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Remember the Great Gold Pullback?

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56

May 04, 2011 – Comments (23)

Enjoy the hype from Paper Bugs while it lasts. Keep it filed for future use. Remember early this year, when gold dramatically pulled back from its highs?  Gold "will pull back to $1,000" they said. Some said even further than that.  It was all over for gold.

Yes, well, gold tumbled all the way to $1,310 and then turned upward again, charging well over $1,500.  Once again, every gold bear scrambled to find an excuse.  It's a bubble! of course, being the most common.

Rules for following precious metals 

1.  Paper bugs don't have original thoughts. The CAPS gold bears are no different. Some have fancier charts than others, but none of them - not even the ones that always beat their chest about how they are independent thinkers - actually has an original thought. It's all regarbled Keynesianism.  It's all they know.  It's the only model they were taught. It's the only model on the news they watch, on the blogs they read, etc.  It was taught to them by professors - and professors know everything.

2.  There is no such thing as a "normal price".  There is no "mean price".  No "stable average."  Check the box for 'None of the Above.' Prices are formed from the subjective value scales of market actors. Prices arise from the demand of the good in question and the demand for the currency the price is calculated in. 

As sick as this is going to sound, killing Bin Laden increases the demand for the dollar.

3. In the long run, the most important factor for the price of gold is the weakness of the currency you are measuring it in.  As a sneak preview to my second rebuttal to Alex Dumortier, I'll let you in on a little secret.  According to his/Keynesian "mean price" theory, there were at least 4 gold bubbles in the 1990s.  I bet that's news to you.  In fact, we saw 4 different currencies rapidly lose value against gold in that decade - one of which was a decade long secular bull run (if you understand fundamentals) or a decade long bubble (if you think economics exists independent of prices and people.) 

Not one of them was actually a gold bubble, of course.  The value of their currencies deteriorated because their econometricians convinced them to print a ton of paper. 

Enjoy the next two weeks. That's about how long it takes for a story this big to be forgotten.  Then gold and silver will head right back north, as the underlying monetary picture remains the same.

David in Qatar

Disclosure: Long gold and silver (I'm pretty sure you know that.)

23 Comments – Post Your Own

#1) On May 04, 2011 at 5:39 AM, dbjella (< 20) wrote:

Do you think Congress and the President will be able to hold the line in spending?  

It seems to me that if the market "thinks" the US is serious about it's debt and deficit then the dollar will be stronger.  What do I know :)

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#2) On May 04, 2011 at 7:50 AM, FleaBagger (29.58) wrote:

dbjella - you're right, or rather, you would be if the market ever really thought that. I think it's more like "the market believes Keynes that debt and deficits are good." But the market is made up of many different people with many different views. It just depends on whether or not the ones with those views happen to be putting their money where their mouth is at any given time.

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#3) On May 04, 2011 at 8:37 AM, MoneyWorksforMe (< 20) wrote:

179,000 jobs...sad....At this rate it will be 2020 before we reach pre-recession levels of unemployment.

There goes the dollar, new 52-week low in the making...

Nothing has changed... 

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#4) On May 04, 2011 at 10:05 AM, fndr489 (83.00) wrote:

David,

 First of all, thank you for your insightful posts.  I enjoy reading them very much.  I thought your previous discussion on reversion to mean regarding fixed points was rather interesting and something I hadn't thought about at all.  Looking forward to the discussion that results from your second rebuttal as well.

Second, I wanted to ask you a question regarding the intrinsic value of gold v. the intrinsic value of a dollar.  What is the intrinsic value of something that has a limitless supply i.e. the dollar?  Gold is a finite resource so it has a limited supply yet dollars can be printed to infinite and beyond.  Perhaps this has been discussed before, and I've over looked it, but that seems to be a pretty big red flag. 

Also paper bugs say gold has no intrinsic value yet fiat currencies are designed to lose intrinsic value through inflation?  On the surface that seems pretty weak.

I just wanted to pick your brain a bit.  Keep up the good work!

Justin

long physical silver,

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#5) On May 04, 2011 at 11:02 AM, outoffocus (22.97) wrote:

Lets not all forget that precious metals are cyclical as well.  For the last 3 years we have experienced weakness in pms around this time of year only for the prices to charge higher during the fall of that year.   This is, was, and will be for a few years, the "buying season" for precious metals. When Bernanke and his cohorts stop being predictable, precious metal trading will stop being predictible.  In the meantime I hope you guys have some dry powder left...

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#6) On May 04, 2011 at 11:40 AM, whereaminow (30.92) wrote:

Justin,

I have to give you short answers today, because I am pressed for time. Very sorry about that.

...I wanted to ask you a question regarding the intrinsic value of gold v. the intrinsic value of a dollar.  What is the intrinsic value of something that has a limitless supply i.e. the dollar?  Gold is a finite resource so it has a limited supply yet dollars can be printed to infinite and beyond.  Perhaps this has been discussed before, and I've over looked it, but that seems to be a pretty big red flag.

Also paper bugs say gold has no intrinsic value yet fiat currencies are designed to lose intrinsic value through inflation?  On the surface that seems pretty weak.

The term intrinsic value is not an economic term. It is (I think) a useful starting point for fundamental stock pricing.  As long as you understand that there is no such thing as objective stock analysis, you'll do ok.  Every pricing model is subjective, since the model designer must choose what is valuable information and what is not, and how much weight to assign to each piece of information.  

From an economic view, dollars (and gold) have something called exchange value.  What that means is, you value a money because you expect to exchange it at a future time for other goods and services that are valuable to you.  One characteristic of a "good money" is that it holds its exchange value.  

Take this example. You sell your labor on the market place (whatever is your profession).  You receive X amount of dollars. Today that can purchase Y amount of goods. But if you can only purchase Y/2 amount of goods in a year's time with that same amount of dollars, the exchange value of dollars is falling.  

A good money retains its exchange value (or even better, sees it increase over time.)  The dollar has poor exchange value.  Since the end of the gold standard, it has had very poor exchange value.  And that case continues and only deteriorates as time goes by.  This is mostly due to the ability to create dollars out of nothing, as you pointed out above.  Unbacked paper money (and now electronic money) has long been the domain of utopian cranks who thought that the only thing wrong with the world was that the common man didn't have enough zeros at the end of his bank account balance. 

Warren Buffet has made quite a few non-economic arguments against gold (you can't eat it, it's just piece of metal, etc..) that you touch on in your comment.  The trick is, if you can you use those exact same arguments, except substitute the word dollar for gold in the sentence, then you know the person is economically ignorant.  Buffet is a great investor.  He is an economic fool.  They are two separate disciplines.  Your plumber doesn't fix your corrupted hard drive, and the policeman doesn't land airplanes.  The stock picker is not an economist merely because he can value equities.

David in Qatar

 

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#7) On May 04, 2011 at 12:06 PM, smartmuffin (< 20) wrote:

David,

Great stuff, as usual.  Every time I hear someone make some claim such as "you can't eat gold" I typically respond with "you can't eat your electronic checking account either." 

Unless you're the type of person who is literally going to attempt to buy and store everything you might need to survive for an undetermined amount of time in a "collapse of civilization" scenario, the question you have to ask is, "will I be able to exchange this for other things I need?"  I know I'm just repeating things that people far more knowledgeable than me have already said, but we've seen hundreds of paper fiat currencies become literally worthless.  How many people, since the dawn of man, would refuse to barter in exchange for gold?

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#8) On May 04, 2011 at 12:18 PM, Munchies101 (99.31) wrote:

It is absolutely astounding how emotional people get about gold.

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#9) On May 04, 2011 at 12:22 PM, whereaminow (30.92) wrote:

Munchies101,

 It is absolutely astounding how emotional people get about gold.

There is zero emotion in the post and comments.

Now, we went down this road with you before on the $1500 gold blog. You had an imaginary conversation with a gold bug that you made up in your head, and then proudly concluded that this is how we all are.

I think you might have problems. 

I gotta warn ya, if you're thinking about being my latest troll, don't flatter yourself. I've been here for 2+ years and seen far better.

David in Qatar

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#10) On May 04, 2011 at 12:24 PM, Munchies101 (99.31) wrote:

:)

 

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#11) On May 04, 2011 at 12:25 PM, PeteysTired (< 20) wrote:

It is absolutely astounding how emotional people get about gold.

Where do you read emotion in this blog or posts? 

 

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#12) On May 04, 2011 at 12:30 PM, catoismymotor (28.99) wrote:

+1 Rec.

Ever since those goats tried to cross that bridge trolls have gotten a bad wrap.

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#13) On May 04, 2011 at 1:25 PM, fndr489 (83.00) wrote:

No need to apologize, David.  Thank you for your response.  Great stuff as always.

Justin

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#14) On May 04, 2011 at 1:26 PM, Munchies101 (99.31) wrote:

Whereaminow,

 

Just like to say, you are one of my favorite bloggers, that’s why I read your blogs. I read your blogs before I ever became a member here, and you were the first one to explain fiat currency in a way that I understood.

 

I would also like to say, although our thesis’s is incredibly different, I hate the cheap shots that are delivered both ways when PM’s rise or fall. Believe it or not, just because PM’s rise or fall doesn’t disprove either of our opinion’s, because in fact we both agree PM’s are very volatile.

 

You wrote this in this current blog:

Paper bugs don't have original thoughts. The CAPS gold bears are no different. Some have fancier charts than others, but none of them - not even the ones that always beat their chest about how they are independent thinkers - actually has an original thought. It's all regarbled Keynesianism.  It's all they know.  It's the only model they were taught. It's the only model on the news they watch, on the blogs they read, etc.  It was taught to them by professors - and professors know everything.

 

Then I made a cheap shot saying you’re emotional.

 

Then you said:

You had an imaginary conversation with a gold bug that you made up in your head, and then proudly concluded that this is how we all are.

 

I hope the irony isn’t lost on you, since you pretty much told gold bears what they think. Also go to the end of the blog you mentioned, I apologized for my outburst.

 

Whether you view me as a troll is up to you. I don’t mind your analysis, but the moment you attack others with different opinions you’re no better then the people who immediately declared that the fall in PM prices means the popping of a bubble.

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#15) On May 04, 2011 at 1:34 PM, mike2004 (< 20) wrote:

Hey guys, I am still a young and inexperienced investor so I might say something stupid but don't you think that the miners might have finally bottomed today? As I am watching the charts, most of them are still in red but they are finally trading much better than slv which is very refreshing and maybe a sign of the long-expected upward move. What are your thoughts on this? 

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#16) On May 04, 2011 at 4:37 PM, rfaramir (29.40) wrote:

"As sick as this is going to sound, killing Bin Laden increases the demand for the dollar."


That is very true. Killing him has caused fear in the markets that some as yet unknown reprisal may happen. This causes people to sell stocks, both generally due to going on the defensive or wanting dry powder to take advantage of irrational drops, and specifically in stocks they believe will suffer more than others, depending on what specific reprisals they imagine.


This stock selling becomes dollar demand by default. Any cash raised from sold stocks that doesn’t get immediately redeployed (in, say, PMs) becomes invested by the brokers in Treasuries and such through sweep accounts. It’s temporary, but for a while, quite real. (I'm no expert on the fine details everywhere, but this is my rough understanding of how it works.)

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#17) On May 04, 2011 at 8:04 PM, whereaminow (30.92) wrote:

mike2004,

Hey guys, I am still a young and inexperienced investor so I might say something stupid but don't you think that the miners might have finally bottomed today?

My first question is, do you have a rainy day fund. If not, stop what you are doing right now and starting saving, first in dollars and then in metals.  

If you do, then here's my next advice, if you are new to the mining market, BEWARE.  It is extremely volatile. 

However, if you want to take a dip into the PM equitites, I highly recommend browing the articles on this site by Christopher Barker, aka TMFSincharuna, or tuning into my personal favorite, Gold Seek Radio (podcasts available on ITunes.)

For now, that's all the advice I can offer.

David in Qatar

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#18) On May 04, 2011 at 8:05 PM, whereaminow (30.92) wrote:

TMFSincharuna

Oops, sorry Chris. That's TMFSinchiruna!

David in Qatar

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#19) On May 04, 2011 at 8:11 PM, djemonk (< 20) wrote:

Post #6 is probably the clearest analogy i've seen to explain the thinking of gold valuation as compared to stock valuation.  That was really helpful

+1 Rec 

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#20) On May 04, 2011 at 11:12 PM, MoneyWorksforMe (< 20) wrote:

http://www.marketwatch.com/story/bank-of-mexico-buys-100-tons-of-gold-in-two-months-2011-05-04

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#21) On May 05, 2011 at 2:24 AM, whereaminow (30.92) wrote:

rfaramir,

Killing him has caused fear in the markets that some as yet unknown reprisal may happen.

To be honest, I hadn't even considered that (shame on me), but that's a good point.  My reasoning was as follows.  Since currency value is as subjective as anything else, the ability of the US to project power increases the desire to hold the dollar relative to other monies.  I expect a slight bump in the dollar's value from this effect. 

Second, the death of Bin Laden might (fingers crossed) mark an end to the Afghan War.  ***NOTE***: I don't necessarily believe this nor do I discount the possiblity that an end to the Afghan War might just see a transfer of troops to Libyra...... BUT...... among market participants in general, they might be led to believe such a thing.  This would also raise the value of the dolllar in their eyes for two reasons. 1. less war equals less spending equals less need to inflate and 2. winning war (even in this illusionary fashion) leads back to the point I raised in the previous paragraph.

I don't like to put price targets on anything, since I'm not an arrogant central planner that thinks an equation can tell me the correct price of a good.  However, I do have ranges where I will start to buy back some gold I traded after Bin Laden's killing (yes, I sold some to play this trade.)  I would not be surprised to see $1,450 gold and $32 silver in the next week or two based o the strength of the initial downward move.  But that is more of a number range where I wouild feel more confident to move back in, rather than a fair value price or anything like that.

David in Qatar

 

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#22) On May 05, 2011 at 10:46 AM, mtf00l (45.06) wrote:

*Prognostication*

The kill'n was just a publicity stunt for the current administration.

The "wars" will never end even after the troops are "relocated" to other "hot spots".  The CIA and the private contractors will remain forever...

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#23) On May 05, 2011 at 8:57 PM, HarryCarysGhost (99.72) wrote:

mtf00l

I'm glad I'm not the only one who's thought that. (David said it in a blog, but I'm of the belief that he was already dead. Don't mean to go all tin-foil hat, I'm just not buyin it)

Disclosure- Took profit from my SLV miners at $50pr/oz and will be looking to buy back. Yeah David $32 sounds about right.

Cheers.

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