Gold and Silver go Bonkers – Time 1980

A guy named AmericanPatriot posted this on Marketwatch:

“Gold and Silver Go Bonkers” TIME

“In one hectic week, the long surge in gold, silver and other precious metals crested into a wild pay-any-price frenzy. While bullion traders from Hong Kong to Zurich to Kansas City gaped in amazement, panicky investors big and small reacted to the worsening turmoil in the Middle East and the increasingly troubled world economy. They sent precious metal bars, coins and trinkets on the most dizzying roller-coaster ride in memory. Prices touched levels that were inconceivable a few months ago. Said a New York commodities expert, George Clarke, in a revealing if overwrought explanation of the market’s extreme volatility and nervousness: “In my opinion what is happening is that the world is looking at World War III.”

On a single day, gold climbed $74.50 per oz., or more than twice its total value as late as 1971. During the week, it climbed an incredible $148, to hit $660 per oz. before slipping back suddenly at week’s end to a still dazzling $603, or an overall gain of 18% in only five days.

The sell-off was spurred partly by rumors that the U.S. was planning a surprise gold auction of as much as 6 million oz. in an effort to break the price runup. Though the Administration denied the rumors, the U.S. could well afford such an auction. The nation’s gold reserves are still far and away the largest on earth, totaling some 276 million oz. At last week’s closing price, the reserves were worth some $165 billion, or more than twice as much as those of second-ranked West Germany. By comparison, the Soviet Union’s official reserves, though never disclosed, are estimated by the U.S. Central Intelligence Agency to be less than 45 million oz.

…full article

Blue chip inflation hedges

the irony

It’s becoming a total crap shoot trading anything that earns its keep by swapping paper. When the only underlying asset of your company is the building you occupy, you are just another upside down commercial real estate bagholder. So forget about trying to use fundmentals because if they worked financials would be non-existent. Technicals are jumbled up because every day the Fed interrupts an otherwise orderly race to the bottom.

It’s time to play it safe and go with the original stores of wealth – gold, wheat, base metals, oil and gas. If it can’t be printed by the Fed, naked shorted in the Cayman Islands or written at the COMEX, it has value and will likely hold value during the oncoming USD derailment.

Is Gold a Commodity?

Marc Faber’s latest comments on Bloomberg that gold was overvalued relative to other commodities got me thinking if gold was really a commodity. When most of us think of commodities we think corn, sugar, oil, base metals and even precious metals. Even clean water and computers are commodities when no premium is being paid for any particular brand. All commodities are a store of value but their value is discounted by cost of storage and shelf life. Gold is the most accepted commodity to store value because of its liquidity and relatively concentrated form. Wheat – probably not so good. One big difference between gold and all other commodities is that it is not consumed. Almost all gold ever mined is available at the right price. The same cannot be said for oil, copper, nor the other precious metals consumed industrially. Since commodities are driven by supply and demand (and a little paper manipulation) and the supply of gold is really quite massive, why isn’t gold undervalued relative to other commodities? When there is a bumper crop in the wheat fields, the price of wheat drops. This, despite perennially bullish fundamentals such as dwindling global supplies, weakening US dollars, and population growth. Can gold then even be considered a commodity?

With a continually increasing supply and almost zero destruction, gold really has more in common with fiat currency than with it’s peers in the commodity pit.  If you don’t like the definition of gold as a currency, then you must be defining US dollars as a commodity (think wheelbarrows full of them and the commodity title isn’t far off). Being rectangular and made of paper are not the exclusive properties of currencies. Throughout history gold, along with sticks of wood and seashells, have all served as exchangeable stores of value. Unlike other commodities, all of these examples shared the quality of being essential purely for commerce and not for life. Gold endures because it is difficult to counterfeit, difficult to extract, more appealing than sticks and beads, and concentrated. It is the currency of currencies.

Of course with gold having limited growth in supply, it’s role as global currency extends into fiat currency markets where it serves as a barometer. One need only look at the price of gold relative to any fiat currency to determine growth in that nations money supply.  Despite gold hitting record highs in many currencies around the world, such as ruble, Canadian dollar, or pound, its performance is too often described in US dollar terms.  With massive monetary expansion greatest in the USA, it is more likely that gold remains undervalued, not overvalued as Marc Faber is now stating.

Yes, gold is barbaric and wars will be fought over it.  But a relic, it is not.  Gold continues to be the longest running currency in existence. Fiat based nations will continue trying to diminish gold’s perceived usefulness the only way that paper wars can be fought – in the paper gold market. Those that understand this game are quietly exchanging fiat currency for gold currency as fast as they can.

Battle of the Gurus

Although Marc Faber and Jim Rogers have pretty good track records, I gotta say Faber’s latest comment that gold is overvalued relative to other commodities is absurd. That’s really like saying the USD is undervalued relative to other commodities and NOBODY is saying that! It’s equally absurd to toss in gold with the rest of the commodities. This is the only commodity NOT consumed.

Faber, the original gloomer, must have screwed up a trade or two recently and now can’t get back into gold. Rogers on the other hand won’t budge on his losing long bond trade, but ultimately he will be proven right.

Faber talks here