Watching the market take on water like a leaky Liberian freighter, I’m wondering about the wisdom leaving my assets in the 401(k) plan. It’s a fact that the market goes up and the market goes down. The question is, what kind of games do the fund managers play as share prices fall? Do they sell-off many low priced shares for fewer shares of stronger stocks? If so, how does that affect your recovery as the market strengthens? I don’t know. Sounds like its time to understand this better.
Gold has been steadily increasing in value since at least June of 03 (near the limit of my horizon). Since stock prices started to nose downward in early 4Q2007, the slope of gold price growth increased. The inverse price trend with investor confidence in stocks is normal behaviour for gold.
But looking at the upward trend in gold prices this decade, I’m left to wonder if there isn’t some fundamental change happening. If the price is rising due to global demand, who is out there steadily driving up prices? Are there big players who are in the know? And what are the consequences for individuals?
Lamentations on Chemistry 
Over the last twenty years mutual fund managers have become progressively more like arbitrage traders rather long term investors. There exist stock turnover figures, but the last set I saw indicated an average hold time for a stock of about a year (3 yr old statistics). Obviously it once was much longer.
And Gold? Ask yourself how much gold exists above and below ground. Last I looked it was about 35,000 tons above ground (it would make a cube 20m in length (about the size of a tennis court). Geologists say that most gold (unlike silver) has already been brought to the surface. Hence the supply is essentially static.
Apocalypse Now
So why is the price appreciating? For one thing gold is denominated in dollars (like oil). As the dollar drops, it takes more dollars to pay for the same amount of gold. Same is true for oil (another non-supply reason oil prices are rising). Both gold and oil price rises are tied to the same phenomena with a lethal twist. Our dollar is dropping in part due to our trade deficit. Oil is the largest component of that deficit (>70%). The more oil imported the more dollars go out, hence the further the dollar drops as the market dislikes trade deficits. Obviously the higher oil is priced (for whatever reason- geopolitical etc), the greater this deficit and the lower the dollar.
Since we don’t make things in this country anymore(bad for dollar) we must import goods from countries with more stable currencies. Thus prices on everything (particularly commodity heavy products) go up. Fund managers buy the relatively static gold ( a form of reserve currency sanctioned by most central banks) as a hedge. In the last four years several ETFs which track gold have popped up, which makes it relatively easy for anyone to buy large quantities of gold. Moreover central banks have been selling off their gold reserves since the late 1990s (see Washington agreement). It means more gold in the hands of non-big banks which will buy and sell it. Because (like homes) there must be turnover for prices to rise- gold thus has been benefiting from its liberation from the dungeons of Swiss banks.
O.K on top of all that is the fact the government no longer publishes figures on just how many dollars exist (M3 money supply). This means a lack of confidence in the value of the dollar. Where do you think the banks responsible for the credit crisis got the trillions for lending out to sub-prime borrowers? Do you think it was in their banks? No, it was lent to them at 1% interest from the US government who printed it on demand. That’s what it mean when a bank uses the spread from the prime to whatever it charges you on your mortgage (more complicated than this but no time for it).
And yet again oil enters the picture. Recently the Saudis and others have been talking about trading oil in currencies other than the dollar.
So what?
Well trillions have been printed to accommodate the trading the global oil supply. If oil begins trading in Euros or rubles then dollars must be sold and must slosh around until they find a new home. Just the fact this is being discussed is enough to send the dollar further down and thus gold higher. Of course yet another problem is our fiscal irresponsibility ( wars without end, outsourcing, yada yada. ) It makes this country appear to outsiders like a bunch of quick buck artists whose sole concern is giving bonuses to executives, rather than building up their own nation.)
O.k that’s all I’ve got time for on this. I suggest you buy at least a small amount of physical gold or silver if you want to eat in the future.
VOLTAIRE (1694-1778)
“Paper money eventually returns to its intrinsic value —- zero.”
Wow. This is an excellent comment. I appreciate your taking the time to write it down for others to see. I have heard of bits and pieces of what you’ve said before. I hope the discussion of using other currencies as the standard of trade is registering in our government.
If China decided to shampoo its hair for four consecutive Fed auctions the United States would shatter like a cheap glass dropped onto concrete. Chemical/biological/nuclear munitions are nothing compared to US need for continuous massive outside financing. An uncomfortable fraction of US finance was recently sold overseas as a bolus to cover initial NINJA loan crises.
Back when Uncle Al suffered academic economics two infallible predictors of depression (re 1929) were consecutive quarters of inverted interest rates and sustained large amplitude high frequency stock market price oscillations. Short term CDs have had much higher yields than long term paper for the past two years. The Dow, NASDAQ, Standard & Poors 500… have been bouncing like a kangaroo, daily.
We then ask ourselves: Is arithmetic true? Was “Handsome Al” Mandelstamm teaching economics right? Did the US really most sincerely irreversibly die during Bush the Lesser’s second reign?
We live in interesting times. Buy guns and ammo.
“sustained large amplitude high frequency stock market price oscillations.”
Sounds like divergence. And to think it is happening in the hands of a Republican administration. These pointy-headed bastards were supposed to know about how money works. \;-)
The dollar is further devalued as US interest rates fall. Obviously a lower return (interest rate) on our treasuries means less interest in purchasing them. Which is why Bernanke is in a bind. He must choose between devaluing the currency and creating more liquidity to stimulate the economy. But of course much of the world does not need stimulation (it’s already hot as hell, i.e. China). Hence inflation fears run rampant. Thus gold benefits.
P.S Gold is always sold off during a market route to cover margin calls on equities. Gold will spike down then surge up. Expect possible sell off to about $800.