Gyroscopic Investing

I am concerned that recent comments by Bernanke have initiated the decline in Gold. Are others concerned that we may have reached the pinnacle in Gold and can expect a sell-off to ensue?

Maybe.

If Bernanke doesn't telegraph more QE, then LT treasuries will probably do well, and gold will suffer.

If Bernanke does telegraph more QE, then LT treasuries will probably do well, and gold will also do well.

What should the PPer do?  If hungry, have a sandwich.

buddtholomew wrote: I am concerned that recent comments by Bernanke have initiated the decline in Gold. Are others concerned that we may have reached the pinnacle in Gold and can expect a sell-off to ensue?

Don't hold your breath.  These issues are way more complicated than what you read in the news.  In the past gold has steep declines during bull markets and then gone on to reach new highs.  It's impossible to predict...even more impossible than other asset classes.

Besides, you should be happy if gold is doing bad.  It means that the dollar is probably doing good.

From what I gather, a rising dollar has negative impact on equities and gold. The price of oil is of consequence to me, but I would rather pay more at the pump and have my portfolio increase, than pay less and watch my nestegg decline.

Desert wrote: But don't you think that LT prices will also suffer if QE ends?  My understanding is that QE has been focused on buying LT treasuries with the goal of suppressing long rates.  If this buying ends, it should have the effect (perhaps minor) of reducing LT prices and increasing long rates.

At the end of QE1 interest rates fell, even though the whole world was certain the opposite would happen.  No one really knows what exactly the Fed is buying with QE funds.

Is your view that the QE effect on long rates is largely just noise in an overall deflationary trend? 

Yes.  Like spraying a garden hose into a tidal wave.

Desert wrote: I'm starting to think that deflation is more probably than inflation now.  I really felt that the Fed's actions would drive more inflation than we've seen.  I guess it's still possible that the Fed could announce a QE that was 10x the size of QE1 and QE2, and drive inflation ... but absent something of that ridiculous magnitude, Bernanke seems to be unable to combat the deflationary forces (except perhaps in investable asset values). 

Fortunately I didn't adjust my portfolio from the standard 4x25 based on my earlier beliefs! 

A $10 trillion QE package would probably generate some sustained inflation (though I don't think this is a certainty).

I think that the size of the hole that the decline in housing values has left in our economy is MUCH larger than people realize.  A collapse of prices in an asset class that large (and widely held) normally takes decades to repair itself.

There is also the underlying long term problem of stagnant wages.  Without any mechanism for generating some sustained upward pressure on wages, inflation doesn't have much chance of getting any traction.  As I have said before, what is more likely, IMHO, is that there will be an initial wave of inflation (as we saw in early 2008) which will hit a brick wall of stagnant wages and immediately push the economy back into recession, which will push prices back down as demand collapses.

The dirty secret about our economy that few people seem to fully grasp is that for many years people have used increasing levels of debt as a substitute for real wage gains.  This worked fine until people realized that they could no longer service the debt they had, much less take on any more.  And thus we are now seeing the mirror image of the levering up process--people are spending LESS than they make, not more, as they realize they are going to have to pay for all that past consumption that they couldn't really afford in the first place, while setting aside enough to fund a reduced level of current consumption.  From where I sit, this is the new secular trend, and it will be unfolding for a LONG time.  It will seep into the culture the way aversion to debt did in the 1930s and it will change people of this generation for the rest of their lives.  For a consumer economy based on easy credit, the scenario I am describing is not good news.

In the long term, of course, the process above is necessary to heal the economy, but right now the economy is like an overweight alcoholic smoker talking to his doctor for the first time about what will REALLY be necessary to restore him to health.  When he realizes he will have to stop doing everything he likes and will probably suffer for quite a while before he begins to really feel good, I'm sure that a QE-like easy fix would be tempting to him, whether or not it would actually improve his health in any way.

If you think about it, Japan's economy has basically been making trips to the methadone clinic for over 20 years now, and it is not a lot closer to economic health than it was in 1990.  Even now, though, I think people are frightened of what might happen if all of the central bank induced distortions and perversions were removed from the economy...and that's just the way it is inside the mind of an addict.

You invite the easy credit in as an exciting and mysterious guest, but before you know it the easy credit has become the master and you the slave.  It is this way with households as well as nations.