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Minyan Mailbag: Gold Trading

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Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.

John,

Beaming from somewhere in the Caribbean sea, I noticed your buzz about $200 gold. In order for gold to get to $200, the following must happen:

1. Balanced budget
2. Erasure of the debt
3. Balanced Trade deficit
4. The housing bubble gets deflated and there are no repercussions

If you think the above can happen, then please, share some of whatever you are taking, I would like some.

Gold today is more political. OIL HIT $70 A BARRELL AND GOLD WAS DOWN $6! Do you think that is a natural market? In Laurie's column today, he used a quote I supplied him from Volker (the only thing he regretted was not controlling the gold market.) The Fed is paying heed to Volker's message.

Gold is now a completely manipulated device, either through the dollar or other outright means. Look at the numbers. For the last seven nights, gold has gone out from the overnight session only to be knocked down on the open in NY. As I write this, gold is up $2.20 on the overnight. See where it opens at 8:30. FOR SEVEN DAYS THIS HAS HAPPENED! Coincidence? Can you imagine the panic if CNBC were to announce that gold was up $10 daily? Can you imagine the panic a + $500 gold price were to induce.

IMO the price of gold will not truly take off until "it" hits the fan.

-Minyan Neal


MN -

You make way too much sense.

One through four will not happen.

We have investigated the trading of gold and like you, we believe there is a high probability that the trading of gold is "interfered with." But then wherever central banks are involved, the market seems unnatural (I consider an unnatural market one in which the participants, or a few of the major ones, do not act economically rationally; there is an agenda other than maximizing profit for risk).

I wouldn't be personally long gold if I thought it was going to $200; I bought my position at an average of $270 and have held it since with no plans to sell.

That being said there is a scenario in which gold could trade down significantly, one where the initial stages of deflation cause a severe reaction from investors. Scott believes that to be the case, but I put a much higher probability on that not happening than he does. You see, that scenario would require the Fed and other central banks to abandon their "printing" ways as deflation took hold. It would require them to fess up and say, "Well deflation is kicking in and there isn't anything we can do about it, so we might as well let it go and begin acting rationally by employing policies to reduce debt and balance budgets."

This scenario has a very low probability in my mind because I believe that real deflation would be met by even more and extreme monetary flatulence. This would counter the initial reaction to sell gold as deflation really kicks in.

But gold going down under deflationary forces is only a temporary phenomenon. Gold actually would do very well as deflation turns into hyper-inflation.

These scenarios do not have to occur. If the world discovered a new, cheap, and clean source of energy a lot of things would change quickly. Or we could begin acting sensibly and revamp our energy infrastructure to be more efficient. Right now 100 units of energy that starts in coal for example are reduced to 9.6 units by the time it is used as energy. This is because our infrastructure is very inefficient. For example, by just widening pipeline transport systems and reducing friction we can improve that efficiency by 15 units.

But now I am talking rationally.

-John

No positions in stocks mentioned.

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