I just read this blog:
http://www.marketoracle.co.uk/Article20363.html
I gather that Karl Denninger is anti-Gold. I couldn't disagree more. But I'm torn. Why? Because Karl Denninger is awesome. I read his blog daily and I agree with absolutely everything he says. In fact I think Karl Denninger should be our next President of the United States.
Unfortunately Karl Denninger has gotten things wrong about Gold. It's really simple. His feels Fiat Currency won out in 1980 and Gold holders were taken to the cleaners. He claims to know people that were bankrupted by their devotion to Gold at the time. Here's where Karl is missing the point:
1) The only way the Gold price was reigned in during the early 1980s was by Paul Volker raising interest rates. Gold and Interest Rates are inversely proportional.
-Karl: Gold And Interest Rates Are Inversely Proportional.
Ben Bernanke doesn't have the same flexibility that Paul Volker had in 1980. The Fed is in an interest rate trap. If they raise rates they will literally crash the economy and simultaneously cause the interest on our National Debt to skyrocket.
-Karl: The Fed Can NOT Raise Rates.
If Gold goes to the moon it's game over. The Fed will have nothing to fight with.
2) If Gold wins the Government might tax it heavily. I doubt it. He says this with the same conviction that people had towards the Government taxing bankers who got big bonus after TARP. That didn't happen because it's unconstitutional and a %90 on Gold profits won't happen for the same reason.
3) Gold vs the S&P is often sighted in arguments for either side of the Paper vs Gold discussion. I've read both and Karl is right. As of Auguest 2010 the S&P wins. But it doesn't win by a lot. It's 200->1200 for Gold and 100->1050 for the S&P. That's %600 and %1000 increases respectively. The reason I'm buying Gold today is because of point 1). The Fed can't reign in the price of Gold. So I suspect the return on Gold and the S&P will eventually because very close. Plus as of late Augest 2010 there have been 3 confirmed Hindenburg Omens and that %1000 return on the S&P is looking really shaky right now. How does Gold look? It looks AMAZING as Russian, India, China, Iran, Saudi Arabia (shall I go on) are all buying Gold hand over fist. And that's just their Central Banks. The actual citizens are buying Gold even faster. Heck they just put a Gold ATM machine in a Hotel in Dubai. That could be a sign of a bubble or a sign the demand for Gold is now so strong a Hotel in Dubai just put a Gold ATM machine in its lobby.
4) Inflation vs Deflation: which will win. Karl is betting on Deflation. I think he's right in expecting that our Economy needs to deflate. It needs to pass all that Debt through the system before moving on. However we don't have that option. I'm voting on Inflation. The Fed will do anything in its power to inflate away our National Debt. Why? Because if our economy deflates then our National Debt can not be paid off and we will have to default. If we don't default we will have to devalue the Dollar to inflate the Dollar to pay of the National Debt. Is anyone seeing a pattern here?
5) Karl doesn't believe in the Gold price suppression scheme run by Western Central Banks. Why Karl? They did the same thing in the 1960s. Why wouldn't they do the same thing today? Maybe because if they admitted it today when we aren't on a Gold standard it would just look really, really bad. If the Fed admitted to anything like that people would start buying Gold by the MILLIONS. Guess what that would do to the Dollar? If you don't know what it would do please contact me and I will tutor you. Do you need actual evidence before you believe me. Try reading this and tell me it's not suppressed:
https://marketforceanalysis.com/articles/latest_article_081810.html
6) I agree with Karl Denninger that a Gold standard isn't feasible. Here's the problem: it doesn't matter what we (the mainstream US citizen) thinks. Too many countries are in the terminal stages of moving to a new currency system for any government to do anything about it. That new system will have a partial Gold backing. If you think our objections to it, however rational, will delay that move you're out of touch.
7) Finally Karl believes we should establish a new monetary system based on a rational level of credit aggregates. First of all Karl stop saying "credit aggragates". Saying "credit aggregates" makes you sound conceited. Secondly the Federal Reserve management of the US Economy has failed because it tried to rationally control the supply of money. It didn't work. We are now seeing the system collapse slowly from within. Get over it. Karl Denninger's rational Credit Aggregate Level monetary system wouldn't work any better. The power of the Market trumps any man made monetary system in the same way the Ocean trumps a childs sand castle however well built.
Denniger is awesome for his outrage, and better than average in his analysis, but dismal on ego.
ReplyDeleteIt regrettably be his financial undoing.
Fortunately for us, he will likely provide a good service by calling the top in gold - when he capitulates.
IMO, gold will be introduced in about a year as a new clearing currency, perhaps one which also contains energy and food. You will still continue to pay your bills in fiat. But you will save your wealth in precious metals. Read FOFOA for a several months and this will become clear.
“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”
-Mark Twain
Re-read your post and realized you made some very clear & important points.
ReplyDelete1) -Karl: Gold And Interest Rates Are Inversely Proportional.
Ben Bernanke doesn't have the same flexibility that Paul Volker had in 1980. The Fed is in an interest rate trap. If they raise rates they will literally crash the economy and simultaneously cause the interest on our National Debt to skyrocket.
*I don't know why I never realized just how screwed the Fed was until I read your statement on interest rates. Thanks for the smack upside the head.
To add to that, gold does the worst then inflation is held at 1-2.5%, which is close to the annual increase in gold holdings due to mining activity, which means if inflation is held to the same rate, it is "good as gold" and there is no need for it as a currency. Clearly, that is no longer the case.
-Karl: The Fed Can NOT Raise Rates.
If Gold goes to the moon it's game over. The Fed will have nothing to fight with.
2) If Gold wins the Government might tax it heavily
*Gold is money, and if taxed will simply flee the country where it is treated poorly to where it is treated well. Europe figured this out ages ago.
3) Gold vs the S&P is often sighted in arguments for either side of the Paper vs Gold discussion.
*You're also going to need to trade the S&P. You can just buy & hold gold until the DOW:GOLD ratio closes in on 1:1 (could go below 1:1 on an overshoot this cycle because they system is so unbalanced IMO).
4) Inflation vs Deflation: which will win. Karl is betting on Deflation.
*Deflationists are looking at the last two years of money supply and ignoring the previous 40 (see chart "L money supply, reconstructed" http://www.nowandfutures.com/key_stats.html )
5) Karl doesn't believe in the Gold price suppression scheme run by Western Central Banks.
*Karl conveniently (or ignorantly) ignores Greenspan's words on this as well.
6) I agree with Karl Denninger that a Gold standard isn't feasible.
*Gold is feasible as a store of wealth assuming it trades freely. Probably more convenient to use fiat for paying bills & speculating.
7) Finally Karl believes we should establish a new monetary system based on a rational level of credit aggregates. First of all Karl stop saying "credit aggragates".
*IMO way too freaking complicated. Let gold trade freely and re-set the Dollar to the new price of gold.
It's going to happen anyway IMO.
I think the U.S. should start buying lots of gold. Let the price go up like crazy then sell it off, make a bundle.
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