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Sunday, July 24, 2011

Gold Bubble Or Hyperinflation?

According to this source, the FRN-denominated price of gold has risen 12 out of the last 15 days, 16 out of the last 20 days.

Normally, prices follow a random walk. Gold is going straight up!

On another blog, someone wrote "My mother is thinking of buying some gold!" He said it was weird, when random people start thinking about buying gold. He drew conclusion #1.

Conclusion #1: Many people are seriously considering investing in gold. Therefore, there is a gold bubble.

Conclusion #2: Many people are seriously considering investing in gold. That's a sign of coming hyperinflation. It's a sign indicating the collapse of the State economic system and State paper money.

If you look just at gold and nothing else, you might conclude it's a bubble. If you look at gold/silver, gold/oil, gold/corn, gold/soybeans, or relative to any other commodity, there is no gold bubble. (In fact, the gold/silver ratio has been decreasing over the past few years. If anything, that indicates a silver bubble more than a gold bubble.) If you look at a 10 year price chart, metals and food and commodities are pretty tightly correlated.

If you invest in a checking account, money market account, or Treasury bonds, you're getting ripped off by inflation. You might as well directly write Lloyd Blankfein a check and cut out the middleman.

Corporate bonds are just as bad. The Federal Reserve keeps interest rates artificially low. That affects corporate bonds as well as Treasury debt.

Similarly, the stock market is a ripoff. Stocks pay dividends and have earnings growth. That's the pro-State troll reason to prefer stocks to gold. Unfortunately, stocks also have friction. The CEO pays himself and his buddies a huge salary and bonus. There's lots of waste and fraud and inefficiency. Corporation managers can spend $2M+ bribing policeman, and the CEO won't notice.

A stock earns a dividend, but there's also lots of hidden costs. Inflation leads to a rising stock market. It's still a loss when stocks underperform true inflation. Over the last 10 years, gold has *CRUSHED* the stock market.

So far in 2011, gold is still a couple percent better than the S&P and other stock indices, even though there were some periods where the FRN-denominated price of gold sharply declined.

Gold ETFs are risky. The GLD fund prospectus allows the fund to lend gold to short sellers. In the event of a default, the GLD fund shareholders are stuck with the loss. For any paper gold investment, even one that claims to be 100% full reserve like PHYS, there's always the risk that the fund manager will commit fraud.

In a SHTF scenario, GLD and ETFs and State paper investments will be worthless.

Even real estate is risky. Politicians can jack up property tax rates, stealing your home. Owning a home isn't really an inflation hedge, when inflation is 20% *AND* property taxes go up 20%.

I saw Cramer touting gold. He was advising ETFs and gold mining stocks. He said "Only a fool buys gold and buries it in your backyard." You should buy gold and bury it in your backyard. If the State financial system completely collapses, gold and silver buried in your backyard may be the only investment that preserves its value.

The price of gold and silver, over a 5+ year period, is the most accurate measure of inflation. If you believe "Gold is money!", then that's a definition of inflation.

It is misleading to say "The value of gold is skyrocketing." It is more accurate to say "The value of the paper dollar is crashing."


Anonymous said...

steamroller says:
Paper of any flavor will ultimately return to paper's intrinsic value. My wife put her IRA with AIG in 1995. In 2002 she did a 401K WITH TIAA-CREF. I chose to take my kiss-off from Mobil when Exxon bought them in lump cash in 2003. My right move was to buy 100 old $10 U.S. gold coins dated from 1879-1907 at $165.each in 1999 because there was fear of the Y2K issue. She lost 48% of her AIG account in 2008 and 34% of her TIAA acount at the same time. We both cashed out of paper-any kind in Nov 2008 and put $179K in 1 oz. silver eagles from 3 mint dealers. We have no paper savings only Gold + Silver now.
The 1800 silver eagles are worth $738,000 now and the $10 Gold coins are worth $85,000. now for a $196,000 outlay. Be My Guest with paper.

FSK said...

Good for you steamroller.

My parents said "FSK, you're not allowed to buy physical gold and silver as long as you're living with us. We're concerned about getting robbed." As if a money market account isn't robbery!

Anonymous said...

I have a gold account with In time I'll sell my gold to other members and use the money to buy more junk silver. Junk silver coins go for as little as 6% over the spot price. I think there's a good chance that coins that are 90% silver will become an alternative currency when hyperinflation strikes. 14 silver dimes are worth about $40. What if when gas costs $20 a gallon you could still get a tank of gas with an ounce of silver?

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