On a recent trip to New York, I had the opportunity to meet with my (very successful) metal trader friends and some other smart investors, as well as listen to a star-studded cast of brilliant thinkers/investors who shared their world views at the Grant's Interest Rate Observer fall conference.
My metal trader friends all want to see a big flush in gold -- a fairly quick 5% to 8% price drop -- before piling in. But they say if the drop doesn't happen in the next week or so, it probably won't.
I don't want to go into too much detail about what the speakers said at the conference. That would be unfair to those who paid good money to hear their views, and to Jim Grant. But I would like to share a couple of thoughts I came away with and a couple of points made by hedge fund luminary John Paulson, famed for making billions by anticipating the subprime mortgage meltdown.
In the for-what-it's-worth department, when I attended the Grant's conference in the fall of 2007, I noted that there was no outright bearishness and that it seemed folks were pretty sanguine. This was six months after the first payment defaults had begun, which was the start of the vaporization of the subprime industry.
I wrote at the time that I had expected to see much more bearishness at the conference. I didn't know what that meant investment-wise, but I thought it was worth noting.
However, at last week's conference in New York, bearishness was quite profound. That does not mean the participants don't have the right view this time around. And there are certainly many, many good reasons to be bearish. I myself have certainly spilled enough ink listing them.
But other than Grant's view that the size of the collapse means we're about to see a decent-sized bounce in the economy (however sustainable) -- eloquently expressed in his Wall Street Journal article "From bear to bull" -- and, from Paulson, some expression of confidence in investors' animal spirits, there was virtually no optimism.
More from MSN Money
Paulson holds court
I don't think I would shock anyone if I said that the day's headliner at the conference was Paulson (though the other speakers were equally fascinating to me). Everyone wants to know what he thinks because he made so much money on the subprime collapse. But it should be noted that he puts his pants on one leg at a time, too, and thus can be wrong like the rest of us.After all, he wasn't that much more right about what was liable to happen than a handful of others, such as Grant and my friend I often refer to here as the Lord of the Dark Matter (who's quoted, for example, in "The trouble with techs right now" and "Will economy's green shoots wither?").
However, what Paulson did was to take his views and express them brilliantly,which may also have been a function of just how well he understood the situation. Thus, given Paulson's recent track record, those who have a bullish viewpoint on gold naturally want to know what he thinks.
Video: Will interest rates soar to 20%?
In short, he believes that money printing by the government will ultimately lead to a good deal of inflation.
Parenthetically, while deflationary chatter certainly has the headlines and the upper hand regarding folks' opinions in the short run, I see quite a body of sharp investment minds coming to the conclusion that in a social democracy with a fiat currency, essentially all roads lead to inflation.
In any case, Paulson is convinced that gold will be a very good way to protect himself from the eventuality of currency debasement (i.e., inflation). He observed that if one thinks about gold in a three- or five-year time horizon (instead of hour to hour, day to day or week to week), the probability increases of gold being higher over time -- and, most likely, much higher.
I had not thought about gold from that point of view, but that is exactly right. Consequently, if folks have positions that are reasonably sized, it makes volatility -- especially when it's downward, as was the case last week -- much easier to accept.
China's stomach growls for gold
I also had a chance to chat with the Lord of the Dark Matter at the conference. He has information, on pretty good authority, corroborating the viewpoint expressed on several blogs that Chinese authorities would like to purchase the International Monetary Fund's gold.Whether that transaction comes to pass, we'll have to wait and see. But when it comes to China's interest in gold or other hard assets, it does seem that where there is smoke, there is fire, and China is making its interest known by its actions.
Just because the Chinese don't come out and say, "Gee, we want to buy all the gold we can," doesn't mean that they don't want to. Obviously, if they did say something like that, they'd be shooting themselves in the foot, and they're way too smart for that.
Another point I found interesting: Annaly Capital Management CEO Mike Farrell, who's in the thick of debt restructuring in the mortgage arena, says repair is taking place slowly but surely, though it will take many years. The $64 trillion question is whether the dollar or the Treasury market will hold up long enough to give the financial system half a decade or more to repair itself. My suspicions are that those problems won't wait that long, but we shall see.
The conference did have a couple of speakers who feel that a 1930s-style deflation is in store for us, although the folks in that camp somehow seem to think the Federal Reserve will act responsibly and actually be ready to remove liquidity as soon as possible.
I expect the Fed to talk tough from time to time -- after all, what choice does it have? But it will be meek as a kitten and terrified of withdrawing much liquidity until the unemployment rate has dropped radically from where it is today.
If my long-held view is correct, we can't have any prolonged deflation in this country until after the printing press is taken away from the Fed via the currency market, the bond market or both.
Housekeeping
I was recently interviewed once again by Eric King. He does a terrific job when conducting these interviews, and here's the latest one.At the time of publication, Bill Fleckenstein owned gold bullion and gold futures.