Wednesday, August 26, 2009

Gold bugs about to get Squashed

Anyone who follows me knows that since the beginning of the year, I have been saying - "Sell your Gold, it's dead money". Even Dentists know better, and don't even use Gold to fill cavities anymore (Though their pound the table buy Gold advise when I get my teeth drilled recently is an excellent contra-indicator).

If you insist on being a Gold bug, at least understand what your talking about. Why are you buying Gold (other than the relentless 24x7 commercials and Glenn Beck telling you to)? Everyone I talk to who is long gold explains to me it is all about the upcoming hyperinflation we will experience. Get it straight...Inflation is not the threat, DEFLATION is.

First, let's chat about inflation, most think of inflation as an increase in the price of Goods or services. The most common measurement of inflation for an average consumer is the Consumer Price Index (CPI), and for business Producer Price Index (PPI). OK, while I disagree that this is the cause of inflation, since most look at CPI, and PPI - let's break these down.

CPI Is weighted this way:

Housing: 41.4%
Food and Beverage: 17.4%
Transport: 17.0%
Medical Care: 6.9%
Other: 6.9%
Apparel: 6.0%
Entertainment: 4.4%.

Forget that every fast food restaurant is all about the $1 meal, look instead at what REALLY makes up the CPI - Housing. Housing accounts for over 41% of the entire CPI index. After housing prices (and subsequently rental prices) have been completely decimated, do you really see them going anywhere, let alone parabolic??

How about transportation? We all know that in the 1960's a nice car would cost at least $2000. Forget about that $250,000 Bentley convertible and instead focus on the recently launched Tata motors $2000 vehicle. Sound inflationary? How about TV's?? In 1949, it would have cost you a sweet $600 for a 16 inch TV. Last year, I could buy a 50" flatscreen at Costco for a little over $2000 (down from $6000 the year before). While in Costco last week, I noted their offering of a 50" flatscreen for $800.

Regarding PPI, unerstand that when an industry is a wash in money, there are too many competitors. I have noted that over the past few decades, anytime there are more than 3 competitors in a space, they tend to compete for market share, and not margins (Witness the PC industry over the past decade as IBM subsequently threw in the towel, or perhaps the ' Big 3 Auto makers). When margins be damned, companies do not raise prices (PPI = PRICING POWER), they CUT prices ... subsequantly commoditizing their product space.

You can not fight productivity, and commodization of product cycles. The facts support my argument, in every asset class, prices go down, have gone down, and will continue to go down. If you do not believe me, simply look at the TIPS which are telling you there will be NO inflation for years to come.

Now people who actually have a clue about inflation will tell you that it is not the cost of goods that cause inflation, it is the amount of money. Well...yes, and no. Though it is true that too much money going into any one asset class is what truly causes inflation, the inverse case (as a result of said productivity and competition) can also be made.

So in summary, yes I recognize that the Treasury is printing dollars like they are going out of style, but look at the 'asset class' they are being spent on. - They're not - the reality is that the Fed is throwing all these newly printed dollars at the banking system in a desperate attempt to recapitalize it. Just because the banks have all those new dollars, it does not mean that the world will ever see them. Unless these newly minted bills suddenly find their way into the economy (AND in to a very concentrated asset class), expect deflation to continue to be the world's issue, not inflation.


You can holler at me on Twitter here.

PS -PLEASE do not tell me about paying $4 per gallon for gas or the mortgage payment on your villa in France.


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8 comments:

  1. You have a brilliant theory to defend your article. I agree with you Inflation is not a threat Deflation is a threat.
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  3. This is true, gold is a very good investment. Only if you sell it off at right time and purchase it according to market.
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  5. Very well said & analysed. I agree Deflation is a bigger threat than Inflation.

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  6. I strongly agree that deflation is a bigger threat than Inflation but still market always panics about Inflation.

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