Is gold a safe haven?

I've looked at gold a number of times on Bearwatch, trying to see whether it's a protection against inflation and/or falls on the Dow Jones Index.

The trouble is, there's so much wealth in the world that the relatively small market in gold can be manipulated by speculators, so it doesn't compensate for inflation etc in a smooth way.

It is also, many suspect, manipulated by central banks and governments, in order to preserve the illusion that the economy is under control. Sharp rises in the price of gold are traditionally seen as a vote of no confidence in national economic management, especially paper money (the last official link between gold and the US dollar was broken in 1971).

The graph below correlates gold and the Dow since the beginning of the 20th century. It's interesting because it shows how major crises impact on investment and gold.



It's also interesting because it suggests some sort of cycle, and the logarithmic scale makes the peaks link up in a straight line. Less so the troughs - many "gold bugs" keep looking back to the panicky spike in the gold price in 1980, which was clearly very exceptional (though the gold bugs still hope it's a benchmark for the future).

Beware: the human mind is very good at perceiving patterns, and will force them onto random data, which is why people used to think they could see canals on Mars.

Having said that, note the green line on the graph, which indicates the long-term trend. In particular, note that the blue line is now well below it, though nowhere near previous troughs. This could mean that gold is overpriced, yet still in the zone where a "bigger fool" may come along and pay even more for it. Such is our vanity, we tend to think we'll never be the biggest fool, ourselves.

On the other hand, since this graph relates gold to the Dow, it could suggest that the Dow is underpriced, and I have been reading a number of commentators who expect a continuation of the recent recovery in the stockmarket, though this opinion is not universally shared.

A further caveat: the graph looks as though it's a fairly regular cycle, but there are features of our present situation that are not cyclical, at least not in the usual few years/couple of decades frame. Some see the downwave of several longer-term cycles coming together in the not-too-distant future - here's an example from Charles Hugh Smith:

Here are some other reasons why the present recession (I believe it hasn't finished and has only been disguised by recent official financial intervention) may not be part of the "normal" business cycle:

• The ratio of total personal and public debt to GDP is the highest in modern history - higher even than just before the Great Crash of 1929
• There's been a social change in the West over the last generation or two, that has seen families become dependent on two earned incomes instead of one, so the option to earn more by sending one's partner out to work has already been exercised by many
• In developed and developing economies (e.g. China), the average age of the population is increasing. This means that more of the populace is looking to spend money on their needs (and older people need more healthcare), and fewer are in work and saving money
• National economies have become much more closely linked with one another. Many Western economies are in a similar, difficult financial situation and many Eastern economies have come to depend on trade with us, so that global fortunes are co-dependent in some ways. Investors may not be able to escape these problems by moving their money into other countries
• International trade has put highly-paid Western workers in much closer competition with workers in other countries where wage levels are far lower. Western wages per hour, already stagnant in real terms since somewhere in the 1970s, must (I believe) eventually come closer to Eastern pay rates; yet mortgages and other personal debts won't reduce just because the pay packet gets smaller
• Developed nations have set up expensive public systems of health treatment, education and social welfare benefits. It is going to be extremely hard to reduce these commitments in order to reduce taxation

Respected commentators like Mike Shedlock and Marc Faber (see yesterday) believe that the US, UK and other countries will not be able to square the circle. They differ only in how they think the disaster will play out.

In short, I would say that investing in gold is indeed a speculation, and to get into that market now appears to be coming a little late to the party, but if you share the wider outlook of many of the "bears" I've been following for the last 3 years, it may still be worth considering as an insurance against disaster. Perhaps we're at the point where we might even be prepared to accept a degree of loss on such a speculation, rather than lose far more if we remain in cash and see inflation destroy the value of money.

Investing in gold isn't the only precaution to consider. Look at what Faber says in the interview I posted yesterday - he's thinking in much bleaker terms and talks about buying agricultural land, moving out of the city etc. Faber isn't the only gloomy one: US Congressman Ron Paul is predicting social unrest when the government begins to fail on its commitments to citizens.

In short, the recent past is no guide to the future. Those graphs issued by investment funds and financial retail outlets, showing growth over 3 or 5 years (or whatever carefully-selected period makes their recommendation seem promising) are, in my opinion, pretty much useless. Whichever view you take, it is now important to make that a wider, longer view, because macroeconomic factors have become more significant.

And yes, the doomsters could also still be wrong, either about how things will go, or how soon, or both.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Inflation or deflation? Crisis, either way.

Mike "Mish" Shedlock, financial analyst at Sitka Pacific, and Dr Marc Faber (Thailand-domiciled investment guru and economic commentator) are thought to represent opposite points of view - deflation versus inflation, respectively.

In this interview, it's clear that to some extent they agree: the US Government will see huge budget deficits for years to come, and it's not going to be a re-run of the 1970s: there is no ability of the people to take on more debt because (as Mish says) we've now gone from 1- to 2-wage households (where work is available).

Faber accepts that the government may eventually choose to default with respect to foreign creditors, but otherwise he sees monetary inflation to cover the public funding gap and stimulate economic demand. Mish sees price rises as compatible with his judgment that the economy will deflate.



DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Too much wealth tied up in houses

Republished from the Broad Oak Blog:

A release from the Office for National Statistics, widely reported in the papers today, says that the UK's net worth is £6,669 billion. Of this, 61% (£4,048 billion) is tied up in housing.

According to Credit Action in April 2010, 11.1 million households have mortgages, at an average of £111, 612 per mortgage. The total of personal debt in the UK (including mortgages) is £1,464 billion; UK GDP in 2009 was an estimated £1,396 billion.

Much of the value of housing depends on the inflationary effect of lending. According to a release by the Council of Mortgage Lenders, in May 2010 the average loan to value for first-time buyers was 75%, and for house movers it was not much less (67%).

Housing has become a far more important element in our economy, over the last 50 years. Here is Table 1 of a press release by the Halifax in May 2010:


Since 1959, total net household wealth has increased 5 times in real terms. But houses have gone up in value 11 times, and mortages are 23 times bigger. Consumer credit is also 13 times greater.

I don't think we can really run a successful economy on the basis of inflating the value of our huts by getting into hock with moneylenders. Sooner or later, we have to get out there and hunt something.

Too much wealth tied up in houses

A release from the Office for National Statistics, widely reported in the papers today, says that the UK's net worth is £6,669 billion. Of this, 61% (£4,048 billion) is tied up in housing.

According to Credit Action in April 2010, 11.1 million households have mortgages, at an average of £111, 612 per mortgage. The total of personal debt in the UK (including mortgages) is £1,464 billion; UK GDP in 2009 was an estimated £1,396 billion.

Much of the value of housing depends on the inflationary effect of lending. According to a release by the Council of Mortgage Lenders, in May 2010 the average loan to value for first-time buyers was 75%, and for house movers it was not much less (67%).

Housing has become a far more important element in our economy, over the last 50 years. Here is Table 1 of a press release by the Halifax in May 2010:

Since 1959, total net household wealth has increased 5 times in real terms. But houses have gone up in value 11 times, and mortages are 23 times bigger. Consumer credit is also 13 times greater.

I don't think we can really run a successful economy on the basis of inflating the value of our huts by getting into hock with moneylenders. Sooner or later, we have to get out there and hunt something.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

The homeopathic approach to negative thinking

Feel free to put it on your coffee mug.

Fun with Google translate

I used Google's translator to render Milton's Sonnet On His Blindness into Chinese, then back again:

When I consider how my light is spent,
Ere half my days, in this dark world and wide,
And that one talent which is death to hide,
Lodged with me useless, though my soul more bent
To serve therewith my maker, and present
My true account, lest he returning chide,
Doth God exact day-labour, light denied?
I fondly ask; but Patience to prevent
That murmur, soon replies, God doth not need
Either man's work or his own gifts, who best
Bear his mild yoke, they serve him best, his state
Is kingly. Thousands at his bidding speed
And post o'er land and ocean without rest:
They also serve who only stand and wait.

When I consider how my light is spent,
Heat half of the amount of my day, in the darkness of the world, width,
This is a talent to conceal the death,
Useless to me, though my soul more inclined to
To meet this related to my manufacturer, now
My true account, lest he come back to blame,
Is God on the date of the labor, light denied?
I affectionately asked, but patience to prevent
This murmur, soon replies, God need not do
Both men's work or his own gifts, who is the most
Bear his mild yoke, they are the best for him, his country
Is benevolent. Thousands at his bidding speed
And after your land and ocean without rest:
They also become the only ones who stand and wait

Not bad, really!

Dagong's Sovereign Credit Ratings for June 2010

The new Chinese credit rating agency has issued its assessment of 50 nations - please click on the picture below to enlarge, then alter your computer view until it's readable (I haven't yet worked out how to get Blogger to show a long list like this full-size).

By way of comparison, you may wish to look at CMA DataVision's rankings of sovereign credit default risk from the first quarter of this year, which I rendered here.

Norway still looks good!

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.