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Old 10-09-2009, 01:00 PM   #41
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The average well off Russian or wealthy Eastern European holds primarily Euros and/or GBP. The ultra wealthy will hold USD as well as the other two.
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Old 10-09-2009, 02:03 PM   #42
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The value of the dollar is a very difficult subject to get your arms around. The exchange rate is set by the FOREX, not by real purchasing power. I live in Indonesia and the dollar has fallen 25% since May. That's crazy. Why should a dollar be 25% weaker in 6 months? Suddenly the price of a HP ink cartridge is 25% cheaper to local people. Why? Because currency traders are speculating with the numbers. So if the dollar is going to tank, that is good luck for Indonesian people (but bad luck for me). But you can't tell me the actual value of the ink cartridge has changed anywhere!

Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be $2193.25 per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?


Another thing to consider... if you were a citizen of any other country in the world, let's say China or Russia, and you wanted to keep your money safe, where would you put it? Because China and Russia are unstable countries where the Government (sort of) controls the exchange rate of money, wouldn't you want your money in dollars? Think about that.

To almost everybody in the world, the US dollar is still the best place to keep your money because the US is rock solid stable. If you think the dollar is going to "tank", what logic can anybody possibly use to think the Chinese yuan or the Russian ruble or the EU euro is going to be stable?

We saw what happened when a year ago when the world markets crashed... everybody flocked to the US dollar and ran away from the other currencies. As much as the national debt is rising, and the unemployment rate is raising, the US government is not going to be torn apart by some revolution. Meanwhile, the movement toward democracy could bring down the Communist Chinese at any time; or if Russia tries to revert back to its old socialist ways; these governments could easily tumble.

Simply put, no country is nearly as stable as the United States and the US dollar.
First... I do not think the dollar is going to 'tank'.... my boss does.. and I ask him 'against what?'... it if tanks, it has to tank against something... so it has to be other currencies (which is usually what people talk about when mentioning a strong or weak dollar)... and like you say... if there is weakness in the dollar, there is not a lot of places with strength...

I have never thought gold was a good hedge for inflation... but it is a good place to hold money when everybody is running around thinking the sky is falling... it is an emotional play to make some trading profits... (now, I do not partake in this trading... just saying)... it is not a buy and hold investment...
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Old 10-09-2009, 02:08 PM   #43
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Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be $2193.25 per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?
I don't think cherry picking data points by looking at the peak of a clear speculative bubble is useful.

If we plotted a long term graph of prices versus gold, you'd see much more correlation. Gold tends to beat inflation when people are *anticipating* higher inflation in the future and drop when the market expects lower inflation (or deflation). But over the long run it comes pretty close to matching inflation; in most periods when gold isn't near a peak or a trough it tends to have fairly constant purchasing power -- indicative of being a *long term* proxy for inflation as well as a short-term speculative play on the direction of inflation.

The fear of runaway hyperinflation in 1980 resulted in its absurd price. The markets didn't have much faith the cycle could be broken, but when the Volcker Fed broke it, gold plummeted closer to where it should have been as a long term proxy for inflation. It's a lot like the old saying about the stock market -- in the short term it's a voting machine; in the long term it's a weighing machine.
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Old 10-09-2009, 06:14 PM   #44
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If we plotted a long term graph of prices versus gold, you'd see much more correlation.
Not really. Here is the price of gold from 1983 "post bubble" to today against CPI . . .




For 20 years (from 1983 to 2003) the price of gold was basically flat. Only in the last six years has it rallied to reclaim its 1983 real price. With this kind of performance one can credibly ask whether the recent run up in prices isn't just another bubble. Certainly 20 years of flat price performance looks more convincing as a long-term trend than a six year spike.

Even if gold tracks inflation over "the long-term", that "long-term" appears too long to be of any practical use. And if I were buying it today, I'd worry that I'm already buying at a time when inflation fears are running high. Will I have to wait another 30 years before my inflation "hedge" pays off?
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Old 10-10-2009, 04:28 AM   #45
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The number of people officially living in poverty (by PRC govt standards) actually tripled last year (new number of poor = 43 million. Link ). That's not because people are poorer, but because the govt raised the official poverty line . . . to 1100 yuan or $160 per year ( 44 cents per day) . I'm sure that people get a lot of "free" support from other sources, but these people are poor and won't be buying consumer goods beyond rice and blankets.

And, China's not just por at the bottom: The country has a per capita GDP of $6000. (US GDP/P is $47,000).

But, China has a lot of people, and they are moving up out of poverty. A dollar goes a long way in China, so households bringing in more than $6000 a year are considered to be living comfortably.

Projections are many but here's what the official Chinese Govtguessers think will happen:




That blue line represents those families that will be buying their first microwave oven, a small TV, a cheap computer, a small car, etc.
May I respectfully suggest that anyone who believes, and is willing to invest in the idea that China will cut its poverty level from 90% to 10% in 15 years based on Chinese government data - is taking a big risk.

Remember, China's entire economy is growing because of cheap labor - just like Japan's economy in the 1970s. Once you loose the cheap labor, you loose 90% of your competitive advantage.

Or perhaps you can tell me how China is going to maintain it's inexpensive manufacturing capability at the same time that the 60% of the population grows to be upper middle class. Voodoo economics.
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Old 10-10-2009, 07:38 AM   #46
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Or perhaps you can tell me how China is going to maintain it's inexpensive manufacturing capability at the same time that the 60% of the population grows to be upper middle class. Voodoo economics.
You raise some good points. But, since "upper middle class" in China tops out at less than $13K per household (and most Chinese women work, so that $13K represents the annual income from two+ people), I'd say they will still have a huge "cheap labor" competitive advantage over the developed world.

There will undoubtedly be some other formerly basket-case economies that emerge to offer competition to the PRC at the low end, but China will have the advantages of scale (a huge net of companies being under one set of regulations and a common language) and of having at least some infrastructure (roads, electricity) and a literate population. I do agree with you that the chart is overly optimistic: It's unlikely that within just 15 years the poor will go from 50% to 10 % and that the middle class (UMC and LMC) will represent 80% of the Chinese population. Maybe this could have worked out if the world economy had kept going as it was when that chart was built (2004), but things look less rosy right now.

The real interesting part will be watching the the old-line communist bitter-enders as this process unfolds. The Party leadership recognized economic reality and elected to ride the tiger of capitalism to allow China to grow. As the Chinese people get a taste of (work + initiative = money --> a better life for my family), they aren't going to be much interested in the wonders of the collective. If that turns bloody, then all bets are off about where the blue line on the chart goes.
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