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Written by José D. Roncal
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Wednesday, 15 September 2010 17:44 |
If you've been reading our blog, or our book,The Big Gamble: Are You Investing Or Speculating?, you already know that one of our favorite subjects is bubbles . . . and all the hot air that inflates them. The focus today is on gold.
Bubbles—whether of the dot com variety, real estate, or some other—have long been the great indicator of impending financial downfall. With history's landscape littered with the debris from bursting bubbles, you think we'd learn. But looking at the gold prices earlier this week, you have to wonder.
In the last decade the price of gold has quadrupled! But it wasn't until the current economic collapse, followed by that other collapse—interest rates on secure U.S. Treasuries—that the modern gold rush really ramped up.
Is all the money pouring into gold just another example of herd mentality in action, or is it an astute observation and a preparation for dire things to come? Is the value of fiat currency vulnerable? Is the value of everything else vulnerable? Is it time for you to jump onboard the gold train while you still can? If so, are you prepared to jump off before it careens over the cliff?
One thing is clear: Gold prices are surging—the price was up to $1,260 an ounce on September 14. The demand for gold seems to rise at the same rate as the trust in currencies and Wall Street falls, but not all analysts see the situation in the same way.
There are those who take the glass half full approach saying that if this is a bubble in the making, it's probably a bubble with a reasonable foundation. They postulate that as long as financial instability and uncertainty persists in the economy, there are arguments to be made for buying gold.
But others like Nouriel Roubini warn investors—and by that we mean, speculators—to not get giddy about surging gold prices. He believes that currency systems will prevail with moderate inflation and that slow growth in the more affluent countries will make the rush for gold's so called safe haven less attractive, especially since, in his opinion, there are better financial risk/return trade-offs than gold.
There's a lot of speculation going on in gold-mining equities and gold bullion—something to hold on to for security or store away in vaults. But there's another kind of gold to hang onto, the stuff that's forged into precious objects. There is a growing demand for jewelry and luxury items in places like India and China where the citizens have more discretionary income today than anytime in recent history. Demand keeps prices up, but how much gold are they willing to consume at these prices?
The babble over the potential gold bubble has crept into the mainstream financial press, creating new concerns and uncertainty. Yet is hasn't deterred those who throw caution to the wind. Just consider the results of a recent client survey conducted by giant money manager, Swiss-based UBS. When asked their opinions on the future of gold as an investment, 86% of the respondents said they expect the gold price to reach a new record high before the end of the year.
Did you get that? "They" expect the price of gold to rise even higher. Just like in the late 1990s, when "they" expected housing prices to rise even higher. And in the 1600's "they" expected the price of a single tulip bulb to fetch enough to buy a comfortable little bungalow facing a canal in Amsterdam. (You'll need to read the chapter on Herd Mentality in our bookThe Big Gamble: Are You Investing Or Speculating? to know what we mean by that one!)
The point is this: Be informed. Know what you're doing. Remember that housing bubbles, dot com bubbles, gold bubbles, etc. are exacerbated by the ill informed who fall into step with what everybody else is saying and thinking and doing without analyzing the facts for themselves. It's classic herd mentality. And who leads the pack? "They" do! |
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Written by José D. Roncal
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Wednesday, 01 September 2010 03:33 |
The long anticipated and hotly disputed Dodd-Frank Wall Street Reform and Consumer Protection Action is finally a reality. Yet the dispute continues.
First the good news: The bill will set up the new Financial Stability Oversight Council, a group of regulators that are supposed to focus a watchful eye on Wall Street and tether the risk takers and deal makers to a shorter leash.
The new bill also establishes tighter restrictions to protect consumers from fraud, or in the very least, it will force Wall Street to drop a few hints in not-so-fine print, reminding us to be more vigilant about what they're up to. It also proposes to force all those exotic derivatives out of the shadows and drive them onto exchanges where the structures will be more transparent, and maybe even understood.
Sounds good, but will putting all of this into action just create more problems? Some critics think a lot will depend on how the regulators interpret the rules, and there appears to be ample leeway for that interpretation.
Critics want to know: Will the new regulations just increase the size of the government? Is it going to restrict credit at a time of economic hardship? Will it mean costly rules for business owners? Who does it really protect? Those questions are still TBA.
Maybe the weakest part of the bill is that it does nothing to reform the housing finance system, which is where this whole ugly mess began. New legislation might help eliminate the shadow banking system and correct the deficiencies in the securities rating system, but there is no mention of Fannie Mae and Freddie Mac.
And we have to wonder how effective the new oversight council will be. Could the current meltdown have been avoided if a similar risk-monitoring group had already been in place? We're not convinced it could have, not when we consider how the unraveling of the economy really began.
When the Feds set dramatically low interest rates, which led to cheap money, followed by the reckless stampede into the housing market, it gave rise to the bubble, and finally, the inevitable collapse. So, how is a systematic risk council going to prevent this in the future? By making the Federal Reserve raise interest rates? We don't think so. And neither does Fed Chairman Bernanke, judging from his comments at last week's annual Fed policy symposium where he made it clear that the Fed could not simply conjure up a recovery by manipulating interest rates and the money supply.
We've felt all along, that a lot of our financial problems could have been avoided had the general populace really understood the difference between investing and speculating. In fact, that's such an important topic, we wrote a whole book about it.The Big Gamble: Are You Investing or Speculating? is filled with cautionary tales, along with actual historical accounts of what can, did, and will continue to happen when people are swept along by herd mentality (the housing bubble). The book is filled with the sad, but documented reality that we are never investing; we are always speculating.
The success or failure of the new legislation is unpredictable at this point. The rules are not expected to be fully enacted until 2015—an eternity in today's hyper-speed financial markets. There are a lot of details to be sorted out, and, as they say, "the devil is in the details." |
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