Currency

Quick! Call the Regulators! Those People Are Buying Gold!

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Unwashed

Let's play a game with this bizarre, elitist Steven M. Davidoff column in The New York Times, shall we? Let's swap out the word gold and replace it with variations on the dollar. Here goes:

It is clear that speculation has been driving the dollar's rise.  […]

This speculation is aided by the financial revolution. Previously, dollars could be bought by retail investors only through dealers and street shops. Now anyone can go on the Internet, click and buy currency in the market through exchange traded funds. […]

[I]t is sometimes referred to as the barbarous relic. You can't eat paper money. Its industrial uses are limited. If someone else doesn't assign the same value to the dollar that you do, you are out of luck. For those who predict it will be valuable if society completely collapses, guns and canned goods might come in handier.

The greenback's relative uselessness has helped spur talk of a bubble. The problem for regulators is whether this speculation is natural, prudent hedging or people irrationally piling ever more into a bubbly asset.

Davidoff is good enough to point out that gold prices are not actually at their all-time high, that we actually might not be in a gold bubble at all, and that "limiting the type of media barrages we see is also impossible in a free society." Still!

Ominous

If you watch cable television, it would certainly appear that gold is in a bubble. Commercials abound for buying gold. Commentators on CNBC talk about gold hitting $2,400 an ounce, which would be a genuine record […]. In fairness, other CNBC commentators have said that this is foolish and that gold prices are too high. Still, the marketing of gold to the masses is an ominous sign. […]

[I]f regulators are going to stop the next bubble, they will need to act aggressively. Of course, they shouldn't act in every circumstance, but when we see volatility and speculation as is the case of gold, acting to curb these forces through limiting leverage in cooperation with international regulators would be a prudent course. This would ensure that if a crash does come, it does not have aftereffects on banks and other institutions. Even if the Commodity Futures Trading Commission is hesitant to take such steps, it could, as an initial foray, take to the media to try to "talk down" the speculation.

Otherwise, we're left hoping, without much basis, that people have learned that this time will not be different[.]

Remember back when we let bubbles burst without bailing out the irrationalistas?

NEXT: George Gilder on "The Israel Test," Obama, the Internet, and...the Gays?

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  1. “[I]f regulators are going to stop the next bubble, they will need to act aggressively. Of course, they shouldn’t act in every circumstance, but when we see volatility and speculation as is the case of gold, acting to curb these forces through limiting leverage in cooperation with international regulators would be a prudent course”

    That’s some nice gold you have there, it would be a shame if something were to happen to it.

  2. So? You can’t eat your mortgage either!

  3. Nor your health care plan…
    Just sayin’

    no hugs for thugs,
    Shirley Knott

  4. I’m not buying gold myself, but I thought this was interesting:

    http://falkenblog.blogspot.com…..ation.html

    1. Fairly standard knowledge among financial practitioners. Gold has the benefit of having a very, very low correlation with other asset classes, and therefore you can eliminate some unsystematic risk by diversifying your holdings. Even just on that basis, owning some gold or another lowly correlated commodity is usually a good idea to complement stocks and bonds.

      Using it to speculate on the collapse of the dollar, however, is probably not the best idea.

      1. Using it to speculate on the collapse of the dollar, however, is probably not the best idea.

        I think that’s exactly the unsystematic risk that it is a hedge against.

        And since the more or less official policy of the Fed and the Treasury is to devalue the dollar, both to “manage” our debt obligations and boost the export economy, I think its a risk well worth hedging.

        My portfolio agrees, BTW.

      2. That’s the main thing the gold bugs tend to miss or gloss over–that owning gold (or any precious metals) is really a hedge for a SHTF-type of scenario. It’s something to have on hand as a potential medium of exchange if the fiat blows up and you have nothing to barter with, but to hear some of these people talk (the commenters on Zerohedge are a good example), you’d think they sincerely believe that when society falls apart, they’re going to be sitting on a hoard of gold like a dragon in a fantasy novel.

        Realistically, anything more than 10% of your net worth in precious metals is probably too much.

        1. I don’t think that anybody is seriously arguing that people should have 100% of their savings in gold right now. The point is that government attempts to “prevent ‘speculation’ in the market are really just attempts to prevent the dollar from falling further. It has nothing to do with having a fetish for gold. It is simply about recognizing that gold is the best alternative to currencies during a time when money printing is the name of the game.

          1. That is, when the economy is weak. Gold prices often went down during bouts of money printing when the stock market was still providing high returns, but we all see how that went.

          2. The point is that government attempts to “prevent ‘speculation’ in the market are really just attempts to prevent the dollar from falling further.

            The government WANTS a weak dollar, not a strong one.

            We are at a point now where gold is in an uptrend and the dollar is in a flat trend. As stated above, the correlation between gold and the dollar is low.

            One could make a better argument that gold correlates closer to credit (inversely) than to most currencies.

            1. The dollar’s only in a flat trend when compared to other fiat currencies. If its value were actually stable it would be butchering the euro and yen in view of Europe’s and Japan’s current fiscal problems.

  5. If gold is only going to go up in value, why are so many people selling it?

    1. The people selling it make nice commissions and margins, that’s why. They can sell you an ounce of gold for, say, $1900, and replace that ounce for, say, $1850.

      1. Arbitrage, HOW DOES IT WORK?

    2. It should be obvious that retailers sell products to earn a margin from retail customers. That’s the nature of retail business, even the retail business of selling precious metals and coins.

      Missing in Davidoff’s column and Welch’s and others’ comments is mention of the fact that there has been an explosion in the business of purchasing scrap gold from retail customers. Around where I live, I see far more retail storefronts offering to “Buy Your Gold and Unused Jewelry” than those offering Krugerrands and Gold Eagles for sale.

    3. They’re selling it for more than the current spot price, using those dollars to buy immediate necessities like groceries and pay rent, then using the rest to buy more gold, which they pay less for as they’re buying in volume.

      Of course, they’re also helped by the fact that many uninformed people are selling their gold jewelry and such for waaaaay below its market value.

  6. Couple of factual-type observations, since the article is rather light on facts.

    (1) The exchanges can and do limit the amount of leverage available to speculate in gold. They have raised the margin requirement (limiting leverage) twice in the last month or so. Regulatory intervention is not needed.

    (2) Classically, it ain’t a bubble until the small retail investors really pile in, and that hasn’t happened yet in any volume. The buyers to date are mostly the big boys, including especially the central banks of many nations.

    On a less factual note, I find any article on gold action that doesn’t mention the pervasive manipulation of the market (downward) due to the massive short positions held by a handful of banks to be woefully lacking.

    1. (2) Classically, it ain’t a bubble until the small retail investors really pile in, and that hasn’t happened yet in any volume. The buyers to date are mostly the big boys, including especially the central banks of many nations.

      Actually there has been a ton of retail investing in gold. Major signal of a bubble: The existence of roll over into gold plans. Where you can roll over your IRA/401k into gold. Yikes.

      1. gold: $1826.46 per oz
        oil: $89.07 per barrel

        ratio: 20.51

        gold if slightly overpriced (5-20 is “normal” ratio range) but I wouldnt call it a bubble.

      2. Actually there has been a ton of retail investing in gold.

        When you look at the actual volumes, I gather the retail sector is still not that involved. Sorry, can’t dredge up a link real quick.

      3. The gold IRA was established by Congress in 1997. Early adopters have fared fairly well.

        1. BTW, a traditional IRA seems to me to be the ideal place to hold GLD, the gold ETF.

          If one holds GLD in a taxable account, the IRS does not allow deduction for losses and taxes gains at ordinary rates if short term or 28% if long term. If GLD goes up, the IRS says, “No long-term capital gains rates for you, goldbug.” If it goes down, the IRS just says “tough luck, pay your taxes, goldbug” without recognition of the loss. If held in a traditional IRA, all distributions will eventually be taxed at ordinary rates regardless of whether they were sourced from contributions, interest, dividends, or capital gains. If GLD in an IRA goes up, the tax treatment on distributions from gains on GLD is no different from gains on ordinary stock investments. If GLD goes down, the future tax liability on the account goes down, which is the equivalent of a future reduction in future taxable income.

          The IRS has issued a ruling that indicates the GLD is an allowable investment in IRAs provided that it complies with terms set forth in a lengthy tax ruling worded in a virtually incomprehensible language similar to English.

  7. “limiting the type of media barrages we see is also impossible in a free society.”

    Who says? Show some spine, Davidoff, and put on your thinking cap!

  8. If you watch cable television, it would certainly appear that gold is in a bubble. Commercials abound for buying gold.

    Commercials abound for tort litigators. maybe there’s an attorney bubble.

    1. Commercials abound on new push-up bras. Maybe there’s a boob bubble.

      1. mmmmm….booobs…..

      2. There’s a boob bubble but not of the enjoyable kind.

    2. Commercials abound for tort litigators. maybe there’s an attorney bubble.

      There are actually a lot of people who would say that there is an attorney bubble (or at least a law school enrollment bubble).

      1. I was driving back to Tampa from Lake Wales and noticed on a good stretch of state highway that every single billboard was for a personal injury firm. I don’t know the exact number, but it may have been as many as twenty. In a row. I think they were all for different firms, though there might have been some repeats.

      2. I’m putting all my money into ShamWows.
        (You gettin’ this, camera guy?)

    3. In the runup to an election, commercials abound for politicians…..

  9. The liberal position: we’re smart enough to make rules to prevent stupid people from doing stupid things.

    I don’t understand the desire to protect people from the consequences of their own folly.

    1. I don’t understand the desire to protect people from the consequences of their own folly.

      They want to be protected from their own folly. It’s a really quite brilliant strategy to garner insulation for inevitable stupidity.

  10. I don’t buy it. Just because the price of something is accelerating rapidly doesn’t mean it’s in a bubble. People are getting into gold because (a) they’re worried about inflation, and precious metals have always been viewed as a hedge against it, and (b) between the US downgrade and the ongoing Euro crisis, more people are finding it safer than sovereign bonds. In neither of those cases are people trying to make money by speculating on the price.

    1. Also, some people actually use gold for things other than speculation. A lot of the big gold mines have been mined out. And there is no new supply on the horizon. Meanwhile, gold has a ton of industrial uses that are driving demand.

      1. Meanwhile, gold has a ton of industrial uses that are driving demand.

        No it doesn’t. Over 70% of gold is used for speculation/investment or jewelry, that is not a ton of industrial uses. In contrast, about 70% of platinum and silver is used for industrial purposes.

        1. tell that to my teeth!

        2. Actually, from the link above, 68% is jewelry and 20% investment, leaving only 12% for industrial uses.

        3. The function of jewelry is more important than any industrial use. Wanting to attract sexy partners will never go out of fashion, long after Apple or others are no more, gold the “barbarous” relic will still be here, because people still will have their barbarous urges to satisfy.

          1. Exactly.

            When people say gold does have uses, I say “Gold gets you laid.” That beats industrial uses every time.

          2. Jewelry is important. But jewelry doesn’t have to be gold. For example, white gold is a heck of lot more popular than it used to be.

            1. I am not an expert, but surely white gold still is gold with other metals mixed in ?

              1. Indeed it is, but it shows that one of the unique things about gold (its color) isn’t that important to the US market. What makes gold valuable for jewelry is that it’s expensive and acts as a signal, not that it’s gold.

                That’s why DeBeers is doing everything in its power to kill artificial diamonds in the market. The second diamonds become as cheap and easy to get as semi-precious stones, is the second that demand for diamonds as high quality jewelry dries up and consumers move on to rubies or sapphires.

                1. As a point here: Emeralds are extremely rare (Beryl) and Rubys/Saphires are also (crstal corundum) while, at least on earth, diamonds are a very common naturally occuring “classical” precious stone (others like jasper, tourmaline, garnet, etc. are much more common). DeBeers holds about 75% of the diamond mines/supply…that is why they are expensive, not because they are rare. Also, industrials are already comparable in quality but there are size limitations to them…making a 25ct industrial would be a real bitch.

                  1. Right. Diamonds are pretty common. There’s even a whole planet made of it. But with artificials, DeBeers can’t control the supply. Hence them trying to get requirements to label synthetic diamonds as such. I once read that were it not for the weak resale market in diamonds, there are enough in circulation to completely destroy current market prices.

      2. Gold Council demand data for 2010:

        Jewellery 2017 metric tons
        Investment 1148 mt
        ETFs 368 mt
        Technology 466 mt
        Total 3999 metric tons

        However, anybody who has travelled in the Middle East and South Asia knows that the distinction between jewellery and investment gold is blurred to say the least.

  11. Gold has outlasted all government economic actions in history, it also is a good litmus test on how well the government currency is doing. For those who love governments it is logical that they do not love gold.

  12. So I guess they want us to buy US Treasuries instead.

  13. How can the regulators STOP bubbles when their mandate is essentially to CREATE bubbles?

  14. Commercials abound for buying gold.

    Did he mean for selling gold? He usage there is ambiguous, which is actually appropriate, since there are tons of people trying to sell you gold and buy your gold. It’s chaos I tell you!

  15. Has the government passed a law mandating that banks loan people absurd amounts of money to speculate in gold? Then it’s probably not a fucking bubble.

  16. Can’t we do something about all those stockbugs on CNBC?

  17. Paper gold means shit when TSHTF; well before that point, the feds will have confiscated all the gold and given its previous owners dollars. You better bury that shit in a pirate chest, because the feds are going to be scrounging for teeth well before that point.

    I think Ron Paul has the best idea for the money situation. We don’t have a national language or religion, why have a national currency? Let’s have a currency melting pot, trade foreign money as easily as we shop for foreign food, along with precious metals or bitcoins or foodstamps or energy credits or whatever else people want to trade.

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