Asset Inflation Except Gold And Silver

Gold and Silver are the worst performing asset class this year. Corn has lost out by a mile too but who’s counting ?

All this talk about asset inflation got me thinking about Gold again and if Gold is an asset class that should be bubbling along with the rest ?

Obviously not as the world seems to see more value in Bitcoins, whose value has risen 4600% this year and a man who spent $27 to buy 5,000 Bitcoins in 2009 has found himself over a million dollars richer (using the latest exchange rate).

The Bitcoin was USD800 yesterday and about USD623 (my chart below is 8 hrs too early) now to talk about volatility. Gold is lower on the day too at USD1,248 (vs prev close 1,275).


What is holding Gold back ?

USD strength.

I spoke to a correlational trader the other day. Gold prices rise as a function of inflation and it would appear that Gold prices would actually fall in a case of hyperinflation as the masses liquidate. And hyperinflation is better known as an economic phenomenon, as unpredictable as its cause and quite without warning.

Are more people holding Gold than a year ago ?

I am guessing no. There are obviously more sellers than buyers and we are what we read. Most gold reports are bearish and downright terrifying. India is restricting gold sales as much as they can from banks to post offices.

That it has no commercial use and hardly any value we can logically ascribe to  for the metal is good enough reason to just destroy all the gold in the world. Paper is also worth more than the money it is printed on so we are moving to plastic and cashcards. Perhaps that is why we are all buying into hard assets like overseas properties – another interesting trend. People are buying offshore because they feel that their own countries are too expensive. And offshore are doing the same.

Paintings are going up with a new record set for Francis Bacon’s painting of Lucian Freud, along with the Chinese obsession with stamps and also Palladium. But all these are not proven universal substitutes for the concept of money.

Credit growth does not benefit Gold because Gold does not yield returns and I have come to realise that not many people are sitting on idle cash these days.

Speaking to a portfolio manager, he explained to me why equity desks are laying off when markets are hitting historic highs. That is because volumes are drying up. Portfolio managers are not buying or selling because 1. the market cannot absorb the volumes that they have which would drive prices down too much and 2. they do not want to lose their returns when they sell and have nothing to buy into because everything else is expensive.

Many a investor are quite fully invested as my broker friend was lamenting that his brokerage this month is absolutely the pits and numbers he has not seen since the dark days of post Lehman in 2010. Even customers who had no problem coughing up millions for margin calls then now have problems squeezing out a fraction of that for their margin call this month. Yet they are stuck with the shares because selling is not an option in a market without bids. That is happening too in the world of real estate – the word is STUCK.

Yet like Bitcoins, Gold also has a limited supply. “Warren Buffett, one of the world’s richest investors, says the total amount of gold in the world – the gold above ground, that is – could fit into a cube with sides of just 20m (67ft)”.

There is just not a lot of it.

Perhaps just enough to pay off 1/3 of the US government debt for every single scrap you can find and for that reason, there are just too many parties who will hate Gold for all that it stands for. And for the same reason, I see Gold going lower in the days ahead as the markets continue to hail their new kings in central bankers who will tell the story to my son that Gold cannot buy them a new game and money is better off in the form of a cash card.

The only reason to buy right now would be if we see a massive erosion in confidence in the markets and a loss of faith in central banks and their ability to manage an economy without perpetuating asset bubbles, which like all bubbles, will eventually burst unless wages justify them, creating a situation of runaway inflation. But when that happens, wouldn’t folks just sell away their Gold holdings to pay for their stock losses (because there will be no bids for their stocks and bonds ?).

It is just too hard to envisage so I will just wait a bit for 1,100.


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