For the concertposters fellow

Open response to the concertposters fellow:

First, I apologize for never having passed your comments til now - I had thought, with the username that you have, that it was just spamming for some website. People who write blogs do get a lot of spam. Thankfully my blog's not even remotely popular so I get much less than others.

I don't want my response to you to be buried in the comments section. Because I have a thesis here about future gold price, and (I'm sorry for being a dick but) I'm now forever done with hearing comments about the price of gold that don't address my thesis. My thesis might be wrong, but if so I would be happy to have it explained to me why.

I'm willing to hear responses from others too. That's why I want to throw this open.

So here we go. You said:

I would love to see GDP growth (and more importantly, unemployment rates) improve.

If that does indeed happen and the resulting follow-on increase in interest rates comes to pass, then whatever support the ZIRP-NIRP pillar had in the PM Bull story, will melt away. Real interest rate returns = sell gold. 

So, whoever wants to, tell me why my supply-demand argument is wrong.

But read the ground rules at the end before you post a comment. Also, for the big-mouthed self-important blatherers out there, read this fucking post in its entirety before you even think about posting a comment. Cos the only comments that will be passed are the ones that respond helpfully.



1. Demand

As I've been saying, if the US economy gets a boost, thus also improving economic performance throughout the world, that means more wealth creation in India, China and southeast Asia. That's my theory.

I'm saying that wealth creation in Asia means more Asian gold demand. It's a fact that Indians buy lots of gold; more wealth creation in India means more gold buying ceteris paribus. I admit I know a lot less about China, but since their gold consumption now equals India's, I'm assuming that Chinese people are also buying more gold as wealth increases. (Though god knows, maybe it's just the Chinese government that's buying all that gold?)

India and China buy 50% of all gold. Fact. Everyone in the entire world can simply fuck off forever until they can present a gold price model that takes that into account!

(I'm assuming gold buying happens more readily in underdeveloped countries with no history of a stable banking system. In such a land, gold is a portable, vaguely price-stable store of wealth, and better than the alternatives. Frankly if I was Chinese or Indian, I wouldn't trust the banks they have over there, and I'd store some wealth in gold too! Same if I lived anywhere that didn't have Europe's 600-year history of banking and present political stability.)


2. Supply

And if the US economy improves, thus improving world wealth creation, that also means more increasing cash costs in the developing world where most of the gold (and copper and silver) is being mined. (First world growth is driving third world inflation.) ~50% of mining costs are labour, and I'm not hearing stories of any country where their qualified mining workforce has a lot of slack in it (except South Africa, but that's a basket case - and those basket cases are multiplying, cf Argentina).

You are not seeing a boost in gold production or gold reserves that is commensurate with the increase in gold price.

Gold has only been exhibiting a premium of ~30-40% over the all-in cash costs; increasing the cash costs can't mean a decrease in gold price. Not without some major demand destruction to wipe out that premium, forcing the shut down of the most marginal producers.

Fact, gold production and reserves are decreasing, says Brent Cook - and he says major analysts' predictions of future production are overly rosy cos they aren't taking the reality into account. Ore grades are trending downward long-term. Capex and opex costs are exploding, so a lot of supposed future mines are failing the go/no-go evaluation now. You simply can't start up some new gold mines when you base your FS and go/no-go on a $1200 long-term price, which is where the headspace of the capital markets is at. And fact, Brent Cook also notes the amount of money that the industry spends on exploration is increasing drastically, but isn't having a useful effect on proven reserves.

(Frankly, Cook's data scare me. He's got the ultimate bull case for gold, moreso than any goldbug nut.)

Scrap gold does increase as the price goes up, but not enough to damage the price - that only happened in 2008 when a lot of wealth was destroyed and some people needed to liquidate gold. Outside of a crash, gold price will increase to attract more scrap, and scrap will only come in enough to stop the gold price increase. That's what the WGC and Thompson GFMS data seemed to suggest.



Now.

If you think my thesis is wrong, please explain why.

But note the following:

A) I don't have any interest in bullshit goldbug blather about an imminent global collapse. Those are not even arguments because they're not based on reality, and they're also not even arguments because they're not based on economics. I am happy to simply delete anything that rides in on that clown car.

I'm still happy to keep my mind open about certain specific goldbug theories - e.g., German Fed gold has been rehypothecated or outright sold and replaced with a promissory note, ZOMGZ to da moon Alice. Or, e.g. central banks are going to find they've cornered the market in tungsten. After all, when you've got a financial system that has institutionalized corruption and fraud outright, with explicit government approval, all sorts of funny things can turn out to be true. I'm not babe in the woods, I know the world power structure is crooked and built on lies.

But I'm not accepting that such a speculation is true until I see evidence. And I'm sure we can agree that Germany would never come out and tell us that they own very expensive tungsten. (Russia maybe.)

I am also open-minded about the idea (that Jojo holds to, among others) that a major fuckup might occur when all the world's governments try to roll over their debt. Long-term, that debt will be reduced relative to GDP as we enter the next secular bull, but between now and then I accept it might be touch-and-go. However I'm not investing based on that, cos Bernanke says he's 100% sure he can contain inflation, and he's been more right than his critics - who after all only criticize for political reasons.


B) I also don't accept the interest rates argument. Maybe partially cos I don't fully understand it. But also partially because I really do think it's being applied incorrectly.

Firstly, the United States doesn't buy gold. They mine it, but they don't buy it. China, India, Thailand, Turkey, the Islamic world, and the odd central bank here and there buy gold. So if you want to apply the US interest rates argument, you have to explain to me what the transmission mechanism is that supposedly allows a change in US Treasury yields to affect the price of gold. Other than morons in Chicago selling on signals.

Secondly, I'm asserting that the interest rates argument is being applied incorrectly. It's a model based on correlation, but the underlying assumptions are being ignored.

I accept that rising US rates can affect gold price by reducing demand: in a time when the US is growing at 4-5% with inflation beginning to scare the Fed, they'll jack up interest rates Volcker-style (we hope) to rein the economy in. In that specific situation, I can see how such rate action would result in a profoundly negative effect on Asian EM growth rates (eg a China "hard landing" scenario like people have written about), which would cause demand destruction and a pop in scrap. And in the EM markets that mine gold, it could maybe cause a reduction in cash costs, I dunno. In that situation, then, a US interest rate rise would cause gold price to go down by simple supply-demand.

But that interest rate situation is not this one we have now. US rates do have to go up in the next year or two, sure.  Maybe by H2 2013. But the reason they go up will be because the Fed can safely abandon the "exceptional measures" that it's been using to keep the US from falling into a depression. Rates going up in this case will mean US GDP growth improving and becoming healthy and self-sustaining, which will mean improving GDP prospects for EMs, which will mean increased wealth creation in the EMs, which will result in increasing gold demand. And probably increasing cash costs in EMs, which will mean an increased marginal cost.

Now, caveat for me: I do accept that the investment world (the people holding all the paper gold) does believe the interest rates thesis and will sell based on it (til they see that I'm right and they're wrong). But the most they can do is decrease the speculative premium for a while. Even if all of Wall Street were to sell gold down to $1200 (which I think is about the lowest it can go even in a 2008-style panic), gold miners will fucking collapse as their margins die off; but then people are going to wonder why all the buying has increased in India and China. Meanwhile $1200 isn't really a sustainable gold price: that price will generate essentially zero new mines and everyone knows it.

Also, yes, FT Alphaville has indeed pointed out that the moribund gold price of the past 18 months has happened at the same time as short-term rates hit the zero bound. That's nice. Correlation is not causation. Cos you know what else has happened the last 18 months? A global slowdown, EU falling into recession, and consequently Chinese and Indian growth slowing.


So, now, before you respond to anything, here are the ground rules:

1) No goldbug bullshit will be tolerated, as I pointed out above. No fucking childish snark about Bernanke, Obama, the Fed and so on, either. They are richer, more successful, and more competent than you. They've proven this cos they have no time to post on blogs, they're busy running the world's greatest superpower. Once you successfully navigate your nation's way out of a major debt-deleveraging, then you can start being catty.

2) To be fair, no "bu-bu-but interest rate rises correlate with gold prices going down!!1!" either. Correlation is not causation, and I've already said I think the model doesn't apply in this case. Explain how it's wrong or let it go.

3) In case your school system never taught you about debate, let me point something out: debate means addressing the other person's points. A legitimate counter to my position will (for a C) present fact and data that refutes a point of mine, and then (for a B) will show how refutation of that point collapses my argument, and (for an A) present the counter-position that takes into account your data. If you didn't learn this in highschool debate club or during a liberal arts BA in university, I just taught you now.

4) If you're going to use a very obtuse and complicated Econ Ph.D argument like something Izzy Kaminska would write, please explain it so a dumbass like me can understand it, m'kay?


Now, if anyone is left, go ahead and comment.

I will interpret silence as proof that I'm right and the rest of the world is wrong.