Technology Investor

Harry Newton's In Search of The Perfect Investment, Technology Investor. Harry Newton

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9:00 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.

These 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.

Which 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.

Gold prices 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 won’t 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.

Even that rise in gold and commodity prices was partly a bubble. It popped in the second half of 2008 when—after US$145 oil helped kill global growth—commodity prices started to fall sharply, led by oil prices, and the global economy spun into a severe recession. The downturn led to concerns about deflation—not inflation—and 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 wasn’t driven by concerns about inflation. Rather, following the global financial meltdown triggered by Lehman’s collapse, investors were so concerned about the safety of their financial assets—including their deposits—that they preferred gold bars in a vault in Zurich to liquid assets in a bank.

The economic 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.

Renewed fears 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 system—that 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 prices—if 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 subsided—and gold prices started to drift down again—after 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.

The pattern 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.

First, while we are still experiencing global deflation, there are rising concerns that inflation may reemerge forcefully in the medium term because of large monetized fiscal deficits.
Second, a massive wall of liquidity—borne of easy monetary policy—is chasing assets. Some of those assets include commodities like oil and base metals—the 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 gold—both existing and newly produced—is 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 demand—see 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 rising—see Dubai, Greece and other emerging markets and advanced economies—the 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 including commodities.

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 gold—e.g. the U.S. dollar—thus pushing gold prices down. In general, gold always competes with fiat currencies and anything that is dollar bullish—like repeated bouts of global risk aversion—tends to be gold bearish.

Thus, the gold bugs are wrong—or at least very, very premature—in justifying buying gold as an attack on fiat currency. The velocity of money is still low or falling—the 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 debt maturities.

Finally, let’s 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, gold’s 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 gold.


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 depression—both relatively low probability events at this point—there 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 still rising.

Investors should thus be wary of getting the gold bug and being stuck with this barbarous relic. The recent swings in gold price—up 10 percent one month, down 10 percent the next—prove 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 one’s 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.

Fantastic 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 Shack's collection.

It's 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 entrance.

+ 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."

Favorite weekend photo:

Accenture dropped Tiger on the weekend.

How quickly kings are dethroned.

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 ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse any, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. Read more about Google AdSense, click here and here.