Home Forums Hunting & Shooting Hunter's Campfire Interesting piece on gold

I was wrong: Gold�s going to crash
By Cody Willard

The government�s been bailing out entire industries left and right. The Fed�s got their Fed Fund rates at 0%, giving banks the ability to borrow taxpayer money at no cost in this country. The Fed�s guaranteed trillions in worthless debt at the world�s biggest investment banks. You�d think the money supply in this country would be exploding right now. Certainly, that�s what I�d been expecting to see as the overpowering macroeconomic trend in this country for the next two to five years.

Alas the money supply, especially if you reconstruct the M3 money supply which the government used to publish as the most complete measure of how much liquid money is sloshing around this country, is collapsing. It stood to reason that if the Fed and Treasury are willing to print worthless dollars to send to the corrupt and insolvent banks, that a bunch of those worthless dollars would gush their way into the economy and increase the money supply. That increased money supply would devalue the existing money supply. That devaluation of the dollar would then likely translate into a bull market for gold.

But something happened on the way from the pump. See, all those same insolvent banks don�t just have all those trillions of worthless debt that they�ve stupidly risked their depositors� savings on. No, those same banks decided to take their customer�s monies and risk them in secondary, derivative markets that were initially created to �insure� all those trillions in worthless loans the stupid banks made. Like a poker player on a losing streak, they started betting ten times as much on the derivative markets as they had in the actual lending markets. You know who they thought would pay them and make those insurance payments if those bets were to work out? Mostly AIG. And other insolvent banks.

They did this ten times over, dwarfing their initial bets that they�d already made ten times over on their depositors� money, eventually gambling on tens of trillions of dollars on insurance on that worthless debt.

And now that the cows have come home and real estate et al is collapsing in this country, these same insolvent banks have to make their balance sheets look better even as they have tens of trillions of dollars of losses that they�re pretending don�t exist. That�s because even after the government has made these corrupt banks whole on about $200 billion of worthless insurance they bought from AIG, $200 billion is a small fraction of what the banks have actually pretended they�ve got on their balance sheets and that they�ve now got to �mark to market� slowly but surely.

And as those trillions of dollars of losses are brought back onto their balance sheets and recognized for the reality they are, the banks find themselves ever more insolvent. And so they have to hoard every dollar they can get their hands on to try to build up their reserves. And that means that despite all that taxpayer money being given hand over fist to these insolvent banks that the money supply keeps shrinking. In the US economy, debt creation equaled money creation which meant the money supply was increasing. Debt is being destroyed now and that means money is being destroyed. And that means money supply is decreasing.

And this trend isn�t about to reverse itself magically. The money will keep being sopped up by these insolvent banks� balance sheets until they are forced to recapitalize entirely � washing their shareholders who foolishly bet on bad management (and often dishonest, fraudulent management such as at Bank of America and Goldman Sachs where the executives in charge always deny their need for capital even when they are desperate for capital), hurting the people who risked their money lending the company money (bondholders, that is) and ensuring that every depositor is made whole.

The preceding sentence is what the government is supposed to do now since Timothy Geithner, Mary Shapiro, Sheila Bair and the rest of the bureaucrats at the SEC and the FED and the FDIC completely failed at their jobs of protecting depositors� money and policing for ponzi schemes and making sure the banks didn�t lever themselves up recklessly.

Until the FDIC, the FED and the SEC start doing their job and while they continue to redistribute trillions of working people�s money to the shareholders and counterparties of these corrupt, insolvent banks, we�re going to see wealth in this country destroyed and the money supply decline.

And that�s why gold ain�t going higher any longer. Gold can be a great hedge when the money supply is exploding. I�m still convinced that we�ll see inflation in many commodities that we �need�, such as food and milk. But betting on gold to go higher in a situation where dollars are actually being eaten out of the system isn�t the bet I want to make. Indeed, because of this new analysis, I expect we�ll see gold below $500 an ounce sometime in the next year or two.

Best bet for the next two to five years � higher interest rates. Regardless of where the FED keeps its FED Funds Rate (they can keep it at 0% forever if they want) the cost of capital in this country and around the world is going higher. The money supply is dropping and people are going to want more interest on the money they lend the US government, the private sector and anybody else. I�m open to ideas on what the best strategy for betting on higher market rates over the next two to five years is. Anybody out there think they got the best play on higher rates?

Gold is not the first "heavy metal" on my list of priorities to stock up on...

TC

I was interested to see some of our resident economics experts, kinda get a feel for what they thought. The guy that wrote this used to run a hedge fund. Guessing he has some experience in this stuff but 2nd opinions never suck.

One would never wish for that article to ring true. In spite of good and sometimees heated debate here on the economy and which investments are most wise, I'd never wish for anything like that to happen with the precious metals, especially to the stand-up guys here who are heavily invested.

Whatever any of us are invested in, we're riding out a very confusing storm. It's why I've been silent on the topic for a couple of months.

I wish everyone well,financially, and I leave it at that!

I don't wish for it to be true either but to my very limited knowledge of econ, it makes some sense.

I'm more concerned with the guy's real estate comments. I'm grateful the market is relatively strong here, but Beck was all over a real estate bust working it's way into the nation's fabric, once again.


Listening and reading all the back and forth, I think if I had 3 million...I'd just stick it in a bank at 4% and live off the interest. It's the only true safe investment I can think of now!

Yeah - all those toxic assets are still out there - we just call them different things and believe that if they go bad - we can cover it with this "free" money.

Don't put all yer eggs in one basket!! Diversity is as important now as ever. 163bc

GOLD! GOLD! GOLD! Just the word generates a spike of excitement. Gold has always had worth more or less depending on the times. The gold I have was never intended to be a money maker. It has always been a source of sure wealth NO MATTER WHAT HAPPENS. Gold in small units, gems, ammunition, long shelf life food products are some of the things a prudent citizen should have for themselves or their offspring.

Exactly.

I've believed for a long time that gold is a lousy investment because it has no value other than what you can sell it for. It returns no interest or dividends. It just sits there doing nothing.
That isn't saying I want it to crash, but historically it has after a run and I think it will again.

Gold should not be thought of as an investment. Can you speculate and win? Yes, but it's main value is as a preserver of wealth against inevitable fiat money inflation. With one ounce of gold you can today buy pretty much the same quantity in real valuable goods as you could twenty years ago, two hundred years ago, and two thousand years ago.

Really? Where? Or, do you mean after you cash it in?

I guess that would depend on with whom you're dealing. Most regular merchants, I assume, would require that you cash it in first. Is that a problem?

No, it' not a problem so long as folks understand if you cash in a 20 dollar gold piece, you get a 20 dollar bill.

Not a problem for the gold dealer. They love it if a gold bug buys gold then later cashes it in for currency. They make the spread between the bid and ask twice for each cycle. I have seen the spread anywhere between 8% to 15%. That is a spanking.

Yeah, I agree with issac in that I kind of shied away from discussing the economy when some of my worst fears were confirmed. It is one thing to discuss, in the abstract, economics. But it can be in poor taste when you don't know if someone reading it has just seen his life's work ruined by this mess. But I'll post on this one hoping that no one thinks it morbid that we are talking about our own ship going down.

As far as the deflation/inflation debate goes I have followed that one closely for maybe two years now. I was always up in the air on the subject until the last month or two.

Now we kind of know where the pressures are going to come from.

Not all banks are hoarding cash. There are several investment banks that showed their hands. They are flush with stimulus money and have their trigger on oil. If given the slightest indication that demand will hold they will pull the trigger. Likewise you see people running out of treasuries every single time there is positive economic news. If someone else starts recovering before we do the price of oil and credit looks to go up substantially. I still think it is too early but what do I know?

On the deflation side, the government is still spraying the housing market with a flamethrower with no signs yet of any stabilization. You will see a numerical anomaly occur this year where the median house price rises as the upper levels of housing get crushed and hence more of them sell. It sounds weird but it will happen. For the last couple years the lower levels of housing sold inordinate amounts and drove the average price of a home sold lower statistically. And don't even get me started on the auto industry.

So what does that mean? Inflation on the things you need, deflation on the things you don't.

But we are maybe in the 4th or 5th inning. The Fed and Treasury are hoping for a rainout. In the end it all comes down to one question: Will the rest of the world finance our deficit spending or not?

What happens to this country in the next year or two is drastically different depending on the answer to that question. You get either what looks like a recovery (but in essence is nothing of the kind as you auger deeper and deeper into debt) or you actually get that depression we all dread. No good way out of this one.

Will

That's exaggerated in my experience, but it certainly would not be wise to buy gold on Monday and sell it on Friday. We're not discussing day trading, but long term preservation of value vs holding cash.

Tell that to my friends who bought heavy in the 80's. Their $500 ounces only bought $300 worth of goods.

Gold prices fluctuate, and the time you bought and sold could amount to the perfect storm resulting in a loss, but on average, assuming you intend to hold for a long while, it's buying power per ounce has been very stable over time.