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goldminingXpert (29.64)

Gold is down $37/oz. What's happening?

Recs

57

July 01, 2010 – Comments (59) | RELATED TICKERS: GLD , UUP

People have been taken aback by today's sharp decline in precious metals, and even sharper decline in mining shares. For months, it's seemed, gold has risen relentlessly, regardless of the activities of the broader market. Today, it seems, the pattern has changed.

What has gold been doing recently? Since last fall, it started an unusual correlation to the US$ index, in which both gold and the US Dollar would rise and fall together. The dollar index was a good thing to get hitched to, the dollar is up almost 20% since Thanksgiving of 2009 and this surge has carried gold to a new all-time high. The thinking has been that the flight into the US Dollar (and Japanese Yen, and Swiss Franc, and US Treasuries) and gold was a flight to safety. People were fleeing the bankrupt European states and taking shelter in the less sickly US and Japanese economies. They also sought out gold and (to a lesser extent) other commodities.

I'm convinced this was right to some degree. I predicted a dollar rally last year to at least 85 on the dollar index. Even I was surprised, however, when we went up for a challenge against a long-standing top at 89. We failed, but the fact we got that far in the first place said there was more than an expected amount of dollar strength. But why?

It seems that perhaps hedge funds and other power players loaded up on leveraged dollar and precious metals positions. As the rally in gold and the dollar has continued, they've become ever more correlated, to the point that the two often trade nearly identically now. When large margin calls (or something) were unleashed last night and the dollar fell 3 cents against the Euro (the biggest move in awhile), it's only natural that the same margin calls also rocked the precious metals world. The fast-moving hedge funds who gorged themselves on dollars, gold and other "safer" assets ... often as a hedge for their declining US equity positions ... were forced to unload. Thus the harrowing decline in the dollar, gold, and miners today. Many junior miners are down 8 or more percent, and this is on top of steep declines in the past few days. While a lot of these miners that are getting killed (Nadagold, Seabridge, Allied Nevada and others deserve their loses), there's some genuine bargains starting to emerge.

That said, as long as the hedge funds remain overlevered and are long commodities with hot money, expect gold to take further losses. They will unload the assets that are showing gains (US dollars and precious metals) rather than the ones showing losses (mortgage equities, real estate, US equities, European debt, etc.) Live by the hot money, die by the hot money.

When the US$ index and gold decouple, we'll know the hot money has moved on to a different trade. But for now, be cautious. We're at an interesting crossroad in gold and mining shares.

59 Comments – Post Your Own

#1) On July 01, 2010 at 1:44 PM, jesusfreakinco (29.03) wrote:

Jsut another market manipulation day by JPM and its unlimited line of credit from the Fed.  Nothing to see here... move along.  Those of us that have been long gold since 500+ has seen this same movie DOZENS of times.  This too shall pass.

Good day to enter new positions IMO.

JFC

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#2) On July 01, 2010 at 1:56 PM, goldminingXpert (29.64) wrote:

We can either try to understand it, or we can blame "them." I'm not a voodoo follower myself, though sometimes, I admit, it seems mysticism works better than science.

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#3) On July 01, 2010 at 2:04 PM, goldminingXpert (29.64) wrote:

That was a little harsh. That said, I find it strange that people are willing to run their entire investment portfolios on theories and conspiracies that lack hard proof. There's a huge difference between buying gold because you fear sovereign default, inflation, war, etc. and buying it because you believe JPM has godlike powers and is in league with the Illuminati or CFR or whoever your favorite shadowy organization is.

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#4) On July 01, 2010 at 2:04 PM, MoneyWorksforMe (< 20) wrote:

 goldminingXpert,

"The fast-moving hedge funds who gorged themselves on dollars, gold and other "safer" assets ... often as a hedge for their declining US equity positions ... were forced to unload."

Gold was already trading at $1150/oz before the stock market even began its negative trend around 4/23/10.

So if your theory is correct, ~$100/oz. had been added to the price of gold as a result of declining equities and a flock of hedge funds to safety. In that case the ultimate floor resistance could be found around 1150, with decoupling occurring at that time/level. If we do reach that level I expect a huge spike upward...

"When the US$ index and gold decouple, we'll know the hot money has moved on to a different trade."

When do you anticipate this to occur? 

 

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#5) On July 01, 2010 at 2:12 PM, goldminingXpert (29.64) wrote:

Hedge funds have been loading up on commodities since the '09 lows. I've seen quite a few managers touting oil and mining plays on CNBC for many months now. The long dollar/gold together play began in earnest the end of '09 at around $1100, though the hedgies were already buying the big miners before that. The GDX and some of its components (particularly NEM, ABX and GG) were getting snapped up before that.

I saw one of high-up management folks of Newmont speak at my college in the middle of 2009, and he said they were looking to go began acquiring left and right because of the "influx of institutional money" into the big companies that created an opportunity to buy the passed over juniors. Big hedgies (unless they specialize in mining) won't buy the $500M market cap and less companies, they want the easy in, easy out, high liquidity ones. And they started buying at least 12 months ago.

I don't know how much of the recent run-up in mining stocks, bullion (or the US dollar for that matter) is hot money related. As I have been an ardent dollar bull, I'm hoping the answer is "not so much" for the dollar anyway, but I don't really know.

In response to when things will decouple, let me say this:

"I have absolutely no idea!" 

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#6) On July 01, 2010 at 2:22 PM, XMFSinchiruna (27.59) wrote:

goldminingXpert

Both you and jfc (comment #1) are likely touching on some truth here. Your explanation accurately characterizes some of the carry trade that developed during the recent dollar rally and its impact upon gold since the two began to trade more correlatively.

However, to frame the discussion as if gold were a free market, you must admit, is a bit naive given what IS known. And there IS solid evidence of coordinated price suppression by JPM and other bullion banks... including the official testimony of the London trader who placed his reputation and career on the line to shed light on this incredibly opaque market via repeated correspondence with the CFTC to aid their multi-year investigation of manipulation of the silver market..

Between the two, I think the opaque activities of the bullion banks are the far more significant driver of abrupt downward moves like we say today ... which incidently display a clear-as-day pattern when you look at the daily charts averaged over time. This was likely their attempt to keep the recent USD correlation alive.

Either way, neither the hedge funds nor the bullion banks can avoid the fundamentals, and now it appears that both the USD and the Euro could see some significant weakness in tandem. This would produce confusion among many investors since the USDX would look relatively stable, but ultimately the paired declining purchasing power of the to principle reserve currencies of the world will propel gold prices substantially higher.

I will reserve my near-term read on a targeted bottom for this correction until I have a chance to see tomorrow's action, but for now I expect only a brief hiccup along the medium-term road to at least $1,500 before the next corrective phase.

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#7) On July 01, 2010 at 2:28 PM, XMFSinchiruna (27.59) wrote:

MoneyWorksforMe

With respect, you'll want to reconsider your methodology for discerning key near-term support if you're basing it simply upon where gold was when the U.S. equity markets turned.

It's equally possible that decoupling of the USG/Gold could say exactly nothing about what the 'hot money' is doing.

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#8) On July 01, 2010 at 2:32 PM, goldminingXpert (29.64) wrote:

What's the catalyst for weakness in the dollar? I was asking myself this, because, as I previously mentioned, I wanted to short GRS, SA and other lousy mining companies a few weeks ago, but I was unable to come up with a case that would send the dollar and gold lower in the short-term. It seems that the dollar will continue to be hoarded in relation to the other currencies as we don't have a short-term debt problem, and slackening oil prices will continue to close the trade deficit.

My working thesis is that once this forced liquidation of dollars ends (today smells like a gigantic short squeeze on the EUR/USD bears), the dollar and (oddly enough) gold will start rising again. But at some point the correlation will snap. For now, however, I think the U$D and gold will continue to trade together, and as long as they do, the outlook for both should be generally bullish.

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#9) On July 01, 2010 at 2:36 PM, goldminingXpert (29.64) wrote:

Connecting comment #8 to the original post. I wouldn't be surprised if this flush drags on for a few more days, but hedge funds don't like having their hands forced for long. At some point, the forced liquidation will stop and we'll get a sharp bounce in both gold and the dollar, probably at the same time. I'm not trading it either way ... if the gold/US$ connection snaps, either one or the other is going to go nosediving.

Gold futures now under $1200, keep on your toes and don't commit too much capital too quickly. 

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#10) On July 01, 2010 at 2:38 PM, whereaminow (30.26) wrote:

I did it.  I purchased MEA two days ago in my RL portfolio, and there is an absolute iron clad rule that whatever David in Qatar purchases in real life must drop 15% within the next 48 hours.

Sorry everyone.  It'll be back to normal in a couple days. 

:)

David in Qatar

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#11) On July 01, 2010 at 2:42 PM, goldminingXpert (29.64) wrote:

I'm considering buying some JAG here. That'll knock things down at least another 10% within a week.

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#12) On July 01, 2010 at 2:48 PM, starbucks4ever (98.50) wrote:

Looks like my yesterday's call was not so bad after all...

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#13) On July 01, 2010 at 2:53 PM, XMFSinchiruna (27.59) wrote:

Same here ... I'm in a holding pattern, not playing this either way ... although I couldn't resist nibbling on a couple of juniors today.

The catalyst for a weaker dollar, IMO, is the realization that concern over Euroland for too long masked the underlying truth that our states, cities, and towns are in every bit as rough a condition as Greece, Spain, and the rest. The catalyst is that all this money pouring into Treasuries as a safe haven is likely uneasy money ... that is ... aware they're seeking haven in an asset that is seriously and fundamentally flawed in a way that guarantees declining value, but lacking viable alternatives in an economy where almost no asset classes are likely to be spared.. Fundamentally, the USD is in horrendous condition, and a declining USDX is long overdue to balanice out the one-sided nature of the Euro's decline. 

At some point, with the yield curve this flat and the USDX showing weakness, we will see an exodus from Treasuries into gold (by the same hedgies who today were booking profits) the likes of which none of us has ever seen).

JMHO.

C

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#14) On July 01, 2010 at 3:04 PM, goldminingXpert (29.64) wrote:

What's the catalyst for an "oh crap!" moment where people suddenly fear for the safety of US government debt anytime soon? I'm not talking years from now, when this will assuredly happen. In the next, say 3 years, what causes people to suddenly say "Uncle Sam can't pay?"

The issues have emerged in Europe not because of their absurdly high debt-load, but rather, because that debt is due NOW, and the governments can't pay NOW. The US is in a far healthier position (federally anyway) in terms of liquidity and it is highly unlikely that the government will face a funding crisis soon, particularly with interest rates at historic lows.

The US government's short term cash situation is far better than Japan's, much of Europe's, or Great Britain's. Thus, the dollar will outperform those currencies, which are the majors of the world for the forseeable future. The long-overdue US$ weakness ALREADY HAPPENED! The Euro trading up to 1.60 was absurd! No justification whatsoever. It revived our domestic industries, shrunk the trade deficit (backing out oil), and boosted our tourism. The dollar index at 75, like it was last year, gives us an INSANE competitive advantage over neighbouring countries. The dollar deserves to trade between 90 and 100 as that's a fair price that facilitates a balanced global marketplace for trade.

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#15) On July 01, 2010 at 3:05 PM, goldminingXpert (29.64) wrote:

What's the catalyst for an "oh crap!" moment where people suddenly fear for the safety of US government debt anytime soon? I'm not talking years from now, when this will assuredly happen. In the next, say 3 years, what causes people to suddenly say "Uncle Sam can't pay?"

The issues have emerged in Europe not because of their absurdly high debt-load, but rather, because that debt is due NOW, and the governments can't pay NOW. The US is in a far healthier position (federally anyway) in terms of liquidity and it is highly unlikely that the government will face a funding crisis soon, particularly with interest rates at historic lows.

The US government's short term cash situation is far better than Japan's, much of Europe's, or Great Britain's. Thus, the dollar will outperform those currencies, which are the majors of the world for the forseeable future. The long-overdue US$ weakness ALREADY HAPPENED! The Euro trading up to 1.60 was absurd! No justification whatsoever. It revived our domestic industries, shrunk the trade deficit (backing out oil), and boosted our tourism. The dollar index at 75, like it was last year, gives us an INSANE competitive advantage over neighbouring countries. The dollar deserves to trade between 90 and 100 as that's a fair price that facilitates a balanced global marketplace for trade.

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#16) On July 01, 2010 at 3:10 PM, MikeMark (29.58) wrote:

Interesting thoughts all.

Here's mine:

I just see this as a resonable small move down that doesn't even drop below a straight-line average trend from 2007. I think it's very possible that gold will drop another $30 - $60 in the next weeks, and I think that's well within the current normal market activity. Where would I consider buying more? Probably between $1090 and $1150. Do I think it's a smoking value at those prices? No, but it's certainly better than the average stock or house.

Do I think gold will hit $1500 this year? No, but it may in 2012 or 2014.

Something else to realize too: it looks like we are in debt (credit) deflation. The US$ may get even stronger, decoupling from gold (as has been mentioned) with the price of gold falling in US$. I think there's a high likelyhood that the Fed may take action to try to prevent that, but it isn't certain.

As far as an extreme fall in the price of gold is concerned, long term price history (36 yrs) shows that the current price is very high, statistically speaking. The forces driving that are much the same forces that drive the price of houses to extreme heights. Like houses in some places, gold could take a fall to below $600. I think that is very unlikely, mainly because I think we would see that only if the Fed raised interest rates to somewhere between 8% and 15%, making the US$ much more valuable. The Fed currently doesn't have that much backbone, and probably won't take the candy away from the baby.   ;)

-MikeMark

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#17) On July 01, 2010 at 3:12 PM, MoneyWorksforMe (< 20) wrote:

TMFSinchurina,

I understand my "technical support level" was derived rather unconventionally. It was a quick, back of the envelope type calculation. I am not placing too much faith behind it. It was a hypothetical guess more than anything else. Sometimes I try to think a bit outside of the box, especially since we are dealing with gold and a very dynamic economic period.

Ultimately as a pm bull I am counting on the dollar to eventually decline. So although I understand why it is today, I have some difficulty rationalizing it. Right now it is being used more as a safe haven--rather than an inflation hedge--along with the dollar, which explains their synchronous movement, as the US economy is currently suffering from signs of deflation. 

goldminingXpert,

I think your definitely onto something. So long as the US economy continues to suffer from deflation, gold and USD will be viewed as a safe haven rather than an inflation hedge. The decoupling won't occur until inflation begins, where gold will make the transition from a safe haven to strictly an inflation hedge. This transition could be months or years away, but when it does, they will move inverse each other with the USD sinking and Gold soaring.

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#18) On July 01, 2010 at 3:12 PM, goldminingXpert (29.64) wrote:

Today's drop is nothing by itself. What it is, however, is interesting in that this is the sharpest tandem drop that the US$ and gold have experienced together, and a good sign that the correlation between the two remains strong.

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#19) On July 01, 2010 at 3:12 PM, XMFSinchiruna (27.59) wrote:

goldminingXpert

I can name that catalyst-tune in 6 easy items, Chuck:

Resumed Quantitative Easing on deflationary concerns

Mounting losses at Fannie Mae / Freddie Mac

Unrelenting OTC derivative meltdown (largely USD-denominated)

Appreciating Yuan and reduced sovereign demand for Treasuries

A snowballing nightmare of state and municipal bankruptcies  

Continued expansion of deficit spending amid continued tax-revenue contraction.

 

And by the way ... discerning Fools are already well aware that Uncle Sam will never be able to repay its existing debts without massive currency devaluation.

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#20) On July 01, 2010 at 3:24 PM, goldminingXpert (29.64) wrote:

Resumed Quantitative Easing on deflationary concerns

Perhaps. But after the amount they ran in 2008 that failed to either A) halt home and asset price deflation, or B) cause inflation, you have to wonder whether this will work. Interest rates also suggest the market views this possibility as rather unlikely, even though the market's high price for gold suggests there is a lot of gold bullishness, it isn't due to this scenario.

 Mounting losses at Fannie Mae / Freddie Mac

This is deflationary. The housing mess is what has caused the credit contraction in the first place. Losses on debt in a fractional reserve system cause more credit to dry up (as you deplete reserves, it reduces the size of the pyramid that can be built from the underlying capital.) This is deflationary and dollar bullish. And yes, this will happen.

 Unrelenting OTC derivative meltdown (largely USD-denominated)

Why would this hurt the dollar? Once again, losses will make dollars more scarce. You have to settle your debts on these trades in dollars which increases demand for them. Every European or Asian back that got hosed on a derivative has to acquire dollars to pay up at the end of the contract. This should be at worst neutral for the dollar and probably net bullish as most of the profits from writing derivatives stayed in the US while we exported the losses offshore. 

Appreciating Yuan and reduced sovereign demand for Treasuries 

I don't expect the first -- it's not in China's interest to do so.

The second ... what's the trigger for that? I've been saying for awhile that treasuries are way overvalued and yet people keep buying them. As every other kind of debt (other nation's sovereign debt, our muni debt, mortgage-backed debt, etc.) goes bad, the treasuries look better and better by comparison.

A snowballing nightmare of state and municipal bankruptcies  

This will happen and is dollar bearish. I don't think it is a big enough catalyst compared to other countries' problems, but I could be wrong. 

Continued expansion of deficit spending amid continued tax-revenue contraction. 

Expansion of deficit spending is becoming politically untenable -- check out the Senate killing an always popular with dumb voters unemployment extension. Combine with the fact that the Democrats will lose the House in November and I think the area of growing deficits is over (though deficits will still be exceptionally high by historic standards.)

Tax revenues will continue to fall, but I expect the government will increase taxes soon which will mitigate that to some degree. 

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#21) On July 01, 2010 at 3:29 PM, cbwang888 (25.55) wrote:

Gold is showing its commodity face today. The headline of China slowing down gave commodity traders a big reason to sell. It is a emotional trade of PM traders (not investors)

Crude oil is also down more than 3%. 

US T-bonds : bubble, bubble, bubble.

30Y T-bond is up while USD weaker, this is not a normal safe haven trade. Looks like this is a setup for stocks, commodities and PMs to trade higher from here as USD is running out of steams of its recent rally.

 

 

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#22) On July 01, 2010 at 3:35 PM, goldminingXpert (29.64) wrote:

Natty gas is up 5%. Corn is up big today too! Commodities are having a good day actually.

Oil is no longer a true commodity, but is also a hybrid currency/commodity.

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#23) On July 01, 2010 at 3:38 PM, XMFSinchiruna (27.59) wrote:

Wow... we have plenty to discuss ... :) I'll be back in the morning to share my responses.

You appear to underestimate both the likelihood and the impact of additional quantitative easing ... which is a common thread through most of the points I made. QE is guaranteed to backstop all the deteriorating conditions that will threaten to tip the economy into depression. Of course the QE will fail to prevent a depression, but it will nonetheless be the default reponse to deflationary threats.

Mounting losses at Freedie/Fannie is not deflationary ... it is inflationary!!!!!!!!!!!!! We have already indicated, explicitly, that there is no limit to the capital will be dedicated to backstopping the GSE losses.Therefore, what appears deflationary is inflationary because of the default response thereto. Same for state/muni bankruptcies, pension funds, and all the other unacceptable deflationary inputs that guarantee QE to essentially infinity.

The crux to this topic is understanding the currency component of inflation, and understanding that gold's rise to $1,250 in the first place is indeed proof that previous fiscal intervention had an inflationary impact through diminished purchasing power of the USD. Gold is a barometer for inflation, which is precisely why central banks and the banking establishment have sought to contain its rise (with only limited success). There is a lot more to inflation than CPI, and depressionafry inputs are inflationary when they are guaranteed to increase deficit spending to confront them.

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#24) On July 01, 2010 at 3:41 PM, goldminingXpert (29.64) wrote:

Only 10 recs people? :) The original post may not have been very good, but there's some interesting commentary in the comments section at least.

Looking forward to seeing more of your response TMFSinchiruna. 

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#25) On July 01, 2010 at 3:51 PM, XMFSinchiruna (27.59) wrote:

We're definitely getting to the meat of the matter.  :)

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#26) On July 01, 2010 at 3:51 PM, 100ozRound (29.50) wrote:

11

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#27) On July 01, 2010 at 3:53 PM, XMFSinchiruna (27.59) wrote:

Getting this topic right will make the difference between who preserves their capital and who losses capital over the rest of the decade.

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#28) On July 01, 2010 at 4:06 PM, rofgile (99.32) wrote:

Why would you buy gold now at such high prices?

If your answer is, you wouldn't - that explains why the prices are falling.

 -Rof 

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#29) On July 01, 2010 at 4:22 PM, EnigmaDude (87.04) wrote:

Wait - is that the sound of a bubble popping?

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#30) On July 01, 2010 at 4:30 PM, XMFSinchiruna (27.59) wrote:

rofgile

It might ... if gold were a free and unfettered market.

EnigmaDude

Why no ...  it most certainly is not .. once again.

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#31) On July 01, 2010 at 5:06 PM, ChrisGraley (29.97) wrote:

I'll be buying more silver tomorrow and waiting for the government to pump even more money into the system.

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#32) On July 01, 2010 at 5:34 PM, alberta911 (74.20) wrote:

goldminingXpert

Kudos for noticing corn wheat and sugar today...perhaps hedge funds felt a bottom and are positioning themselves for a green theme

I felt the bottom and I am no longer just playing the VXX

Risk on Folks!

 

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#33) On July 01, 2010 at 8:26 PM, DarthMaul09 (29.87) wrote:

Great and civil discussion.

The market moves now are like the middle of an interesting chess game, where there is a complicated set of interactions and the outcome is still uncertain.

From an investment point of view, I'm holding my current position (mostly miners, PM, energy and some tech) and putting new money into CEF as opposed to leaving it in a money market account or buying bonds.

It feels like the fall of 2008.  With the knowledge of what happened following that event, in terms of PM, miners and equity prices, I find myself questioning why I should deviate from the correct investment decisions that I made back then.

 

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#34) On July 01, 2010 at 10:19 PM, alberta911 (74.20) wrote:

Last 48 hours closed all short positions…which was 50%

Long Opened tech, green energy, 10% financials

Time will tell…but I wanted the summer off

 Feels like a bottom to me..

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#35) On July 02, 2010 at 1:06 AM, JakilaTheHun (99.93) wrote:

Gold is falling because the Yuan is appreciating. 

I said this exact same thing in a comment on one of your posts a few days ago.  Gold demand is not the result of 'hyperinflation' in the US or any garbage or conspiracy theories that TMFSinch regularly posts about.  Gold demand is driven by China, India, and Russia. 

The Chinese government was destroying the value of the Yuan by artificially undervaluing it versus the Dollar in order to increase exports.  Hence, the Chinese were huge buyers of gold in order to retain purchasing power. 

Notice that gold's boom conveniently coincides with Yuan undervaluation.  It started around 1999, two years after China's fixed peg began and the Yuan slowly started to become significantly undervalued.  Prices continued to rise rapidly until around 2006 --- then, they stayed more rangebound for about a year or so, before the financial crisis hit in 2007.  Not coincidentally, China started letting the Yuan appreciate some in 2005 --- they never fully corrected the undervaluation, but it was alleviated to some degree. 

Gold spiked, then dropped again during the crisis. It fell back down to around $700 for awhile in 2008.  Then, China re-initiated the Dollar peg.  And what d'ya know --- money supply plummets in the US and gold prices rise.

This is why both the US$ and gold were rising simultaneously.  

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#36) On July 02, 2010 at 1:26 AM, whereaminow (30.26) wrote:

JakilaTheHun,  

Wait.... did you just defeat a conspiracy theory... with a conspiracy theory?

Bravo... bravo!

Merriam Webster 
Main Entry:
conspiracy theory
Function: noun
Date: 1909

: a theory that explains an event or set of circumstances as the result of a secret plot by usually powerful conspirators

David in Qatar

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#37) On July 02, 2010 at 1:34 AM, goldminingXpert (29.64) wrote:

Well, this thread has run in directions I did not expect. I like it.

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#38) On July 02, 2010 at 7:32 AM, cthomas1017 (97.15) wrote:

Comment #24 - When did the direct correlation between the quality of a post and the number of recs rule get established?  #24 is clearly in violation of the rule prohibiting "Rec Quantitative Easing".  What's next?  Predicting armageddon on 09/09 IN ALL CAPS!?!  Wait, that's already been done.

Has no one considered the prospect of hyperstagflation?  And yes, I believe you have grossly underestimated the state deficit problem.  California is in an untenable position in being able to cut spending.  The CA economy is an order of magnitude or two greater than Greece.  If CA becomes insolvent before November, DC is going to go bonkers trying to shift remaining ARRA dollars to CA to the detriment of all the other states.  IOU's will only carry CA so far.  At some point, one of their suppliers will pull out and the dominos will start falling.

The current administration & congressional "leadership" have been all too willing to go against the will of the American people and another crisis will be necessary to feed their spending addiction and funneling of money to their special interests.  If there is one lesson the American people will learn (short memory span or not), it is that we must watch people's actions and not their words.

I guess it is possible to increase the debt limit $2T and then crow that you've cut deficit spending by $7B, but it's still not a cut in spending - it's a cut in the projected spending.  Shell games & ponzi.  Pure and simple.  And yes, there will be those shouting "conspiracy" after the fact, but it will be because they didn't see it coming and those who did will be perceived as instigators.

Bottom line, either the event that starts the cascade is completely unexpected, or it will be incredibly obvious to everyone - but only in hindsight. :o 

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#39) On July 02, 2010 at 7:57 AM, XMFSinchiruna (27.59) wrote:

JakilaTheHun

Gold demand is not the result of 'hyperinflation' in the US or any garbage or conspiracy theories that TMFSinch regularly posts about.  Gold demand is driven by China, India, and Russia.

Jakila, do you care to unveil the painstaking methodology utilized to build your hypothesis? I didn't think so.

GLD alone reports holding the equivalent of the seventh largest sovereign gold stash. I suppose all those shares belong to wealthy Russian magnates?

Unprecedented and enormous volumes of gold bullion were sold on the European continent while things turned particularly ugly over there.

Gold derivatives trade in London on the LBMA at an average daily volume of more than $20 billion! I suppose that's where Indian families are purchasing their fine jewelry?

Saudi Arabia just doubled its reported gold reserves overnight, increasing their reported stash by a volume nearly equivalent to India's market-changing 200-ton purchase from the IMF.

U.S. bullion dealer Blanchard & Co. has reported a 60% increase in gold sales thus far in 2010 compared to prior year levels. By the third week in May, the U.S. mint had already sold more than twice as many gold coins (158,000 ounces) in that month as it had in the prior-year's entire month.

Do you have any understanding of the role of the American, Canadian, British, and European bullion banks within the global gold market? Are you aware that many of these banks trade -- not for clients but for their own house trading -- gargantuan volumes of gold and silver positions on the COMEX and other exchanges?

Before you decide to take cheap shots at me, or challenge my understanding of the gold market, you may want to take a moment to actually learn the structure of the global market on at least a rudimentary level.

 

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#40) On July 02, 2010 at 9:03 AM, JakilaTheHun (99.93) wrote:

David,

LOL.  

Look, kiddo, how is it a "conspiracy theory" to assert a known fact? Are you denying the existence of the Chinese currency peg? 

For your next trick, maybe you should challenge the Theory of Gravity.  Things like science and known-facts have never gotten in your way, so no reason to let them get the best of you now!

 

Sinch, 

Nothing you've said refutes my theory.  Acting outraged and babbling on forever does not really prove all that much. 

Do you deny that a large chunk of the world's demand for gold comes from East Asia?  Do you deny that the Chinese currency peg artificially weakens purchasing power for Chinese consumers? 

I agree with you on problems in Europe.  That could be a driver of gold moving forward, still, but if China is truly dedicated to appreciating its currency (and I'm doubtful), then one of the major underpinnings driving gold demand will be undermined.  Instrinsic value for gold should be closer to $900 - $1000 without huge market distortions.

Babbling on about how JP Morgan somehow magically alters the forces of supply and demand all by itself will not really change the production costs for miners, which are well below $1200/oz in most cases.  

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#41) On July 02, 2010 at 9:17 AM, whereaminow (30.26) wrote:

JakilaTheHun,

I was referring to your conclusions drawn from a casual analysis of events, pulled together and presented as evidence of a three country conspiracy to use gold as a weapon in trade wars.  That sure sounds like a conspiracy theory to me.  Are they part of the New World Order?

As for this silly comment:

Gold demand is not the result of 'hyperinflation' in the US 

Well, gee, thanks.  How insightful.  Too bad it's a strawman.  Perhaps you meant to say: 

Gold demand is not due to the EXPECTATION of 'hyperinflation' in the US  

Now you might be walking on solid ground, since many individual investors do indeed buy gold on the EXPECTATION of hyperinflation sometime in the future.  From this point, you can proceed to offer a counter argument that's not a straw man.  

David in Qatar

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#42) On July 02, 2010 at 10:06 AM, JakilaTheHun (99.93) wrote:

I was referring to your conclusions drawn from a casual analysis of events, pulled together and presented as evidence of a three country conspiracy to use gold as a weapon in trade wars.  That sure sounds like a conspiracy theory to me.  Are they part of the New World Order?

You concocted that conspiracy theory, not me. 

I've merely stated an obvious fact: the Chinese peg artificially weakens the purchasing power of Chinese consumers. 

From that, it would make sense that much of China's demand for gold results from Chinese citizens trying to maintain their purchasing power. Not sure what on Earth this has to do with using "gold as a weapon in trade wars", which sounds like some goofy sort of thing that a goldbug would talk about.

 

Well, gee, thanks.  How insightful.  Too bad it's a strawman.  Perhaps you meant to say

Congratulations.  You added an implied word to my statement. You're just one level away from correcting spelling errors. You'd make a great English professor. 

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#43) On July 02, 2010 at 10:15 AM, MoneyWorksforMe (< 20) wrote:

JakilaTheHun,

"That could be a driver of gold moving forward, still, but if China is truly dedicated to appreciating its currency (and I'm doubtful), then one of the major underpinnings driving gold demand will be undermined." 

If you're doubtful of future, rapid appreciation of the yuan, why do you suggest that as a reason for a significant decrease in Chinese demand for gold going forward?

Your argument now seems tenuous...

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#44) On July 02, 2010 at 10:16 AM, outoffocus (23.35) wrote:

Has no one considered the prospect of hyperstagflation?

THANK YOU!!!!! If the answer to this question is no, then your arguments on the reason for gold's rise and why it will continue rise are short-sighted IMO.  I've said it before and I'll say it again, the reason why the arguments for inflation and deflation are so strong is because they are BOTH RIGHT!!

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#45) On July 02, 2010 at 10:48 AM, cthomas1017 (97.15) wrote:

oof & I agree on something?  Surely that can't be a good sign.  But do you remember the tribute posting from last September, almost a year ago?  The one where oof had whined that he his posts were destined to get zero recs, and then he was proven wrong.  Now THAT was a civil post!  (Whereas the civility of the exchange here headed downhill almost as soon as someone deemed it to be civil!

Thanks, oof!  I think the only thing we are assured is that the "new norm" is volatility! 

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#46) On July 02, 2010 at 10:55 AM, XMFSinchiruna (27.59) wrote:

JakilaTheHun

if China is truly dedicated to appreciating its currency (and I'm doubtful), then one of the major underpinnings driving gold demand will be undermined. 

You are ignoring the simultaneous impact that reduced Chinese demand for U.S. Treasuries would have on gold prices.

Instrinsic value for gold should be closer to $900 - $1000 without huge market distortions.

Wow ... that's quite a bold and completely unsupported statement. I could just as easily say that gold's intrinsic value should be $1,600 were it not for the consistent suppression of prices by the bullion banks and the fraudulent leverage employed in the OTC exchanges. Those may appear to be equally speculative claims, but I'll let Fools decide which of us has a better handle on the pulse of the gold market.

Babbling on about how JP Morgan somehow magically alters the forces of supply and demand all by itself will not really change the production costs for miners, which are well below $1200/oz in most cases.

Correction: costs are well below $1,200/oz in ALL cases. In a supply constrained market like we presently have, production costs have no bearing on gold prices EXCEPT to provide a cement floor beneath long-term prices. Costs begin to influence prices only when margins tighten as they did in 2008. If supply were to outpace demand, which is nowhere near becoming a credible threat, only then will production costs come into play as a partial constraint upon price.

There is no magic in JPMorgan's actions in the bullion markets. It's all smoke and mirrors. :P

Lastly, if you're all done employing an insulting tone toward me, some of us would like to get back to a pleasant and respectful discussion of these topics.

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#47) On July 02, 2010 at 10:56 AM, whereaminow (30.26) wrote:

JakilaTheHun,

There was a lot of lashing out there.  Pretty much exactly what you accused TMFSinch of doing as you belittled him.  Although, TMFSinch gets regularly applauded here from investors who have made real money from his sound advice, so I don't worry about Sinchy too much.

It still sounds like a conspiracy theory. 

I was correcting you in order to help you with your argument.  You sounded like a cheesy sports talk radio host that makes up an argument that nobody would advocate and then defeats it to sound smart:

"I don't care what anyone says..... REX GROSSMAN is NOT a quality NFL quarterback!"

You did the same thing:

"I don't care what anyone says.... gold is NOT rising as the result of hyperinflation!"

Well, no one ever said gold is rising because of hyperinflation.  Perhaps now that you understand the difference between "expectations" versus "results", your counter-argument will make more sense.

David in Qatar

 

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#48) On July 02, 2010 at 10:57 AM, JakilaTheHun (99.93) wrote:

If you're doubtful of future, rapid appreciation of the yuan, why do you suggest that as a reason for a significant decrease in Chinese demand for gold going forward?

I've suggested one reason why gold may have tumbled and why gold and the Dollar might have been appreciating at the same time.

I've made no predictions about the future. 

Gold is overvalued on an intrinsic basis, but that doesn't mean that it will fall.  It could rise to $2000/oz for all I know; if currency distortions continue and the Euro's status quo remains, the odds of that happening are improved.

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#49) On July 02, 2010 at 10:58 AM, XMFSinchiruna (27.59) wrote:

cthomas1017

I re-submit my comments posted to this article from 15 months ago:

http://www.fool.com/investing/international/2009/04/23/is-us-hyperinflation-a-real-possibility.aspx

Anand,

may I offer a third scenario?

Bernanke's interventions don't have to be successful to spur inflation.

When you have a contracting economy, but massive spending transitioning into quantitative easing in a failing attempt to counteract de-leveraging, and foreign creditors grow increasingly wary of the entire mess... these are clear ingredients for stagflation.

Eroding value of the USD (looming) vis-a-vis bailouts and quantitative easing can indeed stoke double-digit inflation even as several key asset classes like housing experience falling nominal prices in a contracting overall economy. I prefer the term stagflation because it differentiates from the commonly understood hyperinflationary model which presupposes some measure of economic stabilization to precede the event (thus increasing velocity of money).

I believe the bailouts and fiscal interventions will fail to generate economic recovery in the face of an insurmountable mountain of toxic derivatives (at least $684 trillion). I believe that the recent foray into quantitative easing is just the beginning, which creates a dangerous vicious cycle for the USD, prompting further acceleration of the printing press and sealing the downward trajectory of the USD against the basket of foreign currencies.

This will yield higher USD prices for core commodities like oil, food, metals, etc., forcing the hands of foreign holders of USD reserves to begin unloading in one form or another and making the eventual emergence of a replacement reserve currency system a certainty. Foreseeing this scenario, I believe, China and Russia have held no punches in voicing their level of discomfort with our policies and the continuing role of the USD as the reserve currency of the world.

It seems most folks are watching housing prices, unemployment figures, and other such domestic economic indicators for clues about when we could being to see deflation bottoming and allowing inflation to rear its head. I agree that such a reversal would indeed herald the arrival of inflation, but I consider this scenario far less likely than the stagflationary case.

Instead, I have my focus honed in upon Treasury bond auctions and quantitative easing, the USDX, gold, the growing crisis tally, strategic moves to secure future commodity supplies, and global currency developments with respect to concern over the fiscal health of the greenback, etc. These, I believe, provide the clues we need to follow to predict the onset of inflation.

http://www.fool.com/investing/international/2009/03/24/102-t...

http://www.fool.com/investing/international/2009/04/01/an-op...

Just one Fool's opinion. :)

 

 

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#50) On July 02, 2010 at 11:14 AM, JakilaTheHun (99.93) wrote:

You are ignoring the simultaneous impact that reduced Chinese demand for U.S. Treasuries would have on gold prices.

Not at all. 

According to the Mankiw Rule, the implied Federal Funds Rate should be -5% right now.  It sounds like an absurd result, but it actually reflects the dismal deflationary reality. 

What it suggests is that the demand curve for loans has dropped so far, that a rise in interest rates would actually be highly beneficial in the US.  The implied FFR could rise nearly 8 percentage points, and we would still have relatively low interest rates. 

The more Dollar holdings that China dumps, the better. It will allow the US economy to recover and will increase purchasing power in China.  This will allow the economy to normalize a bit more.

 

Correction: costs are well below $1,200/oz in ALL cases. In a supply constrained market like we presently have, production costs have no bearing on gold prices EXCEPT to provide a cement floor beneath long-term prices.upon price.

Sort of like how earnings didn't matter for tech stocks in 2000?  

If gold rises to $1500 - $2000/oz, supply won't really be all that "constrained" in any meaningful sense.  Even some of these gold mines in remote regions of northern Canada would become profitable at those prices. 

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#51) On July 02, 2010 at 11:23 AM, JakilaTheHun (99.93) wrote:

When you have a contracting economy, but massive spending transitioning into quantitative easing in a failing attempt to counteract de-leveraging, and foreign creditors grow increasingly wary of the entire mess... these are clear ingredients for stagflation.

Except that isn't happening, is it? 

Bernanke started his programs nearly 2 years ago and none of the dire consequences predicted by goldbugs have played out.  Instead, it's been just the opposite.  We're on the precipe of falling back into deflationary territory. 

Money supply is low right now, because the market is not able to reach an equilibrium supply-demand that will allow it to grow under the current conditions.  In order for money supply to grow again, the demand curve for interest rates will have to be pushed upward. 

Until that happens, there will be no hyperinflation.  There won't even be stagflation.  

The idea that "foreign creditors" will suddenly demand high interest rates isn't grounded in reality.  Why would foreign creditors be able to demand 15% interest on a guaranteed return when banks can't even lend out to consumers at 4%?  

And US treasuries are guaranteed.  There's zero default risk.  The US is a monopoly supplier of its own currency, so it can not default.  California can default.  St. Louis can default. Spain can default. The United States can not default. 

We are now at a point where the rates on treasuries might dip below 3%.  This seems to be the exact opposite of many of your predictions. 

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#52) On July 02, 2010 at 11:36 AM, silverminer (30.75) wrote:

JakilaTheHun

The more Dollar holdings that China dumps, the better. It will allow the US economy to recover and will increase purchasing power in China.  This will allow the economy to normalize a bit more.

And who steps in to replace China's demand for U.S. Treasuries when our deficit spending is set to continue at these irresponsible levels for years to come? In order for your point to hold water, someone has to step up to bankroll our deficit spending, and as I look around the world I don't see a whole lot of alternative creditors out there to cover the trillions of dollars in slated Treasury auctions. China's condition of accumulating USD reserves, along with our own QE, has been about the only tourniquet preventing our currency from bleeding to death.

Sort of like how earnings didn't matter for tech stocks in 2000?

Not at all ... those two statements bear nothing in common whatsoever. If you would like to learn something about the minming space, I'm sure there are things I can teach you. We can discuss average mine development timelines and how belated supply impacts are from the moment of a construction decision. When you factor in exploration, conversion of resources to reserves, feasibility studies, and permitting processes, many large-scale projects require 10 years or more to reach production. Taseko's Prosperity project expects imminent permit approval, but the process was initiated in 1995!

In short: dot-com bubbles can pop overnight, while a structural shift in gold from structural deficits to structural oversupply brought about by a price-impact upon production takes many years to unfold.

Over time, $2,000 gold will bring additional supply to bear upon the market, and only time will tell if demand ill rise in lock-step to absorb the added supply, but there is a time-lag in that causality chain that must not be overlooked.

 

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#53) On July 02, 2010 at 11:40 AM, goldminingXpert (29.64) wrote:

Over time, $2,000 gold will bring additional supply to bear upon the market, and only time will tell if demand ill rise in lock-step to absorb the added supply, but there is a time-lag in that causality chain that must not be overlooked.

Yeah. It's taken years for lots of these one or two marginal-mine mining companies to go from, we have an old high cost abandoned mine everyone's written off, back into production, and that's already in mines that have permits and infrastructure.

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#54) On July 02, 2010 at 12:01 PM, silverminer (30.75) wrote:

When you have a contracting economy, but massive spending transitioning into quantitative easing in a failing attempt to counteract de-leveraging, and foreign creditors grow increasingly wary of the entire mess... these are clear ingredients for stagflation.

Except that isn't happening, is it?

I would say that is PRECISELY what is happening. :) The only source of statistical expansion in our economy is government's deficit spending. Even with the trillions spent, we are back on the potential brink of renewed contraction. Everything done to date has failed miserably at addressing the real problem which is the deleveraging $600+ trillion derivatives market, and collectively our predicament is indeed resulting in substantial insecurity in the outlook for our currency, the probability for further QE, and a resulting outlook for stagflation.

Bernanke started his programs nearly 2 years ago and none of the dire consequences predicted by goldbugs have played out.  Instead, it's been just the opposite.  We're on the precipe of falling back into deflationary territory.

Sounds like a pretty dire set of consequences to me. Spend trillions and ultimately achieve nothing with it but a ballooning and untenable debt load. Gold prices haven risen famously over the period, which 'gold bashers' (if we're going to employ silly labels) fail to comprehend as a measure of inflation because they fail to comprehend gold as a currency.

And US treasuries are guaranteed.  There's zero default risk.  The US is a monopoly supplier of its own currency, so it can not default.  California can default.  St. Louis can default. Spain can default. The United States can not default.

Likely right, although I would not call it "zero risk". But in order to avoid default, what becomes of the underlying currency?  

Correction: The U.S. does not supply its own currency. A consortium of private banks called the Federal Reserves is the monopoly supplier of U.S. currency.

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#55) On July 02, 2010 at 12:13 PM, alberta911 (74.20) wrote:

Australia mining tax caved
YOY Indian gold imports looked ugly yesterday  75% down ugly thanks to those people living in their villages who use it like we use bills
US gold and silver derivatives loophole
Overbought
Euro Currency
Margin call
Rotation
Europe goes on holidays

To blame China's currency for all American ills as mercantilism is impossible under Dollar Hegemony.  
From Connolly to Baker to Paulson to Geinthner quarterbacked to Paulson..to China

It is fundamentally hilarious to expect any nation educated or financially illiterate to even consider pursuing a world trade regime that
1. is denominated with a geopolitically constructed fiat dollar
2. that is pegged against an exported geopolitically constructed commodity
3. that floats on a deregulated market
4. where that deregulated global economy has a distorted and detached asset base
5. where that geopolitically constructed fiat dollar deregulated market has government policies that promote
a. serial debt bubbles
b. fuelled by unsustainable over consumption
c. fraudulent accounting.

But it would work with the Chinese if Paulson brokered the deal that was pegged to a commodity asset...

Gold is a different dog every week...it is a culture trade until we create our next ponzi bubble ...which I think will be cap and trade

 

Have not bought physical gold since $800...because I am cheap but would by more silve and platinum if the price was right.

No clue where gold will go but sleep better having it

goldminingXpert any predictions as to  when Africa gold miners will get their rerating?

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#56) On July 02, 2010 at 12:18 PM, JakilaTheHun (99.93) wrote:

Except that isn't happening, is it?

I would say that is PRECISELY what is happening. :)


No, it's not.  The negative economic stuff is happening.  The negative view on US treasuries is not.  You don't understand that the two are contradictory.  Moreover, you seem to be ignoring the reality that INTEREST RATES ON LONG-TERM TREASURIES ARE FALLING!!!

Treasuries are guaranteed.  Loans are not. 

You can't have a market where interest rates on private US loans are 4% and interest rates on US treasuries are 15%.   That's a nonsensical result, because the treasuries provide a guaranteed return and the loans do not. 

You might think that banks could raise their interest rates higher to achieve that result.  Except --- if banks raised the interest rates on loans to 16%+, they'd all go out of business. 

Your result is nonsensical.  It's based on an ignorance of the US monetary system and basic economics.  It's also based on an ignorance of what has happened in Japan over the past two decades.  (Hint:  Japanese treasuries do not have ultra-high interest rates.)  

As an aside, this result could hypothetically occur in Spain.  But not the US since the US govt is a monopoly distributor of its own currency.  It can not occur in the UK or Japan, either. 

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#57) On July 02, 2010 at 12:56 PM, silverminer (30.75) wrote:

JakilaTheHun

Treasuries are guaranteed.

Yeah ... guaranteed to lose to inflation. :P

No, it's not.  The negative economic stuff is happening.  The negative view on US treasuries is not.  You don't understand that the two are contradictory.

You are suggesting that econonmic malaise and waning demand for Treasuries are contradictory conditions that can never co-exist? Boy are you in for a rude awakening once stagflation kicks in.

China, Russia, Brazil, et al. want to replace the USD as the world's reserve currency with a basket of currencies including gold. Does that reflect a positive view on U.S. Treasuries? People are flocking to Treasuries at present not because they love the idea of parking capital for a couple of years at 0.61% yield, but because they perceive greater safety there than anywhere else in this crisis-ridden financial world. Most Treasury investors have no understanding of how little safe haven their supposed safe haven will actually provide.

Your result is nonsensical.  It's based on an ignorance of the US monetary system and basic economics.  It's also based on an ignorance of what has happened in Japan over the past two decades.  (Hint:  Japanese treasuries do not have ultra-high interest rates.)

Glad to see you've brought a sense of respect and decorum back to the discussion. Since you continue to drag the conversation into the gutter, I am done trying to share my perspective with you.

But not the US since the US govt is a monopoly distributor of its own currency.

Especially in light of your ridiculous and insulting comment regarding "ignorance of the U.S. monetary system", you may wish to once again review your mistaken assertion ... since in point of fact the United States is not an issuer of currency at all, having instead delegated said authority to a private consortium of banks called the Federal Reserve.

 

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#58) On July 02, 2010 at 1:13 PM, AvianFlu (35.71) wrote:

There are lots of nuggets of wisdom in this thread if one can get past the squabbles.

For what it is worth, here is my take.
The fed has been printing money at an unprecedented rate. Eventually this will lead to inflation. Holding US dollars is too risky due to possible devaluation. Consequently, the money must be parked somewhere in order to preserve capital. My choice is silver, gold, and stocks in countries that are not committing economic suicide. If our country ever regains its sanity I'll go back into US equities.

Milton Friedman has stated that the time lag between money printing and inflation showing up is difficult to predict. However, I spotted one passage where he generalizes  and suggests that it is USUALLY 18 to 24 months. That would suggest to me that we can expect an increase in inflation between now and the end of the year.

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#59) On July 02, 2010 at 3:47 PM, MoneyWorksforMe (< 20) wrote:

To add some credence to this deflation/stagflation/inflation debate, I suggest everyone take a look at this video featuring Jim Rogers. He clearly states the U.S. is already experiencing price inflation, and all one must do to realize it, is use a more discerning eye when walking around the grocery store. He believes governments around the world, including the U.S. are manipulating inflation data to keep fears in check. I will also add that you can ask almost any adult who has done even modest amounts of shopping over the past decade or so and they will acknowledge the significant increases in the price of gas, food, and medication, among other things.

http://www.youtube.com/watch?v=GE27-RoMdcQ

I came across this video thanks to kdakota630, providing it in his blog. 

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