Julian Robertson: US inflation is a big risk, Japan may sell US long bonds

[omagh]

Smart head Julian Robertson (ex-Tiger Fund, one of the original hedge funds) has some comments about US debt and inflation.  Buffett bought the Xtra trailer leasing company from him a few years back when Robertson wound up the Tiger Fund.

 

http://www.cnbc.com/id/33004753

.../snip/...

“If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said.  “It's not a question of the economy. It's a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we're totally dependent on those two countries. It's crazy.”

 

Robertson said while he doesn’t think the Chinese will stop buying US bonds, the Japanese may eventually be forced to sell some of their long-term bonds.

 

“That's much worse than not buying,” he said. “The other thing is, they're buying almost exclusively short-term debt. And that's what we are offering, because we can't sell the long-term debt. And you know, the history has been that people who borrow short term really get burned.”

.../snip/...

 

-O

[oldye]

Poor U.S government and their sub 1% cost of capital. 

 

I'm pretty sure by offering sub 1% bonds we're telling everyone that we want them to invest in other types of dollar denominated assets...as long as you want to accept dollars in trade you'll want to put those dollars to work one way or another. 

 

We know that if Hoisington is right, the dollar will get stronger and gold will suffer,  some cheap out of the money puts on some leavered mining stocks or levered gold etfs could be a profitable hedge.

[Mungerville]

Oldye, you mean calls on gold etf right?  I have calls on the silver etf which I think will lose money because I think the Hoisington view will come to roost in short-term pushing off inflation again.

[ERICOPOLY]

Oldye has been consistently suggesting that gold is overpriced, so I think he really did mean the puts.

 

I have been giving a lot of thought to all of this.  Gold might do best in a panic, but just like Yahoo stock was once best in a panic to own tech stocks.  At the end of the day, in a global inflation scenario, worldwide buying power will be limited to actual currencies (including CDN, AUD, etc...) and what people in those countries can actually afford to purchase with their currencies.  So it would like agricultural commodities would be a good idea -- and in fact, the #1 idea of Jim Rogers who states that while he does own some gold, he thinks agricultural commodities will do far better.

 

I'm in the camp that USD is going to be worth a lot less in 10 years.  I just want to be smart about this and not just buy gold because it's the first thing we think of -- I want some kind of value based approach so that we preserve our buying power to the maximum.  So agricultural commodities sound brilliant to me because after all, people need to eat and food prices are not already soaring as is the case with gold.

[oldye]

I think its pretty obvious that today the purchasing power of an ounce of gold is at my lifetime high.

 

Thing is we know that bubbles can last for years and even if I'm right today, the dollar can lose its purchasing power and gold could be worth 1000 an oz a few years down the road. 

 

Here is a hypothetical: What if Greenspan lowered rates instead of increasing them allowing inflation to take hold, would incomes rise enough to keep real estate from crashing? 

 

  I have some pretty far out  beliefs about where the world will be 20 years from now, which complicate my position on inflation vs deflation.  If the cost of energy/food/technology  goes the way of the transistor, you think people will still be stockpiling this shiny metal? 

 

[ERICOPOLY]

I think its pretty obvious that today the purchasing power of an ounce of gold is at my lifetime high.

 

In 1970, gold was $35 an ounce and US median house price was $17,000.

 

Today that same house costs $485,714 (priced in gold).  So either housing is a screaming deal priced in real money (gold), or gold is expensive.  Yes, if there is hyperinflation gold will rise in dollar terms, but so will a lot of other things (like agricultural commodities for example).

[Mungerville]

Ericopoly,

 

What was the gold price in 1980 and that house price in 1980 and what does that imply using your same calculation about gold vs housing today?

[txlaw]

Oldye has been consistently suggesting that gold is overpriced, so I think he really did mean the puts.

 

I have been giving a lot of thought to all of this.  Gold might do best in a panic, but just like Yahoo stock was once best in a panic to own tech stocks.  At the end of the day, in a global inflation scenario, worldwide buying power will be limited to actual currencies (including CDN, AUD, etc...) and what people in those countries can actually afford to purchase with their currencies.  So it would like agricultural commodities would be a good idea -- and in fact, the #1 idea of Jim Rogers who states that while he does own some gold, he thinks agricultural commodities will do far better.

 

I'm in the camp that USD is going to be worth a lot less in 10 years.  I just want to be smart about this and not just buy gold because it's the first thing we think of -- I want some kind of value based approach so that we preserve our buying power to the maximum.  So agricultural commodities sound brilliant to me because after all, people need to eat and food prices are not already soaring as is the case with gold.

 

I posted this in another thread about gold and the USD, but it's worth taking a look at what Bruce Flatt of Brookfield wrote in his last shareholder letter about BAM's exposure to various currencies:

 

In summary, about 50% of our equity is invested in U.S. dollar-based investments. We are comfortable with this as we believe that the U.S. dollar will remain an extremely important global currency for many decades. This is mainly because we see no viable alternative currency which has the necessary scale, universal acceptance and a history of rule of law backing its existence.

 

The other 50% of our capital is invested predominantly in three healthy, commodity-based countries where we believe the odds favour the currencies doing well compared with the U.S. dollar. [He's referring to the CAD, AUD, and Brazilian Real.]  This is as a result of their current fiscal situation, but more importantly because the drivers of their economies (oil, iron ore, coal, copper and agricultural products) should enable them to maintain positive fiscal positions.

 

There's the value-oriented approach to currencies you may be looking for, I think.  As for commodities as a dollar hedge, I prefer useful commodities such as agricultural and energy commodities to gold, which is more like a currency anyway. 

 

I'm thinking the run up in gold versus the dollar may have a ways to go, in which case we will finally be in bubble mode. 

[Viking]

I have a hard time understanding where inflation will come from when you have so much plant capacity not utilized and unemployment so high and rising.

 

To me, the risk of inflation is some unexpected exogenous shock like Japan selling Treasuries or China buying much less (possible but low probability). Living in Canada, most of my assets are in Can$ and this is perhaps my 'hedge'.

 

I have invested in gold in the past (Sprott Precious Metals Fund) and did quite well with it. The problem I have with gold today is it does not look to me to be dirt cheap. I like to buy stuff that people hate (that is why it is dirt cheap). That is not to say that gold will not move much higher.

 

If I bought gold today it would be because I want 'store of value' because I suspect there is a decent probability (perhaps as high as 5% that we are approaching the abyss). I cannot buy gold today at current prices because of my understanding of supply and demand for the metal.

 

Gold for me, at current prices, goes in the too hard pile (not that I don't think about it from time to time). Does that make me a closet gold bug?

[ERICOPOLY]

Ericopoly,

 

What was the gold price in 1980 and that house price in 1980 and what does that imply using your same calculation about gold vs housing today?

 

 

 

Exactly.  Volatile.  People say it is the ultimate tool of maintaining your purchasing power... but tell it to the person who bought in 1980.  People come up with these examples that say things like "the cost of a fine tailored suit today is about what it was 100 years ago priced in gold".  Well sure, but 8 years ago that wasn't the case, it could only buy you a third or a half of that same suit.  So the volatility is really crazy, such that whether you maintain 100% or 50% of your purchasing power is highly dependent on what decade you unload at, or what year within that decade -- almost like a broken clock that is exactly right a couple of hours out of 24, and off by several hours most of the rest of the time.  Sure, that clock will reliably give you the accurate time again, but how long do you have to wait?

 

 

 

 

[ERICOPOLY]

Mungerville,

I picked 1970 because gold was still pegged to the dollar and I knew the price of gold off the top of my head without having to look it up.

 

In 1980 gold wasn't pegged to the dollar, it was driven by speculative/investment demand, and I don't want to use such a period as a terminal point for that reason.  Instead, 1970 is a good terminal point because gold/usd wasn't manipulated by speculators.

 

Today (similar to 1980) USD is not pegged to gold and so... are we driven by fundamentals now or investors/speculators?  This is the unknown I fear, so I look to how gold is rising vs other more stable currencies (like AUD and CDN) as clues to whether gold is merely rising in USD terms, or rising absolutely against a whole basket of currencies that most of us deem fairly safe alternatives to the USD.  It turns out that gold is a ballistic missile relative to those currencies.

 

 

[Guest Broxburnboy]

Mungerville,

 

In 1980 gold wasn't pegged to the dollar, it was driven by speculative/investment demand, and I don't want to use such a period as a terminal point for that reason.  Instead, 1970 is a good terminal point because gold/usd wasn't manipulated by speculators.

 

Actually the 1970 official price of gold (35.00 USD) was indeed manipulated.. by the US Federal Reserve.. it had for some time been over creating US dollars and unable to redeem all its dollars for gold at the fixed rate. By closing the gold window, Nixon was in fact stiffing all foreign holders of US dollars and shifting the burden of government debt to foreigners. There was a small free market for gold in Macau at that time which operated outside of the USD world... gold was traded freely then at about 75.00 per oz, and indeed within a year of the depegging, the price in the international market rose to the Macau price.

 

When gold rose to its 1980 high of about 800 bucks, it did so in response to the fear that the US buck would implode because of dillution.

There was a speculative frenzy which lasted a very short time, shorter than last year's speculative frenzy in oil. Quoting 800.00 USD as a peg price in 1980 is as accurate as pegging the price of oil at 150.00/bbl in 2008.

In inflation adjusted terms (even using "official" CPI numbers which understate USD inflation), the price of gold has remained relatively stable since the initial adjustment after depegging.

[ERICOPOLY]

Mungerville,

 

In 1980 gold wasn't pegged to the dollar, it was driven by speculative/investment demand, and I don't want to use such a period as a terminal point for that reason.  Instead, 1970 is a good terminal point because gold/usd wasn't manipulated by speculators.

 

Actually the 1970 official price of gold (35.00 USD) was indeed manipulated.. by the US Federal Reserve.. it had for some time been over creating US dollars and unable to redeem all its dollars for gold at the fixed rate. By closing the gold window, Nixon was in fact stiffing all foreign holders of US dollars and shifting the burden of government debt to foreigners. There was a small free market for gold in Macau at that time which operated outside of the USD world... gold was traded freely then at about 75.00 per oz, and indeed within a year of the depegging, the price in the international market rose to the Macau price.

 

When gold rose to its 1980 high of about 800 bucks, it did so in response to the fear that the US buck would implode because of dillution.

There was a speculative frenzy which lasted a very short time, shorter than last year's speculative frenzy in oil. Quoting 800.00 USD as a peg price in 1980 is as accurate as pegging the price of oil at 150.00/bbl in 2008.

In inflation adjusted terms (even using "official" CPI numbers which understate USD inflation), the price of gold has remained relatively stable since the initial adjustment after depegging.

 

 

Mr Market set the Macau price in 1970 at $75, and Mr Market is setting the price today at $970, which is a rise of 12.93x.

 

The 1970 median housing price of $17,000 priced in gold by Mr Market, is worth $209,100.

 

So housing prices have actually fallen in real terms.  Amazing how everyone can be so easily misled to believe that housing prices rose faster than inflation, right?

 

Well, no.  The problem is that the current price of gold is set by (as we all know) the immensely rational Mr. Market, the same level headed person that set the price in 1970, and of course also set the price under $300 earlier this decade.  There are narratives to fit the prices, but beware of narrative fallacies.

 

 

 

 

 

 

 

[omagh]

Here's the full 30-minute video.

 

http://www.gurufocus.com/news.php?id=70344

 

-O

 

Smart head Julian Robertson (ex-Tiger Fund, one of the original hedge funds) has some comments about US debt and inflation.  Buffett bought the Xtra trailer leasing company from him a few years back when Robertson wound up the Tiger Fund.

 

http://www.cnbc.com/id/33004753

 

-O

[Guest Broxburnboy]

 

So housing prices have actually fallen in real terms.  Amazing how everyone can be so easily misled to believe that housing prices rose faster than inflation, right?

 

Well, no.  The problem is that the current price of gold is set by (as we all know) the immensely rational Mr. Market, the same level headed person that set the price in 1970, and of course also set the price under $300 earlier this decade.  There are narratives to fit the prices, but beware of narrative fallacies.

 

 

Here is an interesting article on a website which documents your "narrative fantasy". If gold was the ultimate sound money then this analysis documents the actual rise and fall of the US housing bubble:

 

http://www.oftwominds.com/blogsept09/housing-gold09-09.html

 

Cheers

 

[ERICOPOLY]

 

So housing prices have actually fallen in real terms.  Amazing how everyone can be so easily misled to believe that housing prices rose faster than inflation, right?

 

Well, no.  The problem is that the current price of gold is set by (as we all know) the immensely rational Mr. Market, the same level headed person that set the price in 1970, and of course also set the price under $300 earlier this decade.  There are narratives to fit the prices, but beware of narrative fallacies.

 

 

Here is an interesting article on a website which documents your "narrative fantasy". If gold was the ultimate sound money then this analysis documents the actual rise and fall of the US housing bubble:

 

http://www.oftwominds.com/blogsept09/housing-gold09-09.html

 

Cheers

 

 

 

Fun and games with an oscillating value.  The key points in the article are "For the past eight years. " 

 

Never mind the entire data set, let's just keep the conversation focused on the periods when gold has risen against the dollar.

 

Of course, this also showcases not just housing was overvalued, but Candian dollars, Australian dollars, Swiss francs... everything that fell steeply against gold over the past 8 years. 

 

Since 1970 though, housing has become cheaper in gold.  Therefore, housing must have been in a bubble in 1970 too, using the same logic in that article. 

 

The fact is that housing was in a bubble this decade -- that's not under dispute.  But a narrative can be developed that gold is only rising because the USD is being debased... and that accounts for part of the rise no doubt... however when gold makes even the Swiss franc look like it's under rapid devaluation, then it's time to wonder what part of the narrative is not being told by the goldbugs.

 

[Guest Broxburnboy]

 

The fact is that housing was in a bubble this decade -- that's not under dispute.  But a narrative can be developed that gold is only rising because the USD is being debased... and that accounts for part of the rise no doubt... however when gold makes even the Swiss franc look like it's under rapid devaluation, then it's time to wonder what part of the narrative is not being told by the goldbugs.

 

 

I'm curious about these "goldbugs", apparently they are withholding part of the narrative, and its now time to wonder why.

 

Who are they? What part of the narrative are they withholding? are they nefarious? are there motives impure? Are they to blame for the short run on the USD? Should they be suppressed?

[Cardboard]

Relative to gold, I would like to mention the following facts which people somehow ignore:

 

1- Gold does not need inflation to go up in price. It did go up during the Great Depression and I have seen a study previously showing poor correlation between inflation and gold at least in the short term.

 

2- Gold did go up dramatically in the 70's and somehow the U.S. dollar is still in existence today. In fact, compared to most major currencies, there is not much difference between the relative value of a USD in 1970 vs what it is at today.

 

Gold is a commodity and its price will be based on supply and demand. Fear of inflation, fear over the USD, fear of competing currency debasement, fear of negative real interest rates will simply fuel investor demand for gold helping one side of the equation.

 

Right now we are seeing a deficit with production/scrap being insufficient to meet demand by quite a margin. It has been like that for many years or a result of the long bear following the peak in 1980. The deficit has been met by Western central banks selling in the market. This is no longer working as stockpiles are being depleted, some are reconsidering this strategy and some central banks (China and Russia) are now strong buyers. The price will likely overshoot until it attracts enough supply or until enough buyers turn into sellers.

 

It is true that over the very long haul (50 or 100 years), that it may match very well with inflation, or with real estate or with suits however, we could be dead before we are able to find out. IMO, that is not what the game is about here.

 

Cardboard

[ERICOPOLY]

 

The fact is that housing was in a bubble this decade -- that's not under dispute.  But a narrative can be developed that gold is only rising because the USD is being debased... and that accounts for part of the rise no doubt... however when gold makes even the Swiss franc look like it's under rapid devaluation, then it's time to wonder what part of the narrative is not being told by the goldbugs.

 

 

I'm curious about these "goldbugs", apparently they are withholding part of the narrative, and its now time to wonder why.

 

Who are they? What part of the narrative are they withholding? are they nefarious? are there motives impure? Are they to blame for the short run on the USD? Should they be suppressed?

 

 

"They" are the people who do not look critically at the magnitude of the movements.  They seem to be intellectually satisfied that the price of gold is rising in USD terms, that the US dollar is declining based on Fed monetary policies and huge deficits far out in the future, and therefore they leave it at that.  "They" forget to say that "well, that being said, the price of gold is soaring in terms of ALL world currencies", and they forget to then wonder what will happen if the price of gold adjusts to the extent that it has overshot these other relatively more sound currencies.  

 

The guy in this article is such a character -- taking a relatively short time period (8 years) and explaining how much "Pricing U.S. homes in gold reveals that housing has fallen by two-thirds from its 2005 peak. ".  It takes only a small amount of critical thinking to realize that most things, houses, Swiss/Austrlian/Canadian currencies for example, have fallen from their 2005 levels if you compare them to gold.  For some reason he was perfectly happy in drawing such a conclusion -- maybe looking for disconfirming evidence is not interesting to him.  Or perhaps for sensational effect he just wanted to find something that has risen wildly in price and use it to price houses.  I personally don't see what value he gets from doing this -- you ask if his motives are impure, and who really knows.  Maybe he just wanted to sensationalize the housing crash in order to draw in more readers, see how many hits he can get.  They do this on the evening news -- often seeming to exaggerate a story for dramatic effect.  What drives them?  I can't imagine.

 

 

[arbitragr]

you don't need to necessarily buy gold if you want to hedge usd

you can short usd with all sorts of tools and instruments these days

 

here's the wild card: how aggressively will the fed utilize monetar policy to curb inflation. they have the necessary tools to do so.

 

 

[leftcoast]

Article by Alice Schroeder on gold, inflation, and the US dollar:

 

Gold Tells You U.S. Bubble Hasn’t Popped Yet

http://bloomberg.com/apps/news?pid=20601039&sid=ajPCIYcGX8t4

[ERICOPOLY]

Article by Alice Schroeder on gold, inflation, and the US dollar:

 

Gold Tells You U.S. Bubble Hasn’t Popped Yet

http://bloomberg.com/apps/news?pid=20601039&sid=ajPCIYcGX8t4

 

I have been seeing sandwich boards out on the highway near my house recently, advertising gold and silver coins.  Has anyone else seen these with more frequency as of late?

[Guest Broxburnboy]

Article by Alice Schroeder on gold, inflation, and the US dollar:

 

Gold Tells You U.S. Bubble Hasn’t Popped Yet

http://bloomberg.com/apps/news?pid=20601039&sid=ajPCIYcGX8t4

 

Good article, I sent her a comment on its content in an email:

 

I read with interest your article "Gold Tells You U.S. Bubble Hasn’t Popped Yet" at bloomberg.com.

Your comments were generally insightful and I was particularly charmed by your "cow - fiat money" analogy.

I think however you could have pushed the analogy a bit further.. what happens to the exchange rate vis a vis cows when I begin

circulating more pieces of paper than I have cows? When I create more paper not backed by cows, and use it as capital to lend at interest, is this fraud, a ponzi scheme  or legitimate central banking? When it is apparent to all that the notes are not redeemable for one cow, I declare that the notes will now trade freely as a promise to pay.

At this point (1971 when Nixon closed the gold window), the exchange rate between cows and notes turns in favour of cows. Forty years later it now takes 30 notes to exchange for one cow and the ratio is beginning to deteriorate an alarming rate, as the explicit policy is to crank up the creationof promissory notes at a time when the number of cows is allegedly stable, based on the widespread delusion that the notes have intrinsic value, not the cows.

The more intelligent people, realizing that cows are in fact the stable value, begin a rush to trade their notes for cows.

These "cowbugs" are villified by the deluded and  blamed for the collapse of the promissory notes.

 

Cheers

 

 

[txlaw]

The more intelligent people, realizing that cows are in fact the stable value, begin a rush to trade their notes for cows.

 

There is a big difference between cows and gold.  Cows have more intrinsic value or utility to them than gold.  You can milk them, you can slaughter them for meat and leather goods, and you can use them for labor (e.g., pulling plows).  Gold has some utility, but not as much as cows or most other traded commodities. 

 

Gold, however, does function very well as an alternative currency, which is driven by the fact that it is a precious metal and has a hold on human imagination that goes back since time immemorial.  Furthermore, the absolute supply of gold cannot be influenced/manipulated by central banks, though central banks can affect the dynamics between the supply and demand for gold in the market, as they control most of the gold that exists in the world.  This monetary function in the minds of most people in the world makes holding gold a nice insurance policy to have in case of sudden currency devaluations or systemic crisis. 

 

I’m not sure that I would ever make the claim that gold has a "stable" value as it is in the end just a currency to be used in exchange for goods and services.  The ratio of exchange between gold and useful goods and services can easily fluctuate based on animal spirits and short term supply/demand fundamentals.

 

-----

 

Here's my theory about what has happened to gold over the last few years and what will happen going forward:

 

-In the late 90s and early 2000s, many central banks -- and the Fed in particular -- came up with an easy money policy where they would inject liquidity into the system to soften every little recession.  One of the things that the central banks did when they lowered rates was to lend gold out at very low interest rates, promoting what has been called the "gold carry trade."  Gold was leased at these low rates to bullion banks, who subsequently dumped the gold into the market in order to lend out the money or buy fixed income securities such as MBS.  This caused the price of gold to be very depressed during this period and the price reached a bottom in the early 2000s.

 

-Between the early 2000s up until the financial crisis happened, the supply and demand in the market for gold began to normalize and so the price of gold began to revert to a more normalized level.  On top of this, many smart people began to realize that we were getting to the point where we would finally see the dollar be devalued at a rapid pace and where we could have global systemic crisis due to the casino-like, too big to fail, derivatives-laced financial system that was reaching its apex.  These people saw that if a global panic were to ensue, you might want to be in gold because of its insurance value.  Reversion to normalized prices plus realization of the potential systemic crisis caused the price of gold to appreciate relative to many sound country currencies over the last five years. 

 

-Then the panic happened.  It became clear to everyone that the dollar was going to be worth much less going forward, including the Chinese and Japanese central banks who had continued to hold dollar reserves and lend money to us in order to sustain their export sectors.  Fearing a sudden devaluation of the dollar and systemic collapse, these central banks, institutional investors, and even retail investors began to pile into gold and useful commodities (such as oil) in order to preserve the wealth they had accumulated.  They did this because it was the easiest and quickest way to do so.  Gold and commodities spiked versus the dollar and versus other currencies.  Gold continues to remain high because supply cannot be ramped up as with useful commodities such as oil, nat gas, and copper, and because demand for gold is not as tied to the real economy as demand for these useful commodities.

 

-Now we see China and Japan, which still have lots of dollars and dollar-denominated fixed income securities in their coffers, chomping at the bit to get rid of their dollars in an orderly manner, i.e. in a manner that won’t destroy their export sectors overnight and cause unrest.  Instead of dumping dollars into the currency markets, they are planning on investing in U.S. commercial real estate in the next few years and will probably buy more stakes in U.S. business so that they have claims to real/productive assets instead of dollars in their hands.  They will likely also slowly diversify into other currencies such as the Canadian dollar and Australian dollar, which will push these currencies up relative to the dollar over time.  Buying gold will no longer be the best way to combat dollar devaluation, and the price of gold will stagnate versus other currencies that are backed by useful commodities, fiscally sound government policies, and strong industrial concerns. 

 

The time to buy gold was between 2001 and the financial crisis.  Not now. 

 

[ERICOPOLY]

The more intelligent people, realizing that cows are in fact the stable value, begin a rush to trade their notes for cows.

 

There is a big difference between cows and gold.  Cows have more intrinsic value or utility to them than gold.  You can milk them, you can slaughter them for meat and leather goods, and you can use them for labor (e.g., pulling plows).  Gold has some utility, but not as much as cows or most other traded commodities. 

 

Gold, however, does function very well as an alternative currency, which is driven by the fact that it is a precious metal and has a hold on human imagination that goes back since time immemorial.  Furthermore, the absolute supply of gold cannot be influenced/manipulated by central banks, though central banks can affect the dynamics between the supply and demand for gold in the market, as they control most of the gold that exists in the world.  This monetary function in the minds of most people in the world makes holding gold a nice insurance policy to have in case of sudden currency devaluations or systemic crisis. 

 

I’m not sure that I would ever make the claim that gold has a "stable" value as it is in the end just a currency to be used in exchange for goods and services.  The ratio of exchange between gold and useful goods and services can easily fluctuate based on animal spirits and short term supply/demand fundamentals.

 

-----

 

Here's my theory about what has happened to gold over the last few years and what will happen going forward:

 

-In the late 90s and early 2000s, many central banks -- and the Fed in particular -- came up with an easy money policy where they would inject liquidity into the system to soften every little recession.  One of the things that the central banks did when they lowered rates was to lend gold out at very low interest rates, promoting what has been called the "gold carry trade."  Gold was leased at these low rates to bullion banks, who subsequently dumped the gold into the market in order to lend out the money or buy fixed income securities such as MBS.  This caused the price of gold to be very depressed during this period and the price reached a bottom in the early 2000s.

 

-Between the early 2000s up until the financial crisis happened, the supply and demand in the market for gold began to normalize and so the price of gold began to revert to a more normalized level.  On top of this, many smart people began to realize that we were getting to the point where we would finally see the dollar be devalued at a rapid pace and where we could have global systemic crisis due to the casino-like, too big to fail, derivatives-laced financial system that was reaching its apex.  These people saw that if a global panic were to ensue, you might want to be in gold because of its insurance value.  Reversion to normalized prices plus realization of the potential systemic crisis caused the price of gold to appreciate relative to many sound country currencies over the last five years. 

 

-Then the panic happened.  It became clear to everyone that the dollar was going to be worth much less going forward, including the Chinese and Japanese central banks who had continued to hold dollar reserves and lend money to us in order to sustain their export sectors.  Fearing a sudden devaluation of the dollar and systemic collapse, these central banks, institutional investors, and even retail investors began to pile into gold and useful commodities (such as oil) in order to preserve the wealth they had accumulated.  They did this because it was the easiest and quickest way to do so.  Gold and commodities spiked versus the dollar and versus other currencies.  Gold continues to remain high because supply cannot be ramped up as with useful commodities such as oil, nat gas, and copper, and because demand for gold is not as tied to the real economy as demand for these useful commodities.

 

-Now we see China and Japan, which still have lots of dollars and dollar-denominated fixed income securities in their coffers, chomping at the bit to get rid of their dollars in an orderly manner, i.e. in a manner that won’t destroy their export sectors overnight and cause unrest.  Instead of dumping dollars into the currency markets, they are planning on investing in U.S. commercial real estate in the next few years and will probably buy more stakes in U.S. business so that they have claims to real/productive assets instead of dollars in their hands.  They will likely also slowly diversify into other currencies such as the Canadian dollar and Australian dollar, which will push these currencies up relative to the dollar over time.  Buying gold will no longer be the best way to combat dollar devaluation, and the price of gold will stagnate versus other currencies that are backed by useful commodities, fiscally sound government policies, and strong industrial concerns. 

 

The time to buy gold was between 2001 and the financial crisis.  Not now. 

 

 

That makes a lot of sense and at least provides a satisfying narrative as to gold vs CDN and AUD, and what I suspect will be their relative outcomes in the future.