Glad I'm not a Gold Bug!

Gold, and other commodities (especially precious metals), are always being touted as investments that increase in value when the markets get squirrely. The bond market is certainly odd right now, with treasuries costing the issuer more.  This is related to the liquidity trap.  Investors are worried that they will  not be able to sell bonds easily, leaving no easy place to park money.

A gold bug is someone who irrationally expects the sky to fall (markets to crash, life as we know it to cease, or the dissolution of civilization), and their full position in gold and other precious metals to pay off. Frequently gold bugs can be seen on the Discovery Network swimming underwater to find raw gold on the sea floor or living in desolate Alaska strip mining hills and operating large crushers and wash plants. Their efforts usually seem to pay off, at least on the shows, but in real life the over exposed precious metals investor is usually bankrupted by market conditions. We studied a case study in MBA school of a gold mine in Canada.  The investors made money on an exhausted claim until they pushed it too far and lost everything.  Losing everything is usually the fate of people who are emotionally invested in their investment position, the way gold bugs are emotional about gold.

Commodities, stocks and bonds frequently trade places.  Usually when one is up the others are down because people are moving their money in between investments. The decrease in Gold seems a little drastic lately, though.  Market forces could be to blame.  Anonymous sellers sold 5 tons of gold in China last night. Other factors are the resolution of the Greece crisis, low inflation, high flying stock market, and dozens of better places to put money.  Still though, Gold hit a 5 year low yesterday.  And that volatility makes me happy I'm not a gold bug!

Is Greece Only the Beginning?

A while ago, I wrote about how the world financial markets were sliding.  Back in April, the issues seemed to be slowing growth, and lower retail prices.  An additional problem that surfaced since then is an ETF (Exchange Traded Funds) liquidity crisis.  This is creating a dysfunctional bond market. When bonds are dysfunctional, the problems usually spread into stocks.  Bloggers are writing of the possibility of a bond bubble implosion. This is significant.

Other significant problems include Greece's economic melt down and possible exit from the Euro. They also voted down an austerity solution to their problems.  This leaves a fairly large tranche without support.  The US seems to be only indirectly involved in this, but once again bad news travels fast.

The final, and to my mind, largest significant problem is China's stock market implosion. They lost 29% of value over the past 21 days on the SSE (Shanghai Stock Exchange). China went so far as to prevent IPOs (Initial Public Offerings). Many are saying this is not a bubble, but it sure looks like one to me.

Ancillary problems include the potential of a technology stock bubble, real estate prices that are going up too fast in the Portland OR area, smart professionals getting into the Real Estate business, and negative sovereign debt yields.

All these small details factor together into a world economy that has deep seated issues. With both Greece and China having obvious issues, most would wonder if the financial system is getting ready to freeze up again, like in 2008. Even if the problems in China and Greece spread to the US, our government and the central  bank have tools at hand to reverse the trends. They've been successful so far, so the market problems are likely to be solved prior to any type of crash.

I feel like a gold bug; We should have a little bit in precious metals, and have some cash at home too.