Tuesday, April 26, 2011

Gold Fever

Articles like this really get my goat (if you’ll pardon the pun). From the Sunday Star (excerpts):

Gold fever rages on

The practice of investing in gold is slowly gaining momentum in Malaysia.

THERE'S a lot of talk about gold these days. More Malaysians are investing in the precious metal and even criminals seem to have caught on to the gold bug…

…Over the last year, the price of gold has risen approximately 23%; and in the last three years it has risen 98%. While unrest in the Middle East and the situation in Japan are cited for record gold prices in recent months, shaky financial systems are the main reasons why the price of gold has been shooting up over the years.

According to RH Investment Services Labuan director Richard Hull, the rise in the gold price is predominately linked to the amount of US currency in circulation.

He explains that it took 200 years for the US to print US$825bil (RM2.5 tril). But in Sept 2008, the US government printed US$900bil (RM2.7tril) and in March 2009, another US$1.2tril (RM3.6tril). This means that in less than a year, they added over US$2tril (RM6tril) to the money supply or a 370% increase in currency.

“People are investing in precious metals because of distrust in the financial system. They want to put money into something that is real,” says Hull, adding that all the currencies in the world are backed against the US dollar.

He believes there is sound economic reason to estimate that the gold price may reach US$15,000 (RM45,000) an ounce, a rise of 1,000% from its present level.

...Jamaluddin Khalid, managing director of Saudagar Emas says many are turning to gold because of the higher returns.

“During the time of the prophets, one dinar could buy you a goat. Now, it can still buy one goat. After 1,500 years, it has still retained its value. Even gold dust is sought after these days,” he quips...

...Rajen Devadason, a Securities Commission-licensed financial planner with MAAKL Mutual Bhd , notes that the practice of investing in gold is slowly gathering momentum...

...He points out that while gold is a safe investment during times of turmoil, human society doesn't just rely on gold for existence.

“Our economic health depends even more on the health of our businesses, on our supply of food and fuel, and in the real estate that houses us and our companies from which our crops spring forth,” he elaborates...

...“It is unwise to just invest in gold and any investment should be done as part of a concerted plan to construct a sensibly diversified portfolio,” he advises.

Devadason believes those who are savvy investors will gradually increase their personal purchases of gold over the next one or two years before everyone else wakes up to the fact that gold prices are rising.

He urges caution, though.

“It's likely a bubble will then form. When it bursts, unsophisticated speculators will lose a great deal of money,” he warns.

It’s hard not shake my head at this, shall I say, “irrational exuberance”. Let me count the ways…

  1. Richard Hull is completely ignoring the context of the US quantitative easing program. I wrote this a few months back: “And here’s where some of the knee-jerk reactions to quantitative easing have got it wrong – people assume the classical case where money cannot be destroyed, but only added to. But there’s plenty of anecdotal evidence that US households and corporations are paying down debt – i.e. destroying money. The demise of Bear Sterns and Lehman, where they defaulted on much of their liabilities, also destroyed a few shiploads of money. The Fed’s actions in 2008-2009 really only just filled the gap – and little more.”

    Look at the numbers I arrived at…at the peak of the crisis, without the various programs the Fed undertook, there would have been virtually no US dollars in circulation at all. A lot of the “money printing” actually went to the purchases of short term papers, which meant that it was subsequently destroyed when those papers matured. Don’t believe me? Check Hull’s figures against actual money in circulation – US M1 (which also includes demand deposits) still hasn’t cracked the 2 trillion level.

    And the idea that the USD backs all currencies in the world…Dick, which century are you living in?
  2. Here’s my reply to the idea that gold retains its purchasing power. Since I couldn’t find an international market for goats, I chose a close substitute and converted the price to gold dinars (about 4,25gms of gold):
    In 1980, it took about 3/100s of a Dinar to buy one pound of New Zealand lamb. By 2000, that price had doubled to near 6/100s of a Dinar. Now it's just a little over 1/100s. As any professional market trader can tell you, that kind of volatility signals a high risk investment.

Devadason has it right, but I think he’s too late. If irresponsible fiat currency issuance was at the heart of gold’s spectacular rise, then we would expect to see the price of gold in currency terms to rise as well – exactly what we’re seeing. But gold is doing much, much more than that – it’s also rising against virtually every other physical commodity and foods as well. If in fact gold has some fundamental and inherent value against other goods and services, then it’s far outrun it’s fundamentals. And that to me signals we’re already in bubble territory, and have been for the past two years.

Caveat emptor.


  1. Money can be destroyed, you are right on that, but what we didnt expect decades over decades is irresponsible economists keep adding it by 10X. It is like hiring a bigger monster to tame smaller monster each time.

    It is not just gold is rising, it is just gold is leading indicator. look at oil. look at food. look at silver. yes gold should not go up at all, it is not supposed to, if monetarists are not corrupted by keynesians to be addicted to printing money they dont have to solve liquidity squeeze problem. They should have stopped speculation with cheap money at early stage.

    economists can look at statistics whole day to say things are fine and saying gold a bubble since I cant remember when, but what they didnt realise they put too much trust in the people who just love spending (good for GDP) and no saving.

    isnt that exactly like 2006 , 2007, 2008? ben bernanke was looking at statistics like you.

  2. quantitative easing (it just a new name created in 2008 to sound techie) have been going on for ages, is not like it just happened in 2008! Unless you only become economist in 2008.

    only 1 way for gold to fall, raise interest rate a lot, but too late for that, malaysia economy will slowdown a lot once you do that.

    not to mention the AMERICA cannot raise interest rate as fast as we like.

  3. the biggest caveat emptor is US DOLLAR, which is kept alive by ASIA CENTRAL BANKERS. WELL DONE.

  4. I think you missed my point - gold is rising faster than every other commodity as well, not just against currency. It has in fact exceeded its 1980 highs against nearly everything.

    That means (to me at least) that the rise in gold is being governed by other factors - the more discerning expert opinion is that it's inflation in China and India that are the fundamental drivers of gold's rise (which incidentally, long predates the current financial crisis).

    Note that if true, US money printing is not a factor at all. (BTW, the US savings rate has almost recovered to its long term average of around 8%).

    But if you want an example of what happens when you don't "print" money in a liquidity squeeze, I suggest you look at the current situation in Iceland.

  5. There's a saying I think by Warren Buffet which goes something like this, "Buy when there's blood on the streets."

    USD assets look really cheap right now - gold does not. Especially since the latter has no intrinsic value.

  6. Warren Buffett's record has been impressive only until so recently, he is lucky for 30-40 years but even someone as old as him cannot be a guidance anymore as we enter the age of rising china, he is living through the time that US economy booms and Soviet Union disintegrated, that is easy, even monkey can do it like EPF.

    USD assets I agree is cheap and a good buy, but I wont want to touch it because I know there is better buy in emerging market. At least I know there will be goods shipping from Australia to China to Hong Kong to India, but America coast to coast shipment ... like buying norther burlington? That is just a very bad buy.

  7. I dont quite agree gold is rising faster than any commodity, I am not sure how vast is your experience in trading commodities. gold is rising much slower versus platinum, palladium, copper, sugar, rice, cotton or recently silver. gold even had not reached its inflation adjusted all time high in 1980 (which should be 2400 today), it is still below record high.

    people are buying gold silver not because they like it, but they hated that the government and bankers had collaborated to cheat them for decades. they are slowly waking up to that, just like bond vigilantes, these are metal vigilantes, those who saved money now saved in metal, those who got hurt run up even more debt because they know paper money can be created easily and their debt actual value will fall, what do government do? they encourage more borrowing by giving out cheap money.

    gold silver will keep surprising everyone on the upside, not even the german fiscal discipline can halt it because everyone is tied to the rotten us dollar.

  8. nouriel roubini and warren buffett said gold is barbaric relic.

    you know what my dad said? he is not as knowledgable as both of the gentlemen above, but he said if the stupid gov only gives 2% interest in FD, what the heck save in paper money?

    my brother said some credit cards you spend 1000 they cashback 100, you save 100 they give you 1. Spend it.

    Want gold to fall ? Raise interest rate to 6%, that is a good start, I dare all the economists and policy makers out there !

  9. Iceland owned up their problems, and now is slowly inching out of recession although it remained tough, they have excesses and they took the pain to purge the system clean, which should be the way. In years to come, I bet Iceland will be the safest nation from financial holocaust.

    economists alike are all keynesians since they graduated from university and taught by mentors, they love government taking on endless deficit and debt to keep the system alive, imagine a human running on a borrowed heart and a borrowed lung. No redundancy, no preparation.

    as for the rest of the nations, their only aspiration is continue to have fun as it lasts, like the America, like UK, like Japan ... the let the zombie banks alive and hogged the resources, give out mega bonuses for those who took risk.

    god blessed them, because next time the crisis strikes again, the country will go with the banks. Satan has a great plan, it corrupted the school of economics first, before it corrupted the world...smart, really smart.

  10. Sorry, I haven't been able to reply to all these - I was teaching yesterday, and spending time with my family today.

    I'm not sure how many people I'm speaking to here...maybe I should disable anonymous comments. But I'll take these as separate commentators.

    @anon 1.28

    That's the first time I've heard what Warren Buffet does as easy! Wanna job as a fund manager?

    US industrial production is recovering rather fast - there's a method to his madness.

  11. @anon 1.36

    I don't trade commodities, but I do watch as many markets as I can.

    I don't have data for palladium, but I'll get that checked Monday morning.

    As for the rest (prices all in gold ounces as of end April 2011, not USD ;)):

    Platinum - I don't have a long enough data series for this, but the data I have indicates Gold is 87% higher against platinum since 2000.

    Copper - gold has lost ground on copper since 2009, but its still over 100% above its 2006 peak. Trading range is about the same as in 2000 but about 50% lower than in 1980. I've got an interesting story about copper, but I'm afraid I can't disclose it.

    Sugar - Gold is up 120% against sugar since 2000, and about 200% since 1980.

    Rice - 99% up since 2000, and 132% up since 1980. Now past 30 year historical highs.

    Cotton - Like copper, Gold has lost ground on copper recently, but its still 50% up since 2000 and 92% up since 1980.

    Silver - Like platinum, I don't have enough data for this metal, but silver is up 30% against gold since 2000 - conceded.

    The problem for gold bugs (and silver bugs I presume) is that they're buying under a false premise. Gold and silver's rise has little to do with the USD, and more to do with inflation in emerging markets.

    Despite the Fed's QE program (and the BOE, and the ECB and the BOJ), money supply growth in the advanced economies is still anemic.

    How much money is being created in China and India? 2010 M2 growth in both these countries was easily 4 times faster than in the US. The M1 growth differential is even higher. How's that for money printing?

  12. @anon 1.40

    Smart man, your dad. But then why would anyone want to buy something that yields nothing?

    I'll go much further than Roubini or Keynes - I would say that the adherence to a metallic monetary system was probably the source of more evil and human suffering than anything else in history.

    6% interest rates? Is that net or gross?

  13. @anon 1.53
    Slowly is right. Better make that s-l-o-w-l-y.

    Unemployment jumped from 1% to 8%, and while its expected to fall, unemployment is forecast to continue at a permanently elevated level. Some people not only lost their jobs, but will be permanently unemployed and unemployable.

    Real GDP won't recover to its pre-crisis level for a decade, and that's even without including the "unreal" excess output created by the financial sector.

    Did I mention that Iceland now owes the equivalent of 10% of their GDP to the IMF and other creditors for bailing them out?

    BTW - the prevailing economic orthodoxy being taught in schools isn't Keynesian, its New Classical. Keynesian theory has been out of vogue for nearly half a century, and what passes for Keynesianism now is a pastiche of modern classical thought with some of the more palatable of Keynes' ideas (active intervention; sticky prices).

    His main underlying premise - that the doctrine of general equilibrium is false - has been virtually ignored by the profession. Hicks developed the IS-LM model as his interpretation of Keynes ideas in a general equilibrium framework, and this was seized on by other neo-classical scholars. Although Hicks later repudiated his own work, the damage had already been done.