Harry Newton's In Search of The Perfect Investment, Technology Investor. Harry Newton
AM ET, Monday, December 14, 2009: There are
opportunities everywhere. Two examples:
Someone ought offer turnkey digital printing services for books. I write a book
called Newton's Telecom Dictionary. I print it on paper. My readers want
it digitally -- for the Kindle, for the Nook for the Sony eReader, for Apple's
new tablet eReader, etc. I'm not set up to convert it to all these digital formats
(no publisher is). Someone needs to do the technical work and negotiate deals
on our behalf with all the various digital "publishers," like Amazon
and Barnes & Noble.
Google is 100% right to produce a phone and sell it directly to you and
I -- not through the sleepy carriers, like Verizon, AT&T, Sprint, etc. It'll
be an unlocked GSM phone. Which means you'll buy a local SIM card and use it
in any of 140+ countries, including the U.S.
examples are industry-revolutionizing. They'll destroy the old way of doing
business. The good news is that the old supplier never figures the new world
and typically dies. You can see that happening to AOL.
way for gold? Crises make gold rise. Will we
have more? Yes. Coming up: problems with debt-laden nations like Britain, Ireland,
Greece, Spain and of course, Dubai (which got a short-term fix from Abu Dhabi
this morning. My favorite economist, Nouriel ("Doctor Gloom") Roubini
is less sanguine about gold. He wrote over the weekend:
The New Bubble
in the Barbarous Relic that Is Gold
In recent months gold prices have risen dramatically, first breaching the
US$1000 barrier, then jumping another 20% in the past few weeks, surpassing
US$1200 before correcting downward again to around US$1100. Some gold-bug
bulls say the gold price could eclipse US$2000 in the next couple years. Is
that possible? Is the recent rise of gold prices justified by fundamentals?
An analysis of the facts suggests that a good part of this rise in gold prices
is driven by a bubble.
rise sharply only in two macro situations: first, when inflation is high and
rising and gold becomes a hedge against inflation; second, when there is a
risk of a near depression and investors are concerned that semi-insolvent
sovereigns wont be able to backstop the financial system and protect
their deposits. The history of the last two years fits this pattern. Gold
prices started to rise sharply in the first half of 2008 when emerging markets
were overheating, commodity prices were skyrocketing, and inflation in high
growth emerging markets was high and rising. Even during this period, however,
gold remained well below its inflation-adjusted highs, unlike other commodities.
rise in gold and commodity prices was partly a bubble. It popped in the second
half of 2008 whenafter US$145 oil helped kill global growthcommodity
prices started to fall sharply, led by oil prices, and the global economy
spun into a severe recession. The downturn led to concerns about deflationnot
inflationand gold prices fell in tandem with the correction in commodity
prices. Gold prices bounced, however, at the time of the Lehman collapse.
This second rush to gold wasnt driven by concerns about inflation. Rather,
following the global financial meltdown triggered by Lehmans collapse,
investors were so concerned about the safety of their financial assetsincluding
their depositsthat they preferred gold bars in a vault in Zurich to
liquid assets in a bank.
scare was contained when the G7 committed to insure deposits more widely and
to backstop the financial system. Thus, as panic subsided toward the end of
2008, gold prices resumed their downward movement. And by that time, with
the global economy spinning into severe turmoil, demand for gold, both industrially
and as a luxury good, took a hit, further weakening prices.
that the U.S. and European financial systems might be largely insolvent prompted
another spike in gold prices in February-March 2009, pushing them above the
$1000 mark. Analysts feared many banks might be near insolvent and at risk
of being taken over by governments, and that the global economy was falling
into a near depression with deep deflation. Renewed concerns emerged that
many sovereigns would not be able to backstop deposits and the financial systemthat
banks were too big to fail but also too big to be saved. The specter of economic
and financial Armageddon triggered another spike in gold pricesif you
worry that even your government cannot credibly guarantee your bank deposits,
it is time to buy guns, ammo, canned food and gold bars, and rush to the safety
of a remote log cabin. That panic subsidedand gold prices started to
drift down againafter the U.S. conducted bank stress tests, began quantitative
easing and further backstopped the financial system through a program to get
rid of bad assets from the banks balance sheets. Fear of near depression
and global financial meltdown abated and markets deemed that the global economy
had bottomed out.
is clear: gold spikes when there are concerns either about inflation or about
depression (with deflation). In both cases, gold is a good hedge against fat
tails, black swan events and extreme event risks.
In the last
nine months, concerns about a global depression have dissipated and the global
economy is recovering from its worst recession in decade; deflation is still
gripping the global economy as the slack in goods and labor markets persists
at high levels. So why have gold prices started to rise sharply again in the
last few months, in spite of no near-term risk of inflation or of depression?
And could gold prices rapidly rise towards $2000?
There are several
reasons why gold prices are gradually rising, but they do not suggest a rapid
rise toward $2000; at most they suggest a gradual rise with significant risks
of downward correction.
we are still experiencing global deflation, there are rising concerns that
inflation may reemerge forcefully in the medium term because of large monetized
Second, a massive wall of liquidityborne of easy monetary policyis
chasing assets. Some of those assets include commodities like oil and base
metalsthe rise of which could eventually become inflationary.
Third, dollar funded carry trades and a more generalized portfolio allocation
to non-dollar assets (especially EM assets) are pushing the U.S. dollar sharply
down. There is an inverse relation between the value of the dollar and the
dollar price of commodities: the lower the dollar the higher the dollar price
of oil and other commodities, including gold. The rise of gold in euros has
been much more muted.
Fourth, the global supply of goldboth existing and newly producedis
limited, and demand is rising faster than supply over the medium term. The
recovery of the global economy has started a revival of retail gold demand
especially in India. Central banks looking to diversify their portfolios account
for further demandsee for instance, the recent increase in gold holdings
by emerging market central banks. Most of the increase in demand comes from
private investors using gold as a hedge against low probability tail risks
of high inflation and another near depression caused by a double dip recession.
Inflation risk and the risk of a double-dip are both low, suggesting lower
gold prices, but increasingly investors want to hedge against such risks early
on. And given the inelastic supply of gold, it only takes a small shift in
the portfolios of central banks and private investors to boost increase the
price of gold significantly.
Finally, as sovereign risk is risingsee Dubai, Greece and other emerging
markets and advanced economiesthe concern about sovereigns not being
able to back stop too-big-to-save financial system could rise again.
But since gold has no intrinsic value, there are significant risks of downward
correction in gold prices:
First, the dollar
carry trade may at some point unravel, popping the global asset bubble that
this carry trade has fueled.
Second, central banks will eventually need to exit quantitative easing and
effectively zero policy rates, which will put downward pressure on risky assets
Third, bouts of global risk aversion may occur as the global recovery may
turn fragile, anemic and subpar, thus leading to a rise in the U.S. dollar
that would drive down prices of commodities and gold in dollar terms.
Fourth, since the carry trade and the wall of liquidity are causing a global
asset bubble, some of the recent rise of gold is also bubble driven by herding
behavior and momentum trading, pushing gold higher and higher. But all bubbles
eventually crash and the bigger the bubble the bigger the eventual crash.
Fifth, the effect of rising sovereign risk on gold prices is ambiguous, as
the events of recent weeks suggest. A risk in such risk could push up the
price of gold if it leads to expectations that central banks will eventually
monetize those fiscal problems. But in practice it has weighed on the price
of gold because it has increased investors risk aversion and led to
a rush into a different (and more liquid) asset than golde.g. the U.S.
dollarthus pushing gold prices down. In general, gold always competes
with fiat currencies and anything that is dollar bullishlike repeated
bouts of global risk aversiontends to be gold bearish.
Thus, the gold bugs are wrongor at least very, very prematurein
justifying buying gold as an attack on fiat currency. The velocity of money
is still low or fallingthe opposite of a currency crisis or run on the
dollar. As a further indication of the collapse of credit/money multipliers,
indicators of expected inflation are subdued or falling, despite governments
printing money (excess reserves). The high inflation scenario may be constrained
even if/when easy money gains too much traction, as the yield curve would
steepen sharply, raising the discount rate for risky private sector debt and
for corporate equity, limiting the speed of the recovery and hence the ability
of states to impose inflation surprises in the context of shortening average
assume the global economy double dips and concerns about near depression and
sharp deflation reemerge. Should investors hold gold in that world? In a true
world of near depression, gold bars are pretty much useless. Keynes referred
to gold as a barbarous relic. Unlike other commodities, it has
little intrinsic value. Much like a fiat currency, golds value is based
largely on the irrational beliefs of investors. In a depression or near depression,
one would be better off stockpiling canned food and other commodities like
oil that are useful for riding out Armageddon. You cannot eat gold or burn
The recent rise
in gold prices is only partially justified by fundamentals, and is in part
a bubble that could easily go bust. Unless the world enters a period of high
inflation or slips into a depressionboth relatively low probability
events at this pointthere is little reason for gold to rise towards
US$2000. Rather, its rise will be gradual and subject to significant risk
of downside correction. Some diversification of gold in central bank and investor
portfolios may make some sense, but not a flight out of dollars and into gold.
The only scenario where gold should rapidly rise in value is one where fiat
currencies are rapidly debased via inflation. That scenario may eventually
materialize if large and monetized fiscal deficits persist for a long period
of time; but overall, today there are more deflationary than inflationary
forces in the global economy, as the slack in goods and the labor market is
thus be wary of getting the gold bug and being stuck with this barbarous relic.
The recent swings in gold priceup 10 percent one month, down 10 percent
the nextprove the point that gold has little intrinsic value and that
most of its price movements are based on beliefs and bubbles. As an insurance
policy against the tail risk of eventual inflation, it may be useful to hold
a small amount of gold in ones portfolio, but stocking up portfolios
with a fiat currency that has marginal practical use, a zero nominal interest
rate, high storage costs, and the price of which is subject to volatile whims
and bubbles is totally irrational. If you want to hedge against inflation,
stock up on Spam or other canned food or buy futures on commodities that have
more physical uses and consumer demand.
for Skype: Radio Shack is selling this Gigaware
headset microphone for $9.99. It works well.
Skype is fantastic
for making free video calls. Grandparents use it to call their grandkids.
Lawyers use it to call their clients. For Skype to work
well, you have to position a microphone close to your mouth. If your
computer doesn't have a camera -- though most laptops do -- there are a million
to choose from. Click here for Radio
still Hanukhah. These announcements come from synagogue bulletins.
Even spellcheck wouldn't have helped.
+ For those
of you who have children and don't know it, we have a nursery downstairs.
+ Thursday at,
there will be a meeting of the Little Mothers Club. All women wishing to become
Little Mothers please see the rabbi in his private study.
+. Weight Watchers
will meet at 7 PM at the JCC. Please use the large double door at the side
+ Rabbi is on
vacation. Massages can be given to his secretary.
+ If you enjoy
sinning, the choir is looking for you!
+ The Associate
Rabbi unveiled the synagogue's new fundraising campaign slogan this week:
"I Upped My Pledge. Up Yours."
Tiger on the weekend.
How quickly kings
This column is about my personal search
for the perfect investment. I don't give investment advice. For that you have
to be registered with regulatory authorities, which I am not. I am a reporter
and an investor. I make my daily column -- Monday through Friday -- freely available
for three reasons: Writing is good for sorting things out in my brain. Second,
the column is research for a book I'm writing called "In Search of the
Perfect Investment." Third, I encourage my readers to send me their
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