Martin Pring, who runs a market advisory service, has recently posted to his website a free report and video presentation (in three segments) entitled “Return Of The Bear”. Needless to say, his well-documented thesis is that the counter-trend rally that began in 2003 is over, and the downtrend has resumed. Recommended. Enjoy.

I’m of two minds about gold as a speculation.

Obviously, one can look at gold like any other industrial commodity. As such, it is of modest value. It has excellent conductivity and corrosion resistance for use in electrical and electronic applications - most semiconductor chips use gold wires and contacts, for example. It is also used in dentistry and for its decorative properties. But these applications really don’t justify the price, especially since there are huge stockpiles of the stuff sitting around, owned by speculators.

The other view, and its main attractiveness, is a result of its historical role as money. For a long time, most currencies were backed by gold because savvy traders demanded a constraint on the production of money, and a requirement for gold backing provided just such a constraint.

But now, and I quote Alan Greenspan: “And, at the base of the financial system, with the abandonment of gold convertibility in the 1930s, legal tender became backed–if that is the proper term–by the fiat of the state.

The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability.

Central bankers’ success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency”

Many people think that inflation hasn’t been all that well contained over the last two decades. That speech was given in 2002, when what had cost $1 in 1982 then cost $1.90. In other words, over those two decades, 1982-2002, the dollar lost almost half its purchasing power to “successfully contained inflation” - 3.3% per year.

One would like to imagine that holding gold over the same period would have been a good hedge against that inflation. Alas, such was not the case. The dollar price of gold actually declined over the same period, from $450 to $340, adding insult to injury.

This doesn’t change the fact that many people see gold as a store of value, particularly in the developing world where buying and displaying gold jewellery is a means of establishing social status. But it does mean that it is no longer a reliable store of value and should be treated as a trading vehicle or asset class.

For the most recent reporting period (w/e June 16), program trading accounted for 69.7% of NYSE volume. These large trades aren’t by any means all the computer-driven trades, lots of folks have black boxes sitting on the internet trading away as well, but those aren’t reportable. It is probably safe to assume that 90% or more of all volume is now computer-driven, algorithmic trading.

Program trading, then at 12% of volume, has been blamed for the 1987 crash. Draw your own conclusions about the riskiness of this practice.

Good summary of the liquidity withdrawal in process from Bloomberg.

“Excess liquidity leads to mispricing of risk,” says Nick Parsons, head of the macro research group at Commerzbank AG in London. “Repricing of risk involves deleveraging, and deleveraging is brutal and indiscriminate.”

The Bubble Markets Inventory Tracking blog (what did we do before blogs) records the new inventory record of houses for sale in San Diego.

“It took 6 years from the peak of last bubble in late 1989 to the previous peak inventory in July 1995. This time it took 27 months, just a mere 965% increase from historic record low to the current new population adjusted record high inventory, 22,203. This increase averages out to a 35% increase per month. Of course, this is helped tremendously by 23 straight months of sales decline.“