Going for gold – are you too late?

20th July 2010

You know what they say. When the shoe-shine boys start telling you to buy something, it's time to cut and run because the market has surely peaked.

Which is why the recent arrival of gold-bullion vending machines at Frankfurt airport and then in Abu Dhabi should have been an early warning to us all.

That and last month's report in the Times that the Rothschilds are joining the smart set by buying bullion again.

So we can't say we weren't warned.

No Title
Source: www.kitco.com

Although, whether gold is a buy has created a lot of chatter on the community boards.

Take DiggerUK on  the Moneysavingexpert.com board entitled 'Big dip for gold?'. He says: "After dropping from 860GBP to 790GBP an ounce in under a month, I think it quite possible that bargains in the yellow metal are still to come."

But as sabretoothtigger replies: "Price is not value. The reasons to buy gold is probably opposite to an average persons interest and belief in it."

Fredn on The Economist site, commenting on an article about 'Gold: After the gold rush', ponders the value in the price too, using inflation as a marker: "Gold's value in essence simply reflects one's expectations for inflation.

"If the supercharged running of the monetary printing presses in the US, UK et. al does not concern you as being a harbinger of inevitable major inflation – sell gold.

"If because you cannot eat it ,wear it or drink it – sell gold.

26 thoughts on “Going for gold – are you too late?”

  1. Anonymous says:

    Once again we see politicians talking about resolving the historical problem, which clearly they must. But without some major and long term changes in Greece itself and the EU in general, the future will be exactly the same and will result in another crisis after a short while.
    Personally I have serious doubts that growth could, in any feasible amount, rescue the situation. I know that it’s the hoped-for outcome in a lot of places (UK included) but I suspect the maths don’t stack up.
    Do you have any feel for the annual growth rate that would be required to substantially mitigate the Greek problem, Shaun?

  2. James says:

    Great blog today, Shaun.

    A couple of observations:
    1. It almost seems as though the people at the centre of the EU are obsessed with the “Project”, i.e. ever closer union. They just cannot utter the words “return to drachma”. They equally cannot utter the word “default” as this would expose the vast transfers needed to keep the Euro ship afloat. So, they are left with posturing and absurdly ineffective bail-outs and crippling austerity measures;
    2. It seems as though the populations are beginning to refuse the austerity, which a lot of young people (and I agree with them) see as the fault of a preposterously profligate and selfish older generation. So, if austerity cannot be achieved and there is no way out of the Euro, the Germans will have to cough up in the name of Euro solidarity. This will take a lot of obfuscation to achieve;
    3. The appointment of Christine Lagarde would (will?) be a travesty. Since when did the IMF need to be run by someone who is being overtly installed to ensure that the IMF props up one part of the world? Have you noticed how this is justified by constant references to finding someone who really understands the European scene, especially the importance of the Euro. I would also point out that she is a lawyer and a politician, not an economist or someone with a background in banking finance.

    Poor old Greeks caught in the middle of this muddle.

    1. Drf says:

      Hi James,

      I feel that your unsubstantiated point made here: “which a lot of young people (and I agree with them) see as the fault of a preposterously profligate and selfish older generation” is somewhat biassed. You do not explain why you believe that the austerity which people now have to face is solely due to a profligate and selfish older generation. To make such a claim with no substantiation is not particularly wise. I do not believe that your claim has any substance, unless you are referring only to the older generation of and previous politicians who it is have got us into this mess by their ineptitude and idiocy, particularly those who aim for full EU political integration. Then I would agree with you; but only relative to the older generation of politicians.

      Populations generally comprise both wise and foolish people. The older generation generally, both those foolish and those wise, have to suffer the same present and coming unnecessary austerity as the young, through no fault of their own. Many of the older generation, particularly the wise ones, disagree intensely with what has been done and directly caused these problems. Quite a few of the older generation have spoken out politically over many years criticising the political actions which have led to these things, and warning of the disasters which would follow, but politicians and electorates would not listen. Now these disasters have occurred, and things are getting worse, but they still will not listen!

      So please do not attempt blame the older generation per se. They are not to blame, although I count myself in neither the older nor the younger generation at present.

      1. James says:

        I include myself in the older generation!!

        To be precise (and thank you for picking up on my imprecision), I do see it as incredible that:
        1. I had free university education and, indeed, a living grant as well as no fees;
        2. I could buy a house in London at 24 years old, with a 95% mortgage;
        3. I could therefore start saving towards a pension in my thirties;
        4. Meanwhile, the government has been running deficits for the next generation to pick up;
        5. Many people slightly older than I are on index-linked defined benefit pensions, which were never funded by their contributions (as all actuarial calculations were based on much lower expected age of death).

        If you are twenty now:
        1. You have almost no chance of a defined benefit pension;
        2. You come out of university with a lot of debt;
        3. You cannot hope to buy a house in London at 24 except for extremely well off people;
        4. Your twenties are spent paying off uni debt, followed by saving for a house. The average age of a first time buyer without parental help is 38 years old.
        5. I don’t even like to think how young people are supposed to do all this and save for a pension.

        And yet, the older generation are demanding more and more healthcare etc but no-one wants to pay for it (look at the screams when it was suggested that people effectively mortgaged their houses to pay for healthcare). Most old people I know insist that they have paid for this through the NI “Fund”, which, as I am sure you know, never existed.

        We have been profligate because we have been running deficits for years and years. This is now nicely turning into massive interest payments for the next generation to pay before their taxes can be used for any services.

        So, I do think that we have given ourselves a much easier life than we are handing on to the next generation and I do think that that is selfis.

        1. Drf says:

          Hi James; thanks for your reply. Of course most of the points you make
          about the way in which the standard of of life in the UK has been
          diluted and ultimately destroyed (particularly for younger citizens) are
          true, but as I pointed out
          previously this is due solely to the inane and idiotic destruction
          wreaked by successive politicians. It is they who have destroyed the
          goose which
          laid the UK’s golden egg. Due to their gradual increase of the tax
          overhead in the UK for example and other ridiculous acts, they have
          destroyed the majority of the UK’s real-wealth creating elements and
          structures, and replaced them with cyclic pseudo economic activities
          which contribute nothing and are a cost centre on the taxpayer. They
          have continuously increased taxation and wasted the
          proceeds. Even then there was not enough for them to waste, so they made
          up
          the shortfalls since WWII by using inflation to balance their deficits
          over and over again.
          If you look back even at the officially published numbers you can see
          this, and as we all know these numbers are continuously manipulated to
          conceal much of the real increase. They have pretended at times that
          they only practising Keynesian economics, to avoid higher unemployment
          and greater recession, but they have conveniently then neglected to
          repay the fake money injected on economic upturns, because to do that
          would have lost them
          votes. They have wasted countless sums abroad on wars, “diplomacy” and
          other dissipating “Remnants of Empire games” expenditure which has
          accomplished nothing, but their own self-aggrandizement.

          Of course such inflation as they have generated ultimately makes things
          harder for the succeeding generation, particularly with respect to
          education and housing. Inflation further destroys real-wealth generation. But they do not care, so long as they can live
          the life of Riley! Now that they have all but impoverished the country
          there is no money left to pay for these things any longer. Then we
          joined what was claimed to be a trading block – the EEC; not many
          understood that the hidden intent was to destroy democracy and integrate
          Europe politically; to do what two World wars had failed to do. Now we
          have the added burden of excessive EU taxation and waste.  But I still must point out that you cannot blame all of the older
          generation for this destruction. It was only the politicians and those
          who supported them who are to blame for all this waste and destruction of what the UK had!

          You are correct of course that the NI fund as such never existed in a
          ring-fenced sense. However from its genesis the NHS and State Pension
          was marketed as an
          “insurance” scheme. It was only the politicians who abused the funds as
          yet more easy money to waste. The liabilities still exist however. Those
          who
          contributed the obligatory contributions (taxes) to the scheme are
          legally entitled to the benefits when they retire. Indeed many have
          suffered effective fraud because successive governments stole their
          contributions and welshed on paying out the promised benefits; as one
          example The Graduated Pension scheme. I am not sure that it is true that
          the older generation are demanding more and more healthcare.  Most want
          to stay in their own home until they die, but of course like everyone
          else they expect NHS treatment if they fall ill. That is not
          unreasonable, since they have paid the contributions like everyone else.

          I do not therefore agree that “…we have given ourselves a much easier
          life than we
          are handing on to the next generation…” or that “…that is
          selfish.” Those who are older lived before politicians destroyed the
          heritage of the UK; they thus enjoyed the benefits of the country which
          our forefathers laid down before politicians destroyed it all. Many men
          laid down their lives in two successive World wars to preserve our UK
          freedom and our way of life. We now see that they died for nothing,
          since politicians have wasted away what they died for. Now the
          real-wealth creating processes which funded and sustained that no longer
          exist. The older generation cannot be held to be to blame, nor the
          younger generation. The only people who can be held to be to blame are
          those who elected those corrupt and deceitful politicians who destroyed
          everything, and those who continued to vote for them even when they
          began to see the destruction which their policies and inept actions
          caused. 

          1. James says:

            I see that you feel strongly!!!
            I could not agree more. It is exactly as you say – the politicians are to blame. The difficulty is that, short of a war or a revolution,  how on earth do we get out of this.

      2. James says:

        Reading you comment more carefully, I agree with almost eveything you say. I carelessly thought that you were somehow denying the burden of intergenerational transfers, about which I feel strongly!
        I will read things more carefully in future!!

  3. Mr.Kowalski says:

    Sadly, that’s the conclusion I came to a while back Shaun. My guess is that at some point Greek riots, protests and strikes come to a point where the place is essentially ungovernable and at this point the Greek Army steps in: 

    http://themeanoldinvestor.blogspot.com/

  4. Drf says:

    Real economic growth at the level which would be required, and in the relatively short period which would be necessary to solve Geece’s problems is clearly out the question in the present global economic scenario. If there is an exit from the Euro and a return to the Drachma it is difficult to see how even that could now be achieved without a significant level of real default?

    The reality of this disaster, just as with the whole global economic disaster, is that Western governments just will not cut their spending to a level which can be afforded by each disparate economy. This has been compounded by the universal bank bailouts, socialising of their debts  and continuing measures to bolster the banks and keep them solvent whilst they continue to pay unrestrained excessive bonuses to key staff, which they also cannot in reality afford from their current real profits in consideration of their real debts. The net balance is thus that the citizens in certain economies have to suffer austerity at the expense of the privileged cartel who enjoy a lifestyle of an even more opulent nature than they did before all of this. People generally are thus not well pleased, and that is leading to increasing insurrection!

    However, even if the Greeks do return to the Drachma it is not clear how this would be equitably undertaken; and if they do, as a fiat currency with no defining datum, the only benefit of this will be to allow the Greek government to generate hyperinflation to pay for its continued failure to reduce public spending to what they can in reality now afford. It will therefore only replace one crisis with another impending one, and thus will not actually be a solution. As many other Western governments will have to face sooner or later, Weimar and Zimbabwe economics just do not work! 

    That is the bitter political pill which must be swallowed, and for now there is no sign that politicians have any intention to take the medicine, because it will not buy them any votes. We seem therefore to be heading now for a Great Depression MkII.

  5. Anonymous says:

    Which banks sold the CDS written against these bonds? Do they have any money?  Did the regulators fix this since 2008? We all know the answer to the last two questions. It is NO! The money does not exist. The swaps will not be paid.

    1. Anonymous says:

      I am even more pessimistic. Taxpayers will be made to pay.

  6. ipis says:

    I have been following you from Day 1 and since that time have escaped to the Far East where things are very different than back home in Britain. I thank you for your excellent input to this incredible turn of events the like of which I hope we never see again.

    Rather simplistically, I see the need  for reform in all areas of public and financial life….perhaps such reforms that I have in mind might be termed ‘revolution’. Again, my simple view sees the same old transfer of the vast majority of the world’s wealth to a favoured few, the same few that it has ever been……..time for a change, and now the people of the hitherto comfortable and complacent west are now feeling the urge to create that change.

    Thank you again for your incredibly exciting and informative work. Perhaps, David Bowie’s “Starman” is an appropriate tune to apply to you Shaun!

    1. Anonymous says:

      Hi Ipis
      If you have been here since Day 1 then welcome to my blog doesn’t seem quite right! It is kind of you to be so complimentary.
      As it happens I did quote a line from Life on Mars today because if things carry on like this we will run out of terrestial organisations to kick the can to which will then only leave the extra-terrestial….( Is there really life on Mars?) for those wondering.

  7. Sovjohn says:

    Hello,

    Ioannis M here, decided to register eventually :)

    The situation here seems quite fluid. An assessment I agree with is that, the Government, has only announced publically about 5/6ths of the “additional revenue / cuts” decided for 2011, let alone 2012 onwards, and these have already caused a ruckus.

    Especially the taxation of… fizzy drinks (!) has been ridiculed quite much. But not only that, since the new “grand idea” is, among others, to reduce the “tax free zone” for individuals from 12,000 EUR to 6,000 EUR, and tax the 6-12,000 bracket with 10%.

    While this is a meaningful measure, it is seen as “praying on the lower incomes once again”, and faces stiff resistance. Furthermore, the tax between diesel gas used for transportation, and petrol gas used for residential heating (note that Greece has quite less gas deployments, as in natural gas, compared to Europe, with the relevant companies operating in the last 10-15 years in certain cities only, and thus a large percentage of heating is achieved by diesel) will be equalized.

    This last bit practically ensures the heating costs for consumers using gas to skyrocket by 40-50% next winter, something almost impossible to “justify”, especially in northern Greece.

    We should note that the taxation for transportation fuel has risen by 50%, and places Greek prices, if I remember correctly, on the 2nd place of all EU prices for fuel. The current price, in Athens, where average costs are lower, of 1 lt. of Unleaded is at approx. 1.68-1.70 EUR, with the same price in 2009 being below 1 EUR.

    Centrally, it is projected that as days go by, a dilemma “strict, harsh, unbelievable austerity, or default and back to drachma, destruction, misery” will be further cultivated. Tomorrow, the President Mr. Papoulias will meet with all the political parties to “discuss” with the government, under his coordination.

    Personally, I believe that MP’s are afraid of proceeding, afraid to be… lynched (no exaggeration) in their constituencies. Rumors about a cabinet reshuffle have lingered for months, and still exist, but nothing actually happened thus far.

    On the other end of the spectrum, yesterday more than 20,000 stayed at Syntagma for a peaceful protest a la Spain, and further Facebook / social media collaboration is attempted, in order to steadily renew these protests (today as well, other days as well, in all cities of Greece).

    I don’t know where this road will take us, but the “general populace” seems to become more active, with whatever this could mean for the country.

    Have a nice afternoon.

  8. Jason Aris says:

    Greece is doomed, the question is will it take the Euro with it! The race is on between the Euro, Sterling or the Dollar to collapse (or maybe even all three!)

    Frightening times indeed

  9. Anonymous says:

    The Eurozone’s greatest lie is that a Greek default will destroy the euro. Germany can afford to bailout German banks, but can France afford to bailout French banks ?  So what if Greece bankrupts, it is a small economy which is unlikely to cause supply chain bottlenecks in Northern Europe. Ouzo supplies disrupted, source olive oil from elsewhere. This bailout is for German and French banks. It is failing and it is damaging the euro.

    If Greece leaves the euro, expect a run on the Greek banks as people rush for Euro notes. The banks will fail and Mr K’s prediction of a coup d’etat looks smart. On the plus side, politicians salaries in drachma would quickly devalue.

    1. James says:

      I notice in today’s paper that rich Greeks/Spanish/Italians have been hoovering up London property just in case!

      1. Anonymous says:

        I don’t think that will help them for long.

        1. stephen glanville says:

          It may.

          London detached itself from the rest of the UK a long time ago – it’s only contact now is a blood funnel running right down the throat of the UK taxpayers.

  10. Anonymous says:

    Shaun I don’t know if you would care to write an article on what a Greek exit from the Euro would look like but I would find your thoughts on this interesting.  Though I could certainly understand why you might out of responsibility choose to not write such an article since every scenario that I can think of involves bank runs, or even worse/stronger-handed measures to avoid bank runs.

    I am no fan of the EU but I will say that I do not see why Greece would benefit from leaving the Euro.  On the contrary I think that all countries benefit from having sound and stable currencies, most especially countries with serious troubles (so I declare here my opinion that addressing problems via currency devaluation might be politically easier but is likely to be more damaging to a country than facing the problems directly)

    So count me in the apparently odd camp of thinking that Greece can/should/must default on her debts or otherwise haircut them by at least 50%, but also thinking that leaving the Euro would be worse for Greece and her people.

    1. Anonymous says:

      Hi Dan
      I did write an article on this back in the early Notayesmanseconomics days. The theory and much of the practice would be unchanged but what has changed has been the alternative. Back then leaving the Euro simply looked like it had many more costs than Greece would gain from defaulting etc. Now I am by no means as sure and am in fact studying the Argentina crisis and default to help think it through more.

      Some factors are simply unknown. For example if we had a new Drachma how much would it fall and for how long? Would Greece then be able to reform her economy and so on…

  11. Anonymous says:

    Back to the European Bank Stress test adverse scenario on 10 year Greek debt at Year Ending 2011 = long term interest rate at 14.1% ( Annex 3), supposed to be c. 2.5% deviation from Baseline scenario ( ?2010). Are we saying this is now inreality near 17% mid-2011?

    1. Anonymous says:

      Yes we are. The interest rate dropped today but it is still 16.6% or 2.5% over the (supposed) adverse scenario… That whole concept just looks more and more flawed to my mind.

  12. Anonymous says:

    Adverse scenarios fpr Y/E 2011 for Portugal and Ireland appear to be 9.4% and 11.2% respectively. Actuals ? 9.87% and 11.10%

  13. Mac says:

    I think like a lot more countries Greece has been failed by
    her political class, much as Drf has stated. 
    Instead if ‘reinventing’ herself independently and taking the pain, she
    has allowed equally as lost Eurocrats to, in effect, govern, preferring to hide
    behind their greater powers of smoke and mirrors.   At
    some point the populous will demand their political class to take their national
    responsibilities seriously or they will get rid of them.   

    They should have negotiated an exit from the Euro last year,
    now with so many other countries in similar problems any possible beneficial terms
    will be unavailable.   

  14. Anonymous says:

    Greece did not, we can not measure their situation, through this measure, its own currency. We stayed mostly with his performance bonuses.

    Criminal Lawyers QLD

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