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Search for Yield and GoldChris Laird Gold is money, nothing more or less I have had a time trying to tell readers not to expect gold to be an investment. I have written about this for several years now. That is hard to do in a raging commodities bull market. If you can understand what gold is for, you will be far more comfortable buying either it or gold stocks. If you expect it to be something that generates 'returns' then you are barking up the wrong tree, and will be disappointed when speculators change to other sectors for their hot money...as is happening at this time. Gold is not supposed to provide interest returns, speculation returns or whatever 'returns'. The recent gold bull, which has many good reasons to exist, made people think gold and gold stocks (also silver, but I talk about gold as the precious metals complex) as some kind of manufacturer of 'returns' of speculative capital appreciation and so on. Gold (precious metals) is not about returns on 'investment' or anything like that. The fact that the gold price has doubled in the last 5 or so years is because gold is money, and not easy to 'make'. There has been so much fiat inflation in the last 5 years, that there were suspicions that the USD was on the verge of collapse. The last time there was true fear the USD was about to fall apart was in the late months of 2004, when the USD threatened to go below 80 in the USDX. At that time, Warren Buffet and Bill Gates were making moves to change tens of billions of their dollars into Euros or whatever currency, and even talking to the press that the USD was done for. These guys are definitely not stupid to say the least. It is one thing for Chris Laird to tell you all the USD is toast ultimately, and quite another for one of the richest men in the world to say so - and move something like $20 billion into foreign currencies to boot - in late 2004 - Buffet. However. We do have a short term gold bear. There are reasons for this, actually good ones, conspiracies aside, (which I believe in- to suppress gold). Ok so what is this paper about? It is about the fact that people are looking to move money into bonds- good sovereign bonds, and are for the time being getting out of the commodities and energy complex. That includes gold for the short time being. I saw a paper out about the fact that investors are seeking interest on good bonds versus looking for capital gains in commodity and energy stocks and or bullion or paper gold. That kind of struck me. It fits many things that are happening both macro economically and also in the commodity and gold markets. We all know the yield curve is very inverted. When there is a recession coming, investors like bonds and the curve inverts. But, there is a catch. Even though there is flight to bonds and cash, if there is a really serious recession or depression, particularly with the indebtedness the US and Japan have now, ultimately, the USD and probably the Yen are going to collapse together. Those bonds are going to be defaulted on or inflated into oblivion. Savers will be wiped out, and gold is really the only answer to that kind of situation, or another currency if there is still one standing. Make no bones about it, the whole world is in an unprecedented currency and debt inflation. The reasons are manifold, I have written, and others have written about the reasons. Too much damn money being printed in excess of actual world GDP growth. Way too much speculation in markets and even commodity markets, in real estate. Too much government debt, too much deflation on the horizon and hence more panicky inflation to come to fight it which will fail to solve the problem. Look at Japan. There are many places all the liquidity that Japan tried to fight off their deflation in the '90s found. Then the US tried to fight off its imminent deflation after the Tech crash and 911 with ridiculous 1% interest rates. The world tried then to fight off their respective deflations with unprecedented money growth in the west of 8% or more per year across the board. So they inflated everything. We are going to have deflation in the world, and panicky bond issuance to stop it, deficit spending you won't believe, and ultimately a USD collapse. But it will be preceded by actual debt deflation and bond defaults. Just a gigantic economic mess which will ultimately destroy the USD and Yen. Why is the USD strengthening now? That is not because the US economy just had improved employment numbers, all courtesies to economists aside. The reason the USD is strengthening is also not completely because of the latest Korea nonsense. Recently, war news has barely budged gold. The reason the USD is strengthening is because gigantic entities such as macro funds and insurance companies are buying all the 'quality' sovereign bonds they can get their hands on. The ones that actually pay some interest. That means the USD denominated ones. The USD now pays a 3 % interest premium over the Yen and 1 to 2% over the Euro denominated bonds. We will get to gold's reaction to all this in a moment - and the ultimate fate of the USD and Yen, and gold's ultimate rise to incredible heights. But in the meantime, gold bugs are stuck with a situation where there is flight out of the commodities and energy complex and into what are called 'quality' sovereign debts issues. But then again, that gives gold bugs the chance to buy gold and gold assets at prices that are very low compared to the inflationary 70's. There is a lot to all this and I know that I am kind of rambling, but bear with me. A couple of weeks ago, before the dollar rallied about 2 points in the USDX to about 87 or so, I stated that I suspected the USD would strengthen into 2007. My primary reason was financial flight to safety, not political flight to safety. It looks as if that observation is proving to be true. Of course, there were a plethora of gold bugs who were writing that a slowing US economy would result in a falling USD and rising GOLD price into Jan 2007, not the least of which was GFMS, which for its own reasons, expected gold to go to over 700 bucks by Dec 06. Not only GFMS but lots of premier gold analysts were saying gold is going to 700 by Dec 06. So why is this? Simply, it is because there is speculator flight out of the commodity complex and energy, and into things like stocks (stupid) and bonds (not as stupid). The place to be right now in my view is cash and gold or silver bullion (not necessarily gold stocks as much but that is fine if you can take a drop to 500 or below and sit on them for later - I know that most people are not as patient to sit and watch gold stocks drop 30% and sit tight). Now, Cash is good and so are good quality bonds. The problem with bonds is that they can be defaulted. The problem with cash is that it tends to be devalued over time. The problem with gold bullion is none of the above. It's just bulky and non electronic. People love convenience, particularly if you figure to go and buy some gold or silver bullion in hand, you have to find a place to get it, hide or safety it someplace, and be paranoid about robbers. OR you can put that stuff into safe deposit boxes and have the government possibly confiscate it at the bank. You can't have it both ways. If you don't like any of the above, get electronic accounts. I don't like them, I have to use some but I sure don't save using them, I was an Oracle systems engineer and I know full well how fast electronic accounts can be frozen or screwed up and locked - I was paid to fix those situations. Problem with bonds Lets broad brush this. Even though bonds are king now, ultimately they are not safe. Reason? We have a deflation coming allover the west and even in China. The respective governments are going to try and fight that with trillions of new paper money. The problem with that is that bond defaults will follow that. Then we have the currency crises world wide, probably starting with the USD, then the Yen, as the USD and Yen are sister currencies for reasons I won't go into- and ultimately even China might have a RMB/Yuan collapse. And of course the Euro too - in spite of the EU economic semi resurgence, they are going the way of the USD and Yen too ultimately (5 to 20 years)- for all the reasons gold bulls have talked about. Friends Don't forget what I am going to say right here: 20 years passes very quickly. Gold bulls have to have long time horizons If there is fight into cash and quality (for now) bonds, gold is going to stay cheap (for now). As many of my readers know, I started a series of gold short term bearish articles a couple of months ago. Fortunately, my subscriptions have held up or even gone up. Perhaps that is fair since I stuck my neck out and made unpopular predictions about where gold was going. I got emails from people saying they appreciated that exact thing. Nevertheless, I am writing this piece to tell people that gold is definitely not dead. But if you are looking for speculation gains from gold (remember that means precious metals in general to me) you are barking up the wrong tree. If you are looking for 'investment' returns from gold, you are barking up the wrong tree. Gold Is Money! Gold is cold hard cash. Nothing more, nothing less. If you want investment returns, go put money into bonds or a bank account. Gold will not provide interest, nor will it always go up, as in a misconceived notion of capital gains. Gold is not about capital gains either. Gold is inflation protected savings, with no interest return. Pure and simple. The problem the gold community has right now is that they have promoted gold and gold stocks as investments, when intrinsically gold (precious metals) is not an investment- it is money and savings. Even a gold stock is an agent for gold as money (inflation protected) and should not be regarded as 'investment'. The gold community has good reasons to promote gold in these times. With the world inflating currency at 8 or more percent a year, when the actual GDP growth in the west is really about 2- 3% - that means that your cash is being devalued quite a bit every year. Gold is cheap I did a study of gold from 1983. I picked 1983 because that is when Volker got US inflation under control with super high interest rates in the high teens. Gold then stabilized in the $500 range. Right now, gold is about $570. If you divide that USD price by about 3, (that is my inflation adjustment since 1983) that comes to $190. So, even though gold hit 870 back then, it is really only $190 right now in 1983 USD. Analogously, gold is NOT anywhere near the 1980's highs of $870. All this does is show us how cheap gold is, how strong actually the Fiat world is - for the moment. Achilles heel of fiat in the west today For now, people are preferring bonds and cash (money markets) to gold and commodities and energy. The commodities and energy thingy was last year's deal (hot sector). The hot sector today is cash and bonds, and the press will figure that one out. When the stock markets crash either this or next year cash and bonds will be king. Commodities are not dead, gold is most definitely not dead either. But the hot money is going to find its way into all the best money funds on the planet, and into every bond of any quality you can imagine, and interest rates ultimately world wide are going to drop. -Which is perfectly fine with the governments, because they are going to be running gigantic fiscal deficits soon after the next world recession starts and borrowing like mad. They are going to be offering lots of bonds to the bond hungry world, now, are going to triple their national bond debts, and have currency collapses in 20 years at the outside - by this analyst's view. The Achilles hell of the western fiat currencies will be bond defaults and resultant currency collapses. That happens once their economies cannot keep up the yields investors want, or default outright in phases. The Achilles heel is the final collapse of yield prospects for US bonds, and hyperinflation and monetization of the USD bond universe. That will also drag down the Yen for similar reasons. Ultimately the Euro too. At that time, gold bullion holders may survive the economic panics. This scenario is well over a year out. Of course, there is always the possibility of a USD collapse before, if the UST bond holders bail out for any reason. But the search for yield, the flight out of speculation in markets of all types, and the flight out of commodities and energy ultimately because of recession, is going to make cash and bonds king for the next couple of years. Gold bugs should be ok with that Gold bugs will get the opportunity go buy more physical bullion for very cheap prices. That is the good thing. The bad thing some will reply to me is that gold stocks could drop quite a bit as speculators get out of commodities in general. U know, I bought gold bullion at 635, and 604 even as I was writing that gold was going below 600. Reason? One day you will want to buy some gold bullion but there won't be any for sale. It will be off market. I buy gold bullion automatically. I don't care about these prices. That kind of thing is for people who will never have any actual bullion should there be the USD crisis we all expect. There will be a USD crisis. Look at the gold complex as a defense against that, but, don't look for gold to make more actual money! That is for speculators and that mentality is totally INIMICAL to what gold is really about. I say again, buying the gold complex for investing purposes is not what gold is about, that only works when speculators are hot on either commodities or are totally focused on inflation, which is disappearing as we speak,- gold bug writers aside. The USD is going to strengthen into 2007. Commodities are going to lose speculative froth. Gold is going lower. Buy it when you get the chance, because after this coming deflation, there is going to be hyperinflation, and you won't be able to get any bullion for any price, it will be off market. For the time being, cash and bonds are also OK if you MUST have interest or investment returns. Stocks are not good now, but they might rally a bit more, but I certainly would not count on that. Chris Laird The Prudent Squirrel Newsletter is a big picture gold and economic commentary. Stop by and have a look. 321gold Inc |
