- Money Morning Australia

The Madness of Mad Men


Written on 04 August 2011 by Kris Sayce

Before we get on to today’s Money Morning, don’t forget to check out Slipstream Trader, Murray Dawes’ free market update on YouTube.

He recorded it yesterday morning.

Murray was cock-a-hoop as weeks of groundwork bore fruit. We don’t know about you, but normally when you think of traders, you think of them making quick decisions… buying and selling in seconds.

If that’s the image you have of Murray, well, sorry to disappoint you. Rapid-fire trading isn’t Murray’s bag. We’ve seen how he works. He carefully pours over the charts… weighing up risk and reward.

This orderly approach means sometimes he’ll miss a good trade… but the extra work means he’ll avoid bad trades too… that explains his current record of 17 winners from 19 open positions – not even Murray is perfect <wink>.

Anyway, for a free behind-the-scenes peek at where Murray thinks the market is heading next, click here.

Meanwhile…

“For millennia, people have killed and died in pursuit of gold. In the recent downturn, so many investors have been eager to buy gold that it is sold in vending machines. Governments are as captivated by it as individuals are: for nearly a century, many nations’ central banks have stashed hoards of gold bullion in a vault at the New York Federal Reserve.” – New York Times

Reading that you’d think no-one has ever killed or died for paper money.

That no-one has ever killed or died for a leather briefcase.

And no-one has ever killed or died for a loaf of bread.

And the idea of gold in a vending machine… it’s almost as crazy as thinking you can stick a piece of plastic into a wall and suddenly paper money will appear… like magic!

As if that’s ever gonna happen… sorry? What’s that… ATMs you say.

Funnily enough, at the ‘Great Property Debate’ in Sydney a few weeks back, one of our fellow panellists was amused by the sight he saw at the Burj Tower in Dubai.

“It has gold vending machines in the lobby, ha, ha…”

We smiled.

More value than gold?

But the liberal media and mainstream attitude to gold shouldn’t surprise us. Another line from the New York Times states:

“When asked recently why central banks hold gold rather than, for instance, diamonds, Ben Bernanke said ‘tradition.’ Given the long history of humans considering gold valuable, does it make sense to continue this tradition, or should central banks focus on other assets with more intrinsic value?”

The New York Times doesn’t explain which assets have more intrinsic value than gold. We can only guess.

Perhaps the NYT is thinking of Aussie dollars, Euros, Chinese Yuan…

U.S. Treasury bonds…

Newspapers maybe!

We won’t get into a debate about intrinsic value. Except to say individuals and the market determine value.

Stocks have intrinsic value. So does property. And so does gold.

Guess what: chocolate bars and tinned fruit have intrinsic value too.

But only as long as they’re in demand. If no-one demands gold, property, shares, chocolate bars or tinned fruit their intrinsic value will be low… maybe even zero.

Anyway, News.com.au writes this morning:

“Gold back in favour as investors take cover from volatile markets”

In another sign of the mainstream not quite getting it, half the article is devoted to stories of people selling their gold… d’oh!

But look out, is gold in a bubble? The article says:

“The [Perth] Mint states that every week it has dozens of self-managed superannuation investors pouring up to $10 million into both gold and silver, which has also enjoyed phenomenal price growth.”

(Incidentally, our publishers – Port Phillip Publishing – have been one of those buyers at the Perth Mint… the metal is currently stored at a secure location. More details on why they’ve made this purchase soon…)

$10 million a week is $520 million a year. Or just 10% of what the Australian Securities Exchange (ASX) turns over each day!

Or according to the Australian Bureau of Statistics (ABS), $74.7 billion worth of building approvals went through in the 2010-2011 financial year… that means buyers spend over 100 times more on new housing than on gold and silver.

We’ll admit relative dollar values aren’t always relevant to decide if an asset is over-inflated. But it does tell you gold and silver are still fringe investments.

Fear Index higher but still low

So, is gold over-valued?

We can’t tell you for certain that it isn’t. Its value is determined by what the market is prepared to pay and receive for it.

But we do know that measured by James Turks’ Fear Index, gold is well below the early 1980s peak. Here’s a chart of his index going from 1967 to June 2010:

Is gold over-valued?
Source: gold-speculator.com

The small blue square on the right is our calculation of where the Fear Index is today – around 3.3%.

And our guess is the gold price is set to go even higher. Today the Wall Street Journal reports:

“The Federal Reserve should consider a new round of securities purchases to spur the economy if growth and employment keep languishing and inflation recedes, former top Fed officials said in a roundtable with The Wall Street Journal.”

If the Fed pours more fresh cash into the market that can only be good news for the gold price.

The question is how the Fed will stimulate. We doubt it’ll be as brazen as before. The mad men at the Fed are no doubt scheming to find a less obvious way of devaluing the dollar and unleashing more inflation on the world.

So what will they do? Who knows? We’ll have to sleep on it to see what we can come up with.

But predicting the actions of mad men is almost impossible. So even the craziest and dumbest idea we could think of will be a million miles away from the ideas swirling in the heads of Ben Bernanke and his pals.

What we do know is we’ll keep topping up on gold and silver at regular intervals… because we value gold and silver more than paper money.

Cheers.

Kris Sayce
Money morning Australia


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9 Comments For This Post

  1. Triune Rational Brain Says:

    That title madness of mad men is spot on in this market.
    The crowd is really mad you have USA and parts of Europe going nearly into default with record debt and interest rates are still very low.
    In a rational market interest rates should be soaring because of the fear of default instead rates are going nowhere or falling.
    Where are the bond vigilates?
    Real fun will start when the bond vigilates start flexing their rational cortex muscles, instead the vigilates are a sleep somewhere.
    Wake up bring on the bond vigilates!

  2. Sam Says:

    Kris

    If Gold is worth more than paper then why don’t you convert all your money to Gold. Why do you largely sit on cash instead.

  3. The Wolf Says:

    TRB… you are 100% correct… Italy and Spain are cruising for their requisite defaults… Italy will be the pinch point… economy as large as the UK… 3rd largest in Europe behind Germany and France… the pressure is building… Italy too big to save…

    a good source of information… check out http://www.zerohedge.com

  4. The Wolf Says:

    The metal to keep an eye on is Platinum… the Gold / Platinum ratio has compressed to a little over 1.07… in US$ terms… a number of “banks”. JPM in particular, have been stockpiling physical since late last year… I can feel some manipulation a-coming…

  5. The Wolf Says:

    QE3… key date coming… 9th August… meeting of FOMC…
    Bernank to “save” the economy again…

  6. Triune Rational Brain Says:

    Kris now with big drops coming in the market will investors run to gold or cash?
    Dow drop over 500 points have investors rush to gold or cash moment of truth will soon clear this up.
    Is a MINSKY MOMENT more powerful than fear of hyperinflation.
    My money is still on cash, still too much debt in the system for hyperinflation.

  7. Peter Fraser Says:

    TRB – last night they initially ran to gold, but the at the last moment they sold it and ran to cash, but that is only one instance, whether it will be a long term trend is unknown.

    Read “Bank of New York Mellon set to charge large depositors to hold cash”
    http://www.livetradingnews.com/bank-of-new-york-mellon-set-to-charge-large-depositors-to-hold-cash-49234.htm

  8. The Wolf Says:

    Gold went up early, but the sudden sharp drop forced asset liquidations…to cover margin…

    “The Dow is down more than 500. The S&P is down 60. The VIX surges 35% to 32 the highest since June 2010. Implied correlation surges to the highest since last summer. ES volume surges to the highest since the flash crash. Europe is opening in 12 hours. Margin debt is near record high levels, and mutual funds have record low cash. Liquidations galore. Did we miss anything?”

    http://www.zerohedge.com/

  9. bb Says:

    The Wolf @#8. Just this little pot set to simmer. Unfortunately as history is so often replayed it’s probably also the only ‘solution’ to the massive economic problems the US and the remainder of the ‘free’ world faces. US hegemony will not be relinquished without a (very big) fight. Here is the entree. http://www.theage.com.au/opinion/politics/bluffing-their-way-into-crisis-20110801-1i84l.html

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