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December 07, 2008

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Sanjay

Now, maybe I am a goldbug it's hard to tell. But I strongly believe in gold as money during turbulent times, and I believe there is strong evidence that gold has acted as money during the past turbulent months.

If gold is indeed money, gold should do well not only in hyperinflation but also in deflation. I will argue that gold has indeed done well during this deflationary period.

While it is true that gold has dropped against the dollar, gold has held up well against every other currency except the carry trade currencies, Yen and Swiss Franc. Gold has made new records against the Canadian Dollar and several Asian currencies. You can buy more commodities, Real Estate and Stocks with Gold today than with gold 3 months ago.

It is a mistake only to look at gold against the dollar and draw conclusions about the nature of gold through that. There is a bigger picture.

I will argue that Gold has dropped against the Dollar and Yen due to deleveraging and that it is still a good hedge for they who do not want to sit fully invested in T-bills, especially not the US T-bill which has it's problems of it own. While it is also a good hedge incase of hyperinflation.

Alan Brochstien

Thanks for your comment, Sanjay. I agree that in other currencies, gold is even more expensive than relative to the dollar. We aren't in a deflationary period - yet. Nothing holds its value in deflation.

Sanjay

You may also ask your self, if gold isn't money, why do central banks hold it at all? I would how ever, unlike others not buy in to the hysteria and conspiracy theories. To me, who sits in the Swedish Krona, gold has been and I believe will continue to be a good diversification in deflation and a good hedge incase of inflation.

Jeffrey Nichols

Monetary Reflation Today, Price Inflation Tomorrow

(Excerpted from speech to China Gold Summit, December 4, 2008, Shanghai -- by Jeffrey Nichols, managing director of American Precious Metals Advisors and NicholsOnGold.com)

I remain bullish on gold because — even as the global economic recession deepens — governments will find the only way out of this mess is to print more money. In other words, to inflate.

The United States Treasury and the Federal Reserve have already thrown a few trillion dollars, more or less, into the banking system and are now also lending directly to businesses and households. And, there’s surely much more to come when the next Administration moves into Washington.

It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy – including the United Kingdom and the Euro zone, China, Russia, Japan and on and on – are doing likewise.

We have never in the history of money seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value – in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable devaluation of money and the corresponding rise in price inflation that will propel gold skyward in the next few years.

As sure as day follows night, reflationary monetary policies — however necessary — have long-term implications for global inflation. Typically, monetary creation affects price inflation with a lag of six months to a couple of years – and in the current environment, the lag could be still longer . . . so it may be some time before inflation is recognized as a serious problem. But gold prices have shorter lags and could begin moving up before rising inflation becomes apparent or worrisome.

Longer term, gold-price prospects remain as bright as ever — and I firmly believe we will see record high prices in the next few years with gold back over $1000 an ounce in the coming year.

With the right confluence of economic and geopolitical developments we should see gold break through $1500, then $2000, and possibly still higher round numbers in the next few years – particularly if we get the type of buying frenzy or mania that often occurs late in the price cycles of financial and commodity markets.

This is hardly an audacious forecast when looked at relative to the upward march in consumer prices over the past 28 years. After all, the previous high of $875 an ounce in January 1980, when adjusted for inflation since then, is today equivalent to more than $2200.

Let me end with a warning about the days and weeks ahead. In the short term, gold remains volatile and vulnerable, if only because market psychology is nervous, anxious, and fearful. In this environment, we could still get a quick sell-off that would bring us back to the recent lows. But, day by day, I think that becomes less likely and, day by day, I think the base is building for a lasting longer-term recovery.

K T Cat

Thanks for posting this. I have never liked gold, but have been doubting myself lately as I grow concerned about the massive debt we are building up. I've never liked investing in rocks and have preferred to invest in human ingenuity and labor instead.

Having said that, how much risk really is there that nations might start selling their gold? Wouldn't that be seen as an act of desperation and cause a run on the currency? The other thing I wonder about with your scenario is the sheer scale of the problem. Obama is pledging nearly a trillion dollars of government spending. Selling gold to pay for that is a one shot deal. Once you do that, the gold is gone and you will have to finance the follow-on deficits, which will be enormous) the old-fashioned way.

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