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gold_dredger,

Why do you consider “intrinsic value” for paper money but “trading value” for gold? What is the “intrinsic value” of gold?

Gold or paper money, all are used to replace faith/trust that we have to put in a 3rd party (govt) when exchanging goods (barter). You said that paper money is a promise in a bad sense but this is exactly what it is supposed to be. Unless you are trading goods for goods, you need a medium/bank/govt to ensure that they can promise to hold value of traded item (paper receipt of trade) and offer it to you later in exchange of something else that you want to trade. The key is how much trust you can put in the 3rd party. If the govt or 3rd party is corrupt, they will default on that promise and then it doesn’t matter whether they offered you a paper receipt in writing or a shiny metal in return. Abd we have seen historical examples from both sides.

The gold debate is about supply and demand, its about inflation vs deflation as monetary policy and its about trust. Sometimes gold bugs try to make it something different, calulating astronomical values of gold. The main advantage of gold is its limited supply chain and that historically it has been easily tradable. But for that matter, you can own Euros if you think European govt is better/honest than ours and Euros are more easily tradable, exchangable and storable than gold. The percentage of gold or land or food or Euros that you hold should be proportional to the probability you place on the defaulting of US govt. I keep it below 20% generally. However, investment/trading gold is seperate discussion.

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I have seen many relisings in UTC, RB, Mira Mesa area. The only difference is that the price has been hiked up by 15K-25K with the expectation of a “spring market boost”. One condo in Saber Springs came back up 25K higher. When I asked the seller about the price hike, his answer was that “market dynamics have changed now and he has put money i maintenance”.

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Small correction. Stock market is getting beaten in last 2 weeks because of “good housing” news not bad. The beating started when yield curve broke through its 200 dma at 4.85 and reversed predictions from rate cuts to a possible rate hike this year. The fear of a rate hike is hitting the markets just like in May 2006.

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I would like to add to the inflation and housing price discussion. I think both parties are making the same point.

A house consists of real assets (timber,concrete,steel,land). With inflation, the price of these assets increase as it takes more money to construct the same house. The higher inflation cycle is caused by easy money flow (low rates) which causes home prices to rise as more money competes for same assets.

Govt interest rates “follow” inflation and as often we have seen, only start going up after inflation is out of control already. It means the asset prices had already risen when interest rates start rising to squeeze out the easy money. This is what happened from 2000-2005 as low rates eventually caused inflation in housing, stock prices, commodity prices, etc. More inflation is caused as eventually greed sets in with a belief that asset prices will keep rising and some assets end up in a bubble. Once that inflation ginnie is out officially then Fed started raising rates in 2004. After sometime, when effect of rate hikes start setting in, it marks the beginning of a deflationary period when asset prices start to fall.

In conclusion, with higher inflation, asset prices rise. This is followed by higher interest rates, that cause asset prices to fall. I believe the Fed still needs to raise rates further to really hurt this liquidity beast and begin a much needed deflationary period.

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Chris,

Just last January, markets started off 2006 with a nuce bang (close to 5% boost in first month) but that was following up a slow December 2005. You are probably right in stating that following a reasonable December return, yeah January hasn’t been too kind to markets.

You talked about going long in Feb. Do you have any short positions or positions you have taken partial profits, considering that market is stuck in ranges for about a month now? I think market will be stuck till end of January in ranges and will then follow a sharp up or down movement. I am also looking for signals right now. There are some signals about end of commodities movement.

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JG,
What are your returns for the last six months? Gold hasn’t moved much in last siz months. I would like to know if you have still been able to make some nice profits duringn this time (thus indciating the benefit of holding commodity stocks then commodity futures).

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FSD,

Totally agree with you on Rich correctly resisting to post personal financial information here. Besides, maybe it is beyond understanding of some people, but I find it in bad taste to reveal or boast about your personal finances on public forums.

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PS,

Poorly done on “getting defensive” by you as well. Forget about Rich but why do you always get defensive if you are called wrong anytime on any topic or any piece of information? Rich very graciously handled your question and also apologised and explained his initial response. A graceful response from you would have been to accept his perfectly fair reasoning. You didn’t focus on his response but focussed on him calling you wrong.

You said Rich is “public personna”. Why and how? Just putting up a blog and discussing housing economics, doesn’t make him a public personna and requires him to disclose his personal finances. Repeatedly asking for someone’s finances would have been crass, invasive and rude though. Secondly, please explain how Rich revealing his profits could affect his integrity on this board? What is so courageous about being open about your personal finances? I for one, agree with Rich that it is in bad tatse to reveal or boast your profits on public forums. It makes discussions personal unnecessarily.

I think deep down you also know why you were called out on this one. The way you boast or announce your opinions as prophecies about timing DOW or RE markets, gives a glimpse of the over confident arrogance. In most cases, this arrogance leads you to argue just for the sake of it.

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I was in Shanghai for a week in September. In short, China is like a young person starting his business/job and willing to put long hours, being creative, imaginative, resourceful and frugal to build an emipre out of his small business. Compare that to USA which is a big, fat, lazy, unimaginative, stuck with too much regulatory processes, corporate like GM or maybe Microsoft to some extent.

In China, I saw engineers bringing sleeping bags to work and working almost 14 hours. From your hotel waiter to the child selling you fake Omega watches on the street to the executive you work with, its all about making money and more money all the time (maybe a turnoff for tourists as you will see everyone trying to ripp money off you in cities). Its a race out there to increase your standard of living and they are working full throttle. They are a communist country but they are probably better capitalists than the US. The lack of belief in God + materialism has a nice combination with eastern traditional values.

China’s biggest problems are poverty, its huge export oriented growth, lack of social programs by govt and mostrous environmental issues.

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jg,
Missed your post, you are on for the wager. I would like it though if the bet is hinged at 1% instead of 1.3% 🙂

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Wiley,
The discussions about pros/cons of gold standard with gold bugs is a long,endless and tirring debate so I am not going to go there. The reason I called the gold standard ‘idealistic’ is because theoretically the gold standard theories rely on the freedom of action that is distributed between free movement of capital, and effective monetary and fiscal policy. However, one reason that most modern macro-economists do not support a return to gold is the fear that this remaining amount of freedom would be insufficient to combat large downturns or deflation.

This argument can also be termed as “controlled inflation” vs “controlled deflation” as goal of monetary policy. Most economists fear that gold standard creates deflation and people don’t spend money and buy stuff in deflationary scenarios thus causing recessions. Also, gold standard doesn’t necessarily guarantee fiscally responsible govts as we saw in WW1 when govts printed money without care for gold, hoping to return it after winning the war. I believe (like most) that there should be some form of hard currency. What we have on hand now is an inflationary extreme but a gold standard would be another extreme. If you have stats/data to show otherwise (since the industrial revolution) then I would love to hear.

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There is acually now dominating view that interest rates will be cut by March 2007 because the housing downturn is taking the whole conomy down with it. However, with the dollar decline, you have a corresponding increase in oil prices. And I think oil prices, not the housing market or recession, is what is going to drive the interest rate outlook for the US. It is simple that the Fed can afford to have a housing recession but it cannot afford $100 per barrel oil in this country. So my prediction for rates is that they will depend on oil prices.

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JG, Gold is an asset and just like all assets, supply and demand drive its price. In future, I do see demand for gold picking up in view of the liquidity glut and so one should definitely have a certain portion of portfolio in gold. But your formulation assumes that all available money (M2) goes after gold (100% demand) which is very idealistic.

With a constant amount of gold around, a growing population,a growing prodution line and a globally linked world,a gold standard idea seems idealistic but quite difficlt practically. Honestly, I don’t like gold as a commodity asset compared to more useful commodities like silver/copper/oil/houses. Reason is simply because if it comes to cut throat survival scenarios portended by true gold bugs, a shiny coin cannot really help me as much as oil(energy),food,copper(tools),guns,etc. But I do own gold because I believe in diversification.

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ISM numbers today slid below 50 indciating manufacturing is contracting for the first time in 3 years. If this contraction is confirmed in next data point as well then I would admit my recession call for late 2007 may have been a bit off because I didn’t expect this number to go below 50. We may hit something ugly 1H 2007. I am a firm believer in the ISM numbers because strong manufacturing provides jobs which fuels consumer spending.

Maybe this is an outlier and if we get the same below 50 number next time, we are definitely in troubled waters. To be clear, since 1960, such contraction in manufacturing activity has always led to a recession. I locked some of my 2006 gains today. The market seems to think the same as SP500 is testing 1400, Naz is testing 2400.

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Another thing about commodities is that technology is always working to to make finding new resource pools,better refining ways,finding alternative materials,etc and this works against commodities in the long run. I also discounted buying gold when below $60 because inflation numbers were down but now this dolar weakness is pushing gold/oil/silver. Did anyone noice that oil is quitely back up above $63 and seem to be breaking out of its around 60 range. If it keeps going then inflation may creep back up and Fed won’t be able to cut rates by March (which is what is driving the dollar weakness in short term).

BTW, another way of hedging against dollar maybe to invest in major exporters from the US. But I couldn’t find any stocks of big exporters that haven’t already moved in last 3 months. Any recommendations here? I tried to directly buy aussie/nz bonds from my broker(Schwab) but the fees are just too high. I think of international stocks as diversifying equity but not fixed income. International stocks are not hedge against dollar because most of these companies export to the US and will get hurt from weaker dollar and economic slowdown in US.

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