PANDA - 16 August 2008 06:48 AM

Why is Panda so bullish that metals could even go much higher than that? The biggest single factor that drives gold and silver is monetary inflation, and that’s already several times greater now than during the great gold and silver bull market of the seventies. And also silver supply will be almost become obsolete in the next 10 - 15 years.

Graph, You may be laughing at Panda now for continuing to buy gold and silver at these bargain prices and loading up on cheap quality asian equities, but i will be laughing at you in a couple of years.

Panda

This market has taught to not be overly confident into what I thought was “bullet-proof” logic. The problem I have is that, because gold by itself does not generate income or dividends and industrial demand for it is actually a fairly small part of overall demand, the premise behind gold going up is simply more people buying into the same logic you’re using.

I’m not necessarily saying I’m against buying gold; I still have a 5% stake - but I had a 10% 2x leveraged stake before, and had I not being lucky I would have been looking at a 40% loss. I guess all I’m saying is I wouldn’t be so supremely confident that gold is going straight up; it’s more of an insurance policy than anything else.

I also keep my ear to the ground and the thesis that we may be headed in a DEFLATIONARY environment has some legs. I’m neutral on wheter we’re in for an inflationary or deflationary cycle, but there is some logic that the fact if nobody can get a loan, then that means fewer dollars available not more. There’s good arguments going for both sides.

These days I’m slightly leaning towards the thesis that a worldwide recession means lower prices for all asset classes, gold included. I’ll still buy gold on a rebound, but not in a huge 10-20% proportion I was willing to do before.

Heck, my super-risky bank puts look safer than my gold right now. At least the bank puts I understand the catalyst for them dropping in value (banks giving out bogus earnings numbers), whereas gold is dropping 20% for no good reason.

Gold went down because the USD went up.  The USD went up because a few central banks besides the US bought a slew of US Treasuries at auction in order to prop up the USD.  Why they would want to prop up the USD, I forget, but when I read about it, it made sense.  As the USD went up and the Euro went down and gold went down, a whole bunch of hedge funds covered margin calls and headed for the exits all at once.

/

What I find hilarious is the markets work exactly the way the pros say they do.  The dumb money sells when prices are down and buys when prices are high.

/

The fundamentals that cause the price of gold to go up in terms of USD have not changed.  Asset deflation will cause gold to go down in the short term, but if you have studied Federal Reserve history or listened to anything B-52 Ben and Hank Paulson have said, you will realize they will print as much money as necessary to prevent long term deflation.

/

Answer to a few pms: Yes, I would call this a dip.  And yes, it is disconcerting, painful, and confusing.  But it will do what all dips do.  It will shake out the weak hands and leave the majority in the dust.  The majority is wrong 99% of the time in fanancial markets.  No, I am not buying.  I bought in the summer of 2005 and I will hold until ... well I have my exit strategy.

I wish the market went up and went down they way it’s “supposed” to. Heck, I’d be rich if that were the case.  Sometimes it starts to go down and then people panic and then it becomes a domino affect.
 
The dominoes go down very, very quickly.

Here is a interesting observation from my research on gold prices and any one can correct me if my facts are off.

Free to float, gold in the last bull market rose from $42 an ounce to its all-time high of around $850 - $877 in 1980, a 20-fold increase. The current bull market in gold has not even seen a tripling yet at gold prices at $786.20 an ounce. A similiar move this time wold give gold a price of $5,100.

Here is the interesting part, at the peak of the bull market of the 1920s the DOW was around 36 and, with gold officially $35 an ounce, the DOW-to-Gold ratio was back to nearly 1 to 1.
By 1966 the Dow was again worth more than 20 ounces of gold, and by 1980, with Dow at about 850 and gold at about $850, it was again back to 1 to 1 for the second time. So they had two occasions in the prior century when the Dow exceeded the value of gold by a ratio of 20 to 1 and then, within a short period of time after hitting 21, went back to 1 to 1.

The Dow’s all-time record high relative to gold occurred in 2002, when it reached something like 44 to 1, an absurd level, more than double the previous peaks of 1966 and 1929. As i write this post today, we are at about 15 to 1. Were we to repeat history of the last century and go back to a 1 to 1 ratio, you’d be looking at a gold price of $11,000 an ounce, assuming the Dow stays where it is at and does not decline any further. If DOW goes to down to September 30, 2002 price at $7528 that would put one ounce of gold at $7528. I will not be suprised to see our DOW go from 11,000 to 7500 within the next 5 years. Again, i am trying to be realistic, gold price at $2200 a ounce is a very realistic figure in the near future.

Panda’s .02 cents.

... gold in the last bull market rose from $42 an ounce to its all-time high of around $850 - $877 in 1980...

Price of Gold August 2008 (28 years later) 785
 

 
For the people who are buying gold, I hope they know when to sell.

CalGal - 16 August 2008 04:11 PM

... gold in the last bull market rose from $42 an ounce to its all-time high of around $850 - $877 in 1980...

Price of Gold August 2008 (28 years later) 785
 

 
For the people who are buying gold, I hope they know when to sell.

That’s my point CalGal,

If the Irvine Company came to you and said that they will sell you all their Irvine SFRs they built in Turtle Rock for less than 1980 prices wouldn’t you buy it?? Panda would buy ten of them at a heartbeat.

Panda

PANDA - 16 August 2008 01:45 PM

Were we to repeat history of the last century and go back to a 1 to 1 ratio, you’d be looking at a gold price of $11,000 an ounce, assuming the Dow stays where it is at and does not decline any further. If DOW goes to down to September 30, 2002 price at $7528 that would put one ounce of gold at $7528. I will not be suprised to see our DOW go from 11,000 to 7500 within the next 5 years. Again, i am trying to be realistic, gold price at $2200 a ounce is a very realistic figure in the near future.

I just don’t see why history should repeat itself exactly the same way. The last gold spike was an era with 20% inflation wasn’t it? If that were to happen, wouldn’t that pretty much imply house prices would have to stabilize or even go up again as the value of the dollar went down the drain vs. hard assets? The scenario you’re implying seems to imply a very quick return to the house bubble era.

Saying gold would go up to 2200$ tells us more about the dollar than gold. Gold is a fixed store of value, the dollar is the thing that fluctuates along with it.

awgee - 16 August 2008 10:14 AM

What I find hilarious is the markets work exactly the way the pros say they do.  The dumb money sells when prices are down and buys when prices are high.

I have to respectfully disagree with that statement.

I think in the past month if you did the maximum possible “dumbest” move with your money, you came out way ahead. The best possible strategy in the last month would have been to assume any new trend will now be projected linearly forever, and that would have worked just fine. No need to be smart; just needed to buy what was going up, sell what was going down - thinking optional.

PANDA - 16 August 2008 05:47 PM

That’s my point CalGal,

If the Irvine Company came to you and said that they will sell you all their Irvine SFRs they built in Turtle Rock for less than 1980 prices wouldn’t you buy it?? Panda would buy ten of them at a heartbeat.

Panda

What if you asked them what price they planned to sell them for next year and they said they’d sell it for the 1960s prices, would you still buy it? That’s exactly what’s happening right now, people don’t care what price the houses are at if they still believe they will be worth less in the future. As an investor, I couldn’t care less if they sold the houses for half price if I didn’t believe the houses would offer a good ROI in a reasonable amount of time.

I just think you’re over-simplifying. Buy low, sell high, but you could pick “low” or “high” depending on any number of timeframes or reference points that you choose.

Just to be clear, I still plan to buy more gold myself at some point, I’m just trying to be devil’s advocate - over-confidence can be investor’s worst enemy.

People spend years educating themselves and specializing in the commodities market. It’s not for the weak at heart. As long as you can handle the lows as well as the highs - then go for it. Just remember, trading stocks and commodities is a gamble. Please only trade what you are willing to lose.  I’ve seen too many people lose their hard-earned life savings in a blink of an eye.

Ooo, I just saw that I’m at McMansion status.

muzie - 16 August 2008 06:28 PM

awgee - 16 August 2008 10:14 AM

What I find hilarious is the markets work exactly the way the pros say they do.  The dumb money sells when prices are down and buys when prices are high.

I have to respectfully disagree with that statement.

I think in the past month if you did the maximum possible “dumbest” move with your money, you came out way ahead. The best possible strategy in the last month would have been to assume any new trend will now be projected linearly forever, and that would have worked just fine. No need to be smart; just needed to buy what was going up, sell what was going down - thinking optional.

Sorry, I should have qualified with, “in the long term markets work ...“.  And by pros, I was not correct either.  I should have said long term investors.  “Pros” implies traders.  My mistake, sorry.  We will find out at the end of this quarter if Buffett sold his Euros and bought dollars.

I should be a bit more clear.  My main point is that 95% of people who trade short term will lose in the long run.  My speculation is that most people who buy what is going up and sell what is going down may have some short term success, but probably not, and long term they will most certainly lose their money, and this includes many professional traders.

I’m not sure if anyone would know the answer to this question. My data for gold prices only goes back to 1968 and was wondering if anyone knows what the gold prices were between 1960 - 1970. I’m think that the price of gold probably moved in a flat line hovering around $35 an ounce and started to make upward movement in the 70s. Can anyone validate if my information is correct?

I think the DOW also moved in flat line between 1970 - 1980, however did the DOW have an upward movement between 1960 - 1970?

Panda

Here’s tabular data for gold price for every year neginning from 1800. No chart though, you’ll need to make a chart yourself in Excel.

Gold prices

Even without a chart, the history of the price of gold is pretty simple.

From 1800 to 1932, gold was at about 20$ almost the whole time, for more than a hundred years.

Then in 1932, it became illegal to own gold after the great depression, gold prices got stuck at 35$ from 1932-1971 as the currency got devalued.

Nixon then ended Bretton Woods in 1971 and gold actually started fluctuating, peaking out at 850$ in 1980, a 24-fold increase. I guess people were so gaga about gold not having a fixed price that there was no reference point to value it properly.

Gold zig-zagged its way back down to it’s recent low of 300$ in 2001 and rose back to its now current price of 800ish$ in 2008.

Basically you can pretty much ignore any gold prices before 1970 because gold was set to a fixed price by the government back then and, well, you couldn’t trade it anyway.

muzie - 18 August 2008 06:08 PM

Here’s tabular data for gold price for every year neginning from 1800. No chart though, you’ll need to make a chart yourself in Excel.

Gold prices

Even without a chart, the history of the price of gold is pretty simple.

The history of the price of gold starts long before 1800 and starts long before the existence of different and failed versions of the US dollar.

muzie - 18 August 2008 06:08 PM

From 1800 to 1932, gold was at about 20$ almost the whole time, for more than a hundred years.

Then in 1932, it became illegal to own gold after the great depression, gold prices got stuck at 35$ from 1932-1971 as the currency got devalued.

Nixon then ended Bretton Woods in 1971 and gold actually started fluctuating, peaking out at 850$ in 1980, a 24-fold increase. I guess people were so gaga about gold not having a fixed price that there was no reference point to value it properly.

I would say people were not gaga about gold.  People were speculating on gold because they were concerned with the effect of price inflation on their savings.  The price of gold in USD is an inverse to the confidence people have in the stability of the USD.  Some may consider the USD to be a poor reference point with which to value gold.  $1.00 in 2008 will buy approx. $0.04 in 1913 USD, when the Federal Reserve was created.

muzie - 18 August 2008 06:08 PM

Gold zig-zagged its way back down to it’s recent low of 300$ in 2001 and rose back to its now current price of 800ish$ in 2008.

Basically you can pretty much ignore any gold prices before 1970 because gold was set to a fixed price by the government back then and, well, you couldn’t trade it anyway.

Actually, you could trade gold in many parts of the world.

For anyone to understand the extrinsic worth or value of gold, one must first understand what money is.  A federal reserve note has been considered money for an extremely short period in the history of money.

Congrats to all the gold nuggets out there.
Gold up 25 today.
Great day to be a nugget holder. 

It’s interesting that a few crazy days of drops in commodities and everyone is ready to run. I really don’t think that any of the fundamentals have changed and this week in stocks sort of proves that. There is no way that the possibility of a bubble in commodities comes anywhere near what has happened in housing and how it has affected the entire market. Sit tight with your gold, you’re ok.

awgee - 18 August 2008 06:52 PM

The history of the price of gold starts long before 1800 and starts long before the existence of different and failed versions of the US dollar.

Well, it does, but how well it did during the Roman Empire really seems of no relevance to me as an investor today . The world pre-1800 was so drastically dfferent than the world we live in today I really can’t see how anyone would try to extrapolate anything from it.

awgee - 18 August 2008 06:52 PM

Actually, you could trade gold in many parts of the world.

For anyone to understand the extrinsic worth or value of gold, one must first understand what money is.  A federal reserve note has been considered money for an extremely short period in the history of money.

Of course, I was only talking about the US government barring ownership of gold. You could probably buy gold too in the US if you were willing enough… but with no exchange to deal in gold for the US, you would have had to deal with an extremely illiquid market.

I’m sure in a total catastrophe situation gold should win out handily… Personally, I’m not interested in that case, as the odds of a total global catastrophy are always very small. I’m more interested in how gold will behave in a “severe strain” situation which is more likely.

The last gold spike happened with 20% wage inflation. That’s just not happening, for now - on the contrary we have massive wealth destruction and wages have been flat for a while.

muzie - 20 August 2008 04:48 PM

awgee - 18 August 2008 06:52 PM

The history of the price of gold starts long before 1800 and starts long before the existence of different and failed versions of the US dollar.

Well, it does, but how well it did during the Roman Empire really seems of no relevance to me as an investor today . The world pre-1800 was so drastically dfferent than the world we live in today I really can’t see how anyone would try to extrapolate anything from it.

awgee - 18 August 2008 06:52 PM

Actually, you could trade gold in many parts of the world.

For anyone to understand the extrinsic worth or value of gold, one must first understand what money is.  A federal reserve note has been considered money for an extremely short period in the history of money.

Of course, I was only talking about the US government barring ownership of gold. You could probably buy gold too in the US if you were willing enough… but with no exchange to deal in gold for the US, you would have had to deal with an extremely illiquid market.

I’m sure in a total catastrophe situation gold should win out handily… Personally, I’m not interested in that case, as the odds of a total global catastrophy are always very small. I’m more interested in how gold will behave in a “severe strain” situation which is more likely.

The last gold spike happened with 20% wage inflation. That’s just not happening, for now - on the contrary we have massive wealth destruction and wages have been flat for a while.

The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.—Cicero, 55 BC

/

The last gold spike happened about six months ago with very little to no wage inflation and massive asset deflation.

muzie - 20 August 2008 04:48 PM

The last gold spike happened with 20% wage inflation. That’s just not happening, for now - on the contrary we have massive wealth destruction and wages have been flat for a while.

To be honest, I haven’t seen any massive wealth destruction.  The US markets are down, but nothing compared to the rest of the world. If anything, I’ve seen the US government try to prop up housing and the banks in order to keep the credit flowing to the consumer.

Then again, I live in Irvine, so I’m shielded from the real world.  When everyone in Irvine starts driving scooters and riding bicycles, then I know its bad.

ukyo116 - 23 August 2008 09:47 PM

To be honest, I haven’t seen any massive wealth destruction.  The US markets are down, but nothing compared to the rest of the world. If anything, I’ve seen the US government try to prop up housing and the banks in order to keep the credit flowing to the consumer.

I think the news has reported on the billions of dollars lost by banks and lenders.  Reports are that so far, $500 billion of value has been lost on homes, a few banks and hedge funds have gone bankrupt, the Hang Seng is down 40%, the American indices down 15%.  Fannie and Freddie are insolvent.  One of the largest IBs in the world needs rescuing so the Fed helps JPM hide who knows how many billions of CDS counterparty default and gives JPM $29 bil.  The Fed has given out $500 billion at it’s new auction facilities and taken toxic waste as collateral, on the pretense of a temporary 28 day repo.  I guess it all depends on what your idea of massive is.  The amount lost by the banks and lenders is already more than was lost in the entire S&L;crisis and LTCM put together.  At what point is wealth destruction massive?  A few billion here, a few billion there, pretty soon you are talking real money, eh?

/

And I guess I almost forgot about Lehman.

And Merrill Lynch, Goldman Sachs, Deutsche Bank, UBS, and who knows how many other IBs have to buy back hundreds of billions of dollars worth of auction-rate securities?

But, maybe we have not seen massive wealth destruction yet?

/

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,‘’ Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.‘’

awgee - 23 August 2008 10:21 PM

And I guess I almost forgot about Lehman.

And Merrill Lynch, Goldman Sachs, Deutsche Bank, UBS, and who knows how many other IBs have to buy back hundreds of billions of dollars worth of auction-rate securities?

But, maybe we have not seen massive wealth destruction yet?

/

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,‘’ Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.‘’

 

I have to see it get to the point where the Fed cuts the interest rate. Then I KNOW the banks are desperate.  Awgee, you hit the nail on the head with CDS and other related derivatives. I’m waiting for that shoe to drop.

“One of the world’s leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200 page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch—and I expected him to defend and explain the practice.

I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the “third inning”. This was pretty amusing, it seemed, judging from the laughter. So I tried again. “Second inning?” More laughter. “First?” Still too optimistic.

Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we’re actually still in the middle of the national anthem before a game destined to go into extra innings. And it won’t end well for the global economy.”