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David Rosenberg: The Case For Gold Going To $3,000 Is Getting Stronger By The Day

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May 05, 2010 – Comments (5)

Like I have made the case for many times, there is nothing in economics that has only one cause and one effect. There will not be "inflation" or "deflation". There are always both effects happening to some degree. Debt is collapsing, and it needs to. There is simply too much of it around the world. It is literally suffocating major economies. This is a very deflationary effect. Yet at the same time, the Fed is monetizing debt at alarming rates (and anybody who thinks that QE-I is it is very naieve IMO). The will be QE-II, QE-III, ... QE-N as long as there is a Federal Reserve. This places "deflation" in context. There will be deflationary impulses against a backdrop of extreme monetary inflation.

This does not make the Dollar a stronger fundamental currency. And even in fiat-currency land, there will be much stronger (less profligate) currencies than the US Dollar when this crisis has run its course. The most likely outcome is not inflation or deflation. It's both: stagflation. I have made the case for that many times. Here is a good summary: Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428.

In this scenario, gold is not simply a hedge against monetary inflation. In fact, this will not at all be the reason it does well. I expect all positively correlated economic assets to do poorly (such as equties as a general asset class). I am bullish on commodities because they are real assets, but think they will not perform as well due to poor economic activity and fundamentals. The asset I expect to perform the best is gold. It is a hedge against finanical shennanigans and the way the Fed and the Government has tried to solve every finanical crisis: poor decisions / poor economic policy / poor monetary policy (i.e. the printing press).

Anybody who puts forth simple statements passed off as analysis regarding the economy is doing everybody a disservice. Statements like "Inflation helps stocks go up" or "Everything moves inversley to the dollar", or the "all one market theory" is BS. They work for short periods of time. But the macroeconomics are always changing. There are always multiple causes and multiple effects.

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David Rosenberg: The Case For Gold Going To $3,000 Is Getting Stronger By The Day
Joe Weisenthal |  May. 5, 2010, 10:10 AM

http://www.businessinsider.com/david-rosenberg-the-case-for-gold-going-to-3000-is-getting-stronger-by-the-day-2010-5

David Rosenberg of Guskin-Sheff  is a deflationist, but unlike some (like Robert Prechter), he's also pro-gold.

Today he argues that the breakdown of the euro is very bullish for gold.

ECB IS NO BUNDESBANK, EURO IS NO D-MARK

In the interim, the ECB has been forced to water down its charter as it permits
sub-investment grade Greek bonds as collateral.  Sadly, the central bank is not a
remake of the Bundesbank and the Euro is less of a “hard currency” than its
architects could have ever envisaged a decade ago.  Now there is talk that the
ECB is contemplating a quantitative easing plan (see ECB Should Resist QE
Siren Call on page C14 of the WSJ).  The case for gold heading to $3,000 an
ounce is getting stronger by the day.  The Euro has already broken below 1.30 to
the U.S. dollar and there is plenty of room for additional decline going forward.
It’s only at a one-year low — wait until it moves to a decade low.

Make no mistake — the problems in Greece are mirrored in places like Portugal
and Spain — this is not about liquidity, like Bear Stearns and Lehman, it is a
crisis in confidence (Banco Santander, widely seen as a barometer of financial
health in Spain, cratered 7% yesterday).  The FT reports today that there has
been some market chatter that Spain has been “negotiating” with the IMF for
assistance (€280bln) too.  History shows that crises over confidence are tougher
to repair over the near-term than liquidity crunches.  The fact that Greek short-
term bonds have collapsed in price even more — even though the country does
not have to come to the market for the next few years so long as Germany
comes through after the vote — is a case in point.  

So contagion risks loom and there are simply not enough trees on the planet
that can provide enough paper currency to backstop countries like Portugal and
Spain.  Moreover, what investors see is that if there is so much political foot-
dragging in Germany and other EU countries to approve a bailout of tiny Greece,
achieving a rescue plan for other large basket-cases will be even more arduous
a task.  Have a look at Martin Wolf’s column on page 9 of the FT — A Bailout For
Greece is Just the Beginning.  What a tale of woe.  And let’s not forget about Italy
— its public finances are less dire but still fragile (see Much to Play For on page
7 of the FT).


Also Jesse of Jesse's Café Américain had this comment, that I think is right on and very relevant: http://www.businessinsider.com/david-rosenberg-the-case-for-gold-going-to-3000-is-getting-stronger-by-the-day-2010-5#comment-4be184d77f8b9a366a110000

Bob Prechter was on Bloomberg television earlier today.

He said that the US dollar will be the strongest currency because it has the most debt issued around the world, in dollars. Therefore as debt deflation occurs, the most dollar credit will be destroyed, and therefore the dollar will be the strongest.

You can't make this stuff up.

The mere nominal amount of dollars, or any other currency, is just one variable in a more complex valuation equation.

There are several more variables, including taxation rates, debt servicabilty, and productivity. One can reduce the amount of the currency to no gain in value, if there real GDP is declining more quickly. Just as one simple example.

Simple thinking gets people hurt. Prechter and Shilling have been putting odd monetary theories forward for many years. I examined them carefully, and even adhered to them for a while in the 2000 timeframe, via Doug Noland.

Simplistic stuff like this sometimes works for a while, but it tends to fall apart, with disastrous consequences.

The dollar may be strong, and it might even be the strongest and last man standing in the overall controlled demolition of fiat currencies. But it will not be because it had the most debt that was liquidated. It will be because it maintains a powerful control over the Ratings Agencies and the global banking system, and still remains the sole military superpower.

Without serious financial reform the US is in and remains in a death spiral that will drag it and its currency down, with very dire consequences to itself and the rest of the world.


[My comment]: I have nothing against Bob Prechter. But I also think the "all one market theory" with regard to the US Dollar / deflationary-only argument is deeply wrong. Seeking "safety" in the US dollar will not provide any long term safety at all. Bad US monetary policy has guaranteed that savers will not be rewarded. Debt can collapse and the Fed will monetize debt at an uprecendented rate. The "pushing on a string / velocity of money" argument is demonstrably wrong. THe Fed has gone outside the banking system and monetized private sector debt directly. And anybody who thinks they won't do it again (and again) is not facing the facts, IMO

5 Comments – Post Your Own

#1) On May 05, 2010 at 1:29 PM, starbucks4ever (97.66) wrote:

Don't be so shy. Just write "gold is going to $30,000" :):):)

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#2) On May 05, 2010 at 2:00 PM, russiangambit (29.16) wrote:

At this point I am convinced that nothing short of outright revolt will stop the FED from printing money. So, monetary inflation it will be. I am going to be buying more commodities on the dips here.

There a re a couple risks I see , however, that could undermine the casino operaiton.

1. European debt crisis affecting  one of major banks and leading to the credit freeze a la Lehman.  That will force US investment banks to sell their equities and that will cause the house of cards to collapse because the banks balance sheet will defalte back  with the falling equities.

2. Unwind of USD carry trade - so far it hasn't been so bad . 

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#3) On May 05, 2010 at 2:05 PM, Option1307 (29.69) wrote:

There will not be "inflation" or "deflation". There are always both effects happening to some degree. 

Statements like "Inflation helps stocks go up" or "Everything moves inversley to the dollar", or the "all one market theory" is BS. They work for short periods of time. But the macroeconomics are always changing. There are always multiple causes and multiple effects.

This is a really good point Binve and I think we, as investors, can tend to forget the fact that everything is intricately related. It's simple human nature to desire to understand things and for practical purposes this is really helpful. However, we need to be careful when we try and "understand" investing and the economy as it is almost impossible to isolate separate entities and thus impossible to truly and accurately understand them.

Even when everything seems to make perfect sense, we should try and realize that we are likely excluding a piece of the puzzle. i.e. only seeing data that fits with our "model".

This is something that I know I definitely try to watch out for in regards to my investing on a daily basis. Not only may I be missing a piece of the economic puzzle but I may be overlooking or ignoring some potential challenge for the company/commodity/etc in the future.

Realizing that you don't know everything is just as important as understanding what you do know.

I don't mean this as a criticism at all, and I think you know me well enough to not take it as one, but I believe GV made this very mistake recently as he thought the markets/metals/etc would correct when the dollar rallied. Initially this was the case, but it has been anything but since. I'm not saying he is wrong and I really respect him/his opnion but I think this is a good example of getting caught up in blanket statements and not realizing the complexity of things.

To be fair, I'm really surprised how well everything has held up as well. I didn't believe everything was perfectly fixed in an inverse relationship (thanks to your charts!) but the fact that commodites have essentially continued to rally, or at least held steady is somewhat surprising to me.

The US dollar crossed 84 today for the first time since May 7th, 2009, yet commodites have not significantly corrected. I don't think many people would have predicted this, certainly not me.

 

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#4) On May 05, 2010 at 4:29 PM, jesusfreakinco (28.80) wrote:

The US dollar crossed 84 today for the first time since May 7th, 2009, yet commodites have not significantly corrected. I don't think many people would have predicted this, certainly not me.

Commodities such as gold and oil are making new highs in other currencies. Look at charts of gold in EUR and YEN for example - new highs.

http://www.the-privateer.com/chart/g-multi.html

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#5) On May 05, 2010 at 5:06 PM, binve (< 20) wrote:

russiangambit ,

Hey russian!

>>At this point I am convinced that nothing short of outright revolt will stop the FED from printing money. So, monetary inflation it will be. I am going to be buying more commodities on the dips here.

I agree man, I think the same way

>>There a re a couple risks I see , however, that could undermine the casino operaiton.

>>1. European debt crisis affecting  one of major banks and leading to the credit freeze a la Lehman.  That will force US investment banks to sell their equities and that will cause the house of cards to collapse because the banks balance sheet will defalte back  with the falling equities.

>>2. Unwind of USD carry trade - so far it hasn't been so bad 

Yep, and I do think both will happen. The question is, what do you hold when these things happen? Do oil and other commodities take an 80% haircut? I honestly don't think so. There will be pullbacks in a lot of sectors, but I think real assets will largely perform well (both relatively and nominally speaking) and I think gold will outperform big time.

Thanks man!

Option1307 ,

Hey Option!

>>To be fair, I'm really surprised how well everything has held up as well. I didn't believe everything was perfectly fixed in an inverse relationship (thanks to your charts!) but the fact that commodites have essentially continued to rally, or at least held steady is somewhat surprising to me.

Thanks man! I think if there is anything that I am most proud of here at Caps, it is the fact that I have been able to show people through my long term dollar/equity correlation charts how bogus simple macroeconomic investing theses actually are.

I spend a lot of time talking about bonds, Treasuries, currencies, LIBOR, the yield curve, etc. But sometimes a long term correlation chart illustates an issue more clearly than several paragraphs ever will.

Thanks man!

jesusfreakinco ,

Hey JFC!

>>gold and oil are making new highs in other currencies. Look at charts of gold in EUR and YEN for example - new highs.

Yes indeed!.

 

..

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