Own Gold? Time to Fold 258 comments
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I first addressed my negative views on gold in mid-October, and boy was that a learning experience. I had known the definition of "gold bug", but I was totally unaware of its antonym until I reviewed the 100+ almost exclusively negative comments that article generated.
Apparently, the term used most frequently to describe someone who doesn't ascribe to the cult of Gold is "idiot". I also learned of all sorts of conspiracy theories and the difference between "real gold" and "paper gold". I will simplify that as the difference between what Joe Retail is willing to pay so that he can get his hands on his investment vs. the much larger futures market.
I am not here today to gloat despite the fact that gold has plunged since I wrote that article on October 11th. I have given considerable thought to not only gold but also to the more important topic of inflation in general, and I have concluded that inflation is extremely unlikely for a long period of time (anyone seen the Japanese CPI numbers for the last many years?). I am definitely not gloating, as I have yet to short gold and I missed the huge trade in the long bond.
There are two reasons to own gold (absent any change in industrial demand). Most of the advocates of investing in gold cite inflation, and I believe that I addressed that issue in the previous article, where I suggested that the historical link no longer makes sense (and inflation isn't happening anyway). I will review this argument and share my thinking regarding the lack of potential for inflation. The other reason is to hedge against the breakdown of society. While I won't rule out mass chaos, it is probably unlikely. I do believe, though, that we could see a big rise in crime and will be publishing shortly some thoughts on this subject.
In the 8 weeks since I published my first-ever comments on gold, it has fallen 10%. I mentioned in that article that I believed that gold would be more appropriately priced at $600 or so. It touched as low as $700 before rallying and then retreating again.
The chart above (click to enlarge) for the SPDR Gold ETF (GLD), which is designed to replicate the price of gold bullion, shows the recent decline. Note that the consecutive highs have been lower, while the lows have as well. Additionally, the moving averages have rolled over. Technically, gold looks like every other asset: sick.
I included the bottom panel because I wanted to highlight the radical change of late in the Treasury market. Longer-dated bonds have seen yields plunge, a sign of a massive shift in investor sentiment. Rates on the short-end have obviously diminished due to Fed policy and an extreme flight to safety, but this recent sharp decline in longer yields has come during a time of stock market stability (though commodities have plunged subsequently).
The decline in yields appears to reflect investor sentiment regarding inflation. While gold has fallen "just" 10%, oil has continued to plunge, falling almost 50% since the October article. The CRB, more broadly representative of commodities, has dropped an astounding 28% in those 8 weeks. It would seem that the market is not telling but yelling that inflation is not a threat but rather quite the opposite. While gold has been doing "relatively" better, if you hold gold, it's time to fold. Here's why: Supply and demand.
On the supply side, I expect to hear about central bank liquidations eventually. According to the World Gold Council, the U.S. has about 8000 metric tons of gold. This may sound like a lot, but at $750 oz, this is "only" $211 billion. According to that same source, the U.S. is anomalous in that it holds over 70% of its reserves in gold compared to foreign currency. The total amount held by central banks and the IMF is approximately 29,000 metric tons, or about 20% of all gold.
After the U.S., which is the largest holder, Germany, France, the IMF, Italy and Switzerland own a combined 12,500 metric tons. They tend to have over 50% of their forex reserves in gold. The general trend in other countries has been to more aggressively diminish the role of gold.
The UK, for instance, owns only 310 metric tons representing just 10%. While I am no expert in central banking policy, it would seem politically that converting gold to cash would be feasible in this environment. To put things into perspective, if the central banks decided to decrease gold by 10% (2900 tons), the dollar value would be $76 billion, which amounts to 4X the amount of assets held by GLD. With all of the turmoil around the globe, would it be surprising to see some central bank sales of gold?
On the demand side, Joe Retail has been paying up big for tangible gold. There is a lag - it takes time to produce physical gold. The conspiracy theorists read a lot into this, suggesting that someone is "artificially keeping gold down". As commodity prices continue to fall, I believe that many who have made the bet could actually reverse it. I would argue that rather than a conspiracy theory keeping "paper gold" artificially low, it is this irrational demand for "physical gold" that has prevented it from collapsing even further.
As I mentioned in the original article, almost every commodity or "store of value" is plunging, and it has gotten worse. Art auctions are indicating year-over-year declines of 50% or more recently. Gold bugs like to argue that gold is a "currency", but please tell me where I can use gold to buy things. In the days of nomads crossing borders, gold was a currency, but it no longer serves that role anywhere from what I can tell.
The most compelling reason for demand to fade is that the debate will soon shift from "deflation or inflation" to just "how much deflation". I had been struggling conceptually with what the response will be to the massive measures being undertaken by the Treasury and the Federal Reserve, but it became clear to me today as I read the words of someone who is in stark disagreement with my views.
The government is not printing money right now. Simplistically, it may seem like "Helicopter Ben" is dropping bags of cash into the parking lots at the malls, but that isn't the case at all. We are simply replacing private capital with public capital, which isn't in and of itself inflationary.
We are increasing federal debt but increasing equity in the financial system. We are shifting the leverage from the private sector to the public sector. The cost ultimately will be higher taxes at a minimum. This could lead to lower economic growth and also potentially higher interest rates.
We do run the risk of inflation if we keep interest rates too low after the crisis has passed, but worrying about that challenge now seems extremely premature. Consider the Japanese example, as it seems very analagous to ours.
Short-term rates have been low there for quite some time, but there hasn't been any sign of inflation. I believe that ultimately we will come to view the commodity rise that included gold and oil as just the last of the speculative bubbles and will wonder why it took so long for gold to roll over and die. I will slightly alter my prior conclusion and say that if you are considering gold as an inflation hedge, you should take a look around you. If you still are concerned about inflation, learn about Treasury Inflation Protection Securities (TIPS). Gold remains a sucker's bet...
Disclosure: No position in gold or any derivative.
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This article has 258 comments:
"Apres moi, le deluge."
The sharp decline in yields occurred in October and November, right? The stock market was hardly stable then.
But did the Japanese dilute their currency the way we are doing?
As far as gold is concerned you have some very reasoned arguments, but when equity markets turn around commodities as well and gold will be a solid investment.
"Things take time to occur"
The US was already the worlds biggest debtor nation "prior" to this entire fiasco that has taken place all over the world. The entire world is racing to debase their currencies. However... once the dust settles, the US will be in the hole for trillions upon trillions of dollars, where the rest of the world will not even come to close to that amount.
Rather than bring up theories on hyperinflation, I will just state the following: In history, every single time you debase a currency it has lead to inflation. Every time.
Inflation, will be back. Just because no one can "see" it at the moment, does not mean it is not right around the corner. Unless the entire world stays in a global recession from now until eternity, expect to see inflation making a comeback soon.
And here the large quantity of gold and its wide dispersion among different types of stakeholders around the world is the easiest way to increase perceived wealth (and if you arm twist banks which government now owns to start lending again) and subsequently consumption. A sharp increase in the price of gold in the next few days would have the desired psychological effect as we approach xmas.
Disclosure: Stopped from gold longs last Friday.
The CPI is the bottom-line about inflation in terms of cost of living; prices of commodities are not. CPI growth is trending higher, as Adam Hamilton's chart Dec. 8 showed (in his SA article, "Negative Real Rates Will Drive Gold Prices Up"). It's not hyperinflation, of course (yet).
+++++++++
"With all of the turmoil around the globe, would it be surprising to see some central bank sales of gold?"
That argument cuts both ways. Central banks that currently own gold seem more inclined to hold onto it lately, from what I've read. (E.g., the UK sold half its stash in recent years, lulled by "the Great Moderation." Now they've stopped, supposedly.) And central banks that don't own gold and are looking for security in a turbulent world are likely to become a bit leery about accepting the US's "fiat" as real security. Gold might seem more real to them--at least a little bit. And it will be easier for them to start to nibble, and harder for holders to continue to sell, now that mainstream opinion-leaders like Citi and Merrill Lynch are projecting that the price of gold might double or triple in a couple of years. I think that sort of big-time big-firm endorsement was rare in the past. In the face of such advisories, it would likely be gold sales, not gold-holds, that would be politically risky (subject to scorn by the opposition party or the media).
The US Treasury bonds and notes are clearly bets on deflation. To loan this government money at 3.2% for 30 years doesn't make sense under any other scenario.
Gold at $750/oz is a bet on inflation. The US would prefer inflation to deflation and is working towards achieving that end. Inflation would solve the most important current problem: falling real estate prices.
Using Alan's own analysis, there isn't much gold around compared to all
the other forms of money. $211 billion is a lot of money, but I think we have already put a greater amount into saving Citigroup. About the same amount has gone to try to save AIG. Can you imagine the uproar if the US Treasury announced that it was selling all its gold to save Citigroup?
If people decide they want to own more gold the price could have a significant increase. After all, governments can sell what they have but they cannot make it.
There was a guy on craigslist from California who's apartment rental advertisement stated he would take 1 oz gold per month in payment, not federal Reserve Notes.
good way to play is CEF, next on my list, also long NXG which is way cheap- 130,000 oz of gold being produced this quarter in safe countries/CN/AUS- and GFI (long) which is dirt cheap and pays a div too. A move from $400 to $1000 is not a big move for gold and it is just consolidating now, again, for the next move and probable spikes when the Treasury Bubble moves out into anything and everything.
Gold is down on a $ chart because the $ is up on a safe haven play, which is ridiculous as the only way we can get out of the mess we are in is to inflate the hell out of the currency and money supply. Again, Treasury Bubble will also burst and flee into all sorts of things like Gold. The $'s decline will add to Gold's rise.
Good article.
But this is a perfect time for VALUE INVESTING. I have posted a series of lessons for value investing on my site.
This is a great time to buy stocks dirt cheap; some of these stocks we may never see cheaper in our lifetimes.
Your argument essentially is that I am wrong because I was wrong in the past, but you failed to review my full record. I get it right more often than not. I suggest that you review my very bearish series of articles beginning in the summer of 2007. Also, because I share a list of stocks that meet certain parameters, these are not "recommendations". The article that you cited contained no recommendation at all - seekingalpha.com/artic.... While I have made some poor recommendations (flipping to long WFMI after being short, for instance), I have made many great ones on both the long side and short side. Spend some time reviewing the whole record and you will see for yourself.
Florida and Oklahoma will battle for the championship. By your logic, since they both lost a game, the game isn't even worth watching.
Now let me give you some advice: Instead of attacking people who apparently disagree with your view, why don't you consider just attacking their arguments.
On Dec 08 08:47 AM Philman wrote:
> Alan, I hate to point this out, but since you are seeking to distribute
> your opinion, people should know that your record of picking investments
> is just short of terrible.
>
> For example, you proffered a list of allegedly "undervalued"... stocks
> that you recommended that people buy, back in April, 2007. The list
> included Wachovia, Lehman, Bear Stearns, which have all gone belly-up.
> You were recommending Bear Stearns, for example, at a price of $148
> per share! Lehman at $71! Wachovia at $55! Bank of America at $51.
> Almost every stock you recommended lost a large percent of its value
> since then. See, Alan Bronstein's recommendations at seekingalpha.com/wp-co...
>
>
> In May, 2008, after a bear market rally, you were calling the "bottom"
> and claiming the market would climb from there. Since then, the market
> has dropped by some 40%. See, seekingalpha.com/artic...
>
>
> Rather than people folding their gold positions, I suggest that you
> may want to consider folding your business of making recommendations
> to people that lose them their life savings. You have made a lot
> of bad calls, and that is toxic for your clients.
>
> The main problem that you have is that you are backward looking,
> rather than forward looking. You were wrong in the past because of
> this error in judgment, and you are wrong about gold for the same
> reason.
>
> You see the gold market from a prism of deflation, because that is
> what is happening at this moment. You are not making rational evaluations
> of the probabilities about what will happen in the future. For example,
> in your recommendation on gold, you fail to see that some $1.3 trillion
> dollars is sitting ominously currently sequestered, inside the Fed
> balance sheet, waiting to be unleashed into the active money supply.
> See, seekingalpha.com/artic...
>
>
> Please improve your stock picking record before you write more articles.
> Thanks.
Thanks for daring to sound a contrary opinion against the goldbug mafia of SA. It's astounding really, I keep seeing at least 3-6 articles on a daily basis regarding GLD, almost all of them relentlessly bullish. One might almost think the goldbugs were trying to convince others to buy from them.
blogs.wsj.com/economic.../
"Federal Reserve Vice Chairman Donald Kohn said Wednesday the risk of deflation in the U.S. is bigger than a few months ago, but “still small.” He also said monetary policy should respond as aggressively as possible to any deflation possibility, suggesting additional interest rate cuts remain on the table.
Meanwhile, Kohn added that the Fed has “already” engaged in forms of quantitative easing, and “we should be looking carefully” at the effect that could have “as a contingency plan should that still-remote possibility, but I think less remote than it was, occur.”
If necessary, see also:
ttp://blogs.reuters.co...
ml-implode.com/viewnew...
www.rgemonitor.com/fin...
www.creditwritedowns.c...
On Dec 08 09:19 AM Alan Brochstein wrote:
> To all of you who think that the Fed is "printing money", I ask you
> to "show me the money". The money supply numbers don't show it,
> so where can I find it? The government is running up debt and transferring
> wealth from the taxpayer to creditors (debtholders).
NEW YORK (Reuters) - Dow Chemical Co said on Monday it would close 20 facilities, divest several businesses and trim about 11 percent of its jobs.
P.S. - investors don't buy or hock bullion at pawn shops.
It has not had the final leg to the downside to retest the lows seen at the $66 area. On the reverse side, I would like to see a move above $840 to decisively break the downward trending pattern.
The Trading range is intact. If you wish to participate in Gold's upside, GLD is a good way to do it.
The monetary situation regarding Credit for the Individual mining stocks has not changed, there isn't any.
Who survives until Inflation does Kick in is moot.
There will be another Central Bank attempt to drive Gold prices down. They will unload what they have left in the face of a Gold increase because they are currently fighting Deflation and will see it as an opportunity to raise capital. It will be the wrong thing to do but I will use it as my Buy signal.
Take today's move, nothing has changed. Take your cue from the Dollar. It has to sustain a downside move which is longer than a day or two.
IMHO
The adjusted monetary base is skyrocketing, as can be seen in the FED's own numbers:
research.stlouisfed.or...
This is the money which the banks multiply by up to 10x and lend out. When they start lending (as everyone is urging them to do to restart the economy) we should see significant inflationary effects from the flood of new money.
The effects of this money may not be seen now, but it is coming. There is no way the FED can withdraw this much money from the system without crushing the economy again. My conclusion would be that a debasement of the dollar on this size will drive the gold price higher over time (or more appropriately, increase the number of dollars it takes to buy gold).
"On the supply side, I expect to hear about central bank liquidations eventually."
Central Bank (CB) gold sales have been decreasing lately. They haven't met the agreed upon maximum sales limit in several years and some European CBs are cancelling previously announced sales.
goldnews.bullionvault....
One other note on the use of the term 'eventually'. It appears that it is meaningful for the author to think that 'eventually' more gold sales by CBs will lower the price of gold, while it is not meaningful for "gold bugs" to think that 'eventually' all the dollars injected by the FED will result in inflation.
If the author is going to speculate on the impacts of future 'eventualities' then he hasn't much in the way of "proof" that contrary speculations might prevail. If your analysis is based on your opinion then how about acknowledging that the results might turn out differently if your opinion proves wrong, as the article at the above link seems to suggest.
The permissible amount of leverage in the market as a RULE is being rewritten again (no more 40:1 leverage) and to make up for the difference, as this leverage unwinds, the government replaces the money lost by OFFICIALLY creating more money which is either being in theory GIVEN or LENT to banks and kind. The monetary pie is getting bigger, China and other creditor nations slice of the US debt pie is getting relatively smaller quickly (against the base of total dollars created) and that will not promote the continued support of US dollars in the form of continued debt support unless we agree to much higher interest payment which we cannot afford...this sends us into a downward spiral either unable to refinance a ballooning debt or digging a perpetually bigger hole.
Looks like gold makes sense as a hedge and one needs not put any more than 15-20% of their wealth into it in order to reap huge benefits in th likely event of some sort of fiat currency crisis of which the dollar will inevitably participate in.
You guys are worried about the long-term side effects while the patient is still on the operating table with months of rehab and treatment ahead...
In terms of the central bank sales, in a world of deflation and governments looking for liquidity, I believe that they will turn to selling gold. Just my opinion. Thanks for the link, though. I said that I am not expert in this area, so I look forward to learning more.
On Dec 08 10:49 AM Smarty_Pants wrote:
> "To all of you who think that the Fed is "printing money", I ask
> you to "show me the money". The money supply numbers don't show it,
> so where can I find it? " - Alan B
>
> The adjusted monetary base is skyrocketing, as can be seen in the
> FED's own numbers:
>
> research.stlouisfed.or...
>
> This is the money which the banks multiply by up to 10x and lend
> out. When they start lending (as everyone is urging them to do to
> restart the economy) we should see significant inflationary effects
> from the flood of new money.
>
> The effects of this money may not be seen now, but it is coming.
> There is no way the FED can withdraw this much money from the system
> without crushing the economy again. My conclusion would be that a
> debasement of the dollar on this size will drive the gold price higher
> over time (or more appropriately, increase the number of dollars
> it takes to buy gold).
>
>
> "On the supply side, I expect to hear about central bank liquidations
> eventually."
>
> Central Bank (CB) gold sales have been decreasing lately. They haven't
> met the agreed upon maximum sales limit in several years and some
> European CBs are cancelling previously announced sales.
>
> goldnews.bullionvault....
>
>
> One other note on the use of the term 'eventually'. It appears that
> it is meaningful for the author to think that 'eventually' more gold
> sales by CBs will lower the price of gold, while it is not meaningful
> for "gold bugs" to think that 'eventually' all the dollars injected
> by the FED will result in inflation.
>
> If the author is going to speculate on the impacts of future 'eventualities'
> then he hasn't much in the way of "proof" that contrary speculations
> might prevail. If your analysis is based on your opinion then how
> about acknowledging that the results might turn out differently if
> your opinion proves wrong, as the article at the above link seems
> to suggest.
I am well aware of that chart and actually looked at it yesterday before writing the article. What you and others are neglecting is that the multiplier effect is not much greater than 1. That chart should wake you up! If anyone felt that was inflationary, do you think long bonds would be at 3%?
interesting points, all. not meant in disrespect, but, yours is a subjective analysis given today's info, subject to change. on that basis i respect your outlook.
my view is that it's premature to know wether deflation or inflation will be the significant issue. we are on knife edge that could slip either way. i prefer to watch and wait, modifying my living/investing habits/strategy as time and info unfold, keeping both extremes in mind. i'm prone to think life will not provide a "'three bears, just right"' outcome. worst case we have all three in strange and awful sequences.
i believe your analysis today and that of M. Richmond over the weekend are helpful for many seeking info/perspective on our current nasty dilemma. i urge you both keep at it; that readers with objectivity will be aided.
happy writing, happy jousting, and happy season.
On Dec 08 09:19 AM Alan Brochstein wrote:
> To all of you who think that the Fed is "printing money", I ask you
> to "show me the money". The money supply numbers don't show it, so
> where can I find it? The government is running up debt and transferring
> wealth from the taxpayer to creditors (debtholders).
Here's another link to a thoughtful analysis of the Treasury markets. You may not agree with the article's conclusions, but it's informative.
www.321gold.com/editor...
Note especially the price chart for the long bond. The price has been bound in a trading range all fo 2008 (113 to 121 roughly), until mid November when the price undertook a moonshot to the upside. It's currently around 135. Yields on the long bond dropped below the official inflation measure.
Mid November was after most of the market turmoil, so the article's author surmised that the near zero yields in the short end of the Treasury curve prompted a shift to the long end, in other words, safety at any cost, even if that meant taking a pricing risk to fluctuations in rates.
If that long bond price isn't a bubble I'll be very surprised. The huge price move and massive volume into an asset that is either losing money or paying next to nothing isn't happening based on fundamentals.
As for the issue of banks loaning or not loaning the FED's newly printed money, I can only see two possibilities:
1) The banks don't loan that money. Under this case, the economy will continue to flounder and shrink as debt laden businesses go under for lack of financing to roll over that debt. The economy can't continue unchanged without more lending.
2) The banks do start lending that money (or the FED does it directly). Under this case inflation will return with a vengance as the circulating money supply would increase by 30% to 50%.
My opinion, for what it's worth, is that the FED won't allow 1) to happen. The multiple and costly bailouts undertaken thus far have set us on the path to 2), and that would imply higher gold prices in the future.
"To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system -- for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."
By the way gold is up 60% in sterling terms in the last 18 months or so.
MD
research.stlouisfed.or...
On Dec 08 09:19 AM Alan Brochstein wrote:
> To all of you who think that the Fed is "printing money", I ask you
> to "show me the money". The money supply numbers don't show it,
> so where can I find it? The government is running up debt and transferring
> wealth from the taxpayer to creditors (debtholders).
Your opinion is worth plenty, I have discovered. It turns out that equities would be a perfect backing for a money in which no deflation is allowed. That rules out FRB from the start as you would expect. It should also beat a gold standard in terms of growth potential. Our current choices are growth potential without stability (FRB and fiat) or stability without growth potential (a 100% reserve requirement gold standard). It seems the good ole bank abused stock market is the solution to non-FRB money and banking systems that are both stable and high performance.
Getting from here to there is now the question.
Money as Investment:
A proposed 100% reserve, equity backed money and banking system
0. Designed for maximum economic growth and general prosperity consistent with stability and saver time preference. The money supply shall only increase through purchases of money from the bank with equities at current backing levels. The money supply shall not ever decrease. The bank shall redeem money with either bank capital reserves or equity from the backing itself if the bank should liquidate. In the case of bank capital, open market purchases shall be made with the redeemed money to put the money in circulation. If the money is redeemed with backing, then pro rata distributions to all money holders shall occur. The right to suspend redemptions from bank capital for any reason is disallowed. In the event of failure to do so, the bank is insolvent and shall enter bankruptcy.
1. This model assumes that true savings + saver time preference -> business loans -> productivity increases -> increased aggregate output -> decreased price level -> additional true savings, etc
2. The bank's money will be preferred shares in the bank. The bank's money shall be backed by equity in companies the bank lends or expects to lend to. Thus, new money shall be purchased with preferred stock in those companies. Capital appreciation in the equity backing shall be sought via loans to the companies whose preferred stock is contained therein. This is the key feature that joins all money holders in a mutually beneficial arrangement for maximum continuous economic growth and shared prosperity.
3. Savings, according to the time preference of individual savers shall be lent out to business for investment purposes. Savers and bank share in the interest proceeds. Collateral sufficient to cover the principle and interest for the entire term of the loan shall be required.
4. Redemptions will occur by the exchange of money for equity from the banks capital reserves. The right to suspend redemption for any reason is disallowed. In the event of failure to do so from bank capital , the bank is insolvent and shall enter bankruptcy.
5. This model should produce growth in aggregate output, causing drops in the price level. This in turn allows more consumption and/or saving. It is also a 100% reserve system, so it is stable.
6. The initial issue of money shall occur by issue of preferred stock in exchange for a single equity. This shall set the par value of the money. For example: 100,000 shares of preferred stock in exchange for 1000 shares of Toyata at $50 per share. The initial (par) backing value is thus $50,000. For purposes of illustration, each share of preferred stock issued as money shall be called the "Hayek". Par value shall therefore be $.50 per Hayek in this case. This is the initial current backing requirement per Hayek. Thereafter, new money shall be sold for other stocks in accordance with the current backing level. As a result of productivity growth in the money, the current backing should normally increase over time. Note that the initial issue of the money involves use of another money, the US dollar. After a market is established for common stocks in Hayeks, this requirement shall disappear. Until that happens, the US dollar shall be used to determine the value of stocks within the current backing and thus the current backing level. Additional issues of money may now occur in exchange for other common stocks. For example, 100 shares of Honda at $60 per share shall now purchase 12,000 Hayeks. Redemptions of Hayeks shall now be in a single stock or combination of stocks from capital reserves at the current backing level. The money is established. Now lets make it grow in value.
7. Bank lending shall occur by the strategy of exchanging non-appreciating stocks in the money backing for equity in companies the Bank lends to. Thus Bank lending, in addition to earning interest, should normally lead to appreciation in the backing and thus the money itself. Though the money should appreciate over time, repayment in it should not be a problem since the money supply shall never shrink. Interest rates are therefore set by supply and demand and the expected profitability of the loan.
Acknowledgments: Impossible to list all since this seems to be the solution to the free market's need for a money system that allows the most rapid growth without the boom bust cycle. But among them Ludvig Von Mises, Murray N. Rothbard, Frederik Von Hayek and the Austrian School of Economics
Please inform of any omissions. This was produced by standing on the shoulders of giants and the author is awed and humbled he should have a part with them, if this is original and worthy of the free market.
Your commented: "The huge price move and massive volume into an asset that is either losing money or paying next to nothing isn't happening based on fundamentals." Funny, that's exactly what I was saying about gold in October. What rate does gold pay? I know you can "lease it out" - do you do that?
I am not suggesting that anyone buy long-bonds, though it sure might work out better than buying gold. The environment has changed dramatically - the deleveraging that was affecting just banks has now spilled over into corporations as well as individuals. We must become a nation of savers rather than spenders. Companies are going bankrupt right and left now - there is little DIP financing available. For the really big problems, the government must act as lender of last resort. The very fact that the governments are pumping all of this money into banks yet GM knows it can't DIP financing should tell you guys that the economy is YEARS away from overheating.
On Dec 08 12:19 PM Smarty_Pants wrote:
> Alan:
>
> Here's another link to a thoughtful analysis of the Treasury markets.
> You may not agree with the article's conclusions, but it's informative.
>
>
> www.321gold.com/editor...
>
> Note especially the price chart for the long bond. The price has
> been bound in a trading range all fo 2008 (113 to 121 roughly), until
> mid November when the price undertook a moonshot to the upside. It's
> currently around 135. Yields on the long bond dropped below the official
> inflation measure.
>
> Mid November was after most of the market turmoil, so the article's
> author surmised that the near zero yields in the short end of the
> Treasury curve prompted a shift to the long end, in other words,
> safety at any cost, even if that meant taking a pricing risk to fluctuations
> in rates.
>
> If that long bond price isn't a bubble I'll be very surprised. The
> huge price move and massive volume into an asset that is either losing
> money or paying next to nothing isn't happening based on fundamentals.
>
>
> As for the issue of banks loaning or not loaning the FED's newly
> printed money, I can only see two possibilities:
>
> 1) The banks don't loan that money. Under this case, the economy
> will continue to flounder and shrink as debt laden businesses go
> under for lack of financing to roll over that debt. The economy can't
> continue unchanged without more lending.
>
> 2) The banks do start lending that money (or the FED does it directly).
> Under this case inflation will return with a vengance as the circulating
> money supply would increase by 30% to 50%.
>
> My opinion, for what it's worth, is that the FED won't allow 1) to
> happen. The multiple and costly bailouts undertaken thus far have
> set us on the path to 2), and that would imply higher gold prices
> in the future.
On Dec 08 02:37 PM Socialism cannot compete! wrote:
> Have a look:
>
> research.stlouisfed.or...
>
I don't deny a debacle at all - things are rotten and likely to get a lot worse.
On Dec 08 02:29 PM User 30121 wrote:
> Thank you SWRichmond, Smarty Pants, and others for TRYING to ENLIGHTEN
> our "friend" Alan. Frankly, I believe he wrote this article with
> tongue in cheek, with the CERTAINTY that he was going to get responses.
> He probably made a hefty wager with some schmuck that he would get
> X-amount of responses. While I am contributing to his number, its
> SHAMEFUL really, that he take time (a sheer waste to be sure) to
> try to downplay the debacle we have as an economy, and trashing one
> of the KEYS to gaining wealth going forward-owning gold and silver--.
> Alan, you should be ASHAMED! You look like a nice boy!
"Bank lending shall occur by the strategy of exchanging non-appreciating stocks in the money backing for equity in companies the Bank lends to." - moonbat
An interesting and thoughtful concept, but it would seem to me that there are still some chinks in the armor ...
What about lending to consumers? Homeowners? Is the bank going to own a piece of my house equity too, forever? Or does the money for equity idea apply only to business loans?
What happens when one of the businesses goes bankrupt (not the bank but the business it holds equity in)? Now the equity backing/preferred share interest behind some of the money is no more. The money has less backing than before, yet can't be "destroyed".
Still some wrinkles to iron out? I'll have to cogitate on it a bit to see if I'm missing anything in my first glance.
Sorry for you bad luck/choices Alan. You can redeem your self however. Buy just one gold eagle, touch it, feel the heft, flip it in your hand. Once you have one in your hand you will see, feel, and understand the difference between what gold is and a piece of paper with 1's and zero's printed on it or a stock certificate.
Go ahead Alan just buy one gold eagle. Take the plunge. Dont be scared, quit being an idiot.
Sorry for your bad luck/choices Alan. You can redeem yourself however. Buy just one gold eagle, touch it, feel the heft, flip it in your hand. Once you have one in your hand you will see, feel, and understand the difference between what gold is and a piece of paper with 1's and zero's printed on it or a stock certificate.
A good point.
BUT, gold hasn't lost 95% of it's purchasing power since 1913, like the dollar has. In 1913 you could buy a top notch men's suit for $20 (1 oz of gold) as SugarDaddy noted above. Today it would cost you several hundred dollars (still 1 oz of gold) and years from now you will still be able to buy the same suit for that 1 oz of gold or the equivalent number of devalued dollars (or euros, or ameros, or whatever) it would bring.
I'm not buying gold for "the rate it pays". I'm buying it because I expect it will hold value much better than the dollar will over time and it won't default. Ever.
I believe that this is the crux of our disagreement. Either you expect the dollar to hold value reasonably well and I do not, OR, you think there is plenty of time to get into gold for any run up in the future and I prefer to start now.
I must admit that I can not be certain that I will be correct tomorrow or next week, but I believe that history is on my side for the long run. I'm simply putting a portion of my money into gold now while it's still available and before a lot more people realize that the value of the dollar has started downhill in a serious manner.
Quite honestly, once a serious run in gold starts I don't expect it will be possible to find any to buy at all. It's difficult now already.
In addition to the shortage in physical gold coins and bars, the Comex gold contracts are starting to show persistent backwardation. It is cheaper to buy gold for delivery in the future on the Comex than to buy it for cash now.
Why would anyone prefer to pay MORE than storage and carry charges to buy gold now when you can buy it cheaper next month via the Comex delivery mechanism? The only reason I can come up with is that those who already have the gold are very reluctant to sell it and buy the next Comex contract as a replacement for fear that it won't be there to deliver when that contract expires.
Supply is thinning out in the paper markets. Contracts for delivery are way up in December and the gold in Comex warehouses is dwindling. The Comex buyers are insisting on delivery and the sellers have come to the realization that they won't be able to cover as easily when they pile on to cap the gold price. If they are more likely to get stuck with delivering, they will be less eager to cap gold rallies in the future. The buyers want gold delivery enough to call that bluff.
It's not like I'm selling everything I own and buying up gold with it, but I think it prudent to get some gold while I still can.
If my main concern was "how much it pays", I'd be buying corporate bonds in companies I hoped weren't going under. But I view those as having not only risk of default, but the loss of purchasing power too.
I still have other investments that I feel will do well for me in the future. Gold isn't the only one, but it is an important one IMHO.
1) Did you include storage costs? No? Hopefully no one broke into your home and took your gold.
2) What kind of fool would hang onto a $20 bill for almost 100 years? Here is the big flaw in your argument: You neglect interest. Short-term rates typically track inflation. For instance, in the past 20 years, CPI has averaged 3% (core slightly less), while the 3-month T-bill has averaged 4.5%. Over 50 years, the T-bills have averaged 5%, while inflation has averaged 3.3%. So, it appears that T-bills offer a relatively low real yield, but in excess of inflation.
3) If I took that $20 and earned compounded interest of just 3% for the 95 years since 1912, I would have $331. If, instead, it earned 5%, I would have $2060. I don't know the exact numbers, though that data exists, but everything I have learned tells me that investing in short-term and rolling it should at least equal inflation over long periods of time. If not, everyone would borrow short and speculate on inventory.
----------------------...
Horrific gold 'dump': Is this guy for real? –
11:24:52 AM | Thom Calandra
‘Interventional’ analyst expects price plunge this week
Michael Bolser, a trained physicist who developed dollar value commodity indexes and 10 months ago correctly forecast the scope of the current recession, expects more than 3,000 tonnes of gold to flood the market this week.
Bolser, based in Florida, says the International Monetary Fund will release the gold for sale on Wednesday, Dec. 10. The 64-year-old Bolser says the price of gold subsequently will slide as much as 40 percent – to $455 an ounce in coming weeks from its current $760 an ounce.
Bolser, whom I met five years ago at a New Orleans commodities conference, writes Interventional Analysis, a subscription newsletter based on his real-time dollar index charts of gold, silver and oil and other metrics he devised. Bolser tells me he is plotting timelines with a 50-day calendar of events that central bankers around the world also use to intervene in financial markets.
“Demand will crushed by a bullion dump and $650 prices,” Bolser told me from California, where he is visiting family.
Bolser is a former director of the Gold Anti Trust Action Committee (GATA). The organization, as well as Bolser, believes governments, multi-national organizations and quasi-governmental agencies such as the Bank for International Settlements and the IMF often intervene in commodity markets to “manage the market.”
That is as much as they share in dogma.
“Since Mike is convinced that the Federal Reserve rigidly controls all markets every day and will have the wherewithal to control them forever, and since, in that belief, he has been advocating shorting gold since it was at $413, he's no longer a member of GATA's board,” GATA secretary Chris Powell says. “But we're still in agreement in principle on … surreptitious intervention by the government in the markets.”
Spot on
In February, Bolser told Jerome R. Corsi, who was writing for WorldNetDaily, that the Federal Reserve this year would drive down stock prices as measured by the Dow Jones Industrial Average this year to the 8,000 level from the 12,635 it was selling for then. Bolser also forecast a deep recession, which we now know already had begun.
The Dow average is now about 8,600.
Bolser used another metric he devised, one tracking Federal Reserve repurchase agreements that the central bank uses to lend funds to large banks, to predict the Dow Jones average’s daily movements. He has been close more often than not in 2008.
Bolser is a prolific author of papers ranging from monetary policy and money flows to “optics materials theory.” He says he called the reversal in the price of crude oil three weeks before its mid-July high of approximately $150 a barrel. A barrel now sells for $40 or so.
Bolser’s theory of interventional maneuvering covers a wide range of what he calls “covert” activity. The large receivers of Fed repurchase agreements each day, Bolser says, use the liquidity they provide to buy and sell commodities such as gold and oil, and to transact derivatives, swaps, futures, forward sales and so on.
On the IMF “dump” of gold he is forecasting for this week, Bolser says, “The IMF will say we need to take outperforming assets and put them in places where we can get the economy of the world going again. This is a replay of 1934, an artificial depression. The central banks will end up with the IMF’s gold.”
If your head is spinning, please do not call the doctor just yet. My head is spinning, too. I have been writing about gold and other commodity markets in one way or another since 1990.
The IMF, for example, already pledged this year to sell about 2,000 tonnes of gold in the marketplace. The IMF essentially receives gold from its member central banks as a pledge. That much I know.
Still, I feel like the reporter in the fictional movie coming out of Hollywood later this month, the woman who essentially wrote terrific stories about Venezuela and an assassination attempt on the U.S. president, but her sources were dead wrong. If your sources are wrong, one character in the film says, then you’re wrong. The film is called “Nothing But The Truth”
Bolser has a small and dedicated audience, and his metrics are original and purely formed. His research is deep. I could not find anyone outright laughing at his predictions.
“We don’t think the bottom (for gold) is in, so any decline fits fine,” says Robert Prechter, strategist, author and chief of market forecasting firm Elliott Wave.
Shoot the …
Bolser’s convictions, alas, are intense – thus making him a marked messenger if his forecasts turn out to be wrong.
“I am calling Dec. 10 as the center of probability for the IMFD selling 2,100 tonnes of Italian gold and another 1,100 tonnes from other countries. They will declare an emergency because the elites in charge want the gold,” Bolser says.
The motive behind all of Bolser’s bold predictions is as plain as he can make it, he says. The Fed and developed nations’ central banks and cooperating banks are victimizing investors, be they oil, gold or currency speculators.
As for economics, Bolser says central bankers have engineered a recession at the same time they are hyper-inflating their economies with trillions of dollars, pounds, euros and yen worth of paper currency. The effect, he says is one to counterbalance deflation and inflation.
U.S. Federal Reserve Chief Ben Bernanke in a 2002 speech about avoiding deflation said, “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
Bolser also follows the platinum market and says casual observers might keep an eye on the platinum price compared to gold. He expects platinum to hold the $800 level as gold slides.
At GATA, Chris Powell is no research slouch either. He likes Bolser, as many do. But he poses these counters to Bolser’s gold timeline:
“There is such a retail shortage and such a premium on real metal above futures contracts.
See Antal Fekete's analysis published on the backwardation creeping into the gold market,” Powell tells me. (Please see: news.goldseek.com/Gold....)
“Central banks all over the world are rushing to reflate and devalue. Indeed, a British economist, Peter Millar, speculates that central banks will use an upward revaluation of gold to avert debt deflation, just as FDR did in 1934,” Powell says. (You can find Millar's treatise on this topic here: www.gata.org/node/4843.)
Bolser sticks to his calendar. “As gold bugs enter a rising hysteria about shorts … and COMEX contract delivery requests, the Fed will slash then mercilessly,” he says. “It is a replay of the last financial hours of (silver speculator) Nelson Bunker Hunt.”
That is it for now. The second issue of Ticker Trax By Thom Calandra is out, and the third will find its way to subscribers this coming week.
I constantly search for someone, anyone who can make a convincing case that we are not headed for massive currency debasement. I read your article hoping for some such information. Forgive me for being such a rube, but perhaps you could address some of these points:
1. The US (Treasury and Fed) has just spent or committed $8.5 Trillion to various bailouts and backstops. As you state, the value of US held gold is about $210 Billion. Other than price suppression, would selling gold at this level accomplish anything fiscally significant? What about if gold was multiples higher, when it might make more sense to sell?
2. You’ve chosen to demean “Joe Public” as “irrational”, so I will ask: Which is more irrational, buying gold or trusting the government to do the right thing? What is government’s track record in this regard?
3. The government is not printing money, but the Federal Reserve IS. Fed buying of securities on the open market is widely acknowledged to be “Quantitative Easing”, a polite metaphor for printing money. It’s been widely accepted in the financial media that quantitative easing has begun. I linked a Fed Vice Chairman above who said it had. Other than merely stating so, can you explain why it hasn’t?
4. If we are “replacing private capital with public capital”, where exactly is this new public capital coming from? Do the numbers add up? TARP money, for example, has been approved by Congress, but I’m not sure that Treasury has funded it yet at auction. IF Treasury has funded it, AND IF the funding was not purchased with “new” money from some central bank, THEN that is new public capital. I suspect what it really happening is this: the Fed “expands” its magical “balance sheet” and deposits cash in the accounts of the primary broker-dealers, perhaps in exchange for worthless MBS securities. The primary broker-dealers buy Treasuries in any amount issued. Calling this “new capital” is merely an accounting trick. So the question is simple: can you print money, borrow it from yourself and call it capital?
5. From September 24, 2008 to December 3, 2008, the Fed expanded its “balance sheet” from $1 Trillion to $2 Trillion. Where did this money come from?
These are not rhetorical questions. I really want to know; my concerns about debt service, currency debasement, capital dilution, and the Fed’s unbreakable commitment to fighting deflation are central to my reasons to hold gold. While there may be deflation in the short term, the short-term risk of currency crisis is too severe IMO to not hold gold, and I can’t see any way to avoid long term high inflation rates. Selling gold at this time would be, well, certainly not idiotic, but, ummm, short-sighted.
And if I 'invested' my gold at the same rates with repayment in gold (as people used to do prior to FDR's gold confiscation) I would have 16.5 oz or 103 oz of gold respectively, either of which would far out-value your cash. The risk of loss wouldn't be any worse than the risk you take by lending dollars out or putting dollars in your pocket.
The only reason you don't pay for storage of dollars is because bankers are lending it out at interest in large multiples. If bankers were required to fully back each dollar they would have to charge you for storing your cash too.
Isn't saying cash requires interest to maintain value with an inert lump of gold admitting the cash isn't holding value?
As for why gold, research the ideal qualities of money. Portability, divisibility, recognizable, stable supply, indestructible, etc. Gold evolved as the 'best' money compared to everything else that was tried from primitive barter onward. The other precious metals would probably work but gold best meets the all the necessary qualities.
Why not a Picasso? I'm going to assume your sarcasm, but come on, really? How many works did Picasso create? Are they easily divisible and indestructible? Easy to recognize counterfeits?
First, thanks for taking the time to consider this. If this system passes the Smarty test, that says a lot. Moving on...
It is reductions in the amount of the money that causes domestic (in the money) economic destruction and not any reduction in the value of the money backing. Look at our fiat economy, for instance. It is in trouble simply because of shrinking numbers in bank computers as FRB loans are repaid faster than new ones being issued. The chief purpose of the money backing is for dealing with folks in another money. It's like we had with the international gold standard abroad but fiat money domestically.
However, in this system, no one is denied the ability to redeem their money with the underlying equity even if the Bank goes bankrupt, just as it should do, if for instance, money holders lose confidence in the Bank management. Oh, I see your point. If equity value is lost, the entire money supply loses value not just "some" of it. The value of a unit of money is simply the total value of the equity in the backing divided by the total money supply in those units. The amount of the money should never be allowed to decrease but the value of it can go down based on poor bank management decisions as you would expect. But an actual drop in the amount of the money supply, be it fiat or backed, is an inexcusable crime against the economy using that money particularly if they have no alternative money choices. That could drop the value of every equity in the base, good or bad. Now about those consumer loans...
1) committed or spent.... great term, as they haven't spent that much. Even TARP has been only partially spent at this point. They haven't assumed the debt of FNM/FRE, but rather committed to supporting them with capital infusions in the future. So, I don't have an exact number, but do realize that they are acting as an insurer for the most part.
2) Why not ask what is more rational, shorting gold or trusting the government to do the right thing? You see, if the government does the "right thing" (combat deflation), then they risk inflation. Simple analogy: the bathtub. The water is leaking down the drain rapidly. The solution would appear to fix the drain, but you don't know how. So, you turn the water on to balance the outflow. You seem to be worried about overflowing the tub when the water is rapidly vanishing still. I am not trying to demean Joe Investor, but I really think he doesn't get it.
3) Open market purchases of securities removes an asset from the hands of holders (banks) and replaces it with cash. Typically, this would lead to an overall increase in the money supply, but this time isn't typical. Economists talk about a "multiplier" effect, but there isn't one when we are talking about using the money to offset write-offs on other assets. Banks continue to need to deleverage.
4) The capital comes from our children and grandchildren. We aren't simply giving them an IOU, but they get all those warrants and preferred stock. You see, our government is replacing all of the hedge funds and leveraged investors with a new hedge fund: Fund USA.
5) I don't know the mechanics. I know that the Fed is authorized to have a certain size balance sheet, and clearly they just used it. I do believe that there have been some recent Treasury auctions, but I am not sure if this was to cover TARP, another program or the FED (probably not).
5)
When you say other precious metals might work, but gold is best, I ask at what price differential? Platinum used to trade below gold but moved well above it, peaking at $2200. It is now about $800. Put that math on gold, and we could see it below $400. I don't see the logic that gold should be that radically different than platinum or other precious metals (or diamonds).
On Dec 08 11:08 PM Smarty_Pants wrote:
> "If I took that $20 and earned compounded interest of just 3% for
> the 95 years since 1912, I would have $331. If, instead, it earned
> 5%, I would have $2060" - Alan
>
> And if I 'invested' my gold at the same rates with repayment in gold
> (as people used to do prior to FDR's gold confiscation) I would have
> 16.5 oz or 103 oz of gold respectively, either of which would far
> out-value your cash. The risk of loss wouldn't be any worse than
> the risk you take by lending dollars out or putting dollars in your
> pocket.
>
> The only reason you don't pay for storage of dollars is because bankers
> are lending it out at interest in large multiples. If bankers were
> required to fully back each dollar they would have to charge you
> for storing your cash too.
>
> Isn't saying cash requires interest to maintain value with an inert
> lump of gold admitting the cash isn't holding value?
>
> As for why gold, research the ideal qualities of money. Portability,
> divisibility, recognizable, stable supply, indestructible, etc. Gold
> evolved as the 'best' money compared to everything else that was
> tried from primitive barter onward. The other precious metals would
> probably work but gold best meets the all the necessary qualities.
>
>
> Why not a Picasso? I'm going to assume your sarcasm, but come on,
> really? How many works did Picasso create? Are they easily divisible
> and indestructible? Easy to recognize counterfeits?
I count on you to rain on my parades, if need be. And the purpose of rain is growth. So far, the rain has worked wonders. Moving on ...
"What about lending to consumers? Homeowners? Is the bank going to own a piece of my house equity too, forever? Or does the money for equity idea apply only to business loans?" Smarty
Yes, you got it, homes are not productive assets, they are not profitable. Notice it is in the interest of every money holder for the Bank management to act wisely. Consumer loans do not appreciate the money. They are the worst form of consumption since they borrow from the future to consume today by using money that could be lent to business to increase the future value of every money holder's money. I had not considered this fully till now, thanks.
On Dec 08 11:08 PM Smarty_Pants wrote:
> "If I took that $20 and earned compounded interest of just 3% for
> the 95 years since 1912, I would have $331. If, instead, it earned
> 5%, I would have $2060" - Alan
>
> And if I 'invested' my gold at the same rates with repayment in gold
> (as people used to do prior to FDR's gold confiscation) I would have
> 16.5 oz or 103 oz of gold respectively, either of which would far
> out-value your cash. The risk of loss wouldn't be any worse than
> the risk you take by lending dollars out or putting dollars in your
> pocket.
>
> The only reason you don't pay for storage of dollars is because bankers
> are lending it out at interest in large multiples. If bankers were
> required to fully back each dollar they would have to charge you
> for storing your cash too.
>
> Isn't saying cash requires interest to maintain value with an inert
> lump of gold admitting the cash isn't holding value?
>
> As for why gold, research the ideal qualities of money. Portability,
> divisibility, recognizable, stable supply, indestructible, etc. Gold
> evolved as the 'best' money compared to everything else that was
> tried from primitive barter onward. The other precious metals would
> probably work but gold best meets the all the necessary qualities.
>
>
> Why not a Picasso? I'm going to assume your sarcasm, but come on,
> really? How many works did Picasso create? Are they easily divisible
> and indestructible? Easy to recognize counterfeits?
I anticipate your next question. How is the bank to know what loans are for legitimate business investment and which are not? The partial answer is that business should be able to outbid consumers for bank loans. Also, when I say equity, I really just mean common and preferred stock. What else increases real wealth that is not privately held?
For a moment I felt sorry for potential homeowners needing a loan but the logic is inescapable. The combination of high investment in home builders, no artificial demand via home mortgages, and an appreciating money would result in the most affordable housing possible.
Here's a major wrinkle. Each money buyer should be required to buy a share of common stock for each share of preferred stock. This would keep the bank capitalized and keep control where it belongs, in the hands of the money holders. Deflation is a catastrophe and this idiot made it possible for the entire money supply to be liquidated! The stock market seems to have been designed to provide its own monies. I wonder Who could have done that?
Well, we know where FRB came from, don't we? The only place the stock market could have come from is in the opposite direction, don't you think? FRB based on fraud and theft backed up by central authority generates false prosperity. The stock market based on free exchanges and liberty generates true wealth. This is no marriage. It is rape, since 1694.
This money concept is very slippery since conceivably, with only this money in existence, the value of the backing for the money is measured in the money itself! However, we are saved because the initial backing of the money is determined in another money, the US dollar for instance. Only an idiot could think this might work. Luckily, it seems, one was available. The Good Book says something about using the foolish to confound the wise. I feel so used!
That said, why wouldn't the end game look more like Argentina than Japan? The Japan analogy breaks down when you look at any important details. Japan has a huge export economy; the US has a very small one (relative to GDP). Japanese have large personal savings; US has negative savings. Japan is huge creditor nation; US is huge debtor nation. Etc. Why would the two countries be the best analogy (or better than Argentina vs. US)?
Isn't insisting there is a distinction between "printing money" and "providing public capital" a matter of splitting hairs? Kind of like insisting there's a big difference between writing insurance policies (and thus holding reserves to pay them off) and writing credit default swaps (and not holding reserves)? If all this "public capital" was not being hoarded by banks (with reserves going from $3 billion in September to $600 billion now), wouldn't we be seeing significant inflation? What would happen if the banks decided it was time to start buying commodities with that $600 billion? Or gold? Or equities?
Also, China has expressed a desire to decrease its US dollar reserves and vastly increase its very small gold reserves. A full accounting of central bank policy should include China's central bank, right?
In the end, you should be congratulated for your short-term success. However, is that short-term success coloring your long-term views too much? Or do you think that US gov't policy trumps the concerns I've mentioned because of the size and influence of the US?
And if you think Japan is a paragon of virtue, look at their deficit and debt levels per GDP. They make the US look pretty good.
Another reason gold is dead is my SA indicator. Whichever posts have max comments are over bought & likely far from bottoms.
At least tulips would multiply if stored underground. Even if their exchange value was diluted they'd still be pretty to look at in larger numbers. Plus they ARE edible so there's some inherent value to them. Better than Picassos anyway.
"I don't see the logic that gold should be that radically different than platinum or other precious metals" - Alan
Platinum is much harder to work with than gold. See divisibility under qualities of money.
Silver will rust over time or react more easily with chemicals. See durability under qualities of money.
Diamonds are much more fragile than gold. Hit a diamond with hammer and you risk destroying its value. Not so gold. See durability.
Even though you could make those items work as money absent any gold, none of them works as well as gold in all respects. Silver probably comes closest though.
"Back to "cash" vs "gold". Cash can't be compared to gold. Cash is NOT a store of value, it is a medium of exchange." - Alan
You raise a valid semantic point, the terms used in discussions such as ours are often mixed and used interchangeably.
In an economic sense all "money" is a store of value, whatever its form. Our debate is basically over whether the form of money matters a great deal or not. The phrase 'medium of exchange' is equivalent to 'store of value' because there must be a lapse of time between receiving and delivering a 'medium of exchange'. During that time it is "storing the value" of your sale until you use it for a purchase, even if only for a few hours.
When I use the term "cash" or "dollar" I refer to fiat paper currency (or its electronic equivalent). It only has value because there is a law which says everyone HAS to accept it as payment upon penalty of punishment for refusal. In truth it is a piece of cloth with ink on it whose intrinsic value is nearly nothing.
Specie (actual gold or silver coin) used as money has its own inherent worth. It can be used for purposes other than storing value. The reason gold and silver evolved into 'the best' store of value was because they best met the ideal qualities of money and they had inherent worth. There is a lower bound on the value of gold because you can always form it into jewelry and sell it, or sell it to someone to use for electrical purposes, or for decorative purposes regardless of the form of fiat currency in use at the time.
If the dollar were replaced by the Amero tomorrow and you were out of the country and unable to exchange your dollars today, what would you use them for tomorrow besides papering your walls, starting fires, or wiping your backside?
The only true 'value' that fiat cash has is the worth of the promise behind it. As history has shown, the promises of gub'mint aren't a sure thing (think Weimar Germany, Argintina, Mexico, Russia, and Zimbabwe for relatively recent examples). Even the Romans were guilty of debasing gold and silver coinage with base metals and forcing everyone to accept them as though the gold or silver content were unchanged.
The only form of money that best fits those ideal qualities is gold, followed by silver. There are thousands of years of human choice behind that assessment.
Personally, given the manner in which the FED and USTreasury and Congress are shifting the bailout into overdrive I believe it is prudent to fall back on the thousands of years of human consensus that gold is the best store of value for a part of my wealth rather than wait for the gub'mint to devalue away the remaining 5% of the dollar's value.
Thanks Alan for responding to all the posts here. I don't mind debating these things or the fact that you disagree with my views. It's probably a good thing to get both sides of the debate out where everyone can read the pros and cons on each side and come to their own conclusion in the matter.
Your remarks about gold are amazing. Gold is money. Gold is stable money in fact based on known scarcity and an extremely well-founded tradition on its use as money. Gold it seems was designed to be used as stable money until an appreciating money solution could be found based on the rule of law and the stock market. Here is the kicker: Gold will be needed to bring in the new money by backing it along with equities. As the stock market finally gains a reputation for stability, gold can finally retire from her work as money. The killer of FRB and the ideal money solution has finally been found by an idiot and a Smarty based on the thoughts of the greatest men in history and the greatest Man and the Creator of the rest of us. And it seems like it is just in time too.
The noble speculators,
no others do they hurt.
They'll soon show what's going on
or else they'll lose their shirts.
I appreciate your suggestion that I may be drawing confidence about my conclusion due the fact that I have been right so far, but I assure you that I have tried to reassess the situation. That was really the point of the article - I now better understand than I did then the factors at play. The situation has actually worsened greatly since that first article. My key break-through, in my view, is understanding better the link between bail-outs and inflation (not very likely unless the Fed doesn't withdraw liquidity at the appropriate time, which is probably YEARS from now. Rates will rise at that time. Friends, as McCain liked to say to all of us he didn't even know, we face a long period of slow/negative growth and eventually higher rates and taxes, not some sort of 3rd-world country hyperinflation.
On Dec 09 09:31 AM ElTiante wrote:
> I own some GLD and mining stocks, but I'd hardly refer to myself
> as a gold bug. I can see gov't policy keeping things (economy, commodities,
> equities) stagnant for quite awhile.
>
> That said, why wouldn't the end game look more like Argentina than
> Japan? The Japan analogy breaks down when you look at any important
> details. Japan has a huge export economy; the US has a very small
> one (relative to GDP). Japanese have large personal savings; US has
> negative savings. Japan is huge creditor nation; US is huge debtor
> nation. Etc. Why would the two countries be the best analogy (or
> better than Argentina vs. US)?
>
> Isn't insisting there is a distinction between "printing money" and
> "providing public capital" a matter of splitting hairs? Kind of like
> insisting there's a big difference between writing insurance policies
> (and thus holding reserves to pay them off) and writing credit default
> swaps (and not holding reserves)? If all this "public capital" was
> not being hoarded by banks (with reserves going from $3 billion in
> September to $600 billion now), wouldn't we be seeing significant
> inflation? What would happen if the banks decided it was time to
> start buying commodities with that $600 billion? Or gold? Or equities?
>
>
> Also, China has expressed a desire to decrease its US dollar reserves
> and vastly increase its very small gold reserves. A full accounting
> of central bank policy should include China's central bank, right?
>
>
> In the end, you should be congratulated for your short-term success.
> However, is that short-term success coloring your long-term views
> too much? Or do you think that US gov't policy trumps the concerns
> I've mentioned because of the size and influence of the US?
In addition to the consumer loan issues, I wonder about whether issues will develop with relative valuations of currency from various banks.
Bank A and Bank B each build up their portfolio of 'money' backing preferred equity, but A owns equity which outperforms the equity in B for whatever reason. If I work for a company that banks at B but wish to do my personal banking at A, how do I exchange the money from B that constitutes my paycheck for money in A? It would seem that there would have to be a time varying exchange rate differential between each possible pair of banks. Rather confusing. Even more so when you try to buy 'stuff' with currencies of various worth.
Seems to me that without a standard unit of account that things would become very complex in short order.
Plus, I'm not sure that I want the banks to own shares in nearly every business around. If I own a business, can I take 'money' back to my bank to buy back all their shares in MY company? Or do I have to accept a 'basket of shares' from every business in town in return?
Can a business ever get the bank out of owning its shares? If not, then banking has become a one way transation and not a free market. If you want a business loan you have to give up a share of your business instead of simply paying back the principle and interest. Such a bank is actually more like a mutual fund than a bank.
The small details appear to get rather messy.
Why, not? Pick a bank that allows this. It is no problem in principle since the bank is just required to redeem your money in stocks at the current backing level from its capital reserves. No redemption from the money backing is allowed (unless the whole money supply is liquidated, which should never happen) but stocks in the capital reserve can be swapped with it to get your stocks out of it.
I never though of this issue before, thanks. I really appreciate your critique. Sprinkle away, please.
Well, the free market of course. Get the best exchange rate you can.
Also, as I mentioned in another comment, gold is always welcome in the money backing and capital reserves. Gold it turns out, is stable money and should be honored. This new money will need it to get started before gold itself can retire as money. Stock up on gold Smarty, the best way you know how. This new money is not a rival but a friend of gold. Gold herself would tell you so,IMO.
To beat FRB, this has to be a high performance money model but it must be 100% ethical too. I'm certain it is, so far. It is scary though. Also, notice that money buyers are required to buy common stock 1 to 1 with the preferred stock (money). This ensures the entire money supply can be redeemed from capital reserves. As a consequence, the money holders OWN the bank.
Is that slick or what? The stock market seems to have been designed so it can provide its own monies and banks. This can't be an accident. to wrap this comment up:
Gold: stable money from God
FRB: unstable, fraudulent money from the devil.
Equity backed money: My bet is this is from God. Please prove me wrong if otherwise. This is potent stuff.
For the following reason:
Suppose I'm a rat b@st@rd businessman looking to shaft anyone I can. I start a business using a loan from moonbat bank. I issue 25% of common shares to said bank and start business. Things go well. Then very well. Then I get greedy and ...
Issue myself a gajillion more equity shares as a bonus for performance on the job. Bank's equity in my business falls to less than 1%, but it's all nice and legal as the bank doesn't have enough voting shares to stop it.
Bad news for bank.
If preferred shares, then interest income must be paid on them to bank as long as income will allow. No changes to payment can be made without bank approval. No new preferred shares without bank approval. Bank and other depositors are protected.
Best a rat b@st@rd businessman can do it buy out the bank's preferred shares.
Excellent points. You know, much, much more about the ends and outs of the stock market than I do.
Just a tiny but essential correction:
Money must never be "retired"; that is deflation. The bank would have to make open market purchases of stocks to replace the ones redeemed from bank capital.
If the rat b@st@rd businessman goes bankrupt the backing for your money evaporates, which is deflationary for the holders of that bank's money.
The more I think about it the more I believe you are describing a mutual fund sort of entity that buys commercial preferred shares and calling it a bank. There are still a great many loose ends.
For some reason I think trying to eliminate deflation won't work in the long run. Deflation is nature's way of telling people they screwed up the money system in a big way, like bankruptcy tell you you screwed up your finances.
I don't think you can avoid some inflation or some deflation. You just want to make them very unlikely and limit their effects to being minor.
This latest version is essentially complete, I think.
Further rain would be appreciated.
Dedicated to Ludvig Von Mises, Murray N. Rothbard, Frederik Von Hayek and lovers of liberty and the rule of law everywhere and throughout time.
Money as Investment:
A proposed 100% reserve, equity backed money and Banking model
0. Designed for maximum economic growth and general prosperity consistent with stability and saver time preference. The money supply shall only increase through purchases of money from the Bank with equities at current backing levels. Gold is also welcome since it is stable money and the honorable predecessor of this money. (It will also serve a vital role in helping to introduce this new form of money.) The money supply shall not ever decrease. The Bank shall redeem money with Bank capital reserves. Open market purchases shall be made with the redeemed money to put the money back into circulation. In the unlikely event the money shall ever be liquidated, then pro rata distributions to all money holders of the equities backing the money shall occur. The right to suspend redemptions from Bank capital for any reason is disallowed and will never be needed anyway since Bank capital reserves shall always be adequate to redeem the whole money supply if needed. This should be expected of an honest money supply.
1. This model assumes that true savings + saver time preference -> business loans -> productivity increases -> increased aggregate output -> decreased price level -> additional true savings, etc.
2. The Bank's money will be preferred shares in the Bank. The Bank's money shall be backed by equity in companies the Bank lends or expects to lend to. Thus, new money shall be purchased with preferred or common stock in those companies. Capital appreciation in the equity backing shall be sought via loans to the companies whose preferred or common stock is contained therein. This is the key feature that joins all money holders in a mutually beneficial arrangement for maximum continuous economic growth and shared prosperity.
3. Savings, according to the time preference of individual savers shall be lent out to business for investment purposes. Savers and the Bank share in the interest proceeds. Collateral sufficient to cover the principle and interest for the entire term of the loan shall be required.
4. Redemptions will occur by the exchange of money for equity from the Banks capital reserves at current backing level. Each purchase of preferred stock (money) will require a purchase of common stock in addition for the purpose of the capital reserve. The entire money supply can thus be redeemed if necessary. As a consequence, the money holders will own most of the common stock and thus will own the Bank.
5. This model should produce growth in aggregate output, causing drops in the price level. This in turn allows more consumption and/or saving. It is also a 100% reserve system, so it is stable.
6. The initial issue of money shall occur by issue of preferred stock in exchange for equities in a single company. This will This shall set the par value of the money. For example: 100,000 shares of preferred stock in exchange for 1000 shares of Toyata at $50 per share. The initial (par) backing value is thus $50,000. For purposes of illustration, each share of preferred stock issued as money shall be called the "Hayek". Par value shall therefore be $.50 per Hayek in this case. This is the initial current backing requirement per Hayek. Thereafter, new money shall be sold for other stocks in accordance with the current backing level. As a result of productivity growth in the money, the current backing should normally increase over time. Note that the initial issue of the money involves use of another money, the US dollar. After a market is established for common and preferred stocks in Hayeks, this requirement shall disappear. Until that happens, the US dollar shall be used to determine the value of stocks within the current money backing and thus the current backing level. Additional issues of money may now occur in exchange for other common or preferred stocks. For example, 100 shares of Honda at $60 per share shall now purchase 12,000 Hayeks. Redemptions of Hayeks shall now be in a single stock or combination of stocks from capital reserves at the current backing level. The money is established. Now lets make it grow in value.
7. Bank lending shall occur by the strategy of exchanging non-appreciating stocks in the money backing for stocks in companies the Bank lends to. Thus Bank lending, in addition to earning interest, should normally lead to appreciation in the backing and thus the money itself. Though the money should appreciate over time, repayment in it should not be a problem since the money supply shall never shrink. Interest rates are therefore set by supply and demand and the expected profitability of the loan.
Acknowledgments: Impossible to list all since this seems to be the solution to the free market's need for a money system that allows the most rapid growth without the boom bust cycle. But among them Ludvig Von Mises, Murray N. Rothbard, Frederik Von Hayek and the Austrian School of Economics
This was produced by standing on the shoulders of those giants and others and the author acknowledges that. Additional acknowledgments to be added later. The glory for this model belongs to God and the stock market He seems to have created.
Money really has two values. One is the value of the backing behind it and the other is its usefulness for determining prices in the economy that uses it. Notice how we got to fiat:
1. Gold used directly as money.
2. 100% backed Gold certificates .
3. Partially backed Gold certificates (FRB).
4. Fiat money with fractional reserves (FRB)
Isn't it wild that fiat money even needs FRB? And that is because fiat can behave like gold as Alan Greenspan said (only partially though). Its value as money comes from its widely known scarcity and tradition of using it as money. However, the scarcity of fiat must be maintained artificially, hence FRB to expand it and shrink it at will for the purpose of making loans with out destroying its value. (Gold is inherently scarce, OTOH, as you well know)
So, once the backing of a money establishes the tradition of using that money, the money assumes a value of its own WITHIN the economy that uses it based simply on its perceived scarcity and the tradition of using it for money.. Once that happens, reductions of the money supply are disasters for the economy using it according to mv = py. Reductions in the value of the money backing at that point simply reduce the foreign exchange value of the money. So poor loan decisions by the bank can make the economy poorer with regard to other economies but cannot cause a recession or depression. Since FRB destroys money when the rate of loan repayment exceeds the rate of new loans, one can see that the banking system is the sole cause of recessions/depressions...
You are correct to debunk some of the incorrect beliefs about gold and you are correct to describe it as an inflation hedge and nothing more. It does get tiresome to see all the conspiracy theories on SA where people try to blame others for how they lost money in the gold market. It's a market, OK? You don't see investors in any other asset class (except a few penny stocks perhaps) making excuses about mysterious dark forces manipulating their portfolio. If the price of gold (and presumably the inflation expectation) is artificially low, you should buy more, right?
What's up with the gold cult trying to recruit everyone they can find to buy their favorite investment? Don't they know that if they succeeded, the price of gold would go up.... oh, I get it now. Most goldbugs either want prices to rise so they can get out or want to be validated. They're not looking to accumulate gold before anarchy breaks out or they wouldn't be selling it so hard.
Nonetheless I think inflation will be a big problem in the future, and I am considering gold - maybe at $350/oz or so.
On Dec 08 08:15 AM mathman wrote:
> In response to "Gold bugs like to argue that gold is a "currency",
> but please tell me where I can use gold to buy things. In the days
> of nomads crossing borders, gold was a currency, but it no longer
> serves that role anywhere from what I can tell.":
>
> There was a guy on craigslist from California who's apartment rental
> advertisement stated he would take 1 oz gold per month in payment,
> not federal Reserve Notes.
I have suspected this. In that case the solution already exists. When the hyper-inflation takes off people should just start trading preferred shares in mutual funds. The hyper-inflation in the dollar will then accelerate to destruction while those trading mutual funds will be safe in an appreciating "money". Who invented mutual funds? He sounds like a hero of the market.
My above comment applies to gold too. So fiat will be replaced by stable money (gold) and appreciating money (preferred shares in mutual funds holding preferred shares in other companies). Gold is vindicated AND FRB is headed for the scrap heap of history having killed hundreds of millions. This is also vindicated and its Author: "Thou Shalt not steal." How could it get any better?
www.minyanville.com/ar...
FWIW, although he articulates the argument well, I'm not sure I'm ready to lower my 10% GOLD position hedging inflation. I don't think the U.S. will allow significant deflation to take hold.
- I think the Federal Reserves around the globe believe they can coordinate a reflation that keeps currencies stable relative to each other.
- Obama has a mandate to spend like there is no tomorrow.
- Propping up toxic assets by buying them for more than they are worth isn't a simple swap for liquidity.
It pays to be forward looking. At the first sign of economic growth, the US is going to have to start competing with commercial paper and rates will soar. The dollar will be under a lot of pressure. Gold does well under such circumstances. Since markets look ahead 6-9 months, unless you are predicting this recession will last more than another year (unprecedented), now is the time to buy (or at least hold, IMO).
I have seen a chart, from the St. Louis Fed, showing the money supply (which they call the 'monetary base') increasing from $0.85T to $1.5T, beginning last August. This would imply almost a doubling of the amount of dollars in existence, which I think will lead to a doubling in the price level once this money gets out into the economy.
I think you are right, in that the government is essentially paying off everyone's debts, by taking them on itself. It is assuming non-performing loans in exchange for Treasury securities. Of course, it is not paying off *everyone's* debts, it is paying off the debts of certain institutions and people, and not the debts of others. What are the criteria to get this preferred treatment? Who knows?
But Treasury securities and dollars are just two forms of the same thing: US money. The inflation will come when people want to sell their T-bills and bonds to buy stuff, flooding the world markets with US currency.
As far as gold goes, in comparison with other things, including most currencies, it has been going up in value, as you point out in your article. (You say that gold has gone down less than other things.) Today it takes fewer ounces of gold to buy a barrel of oil, a ton of zinc, a house, a car, the Dow Jones average,...and on and on, with the only exceptions to this being the US dollar and the Japanese yen. But I think the dollar will also begin to fall in relation to gold, once the money being created by the US government begins to make its way into the marketplace. I don't know about the yen.
I don't doubt that the long term (multi decade) trend of rising gold price relative to the dollar will continue, but there surely will be corrections, which is what we're in now. When will this correction end? When the economy recovers and banks and others holding US Treasury securities decide to sell them to use the proceeds to buy stuff. When will that be? Your guess is probably better than mine. Market timing is really tough.
Thanks for the good article.
On Dec 08 09:19 AM Alan Brochstein wrote:
> To all of you who think that the Fed is "printing money", I ask you
> to "show me the money". The money supply numbers don't show it,
> so where can I find it? The government is running up debt and transferring
> wealth from the taxpayer to creditors (debtholders).
This counterproductive system faced a radical change when the letter of credit was invented. A merchant in Venice would deposit a sum certain in a bank or financial institution and receive a written parchment instructing that the bearer was entitled to that sum upon presentment to the issuing bank. These letters of credit acted as a sort of certified check payable upon demand.
As travelers would wind through desolate mountain ranges, brigands would fall in around the carriage and fling open the door. A search of the carriage would not reveal any precious metals. Upon opening the travels trunk, the bandits would be faced with rolled parchments or scrolls sealed with wax. Being illiterate, the bandits had no idea that those pieces of papers represented large sums of gold bullion, and they would leave empty-handed, or so they thought. This is one of the most unheralded and overlooked contribution of the Renaissance to modern life.
The moral of my story is that gold will always have its charm for the illiterate. I have tulip bulbs that I will exchange for an apartment rental in California if you are serious about bartering. But this is a site for investing, not a site for medieval finance, and now that the speculators have been shaken out of the market, perhaps we will move out of our momentary fascination with a commodity that earns no interest and cannot be converted into everyday ordinary purchases.
On Dec 10 02:11 AM fotd wrote:
> John Mauldin over at Minyanville has a nice article that expands
> on Alan's views.
>
> www.minyanville.com/ar...
>
>
> FWIW, although he articulates the argument well, I'm not sure I'm
> ready to lower my 10% GOLD position hedging inflation. I don't think
> the U.S. will allow significant deflation to take hold.
>
> - I think the Federal Reserves around the globe believe they can
> coordinate a reflation that keeps currencies stable relative to each
> other.
> - Obama has a mandate to spend like there is no tomorrow.
> - Propping up toxic assets by buying them for more than they are
> worth isn't a simple swap for liquidity.
>
> It pays to be forward looking. At the first sign of economic growth,
> the US is going to have to start competing with commercial paper
> and rates will soar. The dollar will be under a lot of pressure.
> Gold does well under such circumstances. Since markets look ahead
> 6-9 months, unless you are predicting this recession will last more
> than another year (unprecedented), now is the time to buy (or at
> least hold, IMO).
Think abou it.
On Dec 08 09:19 AM Alan Brochstein wrote:
> To all of you who think that the Fed is "printing money", I ask you
> to "show me the money". The money supply numbers don't show it,
> so where can I find it? The government is running up debt and transferring
> wealth from the taxpayer to creditors (debtholders).
2) Why not ask what is more rational, shorting gold or trusting the government to do the right thing? You see, if the government does the "right thing" (combat deflation), then they risk inflation. Simple analogy: the bathtub. The water is leaking down the drain rapidly. The solution would appear to fix the drain, but you don't know how. So, you turn the water on to balance the outflow. You seem to be worried about overflowing the tub when the water is rapidly vanishing still. I am not trying to demean Joe Investor, but I really think he doesn't get it.
EXACTLY! Your Analogy is perfect because that is what our government has been doing for decades; we know we need a plumber to fix the leak but that would be inconvenient and time consuming so we decided to just keep running the water. Waters free right?
Now, lets say, that in my apartment building there is just one water main and every tenant splits the bill. Sooner or later some might figure out that the bill is going up. As long as they can’t figure out who is using so much water they will just complain about the bill. If things get bad they might call a tenants meeting where I might suggest water rationing and they may all agree - but still the bill goes up. It might still be working out for me if I am the chairman of the tenant committee in charge of water rationing so I can deflect attention away from me. I might suggest more and harsher water restrictions and still the bill might go up. At some point the other tenants’ may do their own figuring, and come to their own conclusions, which might, eventually, lead to a new policy. Or rather, when they figure out that I am using ten times more water than average - they may decide to cut my water off.
Here is another example.
I play monopoly with some friends of mine and we all enjoy it, but last year I decided it went too slow, so I re-structured the rules to where whenever I get into financial trouble the bank gives me $500.00. Financial trouble for me is like; I land on boardwalk and want it but don’t have the cash, you know. Anyway, it’s just a loan from the bank which I get because I am the banker. My partners don’t like this rule so I have to give the ingrates each a cut of $50.00. This works great though because there is a lot more money and large scale projects happen much faster. Everyone is better off but I tend to increase my debt load as time goes by - so I put in a new surcharge, where, when one of them lands on my property they pay me 2x the rental rate. This extra rate goes to service my debt which is important because it keeps me solvent which keeps the game going, you know. I always end up with all their stuff and it’s a wonderful game – except for their bellyaching – and I always win!:’)
My partners don’t want to play anymore.