Tuesday, October 27, 2009

Scarcity. That Is The Answer To The Question “Why Gold?” End Of Story !

The headline is from the latest David Rosenberg piece ( as always much needed ANTI SPIN ) and sums up the some of the reasons (here is another good overview, thank god that at least the banks are "well capitalized"...... ) why Gold should outperform for some time to come ( not so sure obout the short term )....... Especially when one of the biggest headwinds during the past decades is becoming a tailwind ( see Central Banks Net Buyers Of Gold....... )

Die Überschrift stammt aus dem letzten Report von David Rosenberg ( dringend benötigter ANTI SPIN ) und faßt einige der Gründe ( hier noch ne nette Übersicht., da kann man ja von Glück sprechen das zumindest die Banken ""well capitalized" sind...) dafür zusammen das Gold auch weiterhin outperformen wird ( kurzfristig bin ich mir da weit weniger sicher ) ..... Das gilt umso mehr als sich der stärkste Gegenwind der letzten Jahrzehnte zunemhemnd in einen angenehmen Rückenwind zu wandeln scheint ( siehe Central Banks Net Buyers Of Gold....... )

WHAT IT IS ABOUT GOLD?

After all, you can’t calculate a P/E. There is no dividend discount model. There is no interest rate or income stream. No — gold is a store of value and one that has been durable and reliable for thousands of years. No fiat currency system has outlived gold. The question is what is so sacred about fiat paper money? A backing of the government printing press, is that the alluring factor? The Fed has been pumping money into the system at an unprecedented fashion and even if it is sitting idle on commercial bank balance sheets as excess reserves, that money is still in the system.

So what about gold? How much of that is in the system? How about the fact that global gold production, after doubling from 1980 to 1999, has completely stagnated over the past decade? Has fiat currency done that? And, how long does it normally take for a gold mine to yield production? Answer -- five years or so? Do you think it takes Bernanke et al that long to print greenbacks? At least we know with some degree of confidence about the supply of gold; there are reserves equivalent to about 40% of the total amount of gold above the ground (and half of that is in South Africa).

As we said, it takes time, usually five years, and plenty of financial resources to bring gold mines into production. In this sense the supply side of the gold equation is relatively constant — in economic parlance. Fiat government-issued currency is not — especially in the context of a U.S. monetary and fiscal authority that will stop at nothing to revive a cycle of overspending and overborrowing.

In the current sense, the pullback in consumer spending is being replaced either by government spending or incentives to prevent households from modifying their spending behaviour away from frugality; and the pullback in credit demand by the consumer sector is being offset by the Fed’s involvement in the mortgage market to ensure that borrowing costs remain very low, and by the FHA to ensure that down-payment requirements are as close to zero as possible. The supply of gold is reasonably easy to figure out — the supply of fiat currency is less easy to figure out. The behaviour of not just the U.S. government but governments everywhere seems to be that reflationary policies will ultimately be the key towards redressing the ongoing private sector deleveraging cycle.

Back to the gold market. There is an estimated 120,000-140,000 tons of gold above ground. That would equate to roughly $4 trillion. The total amount of U.S. dollars in circulation globally is estimated at $8 trillion, and the total size of the global money supply would thereby be closer to $30 trillion. The size of the world stock market is around $40 trillion. At last count, the total size of the global bond market was north of $80 trillion. The total world derivatives market has been estimated at about $800 trillion, face or nominal value. Hopefully all this places the total value of gold above ground into a certain perspective.
So, here is what makes gold so attractive, beyond the fact that it is a hedge against irresponsible fiscal, monetary policies and reckless trade policies, is that relative to fiat currency, bonds and equities, it is scarce.
We can also get into geopolitical uncertainties and reckless trade policies, but they are just the proverbial cherry on the ice cream.
Scarcity. That is the answer to the question “why gold?” End of story.

Just to back the amount of currency that is out there right now, gold has the potential to triple from here, never mind merely double. Sounds outlandish, to be sure, but when gold was carving out its bottom at $255/oz in September 1999 (when the S&P 500 was flirting near 1,300 — sorry to have to add that one in), was anyone calling for it to rise four-fold in the next decade? Secular bull markets usually last 16 to 18 years and this one is just in year 10, so let’s say that we are barely past the halfway point in both duration and magnitude in this gold cycle

Paul Tudor Jones ♥ gold FT Alphaville

By our estimation, G7 central banks have upwards of 35% of total reserve
assets in gold. However, the remaining countries that make up the G20 only have 3.5% of their reserve assets in gold. These countries have seen a $2.2 trillion increase in reserve assets over the last five years, making up well over 50% of the increase in global reserves. However, despite a 150% increase in the price of gold, 97% of the increase in reserve assets has been in the form of paper currency or interest-bearing notes backed by paper currency.

> I also urge everybody still not convinced that at least a small part of their portfolio should include GOLD to read the following report........

> Der nachfolgende Report verdeutlicht mehr als eindrucksvoll warum meiner Meinung nach in jedes Depot GOLD zumindest einen gewissen Prozentsatz enthalten sollte.....

Sprott Oct 2009 Comment






H/T ZH

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2 Comments:

Blogger jmf said...

Wall Street's Kleptocracy.....

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers via Jesse

1:20 AM  
Blogger jmf said...

BlackRock, T. Rowe Price Seek Fed Loans to Buy Bonds Bloomberg

T. Rowe Price and BlackRock, the world’s second-biggest bond manager, began using financing provided by the Federal Reserve in July and OppenheimerFunds Inc. started to do so last month, officials at the companies said

The funds may be able to reap returns of 15 percent or more on commercial mortgage-backed securities while limiting losses by passing most of the credit risk to the central bank, according to Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago.

“This is one of those opportunities that, as an investor, we have to take advantage of,” said Krishna Memani, who heads the investment-grade fixed-income team at OppenheimerFunds, a New York-based unit of Massachusetts Mutual Life Insurance Co. in Springfield. “The key concern is what is the maximum amount of potential loss, and that is limited to our equity” investment under the program.

The Term Asset-Backed Securities Loan Facility, or TALF, offers low-cost financing for up to five years to buy AAA-rated bonds backed by consumer and business loans as well as commercial mortgages.

Investors can borrow as much as 95 percent of the bonds’ value by pledging the securities, plus varying amounts of additional collateral, to the Federal Reserve Bank of New York.

The borrower has no obligation to repay the loan beyond the collateral provided to the Fed, an arrangement that shifts most of the potential losses to the government.

4:14 AM  

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