August 29, 2006 at 5:36 PM #7373
I’ve been saying for a while now that commodities prices will go down as we enter the recession. Gold is a different story.
I’m allowing myself 30 min. per day on piggington, since I just can’t stay away. my time is just about up.
Anyway, I found this on Barry Ritholtz’ site:
“One possible interpretation of that is the commodities market is anticipating cooling demand — from the decrease in New Home construction, the slowing of the broader US economy, even a lessening of US purchases of goods made in China.
This is a chart worth watching over the short term as it could be the canary in the coal mine . . .”
The image uploader did not allow me to upload a .jpg file, so sorry, you’ll have to follow the link above to see the chart.August 29, 2006 at 9:45 PM #33914greekfireParticipant
5-Year Commodities Chart
[img_assist|nid=1414|title=|desc=|link=node|align=left|width=400|height=272]August 29, 2006 at 10:09 PM #33920
hey, how did you do that? thanks…August 30, 2006 at 7:28 AM #33944AnonymousGuest
Gold is usually a proxy for commodities. Why do you believe it will be immune if other commodities fall due to a recession?August 30, 2006 at 1:25 PM #34008
Gold is linked to inflation, and is bought as a store of value, as investors buy it when they fear inflation rises. Central banks store gold too. But copper, nickel, lead, lumber, are in demand when the economy is heated, to make houses, cars, computers, batteries for cars; during recessions, as demand cools, their prices will drop.I never heard that gold is a proxy for commodities.August 30, 2006 at 6:58 PM #34041AnonymousGuest
Gold is the premier commodity money. It’s metal after all. I’ve studied gold until I’ve gotten sick of thinking about it. A few points stand out to me.
1. It’s a small market and subject to wild swings caused by various interests trying to manipulate its price.
2. In the end gold isn’t magic and has no intrinsic value. It has a lot of good money properties but money derives value from our faith in it. Period. A commodity that can be swung ten percent in a few days doesn’t inspire faith. When the day comes that gold goes through the roof we may find that a gun and some lead are even more valuable. Gold, as I see it, is a hedge of last resort. I’d never put more than 10% of my net worth in it.
3. When a recession hits hard, economic activity declines (that’s almost a tautology, I realize) and commodities take a big hit. Some argue that the producers of commodities are always free to take production off the market and keep the price high. I’ve never seen this in practice. Usually the producers are paying off loans on large capital expenditures. When their cash cow takes a dive they produce even more of it to maintain cash flow and avoid bankruptcy. I believe gold is just like the other commodities and will fall abruptly when the recession comes, right along with $50 oil and $1.50 copper.
4. Hedge funds make me very nervous regarding gold. They have the instincts and morals of a George Soros. When they pile on and then jump off gold they can easily make it swing 20%. That’s great for them since they make money on volatility. For me it’s sleepless nights. I don’t like that kind of volatility in an investment I’m purchasing for safe haven.
5. Much as I hate to say it, just so long as this civilization endures, the gold standard will remain a barbarous relic. That’s not to say governments won’t keep a supply of gold around or that its price won’t go way up. I’m just saying gold won’t behave like the dollar or the euro. It will be Mr. Toad’s mad ride.
6. If you believe we’re heading for a bout of commodity inflation then gold is a good proxy. However, there are a lot of ways to hedge against commodity inflation using ETF’s. DBC is an example.
7. Gold is also a good hedge against political instability though I think I’d prefer eight barrels of oil to an ounce of gold now that ETF’s make that sort of thing possible.
I think we’re heading for a severe recession and that a lot of loans are going to be written off as bad debt. I also, like Nouriel, think that when we sneeze, China is going to get the flu and that will put the kabosh on a lot of industrial activity. The way I read the blogleaves, they’re ripe for a fall even without a recession.
Commodity demand can be inelastic but so is production. When you are running a billion dollar copper mine it’s not easy to cut back production on a dime. Suddenly there is too much copper and pretty soon everyone is competing for the suddenly disappearing buyers. Gosh. That sounds familiar.
When dollar denominated debt goes bad it has the effect of reducing the number of dollars in circulation. That makes a dollar worth more. The fact that China and Japan have so much dollar denominated debt makes them all the more concerned that it not lose too much value. They don’t love us but they do value their investments here. A run on the dollar would hurt them as much as it hurts us.
It’s terribly unimaginative but I think short term government bonds are probably the safest investment. Never thought I’d hear myself say that.
One area where I agree with almost everyone is if you’re going to invest in gold, own the metal. That’s because I believe it’s the hedge of last resort. By the time it comes into its own the financial structures we take for granted will be in disarray. ETF’s will be history.
Don’t take that wrong. I’m not predicting such a scenario but just saying that it’s the scenario I’m hedging against when I buy gold.
Over the years I’ve run the gamut of emotions regarding gold. After all was said and done I concluded that gold, like any money substance, has value simply because we have faith in it. And for the most part we don’t anymore. If we did it wouldn’t have such volatility against the dollar.
I wish I believed in gold in the same way I wish I had faith in a benign and loving god. My life would be happier for it. Until reality smashed me in the teeth.August 30, 2006 at 8:42 PM #34045
ljr, I have to agree with your comments. If gold were a true safe haven, it wouldn’t fluctuate so wildly. How safe is my “safe haven” when its value could be down 15% tomorrow? I’ve asked all these questions about gold. For that reason, I would be reluctant to put more than 5% of my money into gold.
I’m also concerned with ETFs; if the sort of economic collapse that necessitates gold comes to pass, perhaps ETFs would be unredeemable, due to cash flow problems, computer glitches, anything. But keeping it at home seems risky too, and I wouldn’t want to store it somewhere else. It’s funny, but when I had a mortgage and more debt than assets, I had fewer worries about money; it’s true that the more money you have, the more you worry about losing it all.
Short term gov’t bonds sound good for now, but if the dollar starts plummeting, I wouldn’t like the bonds too much either.
Before anyone says I’m all doom and gloom, I am constantly on the look-out for a ray of sunshine on our economic horizon,because one day it will come, and I want to be one of the first to spot it.August 30, 2006 at 9:47 PM #34052WileyParticipant
Wanted to make a few comments in rebuttal to your remarks…
1. small market-Considering that the U.S. money supply has doubled during W. Bush’s tenure, the fact it is a small market makes it even more compelling. What I’m saying is if you take the amount of money that was put into existence in this country since George Washington, that amount has been doubled in the last 10 years. Truly amazing. All those dollars cannot be drained and are always seeking best risk/return. This does not even speak to the Japan/US carry trade that also injected unprecidented amounts of liquidity.
2. Money is faith-Agree completely. A 1950 dollar is worth less then .12 cents now. See #1 and understand when its a good time not to have faith in the paper money. Gold has been money for 5000 years. Our current $ has existed for about 35 years and doesn’t have a great track record for that short period.
3. Recessionary affects-My argument would be we may get more then a recession (gold positive last time), a dollar collapse (given the amount of debt, current account deficit, and inability to fix this in a declining market), above mentioned inflation, and recources being used up with mine production sidelined for 20 years causing delay in more production coming online to fulfill investment demand.
4. Hedge funds- completely agree. But if something is in a bull market all the manipulation in the world is not going to stop the primary trend from completing.
5. Golds behavior-has been and always will maintain value. Unfortunately there isn’t a paper money in history that has ever survived. Paper money is political, gold is not. Paper money is created out of debt, god is not. If paper money is so great why do the banks keep tons of it? Doesn’t make any sense.
6. ETF’s-with the amount of corruption being announced almost daily in the financial world why trust them with your only real insurance against instability. The London Metal Exchange defaulted on their nickel contract just the other day.
Defaulted debt does not have the affect of reducing dollars in circulation. That is an old wives tale. Where did the money go that was lent?
Apparently some people do have faith in gold. It has outperformed the dow the last six years.
My feelings are basically that paper assets have been in a bull market the last 20 years. Commodities a bear mkt the last 20. That is reversing as we speak. Don’t believe me look at the trend of the US dollar index and a gold chart.
Obviously to each his own but you said you’ve thoroughly researched gold which I find interesting that your not a believer in this climate. Have you ever read ‘Creature of Jekyll Island” ?August 30, 2006 at 10:37 PM #34058AnonymousGuest
I purchased my home here in Fallbrook back in 1997 for not much money. It’s an owner built adobe with open beam ceiling sitting on two acres. Every wall in it is adobe. In the summer it stays cool and in the winter it stays pretty warm.
I’ve watched its price go up and now I’m watching its price go back down. But, truth be known, I don’t care that much. It’s home to me and it grounds my existence. I’ve paid it off and burnt the mortgage, so to speak. I have a HELOC but it sits there for emergencies so I won’t have to reach into retirement money.
There have been times in the last year when I wondered if I wouldn’t be better off selling the place but in the end it came back to how I want to live. Every day here I get value. When I want to build a carport I don’t have to ask the landlord if it’s OK. When a buddy brings over 20 cu. yds. of earth and piles it up in my front yard I can leave it for a year if I want to waiting to figure out what I want to do. I value those liberties.
I know just what you mean about money. It’s a constant source of concern – how to preserve its spending power. I’m risk averse and completely aware that the guy with the deepest pockets usually wins at the gambling table. My pockets are anything but deep. So what does one do? I don’t know. Wish I did.
Gloom and doom is a downer but that doesn’t mean you’re wrong.
Philip Dick, the Sci Fi author, said he liked to write about times of great social disintegration because that’s when we humans come back to our real roots of adaptability and ingenuity.
I don’t see how anyone can look at our society and say, “Wow! This is a great way to live.” We need to change and we will change – it will be forced upon us. We need to keep in mind that the change is necessary and resist the temptation to think back on these times as the “good ole days” though it may seem that way. We shall pay the price for not being capable of effective collective self-governance.
You commented earlier about raising your kids to be self-sufficient, curious, self-enabled and self-entertained. Now there’s real wealth. Hat’s off to you. When I read that I realized you’re not gloom and doom at all. You’re a person with a stake in the future looking at a scary time in history with the good sense to be frightened while taking time to bequeath traits of successful living for adverse times to your kids. That is core optimism in my book.
Marshall McLuhan had a saying I really like and agree with:
“It is the business of life to be dangerous.”
I find your posts insightful and well-written. Don’t know where you find the time to participate as much as you do but I’m glad for it.September 12, 2006 at 3:00 AM #35038qcomerParticipant
So what do people think of the latest declines in oil price and the corresponding hit seen on stock prices of oil companies? Did anyone see oil going below $65 and COP going below $60? What are the oil bulls like zeal saying and I would be interested to know how folks think the drop in oil prices will work for other equities.
I think if commodity prices keep dropping, we may well enter a state of deflation. With real estate going bust and recession on the horizon, there is not much support for oil prices to hold up barring geo-political tensions. The argument for peak oil seem to be losing ground as the latest discovery of the oil reserve by Chevron indciates and as production from oil sands become more cost efficient and OPEC reduces production to support oil prices. As per Fed, the biggest concern for inflation has been high energy prices. If oil drops and economy slows to snail pace due to housing then we may as well enter a cycle of deflation where comodities, housing and equities will all lose value.
However, as per previous experiences, our Fed seems to be more capable of handling deflation than inflation. Maybe they will come to the rescue again by cutting rates drastically. What do folsk think?September 12, 2006 at 11:19 AM #35055
I am disappointed in Zeal. It just goes to show that every trader has a good and a bad run, and Zeal’s winning streak is definitely running out. They rode the commodity bull, but once that ended, so did their good calls.September 12, 2006 at 12:38 PM #35069AnonymousGuest
Commodities will continue to weaken for two reasons: (1) demand is falling off due to slowed growth in the economy and (2) supply has increased due to high prices over the last few years. Oil prices will continue to fall due to (1) and (2).
Short-term, gold and the stock market bounce up and down due to reaction to news here and there. However, long-term, the prognosis for gold is awesome, if you believe folks will move out of the U.S. dollar to something safer.
Why will folks move out of the U.S. dollar?
1. The supply of dollars in foreigners' hands continues to grow strongly (see today's trade deficit figures).
2. But, with the increased supply of dollars, the value of the dollar continues to decrease: (http://www.research.stlouisfed.org/fred2/series/DTWEXB?&cid=105
3. Japan is already undwinding its supply of U.S. dollars: http://www.treas.gov/tic/mfh.txt
4. With oil prices falling, we'll see purchase of U.S. Treasuries by the Middle Easterners fall off; only the strong purchase of U.S. Treasuries by MEs (as someone else explained, U.K. is where the sheikhs bank) has kept prices for Treasuries high.
5. When demand for Treasuries falls off, the Dept. of Treasury will have to offer high rates on Treasuries to keep buyers coming.
6. The high rates of U.S. Treasuries will increase rates that corporations must pay on commercial paper and bonds, otherwise investors will purchase risk-free, high yielding Treasuries.
7. High interest rates broadly will kill demand for homes, cars, investment, etc.
8. Foreigners will exit the dollar-denominated investments en masse, due to lack of confidence that borrowers will be able to repay loans/make attractive returns on equity.
9. The glut of freed dollars (investors turn in Treasuries for dollars) or printed dollars (the Treasury can find fewer buyers to finance the federal deficit, so it cranks up the printing press) will result in horrid inflation.
10. Prices go up, wages go up, but not as fast; thus, purchasing power falls, demand falls, then tanks, as folks wait to buy homes, cars, etc. in the expectation that prices will fall further . That is deflation (same volume of money x slower velocity).
When folks exit Treasuries and U.S. corporate stocks and bonds, where will they go? Swiss Francs are nice, but gold is better.September 15, 2006 at 1:27 PM #35445heavydParticipant
As someone who works at a hedge fund, I take some offense to the comments about hedge funds and George Soros. I can think of no other private individual who has done more to promote democracy and clean government in places like Russia, Czechoslovakia, Georgia, Hungary, and South Africa. Likewise, prior to Gates’ and Buffet’s recent announcements, I can’t think of any living philanthropist who has given away a greater percentage of his fortune (ca $5bn at last count). As an industry hedge funds are publicity shy, which is too bad considering what a positive force they are in US philanthropy. Bottom line is, if you don’t like risk, stay away from risky assets like stocks, currencies, commodities, and real estate.September 15, 2006 at 5:24 PM #35478AnonymousGuest
What comments about Soros have been made in this blog, I must have missed them?September 15, 2006 at 6:28 PM #35482
vrudny, great analysis! Can you copy the WSJ article, since it’s subscriber only? Now that oil prices are dropping, we’ll see a big reduction in UK purchase of treasuries. The late September auctions should be at higher rates. What about euros? I like gold, but after seeing its high volatility, I am getting more nervous about buying gold. How safe is my money when its value can fluctuate by 20% within a few weeks? That certainly does NOT inspire confidence.
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