The Association of Mining Analysts recently held a very interesting debate about whether the outlook for Gold was bullish or bearish. This article is a step by step analysis and commentary to this debate, which you can watch
[ here ]. I would recommend that you either watch the debate first, or open it on a separate window so you can follow along. The entire debate is 1hr 17mins long, so as you can imagine, this analysis is quite long as well. I apologise for the length of this article, however, I believe that commenting on this debate is very important, since pretty much every argument about Gold and it's future is brought up and discussed here.
The Bears get the chance to go first, their essential argument being that Gold is a bad investment which will decrease in value in the future.
The
first bear speaker makes a very important point, which is that gold is
used as a secondary settlement mechanism between people
whom you do not
trust. I agree with her entirely. In fact, it is this exact reason why I believe Gold is a good asset to own at this point in history, since, as you may have
noticed, there has long been a significant lack of trust in the global financial
community. This lack of trust is what froze the interbank lending market in the lead up to the 2008 crash. Once again, we can see this lack of trust manifesting with the dramatic shrinking of interbank lending, since the banks involved
do not trust one another to accurately state their real financial
position.
The bear speaker then makes the argument that Gold has no utility beyond certain
industrial applications. I believe that she is correct in this point, since most gold is kept in vaults as a store of wealth and very little is used by industry. This is why Silver, in my view is a much better investment, since it
has many industrial uses, some of which are absolutely critical for our
current standard of living (electronics, LCD screens, photography,
mirrors, solar panels, band-aids and anti-bacterial clothing to name
just a few.) Not only that, but many of the industrial uses of Silver are non-recoverable, meaning that once the silver is used, it is gone for good and cannot be recycled. Add to this the many new industrial processes just coming on line which use Silver and you have a situation where Silver demand could very easily outstrip supply. See
[ here ]Interestingly, she also says that, unlike a Gold
Hoard, a '
social debt, verified by ones peers, cannot be lost as easily'
(
unless in the case of default, which she says very offhandedly.) If this
were true, then the people of Cyprus would still have their money, since
it was not they who in fact borrowed the money that the Cypriot Government
had to pay off. I believe if history has shown us anything, it is that
there are as many ways around paying a '
social debt, verified by ones
peers' as there are ways to lose a hoard of gold, making this argument
specious in the extreme.Her next point, that cigarettes prove a
better store of value may indeed be true, in certain, short-term situations, however, cigarettes can go
stale, get mouldy and are subject to the effects of the elements, which
makes holding them long-term very impractical. It is also true that '
the
hungry can never eat gold' However,
the hungry cannot eat paper either.
Therefore, if she is outlining a situation in which there is no food
for any price, that would hold true. However, in a state where food is
scarce (especially during hyperinflation) it is much more likely that
gold will
buy you more food than fiat currency, especially if it is a
sellers market (ie, a food shortage).
She then goes on to say
that a doctor, in a time of shortage would be more likely to accept
cloves, or oil, or other such consumable goods as barter rather than
gold. I again, find this argument specious, since if said doctor was
paid in gold, he would be able to purchase any commodity that was
available, not just those who are held by those needing immediate
medical treatment. (What if he already has enough cloves, or oil, or
rice? More importantly, in such a situation, medical supplies are likely to be worth much more than in normal times and whoever has stockpiled such supplies may also not wish to accept payment in cloves, or oil.)
She then goes on to say that there is no guarantee that a
primitive culture would value gold the way that we do. Although that may
be true in terms of direct price, you will find that almost all ancient
cultures worshipped gold and believed it had intrinsic value because of
it's great reflectivity, it's beautiful colour and it's ductile
properties which allowed it to be fashioned into anything from mirrors
to jewellery to temple idols. Consider the Aztecs. Although they did not
value gold the way we do today, strictly speaking, it was still a
valuable item and venerated as the 'tears of the sun' Almost all ancient
cultures that I am aware of regarded gold as being sacred and therefore
intrinsically valuable.
Another reason this argument is specious
(say you landed on an island where they used shells instead of gold as
currency) is that gold has always had a profound effect on the human
psyche. Whenever a human sees a large amount of gold, you can hear them
going 'oooh' and 'aaah'. This does not happen with materials such as
lead, or seashells. Therefore, if you landed on such an island, I would
bet that one of the natives would be more than willing to trade you some
seashells for gold, simply because it's colour captivates mankind and
has done so for millennia. This, again, is one of the reasons why I prefer
Silver. In the case of a hyper inflationary collapse, being seen with a
gold coin would almost certainly get you robbed and killed, whereas
silver (particularly because it tarnishes over time) resembles the coins that people use every day.
Finally, when she says that there
sprung up many 'cash for gold' shops, instead of 'gold for cash' shops, this
argument is also specious, since it was primarily the poor selling any
gold they had at knock down prices to dealers who then recycled it and
sold it on for higher prices. The fact of the matter is that it was the
dealers who wanted to exchange cash for gold, so they could sell it on for higher prices. Therefore, saying that there was
no market for 'gold for cash' is incorrect. It is just that the vast majority of people did not have the skills or backing to set up such a 'cash for gold' shop.
In fact, at the
moment, we
ARE seeing 'Gold for Cash' shops springing up all over the
internet and in shops all over the world as physical demand outstrips
supply.
Next is the first bull speaker. I agree with practically everything that this speaker had to say. Gold is a hedge, an insurance policy and how likely
you think a hyper inflationary event is going to happen in the future
should determine how much gold you hold in your portfolio. Personally,
I think the likelihood is greater than 10%. However, what he says is
true in my opinion. If you get insurance on a house, you do not want the cheapest
insurance necessarily, you want the policy which is most likely to pay
out in the event of disaster.
Gold is that policy, since in a hyper inflationary environment, even if you only hold 10% of your assets
in gold, there is a good chance that the price of gold could rise by as
much as 500%, which will be very helpful if all your paper assets go to
zero.
This speaker also touches on 'Peak Gold' or the fact that there
are less and less deposits being found and not for lack of looking, or
the funding to do so. As he points out, Barrick said that in 2013, their
extraction price per ounce went up 16%. 10% of this was inflation and 6% was due to having to mine in more remote and hard to get to locations.
When you are talking a mining company of that size, these are large
amounts of money and will provide a hard bottom for the physical gold
price, since no mining company is going to sell gold for less than what it
cost them to mine it, unless they are in serious financial trouble.
Instead, what they are likely to do (this has already begun to happen
with Silver) is hold on to the Gold and wait for prices to rise again.
This in turn creates less supply, forcing the Gold price up.
The Next Bear speaker begins by undermining his position by stating that Gold is a good hedge
against financial uncertainty and says that 5-10% Gold is a good amount
to have in a portfolio.
His 3 arguments against the bull position are:
1.
That the USD will continue to strengthen, even though it
nearly
defaulted a couple of years ago and the Fed is pumping
$85 Billion USD
every month into the markets just to keep the economy from turning
negative. He then says that the USD is the '
least ugly currency'. I
could not disagree more with this assertion. At the moment, it would seem to me that the AUD
is the '
least ugly currency', at least in terms of fundamentals.
He also says that rising bond yields
will lead to a stronger US currency. Again, I could not disagree more
strongly. The higher the yield on US treasuries, the more the US Government
will have to pay to borrow money and service it's current debt. The
US is already in an impossible situation as it is. If it's bond yields
were to double, the only way it could possibly pay for the extra cost of
borrowing is by printing more money, hence leading to greater
inflation.
2. He states that inflation is very muted. I cannot express how much I
disagree with this analysis. Many people who are not in the field of finance can tell that
the inflation figures being published by the US and UK are heavily
massaged, because their experience of how fast prices have risen, particularly for things such as fresh food, are much higher than the quoted CPI.
3.
He states that the Federal Reserve will begin to pull back on it's QE program by 2014. This
argument is also specious, because without that stimulus money, the
stock market will implode, taking the bond and derivatives markets with
it. In other words, stopping QE may bring inflation down, but only at
the cost of massive destruction of paper wealth.
His argument
that the USD has bottomed out are also very suspect and shows how dangerous
short memories are. Let me give you an example.
Here is a Daily
chart of the GBP/USD. Notice that the value of the USD bottomed out at
1.561 GBP around the beginning of May 2013.
Next is the weekly Chart. Notice that the USD bottom here is at 1.66 GBP on the 14th of June, 2011.
What I am trying to demonstrate here is that people generally have very short memories and pronounce things like '
we have reached the bottom of the USD' without clarifying that in the long term view,
this is not true at all.You will also notice that this speaker acknowledges that it is widely known that US inflation figures are manipulated, yet then goes on to base his argument on those same flawed figures. He then states that US inflation would have to 45% for 5 years to justify the current gold price. There is no indication as to how he arrived at this figure.
He then goes on to talk about Moral Hazard and the fact that the US Government will backstop the banks (with
citizens money now that the Cyprus model has been established) To me, this is an argument
in favour of possessing gold, not the opposite, since not even the coffers of US depositors will be enough to fill the black hole that is the
$700 TRILLION USD derivatives market. This means printing more money, which in turn means more inflation. He in fact makes this exact point, saying that if the US stops QE, then inflation will
also rise.
It is interesting to note that this speaker sums up by saying that he believes that there are no bullish conditions for the Gold price, while the very arguments that he made, in my opinion, support exactly the opposite conclusion.
The next bull speaker opens with a very important point about how the spot price of gold is calculated. It is calculated, in secret, by 5 banks, who are fixing the value of 400 oz bars that are worth over
$500,000 USD each. As everyone knows, things are cheaper when bought in bulk, so the spot price, even if it were not manipulated, does not represent the '
real' value of gold at all, since only banks can buy such bars stored by the LBMA in the good delivery system. This is one of the reasons why if you go to buy gold coins, you will find that the current price is more like $2000 oz at the moment, rather than the $1400 spot price. He then goes on to point out that although during the 2008 crash, the spot price fell. However, in the retail sector, it was a very different story. Volumes skyrocketed by
300-400% and there were significant delays in obtaining retail gold. The same thing is happening at the moment. I am sure that if you were trying to buy gold coins in the 2008 crash, you would have been paying a very large premium over the spot price. (These premiums have now become so ubiquitous that many bullion sellers simply list their prices as 'x% over spot'.)
Furthermore, in the last two weeks of April, more Gold was bought by Chinese Housewives than the entire gold reserve held by the Bank of England, making them (in aggregate) the 14th largest holders of gold in the world.
He then goes on to point out that given that of many of the Eurozone banks are now bust, holding gold outside of the banking system is an essential hedge in these times of financial uncertainty.
Just think how you would have felt if your money had been in a Cypriot bank. QE and low interest rates have helped the indebted, whilst at the same time, penalising anyone who saves money or who is not in debt.
His last point, in my mind, is the most important. You
MUST have some of your assets
outside the banking system in case of hyperinflation or systemic collapse.
Also mentioned by the moderator is how well gold has done against rapidly depreciating currencies, such as the Yen.
The Next Bear speaker makes his first inaccurate point by saying that gold has gone up 600% in the last 12-13 years, meaning that it will buy 6 times as many suits as it would have 12 years ago. This does not take inflation into account. He also points out that the spot price has not risen during such crises as Cyprus. This entirely ignores the massive selling of paper gold onto the global market to deliberately keep the gold price down. A good example of this is the last dramatic fall in the spot Gold price in the first weeks of April. To get the Gold price down that low,
enough paper Gold to account for the entire world's yearly output was sold onto the market over one week. If these kinds of manipulations were not made possible by the fractional reserve lending practices of bullion banks, this could never have happened, since there is no way that anyone could sell the entire worlds
annual physical gold output in
one week. Since to do so, someone would have to effectively corner the market and have the entire worlds mining output at their disposal. It is important to remember that the recent downturns in gold have been caused by the selling of
paper gold (such as ETF's, Gold Leases, etc) rather than the selling of
actual physical gold. Since the amount of paper gold is not constrained by direct supply, (ie, more gold certificates can always be printed and sold) it is entirely specious to claim that this could have happened with physical gold, which has a strictly limited supply.
He then goes on to say that the USD is going to strengthen. I do not believe this to be true. The USD
may rise in relation to other currencies, but all that really means is that other currencies are being devalued faster than the USD. Not only that, but the speaker says that QE will taper off and interest rates will rise. Neither of these things will be good for the USD, since stopping QE will panic the stock market and will significantly increase the amount of money that the US has to pay to service it's debt. Since the
only way that the US can make up for this shortfall is by printing more dollars, I believe that exactly the opposite will happen. That is, stopping QE and raising interest rates will devalue the USD.
He then goes on to state that emerging markets will provide investors with better yields than can be had by Gold. Well, this is already happening. It is known as the '
reach for yield' and what it means is that investors that would normally be putting money into blue chip stocks, or bank accounts now have to buy and hold
much riskier instruments
just to keep pace with inflation, not to mention actually beating inflation. The problem with this is that these instruments are not meant for 'mom and pop' investors. They have many risks attached and because they are linked to emerging markets, can be very volatile. This is the reason that they pay a higher yield, because they
carry more risk. This phenomenon has lead to many people without any investment knowledge investing in very risky products which could wind up losing them
all their money.
The remainder of his argument is fully based on the idea of US economic recovery and rising interest rates taking the price of gold down as people move back into higher yielding treasury bonds, etc. As I just mentioned, it completely ignores the fact that the US has been unable to even announce it's
intent to 'taper' QE without triggering major stock market sell offs. It is my opinion that much of the money made by people who are selling equities at the top of the market (ie now) will go into investments such as gold because the benefits of having a lack of counterparty risk outweigh the benefits of holding positions in bonds or equities that will, in my opinion, become increasingly more volatile as the US attempts to pull back on QE and raise interest rates.
The comment that tales the cake, however, in my opinion is that '
we don't need any new gold mines' Really? Well, demand is skyrocketing while supply is slowing dramatically. As I have said earlier in this piece, the amount of money it costs to get 1 ounce of gold out of the ground has risen significantly in the last 10 years. How this is supposed to translate into cheaper gold prices, I do not know. However, if the speaker is talking about
paper gold then this could very well be true, since paper gold is, in essence, a
terrible asset to hold. Not only does it not yield a dividend, but it is linked to a rigged spot price and there is no guarantee that the paper gold in question can actually be converted into real, physical gold. This is the main reason why physical gold is trading at such a high premium over the spot price for paper gold.
Notice, again, how as his last statement, he says that
if the US economy recovers, the gold price
should fall. That is alot of assumptions to make in my opinion.
The final speaker for the bulls is a chemist. He says that gold is a medium of exchange because it is rare. There is only the equivalent of one ounce of gold for every person on the planet (6 billion ounces). He correctly points out that gold is used as a medium of exchange '
where nothing else works.' Traditionally, this would be places like war zones, or in transactions between parties who do not trust one another. However, given the current state of the world financial markets, I would say that trust is already in short supply. Remember, it was lack of trust that froze the interbank lending market before the 2008 crash (banks would not lend to each other because none of them knew which of the other banks were solvent and which were not.) We have recently seen a big drop in interbank lending, suggesting that there is, once again, a lack of trust in the world markets. He makes a very good point that the value of gold is tied directly to the amount of trust in the immediate environment. If it is likely that a currency is being counterfeited, or debased, then gold is the
ideal medium of exchange and will thus rise in value.
He then goes on to make the very important point that gold has held it's value, long term in the UK over the last 28 years. Gold has increased in value 400%, while the rest of the economy has increased only 380%, even though 15 of those years were bad years and 12 were bull years, giving a good balance.
In the US, the situation is even more dire. Gold was first priced at $35 USD an ounce on the 30th Jan 1934. If you bought a basket of goods, according to the (manipulated) CPI, they would now be worth $600 USD, whereas gold (even at the manipulated spot price) is now worth $1400. (The physical price is closer to $2000 / oz as I have already said).
Therefore, as a long-term store of value, Gold has performed excellently and cannot be beaten. It is of course true that Gold does not pay a dividend, but it is also true that Gold is not affected by inflation. This means that if your dividend is below inflation (ie, under 8%) then Gold is an excellent choice as a store of value, since if you put your money into a 5 year bond (assuming an inflation rate of, say 7%) then when you receive your principle back, it will be worth 35% less in real terms than it was when you paid it in. As I said, unless your dividend is higher than inflation, then you have in fact, lost money, whichever way you slice it.
He then makes an excellent quote, saying effectively '
If you do not believe in the monetary value of gold, then you believe in taking a tree that costs $600, cutting it down, turning it into paper, daubing it with ink and then calling it a billion dollars.' This is of course, the essential problem with all fiat currency, which is that it is backed not by intrinsic worth, but by the power of the institution that stands behind it and your belief that said institution will continue to honour it's debts and not debase it's currency. The US has debased it's currency to such an absurd degree that if it were not for the world reserve status of the USD, it would have hyperinflated into worthlessness by now.
He also makes a very good point that as the US monetary base continues to expand and the USD continues to be debased, the price of gold will continue to rise. This is obvious, really, since it is the currency that is being devalued, while gold holds it's value at a stable rate.
Again, I feel that many of the bears are exploiting the naturally short memories of many people. It may be true that gold has come down $200 in the last few months, however, as I have said repeatedly, this is only for
paper gold, the
physical value of gold has not declined to anywhere near that extent and in fact, is rising due to unprecedented demand from all over the world.
In contrast to the speaker before him, he says that more QE will infact cause the price of gold to rise, not fall. In my opinion, this is entirely correct, since QE is essentially a massive debasement of paper currency, where as physical gold cannot be debased in such a manner.
He then makes some interesting comments about QE, stating that half of the 2 Trillion USD so far spent by the US QE programs has gone directly into the vaults of banks, while the rest only amounts to about $3500 for every US citizen. Personally, I disagree, since very little of this QE money has, in fact reached consumers. The main way the US has been helping it's population is through low interest rates, since practically every man, woman and teenager in the US is in debt. (If you doubt this, then consider this. Student Loan debt has just passed credit card debt in aggregate. This is because in the US, if you wish to go to college, you have to borrow up to $200,000 USD from the government, which will have to be paid back,
with interest. A wave of massive student loan defaults is a very real possibility, since there are many people who have gone to college, gotten degrees, gotten jobs and at the age of 40 are still struggling under massive student loan debt. (There is a very good video about this called 'The College Conspiracy', which you can watch
[ here ] if you wish to learn more.)
The next Bear says that the most worrisome scenario is if central banks cannot keep control of the economy. This is a
very real possibility in my opinion. The other argument put forward is that '
they have alot of faith that society will remain stable.' I think any serious study of history will show that this is a
very dangerous assumption to make. She also says that '
all value is relative.' This point is true, but is being put forth in a very disingenuous manner. In my opinion, it is far more likely that we will see much higher valuations for commodities representing basic human needs (such as water, oil, wheat, etc) since the fact of the matter is that the earth's resources are finite. Therefore, unless there is a
massive depopulation event, there will be ever more mouths to feed with declining amounts of materiel. She also says that most people would rather trade than '
hoard in a Scrooge McDuck kind of way' well, that may well be true in 'normal' economic times. However, in the times we are living in today, faced with the possibility of your money losing a significant potion of it's value when it is stored in a bank, hoarding makes alot of sense, since it allows you to have control over your own small money supply instead of relying upon the government, which has been shown to be all too happy to devalue the currencies that their citizens use. As if that were not bad enough, since Cyprus imploded, governments around the world have been passing laws which will allow them to fund the next bail-outs by raiding the bank accounts of their own citizens. Personally, I think under these kind of conditions,
not hoarding is insane behaviour.
The bears then state that although central banks have become huge net buyers of gold, this will somehow cease, because they are 'satisfied'. Personally, I have not seen any data that backs this assertion, indeed, quite the opposite. China in particular, which is the world's largest producer of gold (mining 370 tonnes last year) has been importing
vast quantities of gold bullion via Hong Kong (809 tonnes in 2012) meaning that it may have added an additional 2000 tonnes to it's reserves since 2011. She then essentially contradicts her own argument by saying that because the Central Banks are buying gold, their Treasuries have worth. This, logically, means that gold
IS a store of value, otherwise, why would central banks be holding it to help prop up the value of their treasuries and bonds?
The bulls then say that the only real argument that they see any credibility to is
IF the US starts to really recover economically, in other words, more than just the top 1% of society begin making more money. I find this scenario very unlikely, since you cannot drive a consumer society if the people do not have enough money to buy the things which they consume, which is why so many Americans are in crushing debt. It is also well known that official US Government economic data is extremely flawed and massaged. Companies such as
shadowstats.com, who compute government metrics based upon the way they used to be done before the 'voodoo economics' of the Reagan years, do not see any recovery in the US economy. In fact, they see quite the reverse. According to their figures, while the top 1% of the country may be getting richer through QE supporting the stock market, the other 99% of the US population have actually seen a
fall in the
real value of their wages since the 1970's. I find it difficult to believe that the US will be able to pull itself out of it's economic troubles just by continuing to enrich the top 1%, since it is the bottom 99% that have to pay back all the loans issued by the banks that are owned by the top 1%. If the 99% cannot pay back their loans, then these banks will go to the wall and will have to be bailed out,
again. Remember it was precisely this factor that started the subprime mortgage crisis in the USA in 2008.
The next question is about the CGBA agreement which allows central banks to sell gold. If you look at the figures however, you will find that the only central banks that have been selling gold are those that have been forced to by a financial crisis, such as Cyprus. All the major central banks, as I mentioned before, are massively net buyers of gold. They then go on to say that CGBA 4 is not needed, since Eurozone banks are unlikely to sell their gold outright, instead, they are likely to use their gold reserves to hypothecate lending and leasing, in effect, creating more paper gold out of thin air. While this may have a negative effect on the spot (paper) price, this will in no way affect the actual (physical) price of gold.
The next bear then points out that the central banks really only have two choices in what to buy. They can either buy US treasuries, which they will lose money on, because of USD inflation, or buy gold, which will hold it's value relative to all other currencies. I would think that this is one of the reasons why the US Federal Reserve is now buying over 70% of it's own bond output. US Treasuries, at the currently artificially low rates of interest are simply not economically viable.
He then goes on to say that the only banks who will sell gold are those that will be forced to because they cannot find funding in any other way. In that situation, they will find central banks all over the world willing and ready to buy as much gold as they have to sell. This in my opinion is not an argument that supports the view that gold is not a store of value.
The next point he makes is very interesting. He says that the only reason that the USD is the global reserve currency is because the US has the largest gold reserves. I believe that this to be untrue. Despite the fact that the US gold supply has not been audited since 1950, the main reason that the US dollar is global reserve is because you can only buy
Oil in USD and
every country in the world needs oil. However, this is changing as
Iran now accepts Gold for Oil and as China makes more and more agreements with it's trading partners to bypass the USD altogether and settle trades in local currencies. It is my sincere belief that the Chinese plan to launch a
Gold backed, convertible Yuan, which once they do so, will immediately push the USD from the spot of global reserve, since every nation using the USD to buy Oil has to pay a tax to the US in the form of inflation devaluing the dollars in their possession. Once it becomes possible to buy Oil with a currency backed by gold, the days of the USD as global reserve are numbered. In my opinion, this could very possibly provoke a war between the USA and China, although given the current world situation, it is very hard to see how the US could find a suitable casus belli (which is latin for 'cause of war.) Essentially, because the USA does not wish to look as though they are the aggressor and thus, 'the bad guy', they always come up with a casus belli, which is some kind of event to galvanize public opinion behind the war. Pearl Harbour and the Gulf of Tonkin are both excellent examples of this, allowing the US to enter WW2 and the Vietnam war respectively. There are also many who believe that the 9/11 attacks in New York was the causus belli to start the wars in Iraq and Afghanistan. Secondly, there are serious doubts about how effective a US military assault on China would be, given that so much of their military hardware is made with Chinese parts.
I would like to digress from the current topic for a moment to discuss a very important, but relatively unknown part of world history. Many wars have been won by countries using 'backdoors' that are hidden in military hardware that are then sold to other countries. A classic example of this is the Falklands conflict. The Argentinians had French made Exocet Ship-to-Ship missiles. The UK simply leaned on the French Government to give them the de-activation codes to the Exocet missiles and the UK were thus able to disable their enemies most powerful weapon by remote control. If you consider the case with the China and the US, the positions are reversed. So much US Military hardware is now made with Chinese parts that there is a very real possibility that the Chinese now have the ability to remotely disable critical US military equipment remotely through the use of such 'backdoors'. If this is the case, then any war between the US and China is doomed to failure, especially when you consider that the Chinese have stolen an estimated 15 years and hundreds of billions of dollars worth of US weapons research, which has enabled them not only to very quickly make military hardware that is equal in power to the US, but also to back-engineer US military hardware to discover their vulnerabilities and weaknesses. This has been going on for quite some time and I believe, when you combine this with the fact that the US military has been relying on Chinese made components for much of their military hardware that there is a
very good chance that the Chinese will have not only weapons of a similar power to the US, but also the ability to remotely sabotage US hardware in the event of a war.
The next point made by the bulls is that although the short term outlook for gold may be bearish, especially when the Central Bank of China announces how much gold is has bought over the last 3 years, there is a massive rise in new kinds of currencies being enabled by the internet. Gold will have an essential part to play in this, since an internet currency backed by gold and redeemable for gold, would, in my opinion, gain wide acceptance in the international community.
At this point, the floor is opened to questions from the audience.
The first question by an audience member is an excellent one. Essentially she is saying that the arguments of both sides are really backed by what they expect the economy to do in the next few years. The bears believe that the US economy will recover, while the bulls believe that it will not. Personally, this is the main reason why I am on the side of the bulls. I can see no reason, fundamentally, why the US economy will recover, especially if you consider that the massive injections of money via QE have only
just kept it from contracting. I think that this is the nub of the problem. As I have said, when the US is forced to pull back on QE and raise interest rates, the stock market will go through the floor and higher interest rates will cause a massive flood of defaults on everything from student loans to credit card debt and mortgage debt. In my opinion, the US has painted itself into a corner that it is unable to pull itself out of. All it can do is to continue to paint itself further and further into this corner, thus making the inevitable correction, when it happens, that much larger.
The bear then answers this question by saying that there is so much technology in the pipeline that it will ensure a US economic recovery. I could not disagree with this more. There are many people who have been placated by US claims that by using hydraulic fracturing (also known as 'fracking') and extraction of oil from tar sands, they will become a net exporter of oil. However, what is never said is that fracking wells only deliver an average of 82 barrels a day, which is a pittance. Therefore, the number of wells that have to be drilled to meet US domestic demand is enormous. Already
hundreds of thousands of fracking wells have been drilled and in order for the US to become self-sufficient in gas, they will have to drill
millions more. As if that were not bad enough, it takes about
1-8 million gallons of water per frack (wells can be fracked between 5-18 times before they run dry.) As of 2010, the US had used over
40 trillion gallons of water for hydraulic fracking. All of this is happening at a time when the US is
fast running out of water. As
[ this ] article from the Washington Post details, water supplies in the US are falling at an unprecedented rate and the increase of fracking as an industry will only make this worse.
Remember, all the water that is used for fracking is effectively wasted, as it
cannot be recycled since it is contaminated by hundreds of toxic chemicals and heavy metals, such as
benzine, PCB's, asbestos, lead, arsenic, mercury and cadmium, to name just a few. Unlike water used by humans for drinking / bathing / etc, which can be recycled by using it for irrigation, etc,
none of the water used for fracking can be re-cycled. Instead it is dumped in open pools, stored in poorly protected tanks, or just sprayed as mist into the air so it evaporates. Needless to say, the effect upon the health of the people living near these fracking operations is seriously threatened, with large clusters of paralysis, peripheral neuropathy, cancer and other serious diseases linked to sites with intensive fracking operations.
I believe that US fracking is a dream that has already become a nightmare as massive pollution of underground water tables is already happening in parts of the USA (in some places, there is so much natural gas dissolved in the water table that people are literally able to set their taps on fire.) Fracking is incredibly destructive to the environment and to human and animal life. I sincerely believe that the USA will be living with the after-effects of fracking for decades, possibly centuries after the shale oil and gas has been removed and the extractors have moved on. Remember also that in order to increase fracking production, the US will have to use much, much more water at a time when half of the country is in a state of severe drought and water tables are falling to historical lows. A good place to start if you are interested in the mechanics of Fracking is the movie 'Gasland'. You can find the trailer
[ here ]. If you wish to watch the entire documentary (which I strongly suggest that you do) there is a link to it
[ here ]The bull counters the comments by saying that he does not believe there will be any real changes until there is better leadership. I believe that this is true and that the likelihood of getting better leaders is very low. Even in the unlikely event that someone who was actually a friend of the people won the top position in the White House, their attempts to fix the mistakes of their predecessors would immediately cause a myriad of problems which the population would then blame on the new leader, rather than realising that they are merely the result of trying to fix the mess that they have been left with by the previous administration. There is a reason why politicians always follow the path of least resistance and it is because, when dealing with with an electoral population that has such short memories and a serious lack of education, any leader
not taking the path of least resistance is very likely to be voted out of office. Not only that, but as history has shown, US Presidents who go against large industrial interests have a much higher probability of being assassinated.
The next audience question is also a very good one. The questioner points out that the last time we had a 'risk on' market, in August 2011, (when the US
nearly defaulted and suffered a ratings downgrade because of the stand-off in congress over the raising of the debt ceiling) the Dow Jones and the FTSE fell by
16.5% and the Gold price rose by
18.5%. Even the bears admit that in times of risk, gold is an excellent asset to own. In my opinion, we are now entering another period of
massive risk on and there is a very real danger that once the USD loses it's global reserve status, the USA will default. If you think that this is impossible, then remember that everyone thought that the default of the USSR was impossible too,
until it happened.
The final question made by the audience is '
which would you rather have? 1kg of Gold, or 40,000 roubles?' The bears conveniently avoid answering this question by saying that they would '
prefer to have a network of individuals that they can trust'
Despite the fact that this did not answer the gentleman's question, given the massive size of the global markets today and the amount of rigging and intervention, I would say that at this time, the world economy
cannot, by any stretch of the imagination, be defined as a
'network of individuals you can trust'. In fact, quite the opposite is true, as the current slowdown in interbank lending shows. Therefore, the answer, by default, is that it would be better to own gold. Even the bears admit this, in a roundabout manner.
The vote at the end speaks volumes.
The bears were heavily outvoted by the bulls.
I believe this gives a definitive answer to this debate.I hope you have enjoyed this breakdown of the debate, if you have any questions, feel free to contact me on the
Bullion Traders Facebook Group. You can also tweet me @infernalmagnet.
Thank you for your time.
Christopher Carrion
Algeria
Angola
Ecuador
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
