Goldman Goes Goo-Goo For Gold

[Joanne98]

Goldman dedicates 9 pages to a regime change in which it goes openly bullish on gold. The report is attached, which we present without commentary but as always, if there is one flashing red light saying the peak price for any asset has been hit, it is a Strong Buy signal by Goldman. The report will likely result in a brief pop in spot over the next 24 hours as the idiot money rushes into the latest Goldman trap. Alas, it also means that GS is now offloading. Be very wary of market dynamics over the next month.

http://www.zerohedge.com/article/goldman-goes-goo-goo-gold-gold-market-poised-rally-us-real-rates-head-lower

[Xipe Totec]

1. Interesting - just as we're on the verge of going into deflation

which would make the value of gold drop...

You're looking at the next crash after the real estate bubble.

[Art_from_Ark]

2. There are various types of deflation

For example, there is interest rate deflation, and there is price deflation.
We have interest rate deflation. That would tend to support gold prices-- Interest rates on savings that are essentially zero tend to make other forms of investment, including precious metals, more attractive.

On the other hand, I would argue that we do not have price deflation. While the prices of some imported junk may be going down, prices for other things such as insurance, health care, college tuition, utilities, car maintenance, even food, are mostly going up, not to mention state and local taxes, property taxes, etc., that are being raised to offset funding shortfalls from the federal government. Thus, many investors tend to view this situation as actually being inflationary, especially for people on fixed incomes, and that would also tend to support gold prices.

Moreover, the United States is not the only player in the world gold market-- not by a long shot. India is the Number 1 gold market these days, followed by China, and numerous central banks have been quietly building up gold reserves. Even if all of Glenn Beck's listeners decided to cash in their gold hoards, it would not make much of a ripple in the world gold market. However, if central banks start manipulating (dumping) gold, like they did in the pre-euro days, and/or if interest rates on savings become respectable again, then there would be cause for concern about a dramatic decrease in gold prices.

[westerebus]

3. Or you can have stagflation.

Or some combination there of. As in inflation in taxes which does not effect how the CPI is calculated. You can have deflation in wages while the cost of food rises, again that does not effect the CPI number.

Why is CPI important? That's the metric the government uses to track inflation. No inflation equals no cost of living increases. Mean while gas and food cost keep going up.

So where is this deflation coming from? No money as in credit contraction. Our economy depends on people using credit. The more credit being used, the faster the economy expands. Without credit expanding, debt being created, contraction interrupts the chain of inflation that improves that value of assets.

For example, the housing bubble. Lots of cheap credit from the Fed allowed the expansion of the housing market into sub prime lending and inflated the price of homes. In essence, you couldn't loose while the bubble was expanding. Inflation was built in.

Who knew the banks were dealing dirty mortgages out to the rest of the world as prime investments? The banks knew. The FED knew. The government knew. Economists knew. The economy was expanding as credit flowed and asset prices were going up.

And when a few banks decided it was time to kill the competition, well the rest is history. Their version was sub prime borrowers were the cause. My version, the banks including the FED and the government were the cause.

There is no inflation in the US. At least according to the CPI numbers. Or so low it doesn't matter. Now if the banks aren't lending and people aren't borrowing and no one is spending except for essentials or replacements, the economy will continue to contract.

Contraction equals deflation. So what about gold?

If Mr Paulson and Golum want out of the market and are looking for a short squeeze what would they do to get one?

It worked before didn't it? They created a market and sold short their own market and killed the competition. So you lost half your 401k? Like they care.

Now the question becomes where is JPM in all this? If you beat down gold, that will beat down silver. And conversely, if you pump gold...

Capitalism has been replaced. Bet accordingly.

[Statistical]

5. In *SOME* deflationary scenarios gold holds value.

Gold was desired and appreciated in value in the deflation period during Great Depression.

The reason for the deflation is critical.
Currently we have NEGATIVE interest rates.

Example: 1 year CD 1 year ago yielded 0.9% however CPI rose 2.2%. Thus despite having a nominal rise in money $100.00 yields $100.90 you have a decline in value in real (buying power adjusted for inflation) terms. That $100.90 only buys $98.73 in goods and services.

Thus by keeping $100 in the bank you took a guaranteed loss of $1.28.

In interest rate deflation (negative real interest rates) gold TENDS to appreciate. It has in the past many times. If short term interest rates become positive I would be more bearish on gold.

[Art_from_Ark]

6. The Great Depression/gold situation was a bit of an anomaly

The ownership of gold bullion was made illegal by presidential decree in 1933, although people were allowed to hold on to gold coins (technically, no more than $100 face value), and dentists, jewelers, etc., could continue to use raw gold in their respective trades. People were expected to turn in their gold at the going price of $20.67 per troy ounce (31.1 grams). The Gold Reserve Act of 1934 raised the official government price of gold to $35/troy ounce.

[Extend a Hand]

4. Time to sell n/t