This entry was posted on 11/17/2009 3:56 PM and is filed under uncategorized.
The following is a series of questions and answers that I
prepared for a journalist as part of an interview
William Gamble
How will investors know when it's a
good time to sell gold?
No
person, no formula, no amount of data, no historical analysis, nothing can
predict the future. First, no one has access to all information. Second, people
are lying, so the information is inaccurate. Third, governments have a larger
say in economies and can distort the economics at any time for any reason,
which is the main problem in predicting gold.
What
I do know is that markets are like penises. They go up and down. When any market
reaches a new high, I know that it will soon be going down. There is always a
speculative frenzy before the bubble pops.
What should you look out for with
prices at such lofty levels?
A collapse.
Many people believe that too many
things are going right to push gold prices higher, so what can go wrong -- and
more importantly, what can happen suddenly to turn the tide?
I am not sure I understand what is going right about gold.
On the contrary. I thought that gold increased either because people feared
inflation or were worried about an economic collapse. Most people including the
Fed and the bond market do not seem to be worried about inflation. Only the
difference in yields on a 10-year Treasury and a 10-year Tip seems to be
indicating any inflation. So inflation concerns are not a worry. Some people
including myself are pessimistic about the world economy, because stimulus
packages are being withdrawn, but I have not read about any imminent major
collapse. A pull back, yes. Slow growth yes. A major correction yes, but no
collapse.
So what is driving the price of gold? In my view there are only two
things: Speculation against the dollar by carry trade funds and governments. The
India purchase was widely publicized and I just read that Mauritius and Sri
Lanka were buying. So I assume many others are as well. The governments are
trying to diversify out of dollars. Being governments they are doing so for
political not economic reasons and make bone head investments. They are
basically driving up the price of gold and buying in at the top of the market.
The other cause is the carry trade. I agree with Professor Roubini (see
“Mother of all carry trades faces an inevitable bust”
The problem with governments is that they could simply stop buying.
They may finally discover they are buying at the top of the market and that the
dollar will not fall forever. So the slightest strengthening in the dollar,
either because of a perception in higher interest rates or global instability,
and the price could collapse. A slight pull back could easily turn into a panic
which would feed on itself.
I know some of those factors include
renewed interest in the dollar and higher US interest rates… How does China
factor in and could its involvement potentially cause a collapse in prices?
I believe that China’s attempt to diversify out of dollars
is a big factor. What will cause a collapse is that the Chinese and US stimulus
will have to end. Neither government can go on spending money like this. In
October the Chinese already started to restrict lending and will do more. With
two wars and a health care bill that does not restrict medical spending; the US
budget deficit will go through the roof. Eventually the bond market will
require higher interest rates.
The US and the Chinese government bet that the stimulus
could kick start the economy and then be withdrawn. Both no doubt hoped that American
consumer spending would revive. It won’t. Americans don’t have jobs, so can’t
spend. So both the US and China will have to start withdrawing stimulus money
before the economies in either country have really recovered. The result will
be higher interest rates, a slower global recovery than the markets are now
presently projecting and a stronger dollar.
Is gold really acting as it should
in this environment? Is the inflation-adjusted high ($1,600??) the ultimate
target for gold in this bull run (why/not)?
As I pointed out previously I do not think that gold is
acting as it should. Its present price is the result of government policy and
speculation and is not sustainable. By the way, what is an inflation adjusted
high? This assumes that there is value in gold. This is like saying there is value
in real estate or diamonds and that both should track inflation. Both are
subject to supply and demand like anything else. Gold’s only real utility is
that it is rare and has a long history.
Why does gold seem so much stronger
than it has in the past -- it's been able to hold key levels and blow right
past them. It seems that there are few gold bears. Isn’t that something to
worry investors?
Yes, it should worry investors a lot. First, I do not
believe in “key levels”. I have read about economic papers that have looked
into the Dow Theory predictions and found that they are right only 50% of the
time. They are only important because people believe that they are important,
like religion.
The fact that everyone believes something is a major issue. Cognitive
biases, like the band wagon effect, are an investor’s worst enemy. For example,
there is the “emerging markets story”. The story is that all emerging markets
will grow faster than developing countries. However, if you look at the past 30
years, developing countries economic growth has been the exception rather than
the rule. The same is true with the “gold story”. My belief is that the
financial industry runs on marketing not sanity. The ‘gold story’ like the
emerging market story or the China story is an easy sell. I would be very
worried.
I believe that gold is stronger because the dollar is weaker
and many Asian economies are carrying these huge reserves. They are under
pressure to diversify out of dollar assets. China did the same thing last year
and ended up taking a bath in US financial stocks. They always buy in at the
top, because their motivations are political reasons, not economic.
Also, is there anything you can say
about central bank sales and purchases.. And what recent actions among central
banks may be telling us about gold's worth and price direction?
Yes. When politicians and central banks enter the market, it
is time to leave. They don’t care about price, because it’s not their money.
