gold and deleveraging

secondrepublic

Mike Shedlock had an interesting commentary on this two months back. I happen to agree with him that we are, at least for the short term, in a deflationary period being caused by the huge destruction of capital and wealth and the shrinking of credit. (I happen to think this period will not last very long at all, and we will end up with some serious inflation, given all of the printing and spending the government is undertaking to counter the deflation). Nonetheless, the short-term deflationary explanation seems to better explain why gold has fallen, rather than the conspiracy theories floating around the internet:

What's happening with gold should be no real surprise. Although I have stated many times that gold is money and gold should do well in deflation, and we are in deflation... in the initial stages of deflation, leverage in everything is reduced by force.

There are thousands of hedge funds, pension plans, and individuals over-leveraged in a massive bet against the US dollar and US assets in general. Many themes of the past 7 years are now being unwound. And one would expect leverage to be forced out in deflation as credit simply dries up. I call this the great unwind....

Gold will reassert itself eventually along with the short financials trade, but as the great unwind continues, the unwinding process for those in gold can be painful....

There is no reason to believe that dollar manipulation or gold manipulation is the driving force behind movements in gold, silver, and currencies. Never believe conspiracy theories or screams of manipulation when far simpler explanations such as the Great Unwind explains things quite nicely.
LINK to Aug. 18 article.

I would add to this that gold should re-assert itself as the massive stimulus, printing, and spending of the past month (and the coming months) works its way through the system. At the end of the day, I cannot see how more printing = lower gold.

HonoluluDude

This doesn't look like deflation to me.

roadrunner

What the smartest guy on earth has been doing with his global fund

Obviously Shedlock has called the first round of this crisis spot on. There is a lot more out there to support massive manipulation in the dollar starting in July than just internet theories by maladjusted bloggers. My only fear is that we gave the Hankster a blank check to "play" with the markets as he and his bankster buddies see fit.

If the deleveraging process were only about the flight back to the world's reserve currency, it would not explain why the Yen has far outperformed the dollar during this crisis.

roadrunner

secondrepublic

<< <i>This doesn't look like deflation to me. >>



This is not the entire money supply, and this chart doesn't reflect the destruction of certain types of capital and credit.

What the smartest guy on earth has been doing with his global fund

I'm not sure he's the smartest guy in the world, even with those returns. John Paulson comes to mind as having done even better. And he's not the only one who has made these calls; Roubini, Shedlock, and even Schiff have been right on the mark. Still, I agree with him on this point:

There are, however, some things The Smartest Man wouldn't touch. They happen to be the assets the investing masses have flocked to in this crisis: U.S. Treasuries and the greenback. “I don't think it can hold for that much longer.” Once the world has to absorb trillions of dollars in new U.S. debt – watch out. In fact, he thinks the odds of the U.S. having its own currency crisis are “at least 30 per cent.”

As for the Japanese Yen, it's a complicated story. Like the dollar, the Yen was beaten down for many years, though for different reasons than the dollar. Part of the yen's rise seems to be the unwinding of the Yen carry trade. Another part is that the fundamentals of Japanese banks were not as affected by the mortgage crisis as US and European banks. But I'll freely admit I don't fully understand all of the recent yen moves.

roadrunner

I can agree that Roubini, Shedlock, and Schiff have told similar stories, but not all of them to my knowledge manage large portfolios for others. It's one thing to predict while only writing about it and limiting that risk to yourself. Newsletter writers only have to be right once in a while to keep their business. Successful fund managers typically only get one chance to be right. And being right was much easier until summer 2007.

It's far more impressive when you present other people with large returns for 5 years, and 57% ytd, while most everyone else is sucking wind in 2008, even the commodity guys. I would probably guess that Schiff kept his clients in gold for much of this year. The "smartest man" could not have gained 57% this year without reducing his long exposure to gold, and then shorting the S&P and/or shorting the commodity sector in general. This guy is certainly not the smartest financial man in the world, but he did real good for his clients. Maybe he's in the top 10.

roadrunner

secondrepublic

My 401(k) is down 38% on the year... does that make me dumbest guy in the room?

Deadhorse

<< <i>My 401(k) is down 38% on the year... does that make me dumbest guy in the room? >>





I think that makes you about average, average for 401K owners anyway.

Heard a guy talking that his 401K was down to a 101K while another said his isn't even OK anymore.

roadrunner

You have company secondrepublic. While I may have been smarter than a 5th grader to unload all mutual funds and shift into treasuries back in the spring, I was dumber than a 3rd grader for maintaining a significant exposure to gold shares. The only "good" news is that the gold stocks have gone down so far, that further declines would affect the overall 401K relatively little.

Now the next axe to fall is treasuries and cash. Hopefully a safer place to shift those into comes along fairly soon as TBills and cash won't hold up forever.

roadrunner

jmski52

Big meeting this weekend. The US wasn't invited, it seems. It's funny how we can give away our technology and manufacturing, in return for ethylene glycol laced foods, contaminated heparin, lead paint contaminated toys, and diseased food products, but we're the bad guys......yeah, right.

Reuters article, linked from Sinclair's website:
China isn't happy........

It looks like an assault on the dollar is in the works, and our massive inflationary injections into the worldwide banking system will exascerbate the whole situation. Not good.