Inflation, deflation, gold and currencies

[RDRUNR]

I have an interesting chart too. It's called Gold Bubble.

Wow, look at that, actual history showing gold going up 300% then crashing 300% downwards taking... 31 YEARS TO RECOVER! What an investment.

[richard5za]

31 YEARS TO RECOVER! What an investment.

I don't think that the debate is about gold being in a bubble, or that it won't crash at some stage in the future, or that it isn't a sound long term investment.

The point about gold is that it has made some people a lot of money since 2000, those sharp enough to spot the opportunity, and the question is how long will the bubble last before the crash? And what sort of opportunity lies ahead for speculators such as myself?

The graph I posted is intersesting in terms of the very high correlation between price and USA debt. With USA debt spiralling out of control, along with many other nations, one might anticipate a gold bubble to continue for at least a while. To be human is not to know the future so I may be wrong of course. Lets see what the future brings.

Secondly, at present there really aren't any attractive and sound long term investments: Stock markets are priced much too high; and expect future PE ratios below 10 and perhaps below 6; real estate is still over priced globally and only becomes interesting if inflation lifts its head, and interest rates are low for cash investments. The conservative long term investors need to be in cash at present - in my opinion. That way they are not going to lose money which is rule No 1 in investing. For the speculator I believe there remains upward potential in gold and silver bullion for a while.

In 2007 I liquidated stocks and got into cash except 5% which was in gold and gold miners. That 5% has grown to 10% so my exposure remains quite small. Recently I reduced gold miners and put some money into silver bullion. I wouldn't suggested a high gold exposure unless you are a high risk person.
Regards
Richard

[vincecate]

I have an interesting chart too. It's called Gold Bubble.

Wow, look at that, actual history showing gold going up 300% then crashing 300% downwards taking... 31 YEARS TO RECOVER! What an investment.

From $35 in 1971 to $850 in 1980 is 2,429%.

The way to think of it is that 1 oz of gold bought a nice suit and shoes back in roman times and through most of history. If you had 1% interest for 2000 years you would be 400 million times better off. So on average gold is a great store of value, but not a great investment. But when people are worried about paper money failing, a good store of value is the best you can hope for. When interest rates are moving up what people will pay for bonds, real estate, or stocks goes down. In the late 1970s interest rates were up and people were worried about paper money. I think they will be again soon.

I note that a graph saying gold was a bad investment in 2005 has been wrong. Gold is up by about a factor of 3 since then.

If we get another Volker who takes interest rates to 5% over the real inflation rate, then you should get out of gold. As long as central bank interest rates are below the real inflation rate, and they are monetizing huge amounts of debt, I expect the danger of paper money failing to increase, and the price of gold to increase.

[vincecate]

Interesting graph

Yes, that is a nice one. So if the limit on the debt goes up 15% we should expect gold to go up 15%. This would get to $1,863.

If hyperinflation hits, as I expect sometime in the next couple years, then gold prices will seem crazy in US dollars.

[richard5za]

If hyperinflation hits, as I expect sometime in the next couple years, then gold prices will seem crazy in US dollars

Dear Vince,
This is my fear: That hyperinflation will hit, and in the process we will all invest in inflation proof assets, and then with incredible speed the globe will implode deflationery. Its really and trully possible.
Richard

[vincecate]

If hyperinflation hits, as I expect sometime in the next couple years, then gold prices will seem crazy in US dollars

Dear Vince,
This is my fear: That hyperinflation will hit, and in the process we will all invest in inflation proof assets, and then with incredible speed the globe will implode deflationery. Its really and trully possible.
Richard

There is often deflation before hyperinflation but I don't think there has been deflation after hyperinflation started. Once many people who have bonds coming due just take their cash and buys real goods, and do not roll over to new bonds, then there is a steady and huge flood of new dollars coming into circulation. Also, the government ends up using new money for most of its spending. The more inflation, the fewer people roll over bonds, the more messed up the economy, the lower the real taxes the government gets, and the more they have to print. You get a series of feedback loops that make it very hard to stop hyperinflation once it starts.

Do you think there has ever been a case where after hyperinflation had started there was deflation?

http://pair.offshore.ai/38yearcycle/#hy ... onfeedback

[RDRUNR]

It is amazing that Americans haven't learned anything from your on-going Realestate bubble down there. You are so eagar and willing to buy a product at the VERY TOP of it's price and think it's going to keep going up.

Let's take a look at the win:

WIN - Gold goes to $10000000 oz and the US Dollar is dead. Gold holders win right?

WIN - The USA dies as a country thus gold holders win right?

WIN - USA hyperinflates out of debt. Gold holders win right?

Amazingly enough, gold bugs only win when USA loses. Nice.


PS. Here is a nice warming thought for those holding gold coins/bars... Have you told others you have gold in your home? do you trust your neighbours? If the SHTF for real, don't assume for 1 minute a horde of straving, poor, nothing to lose people won't be coming for your gold.

You know the world is watching you buy gold and laughing right?

[shoshin]

I'm leery of gold, but this makes me wonder...South Korea is buying???

http://in.reuters.com/article/2011/08/0 ... 7120110802

[richard5za]

Do you think there has ever been a case where after hyperinflation had started there was deflation?

Firstly, no, I don't not know of a case of deflation after hyperinflation started.

This is my thinking however:

Current levels of USA debt require much higher levels of GDP growth than is feasible in order to become manageable. Unspoken, I guess that the Fed's strategy is to increase inflation to above 8% but below dangerous levels in order to massively devalue the dollar over a decade, simply to get the debt starightened out to manageable levels.
OK so its not hyperinflation but will chase all of us investors into inflation hedges
In current circumstances there is a lot of potential for deflation; toxic assets haven't been dealt with; etc. and other countries are going to react to US dollar devaluation by doing likewise. So in these circumstances deflation remains a danger.
If hyperinflation takes hold, and you may well be right since its genuinely possible, then I suspect that deflation is not possible afterwards.
Hyperinflation is probably preferable since the USA may well hold a democracy together; serious social hardship, in fact starvation from a deflationery implosion will probably change the political order

[vincecate]

PS. Here is a nice warming thought for those holding gold coins/bars... Have you told others you have gold in your home? do you trust your neighbours? If the SHTF for real, don't assume for 1 minute a horde of straving, poor, nothing to lose people won't be coming for your gold.

Rit-Dilb.gif (38.8 KiB) Viewed 4356 times

Hyperinflation has happened like 100 times before. The US has had hyperinflation twice (Revolutionary War and Civil War). Society does not break down. There are a few more crimes than normal, but nothing like what most people who do not have gold seem to expect.

Another thing. Most of the people smart enough to figure out that the currency is going to fail and they need food and gold/silver also figured out they need weapons. Many even have bullet proof vests etc. Not all the gold guys will make it through the coming mess, but their chances are better than the starving people in the mob.

My guess is that a 17% increase in the US debt limit will result in a 37% increase in the price of gold. See my math at:

http://howfiatdies.blogspot.com/2011/08 ... -debt.html