Posted on 11/26/2009 7:50:16 AM PST by blam
Investors Buy Gold As Central Banks On Course To Crash World Economy
Commodities / Gold & Silver 2009
Nov 26, 2009 - 02:59 AM
By: Bob_Chapman
Investors buy gold when there is inflation and when there is a flight to quality. They buy gold when they no longer trust currencies, due to government or central bank profligacy.
Due to those and other reasons gold has broken out to new highs. It could well be that gold may never see $1,000 again. Long ago the world’s central banks set the course for a planned collapse of the world economy to implement world government and there is now no turning back.
We have proof stretching back to 1965 that intervention by the Treasury and the Fed was taking place in the gold market.
The illegal sale of gold on 10/19/87 was a good example of that. Then came the FOMC memos of the 1980s and 1990s to kill the perception that gold be allowed to reflect a policy of a weak dollar unbacked by gold.
It is all there and probably more proof which our government and the Fed hides from us.
We have to laugh at the smug who say why would the Treasury bother to rig the gold price? The point is they have and they are still doing it.
The perception now is that the massive stimulus put into international markets, especially US markets, will be withdrawn as interest rates are allowed to float upward.
This stimulus was responsible for the stock market climbing from Dow 6600 to 10,500, a 60% leap built on monetization. If the punch bowl is removed the market will return to test 6600.
In addition, the deflationary undertow kept at bay by the stimulus, will overcome monetary policy and the nation and the world will slip into monetary, deflationary depression.
The Fed is now forced to allow gold to trade higher and the dollar to fall lower. What else would one expect under current monetary circumstances?
This policy will allow both gold and the dollar to play out to their full extent.
The Fed’s job has been very difficult considering a fiscal budget deficit of $1.5 trillion not counting off budget items that take it over $2 trillion – a condition we are told that will persist for the next ten years.
The solution has been the creation of ever more money and credit. There has been no cooperation. Nothing has worked together. All the problems have gone spinning off into a number of directions. There is no control on fiscal or monetary policy.
What the players refuse to understand is that until the system is purged the situation is only going to get worse. There is no recovery. It is only an interlude in an ongoing depression.
[snip]
FR was ahead of the curve on the real-estate collapse and I think is ahead of the curve on gold. IMO it will be a hyper-inflation and devaluation, not a deflation. Politicians will do anything to save their jobs. The greatest threat to their jobs is unemployment. They’ll monetize the trillions.
Brighter investors buy munitions and agricultural land.
I think it’s a near thing between inflation and deflation. There is no doubt that we have been inflating asset values since about 1990. Each time the bubble bursts, there is a new round of inflationary stimulus to reinflate it.
Gold and equities look to me like just be the most current beneficiary of the most current attempt to reinflate asset values to preserve the “all-assets” bubble that started in about 1990. Each time the bubble starts to pop, whoever is in power manages to blow it up again for a while.
IMHO, the only question is HOW LONG the current blowing on the bubble will work. Assets right now are grossly overpriced (look at S&P average dividends from a 100 year historic view or at P/E).
I think the likely result is that it is not sustainable this time. The gvt is running out of ways to inflate asset values—loans by the fed to banks can’t go below 0% interest, where they are now, even dems are scared of adding another trillion dollars to the deficit, the Indians are running for cover by buying 400 tons of gold with dollars. In short, political pressures and reality are rapidly closing in on the administration.
That points to eventual and massive deflation of asset values, like 1932 and on (to me, the bubble looks a lot worse today . Gold will probably partake in that. Maybe the administration will manage to combine that with hyper inflation—they are certainly trying. That would just mean the nominal value of Gold deflates as the dollar denominated value increases.
“Brighter investors buy munitions and agricultural land.”
I tend to agree although if a serious 1932 style deflation occurs, agricultural land will partake in that deflation at least for a while—perhaps not as badly as other assets. I’m long .357 and .380 and 12 gauge :)
Inverse US market etf’s should at least preserve the value of dollar denominated assets for a while.
I’m very leery of gold right now. It looks WAY too bubbly for me. But who knows when it will pop. I thought it was going to be sooner than this and lost some money in short silver. At least I wasn’t short gold :)
Related
http://news.yahoo.com/s/afp/20091125/bs_afp/imffinancegoldsrilanka_20091125185909
http://www.breitbart.com/article.php?id=D9C7090O0&show_article=1&catnum=0
http://www.bloomberg.com/apps/news?pid=20601087&sid=ap4.6m_qbcKo&pos=1
Fed will destroy itself, and gold price is rigged, Paul tells CNBC
Brighter investors buy munitions and agricultural land.
or they want their investment to be compact or portable or quickly sellable or universally attractive in barter
or they already have enough ammo or land.
Everyone please watch ‘The Secret of Oz’ and share it with everyone you know. This will likely be the most important documentary you ever watch.
The Secret of Oz’ has been banned by Amazon.
http://www.wnd.com/index.php?fa=PAGE.view&pageId=116825
This is the same guy who did ‘The Money Masters’ which if you haven’t already seen you should.
http://video.google.com/videoplay?docid=-515319560256183936#
here is a torrent download for it but, it would be preferable to support the filmmaker since this is such good and brave work.
http://www.mininova.org/tor/3157611
Please start sharing this with everyone you know.
—
i’m no economist but, it seems that there are two things we could do to really turn around this disaster.
1. end the criminal Fed and enact our own Sovereign currency (see ‘Secret of Oz’) that isn’t debt based (no interest) controlled by the people through Congress (a better one that isn’t filled with Marxists)
2. enact a consumption based tax system like the Fairtax
www.fairtax.org
these two would cause so much of a positive change we could have a very bright future where right now we are on the edge of a disaster.
Gold is just one commodity among many. It is useful because it is imperishable, and is a dense store of value. But it is simply a commodity.
“there are two things we could do to really turn around this disaster”
And HOW do they propose? The American people 100 years ago did not have the fortitute to prevent the privatization of currency, and this has been an ongoing war for hundreds of years, many presidents have complained of the banks being the greater foe, and the most significant thing JFK was doing at the time of his assassination was an executive order allowing government-printed currency.
HOW do they say today’s America stands a chance in “ending the criminal fed” compared to the historical issues?
And there is NOT a non-Marxist congress. Get your non-Marxist congress 1st, I’d say.
ping
I’m guessing that if 500-1,000 high-level politicians are eliminatd, the economy will get on the right track.
bttt
There are a few things you need to consider, though, that I'm not sure you are factoring into your valuation. First, when you take a 100 year look at the overall market proper, you have to adjust for the fact that at the beginning of the 20th century, virtually all companies were incredibly asset intensive (railroads, steelmakers, steamboat transporters). It took exponentially more human labor and physical, capital assets such as machinery to perform a job than it does today. The Burlington Northern Santa Fe railroad, for instance, transports 10x more goods today than it did only half a century ago despite having a payroll that is a fraction of its former size. The gains came in the form of productivity increases due, in part, to more efficient technology, software management of loads and routes, and knowledge built up about the business over the course of cumulative decades. This has led to a slow, but gradual rise in the overall return on equity and return on assets enjoyed by American corporations.
With that in mind, you have to understand the limitations of GAAP accounting. All profit is not created equally. That's why private investors often calculate "owner earnings", which represents the profits that can be taken out of a business with no changes in unit sales volume without hurting the firm's competitive position. 1
In other words, a business that earns 50% on capital and has a 25 price-to-earnings ratio is much cheaper than steel mill that earns 6% on capital and has a price-to-earnings ratio of 9. The reason is that the "earnings" portion of the p/e ratio doesn't factor in capital that must be reinvested to maintain the company's operations (this is often known as "maintenance capital expenditures"). Thus, by purchasing the 25 p/e stock in full, I could actually take more absolute dollars out of the company than the 9 p/e stock. This is a limitation of traditional accounting (someday, I imagine, they will fix it). So the price-to-owner-earnings ratio would be more attractive (lower) on the high p/e stock.
This accounts in part for the overall rise in price-to-earnings ratios over the past century. (There are some other factors at play such as reduced dividend payout ratios, which mean more money is going in to fund expansion into new research and development, which leads to higher profits and technological advancement.)
All of that was to explain why Jeremy Siegel has proven quantitatively through his research at Wharton that the average price-to-earnings ratio, when adjusting for these factors, has slowly drifted upward to between 15 and 20 times earnings. In other words, the market at 15 to 20 times earnings today has the same economic benefits to someone who "owned" the market as a 10 to 15 price-to-earnings ratio market did back in the early part of the century.
So, you can't just look at a p/e chart for 100 years, see that the market is above or below a trend line, and make a determination that stocks are cheap or expensive. It's not that simple. (You are correct, though, that in general, a high p/e stock is bad and a low p/e stock is good.)
You also aren't accounting for the fact that a large percentage of the profits generated today relative to the early part of the century come from international exports. The large multi-nationals make as much, if not more, of their profit in non-U.S. dollar currencies than they do here at home. Even if the United States were to experience falling asset prices, these corporations could setup a currency arbitrage desk at headquarters (Coca-Cola has effectively had one since the Don Keough / Roberto Goizueta days), using the price changes to make money for the owners. Their actions would be the opposite of the inflationary scenario I've laid out in other posts; in this case, they would take more valuable U.S. dollars and ship them overseas to build factories in China or India, as well as acquire international firms in whole or part. Either way, there are always intelligent things to do that will make your richer if you pay attention.
My personal theory is that Congress will monetize the debt it is creating, especially as the unfunded liabilities start to hit their stride in 2030 beyond. I think inflation is an inescapable reality looking forward; probably not in the next few years, but beyond that, I don't see a lot that we can do to avoid it. The reason comes down to my belief in human nature: Congress will not reneg on promises to seniors, so they'll simply print money to cover the costs.
Of course, if we could come up with a new industry, such as the Internet, its theoretically possible that the gains in real GDP could more than make up for the stupid decisions our elected officials have made over the past 30 years. I don't like banking on things like that because they can't be predicted.
Regardless, I'd much rather own excellent businesses that generate large amounts of cash relative to the capital invested in them than I would any other asset class. Sure, I can play inflationary changes. If I thought we were going to hit super inflation next year, I'd borrow massive amounts of money on fixed rate terms to buy cash generating real estate, such as apartment buildings. I could effectively arbitrage the difference between the inflation rate and the fixed rate after tax deductions on the debt, having that portion of the balance paid off for me by Congress.
1: If you're interested, the calculation of "owner earnings" is operating profit + depreciation + amortization +/- changes in LIFO reserves - capital expenditures necessary to maintain current unit volume - working capital needs to maintain safe liquidity levels. You can then take this and divide it by the average shareholder equity necessary to keep the company in business to figure the return on owner earnings, which is a better gauge of profitability than return on equity. Sometimes, you'll find stocks that appear to be expensive yet are actually incredibly cheap. They are rare, but if you can get your hands on one, you're set for life.
Amen. Amen. Amen. And Amen.
I would argue that America’s influence as gold buyers is trivial in the main scheme of things.
The gold buyers are elsewhere.
Central banks of China, Russia, India, Sri Lanka, and others. Hedge funds. Assorted investors. Gold has a pretty solid base right now, and it has not reached historical bubble stages yet.
Incidentally, the Dubai fiasco is having severe effects on the market futures for tomorrow (Dow futures down 183, S&P futures down 23). Stocks appear set to take a major hit, and with their being near predicted highs, this development may be enough to confirm a top. We'll see. The next week or so may be verrry interesting.
In any case, gold is holding up despite a rush to dollars in Europe and elsewhere. Still in the 1180's, and may take off toward 1200 tomorrow.
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