The shoe shine boy has entered the building

[Wonk]

You all know I'm extremely bullish on all things precious (metals, that is) and I put my money where my mouth is.  Today I happened to see this article and it appears things are about to get exciting:

http://www.smartmoney.com/invest/strate ... _featStory

IMO, this is the first indication we're getting close to starting the parabolic phase in gold.  When Joe Public starts to speculate due to impressive recent returns, it signals the beginning of mass participation.  These people are the early adopters.  They buy asset "X" because of what they see on TV.  The key is they start making good money and start to tell their friends.  Their friends start buying and they start making money too.  Pretty soon, you're an idiot unless you are buying asset "X."  It was stocks in the '90s, real estate in the '00s and I believe it will be gold in the next 5 years, plus or minus a few.

The only question in my mind is will gold be a part of a new monetary world order (such as a return of some form of gold standard) or will Bernank and Co find religion in strong dollar policy when the time is right?  Gold speculators were burned badly in the early 80s when Volker jacked rates.  It could happen again, but we're still a long way off.

[moda0306]

For some reason I feel like we won't see "mass participation" in gold at <2% CPI inflation.

I just can't see it happening.

I don't know if we ever followed through with it, but in a recent thread we were discussing the 1981 participation in gold to today's.

I guess I'm of the prediction that gold will rise to about $2,500 and hover.

I put very little weight behind that prediction.

[Pkg Man]

I was listening to some of the old HB radio shows and he is very clear that gold only reacts strongly to high inflation.  Obviously we are not there, so does anyone have any thoughts on how to reconcile HB's thoughts on gold and inflation with the run up in price over the last few years? 

If LT Treasuries were not at such low rates I think we could say that the market is fearful of dollars in general, not just US inflation, but that explanation doesn't seem to hold water right now.

[moda0306]

After observing gold in a deflationary (sorta) recession, I guess I'd have to say that while it's number one factor would be troublesome inflation, negative real interest rates also seem to have a pretty solid effect on golds price.  Remember, gold isn't an industrial commodity (at least not at current prices)... so solid balance sheets, disinflation, prosperity, and high real returns even on ST bonds during the 80's and 90's made gold look almost obsolete as a monetary metal... a "barbarous relic."  If inflation was consistently low, and even if it wasn't interest rates were higher than it, and there's not enough social unrest or unemployment to question the status quo, what's the point of gold?

Further, the state of major fiat currencies probably plays a role.  Europe is having some very large problems with the Euro, but not so much inflation as a default risk problem.  This helps gold as well, because if it has an exponential reaction to the fear over there, but our currency remains safe and in tact, then we benefit from it by having it in our portfolio.

To be honest though, gold is (to me) such a game of greater fools that I can hardly guess as to what it's going to do next.... and to be honest, that's why you want it in a portfolio.  Because for thousands of years, when crap hits the fan, Gold is the game of greater fools that people want to play... not the one that you and I play with our houses, stocks, etc when we spend more than we think the asset is fundamentally worth.

[Pkg Man]

After observing gold in a deflationary (sorta) recession, I guess I'd have to say that while it's number one factor would be troublesome inflation, negative real interest rates also seem to have a pretty solid effect on golds price.  Remember, gold isn't an industrial commodity (at least not at current prices)... so solid balance sheets, disinflation, prosperity, and high real returns even on ST bonds during the 80's and 90's made gold look almost obsolete as a monetary metal... a "barbarous relic."  If inflation was consistently low, and even if it wasn't interest rates were higher than it, and there's not enough social unrest or unemployment to question the status quo, what's the point of gold?

Further, the state of major fiat currencies probably plays a role.  Europe is having some very large problems with the Euro, but not so much inflation as a default risk problem.  This helps gold as well, because if it has an exponential reaction to the fear over there, but our currency remains safe and in tact, then we benefit from it by having it in our portfolio.

To be honest though, gold is (to me) such a game of greater fools that I can hardly guess as to what it's going to do next.... and to be honest, that's why you want it in a portfolio.  Because for thousands of years, when crap hits the fan, Gold is the game of greater fools that people want to play... not the one that you and I play with our houses, stocks, etc when we spend more than we think the asset is fundamentally worth.

You make some good points.  The combo of the Euro problem along with low interest rates is probably what is driving it. 

And while not trying to divine the future, if the Europeans right the ship and the markets then begin to look at the US debt situation as a problem, then we could be in for some interesting times.

Thanks

[HB Reader]

I was listening to some of the old HB radio shows and he is very clear that gold only reacts strongly to high inflation.  Obviously we are not there, so does anyone have any thoughts on how to reconcile HB's thoughts on gold and inflation with the run up in price over the last few years?  

I seem to recall in one of his radio shows (when discussing the 1930s) and in a few of his newsletters over the years he raised the possibility of gold as a form of money doing well under deflationary conditions.  He just didn't believe we could reliabily count on it to perform well like we could under highly inflationary conditions.

Gold did perform well in the early 1930s (for people outside the U.S.) after President Roosevelt arbitrarily raised the price in 1933 by nearly 70% from $20.67 to $35.00 after outlawing domestic ownership.  Having the U.S. government guarantee a price and a market while production costs remained relatively low was also quite a benefit to gold miners during the 1930s.  I think Newmont Mining was one of the best performing stocks in the U.S. during the 1930s.  I doubt that things will unfold exactly this way again, but it does show a complex relationship between gold and deflationary conditions.

Why is it performing so well now?  Obviously we can't understand the motives of everyone involved in the market, but it may simply be that many people around the world see the governments and central banks of the major countries increasingly painting themselves into a corner as they create more promises and liabilities (some of which gets monetized) to prevent their economies from crashing.  While this credit and monetary expansion (which can be traced back at least to Greenspan's reaction to the dot.com crash -- but probably much farther back) has not created generalized price inflation like we saw in the 1970s, it has undoubtedly distorted relative prices in the world economy and created booms and busts in real estate, stocks and bonds (especially derivatives) and food prices in various places and times in recent years.  

That under these circumstances investors would "rediscover" and bid up the paper currency price of what has historically been the ultimate form of non-liability money isn't surprising.  HB talked often of the desire to "hold money" during times of uncertainty.  While the dollar's lead over gold as the most popular form of money seems to be shortening, this overall response to uncertainty seems to be bolstering both right now.  How long can this go on?  Probably longer than we think, but who knows?