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The Gold Market and World Economy
Kenneth J. Gerbino & Company
Posted Jun 19, 2008
Genève and Zurich Speech Notes
June 4-6, 2008
Academe Finance Conference
Keynote Address
* There are three main mega drivers to all investment markets 1) The Commodity Pendulum, 2) Excessive Money and Credit Creation Globally, 3) Progress - Population - Technology.
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* Commodity Pendulum has just started. Normally 20-25 years. Uptrend started in 2001. Commodities adjusted for Inflation in real terms must increase 75% to just catch up with the 1960 prices. Much higher prices coming and will trend higher for the long term.
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* China and India: Obvious and Huge. Highest U.S. Steel consumption is from building industry. If a 75% downturn in the U.S. (worse than the great Depression of the 30s) there would still be a shortfall of copper supply due to Chinese demand in 2008 and 2009. Massive demand for raw materials coming for decades from developing countries.
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* World Governments cannot fulfill the promises to their citizens. Only way out is printing more money. Very Inflationary. Gold will go much higher.
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* No Deflation: This is a PR Line from Central Banks as an excuse to print money. 1987 crash in the U.S stock market saw over $10 trillion in Stock and Bond market losses and there was no deflation or recession. Financial assets, money, and credit are distinct economic classes and should not be confused with each other, even if they are related.
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* Mining Analysts too conservative in metal price projections. 35 years in this business and I have never seen them get it right. This creates uncertainty in the market. Most are geologists or engineers and have little economic background to predict raw material prices. Since economists are also clueless - it makes for a volatile metals market. Key to the future will be the three drivers mentioned above. Metals are going much higher.
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* U.S. is a Welfare-Warfare State. 90% of our budget is spent on these two items. Both require printing massive amounts of money. Internationally the U.S. is the Good, Bad and the Ugly. Great nation for many things but foreign policy difficult since plenty of business is conducted in many countries that have horrible human rights records. We give more money to dictators than any country on earth. We are also the first country to send help for earthquakes and floods. We are the most generous nation.
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* U.S. had $21 trillion in direct and indirect obligations as of 2000. In 8 years this is now $53 trillion. A $32 trillion increase. Very inflationary. Bullish for all precious metals.
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* Highly Speculative world: J.P. Morgan with $1.2 billion in equity controlling $91 trillion in derivatives. Many foreign banks and investment groups will have problems as well in the future. Time to be conservative.
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* Best Investments:
o Swiss Francs
o Gold
o Precious Metal Mining Stocks
o Natural Resource Companies
o One Year Government Bonds
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* Major stock market investments should wait until Interest rates are twice as high as today and then look to buy well known consumer brand large cap companies on world stock markets that will be much lower in price as inflation and interest rates head much higher and hit world stock markets hard. Precious metal stocks will be the strongest stock sector.
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* Gold should stay above $800 and if lower will only be temporary. Gold will trend higher for a decade. I see much higher prices.
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* Gold mining stocks are undervalued and weak holders are all out. As inflation numbers continue to be reported, these shares will be very strong. Inflation is from excess money creation not oil or commodities prices going up. Paper money is cause. Prices going up is the effect.
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* Credit and Monetary conditions are out of control and very dangerous. Our fund and client portfolios are basically in cash or precious metal stocks.
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* U.S. money supply is expanding but Monetary Base and M1 are now misleading as money is swept from checking accounts daily and placed in interest bearing money market accounts. M2 is now the only reliable money supply. Monetary Base and M1 numbers are misleading most commentators that are not sophisticated in Fed policies or new programs.
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* Bottom Line: G-8 countries cannot meet their financial promises and the political solution is to print money to make ends meet. This is now ingrained in their systems and with budget deficits mounting will become worse over time.
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* The world will not go into a depression like the 1930s which was a depression of productivity.The depression of the future will be one of purchasing power of the lower and middle class wage earners who will see their standard of living reduced because of the paper money system.
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* The world will not come to and end. The future will be like the past only everything will be more expensive.
Thank you,
For more articles on gold, the stock market and economy please visit our website at: Kenneth J. Gerbino & Company
Ken Gerbino
Kenneth J. Gerbino & Company
Refute it. While you're at it, read more at the website. There's plenty to take in.
Still trying to make your point about gold as a wealth accumulator, huh? You haven't gotten the message yet, over the 1693232512780 times I've said I don't view gold that way?This is a load of crap, basically. For the past 50 years commodities, especially metals traded on futures exchanges have been HORRIBLE investments. This site is run by those who stand to gain tremendously from high volume commodity trading, so it's bunk, anyway. We are NOT headed for long term and perpetual double digit inflation. We have had only one spell of multi year double digit inflation in the US in over 100 years, the late 70's, and that lasted only about three years.
Gold SUCKS as a wealth building instruement, so you would be investing in something the essentially SUCKS if you trying to BUILD wealth.
There is one and will ALWAYS be ONLY ONE vehicle for long term WEALTH ACCUMULATION.......equities, period. Any other "advice" is a FOOL's advice.
WTF does that have to do with the price of tea in China?BTW, this nutjob, Ken Gerbino is a Scientologist
There were several references to this in Gerbino's piece. But the above two are suitable for my response.Kenneth J. Gerbino & Company
* U.S. money supply is expanding but Monetary Base and M1 are now misleading as money is swept from checking accounts daily and placed in interest bearing money market accounts. M2 is now the only reliable money supply. Monetary Base and M1 numbers are misleading most commentators that are not sophisticated in Fed policies or new programs.
.
* Bottom Line: G-8 countries cannot meet their financial promises and the political solution is to print money to make ends meet. This is now ingrained in their systems and with budget deficits mounting will become worse over time.
Refute it. While you're at it, read more at the website. There's plenty to take in.
I am not saying that no new money is being created by the Fed. I am saying that very little new money is being created by the Fed ... thus far. And the vast majority of the price inflation we have experienced in recent years is not due to the Fed "printing of money". The vast majority of money creation has been due to lending (which was encouraged by Fed policy). Another source of inflation (and debasement of the Dollar) has been both the dishoarding of US Dollars from foreign reserves and the deceleration of foreign accumulation of US Dollars. Dishoarding brings those Dollars back to our shores. So, some of this is (and will be) payback for decades of borrowing and trade deficits.Brian I don't want to get TOO far off topic, but when it comes to economics I usually don't care what's being discussed, I just enjoy it overall.
This being said, when you say no NEW money is being created, are you saying that the rate of inflation is being caused by something else besides dollar devaluation? I mean, I don't even trust the CPI and PPI, for instance. I believe they are greatly under-reported, and derived from skewed numbers to begin with.
The price of oil certainly affects pricing of a multitude of essential and non-essential items. But you and I both know that the root cause of price inflation is not the price of oil (nor the price of commodities themselves). Commodities are up in price across the board, in all currencies (to varying degrees). When it comes to commodities, we simply have more money (across the world) competing for the same resources. It is a monetary phenomenon. But it is also incorrect to say that this is because of Central Bank printing of money.Is it the price of oil that is causing most price increases, then? Why the run to commodities? Fear?
The US Dollar will be subject to periods of strengthening as financial instruments to not decline in a straight line. But the fundamentals for the Dollar are very poor. The banks are in serious trouble, the Fed has assumed a troubling amount of questionable (at best) assets on its balance sheet, the US continues to run large deficits, the trade deficit continues to be a very large number, and spending is likely to get worse with the next Administration (particularly with Obama, but McCain is not far behind). Add in that there are a number of US Dollars sitting in foreign reserves vaults around the world (that can at any time provide more competition for precious resources), we have a very troubling mix of problems.Where do you see us in, say, 3 years, and how is the Dollar going to strengthen anytime soon? "Soon" meaning in the next few years.
It depends what you mean by collapse. The Dollar? Asset prices? A collapse of the Dollar can be prevented by implementing sound monetary policy. Here, the loose credit needs to stop (interest rates need to be much higher), Wall Street needs to square away their own mess (no assumption of questionable assets on the books of the Fed, no government bailouts of lenders or homeowners, no Fed guarantees of loans (Bear Stearns)), housing prices must correct appropriately (we are not close to the bottom), government needs to get its spending in order, etc. Asset prices are generally inflated and need to correct. These measures would strengthen the Dollar. Of course they would also throw the economy into a massive cleansing (depression). This is not politically palatable, so I do not expect this choice to be made explicitly. But the cleansing could still come despite their best efforts to prevent it.And then what's going to stop an eventual collapse? How much longer can this mess be controlled?
Now, am I convinced that quantitative easing is not in the future of the Fed and other World Central Banks? Absolutely not. The balance sheet of the Fed is beginning to look quite rough and eventually they will run out of treasuries.
In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculatorsʼ demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!
Still trying to make your point about gold as a wealth accumulator, huh? You haven't gotten the message yet, over the 1693232512780 times I've said I don't view gold that way?
I didn't post this article to make the case for gold. It was to make the case that our economic future is bleak. There was data provided, facts, etc, that you chose to ignore while you once again blasted gold.
You view the economy as a world economy that can't possibly go bad merely BECAUSE of that. I find that to be patently ridiculous, personally.
I love your view on inflation, too. Because double digits happened only once, it can't possibly happen again. Look around you, dude. Major banks on the brink of collapse, prices at all time highs, debt unprecedented. And the only solution thus far from our fearless leaders is PRINT MORE MONEY. But yoiu choose to view with rose colored glasses, I guess becuase it helps you sleep better at night and makes you feel secure in your investments.
You aren't telling me SHIT about equities, brother, that's where the majority of my portfolio is allocated to. Mostly foreign currency denominated, because the dollar is rolling along towards worthlessness. We'll obviously be disagreeing about that until one of us is proven wrong, but I've yet to see you make your case for a strong Dollar. Be my guest, though.
WTF does that have to do with the price of tea in China?
Since when does someone's religious beliefs have anything to do with their economic opinion?
I sold some gold today, though I still have a lot of it.
According to Michael Masters, the incremental demand for oil from institutional investors nearly matches that of China.
And
I have summarized Masters' argument here
Toro's Running of the Bulls Market Blog: Michael Masters on Rising Commodity Prices
But if you want to read his entire testimony to Congress, you can do so here
http://hsgac.senate.gov/public/_files/052008Masters.pdf
The price of oil certainly affects pricing of a multitude of essential and non-essential items. But you and I both know that the root cause of price inflation is not the price of oil (nor the price of commodities themselves). Commodities are up in price across the board, in all currencies (to varying degrees). When it comes to commodities, we simply have more money (across the world) competing for the same resources. It is a monetary phenomenon. But it is also incorrect to say that this is because of Central Bank printing of money.
The US Dollar will be subject to periods of strengthening as financial instruments to not decline in a straight line. But the fundamentals for the Dollar are very poor. The banks are in serious trouble, the Fed has assumed a troubling amount of questionable (at best) assets on its balance sheet, the US continues to run large deficits, the trade deficit continues to be a very large number, and spending is likely to get worse with the next Administration (particularly with Obama, but McCain is not far behind). Add in that there are a number of US Dollars sitting in foreign reserves vaults around the world (that can at any time provide more competition for precious resources), we have a very troubling mix of problems.
I cannot say where I think the Dollar will be three years from now. While my guess is that it will be lower (maybe significantly so), I do think that we run the real risk of a massive deflation (without hyperinflation). Here, asset classes would collapse, a depression would ensue, and the Dollar would actually strengthen (money supply would contract). But most of my assets are still in the inflation (and dollar devaluation) camp.
It depends what you mean by collapse. The Dollar? Asset prices? A collapse of the Dollar can be prevented by implementing sound monetary policy. Here, the loose credit needs to stop (interest rates need to be much higher), Wall Street needs to square away their own mess (no assumption of questionable assets on the books of the Fed, no government bailouts of lenders or homeowners, no Fed guarantees of loans (Bear Stearns)), housing prices must correct appropriately (we are not close to the bottom), government needs to get its spending in order, etc. Asset prices are generally inflated and need to correct. These measures would strengthen the Dollar. Of course they would also throw the economy into a massive cleansing (depression). This is not politically palatable, so I do not expect this choice to be made explicitly. But the cleansing could still come despite their best efforts to prevent it.
If we do not get a Fed that makes the tough choices to cleanse the problems, I expect that an attempt is made to inflate away problems while attempting to manage the currency (with the help of the world's central banks) and Gold. This will only punt the problem down then road and make the correction worse when it eventually comes. I do not worry about so much as when. I just simply follow the data and try to stay ahead of the market with my investment decisions. When the fundamentals changes, so will my investment strategy.
Brian
I'm buying silver, fine art and real estate.
I haven't yet decided whether or not to get into serious long term fixed rate debt, but if things keep getting wierder, (and I see very little that make me think they won't) that's where I headed.
Gold is obviously a way to hedge against inflation.
Likewise obviously it is not an investment, unless you buy it on margin.
Silver is throwing your money away, you've missed much of the metals boom.
Yes. Although, the banking system is now creating less credit than it was. Credit is certainly tighter. Also, I am not convinced that M3 is an appropriate measure of the money supply. I tend to put more faith in M2 and MZM. But I am still formulating my opinion here.Gary North was saying something about this a little while back. M1 is holding steady and M3 is growing...which if I understand correctly, kind of goes along with your statement that the central bank is not directly printing money per se, but the banking system is creating more credit.
Yes, the Fed is really changing the composition of its balance sheet at this time, not conducting a massive inflation campaign. Now, there is a small amount of inflation being created. For example, TAF transactions are inflationary to the extent that funds disbursed by the Fed for collateral exceed the sterilization operations ...He said that they are trying to bail the banks out but not inflate--by swapping treasuries for junk mortgages. Just one problem as you mention--they only have a finite amount of treasuries. Once they are gone--by this fall, at current rates--the fed will face an ugly choice: big inflation, or letting the financial system collapse.
I wish that you were right. But I know that you are wrong. I can provide interesting reading material, if you are interested, that will help broaden your understanding of the Central Banks, fractional reserve banking, and the impact they have.You can pontificate all you want of Central Bank policy an its effects on dollar valuation, inflation, and the economy, but I continue to believe you put far too much faith in those policies overall effect on the global economy. We just have to again agree to disagree. The policies of central banks in the 21st century of decentralized capitilazation and what is beginning to break back to a more barter based global system, is becoming increasingly IRRELEVANT.
It is simply THAT simple and nothing our central bank does or does not do has much of anything to do with it.
There is NO reliable "data" on that crackpot website.
Scientology is a cult of kooks and NUTBALLS in case you haven't figured that out.
You bascially paint yourself as a WHACKED OUT extremist. You quote a kook, and you vote for a certified screwball like Ron Paul.... You're associations paint you for what are, an EXTREMIST.
I'm guessing you are in to "holistic" medicine as well. ....
That's only not extreme to you because you've grown up during it's progression, so it only seems natural to you. Not sure the founding fathers would agree, but then, I imagine you view THEM as whacked out extremists as well. 
