Bill Cara's Blog for Jan 2, 2012

with great long term charts here: http://contraryinvestor.com/mo.htm

Short version: long term prospects are great; short to intermediate term who knows?

The "who knows?" part is why IMHO gold will go up now (wall or worry) but with another retest of lows later.

note to self, wake up bright and early.

Not really if one considers rhodium went from $2,450 to $1,350:
http://www.kitco.com/charts/popup/rh0365lnb.html

And this nothing compared with 2008 when it went from $10,010 to $760 in short time. Outch!
http://www.kitco.com/charts/popup/rh1825lnb.html

I read the Tax Credit on Ethanol was allowed to die. Is Congress waking up??

HIP HIP HOORAY!!!

Thanks Bill and have a nice vacation (you deserve it!).

Lots of symmetrical triangles showed up in your charts. The resolution should be very soon. The european markets tipped the way today. Will it stick tomorrow?

Kaimu and I are both trying to get a sense of how gold will do going forward. The methodology we are both using reminds me of my background in political science long ago. Political Science is not exact. To attempt to predict how a present-day situation would likely play out, you find a series of situations in the past that are as close as possible to present-day situation, and explore the similarities as well as the differences and see where that gets you. "Proof" is impossible, since things are never identical. Really its all about "getting a sense" more than anything else, and assessing for yourself where the weight of evidence points.

So we have Japan 1989, and the US Great Depression. Throw in Weimar too. If I were a better student, I'd look into the South Seas Bubble, the Tulip Bubble, and France 1790. Not in order to study the bubble, but to study the aftermath, and see how various things performed both as, and AFTER the bubble popped. Including gold.

I think its an interesting process, which is why I bore you all with my posts. Writing helps me sort out my thinking, and criticism provides contrary points of view I didn't consider.

Kaimu brings up counterparty risk as a physical gold positive. I agree, the counterparty issue is real, and severe. MF Global shows us we can't expect to get our electronic cash back if JP Morgan is the counterparty to anyone that can be thrown under the bus - like futures traders. Can we extrapolate this to bank deposits as well? In a bigger failure, would grandma's bank deposits get eaten by JPM and FDIC be unable or unwilling to pay them back? 40,000 futures traders and their segregated accounts are one thing, but mom & pop depositor is a step further. I'm not sure what the answer is. I guess that's a bit of a collapse in my own personal confidence level.

I'm noticing that the problem is an electronic/physical issue, not a gold/dollar issue. Electronic gold was stolen too. Thefts occur easily when things are all electronic. The best defense to a counterparty problem is having physical whatever-it-is, be it dollars, or gold. The moral of the story is, ownership beats a receipt any day of the week.

Kaimu asks - "What good is low prices if the US government defaults? Which it did in the 1930s."

If you are holding cash - and here I mean physical bank notes - low prices are great. Really great!! So, I care. My bank deposits are protected by FDIC (and that's backed by the US Treasury, and that's backed by the Fed - who may not be able to print ad infinitum, so there is a limit) so that may be there, but possibly not accessible immediately. Especially if there is a default, bank holiday, etc. Bank deposits are just a warehouse receipt for your cash.

So let's split counterparty risk away from the equation. That leaves the question, which will be better to have in a default - physical cash, or physical gold? And its really a question, not a statement.

As for how things play out, for me this is boiling down to a couple of cases. One track involves money printing, which means the system continues functioning, but a lot of new credit money is created, gold and oil goes nuts, and the Tea Party proves incapable of stopping it. I'll call this the "Ben Prints 15 Trillion" outcome. Everyone's deposits are still available, they're just slowly made worthless. Cost of living screams higher, buck tanks, gold is a big winner. Dr. S gets to say QE to infinity, I was right, I was right. :)

Another track is deflation - the Tea Party stops the Bernanke Print operation and the bond market eventually requires more austerity. This eventually triggers bank failure and temporary systemic collapse, involving bank holidays, seizures, counterparty failures, and the like. In this track, everyone's electronic assets may not be available at all - or they may be seized by powerful (and protected) players using opaque acts that boil down to corporate survival for the top 1%. And then there will be an overnight electronic default and/or wealth confiscation of some sort. A bunch of people will lose a bunch of money. The question is of course, which people? Holders of treasury debt? Bank depositors? Pension holders? IRAs?

In a temporary systemic collapse, holding any electronic assets, be it gold, cash deposits, debt, or equities seem like a huge risk. For me its a tossup between physical cash and physical gold because I like the portability, but cows and property (unencumbered by debt) work well too. However in the Ben Prints scenario, its only electronic cash that suffers a decline. Electronic gold is probably the best choice, though a windfall tax on electronic commodity profits is quite possible.

"Like I have said before in SOUND MONEY we are in uncharted monetary territory historically...What was the high of the latest USD rally? This time is different because the USD is not rallying off the 80 multi-decade support levels, it is rallying off all time multi-decade lows with a collapsing EU economy in support."

I have to say, this is a really good point. I've lost sight of this. Imagine for a moment it was 2008, and let's just imagine we only had the current eurozone difficulty. Where do you imagine the dollar would be trading? 100? Higher? We have governments and major banking institutions gaming the collapse of the eurozone, and the best we can do is 81? Like Ali vs Foreman - "Is that all you got, George?"

We will see a Greek default at some point. Watching how the buck performs during that time will give us a clue to just how sick the dollar really is.

But - and this is a big one - if we go down the deflationary path, a lot of that printed money vanishes from the system. When printed money vanishes, whatever money remaining (that isn't destroyed by counterparty failure) is made much more valuable. Its a supply & demand thing.

"Your Ron Paul remarks mean what exactly? That staying on a sure path to default and currency collapse is better than what? Not owning gold or owning it?"

My remarks were not making a policy recommendation, just a prediction. Based on his statements, Ron Paul would enact policies that would be bearish for the price of gold. Balanced budgets (which we call "austerity" these days), no bailouts, enforcement of mark to market and the resulting widespread bankruptcies would lead to massive deflation in the short to medium term. Paul himself has said his policies will be initially quite painful. And the last thing he would do is countenance money printing. That's all gold bearish. Don't you think? Another way to look at it - if we had a balanced budget, no inflation, rule of law, and strong property rights, why on earth would we want to hold gold? Armstrong's Rule - gold is a hedge against the government. Ron Paul's government wouldn't be threatening at all.

I find it interesting that the same people who hold gold also often vote for Paul. Its as if they are saying, "please make my major investment worth a whole lot less." That's what I find ironic.

Personally, I'm not sure where I stand on the whole Ron Paul candidacy. Libertarians have always had a blind spot about how the courts and the free market together will protect the commons. A company's bad acts can cause far more damage to the commons than any cash they could possibly cough up in court after the fact. Witness what happened with TEPCO. The temptation of the gamblers among us to make money in the short term and hope something bad never happens to a shared resource (air, land, water, etc) is endemic to the human condition. I believe regulation is required; it can't all be solved by the courts imposing damages ex post facto. Often companies in such situations have far less market value than could possibly compensate everyone for all the damage they suffered. An ounce of prevention, and all that.

But I digress.

something doesn't add up. Greece banks down big. EU banks like bnp and soc gen also down 2-3%