Gold continues up...

[A9suited]

This is a continuation of the gold-themed posts I've intermittently put up over the past 8 months.

Gold, and indeed most metals, continue higher. Platinum has exceeded $800, and even silver is moving higher.

IMO there are 2 reasons for this: The continuing loss of purchasing power of the US dollar, and the increasing fear of inflation, as inflationary seeds (unnecessarily low interest rates, and federal, state, and personal deficit spending) are being sown.

Greenspan strickes me as the emperor who has no clothes with his fretting about deflation. With oil prices comfortably above $30/bbl, metals in a frenzy, and housing on a tear, he should be tightening now.

The argument against this is of course that the economy is still weak. My argument is that while there is no question that the economy would be hurt by interest increases now, there is no way to borrow ourselves into prosperity. We just came through the dislocations of a severe bubble, and it will take some economic pain to repair the damage caused by the misallocations of the bubble. Greenspan is simply delaying the pain, as the low interest rates lead to increased home prices and owners equity, which is then tapped to allow a continuation of our living beyond our means.

The low interest rates have a cost as well...seniors who rely on earnings from savings have been crushed. (Even those diversified into stocks show minimal gains over the last several years), and the US dollar has been crushed.

The sad part of this is that the poor are getting poorer despite the low rates...those who do not own homes see the prices rise, and 0% auto financing is only available to those who can pay over 3 years or so...

Back to gold...The strength of gold through the last week has been impressive, what with the capture of Saddam, Dow through 10,000, and decent economic data. Given this strength the rally in gold prices should continue. Silver, too, has joined in...if silver regains its allure as an inflation hedge then it could ultimately have a stronger rally then gold, as it has been in production deficit over the past few years.

For those who disagree with this analysis, I ask several questions:
-Why are personal bankruptcy rates so high despite low interest rates?
-Where is the job creation?
-Why are retail sales at the low end of estimates, or even worse, despite tax cuts and record levels of home refinancing and liquidation of home equity?
-Help me understand the soaring price of metals and oil.
-Explain the drop in the dollar.

Any opinion if appreciated. Like the rest of you I am trying to scratch out a living!

A9s

[adios]

[ QUOTE ]
For those who disagree with this analysis, I ask several questions:
-Why are personal bankruptcy rates so high despite low interest rates?
-Where is the job creation?
-Why are retail sales at the low end of estimates, or even worse, despite tax cuts and record levels of home refinancing and liquidation of home equity?
-Help me understand the soaring price of metals and oil.
-Explain the drop in the dollar

[/ QUOTE ]

Seems like you're offering a challenge. Not sure I disagree but I would say that gold isn't the only commodity that's gone up a lot this year. My own view of gold mining stocks is that their valuations are quite high and that a lot of the good news about gold prices are already "baked in the cake." If you're advocating investments in gold mining stocks be sure to tell us when to sell, seriously. Before I answer I'll say that my portfolio is basically bets on higher commodity prices and bets on certain companies benifitting from the "carry trade" (borrow short and lend long).

Anyway to answer your questions:

"-Why are personal bankruptcy rates so high despite low interest rates?"

Don't really know the stats but typically what I've seen from many is that they quote absolute data instead of normalized data so a source to your claim would be much appreciated before I would comment. I mean if bankruptcies in absolute terms are way up and in normalized terms are not it's not that important unless we're evaluationg a trend. I submit that the data in absolute terms means very little and is usually presented as a means to win an arguement.

"-Where is the job creation?"

Government employment surveys have shown job growth over the last 6 months especially when using the Household survey.

"-Why are retail sales at the low end of estimates, or even worse, despite tax cuts and record levels of home refinancing and liquidation of home equity?"

Again where's your data on retail sales. I believe durable goods orders have been beating expectations. Anecdotal evidence to be sure but at least some home equity money finds it's way back into reinvestment in upgrades to the property. Of course people have financed their high debt at lower prices. Again cite the data that proves your point then we can discuss it rationally.

"-Help me understand the soaring price of metals and oil."

Why don't we change it to commodoties as many basic commodities including food are up. Falling dollar and increase in demand.

"Explain the drop in the dollar"

Low short term interest rates. Big current accounts deficit exascerbated by a bigger than expected budget deficit as foreign investors buy more US debt in the form of Treauries.

I'm not disagreeing with your premise regarding why gold is on the rise, what I question is why are gold mining stocks or gold itself a bargain given that other commodities (like oil and natural gas that you mention) are going up in price for the same reasons more or less. My thinking is to buy at the best prices and if so why does gold offer the best risk/reward tradeoff as opposed to oil and natural gas?

[adios]

Copper is the commodity du jour making new highs. Phelps Dodge has done well this year.

Phelps Dodge, Copper Miner Stock Price Chart (http://finance.yahoo.com/q/bc?s=PD&t=2y)

Copper Rises to Six-Year High
On Supply Concerns, U.S. Data

By GAVIN MAGUIRE
OsterDowJones Commodity News


NEW YORK -- Copper prices on the Comex division of the New York Mercantile Exchange climbed above the $1-a-pound mark to their highest levels since mid-1997 Tuesday on speculative and bank buying spurred by supply concerns and another round of robust U.S. economic data.

Comex March copper futures settled at 100.40 cents a pound, up 0.95 cent.

While voracious Chinese demand and an improving outlook for global industrial demand have been the main drivers of speculative buying over the past few months, news of a strike threat at Canada's Highland Valley mine combined with reports of an explosion at a copper mine in Poland proved to be Tuesday's catalysts. Both of these events could limit supply and were deemed bullish.

Encouraging economic data on U.S. industrial production, housing starts and consumer prices released Tuesday morning also lent a supportive hand by offering further proof that the U.S. economy is staging a rebound without suffering much from the threat of inflation.

This sustained the speculative buying throughout the day while keeping any aggressive sellers at bay. Further gains are possible, with initial upside targets for March futures including $1.02, $1.05 and $1.07 per pound, trade sources said.


However, while additional gains seem to be on the agenda over the medium term, a slight retreat on profit-taking hasn't been ruled out over the immediate term. Analysts note pressure is mounting before the calendar year end for net-long speculators to book profits on purchases made at much lower prices. A long position is a bet prices will rise.

"Certainly we expected prices to come off a little recently because we looked a little overextended to the upside, and there seemed to be less immediate reason for us to be rising so aggressively," said Ed Meir, analyst with Man Financial.

"But as we have learned in every commodity market this year, if the [speculators] want to keep buying, prices will keep rising," he said.

David Meger, analyst at brokerage house Alaron Trading Corp. agreed. "It would be remiss of me to just dismiss the possibility of a burst of profit-taking because that is something that concerns us," he said.

"But recently this market has looked very strong, as any price dips have been bought aggressively by the funds. As long as that remains the case, this market could keep going higher," he added.

In other commodity markets:

NATURAL GAS: New York Mercantile Exchange futures fell, retreating further from the 10-month highs registered last week. Some traders said the market was due for a breather, but others said it had risen to unsustainable levels. The January contract dropped 20.7 cents to $6.747 a million British thermal units.

HOGS: Futures fell at the Chicago Mercantile Exchange, as traders worried about a high level of slaughter in the next two weeks and the failure of pork to gain market share from beef. February futures fell 1.05 cents to 51.75 cents a pound.

Write to Gavin Maguire at gmaguire@osterdowjones.com

Updated December 16, 2003 10:56 p.m.

[GeorgeF]

The thing to remember about gold is that there is alot of it above ground. More than any other commodity there is alot of it stored. The reality is that if people did not hoard gold it would not be scarce as industrial/jewelry demand is not that high. I personally see no reason for the US government to hoard gold.

As to silver:
1) Some day photography demand will go to 0. That will leave hording, jewelry and some industrial demand.

2) Silver supply should expand due to copper mining as silver is sometimes a by product of other metal mining.

As to other metals recycling and substitution, such as pex tube for copper pipe, might reduce demand.

As for oil at some point Venezualia and Iraq will be back in business. Add new Russian/other capacity and you have the makings of a commodity bear market.

China has been in the news alot for it's booming economy. It might be true but but as a child of the cold war I would not be surprised if the whole communist sharade falls apart after the Olympics and commodity prices fall with it.

-Why are personal bankruptcy rates so high despite low interest rates?
I am not sure what the correlation between interest rates and bankruptcy is. There was a recession so bankruptcy should be expected.

-Where is the job creation?
The stock market is anticipating a recovery.

-Why are retail sales at the low end of estimates, or even worse, despite tax cuts and record levels of home refinancing and liquidation of home equity?

-Help me understand the soaring price of metals and oil.
Economic recovery is leading to demand for raw materials. I also believe that some of the demand is from speculators.

-Explain the drop in the dollar.
When the euro was introduced it was at $1.20/euro. Back then they were also saying that the euro would rise against the US$ as people got other investment choices. The $0.85/euro was the Clinton/dot com bubble dollar that could not last.

To see the bull case you need to listen to more right wing talk radio.

[Ray Zee]

when gold is in the 300 to 400 range alot of closed mines can reopen profitably. although it takes them maybe a year to get in full swing. so when gold goes up supply goes up with it. soon gold goes down.
the real boom for gold could come when countries like china and india where the people believe gold is wealth, start to prosper and the common people get some money. they will hoard gold and then it will shoot up as no supply can keep up with such large populations buying it.

it is good that the dollar takes big fluctuations. why-- when it is low, other countries buy lots of our goods. when high we get to buy cheaply. if companies or govt. invests wisely they can do alright. overall a strong dollar is good but not to strong.

[adios]

"the real boom for gold could come when countries like china and india where the people believe gold is wealth"

This concurs with a case for gold made by many gold bulls that I've read. Not totally clear on this but they state that China has recently liberalized ownership of gold. The gold bulls state that if folks in China start buying gold as their economy improves averaging out just a timy portion of gold over a billion people means a lot more demand.

[A9suited]

But I have had the opinion that this is a 'Bubble II' since the rally began...it is shrouded with a lot of excesses, and even with our markets rallying the "Value" of US holdings has increased only in terms of US dollars. (I travel a great deal at my own cost and recently it has been no fun to pay $600 a night at the InterContinental Airport hotel in Jo-berg for a rack room, or $7.40 for a latte at CDG.)

My belief/worry is that the US economy is straining under the weight all of our debt, and that the dollar will continue to devalue.

It seems to me the consumer should have money out his/her ears after the tax cuts, low interest rates, and liquidation of home equity, but retailers aren't seeing a boom; indeed, several (Circuit City the case de jour) are aggressively marking down prices despite earlier bravado that this wouldn't be necessary. If this is the case now, it seems a possibility that 2004 will be tougher: tax rebates are spent, home equity liquidation is plummeting, and jobs are still hard to come by.

The crystal ball should be a bit clearer after the first quarter '04, and (hopefully) I will be proven wrong; the buck will rally, Nasdaq will continue strong, and consumers will all have jobs and keep spending.

I should feel better after a year where my net worth (in US dollars lol) has increased by 40+%, but I don't....

Merry Christmas all
A9s

[squiffy]

Job creation always happens later in a recovery. So just because we don't see a ton of new hires, doesn't mean we aren't in a sustained or sustainable recovery. At first, the people we do have on staff, just work harder. And businesses won't start hiring until they get more and more increases in orders.

Early in a recovery basic metals and materials should increase in price. That is often an indication, say with copper, that industry is starting to buy more for manufacturing.

Don't understand the dollar drop. One would expect is the US is recovering that there would be more foreign investment here. One possibility is the fear that Bush will be increasing the size of the budget and trade deficits and increase deficit spending, which is generally bad for stocks and bad for the dollar, I would think, as it will increase inflation. Also the huge expense of the 9/11 attacks, the huge expense of the war in Afghanistan and Iraq is always bad for the economy and inflation in the long run. Sure you are buying more security and it may be necessary, but your money is going to buy more guns and security, and less butter. Very very bad for the dollar, the market, and the economy. Money spent on tanks, airplanes, bullets, and explosives is expensive and does not increase our national wealth, though we may end up getting some oil or securing our access to oil.


If the U.S. economy, European economy, and Japanese and Asian economies slowly start to improve, oil prices should go up as they start to manufacture and travel and ship more things.

During an economic downturn, the people who lose their jobs are more likely to declare bankruptcy. But again that is a trailing indicator. That will be the last statistic to turn around.

You want to look at raw materials and basic metals orders to see if manufacturers are buying more. And at bubble wrap and Fed Ex statistics to see if people are shipping more goods.

[adios]

As far as Circuit City goes Best Buy is killing em which I think points to taking an aggregate view. For instance Walmart has gained a lot of market share at the expensive of others. Again I'm not stating your points are invalid, just that the data you're supplying doesn't necessarily make your case.

[squiffy]

Another way to look at the strength of the dollar vs. other currencies, is to think of it as a commodity or stock, with supply and demand for that currency.

So if interest rates are high in America, and the deficit is low, and business is humming, people will want to trade Euros, marks, yen, and francs to get dollars so they can invest in U.S. treasuries, real estate, stocks, etc.

So if the U.S. economy is strong the demand for the dollar should be high and the demand to invest in the U.S. should be high, so the price of the dollar should be bid up relative to other currencies.

Given the budget deficit, the cost of the wars, and the low interest rates offered on bonds and securities here now, I suppose it makes sense that the dollar is low.

So this might be a good time to place a bet that the dollar will eventually rise. But I am not sure how one can place such a bet? Anyone have any ideas how you make a profit from currency trading?

[squiffy]

Gold is a very fishy "commodity." I am not sure why. But part of the problem with gold prices is that the value of gold is largely based on emotional factors because it is a store of value and not purely on its utility.

That is, I am much more comfortable with investing in the energy sector, because I think oil is a more "honest" or "pure" commodity, whose price is based on supply and demand, whose demand is largely inelastic, and whose demand is pure and utilitarian, not emotional.

One unpredictable factor with gold is that I have heard the Russians, South Africans, Chinese etc. have a tendency to sell stocks at unpredictable times, I suppose when they need hard currency, which can obviously greatly affect the supply on the market and the price.

Over say 100 years, all the books I have read suggest that gold is really a lousy investment compared to stocks or real estate.

And additionally, unless you invest in a gold mining company, if you invest in gold itself, you earn no interest on the money tied up in the gold and you have to worry about storage and security.

So overall, not an item that interests me.

But then again, it is a commodity. And I suppose if gold were at a 50 year low, you would have to consider buying gold or a gold-industry related stock.

Even Warren Buffett bought a huge amount of silver when silver prices were low.

Perhaps the key is to focus on spending more time casting a very very very wide net. Currency, commodities, stocks, real estate, CONSTANTLY LOOKING FOR THOSE ONCE IN A LIFETIME HOMERUNS.

I knew ODP was a steal at 10 and MCD at 15. But now, they are much much higher. So I can still make a profit on them, but they are much much much riskier and have more downside, and not nearly as much upside.

But having the time and breadth of knowledge to conduct these searches is difficult.

Ray has mentioned EK. And while I can never predict with any assurance that EK won't recover. I just don't like EK at all.

While it may recover and turn a profit, it is much more RISKY. EK's price is low, not just because of a temporary downturn in the economy.

If I recall correctly EK makes 10% of its profit from traditional film. And we all know traditional film is going the way of the horse and buggy.

Now film is not 100% of their revenue. But losing 10% of your revenue stream is not trivial. And this is not temporary.

This is a very dangerous paradigm shift. And while EK might make the transition to becoming a powerhouse in digital photography, it might not.

There are a lot of competitors which, I believe, are way ahead of it in the field.

So we are talking a lot of uncertainty here. I mean some horse and buggy manufacturers started making autos and survived, but many went bankrupt.

And many of the new auto companies that sprouted up collapsed and only 2-3 big ones are left in the U.S.

This is typical of what happens when a new niche springs up in an infant industry, whether it is railroad, tvs, cars, internet, high tech, computers, etc. But eventually there is a consolidation and only a few are left standing.

But this is much more risky, which is why traditionally Buffett would rather bet on a Coke or Washington Post or Sees Candy or McDonalds, at the right time.

Why bet on an uncertain horserace, and have an uncertain and unquantifiable shot at a humongous amount of money, when you can have a 95% shot a a semi-humongous amount of money?

I would rather have a really certain 10% return in MCD than 1 chance in 3/4/ or 5 with EK. I mean, can you even figure out the odds of EK returning to profitability. Not to mention the huge outlay of capital required for success in a new high tech field?

Another reason not to invest in a telecom company or railroad when it is just starting and needs to lay thousands of feet of cable, railway, or other infrastructure.

Let the suckers invest in the early infrastructure. You can wait until there is a proven winner, then invest in them.

For example, in the case of American railways, many of them were built by British money. Basically these investors built many of our early railroads for free. When a huge percentage of these early railroads went under, America was left with thousands of miles of free railways, and the British investors were left with millions in worthless stock.

[squiffy]

Just received a new book on real estate in the mail today from Overstock.com

John Rubino, How to Profit From the Coming Real Estate Bust.

At pages 65-66 he talks about one theory about why the dollar is dropping. I addressed this in a prior post. But he also discusses this issue as it relates to real estate.

Overstock was the cheapest mail order price I could find. It was selling the same title, brand new, but I think it was about half the price at Barnes and Noble. (I am not affiliated with Overstock.com, but do a lot of reading and have ordered from them.)

Usually, I go to Barnes and Noble to check out new books. If I find a title I like, I order it online, if I can wait.

Once in a while I will buy something from Barnes and Noble as I feel guilty freeloading on them. After all they pay a lot of rent to create a bricks and mortar site, and without that site I could not peruse books before buying them. (Although some websites I am told offer snippets of books online to browse).

Also, if you want to search multiple sites for the lowest book price offered on the web try this free site.

http://www.campusi.com/bookFind/default.asp?srcId=15040