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  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    Not so fast. The debt (approximately $3 trillion) held by the Social Security Trust Fund in the form of non-marketable Treasury Securities will be needed to pay benefits regardless. Changing the age requirements or means testing benefits will not have very much impact in the near term. Let's not forget that the money being paid out already exceeds the money being paid in so the $3 trillion Trust Fund is already being drawn on (NY Times, March 24, 2010).

    As for printing dollars, you are right; but in global markets doing so will cause interest rates to rise - which would be catastrophic. So far, the Treasury has been able to keep rates low through QE and much of that money has not been "used" which has been keeping velocity at low levels. The paradox is that if the Treasury is successful at restoring confidence, velocity will pick up and interest rates will soar. There is already way too much latent purchasing power out there.
    Feb 28 12:47 PM | Likes Like |Link to Comment
  • Has The Gold ETF Bull Market Run Its Course? [View article]
    Those of you who think that sound money policies are back should not own gold because gold never does well under those circumstances; those who think otherwise should make and/or keep gold investments. I would also add that we should all realize that prospective events occur seemingly slowly, while retrospectively, events appear to have progressed very rapidly. "The Great Crash 1929" by John Kenneth Galbraith is a good read (for all who have not read it) and demonstrates the seeming speed of events that were really spread out over the course of some five years.
    Jan 19 05:48 PM | 1 Like Like |Link to Comment
  • Gold And Silver Outlook For January 14, 2013 [View article]
    I am not sure what point fishfryer or jklk0429 are trying to make. "Petrodollars" simply refers to dollars held by OPEC members as the result of the sale of petroleum products and are represented by deposits in US banks regardless if they have been exchanged for other currencies or converted into Eurodollars. We buy oil in our currency and others generally choose to purchase oil in dollars because the dollar is the world's most liquid currency and the most frequently used in international trade. All purchasers of petroleum products look at the cost of petroleum in the context of their own currency, regardless of the currency used to settle the payment and it is not unusual for the cost of crude to be rising in one currency and falling in another.
    Jan 17 09:51 AM | 1 Like Like |Link to Comment
  • Gold And Silver Outlook For January 14, 2013 [View article]
    There is no such thing as a petrodollar. Let me explain: all dollars are deposits held by US banks or US branches of foreign banks. "Eurodollars" (and the wrongly named petrodollars - which are eurodollars) are created when a foreign entity buys something in US dollars. This purchase always creates a deposit with a US Bank. Should the owner of that deposit wish to invest it with a non US bank, that dollar is not put on a plane and flown abroad; instead, the US bank changes the ownership of that deposit from its original owner to the foreign bank (this is known as a "due to" the foreign bank. The foreign bank now has a new asset (a "due from" the US bank, and a new liability in a like amount to the original owner of the deposit in the US bank. Those new assets are called eurodollars, even though the foreign bank may not be European.
    "Petrodollars" are typically eurodollars owned as a result of the sale of petroleum products to the extent that the deposits created by such sale were exchanged for eurodollars, as described above.
    Alternatively, the original owner of the deposit may want to own a foreign currency. In that case, the deposit will be assigned to someone in exchange for foreign currency. But the deposit always remains with the US banking system. And if the foreign currency remains with the US bank, it will be in the form of a "due from" a foreign bank.
    That is a slight simplification of the process, but necessary to the understanding of what actually takes place. The success of the US dollar is based on foreigners' willingness to hold deposits at US banks. Were they to sell them all for foreign currency, the dollar would fall.
    Jan 16 10:07 AM | Likes Like |Link to Comment
  • The Bundesbank is repatriating at least part of its gold from New York (where 45% of the country's reserves are held) and Paris (11%), according to Handelsblatt. Steve Liesman says the Buba has confirmed the story, and the amounts are to be announced tomorrow. [View news story]
    The real question is why are they repatriating. I mean really why, not what they tell us. There is a message here.
    Jan 15 12:10 PM | 4 Likes Like |Link to Comment
  • Gold And Silver Outlook For January 14, 2013 [View article]
    In these transactions, the dollar only serves as a means of exchange. You can buy any currency and gold with dollars and use that to pay for crude (or anything else for that matter). Bottom line, we don't care whether our currency us used or not. The Japanese, for interested in what the cost of crude is in yen, not the instrument that they choose to use to pay for it.
    Jan 15 10:36 AM | Likes Like |Link to Comment
  • Gold And Silver Outlook For January 14, 2013 [View article]
    It is hard to look at any investment in a very short term context and that is particularly true with gold. Unlike most investments, gold is a hedge against "loose" money policies and, unlike most investments, does not have attributes such as earnings, cash flow or operating risk that serve to help in the analysis of its likely performance in the market. What impacts its performance are macro trends and events that are generally attributable to the economic policies of nations.

    The real attraction of gold today comes from long-term economic mismanagement in most of the developed world and the excessive levels of debt that have been allowed to accumulate. When usually wise and sane economists and treasury functionaries publicly suggest that the debt crisis can be solved by minting trillion dollar platinum coins or tearing up Treasury securities held by the Fed, you know that they are either desperate or not thinking. It does not take a college degree to figure out that if it were possible, there would be no need to collect taxes to cover government expenditures! That suggests to me that we are nearing the end of the "loose money" era and that the ending will not be managed or controlled, but rather, imposed by the market and thus disorderly.

    Beyond soon, it is very hard to know when this will happen, but you will want to own gold when it does as buying it then will be expensive.
    Jan 14 09:56 AM | 2 Likes Like |Link to Comment
  • Where Are We In The Secular Bear Market? [View article]
    I think that your point would be stronger and more apparent if you adjusted your charts for inflation. Had you looked at, say, Zimbabwe, your chart would be rising sharply as everybody was losing their money. Weimar Germany in the 20's is another example.
    It is unfortunate, but understandable that most investor advisors look only at nominal movements in the market, but even more unfortunate for those who do not realize that much of their gains are illusory for all but the government who taxes these illusory gains anyway.
    I believe that most people invest because they want to increase the purchasing power of their assets and if so should look only at real returns.
    Jan 9 04:09 PM | Likes Like |Link to Comment
  • 2013: The End Of Gold's 12-Year Winning Streak [View article]
    It's really pretty simple: when sound money policies are pursued, gold languishes, when they are not, gold flourishes. If you think that we (or anyone else in the developed world) is pursuing sound money policies, you should not invest in gold. Those who think otherwise should invest in gold. History will show that it is invariably a winning investment in those circumstances.
    Jan 6 11:22 PM | 7 Likes Like |Link to Comment
  • The central thesis of gold bugs - that the Fed has lost control of the money supply - is now "in tatters," writes Dennis Gartman. The bulls only hope is a more dovish FOMC in 2013. It may be so at the margin, but not materially so, he says. Gold -1.8%, but - as they say - off the lows[View news story]
    The real problem is that at some point money printing causes interest rates (swap rates, actually) to turn up. At that point, the die is cast and debt service becomes increasingly expensive, consuming an ever larger portion of revenues. Eventually, default is the only option. Latin America offers plenty examples, but so does Europe without needing to go further back than a single century.
    Sovereign defaults are a much better reason for purchasing gold than the simple fear of inflation.
    Jan 4 05:00 PM | 2 Likes Like |Link to Comment
  • Gold investors are making a "major mistake" if they think the latest Fed minutes indicate the end of QE is likely by mid-year or even year’s end, Peter Schiff writes, seeing the recent decline in gold prices as a buying opportunity. The Fed's hands are tied, as any end to buying Treasurys or MBS would result in higher rates that might tip the economy back into recession. Gold finishes the day at $1,648.90, -1.5%[View news story]
    The real problem is that at some point money printing causes interest rates (swap rates, actually) to turn up. At that point, the die is cast and debt service becomes increasingly expensive, consuming and ever larger portion of revenues. Eventually, default is the only option. Latin America offers plenty examples, but so does Europe without needing to go further back than a single century.
    Sovereign defaults are a much better reason for purchasing gold that the simple fear of inflation.
    Jan 4 04:55 PM | 3 Likes Like |Link to Comment
  • Gold Cannot Seem To Make A Move Even With Fiscal Cliff [View article]
    I think that anyone who buys (or sells) gold on the basis of demand (or lack thereof) from the jewelry or industrial users does not understand that the significant mover in the price of gold is its value as a currency.
    When sound money policies are followed by the developed nations, gold's value diminishes and when sound money policies are abandoned - as they have been for some time now - gold's value is on the rise.
    The really big mover of gold prices will be the inevitable default of one or more large banks and/or sovereign borrowers.
    Those who believe that zero percent interest rates will stay forever, probably believe in Santa Claus and the tooth fairy. Eventually, interest rates will turn up and the game will be over. Those who doubt this need only look at the percent of revenues that sovereigns spend on debt service now and what happens to that number as interest rates rise. Doing so will demonstrate that there are few nations who can pay interest rates that have been customary in the past without using up all of their revenues.
    Once that point is reached by one of the larger of the developed nations, all debt and all major currencies will become suspect and gold will become the safe haven.
    Dec 28 04:04 PM | 1 Like Like |Link to Comment
  • Paul Van Eeden On Why Gold Is Overvalued [View article]
    One might think (from the article and most of the comments) that the US was the only country in the world and the dollar the only currency. Obviously that is not true. In addition, in the developed markets "money" moves freely and events in say, Japan or Europe impact the financial markets in the US, just as water always seeks its level in series of interconnected tanks. In addition, limiting the analysis to the US money supply includes what are called (improperly) Eurodollars, (which are bank deposits held in the US by foreign entities) but does not include the leverage created by these dollars that support borrowing in dollars to finance, say mortgages in Hungary. As might be expected, those dollars were converted into local currency, the forint, to purchase the house - which means that dollars need to be purchased to service the mortgage. In effect, the Eurodollar market represents a gigantic short position against the dollar and will be the source of steady dollar purchases in the market. When added to the deleveraging taking place in the dollar banking system the effect is very powerful.
    It is also very dangerous because it is highly deflationary and in a deflation the problem becomes one of debtors not being able to service their debts; and, when that happens, all money (which is debt) becomes suspect. In addition, when that has happened in the past, the only solution has been to devalue the currency relative to gold. So far, I see no other solution on the horizon. Everyone would like to get rid of debt through inflation, but there are times when that does not work and I would suggest that this is one of them.
    Nov 30 11:02 AM | 1 Like Like |Link to Comment
  • Agreeing on the creaky condition of the fiscal position of Western governments, two economists come to the opposite conclusion on gold. Lombard's Leigh Skene thinks the EU debt crisis has set in play a deflationary spiral in which gold falls (and sliver plunges), while John Williams says 2014 will bring realization of the U.S. government's insolvency and a soaring price. [View news story]
    Pretty much everybody understands why gold increases in price during an inflationary period, but few understand why gold rises in a deflation. The answer is simple: in a deflation, borrowers can no longer repay their creditors and all debt becomes suspect. Gold is not someone else's liability and takes on the role of money as currency (which is debt) is no longer trusted as a store of value.

    I would also note that in past deflationary depressions the answer has invariably been found in the devaluation of the currency versus gold.
    Nov 29 09:41 AM | 7 Likes Like |Link to Comment
  • Commodity Chart Of The Day: Gold [View article]
    All that may be fine for traders, but if it were that easy, we would all be very wealthy. Gold like most financial assets move on the basis of events. If we were to return to stable money tomorrow, there would be no need to own gold, but I don't think that is going to happen soon. We think of say, a cash dollar as an asset, but forget that it is someone else's liability (or debt). Right now there is too much debt and much of it will never be repaid. That will happen either through inflation or outright defaults (deflation). In neither case do you want somebody else's debt.
    As for equities, there are hardly any that do not have a lot of debt. Those that have to default will take a hit to capital because debt gets repaid first.
    Gold suffers from none of these risks.
    Sep 28 05:41 PM | 1 Like Like |Link to Comment