7 Myths About Gold Debunked: Bubble Warning; $600 Target?

A bubble is when prices gets distorted from fundamentals by speculation, fear, market manipulation, etc; they are different from cycles which are the natural trade-off and re-adjustment of supply and demand. The difference is that bubbles pop (see here). The problem with understanding gold is that it's hard to work out the fundamentals, which explains why there are so many myths about it.

Myth#1: The price of gold correlates with CPI in USA

That gold long-term is a hedge against inflation is undisputed; legend has it that a toga in ancient Rome cost about the same in gold as a suit today. But I just saw a special offer at a Savile Row tailor for suits that were priced at £2,000 last year, going for £500. So if the "toga" theory is correct, gold should now be worth a quarter of what it was worth last year, like $250? And that's not counting the fall of the pound/dollar exchange rate.

But then any self-respecting economist can explain how it is, that although now the price of just about everything is going through the floor, that is not "deflation" that is "disinflation", and they will tell you, anyway. that's not "core".

One question: if we take (a) food, (b) gasoline, (c) housing, (d) automobiles, (e) clothing, and (f) computers out of the CPI calculation (the cost of all of those are going down)...is there anything left?

Here is a chart of the price of gold (annual average) against the US CPI deflator:

That is not a good correlation; what it proves is that based on current published CPI numbers there is a 95% chance that the price of gold should be somewhere between $300 and $1,200 (and a 5% chance it will be outside that range).

That's not very helpful; sure long term perhaps, but there is something wrong with that comparison, although it probably proves that the new idea that's floating around in some quarters that gold protects against inflation AND deflation, (the universal protector against all things bad), is unlikely.

All it really proves is that either over the past thirty-five years or so gold was massively mispriced from time to time (some people say there was a conspiracy), or there was something massively wrong with the CPI numbers (more on that later).

Myth#2: Long term gold has been a fantastic investment

This is a plot of the price of gold (annual averages) compared to the S&P 500 and housing in USA since it was "liberated" from the gold standard in 1971.

That's not strictly a "fair" comparison because if you had stocks you would have got dividends, and if you had a house you could have rented it or saved on the cost of renting, whereas if you had gold it would have cost about 1% a year to store it.

But just for illustration, if you bought gold in 2000 you would have more than tripled your money, if you bought stocks then you would be down 40%. If you bought gold in 1980 you would have watched it slowly slide to about half by 2000.

It depends on your perspective; like they say, investments can go up and they can go down, trick is of course to buy at the bottom and sell at the top.

Myth #3: Gold does not have bubbles and busts

The little gray circles on the chart are bubbles and busts. Since Gold got liberated from the gold standard in 1971 it has had two bubbles and busts, so did the S&P 500; housing (in USA) has had one (commercial property had two and UK housing had three).

I can't help wondering...isn't it the "season"?

Myth#4: Technical analysis warns of bubbles popping (and the "technical" for gold is great)!

I trawled through of articles leading up to the recent stock market crash, very few said "Grab your money and run a mile", at least until it was too late.

I'm not trying to score points; but as far as I understand, that analysis predicts where the herd is likely to head, short-term. Well you can predict where a herd of lemmings is going to go next, ninety-nine times out of a hundred, but that says nothing about when they are all going to jump off a cliff.

The latest survey of analysts by Reuters confirmed that none of the analysts think this lemming is even contemplating jumping off a cliff. Why does that not impress me?

Myth#5: All that new money will cause hyper-inflation so gold will rocket.

This is what just happened:

1. The banks lent a lot of money.
2. People used that money to buy all sorts of things, much of which they didn't really need and most of which did not generate income that could pay the loan back, that's inflationary.
3. Then the people who borrowed the money didn't pay it back.
4. The banks were then "technically" insolvent
5. The government printed some more money and handed it over to the banks to help make up for all the money they had lost.

The problem is that it looks like the amount of money that has been printed so far is a lot less than the amount of money that was lost.

Also, regardless of what clever accounting standards you use, the reality was that money was actually "lost" when it was handed over to the people who didn't pay it back, not when the genius bankers and their auditors finally woke up to the fact that it wasn't coming back. So there was a time when banks were throwing money around with gay abandon, and THAT caused inflation, THEN...(just no one noticed - more on that later).

NOW it looks like there is deflation (unless of course you are an economist), prices and incomes are going down and there is an expectation they will go on going down, and banks are not throwing money around with gay abandon. Chances are it will stay that way until the market for securitisation re-starts (see here), and that's only going to happen after some of the more obvious flaws have been fixed (see here); here is a piece of advice, don't hold your breath.

All that happened so far was propping up Zombie Banks. That doesn't cause inflation. That's what they did in Japan where it caused deflation; just this time, in the USA, they put a different spin on it. Professor Antal Fekete wrote a great article on that (see here).

Myth #6: Gold is essential to back up a currency

Money is nothing more than something used to facilitate trade. So say I got a cow and I want to buy one banana; well I could cut off the cow's ear and trade that for a banana, or I could sell the cow for money (of a style and denomination that I know the banana seller will accept), and use a small faction of that money to buy the banana.

It doesn't actually matter what the money is. It could be beaver pelts (very popular with early American settlers), it could be rare cowry shells, it could be silver, it could be gold, or it could be an asset backed security (ABS) or even asset backed bits of paper saying 'I promise to pay the bearer one banana' or whatever. So long as there is a broad consensus on how much a cow's ear and a banana is worth in the currency of choice, it works.

Fiat currency can work too and it's not new; the Chinese had it in the Sixth Century (and it got out of hand then and caused massive inflation); that's backed up by the promise of governments that they can tax their subjects until eternity (although whether the future generations will be inclined to accommodate the debts being run up now is less than completely certain, as the Governor of California is finding out).

Take an example:

1. 1920, the German government had agreed to pay huge sums of money in reparations under the treaty of Versailles.
2. They didn't have any money, they certainly didn't have any gold, and they were afraid to raise taxes or cut spending, so they printed it, lots of it.
3. Foreign speculators then shorted this money, and it's value went down-down-down.
4. After three years one "old" mark was worth (in terms of buying stuff) basically nothing.

That was hyper-inflation. There is still a bit of a debate as to whether the cause of that was (a) printing the money in the first place or (b) the foreign speculators.

Anyway in 1923 along came a very smart guy called Gustav Stresemann who "created" a new money, called the rentenmark, this was "backed" by agricultural land and industrial infrastructure...sound's familiar?

So instead of "promising to pay the bearer one ounce of gold" or whatever, this money promised to pay the bearer "two cows, five acres of land in Bavaria, and a second-hand bottling machine". Another word for that kind of money is an "asset-backed-security", which works great so long as everyone believes in the value of the asset backing the security.

Thanks to that 1923 to 1929 were the "golden years" when Germans enjoyed stunning prosperity. Then along came the US stock market crash, followed by Great Depression, then unemployment, then war; but that was nothing to do with the color of the "money" that Gustav Stresemann created.

This is the thing: when the Fed buys a Treasury that increases money supply, same deal for when a bank (or an insurance company or a pension fund) buys an ABS.

Up to recently a large part of the credit in USA was backed by ABS, now that "shadow central bank" got shut down. Until it starts up, the real central bank is going to have to take up the slack, but unless they print money faster than the ABS system was creating it AND faster than the bankers managed to lose it, that's deflationary. And by the way, they can't just print it, that's an illusion, as Professor Fekte points out the Fed must “post collateral with the Federal Reserve agent (who is not under the jurisdiction of the Fed but under that of the government)”.

Myth #7: The price of gold is historically 15x the price of oil

That's an industry "rule of thumb" in some quarters, but is it right? Here is a plot of oil price against gold (annual averages).

The line that is zeroed and says gold = 11.9 times the oil price, (not 15 by the way), that has an R-Squared of 45% which means that the formula explains 45% of the changes in the gold price since 1971. That's not much better than CPI as an explanatory variable.

76% R-Squared is a lot better but hardly perfect, if history repeats it should get you within +/- 25% ninety-five percent of the time (it's the other 5% of the time that's the kicker; that's called a Black Duck or something).

So why does oil correlate with gold and CPI doesn't?

Perhaps someone made a mistake in calculating CPI? That's not a new idea; this is a plot of the reported CPI in USA compared to the annual change in the price of oil:

In the 1970s America imported 40% of it's oil (and that dropped to 30% by 1975), then there was a fantastic correlation between oil prices and CPI (one or two year lag).

Then in order so that they could "streamline" the foundations of the great new QTM monetary theory and do "Inflation Targeting", they changed the way CPI was calculated, and "miraculously" that correlation disappeared, even though in 2008 America imported 70% of it's oil. And surprise-surprise, magically inflation disappeared too!

But did it really disappear?

Perhaps a better measurement for inflation over the past fifteen years since they cleverly changed the way it's measured, was the price gold?

That would explain the huge rise in the price since 1999, so perhaps the Bureau of Labor wasn't keeping track of "real" inflation...but gold was?

Next?

In a recent article I looked at the things that cause bubbles (see here), it looked like one was fear, another was "easy-money". Well there was a lot of fear recently, and also there was a lot of money floating around (in some quarters), that belonged to people who had managed to avoid the pop of the stock markets and real estate. And that money had no-where to go; some of it went into gold. So there was an outbreak of fear, and there was an outbreak of easy money, those are the two essential ingredients for a bubble to form.

If that's right whenever the fear subsides (the recent rally in the stock market and the rate of change of the rate of change of the rate of change in house prices appears to be stabilizing, suggests that the blind terror of six months ago has eased), or whenever the supply of loose money looking for a home, runs out, then if there was a bubble, it might pop?

Of course the link between oil and gold is most probably not direct (likely oil price rises cause "real" inflation and gold is driven by "real" inflation (rather than the numbers put out by the US Bureau of Labor)).

But let's suppose that relationship between oil prices and gold holds; if so, the thing that will determine the "correct" price of gold will it be the price of oil.

In that case the key is where will oil go?

That's a hard call. Previously I suggested that in the medium-term that was more to do with politics than markets or GDP (see here). If $147 was a bubble (rather than a supply/demand cycle) and $32 was the trough that followed, market-long-wave theory says the equilibrium should be about $58.

That's about where it is now, so put that into the formula (above) and you get an "equilibrium" price for gold of about $611. Now it's about $930 so by that logic, now it's about 50% too high, and market-long-waves says that if that was a bubble, and it pops, the trough could be 34% below the peak (1-1/(1.5), which would get it down to about $400 at the bottom.

But I don't think $147 was all bubble. I figure the "right" price now is about $75 which is the Saudi target and I think what Saudi wants Saudi will get. That gives the equilibrium price of $746, so if (big IF) today's price is a bubble and it pops, then by that logic the bottom will be about $600.

How about CPI?

The way it looks gold IS sensitive to inflation, just it doesn't look up the US CPI numbers, which proves that "gold-bugs" are smarter than the US Bureau of Labor (which isn't saying much). So how about "repairing" the CPI numbers?

There are people who did that (see here and here), but they don't completely explain their methodology, so it's hard to figure if they got it right or not.

The most likely error is the change in methodology in 1999 which basically meant that the shelter component of CPI tracked rents, which was an idea that can most charitably be described as completely idiotic.

So how about adding 50% the increase/decrease in house prices x 30% (about the weighting of shelter). I call that CPI_X. That's pretty random, but just to see; this is what you get:

OK I admit it, I got to the number of 50% on the house price inflation (and deflation or disinflation if you like), by "iteration".

The "plain-English" way to say that is "I cheated", but it looks like a nice story that fits with the idea of how bubbles form, and then pop, so humor me, let's run with that idea for a moment.

The period 1971 to 1981 was a period of "fear", OPEC had demonstrated that it had a firm hold on the soft parts and if it felt like squeezing then that's what it would do. On top of that, they couldn't spend all the money that started rolling in fast enough so they sensibly shipped it across to a place that could, and...(easy money + fear = bubble).

In about 1980 oil prices started to edge down as other sources of supply were brought on line (example the North Sea), and by 1986 it was game-over and the Saudi's capitulated as the "swing-producer". Also by that time the oil producers had started to figure out ways to spend more of the money at home.

And if that's the explanation, then, well... (no easy money + no fear = pop).

If that's right then the "right" price for gold right now is about $750, which is about where the second "oil" logic argument ended up, so if there is a pop, then the outcome of that will be a bottom of $600.

I know all the "technical" people are saying that gold is stable and there is a possibility of a big jump at some point. I don't see that. I smell a bubble.

No positions.

Comments

[Caveat M. Tor:]

You're right about them, but they're both correct ONLY if all four events are uncorrelated with each other, that is, they're all completely independent events. If the occurrence of any one event changes the probability of another, then both authors are wrong. This world is a more complex place than most people think!


On Jul 21 10:55 AM Whippet wrote:

> Actually, everything you both said is correct. The author is just
> incapable of accurately reading a comment... it carries more weight
> to blast off in error.

Jul 21 12:58 PM

[Whippet:]

Good observation. If only the Wall Street Quant Gods understood this when assessing the risk of MBSs and CDOs... it's one thing that precipitated the whole collapse.


On Jul 21 12:58 PM Caveat M. Tor wrote:

> You're right about them, but they're both correct ONLY if all four
> events are uncorrelated with each other, that is, they're all completely
> independent events. If the occurrence of any one event changes the
> probability of another, then both authors are wrong. This world
> is a more complex place than most people think!

Jul 21 01:23 PM

[Tony Daltorio:]

As some other commenters have noted, the key to the article is the words "So Far". The people who think that gold is in a "bubble" (and who somehow miss that the biggest bubble in history is occurring in US Treasuries) believe that the Federal Reserve is done with their policy actions.

Let's say a year from now the US is experiencing continuing negative economic growth and an increasing unemployment rate of 15% and climbing. These people actually think the Fed will say "we've done enough, we want to be prudent, we don't want to risk inflation".

Hey, I've got some swamp land to sell you! What the Fed WILL do is print tens of trillions more dollars in an effort to boost the economy. Perhaps even offering to pay some of consumers' debts directly.

Jul 21 01:42 PM

[Whippet:]

You're right, but it's even worse. The Fed has already gunned the M1 supply to unforeseen levels, thereby increasing inflation risk. If the Fed is done, they've still gone way too far. If/when liquidity returns, and this money is fractional-reserve multiplied, the Fed will have to flood the market with Treasuries to soak up the liquidity. This will gun 10 and 30 year yields and kill any nascent recovery (bad politics) or create massive inflation (bad politics, but can be obfuscated.) This of course nixes any sort of Fed monetization of monthly Treasury auctions, and we know they'll be printing bonds at record rates well into the future. Which will Helicopter Ben choose? He seems to be pretty confident he's got it under control, today...


On Jul 21 01:42 PM Tony Daltorio wrote:

> As some other commenters have noted, the key to the article is the
> words "So Far". The people who think that gold is in a "bubble" (and
> who somehow miss that the biggest bubble in history is occurring
> in US Treasuries) believe that the Federal Reserve is done with their
> policy actions.
>
> Let's say a year from now the US is experiencing continuing negative
> economic growth and an increasing unemployment rate of 15% and climbing.
> These people actually think the Fed will say "we've done enough,
> we want to be prudent, we don't want to risk inflation".
>
> Hey, I've got some swamp land to sell you! What the Fed WILL do is
> print tens of trillions more dollars in an effort to boost the economy.
> Perhaps even offering to pay some of consumers' debts directly.

Jul 21 02:43 PM

[KIT:]

To force world economic activity to available gold supply would by need send gold price to the moon. Just inflation in a new form but this time you would never want to sell gold or use your gold based dollars as it would always be worth more tomorrow. (fullstop)


On Jul 21 10:53 AM Whippet wrote:

> Isn't that the problem? When our wages inflate, it pads our ego,
> but takes REAL money out of our wallets thanks to progressive taxation.
> "Gold bugs" would rather see a return to hard currency and systemic
> Austrian deflation- where money retains its value and does not have
> to be risked with banksters to stay even (or earn 5% a year in taxable
> income when real CPI inflation is 8%). MONETARY deflation makes a
> zero interest rate positive. Keynesian deflation is a system of systemic
> economic collapse. Do not confuse the two.

Jul 21 06:48 PM

[HA65MPH:]

AUTHOR , WAS LONG WINDED , TRYING TO PROVE HIS POINT , ...LIKE OBAMMANATION READING HIS 'TELEPROMPTERS'...BLAH... HE HAS NO 'POSITION , MORE GOLD AND SILVER FOR US 'BUGS''...

Jul 22 02:09 AM

[Andrew Butter:]

You are correct, the problem that I see is that however hard they appear to be creating inflation, it doesn't seem to be working...at least yet.

I suppose at the back of my mind is the concern that they are still using the formulas that catastrophically failed in the past.

I would be feeling much more comfortable if the mandarins were focusing on creating an environment for real sustained economic growth rather than manipulating the currency to get them out of the hole they dug for themselves.


On Jul 20 10:04 AM DONE_SONZ wrote:

>
>
> Monetary policy will cause an asset price boom. Added liquidity increases
> the demand for assets, thereby causing their prices to rise, stimulating
> the economy as a whole.Asset charts don't lie.That is the way the
> game is played. There is no bubble in gold."money lost" is a change
> of hands.

Jul 22 04:24 AM

[Andrew Butter:]

Sure, divide the total amount of fiat money in the world by the total amount of gold and you get $9,000.

So why isn't it up there?


On Jul 20 10:54 AM Barbarous Relic wrote:

> Gold is effectively a fixed supply commodity -- that is the primary
> reason it makes an ideal store of value.
>
> A little bit gets produced every year, while a little bit gets consumed
> every year to make jewelry. The net of these is miniscule compared
> to the size of the inventory of usable gold in existence in non-jewelry
> form. Thus the volume of that inventory barely changes from one
> year to the next.
>
> Contrast that to steady growth in the amount of paper currency in
> existence. Gold doesn't increase in value over time -- rather the
> unit value of paper currencies simply falls over time relative to
> the unit price of gold.

Jul 22 04:27 AM

[Andrew Butter:]

My point in the end was not that gold is not a good hedge against inflation, it was that since 1987 and particularly 1999 the CPI numbers that were reported were nonsense.

OK I admit I was shaking the tree a bit with that chart - it's so easy to upset gold bugs, sometimes you can't resist.

My big point is simply I'm not certain that "real" inflation is coming any time soon, to produce inflation with monetary policy you need economic growth, that's not happening.


On Jul 20 03:13 PM Whippet wrote:

> Mr. Butter,
> You lost me with your obvious manipulation of statistics (to prove
> your point, of course!) in Point 1. To debunk the case that gold
> has a correlation to CPI, you went all the way back to 1984. This
> firmly anchored your "chart" in the worst period gold has ever had,
> for a reason stated by a commentor above: this was a period of REAL
> POSITIVE INTEREST RATES. There was confidence that the Dollar Ponzi
> was being held low at this point in time, because we had the last
> responsible Fed chairman to date. Try taking your chart back to
> 1913- an actual sensible basis for it, as this was when gold was
> effectively demonetized. You will see that a $20 St Gaudens then
> would be worth $917.86 today. Compare real wages, prices, etc. of
> the day and that 46x inflation is not a "bubble".
> Now I'll go back and attempt to give the rest of your arguments a
> fair shake.

Jul 22 04:34 AM

[Andrew Butter:]

I don't think it is a good idea to borrow money from the taxpayers account to pay of the past debts of imprudent banks. That just makes them whole, it does not do anything for the economy.

The argument is the economy can't work without banks, sure, but why not just let the lot of them fail and create new banks?


On Jul 20 02:03 PM User 360912 wrote:

> "The problem is that it looks like the amount of money that has been
> printed so far is a lot less than the amount of money that was lost."
>
>
>
> Since you've figured out how to stop the annual deficit from ballooning
> to over a trillion dollars for the next decade, please inform Congress
> and the Obama administration so that our future will not be in economic
> ruin.

Jul 22 04:38 AM

[Andrew Butter:]

Good points, I admit that I did not look hard at the differential between interest rates and "real" inflation, I should have.

I have a problem with Shadow Stats numbers mainly because they are so different from the official numbers, there are two points, the first is the re-weighting to go along with the idea that Allan Greenspan expressed which was "if the price of steak goes up people can eat hamburgers", the logical conclusion of that argument is that if the price of hamburgers goes up people can eat minced rat meat, all the way down to cockroach soup.

But I do accept that as technology and the way people live changes you have to account for that. It's hard standing on the outside to see if they got it right or not.

I like what I call CPI-X because the logic of "rental equivalence" is so obviously flawed.

I think a big issue is whether Treasuries are a bubble, Professor Fekete thinks not.


On Jul 20 01:41 PM E.D. Hart wrote:

> Your article was beautifully written, well documented, and mostly
> correct in the basic facts--and your conclusion was entirely wrong.
>
> Here's another way to think about gold:
>
> Real interest rates positive = falling price of Au (1980-2000 approximately)
>
>
> Real interest rates negative = rising price of Au (2000-???)
>
> As long as we have negative interest rates (and that looks to be
> for quite a while) we will see rising gold, and commodities generally.
>
>
> For my purposes I don't rely on bureaucratic cpi which are bogus,
> but on adjusted real inflation as put out by shadowstats.com. Yes,
> I realize that the government reports low inflation numbers.
>
> There will be corrections along the way--as we have seen in oil,
> and gold could drop 10-20% in a matter of weeks, but it won't be
> a bubble bursting; it could be dumping, Goldman Sachs-Government
> manipulation, IMF de-hoarding, etc.
>
> Long term, we are in a golden bull market, and silver will be even
> better. Why? Supply and demand. Capital assets seeking a safe home
> in assets that rise with the deluge of dollars.
>
> Instead, we are in a treasury bubble--look there for your bubble
> to burst. (buy TBT)
>
> There is no bubble in gold , its a bull market and will remain one
> until we get a new fed chief; a neo-Volker to raise rates above the
> real rate (not cpi) of inflation. Look for that to happen in 2018-2020.
>
>
> In the mean time, buy gold on the dips, and sell your eroding treasuries.

Jul 22 04:53 AM

[Jade Bond:]

There's a couple myths in this analysis, too.

1) "CPI is a price index".
Not since sometime in the 90s. It's a cost of living index, which means some prices get treated differently than others. Don't expect them to correlate any more than the price of food vs. the price of space shuttle launches.

2) "The amount of money that has been printed so far is a lot less than the amount of money that was lost."

Money didn't get lost. It was always sitting around in someone's bank balance. My stock price declines don't destroy money in my account - my money was transferred to someone else's account and now I have to find twice as much to get the same money back. But whomever sold still has all that money. Look at MZM, M1, and M2.

3) Gold bugs say gold is essential for backing money.
Who ever said that? No, the claim is that it provides more predictability to monetary value, like the SEC rules on corporate stock issues provide predictability on stock prices by limiting how and when a company can dilute it's paper claims against assets. Imagine how erratic equity prices would be if corporations could (euphemistically) print more stock and bond certificates to sell into the open market, and the only way you could find out was digging deep into the footnotes of 10-Q filings.

With analysis like that, I quite reading.

Jul 22 09:07 AM

[KIT:]

Because we are off the gold standard and use all assets of the nation ,wheat, copper, uranium, home value, the navy ships, everything of value


On Jul 22 04:27 AM Andrew Butter wrote:

> Sure, divide the total amount of fiat money in the world by the total
> amount of gold and you get $9,000.
>
> So why isn't it up there?

Jul 22 08:17 PM

[Andrew Butter:]

1: You are right CPI has had nothing to do with inflation since 1987, and forgive me for baiting the gold-bugs but I just couldn't resist.

Although come to think of it perhaps someone should have told that to Allan Greenspan and Chairman Bernanke because they still seem to be under the impression that it does have something to do with inflation, at least when they do their magic "Inflation Targeting"?

2: I didn't say the money "disappeared" I said it was lost, if someone takes money out of your bank account and runs away and doesn't give it back, you lost money. But sure, the money didn't disappear just you don't know where it is and you got no control over it.

So where did the money go?

Well look at the current account deficit, that's a clue. The money that left the shores of USA is not in USA any more and no one in USA has any control over it.

With regard to money supply, the broadest definition includes "liquid" securities, once that was just Treasuries, then ABS got added to the list. Well those aren't liquid any more, that's the problem.

3: Sorry I slipped up I should have said "some" gold bugs, please forgive me for my insensitivity.


On Jul 22 09:07 AM Jade Bond wrote:

> There's a couple myths in this analysis, too.
>
> 1) "CPI is a price index".
> Not since sometime in the 90s. It's a cost of living index, which
> means some prices get treated differently than others. Don't expect
> them to correlate any more than the price of food vs. the price of
> space shuttle launches.
>
> 2) "The amount of money that has been printed so far is a lot less
> than the amount of money that was lost."
>
> Money didn't get lost. It was always sitting around in someone's
> bank balance. My stock price declines don't destroy money in my account
> - my money was transferred to someone else's account and now I have
> to find twice as much to get the same money back. But whomever sold
> still has all that money. Look at MZM, M1, and M2.
>
> 3) Gold bugs say gold is essential for backing money.
> Who ever said that? No, the claim is that it provides more predictability
> to monetary value, like the SEC rules on corporate stock issues provide
> predictability on stock prices by limiting how and when a company
> can dilute it's paper claims against assets. Imagine how erratic
> equity prices would be if corporations could (euphemistically) print
> more stock and bond certificates to sell into the open market, and
> the only way you could find out was digging deep into the footnotes
> of 10-Q filings.
>
> With analysis like that, I quite reading.

Jul 23 09:25 AM

[Andrew Butter:]

Absolutely correct.


On Jul 22 08:17 PM KIT wrote:

> Because we are off the gold standard and use all assets of the nation
> ,wheat, copper, uranium, home value, the navy ships, everything of
> value

Jul 23 09:27 AM

[5142152-337:]

Wasted time, wasted effort, a waste!

Jul 25 07:52 AM

[Poborsky:]

"And by the way, they can't just print it, that's an illusion, as Professor Fekte points out the Fed must “post collateral with the Federal Reserve agent (who is not under the jurisdiction of the Fed but under that of the government)”.

So what have they been using as collateral? Are you saying that they have taken out mortgages on say Chicago?

Aug 07 01:58 PM

[Andrew Butter:]

Treasuries they buy in the open market, see my next article on Securitization


On Aug 07 01:58 PM Poborsky wrote:

> "And by the way, they can't just print it, that's an illusion, as
> Professor Fekte points out the Fed must “post collateral with the
> Federal Reserve agent (who is not under the jurisdiction of the Fed
> but under that of the government)”.
>
> So what have they been using as collateral? Are you saying that
> they have taken out mortgages on say Chicago?

Aug 08 04:15 AM

[Poborsky:]

Yes they do. With printed money or quantitative easing if you prefer. Along with the other central banks, they are creating an illusion that the system is functioning properly. One of them will step out of line eventually when its not in one countries interests to prop up the ponzi scheme any longer, or a crisis in another country will cause it to collapse. Adding zeros to bank accounts and passing bits of paper around to each other will not bring about a solution. The same incompetent and greedy people who got us into this mess have been handed trillions of dollars to get us out of it. All they are doing is filling their own pockets again and robbing the decent people of the rest of their savings with more ponzi schemes. It is not particularly important whether gold is 100$ or 1000$ an ounce, or silver. The important thing is having hold of some for future use. Paper currency is only worth anything if the people have confidence in it. Confidence can evaporate very quickly, specially when the ponzi scheme starts to fall apart.


On Aug 08 04:15 AM Andrew Butter wrote:

> Treasuries they buy in the open market, see my next article on Securitization
>

Aug 08 09:19 AM

[Laurence Hunt:]

I commend Mr. Butter for sparking so much discussion and debate. His meticulous attention to detail is encouraging. And of course bearish articles on gold are the lifeblood of the contrarians who choose to invest in it.

However, I am another who reaches opposite conclusions from those of the author. I'll grant you Mr. Butter's downside target of $600 was a potential bottom call. But the likelihood of doubling that figure to the upside is now in sight.

Obviously there are factors at work in this market that Mr. Butter has not yet considered.

I look at it this way. You have two trains travelling two different directions. On one train, headed downwards, are all the inflating global currencies, losing real value - in most cases as a matter of policy - on an annual basis.

On the other train, headed upwards, are those items that are gaining in value relative to the currencies. In general, this includes the precious metals and the commodities - things that are real, if you like.

Things that are real don't "sit still" in value as the value of currencies declines. That's because investors jump ship, as gradually more and more choose the train that is on an uphill course. Their investment fuels the train, and the upward dynamic continues.

Both gold and commodities remain very cheap in historic terms today. The upside dynamic is nowhere near exhaustion. If anything, it is now moving into a more powerful phase.

So in my view, Mr. Butter has treated as static, factors which are in fact dynamic. That is the $600 error if you will.

So let's say it here and now. $1200 gold - soon. $600 gold, sayonara!

Oct 25 09:02 PM