May 2009


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From the comments section. I’ll address the points individually during the next few days.

chivasontherocks Says:

Jake,

the main differences between now and the 70’s are as follows;

1- wage inflation, the big driver of the 70’s

2- shortages, now if you have the money you can buy anything.

3- inefficient american manufacturing. part of the 80’s bull market had to do with the restructuring of corporate America.

4-residential r/e was hot between 1976-1981

5- credit availability was not a problem.

6- leverage (debt) a lot greater today.

7- outsourcing of jobs was virtually non-existant

8- tech today helps keep inflation in check ( many reasons )

9- unions were a lot more influencial.

i can go on, believe me.

yes, it’s always good to be prepared, but with 500-700 trillion in debt out there, most of it in derivatives, it will take an act of God, to allow us to inflate the problem away. the good news is, that until real clarity is known, gold will do well. and it will do even better with deflation or extreme inflation.

again, until we resolve that 70% portion of GDP, economic growth and inflation, imo, will remain anemic.

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30-mei-v17

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Difficult to quantify the following, but interesting nonetheless. Sentiment clouds that identify where the crowd [unquantified] are looking. Thus, providing areas for further research.

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First off, a general, macro-economic cloud. We can see the themes that still predominate…gold, banks, financials, dollar.

Then go to stockcharts, and view their ticker cloud, GLD for gold is their largest interest, and has been certainly through last week.

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Again, gold has appreciated by 2.1% over the past week, but more intresting is that over the last 52 weeks, it’s appreciated by 10.3%, which apart from the US dollar, is the only bull market in the chart.

Gold is in a bull market. Where it will end is the question.

goldingots_tbi

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“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

What would be required? Two components.

The first are the banks that are the key in the credit expansion that would be necessary, combined with some parties wanting to borrow. Let’s look at the historical list.

*Commercial Real Estate and Property developers
*Residential Real Estate [the previous bubble]
*LBO’s
*Hedge Funds
*Consumer credit
*Foreign debt
*Business credit
*The Black Swan borrower [currently unknown]

Confidence is the second component required. We had the globilisation trend that drove, or was part of the dual stock market & real estate bubbles that developed since 1982, the end of the previous bear market. This provided the confidence within the creation of credit, that it was supporting wealth creating enterprise, and thus, the interest due would be provided for, and the principal safe.

Commodities will most likely benefit in any credit expansion, simply due to the fact that they [commodities] are the underlying ingredients to all products. Products [in greater or lesser] are still being demanded, thus there is a base that will hold. Most likely, that base has already been seen.

Second, commodities, as primary exchange goods, effect some of the value that is associated with money. When money devalues, commodities appreciate. Thus, even in the absence of a growth in demand, commodities adjust their nominal price, to reflect their real values in terms of exchangability.

Third, commodities need to be produced in of themselves. This production is not instantaneous, it requires lead times. Supply therefore can be constrained in the rapidly fluctuating demand for commodities. When demand falls quickly, there comes a relative oversupply, driving forces that then curtail the supply. This supply cannot simply be switched back on. Thus, if demand picks up from a black swan demander, supply will be severly constrained.

That any black swan demander for credit would be the first in line for said credit, they would profit hugely from the initial advantage of having expanded buying power in a world of reduced buying power [relative] and would stand to make outsize profits.

The smart money would catch this new sector quickly, and as others joined in creating potentially another bubble, would, potentially realize outsize profits. The confidence engendered by this nascent sector, would potentially stimulate the banks into credit creation into other sectors that benefitted from this unseen profitable sector.

Thus confidence and credit gain traction, lifting once again GDP. The problem of course is that the banks are nowhere near in reality sound currently, and cannot sustain the growth in credit that the government would like to see, and would therefore encourage. The likelihood therefore remains of a further deflationary contraction in credit should another bubble eventuate.

That another bubble is being sought by the government seems unequivocal. The difference however seems to be the belief that they can control the next one. That they will let it inflate only enough to lift GDP and most importantly employment, and then through judicious management, they will limit it’s size, presumably to allow the bubble to mature into a self-sustainable sector/industry.

Ignoring for the moment any visionaries who have already spotted the next big thing, or will, if and when it eventuates, the resultant lifting of economic activity will create demand for commodities. Thus, commodities, based on their three characteristics remain the best place to allocate investment funds currently.

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Goldman Sachs is one of the buyers on the commodity side, while, concurrently writing a downgrade.

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The inflationary trade adding a further datum of evidence to the area that will likely see a bull market.

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Today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 192 ounces of gold to buy the median single-family home.

This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 68% from its 2001 peak and remains within the confines of its four-year accelerated downtrend.

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Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.” – Murray N. Rothbard

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Gold gapped open past a resistance point. Thus, technically, looking good for $100 on the ETF. Should the $100 target be reached, we then enter potentially a very interesting psychological area for Gold.

All time nominal highs will be on a lot of traders watch lists, as new 52 week highs in a bull market are quite high probability trades. With the inflation fears starting to be signalled through other asset classes, Gold might go on a bit of a jog.

Should it break down, how fast, how far? Do you take some profits, tighten stops, or just hang on? Gold has always been pretty volatile, will increasingly be so at these approaching levels.

gld

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