Send Message
View as an RSS Feed
  • Gold Is A Terrible Inflation Hedge: Looking At The Numbers  [View article]
    You (and J.P. Morgan) have it exactly right.
    History (and not just the last 35 years) is needed to understand gold's role as money. For the last 44 years we have seen an experiment in fiat money and the results have not been stellar. In particular, it has not served as a good store of value, one of the requirements of "money". Indeed, since 1971, we have had a 471% inflation with a 1971 dollar equal to $5.71 today.
    This process has encouraged the taking on of ever increasing amounts of debt, the cost of which has been significantly reduced by the effect of inflation, which not incidentally, has also substantially increased asset prices.
    Presently, we are at the end of this cycle because the marginal return on additional debt is no longer attractive and thus inflation is no longer likely. Indeed, despite (desperate?) attempts to create some inflation, it has proven impossible to create even the most modest (2%) amounts of inflation. Who would have thought?
    The unfortunate reality is that we cannot create inflation because the deflationary forces are too great. Just look at the commodity markets for oil, coal, iron ore, copper, etc. that are selling for less than 50% of their highs. That's nice for the consumer, but not so much for those who have financed those activities. Soon we will see a few defaults, and then the deflationary snowball will gather some momentum. Eventually, we will see that J.P. Morgan was indeed right.
    Sep 19, 2015. 10:11 AM | 1 Like Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One  [View article]
    Gold will have value as a currency - which is its only value beyond its industrial uses and those do not account for a significant amount of its value. Cash will also increase in value in a deflation, because prices of goods and services fall. Currency, however is debt and because of the need to reduce debt in a deflation, currency is often devalued against gold. That's what happened in the '30's and in earlier deflations. That of course implies a return to some form of a gold standard.
    Sep 15, 2015. 09:19 AM | Likes Like |Link to Comment
  • Are We On The Precipice Of Another 2008?  [View article]
    It is not clear whether the clouds that are appearing in the world financial markets are new or whether they just represent a continuation of the storm that started in 2008. The problem then - as it is now - was too much debt (both public and private) and since 2008 every country of any economic significance has continued to increase their debt burden.
    Some countries, and the US in particular have taken significant steps to reduce the risk profile of their financial institutions, which, among other things, involved moving private debt to the public balance sheet.
    Presently, we are seeing some fraying at the periphery of the financial system (Greece, Portugal, Brazil, Argentina and Russia to mention a few). The most worrisome element right now is the collapse of the commodities market and while cheaper gas, iron ore, copper, etc. may look like a good thing to the consumer, it looks ominous to those who have provided the financing for that sector.
    The real danger is not the losses or write-downs in the financial sector, but the loss of liquidity for the banks (and financial intermediaries) that can occur when lenders to the financial sector get nervous. As we know from history, there is no amount of capital that will protect a lender against a loss of short-term financing. And when, or if, that happens it's Katy bar the door.
    Sep 12, 2015. 10:54 AM | 6 Likes Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One  [View article]
    Two points to your comment:
    1. Gold was not a "hedge" for the US dollar in the '30's because, at that time dollars were freely exchangeable for gold at a fixed price. When Roosevelt devalued the dollar against gold in 1934, the price was fixed at $35 per ounce and US citizens were prohibited from owning gold, the dollar remained fully exchangeable for gold at this price until 1971 when Nixon severed the link between the dollar and gold.
    2. Subsequent to 1971, gold has not been linked to the dollar and has appreciated substantially from its price in 1971 - as I am sure you will agree.
    Sep 11, 2015. 09:13 AM | Likes Like |Link to Comment
  • It Wasn't A Crash, But It Could Become One  [View article]
    I would note that gold is a good hedge in a deflation, because a deflation makes debt more expensive to service thereby creating bankruptcies, which, in turn, make debt suspect as an investment. People forget this because deflation is a rare event; however, in every deflation in economic history gold has performed well. Indeed, often because the government decides to devalue its currency (debt) against gold. That's what happened in the US in the '30's.
    Sep 10, 2015. 09:56 AM | 1 Like Like |Link to Comment
  • Greece And The Gold Drachma: A Possibility For Returning To Solid Fiscal And Monetary Policy  [View article]
    I am talking about the world financial system.
    Aug 20, 2015. 08:24 AM | 1 Like Like |Link to Comment
  • Greece And The Gold Drachma: A Possibility For Returning To Solid Fiscal And Monetary Policy  [View article]
    An interesting article. Personally, I am of the view that deflation lies ahead (if we are not there already - e.g., commodity prices). If that is true, then the only way we can lessen the debt load is to devalue the currency against gold and revert to some sort of gold exchange standard as existed prior to August 1971. Indeed, there is no precedent for doing anything else in a deflation.
    Aug 18, 2015. 03:03 PM | 1 Like Like |Link to Comment
  • Gold demand plunges to six-year low  [View news story]
    Looking at the supply and demand equation for gold is pretty boneheaded. Very little of the gold that has been mined is ever consumed; instead it is hoarded - by central banks and investors. As a result, the "supply" is truly vast. That makes it very hard to measure supply and demand in the traditional manner.
    Indeed, gold's principal function is to serve as money. That's why the majority of the gold supply is held by the central banks. They count it as money and so should we.
    Aug 13, 2015. 08:51 AM | 2 Likes Like |Link to Comment
  • Gold's Artificial Lows From Extreme Shorting Attack Won't Last  [View article]
    There are many ways to guess at the value of gold after the debt bubble bursts. I would opine that around $12,000 per ounce is probable because that would restore gold as a percentage of international (central bank) reserves to roughly the amount (50% of total reserves) that existed from 1950 to 1971 on average during that period. Bottom line, the increases in the price of gold following a bursting of the bubble are going to be very significant even if they are much less than your and my guesses.

    As an aside, I would note that the "total" amount of derivatives outstanding grossly overstates the values at risk. A single derivatives transaction generates multiple transactions of the same risk amount as counterparties hedge their book. In addition, derivatives transactions have no principal risk as (unlike bond transactions) no principal amounts are exchanged. Instead, they involve exchanges of cash flows on "notional" amounts.
    Aug 10, 2015. 09:35 AM | Likes Like |Link to Comment
  • Gold's Artificial Lows From Extreme Shorting Attack Won't Last  [View article]
    I wouldn't expect a meaningful move in the price of gold until the debt bubble bursts - as it surely will. At that point, I would expect to see prices to rise by more than $1,000 per ounce.
    The big question is when will that happen and that is very hard to determine because it will almost certainly will result from a seemingly random event. In the mean time, the world's central banks will continue their extreme policies to counter the forces of deflation, much as did Sisyphus with his rock. Ultimately, they, like Sisyphus, will be unsuccessful.
    Aug 9, 2015. 10:39 AM | 2 Likes Like |Link to Comment
  • Credit Deflation And Gold  [View article]
    The Wall Street Journal late last week reported that
    China has itself reported out its central bank’s gold
    holdings as of the end of June: 53.32 million troy ounces,
    up 57% from the last time the Bank reported the same
    back in ’09. As the IMF now reports, the US continues to
    hold the world’s largest reserves of gold: 261.5 million
    troy ounces, with Germany, Italy and France 2nd, 3rd and
    Jul 20, 2015. 10:14 AM | Likes Like |Link to Comment
  • Credit Deflation And Gold  [View article]
    Most people see gold primarily as a hedge against inflation and are inclined to sell gold when the risk of inflation seems low or the greater risk appears to be deflation. The reality is that in a deflation debt becomes suspect and gold becomes a safe haven.
    It is equally true that devaluing a currency against gold (assuming a gold exchange standard exists) also serves to get rid of excess debt. Indeed, that's what the US did as explained above on several occasions (as did Great Britain as well).
    It is also worth noting that being the largest holder of gold, the US has the most to gain from a return to a gold exchange standard.
    Jul 17, 2015. 11:22 AM | Likes Like |Link to Comment
  • Greece Bailout Agreement Adds To GLD Selling Pressure  [View article]
    Not really; the US has the ability to print dollars to pay off its debt, while Greece cannot print Euros.
    With respect to the currency, I expect that the dollar will be rising vs. other currencies because of the $9 trillion or so that has been borrowed and converted into other currencies (e.g., dollar mortgages in Hungary). This represents a gigantic short position against the dollar that will need to be covered.
    Jul 17, 2015. 08:52 AM | Likes Like |Link to Comment
  • Greece Bailout Agreement Adds To GLD Selling Pressure  [View article]
    I would note that US debt is well over 100% of GDP. Your numbers do not include the US Treasury debt owned by the Social Security Trust. It is often excluded on the theory that it is "owed to ourselves". The fact is that it is a debt of the Government owed to all of the payers into the trust and really reflects the borrowing of money that has been spent. Eventually, it will need to be repaid when outflows from the Trust exceed inflows.
    Jul 15, 2015. 10:50 AM | Likes Like |Link to Comment
  • Greece Bailout Agreement Adds To GLD Selling Pressure  [View article]
    If you think that Greece will be able to pay any of their debts or meet the conditions imposed on them, I think that you have either gone through the looking glass or are somewhere in la la land. Just meeting a primary surplus in 2015 will prove to be impossible.
    But that is not really the issue and anybody whose gold investment turns on whether or not Greece blows up is misguided. Greece only illustrates the problem that the world economy faces: excessive quantities of debt that can neither be repaid nor serviced at "normal" interest rates. Even in the US, growing your debt faster than you grow GDP eventually takes you to a very bad place.
    Right now storm clouds are forming everywhere:China, Japan, Russia, etc. Puerto Rico and Greece are indeed minor in the scheme of things. Remember Penn Square Bank? That was a small unheard of bank that took down Continental Illinois (the 7th largest US bank at the time). Why? Because their involvement with Continental Illinois caused them to lose a significant part of their short term funding.
    That's how these things start; never with something obvious. For my part, I find it hard to see how we will avoid the storm that invariably follows the creation of excess debt and that is the reason to own gold, not to try to make a few bucks off of a $100 move.
    Jul 14, 2015. 06:10 PM | 10 Likes Like |Link to Comment