October 16, 2008
– Comments (6)
With all the volatility. With all the doom and gloom. With all the forecasts for future major inflation. Why is gold only at around $844 per ounce?
I can certainly provide answers for you, just not at the moment (it's late!) :) If I don't get back to this post, please remind me with an e-mail to firstname.lastname@example.org
Briefly, though, these prices won't last.
Interestingly, due to the credit bubble collapse the first thing that should happen is that the dollar gets extremely strong. Put another way, in order to pay debts of all kinds, every asset class will be sold off. Stocks, oil, gold, silver, base metals and anything else that has been speculated will be sold to pay the piper. Conversion to dollars must occur because debt/credit is issued in dollars.
After that happens for a time, then inflation sets in due to the money influx by the Fed (possibly beginning 18 months out according to some).
There's quite a bit to this. See dwot's blogs for more info.
What inflations? Don't you see all the commodity price dive? You would make fortune by buying ultra-short on basic materials for the last month. Oil is BTW $73 now.
We are going to see a deflationary recession, IMHO.
What he's saying is that prices have to contract due to lack of money to buy them. The fed keeps pouring money into the system. If they don't get it out, then yes the prices will go back up (on everything) due to the paper being worth less.
One word: deleveraging! That means selling whatever you have on your books (including gold)...
Remember we had 5 "investment banks"? These guys were leveraged 30:1. They have gone under or become regular banks. That means they have to play by (more regulated) bank rules. 30:1 is not allowed for a regular bank! So they need to deleverage.
Remember Credit Default Swaps? $30B in LEH bonds had about $270B in CDS "insurance" (by the way, just imagine you can insure your neighbor's car for 10 times its value! Wouldn't it somehow magically sustain some major damage? Cha-ching...). The issuers of these CDSs now need to pay 91.375 cent on the dollar! And for a significant part, they are hedge funds. A typical hedge fund is heavily leveraged, so they need to sell, sell, sell.
With two major groups of players sellling everything they can sell, where do you think the markets are going? Why would gold be exempt?
The COMEX is becoming irrelevant.
Not so much for gold, but silver is underpriced. You can't get silver for $10/oz, not in coin or small bars. I just sold some 1 oz silver coins (Canadian maples) for $23/oz. I buy and sell. There is tremendous demand and not enough supply.
There is massive deleveraging, the money supply has actually contracted recently, so the only way I see terrible "inflation" is a dollar collapse. It's wouldn't be bank inflation or maybe even so much the Fed printing money as the whole world cashing in dollars they have. Everybody blasting each other with dollars simulataneously. Just a loss of confidence somehow. And nobody shows up to buy the dollars. That's leads to a crash. The guns, gold, bunker crowd likes this theory. I just prepare for any possibility...