deflation (how long?) followed inevitably by hyperinflation - is that a correct read of your post?

Almost, but not quite. I expect deflation (clearly present now) to continue and then reverse to inflation. I have no clue how long, and feel that I'm shooting from the hip with respect to my gold position. One minute I feel like there will be more deflationary pressure and I should take some profits on the gold I already hold, then get back in at 700 on the next dip. But if I did that, Murphy's law would kick in and we'd see a huge breakout from here. Other days I feel like I should double my position now before the breakout we may already be seeing really takes off.

I really have no idea, but I think deflation will be here for a while longer. For now I'm holding off on buying any more gold, and investing my resources on the short long bond trade instead.

Quote:

Also, I've been wondering about the variations in posts on this site. Some seem to be heading for the hills and returning to an agrarian society and jettisoning all financial instruments except some gold (Damnthematrix is an example). Others, like yourself, seem to be more inclined to stay and try to maintain their financial well-being by investing in various paper instruments. (Please correct me if I have misinterpreted your remarks)

Actually, I'm on the fence on this subject as well. I think the most likely scenario is that the current crisis will be averted (we'll escape deflationary collapse), and the debt-based economic machine that caused all these problems in the first place will be jump-started back into operation. It's unsustainable in the long term, but as long as it gets rescussitated, paper instruments will be fine. For now.

I've thought about bailing out to physical bullion, but the trading inefficiencies have so far outweighed the safety benefits, at least for the short term. I've definitely organized my affairs to be ready to quickly move to physical bullion if new developments warrant heightened concern about the stability of paper markets.

Quote:

If things go to hell in a hand-basket, what confidence level do you have that your paper instruments will have value? E.g., if you have invested in gold but haven't taken actual physical delivery, how do you know it will be there if you try to redeem your paper certificates when the world goes awry? We've already seen how companies once thought to be solid as a rock turned out to be hollow shells and billions were lost by investors! In todays climate, it really makes you wonder - who can you trust?

If things really go to hell in a handbasket, as you put it, my paper instruments will be worthless. For now I'm pretty confident that we'll get through this round. It's the next one that will take us out, and I plan to get my assets out of paper markets before that happens. I'm definitely taking a risk by assuming that we're no longer at risk of a complete systemic meltdown in the current round, but so far I haven't felt a strong enough threat to warrant heading for the hills with physical gold.

Erik

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Late gold rally, New Year's Eve

Erik,

Thanks for your detailed response. It's nice to know that I'm not the only one in a quandry about what's going on. Maybe this is a case of misery loves company? Anyway, this site has been a veritable bonanza of information although I confess that sometimes I feel like I'm trying to drink out of a fire hose!  Wink

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Late gold rally, New Year's Eve

The term 'deflation' could be misleading. During Bubble II
(2002-2007), official spokespersons constantly assured us that there
was 'no inflation,' because the y-o-y change in CPI and core CPI
remained in low single digits. Well, let's hoist them on their own
petards here. Despite the NY Times screaming 'DEFLATION' in front-page
headlines, the y-o-y change in CPI is still plus 1.1 percent, while the
core CPI is up 2.0 percent year-on-year. And that's after two dramatic
monthly drops in the last reports.

http://www.bls.gov/news.release/cpi.nr0.htm

If
you retort that CPI and core CPI are flawed measures of inflation ...
well, I agree with you. But there the consensus ends, as to what IS a
sound measure of inflation. Gold is one independent reference point ...
and it was UP about 4 percent in 2008.

Whether Bensane Bernanke's
buffoon-ballooning of the monetary base will get traction before the
y-o-y CPI declines below zero is an open question. The Continuous
Commodity Index has been rising since early December. So it's possible
that the bout of liquidation in raw materials has ended. I'd estimate
about a 50 percent chance that the y-o-y CPI goes negative in 2009, but
only about a 10 percent chance for the y-o-y core CPI.

What we
should not accept is inconsistency from the statistical authorities. If
their [flawed] indexes showed 'no inflation' during 2002-2007, then
they are in no position now to yap about 'deflation' when their indices
are still rising. Until those indices go negative, what we're
experiencing is 'disinflation,' not 'deflation.' And disinflation is
not nearly as scary a monster as deflation.

I wish Ben had
understood this. But it's too late. Ben-Baby has already overdosed on
nitrous oxide, and he's giggling his fool head off, spewing champagne
onto his shirt collar, as his bloated balance sheet writhes and hisses
ominously. 'No fear,' he hollers, breaking into fresh peals of laughter
as his hurled champagne flute shatters against the equation-littered
whiteboard.

Oh, my. Houston, we've got a problem. Money mouth

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Late gold rally, New Year's Eve

Wow, here's a little factoid I wasn't aware of. From Bloomberg --

'[Gold] gained
for an eighth straight year [in 2008].'

http://bloomberg.com/apps/news?pid=20601087&sid=axkh_w.LHq0w&refer=home

IN-credible.
Almost like the guaranteed 10 percent per year return from stocks.
Except they cancelled that guarantee last year, without telling anybody.

Oh,
well -- maybe the guaranteed 10 percent per year depreciation of the
dollar is the last, best sure thing. As Bonnie Raitt used to sing
['Angel from Montgomery'] .. 'just give me one thang that I can HOLD
ONTO.'

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Late gold rally, New Year's Eve
machinehead wrote:

Wow, here's a little factoid I wasn't aware of. From Bloomberg --

'[Gold] gained
for an eighth straight year [in 2008].'

http://bloomberg.com/apps/news?pid=20601087&sid=axkh_w.LHq0w&refer=home

IN-credible.
Almost like the guaranteed 10 percent per year return from stocks.
Except they cancelled that guarantee last year, without telling anybody.

Oh,
well -- maybe the guaranteed 10 percent per year depreciation of the
dollar is the last, best sure thing. As Bonnie Raitt used to sing
['Angel from Montgomery'] .. 'just give me one thang that I can HOLD
ONTO.'

You know, with everybody supposedly buying gold - you have to wonder who is selling it and what they think the future holds. After all, what are people using to buy gold - Fiat Currency. If fiat currency is supposedly going to be no good, then why would holders of gold (something which purportedly has value) exchange it for something that purportedly is going to have little or no value (i.e. fiat currency)?

Would some enlightened soul out there please explain this one to me? My head hurts from all his stuff. Yell (ouch!)

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments