I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Monday, June 7, 2010

binve's Gold Foil Hat Zone: More Thoughts on Gold's Massive Bull Market

WARNING!! binv's Tin Gold Foil Hat Zone !!

.... Just call me a Gold Bug. (In case you didn't notice, I am being sarcastic. Because anybody who is bearish on gold labels anybody who is bullish on gold a Gold Bug. But that's fine, I will take it).

I am very bullish on gold. This is no surprise. I have written on the subject of gold many times.

The main reason why I am bullish on gold is that it is in a massive bull market in comparison to fiat money. Gold is a currency. Like any currency, you don't own it because it has intrinsic value, you hold it because it is a store of wealth. So when I say gold is in a massive bull market in comparison to fiat money, I mean exactly that. Gold will hold its value while fiat money is devalued in comparison.

As Gary says: Gold is not about price, gold is about value

We have one of the final possible bubbles at it's apex: A Sovereign Debt Bubble. Economies all over the world are suffering and are trying to solve a debt related crisis with more debt. It was *never* going to work and will end badly.

So when ranking currencies relative to each other, and all the major currencies are engaging in some form of Devaluation / Quantitative Easing, they are all fighting debt with more debt.

The problem is debt.

And the Fed has made it very clear that monetizing as much debt as is necessary to keep the system going, at the direct expense to the Dollar, is not only a course of action that is open to them, but THE course of action that they are taking and will take. This plan will continue until there is no longer a Federal Reserve.

Yet the market is trying to purge excesses, and the Fed and the Treasury is not allowing it to happen.

This makes the outcome both simultaneously deflationary and inflationary. The market wants to, and desperately desires to save, but the Fed is directly hurting savers behind the backdrop of *extreme* monetary inflation.

I have been hammering on the topic because it is the critical issue to understand how all of the advanced economies government's action will not only fail to produce the desired effects, but will more importantly make matters worse. The main issue is  Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428. It is critical to understand that an increasing debt load has decreasing marginal utility and there comes a point due to servicing requirements that all new debt has a negative economic impact. This is why we were NEVER going to be able to borrow and spend our way out of a crisis that was caused by too much debt to begin with.

This sets up an extreme deflationary environment (this debt load is unsustainable) within which the Federal Reserve will monetize unprecedented amounts of debt at unprecedented rates. Which will result in a simultaneous deflationary and inflationary outcome: stagflation. There is NEVER anything in economics and especially macroeconomics that has only one cause and one effect. There are always multiple effects with varying degrees of influence (both in absolute value and transience). There will be deflationary impulses and there will be extreme monetary inflation, the Fed will see to that. Which means that I think the most likely outcome will be a combination of the two: stagflation. Economically correlated assets go down in value (like your home and equities as a general asset class) and things you need to buy/consume (such as real assets / commodities) cost more. Really the worst of all possible outcomes.

I do think that most inflationists discount the amount of debt that is collapsing (even though most deflationists use measures like M2 and M3, which have a lot of non-monetary components to prove their point) while at the same time most deflationists discount the amount of monetary inflation the Fed can generate (they argue that the Fed creating base money is like pushing on a string because the banks don't have to lend, even though I am many others have pointed out that the Fed has gone around the banking system and has started monetizing private sector debt directly, which is a trend that is likely to increase not decrease). Most people on either side of the debate is not considering strong evidence that both forces are significant.

The result is and will be stagflation. It is really the worst of all possible outcomes. The economy needs savers and the Fed will not allow savers to be compensated for their risks. This will ultimately result in the collapse of the bond bubble as there is no longer any faith in Sovereign Debt. And the world will turn to real assets as a store of value.

And this sets up the final bubble ... the Gold Bubble.

Now I don't mean this pejoratively. And I am not casting a negative connotation on it. Bubbles are what they are. When Central Bank monetary policy forces all of us to become speculators by not rewarding savers, then bubbles are formed.

Gold doesn't care that it is in a bubble. It is quietly and quiescently preserving wealth. Again Gold is NOT about price, gold is about value.

I don't hold gold because I like shiny objects. I don't hold it because it makes the world go round. I hold it because it will be the last currency standing that preserves wealth as the world's economy goes through this painful deleveraging process.

No fiat currency will preserve wealth. Certainly not when this crisis has run its course. Some will fare better than others (many will fare much better than the US Dollar), but all will pale in comparison to gold.

The current trend of piling debt on top of debt is unsustainable: Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428. And neo-economists and politicians have to get their collective heads out of their collective asses and not allow a vampire industry (financials) hijack the real economy. But since that won't happen willingly, then the market will force a crisis that will fundamentally change how we view politics and the economy. Crony capitalism will go away. Good laws like Glass-Steagall will become reinstated. Too big to fail will be abolished. Grass roots companies will grow like a new forest. The Mittelstand companies of Germany (small/medium firms, mostly family owned) is exactly the economic model that most of the western world should be following, and I believe will in the future.

And when the crisis nears a real bottom, I will be the first person to dump my gold and invest in the new world economy. One that produces goods, and solves problems, and increases the quality of life for humanity.

Gold is not an end in and of itself. It is a means to an end, a way to preserve value as the economy purges excesses so that the new economy can be invested in.

It is a way to save. And since the Fed is not allowing us to save in the Dollar or Treasury debt, people will turn to saving in real money.

I don't care if you don't agree with me. I don't care if you think gold is a useless shiny rock (it is, just like the Dollar is a useless piece of green paper). I am not here to convince anybody of anything. I am just stating my opinions and why I have them.

I have complied a long list of posts that I have written discussing my macroeconomic views on the Dollar, Inflation/Deflation/Stagflation, and Gold. These might be useful in understanding why I have come to these opinions:

--- Debt Saturation - LINK
--- Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR - LINK
--- What the Bond Market is Trying to Tell the Stock Market: A Look at the Yield Curve and Expectations - LINK
--- Thoughts on the Euro, the Dollar, and a Long Term EUR/USD Count - LINK
--- Something Very Strange Is Happening With Treasuries - LINK
--- The Long View - LINK
--- The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) - LINK
--- Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog - LINK
--- The Dow / Gold Ratio - LINK
--- The Gold / Silver Ratio - LINK
--- Gold Miner Performance Relative to Gold - LINK
--- Gold Miner Performance: A Look At Miner Cost Inputs vs. Gold Price - LINK

US Dollar



Monthly Chart - tune out the noise

Elliott Wave Counts

.... at least that all makes sense if you are crazy like me :)

Thank You for visiting binv's Tin (and Gold) Foil Hat Zone
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