Update (November 14, 2009)
This isn’t an update so much as an additional note on the Van Eeden excerpt below.
*Van Eeden has a good track record, but he’s also a disbeliever in any CB or Fed conspiracy to intervene in the markets. Since that intervention is not conspiracy but fairly well-documented, I’m less confident of his opinion.
*Faber, on the other hand, seems to have his ear much closer to the ground.
For instance, he called the RBI one of the best banks in the world on November 6 (see my blog post).
That was just before the Indian bank’s gold purchase. Now, doesn’t it look as if he knew something was coming up? Either that, or he is doing some clever PR for the IMF.
*Faber’s recently (Nov 11) called $1000 the floor for the gold price and has said that it won’t be breached to the downside again.
[However, just a few days ago, on November 6th, he also said gold could drop to $800. I don’t know how to explain this sudden change. It wasn’t the IMF gold sale to the RBI, because that was completed in mid-October and went public on November 3, before both of Faber’s comments].
*Faber argues for much higher inflation than Van Eeden…who doesn’t believe we have inflation..yet.
Now, Faber’s analysis might be overblown, but his conclusion could still be right. Since he’s based in Asia, he could be privy to information that American money managers might miss.
Conclusion: while Faber’s analysis doesn’t seem as sound to me as Van Eeden’s, Faber might just end up being right because he’s factored in market manipulation.
*In response to a reader comment below:- I know Eric Janszen has also called for very high inflation in the 4th Q, which would indicate a high gold price.
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From Paul van Eeden:
“The Chinese Communist Party apparently learned from America that debt financed consumption was not a sustainable economic model. Their solution, it seems, is even more absurd: debt financed production in the absence of demand…..
Earlier we reached the conclusion that interest rates could potentially start increasing and cause the US dollar exchange rate to strengthen, which, in turn, would cause the gold price to fall. We can now add that the massive inflation of China’s money supply can cause the renminbi to collapse and send another currency crises rippling through financial markets. A collapse of the Chinese renminbi could also result in a stronger dollar and lower gold price…….
What would happen if China were the epicenter of an economic collapse? What happens when the gold and commodity bulls realize China cannot continue to consume at an even greater pace than it had been when the world was buying its goods, but, instead, now has to work down the excess inventory it built up? It would be a good bet that the US dollar would rally and the gold price would fall.
Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory.”
Hi Lila,
how do you calculate the “Fair Value” of Gold (or of anything else, for that matter, but at least I know the concepts supposed to work for stocks etc.)?
Cheerio
Fabio
I assume you do it from the cost of producing from the mines (which factors in inflation), taking into account population growth and economic growth.
I’ve heard figures around 850 – 950…I don’t know how reliable.
Will post again on that
Interesting thoughts. Always good to read a different view.
Dear Lila,
I hope that you are well. How was your trip to India? Did you visit Madras?
As a child I played with trillions of Reichmarks that were completely worthless. Now I am anxiously waiting to play with with trillions of dollars in the not-too-distant future.
Truth has kept me alive, and I thank you for your insight, courage and honesty.
Wishing you the best,
Herman
Thanks Herman..for that scary insight.
Since I am still sitting on dollars, anxiously..I can tell you the thought would make me ill except I’ve been living with it for so long, I am almost innured..
Van Eeeden doesn’t see hyperinflation. 10-20% inflation in the US, but not 50% or more. He seems to have a pretty good track record and his pronouncements seem more measured than Faber’s.
But, as I said, Faber is well regarded.
So who knows..
Lila,
Eric Jansen at itulip.com has had a pretty good record throughout the last ten years including buying gold in 2000 or 2001 (i can’t remember) and continues to hold. I would be interested in your take on his various analyses which appears fairly rigorous. I read his forum because he is independent. He views gold as the fourth currency and expects it to continue its rise for awhile. He says all the money needed for the inflation he expects (like Paul) already exists in the hands of foreigners – and they may unload in a hurry.
I know of Eric Jansen at itulip.
Gold can keep going up…yes. But I can’t see why foreigners would unload in a hurry – it would crash the dollar…which is their primary asset. It’s not the foreigners who are threatning the dollar..it’s the US government..which wants to get out of its debts.
Fair market value, seems like it has more to do with the price of a substitute rather than so much about the cost to produce alone.
When or if the gold window closes, there is only a tungsten bar as a substitute for Central Banks. The fair market value of gold kind of goes up then, for the Central Banks anyway.