Monday, July 25, 2011

Gold as a hedge against uncertainty

Almost 3 months ago to the day I wrote an article titled: Is Bob Moriarty shorting Silver? A look at his "Facts", the article looked at recent predictions for the Silver market from Bob Moriarty in the months leading up to the collapse in Silver price from $50 down to low $30's. The other day Bob sent me an email suggesting an update to this piece.

Although some of the specifics to Bob’s predictions were off, the general timing of his warnings came fairly close to the peak including the last one which was within a trading day or two from the start of the crash in Silver price. To his credit Bob got much closer to calling a peak than my suggestions that started several months earlier at around the $30 mark.

In a few emails we shared back and forth I found that we had similar views on some aspects of the Silver market and the financial system in general.

On the Silver market (and precious metals sector in general) we both agree that there is a ridiculous amount of spruiking that occurs. It could almost be said that those pumping the manipulation angle in the Silver market are infact manipulators themselves, playing on the fear, greed and herd mentality of smaller and inexperienced investors.

The amount of misinformation and rubbish that circulates as precious metals 'news' is atrocious.

Anyone remember in late 2009 when we were told 25% premiums were being paid for those seeking physical Gold delivery to settle in cash instead?

Remember when the LBMA made a slight change to their website causing a popular commentator to suggest they were days away from implosion and hiding the data?

Remember when we were standing for delivery which was going to cause the COMEX to default in December and then again in March?

Remember when every ounce of Silver purchased was another step to toppling the much despised JP Morgan?

Fantastical stories are circulated to encourage investors to get involved personally & emotionally with their investment in metals, which is exactly what you shouldn't be doing!

Further to discussion about those pumping the Silver market we also briefly discussed the possibility that Silver could head to much lower prices which would probably occur in a deflationary collapse. I later found a recent article which presented Bob's views quite succinctly:
TGR: You've also expressed serious concerns about international governments and their debts underpinning the increase in the gold price. Are you still making that argument?

BM: Well, here's the key, and this is what the gold bugs totally ignore. You can die of lung cancer or a heart attack, and the end result is exactly the same. In a financial system, you can die of hyperinflation or you can die of deflation. With $600 trillion worth of derivatives in the world, the risk of deflation is enormous, and that means that gold could drop to $500/oz. It might buy 10 times as much as it does at $1,600/oz., but everybody in the gold arena believes we're going to go into hyperinflation, and that's a slam-dunk. What if we don't? What if they're wrong?

TGR: It's interesting that you bring up the need to look at the price of gold in terms of what it can buy, but if you believe in the theory that gold at $500/oz. will be able to buy 10 times more than it does today, doesn't that make gold great regardless of whether we're in a hyperinflation or a deflationary environment?

BM: Yeah, I absolutely believe that the financial system of the world will collapse—and I think lots of people have now come into this camp. Even Tim Geithner came out just a few days ago saying that we're in some really, really, bad times. I was saying that five years ago and 10 years ago, and now Mr. Geithner's finally figuring it out.

But the gold bugs need to understand that Greece could default, Italy could default, Spain could default, starting a series of cascading defaults and the banking system could close in a month. Then maybe gold isn't $10,000/oz.; maybe it's $500/oz. The Gold Report
Some good points are made here and I'm inclined to agree that we shouldn't look at an inflationary outcome as the only possibility. On this blog I have measured Gold against other assets (including houses and oil) as I think this is probably a more important metric than against fiat currencies. We could still see Gold head into the 3rd phase of the bull market, but doing so priced lower than it is today when measured in dollars. From a chart perspective that might look odd, but measured against other tangible assets is where you will find the move to an overvalued state.

When we have continents, countries, states and regions that have their finances so intertwined it's hard to imagine how just one of these counties could default or even partially/temporarily default without setting off some sort of chain reaction. The NY Times image 'Europe web of debt' is a nasty reminder of just how tied together the countries in Europe are:


It was in part the unforeseen side effects of the Lehman Brothers bankruptcy that seized up the markets earlier in this rolling crisis. I certainly don't have any confidence that central banks and governments will manage this new series of risks (sovereign default) with perfect timing and resolution...

Decisions they make and actions they take could result in unintended and unforeseen circumstances. They might be able to change the route we take, but ultimately the destination is going to be the same either way. Gold can provide a hedge to the unknown events and uncertainty that lie ahead of us.


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