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John Embry Suggests Munger is Not Rational


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i think at the end of the day , everyone talks their own book .  it doesnt matter who it is!  i personally been a holder of brk, ffh from last 10 years and holder of gold equities from last 6 and have done fairly well. in this instance i agree with john that US will print more money and i intend to play that trade by buying and holding gold until i see otherwise.

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Gold is indeed in a bubble.  How long and how far it goes, I don't know.  Just over Christmas weekend, I found out that one of my cousin's sold some of her gold jewellry to a friend.  The friend decided he wanted to create another source of income for himself, and is buying and selling gold and scrap gold.  This guy has no clue what he is doing.

 

The same sort of thing was happening right before the tech wreck and right before the collapse of the housing bubble.  When the common man becomes interested in an idea, it certainly is by no means a unique idea any longer.  I remember a friend who lost 80% of her nest egg by buying all sorts of bloated technology stocks in late 1999 and early 2000.  I know several people in the U.S. who have lost nearly everything because they were leveraged and had several rental properties with large mortgages.  Now I'm meeting alot of people, even on this board, who think that the U.S. dollar will be worth much less while gold will continue to increase.

 

It all reeked the same at their corresponding times.  But there was no convincing anyone of that.  Both times there were people telling Buffett & Munger how this time it was different.  Yet it wasn't.  It could be three weeks, three months, or three years...I have no idea.  But I think investors holding gold today will find themselves at the wrong end of the bargain.  But hey, I thought "rap" was a fad twenty years ago and I've been proven wrong!  ;D  Cheers! 

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In the tech bubble fundamentals were non existent. In the real estate bubble supply vs demand balance was off. Currently gold is fundamentally sound( Us money printing) and supply is low. Gold will be strong until gold supply outweighs gold demand or the U.S. and the world turns off there printing press. Granted gold is a speculation not an investment. Gold will be in a bubble and reach parabolic levels dont think we are in it now. I have a bit of my portfolio in mining companies understanding its  speculation not an investment.

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I don't know how to trade gold but I do believe the dollar will be worth less and less.

 

In the US, we face a tough, tough dilemna.  We want to provide good health care to seniors, and it comes at a giant cost (economic).  Really, enough to bankrupt the nation. 

 

But how do you tell a senior that you (the government) won't pay for their life extending medications.  Political suicide.  Can't be done.  So we rack up bigger and bigger debts.

 

The only way out is to print more money.  That is my opinion, but I don't see the alternatives.  So the dollar will decline. 

 

The only potential other solution is mass immigration and a related increase in economic activity.  But this comes with its own problems, including future support of their health care, current costs of new citizenship, etc. 

 

None of this may explain the price of gold, but again, I believ e it will explain the decrease in USD purchasing power.

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In many important ways the value of the U.S $ has gone up and is going to keep going up. Japan shows that high debt loads compared to gdp can lead to long periods of low interest rates and ever increasing value compared to other currencies.  Unless we're in for a period of increased trade barriers we probably won't see inflation. 

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I think of gold as insurance rather than an investment or speculation. Bronco nailed it - gold will continue to rise as long as the dollar falls. The dollar will fall until congress figures out how tro deal with the whole deficit/debt/taxes/entitlement issue. If you have the conviction that Congress will deal with the problem - and quickly - stay away from gold. If you think there will be ten more years of trillion dollar deficits then gold looks to do okay. Embry & Sprott have done fairly well the past ten years with gold.

 

 

cheers

Zorro

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I have problems with gold and John Embry.  John Embry has been a gold bug and talking up gold the entire time I have been investing - 15 years.  He finally gets to be right.  Lets hope he has the where-with-all to bail before its all over.

 

Problems with Gold itself:  

- as an inflation hedge it is weak at best.  

- you cant define a value for it.  I can put a rough value on my stocks.  So, how do you know when its undervalued, fairly valued, or overvalued.

- the US dollar is going up, not down, relative to other currencies, excepting the commodity currencies where it is more or less stable.  

- every time there is a mini-panic there is a run to US treasuries.

 

I personally think gold has a way to run in this 'bubble' because that is what bubbles do, but I wouldn't touch it with a barge pole.  

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In the tech bubble fundamentals were non existent. In the real estate bubble supply vs demand balance was off. Currently gold is fundamentally sound( Us money printing) and supply is low.

 

Supply is only low relative to speculative demand.  Tim McElvaine had a terrific chart showing global gold demand and supply in his September Letter:

 

http://mcelvaine.com/wp-content/uploads/2010/03/2010-We-are-here-30Sep.pdf

 

Supply on a current annual basis far exceeds utilitarian demand.  The current price is purely speculative based on fears with global economies.  We saw what happens when fundamental supply exceeds demand with natural gas.  There is no reason why gold at some time in the future will not return to a more rational level as fears diminish. 

 

In the US, we face a tough, tough dilemna.  We want to provide good health care to seniors, and it comes at a giant cost (economic).  Really, enough to bankrupt the nation. 

 

But how do you tell a senior that you (the government) won't pay for their life extending medications.  Political suicide.  Can't be done.  So we rack up bigger and bigger debts.

 

The only way out is to print more money.  That is my opinion, but I don't see the alternatives.  So the dollar will decline.

 

As Prem says, when too many people start thinking the same way, that is a time for concern.  I'm concerned!  ;D  Cheers!

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I have never used drugs, but if I did, I would ask some board members for their suppliers. 

 

The value of the USD is not going up.  Over the past 20 years, the cost of almost anything is higher.  What did a house cost in the 50's?  A burger?  What about a candy bar or a coke in the 90's. 

 

Why would I care about the USD versus the Turkish Lihre?  I don't. 

 

People care about what their $$$ can buy.  How about health insurance?  Surgery?  Prescription drugs? 

 

Gas in my cheap state of NJ is $3 / gallon.

 

I think I'll stop ranting and let others battle this one out. 

 

 

 

 

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Me neither... Inflation has been more or less continous since the second world war.  I find the reconcilation between inflation and the gold price to be very poor.  Inflation in the early 90s was running in and around 5% and the gold price was... dropping.

 

The price of gold ran up quickly after the peg was removed until its 20th century peak in 1982, and then it retrenched and stayed there for 20 years while the CPI doubled.

 

I'll know the bubble has peaked when my mother buys another ounce of gold - she last bought it at 800 and sold it at 400.

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"I have no objection to Mr. Buffett's endorsement of farmland and stocks like Exxon Mobil. They represent ideal investments in the world I see unfolding. Unfortunately, there are tens of trillions worth of paper money out there and more is being created everyday and, unfortunately, there are a very finite number of hard assets of the type cited by Mr. Buffett available for purchase."

 

I think we all agree that our cash will buy us less in the future.

 

What are good buys out there today that will protect us from less valuable paper money in the future?

 

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More dollars were destroyed than created in the last few years (M3). The inflation rate is now around 0.8 %. QE2 was not inflationary but slightly deflationary as it replaced long duration debt with short term instruments. Inflationistas and hyperinflationistas often use wrong arguments to convince people of their beliefs, Schiff being the stereotype example. Anyway gold is not a good inflation edge (the 80s and 90s are a proof of this).

Gold is a speculation supported by the uncertainty and fear about the whole system. There is going to be plenty more uncertainty and problems over the next few years so I would not bet against gold. If I had to I actually would bet it is not finished going higher even if it may go through rough corrections. It is definitely a bubble in the long run however.

Gold is not the only speculation out there: the QE trade has made many other markets really speculative at this moment.

 

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The rational thing is a rolling long term out-of-the market put on bullion.

Buy as cheaply as possible, & keep rolling it forward every 6 months to minimize the decay cost - essentially the poor mans CDS

 

More gold is produced than used each yr, & unfortunately the stuff recycles - so there's a growing cummulative supply overhang. Stop the buying & we will get a rapid drop as the hoards come out of the woodwork - unless developing nation central bank(s) switch a portion of their $ holdings to bullion (the traditional position). Lots of volatility.

 

Culturally the (mostly) rural populaces of both India & China have used gold as their store of value - & its that growing marginal wealth that is pushing prices. More savings to invest, & the growing value of your existing hoard, producing a nice wealth effect - not unlike the Tech bubble.

 

Given that you can margin against your hoard to support spending, there is probably quite some way to go yet.

 

SD

 

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There are a lot more gold naysayers than there are cab drivers and common folk piling into gold. As I've said more than once, when people flip from calling the highs "tops" to calling the pullbacks "opportunities", then we're in bubble territory. Right now everybody is falling over themselves to explain why gold has nowhere to go but down.

 

This thing still has a long way to go IMHO. Canadian Real Estate is far more in bubble territory than gold is right now. It's almost a perfect mirror image, because you get shouted down in most circles for even suggesting Canadian RE can go down. Cab drivers and newlyweds with no money are "investing" in second and third properties, trying their hand at "flipping". You tell me that's not screaming a top.

 

As far as the USD goes, just plot out the purchasing power of the USD from 1913 to now, it's down 97% and falling. There has been no paper currency that has not gone into terminal decay like this, ever. So if you want to talk about the fallacy of "this time it's different", please explain to me how come a piece of gold dug out of the ground 2000 years ago can still buy you a suit and you can't rent a video with a 1913 $100 bill.

 

People who hold gold are saying the exact opposite than "this time it's different". They're holding gold because they know that this time it most definitely is not. People who deny that the USD is going into terminal decline and that the world monetary system isn't headed for a massive reboot are the one's saying "this time it's different".

 

 

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There are a lot more gold naysayers than there are cab drivers and common folk piling into gold. As I've said more than once, when people flip from calling the highs "tops" to calling the pullbacks "opportunities", then we're in bubble territory. Right now everybody is falling over themselves to explain why gold has nowhere to go but down.

 

This thing still has a long way to go IMHO. Canadian Real Estate is far more in bubble territory than gold is right now. It's almost a perfect mirror image, because you get shouted down in most circles for even suggesting Canadian RE can go down. Cab drivers and newlyweds with no money are "investing" in second and third properties, trying their hand at "flipping". You tell me that's not screaming a top.

 

As far as the USD goes, just plot out the purchasing power of the USD from 1913 to now, it's down 97% and falling. There has been no paper currency that has not gone into terminal decay like this, ever. So if you want to talk about the fallacy of "this time it's different", please explain to me how come a piece of gold dug out of the ground 2000 years ago can still buy you a suit and you can't rent a video with a 1913 $100 bill.

 

People who hold gold are saying the exact opposite than "this time it's different". They're holding gold because they know that this time it most definitely is not. People who deny that the USD is going into terminal decline and that the world monetary system isn't headed for a massive reboot are the one's saying "this time it's different".

 

So, there are two keys to this situation to me.  1) These kinds of currency destruction scenarios are extremely unpredictable in the endgame, which can be drawn out for many years.  I have no idea when that could happen.  People have been saying that it was imminent for over 50 years.  So therefore.. 2) The people who are claiming that it's going to end "this time" are the ones who are claiming that "it's different this time".  I totally understand the overall argument, but I can't say that THIS is the time when we hit hyperinflation or some other major event.

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That 1913 $100 bill would have done quite nicely in a wealth-creating company which earned above its cost of capital.  Coca-Cola is but one example.

http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stocksplit

 

If this is the central thesis of your argument, you may want to check it more closely.

 

-O

As far as the USD goes, just plot out the purchasing power of the USD from 1913 to now, it's down 97% and falling. There has been no paper currency that has not gone into terminal decay like this, ever. So if you want to talk about the fallacy of "this time it's different", please explain to me how come a piece of gold dug out of the ground 2000 years ago can still buy you a suit and you can't rent a video with a 1913 $100 bill.

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Guest broxburnboy

More dollars were destroyed than created in the last few years (M3). The inflation rate is now around 0.8 %. QE2 was not inflationary but slightly deflationary as it replaced long duration debt with short term instruments. Inflationistas and hyperinflationistas often use wrong arguments to convince people of their beliefs, Schiff being the stereotype example. Anyway gold is not a good inflation edge (the 80s and 90s are a proof of this).

Gold is a speculation supported by the uncertainty and fear about the whole system. There is going to be plenty more uncertainty and problems over the next few years so I would not bet against gold. If I had to I actually would bet it is not finished going higher even if it may go through rough corrections. It is definitely a bubble in the long run however.

Gold is not the only speculation out there: the QE trade has made many other markets really speculative at this moment.

 

 

The salient number is not M3, or M2 or M1 but the total accumulated US government debt ....which is increasing (now around 14 Trillion).

If all the creditors (people who hold these dollars) came to the treasury to redeem their dollars at once in the event of a bankruptcy of the said institutions.. they would be paid in ozs. of gold for that remains the only physical capital store held by the Treasury/Fed reserve.

That number would be about 8000.00 to the ounce currently. That is the target number in the event of a liquidation or a voluntary repeg of the US dollar to gold..... if the US government balance sheets continue to move toward ultimate insolvency, the price of gold will continue to head toward this moving target as risk increases.

 

Perhaps John Paulson said it in a way that US dollarbugs best understand:

 

"As for the gold price, Paulson remains very bullish on the yellow metal, noting that the price of gold has been highly correlated to the monetary base for as long as his firm, Paulson & Co., has tracked the data. "

 

http://www.gurufocus.com/news.php?id=108655

 

 

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"As for the gold price, Paulson remains very bullish on the yellow metal, noting that the price of gold has been highly correlated to the monetary base for as long as his firm, Paulson & Co., has tracked the data. "

 

http://www.shadowstats.com/alternate_data/money-supply-charts

 

According to this the money supply has been shrinking for most of 2010 and while gold is up 30%...

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Classic market tells us that there are three phases in a bull market:

 

1. The stealth phase. This is when prices are extremely cheap and everyone hates or has forgotten about the investment/asset;

2. The second stage is the wall of worry phase. People know about the investment as it’s increasing in value and seems likely to go higher. But they deny it and think that every correction along the way up means it has peaked;

3. The third and final phase is the mania. That’s the explosive phase, when there is no more rationality.

 

I think gold is close to the end of the second phase, in the middle of a correction. As the sovereign debt crisis develops in the next few months/years, it will likely enter the third phase and become a real mania.

 

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That 1913 $100 bill would have done quite nicely in a wealth-creating company which earned above its cost of capital.  Coca-Cola is but one example.

http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stocksplit

 

If this is the central thesis of your argument, you may want to check it more closely.

 

-O

As far as the USD goes, just plot out the purchasing power of the USD from 1913 to now, it's down 97% and falling. There has been no paper currency that has not gone into terminal decay like this, ever. So if you want to talk about the fallacy of "this time it's different", please explain to me how come a piece of gold dug out of the ground 2000 years ago can still buy you a suit and you can't rent a video with a 1913 $100 bill.

 

But the wealth creating company isn't the same thing as the currency. (I suppose that is the central point going back to what Munger said: that if you get more bang for your buck when you can invest it into companies that can do this, like he and WEB can - and in their case it would perform better than having put into "a block of gold").

 

But at some point we started talking currencies and whether gold is in a bubble stage and I was just saying that over time the paper currencies trend toward debasement and worthlessness, and gold doesn't.

 

Marc Faber said it best in his most recent newsletter: the USD has lost 2 out of 3 functions of "money": it is no longer a useful store of value and it is no longer a meaningful unit of account. He speculates that at some point it will lose its third function: facilitating the exchange of goods and services.

 

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Guest broxburnboy

The quantity of gold held as reserves against the USD buck has remained relatively stable (If the Fed is to be believed).. the number of USbucks created (the 14 Tr national debt) has not .. it has increased lately at about 10% annually.

 

This is monetary inflation... which dilutes the purchasing power of every previous dollar. It's a great way for governments to close budget deficits... in effect retroactively taxing every USBuckholder with a flat "inflation" tax.

This method of taxation is highly popular with those who believe that gold (and most other commodities) are in a "bubble" and that the US dollar is the constant store of value, even when faced with the (now) annual farce of raising the mandated debt ceiling.

 

These people believe that they have successfully reduced their personal tax burden through the miracle of the "printing press". They are holding their cash, low yielding stocks and  treasury debt, patiently waiting for the bubbles to burst, hence increasing their purchasing power as prices deflate and proving once and for all that there is a free lunch.

 

Unfortunately foreign holders of USdollar debt are on to the ruse and some are quite POed about it, especially considering that the inflation tax vested upon them is likely to increase going forward and that they are in effect financing unpopular wars. This makes them less inclined to hold dollars and more inclined to prepay future USD expenses with current dollars, hence bidding up commodity prices. They tend to replace USD reserves with gold and alternate foreign currencies.

 

It is treasury debt that is in the self stoking bubble.. not gold.

 

 

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