Commodities plunge, gold soars

I took heat in other threads for maintaining that gold was more currency than commodity; you can always sell it and use it, in effect, as a currency. Thus, as true commodities like oil and copper deflate, gold goes up during times of economic uncertainty. No, you can’t buy a candy bar with it, but gold is always, always the safe haven during a crisis, and if this isn’t a crisis…. I think this theory holds water.

Meanwhile the dollar is doing great, for now. That’s not due to any great faith in the US economy, rather to the awfulness of other currencies (have you checked the Euro lately?). When the auto industry goes belly-up in April, the dollar will crash, hard.

Investors have taken to terming the flight from risky assets into gold a new currency trade. The ongoing concern about the enormous task of getting the world’s banks on track — bedeviling investors across the globe — has produced a safe-haven trade into the likes of Treasurys and the dollar. However, the dollar’s success is, in some ways, a mirage, improving only because other major world currencies have been dreadful.

The dollar has strengthened in the last couple of months, along with gold, which is an odd occurrence, and speaks to the dearth of worthy investments around the world. But the shift to gold has picked up as “everyone is trying to devalue their own currency against everyone else,” says Sean Peche, manager at BlueAlpha Investment Advisory Limited in London.

Gold is nearing its highs from last summer.

That explains the dollar’s strength of late, one founded on risk aversion. Since the beginning of the year, the dollar has gained 9.5% against the euro and 2.3% against the pound, while gold, in dollar terms, is up 9.4%. The yellow metal closed up $25.50 to $967 an ounce Tuesday, highest since July 17, 2008. “Gold is telling you the dollar’s rally is not going to continue,” says Lance Lewis, fund manager at Lewis Capital Partners.

Please fasten your seatbelts. Gold is going to $2,000. I know, I have no idea what I’m talking about, as my earlier posts indicate. It was 880 when I last posted about it two weeks ago; now it’s near 1,000.

Dali is like heaven. It wasn’t on our agenda, we sort of stumbled here, and don’t want to leave. Onto Chongqing tonight.

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Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 53 Comments

Richard,

You said:
We have to differ between the VC investment that catalyzed the bursts of creativity from the hype-driven bubbles that ensued.

Two problems.
1. You don’t know before hand what is going to succeed and what is going to fail. A bubble allows you you try a lot of ideas, including many for which the conventional wisdom is that they have no chance of success. Btw, what is the business case for youtube and facebook. They have no rational business plan yet.

2. A lot of the fibre optic cable which carries internet traffic was laid with massive amounts of capital during the late 1990s bubble. Most the the companies lost a lot of the money, but we end up with good infrastructure. (Without the bubble, there is a good chance that Internet access, especially international Internet access would be more expensive that it is today)

February 28, 2009 @ 10:20 am | Comment

Lindel,

I know that DARPA built the network technology for the Internet (TCP/IP etc.) Just like most innovations, the basic science is usually done by govts. But you still need massive amounts of capital to provide all the services to make the Internet useful. You also need capital to educate the public about the Internet (advertising).

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them. This would help reduce costs for new businesses. (Just like the overcapacity in the fiber optic cables reduced prices for customers below what it would cost to build them)

February 28, 2009 @ 10:26 am | Comment

Ah, once again MT is right because he found a link in the Economist. Good; the tech bubble was for the best. The real estate bubble was for the best. This has been an extremely enlightening discussion. I had wondered earlier why everything became a tug of war; now I know. I want everyone to savor this:

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them.

As I said, we now have a credibility problem here. The banks are being nationalized, Detroit is going out of business, kids can’t go to college, the debt has gone off the charts, America may be a financial basket case for a decade to come and MT finds a cozy silver lining.

Back to the tech bubble: This argument doesn’t belong in this thread and it’s a hot button for me because I was so involved with the VC people and with so many dot-coms, I hate seeing the history distorted. Most of the innovations of the late 90sa happened despite the concurrent stock market bubble. None – not one single one – happened because of frenzied, delirious, irrational exuberance (the usual components of a bubble). To equate one with the other is heartbreakingly wrong.

Netscape was the great innovator, creating mosaic and the first Internet tools for the common man. They did all of this years before the bubble. I guess I need to repeat: Amazon had its superb model in place long before the bubble started, and it has remained basically intact for 15 years. The only thing the bubble did for these companies, – the few that actually had a lot of value and innovation – was load them with unrealistic amounts of cash, pushing them to make idiotic acquisitions, to grow too fast and sometimes even to burn out. AOL is the classic example, the acquisition of Time Warner one of the textbook cases of irrational acquisition, made by what had been a leading company that had no rational right to such a high stock price. Of course, AOL’s model was running fine in the early 1990s before the word Internet was in the common parlance. The bubble didn’t make AOL. It destroyed it.

All of the good stuff survived the bubble, because the bubble was essentially irrelevant to it. Google’s famous algorithim may be its No. 1 innovation, but that of course survived and since the bubble they have come up with equally amazing products, like Google Maps and Gmail and Picasa and Google Reader. The stock market madness did not help google develop anything. They had the venture capital – they did not go public until long after the bubble had burst.

Finally, before I close this thread, which has gone way off-topic, I want to savor yet again these words:

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them.

Yes, now we know.

February 28, 2009 @ 1:10 pm | Comment

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