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Gold was in a bubble, but now it's going to have its first losing year for 13 years; Gold and Bitcoin Aren’t So Different After All
Topic Started: 10 Dec 2013, 10:16 PM (4,643 Views)
Kris Sayce
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Oh shit...Oh shit...Oh shit

http://www.moneymorning.com.au/20131209/why-gold-and-bitcoin-arent-so-different-after-all.html

Why Gold and Bitcoin Aren’t So Different After All…

Written on 09 December 2013 by Kris Sayce

Barring a price spike of Bitcoin-style proportions, gold is set to have its first losing year for 13 years.

It hardly seems possible.

After all, isn’t the US Federal Reserve printing US$85 billion a month?

Doesn’t that mean gold should appreciate as the US dollar depreciates?

That’s right, it should.

But it isn’t. Here’s why…

Over the past three or four years we’ve heard a lot of claims about what gold is and what it isn’t.

We’ve also seen many charts claiming to ‘prove’ that gold must go higher as the US Fed prints more money. Most of those charts involve overlaying a chart of the rising money supply with the rising gold price.

These charts appeared to show that gold rises as the money supply rises. That was the ‘proof’.

It was a nice theory. Unfortunately, as the last two years have shown, it was also a woefully naïve theory. What those who used such arguments failed to realise is that it wasn’t a fair comparison.

The money supply chart represents a factual increase in the supply of a ‘good’, namely money.

The gold price chart is completely different. It represents the price of something. Price relies on what a buyer is prepared to pay and what a seller is willing to receive.

In other words, the relationship between the money supply and gold price was little more than a casual or coincidental relationship.
Nothing Has Intrinsic Value

Now, we know that won’t endear us to our friends in the gold world.

But facts are facts. That doesn’t mean we’ve given up on gold, or silver. We still hold both in our personal portfolio, and we’ll continue to hold both. Plus, with the price so soft at the moment there’s a good chance we’ll add to our position for the first time in at least six months.

And what’s more, we don’t accept the argument put about by the anti-gold crowd. They say gold doesn’t have any intrinsic value. Of course, what they forget to mention is that nothing really has an intrinsic value except for what people are prepared to pay for it.

An Aussie ten dollar note doesn’t have any real intrinsic value. Its value only exists due to its status as legal tender. If the parliament revoked legal tender laws on the Reserve Bank of Australia’s currency you would soon realise that it doesn’t have any more intrinsic value than gold.

That’s the important thing to remember about the price of anything. Something is a certain price because that’s the price at which buyers and sellers will transact.

If buyers are willing to pay more, sellers will soon figure that out and charge more. If buyers aren’t willing to pay more, then sellers will soon figure that out too and charge less.

That is exactly what has happened to the gold price over the past two years. Regardless of what the Fed has done by increasing the money supply, buyers didn’t want to pay the higher price, and so sellers had to drop their asking price.

The result of this price action is the following chart. Barring a miracle recovery in the next three weeks, gold is heading for its first losing year in a long time:

Posted Image

But having a losing year isn’t unique to gold. So it’s not worth turning it into a big deal. It happens to every market, as we’ll explain below…
All Bubbles End the Same Way

You may remember the ‘weight of money’ argument during the 2003 to 2007 bull market. Many argued that share prices would always go up because of the billions of dollars flowing into super funds every year.

They argued that there just weren’t enough shares to go around and so there would be so much demand for the current shares in circulation that prices would have to rise…forever.

Again, they forgot the most important thing. They forgot that people don’t actually have to buy shares. Prices got to such a level that investors no longer perceived them to be good value. So they lowered their price expectations. This forced sellers to lower their price expectations too.

A more recent example is the hysteria over Bitcoin. Again, folks have gotten themselves in a lather about the limited supply of Bitcoin. They see this as a reason that the price will always go up.

At the time it’s happening those arguments always seem bizarrely rational – even though we know it’s irrational. Over the past month the Bitcoin price soared from US$329 to a high of US$1,242.

Comments from Fed chairman Dr Ben S Bernanke, who said that Bitcoin was a legitimate form of payment, helped fuel the price rise. A report in the press over the weekend notes that someone had paid for a US$100,000 car with Bitcoins also helped legitimise it.

However, that hasn’t stopped the Bitcoin price falling. It hit a low over the weekend of US$576. Today it’s trading off that low at US$760.
The Meaning of Money Takes a Turn

So what does this all mean? For us it means that the notion of money is at a key inflection point. Our guess is that for the first time under the current monetary system even people in the mainstream are questioning its meaning and whether it’s sustainable for central banks to print money from thin air.

To your editor’s mind it means changes are afoot. Some say that it means a return to a gold standard. Others say it means Bitcoin is about to hit the mainstream and become a widely accepted medium of exchange.

But we say they’re both wrong.

We’ll expand more on this from time to time over the next few weeks and months. But to put it simply, the definition of money is what the consumer wants it to be. That’s what makes the future of money so unpredictable.

And that’s why we’re so excited about presenting our view at the Port Phillip Publishing ‘World War D’ conference next March.

You can find out more here, including the line-up of A-list keynote speakers.

Cheers,

Kris+



http://www.moneymorning.com.au/20131209/gold-investments-will-shine-again.html

Gold Investments Will Shine Again

Written on 09 December 2013 by MoneyMorning

‘When you come to the end of your rope, tie a knot and hang on.‘ - Franklin D. Roosevelt, US President

After two years of falling gold prices, maybe you’re sick and tired of reading about gold.

But realise the gold price went up for over 12 years straight!

It can’t keep going up in a straight line forever. Since hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011.

Gold is now going through a correction. That happens at the end of every price bubble. But make no mistake; eventually gold will make a very strong comeback. Let me explain why…

Posted Image

But first, let me be straight up – I still see some downside in the gold price. In fact, it could still fall another 15%.

Even so, I’ll still argue that gold stocks are a bargain today, let alone if the gold price hits near $1,000.

The bottom line is this: If you buy gold stocks today and hold them for the long term, I believe you’ll still make a great return.

Over the next few weeks in Diggers and Drillers, I’ll explain why the gold price has fallen and why, contrary to most mainstream views, gold is set to rise back to all-time highs.

Some of the topics I’ll discuss include:

The global economy and company earnings – can financial markets really continue to keep rising?
The technical picture and the physical gold market – what’s the true story for gold?
The rise and fall of crypto-currency – why does Bitcoin really exist and what does this mean for gold?
The great debate: Inflation vs Deflation. Where are we today and why does gold even matter?

But for now I’ll talk about the only two words you should know and remember when investing in gold – ‘Quantitative’ and ‘Easing’.

Why You Should Back Gold

Quantitative Easing, also called ‘QE’ or ‘money printing’, is the most important reason that makes gold an attractive investment. These two words are why gold more than doubled from less than US$837 an ounce to over US$1921 an ounce in less than three years.

Posted Image

Money printing is simply where the US Federal Reserve prints money out of thin air and uses it to buy US government debt and mortgages from banks.

The US Federal Reserve initiated this program to avoid another ‘Great Depression’ of 1929. In 1929, millions of people lost their jobs and fell into poverty. Many banks either stopped lending or went out of business.

Whatever the critics say, the money printing program has worked to some degree by avoiding another ‘Great Depression’…for now anyway.

The problem is the US Fed’s money printing program doesn’t have an end date. There is talk of cutting back the program, but so far that seems more of a fairytale than a fact.

In fact since the program first stated, the US Fed has really put the ‘foot to the metal’ and accelerated the ‘money printing press’. You can see in the chart below that the US Fed owned less than US$1 trillion dollars of debt before the 2008 financial disaster. This has now increased to over US$4 trillion today.

But what’s the purpose of money printing? In simple terms, the aim is to drive interest rates down to ultra-low levels so that banks can lend money to investors at low rates.

Sounds great if you’re a borrower, but it’s only good in theory!

The problem in the real world is that people are choosing to repay debt and save instead of borrowing money. And can you blame them? Everyone remembers what happened to their superannuation and investment portfolios when the global financial disaster shocked financial markets.

But that’s not all. In many cases banks won’t lend money to people who want to borrow. Farmers can’t get a loan to expand, many resource companies can’t get a loan to explore, and if you want to start a company, good luck in trying to get a loan.

The following graph shows how much money people are saving in Australia as opposed to investing in the stock market or other assets. Since the financial meltdown, the savings rate has increased almost vertically.

Instead of increasing lending and borrowing, let’s see what money printing has really done over past couple of years.

The following graph shows the impact that money printing has had on the US S&P 500 Index (index with largest US 500 companies). The graph shows all four money printing programs since late 2008/09 (red line in chart below).

You should pay specific attention to the current money printing program, QE3 (orange line in chart below).

I realise that it may be hard on the eyes but the red circle at the bottom of the chart displays January 2013. Around this time, the US Fed’s QE3 program truly began to have an impact on financial markets.

Put more simply, QE3 involves the Fed buying US$85 billion of debt per month over an unlimited amount of time. This is an ‘experiment’ which has never been tried before in history.

What you can see is that all the money printing programs have seriously inflated financial markets to the point that they may now be in ‘bubble’ territory.

That makes it hard to figure out who’s more addicted to money printing – Wall Street or Ben Bernanke (US Fed Chairman).

As Warren Buffet says, ‘all bubbles inevitably pop‘. As I said above about gold, financial markets simply can’t rise forever either.

Essentially the US Fed has said to investors: ‘we’ll buy the debt and you can buy everything else’. As a result, you’ve seen the stock market go through the roof. The following graph shows the actual returns from quantitative easing for the US S&P 500 Index – over a 92% gain since it first began.

Not only have stock markets gone up but bond (debt) yields have fallen to all-time lows on the back of money printing. The Reserve Bank of Australia has cut interest rates by 2.25 percentage points to 2.5% since November 2011.

When bond yields fall, bond prices rise. With rates at or near record lows we are in the midst of a global bubble in bond prices.

Financial markets are going up all around the world, it’s a financial bubble mania!

Even Bitcoins skyrocketed!

But imagine what will happen to financial markets if the US Fed actually stopped entirely its money printing program.

If bond yields will rise, the stock market will fall and gold will ‘shine’.

The fact is that money printing is a giant experiment by the US Fed and other central banks (i.e. Bank of Japan) as they try to avoid another Great Depression.

Of course, some say that money printing was necessary and that it saved the world when Lehmann Brothers collapsed in 2008. At the time it was the world’s third largest investment bank and many argue that the Fed needed to take drastic measures. That’s debatable.

But even if you argue that money printing was necessary, there’s no doubt that this ‘experiment’ is getting out of control and financial markets are ‘cooked’ on money printing.

Let’s see what happens to interest rates when the central banks stop buying bonds.

Let’s see what happens to business conditions.

Let’s see what happens to corporate profitability.

No one knows the full long-term consequences of the money printing policies.

This is why gold as an investment is crucial. A lot of people underestimate its true value, which is…investment portfolio protection!

Gold will return and reward patient investors. When it does gold stocks will be back.

This is the art of contrarian investing.

As Warren Buffett, the world’s greatest investor says, ‘Buy when others are fearful and sell when they are greedy.’

Jason Stevenson

Resources Analyst, Diggers and Drillers
Money Morning Australia
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peter fraser
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Quote:
 
We’ve also seen many charts claiming to ‘prove’ that gold must go higher as the US Fed prints more money. Most of those charts involve overlaying a chart of the rising money supply with the rising gold price.


It's not as simple as that Kris. QE isn't really money printing, that's why you make so many errors in your analysis.

You should stop by and read sometime.

Start with this pdf - http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf



Any expressed market opinion is my own and is not to be taken as financial advice
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Perthite
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Peter I find it odd that gold seems to have stopped just above the point at which we lose gold as an industry.

Do you think the risk of losing the production of the second largest miner is a factor?
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peter fraser
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Perthite
10 Dec 2013, 11:22 PM
Peter I find it odd that gold seems to have stopped just above the point at which we lose gold as an industry.

Do you think the risk of losing the production of the second largest miner is a factor?
It's a global market, I doubt that the markets will care about our mines. Each mine will have a price point at which it becomes uneconomic to continue mining.

Are you making reference to the point often made that as mines stop production, demand will then outstrip supply putting upward pressure on prices?

It sounds like a valid point to me but I don't know how strongly it would apply. I also don't know what stockpiles there are in the system. Was that your point?
Any expressed market opinion is my own and is not to be taken as financial advice
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Perthite
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It's along those lines. To me it seems to have really struggled to break below 1200.

The number is very significant to us. It seems more than a coincidence.

It feels like a buy.

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peter fraser
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Perthite
10 Dec 2013, 11:38 PM
It's along those lines. To me it seems to have really struggled to break below 1200.

The number is very significant to us. It seems more than a coincidence.

It feels like a buy.

You may be right, but for it to be a good buy you will need some upside. Do you see a reason for any upside?
Any expressed market opinion is my own and is not to be taken as financial advice
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Perthite
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Yes I do.

I was about to buy when I heard miners are tapping their emergency high grade deposits which is resulting in a surge in production.

The main thing is I just can't see it any lower.
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peter fraser
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Perthite
10 Dec 2013, 11:49 PM
Yes I do.

I was about to buy when I heard miners are tapping their emergency high grade deposits which is resulting in a surge in production.

The main thing is I just can't see it any lower.
Well you're a consenting adult who understands the economy, so follow your beliefs and best of luck with it.
Any expressed market opinion is my own and is not to be taken as financial advice
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mel
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who wrote the article? At the onset it states it was written by Kris, yet it's signed off by Jason Stevenson. Maybe it was written by Tyler Durden. :)
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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Count du Monet
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peter fraser
10 Dec 2013, 10:39 PM


It's not as simple as that Kris. QE isn't really money printing, that's why you make so many errors in your analysis.

You should stop by and read sometime.

Start with this pdf - http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf


Quote:
 
It might be asked: if banks cannot lend the excess reserves that the central bank provides,


The central bank doesn't provide reserves. The central bank reserve account is the collective excess reserves of the commercial banks. It is the collective deposits of excess cash from the banks that have excess cash. The central bank then loans this money that the commercial banks themselves are unwilling to lend because of the lack of credit worthy loans. Traditionally it is used to buy foreign reserves, the treasuries of foreign reserve currencies or of their own currency. In the case of the RBA this at times has been extended to state government debt and longer term lending to commercial banks via "purchases" of stuff like MBS.

The central bank has always provided O/N lending to commerical banks. In the case of the RBA over the last ten years this has been extended to multiple day, week and months.

The FED has used excess reserves to by US government debt or mbs. The central bank reserve account is always a liability to the commercial banks that made the "deposits". From what I can gather the commercial bank excess reserves automatically appear in the central bank reserve account.

So the PDF itself is inaccurate. The RBA has very little or no excess reserves, the Australian commercial having little difficulty finding credit worthy lending. However the FED, the ECB, the BOE have had large reserve accounts since the GFC. Reserves can always build up via new deposits and repayments on existing loans. This must loaned in some way or other or multitudes of cash will disappear from the streets causing instant deflation. The risk has been the cash simply stops circulating.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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