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  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    It would be nice if we could do away with gold, but until politicians are no longer able to debase their currencies for political and other policy ends, we will need to find something that introduces discipline into the system if currency is to be a store of value, one of the important attributes of money.
    If you look at the history of money from the beginning of time you will see endless schemes to debase it and all have failed. One of the most interesting occurred just prior to the French Revolution, when the perennially broke French State decided to confiscate all church lands and use them to back a new currency, the Assignat. Since the church lands were finite, this, it was thought, would restore confidence in the currency, and indeed it did - until it was discovered that even this new wealth was insufficient to satisfy the state's needs and untold new Assignats (also backed by the same confiscated lands) were printed. It wasn't long before this was discovered and the Assignats soon became worthless. The next chapter was the Revolution.
    During all of these periods of currency debasement, ownership of gold served to protect one's wealth.
    One can argue as to whether another such economic crisis is at hand or not, but you cannot argue that if it, is one should not buy gold.
    Aug 26, 2013. 10:21 AM | 1 Like Like |Link to Comment
  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    All these comments demonstrate why we have vigorous and healthy markets; sellers can't sell without buyers and buyers can't buy without sellers. I think that sometimes people for get that there are two sides to every transaction.
    That being said, there have been times when it has been profitable to hold gold and times when it has not. Unlike equities which depend on earnings (and sentiment) and bonds which depend on interest rates, gold depends on the perceived soundness of money (and debt - which is what money is).
    Those who think that we have sound money now should eschew gold and those who think otherwise should embrace it.
    Aug 24, 2013. 09:06 AM | Likes Like |Link to Comment
  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    You can't talk about quantity and ignore price; there is always a price at which a commodity can be obtained. If we wished to return to the 1980's (when gold made up approximately 50% of central bank reserves) you could do so by raising the price of gold to approximately $11,000 per ounce. In fact, that is roughly the price that would be needed to return to a gold standard.
    Aug 22, 2013. 09:49 AM | Likes Like |Link to Comment
  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    The point is that the Great Depression was all about excessive debt levels. The Gold Standard was not responsible for the high debt levels and the best way to reduce them was to devalue the dollar against gold. Usually, excessive debt levels are reduced through inflation, but sometimes that doesn't work and you get deflation instead. The results are the same, but deflation is far more painful and harder to reverse.
    As a separate point, there is no such thing as a balance of payments deficit (that's why it is called a balance). I think that you are referring to a trade deficit which is offset by money flows to achieve a balance. So long as the money flows remain available, the trade deficit doesn't have an impact.
    Aug 19, 2013. 09:35 AM | Likes Like |Link to Comment
  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    I think that a more correct answer would be that under a gold standard, some countries tie their currency to gold (offering to buy it or sell it at a fixed rate). Other countries will need to periodically devalue (or revalue, which is pretty much unheard of) to maintain their competitiveness.
    If the quantities of currency were fixed (like the quantity of gold) or did not increase by more than marginal amounts (like gold), floating exchange rates would be fine.
    The real problem lies with the central banks. They have been increasing their asset bases at rates that boggle the mind. Recall that their assets (International Monetary Reserves or IMRs) can consist only of foreign currencies, gold and Special Drawing Rights; gold and SDR's have remained constant so all of the increase has been in holdings of foreign currencies.
    From 1968 to 1980 IMRs increased at an average annual rate of 22.7%; from 2000 to date, IMRs have been increasing at an average rate of 13.7%. Obviously, these rates of growth considerably exceed growth in world GDP and that is a real problem because the bulk of the IMRs are (unlike gold) debt and thus someone else's liability (which probably cannot be paid).
    In my view, the only way out is to reduce these debts by devaluing all currencies against gold.
    Aug 19, 2013. 09:24 AM | Likes Like |Link to Comment
  • Ron Paul Has It Totally Backwards, Gold Isn't Going To Explode Higher [View article]
    You make two statements that we can agree on:"Ron Paul isn't an expert in economics" and "I'm not an expert in gold".

    The rest of the article strikes me as very muddled. For instance, you state "If rates are going higher, it will be due to natural market forces attempting to reach a market equilibrium. Those natural forces would be a stronger growing economy and an increase in demand for capital." Is that how you would analyze the record high rates in the early 1980s? I think not.

    Or, "...strict adherence to the gold standard both during the 19th century and Great Depression was most likely a major contributing factor to the depth, length and severity of those depressions." I am not sure how you reached that conclusion, but I would note that one of the important steps that FDR took to address the depression was to devalue the dollar against gold (i.e. raise the price of gold). I would add that that worked pretty well until Nixon took the US off the gold standard in 1971. That left everyone to create currency at will (and at an accelerating rate). I would argue that this will end badly. Right now the US (along with the rest of the developed world) is creating debt faster than they are creating GDP and that ALWAYS ends badly.

    Or,"Ron Paul believes that the Federal Reserve is responsible for destroying 98% of the value of the US Dollar." We can argue as to whether or not the Fed was responsible for the destruction of the value of the dollar or not, but it cannot be said that the cumulative inflation since 1913 (the year the Fed was created) was not 2,260% or that it would take $23.60 dollars to equal $1 in 2013 (based on CPI). Unfortunately, one of the attributes of sound money is its ability to serve as a store of value and the dollar hasn't done so well in that regard and, I would add, far, far less well than gold. In 1971, gold was worth $35 an ounce; 42 years later it is worth $1377, a 3,834% increase. I doubt that you have been so fortunate in your investment results.
    Aug 17, 2013. 05:08 PM | 2 Likes Like |Link to Comment
  • What Do Declining COMEX Inventories Signify? [View article]
    GLD does not own derivatives; rather, they own physical gold in fairly large "baskets". If you own a "basket" you can always take delivery; if you own less than a basket you get cash. All of the gold they hold is stored in ware housed and regularly inventoried and anybody can access the inventory which shows the place of storage and the identification numbers on each bar of gold. That's way beyond anything that the Fed is willing to do with their gold and one may speculate as to why this is the case.
    Aug 8, 2013. 03:34 PM | 1 Like Like |Link to Comment
  • What Do Declining COMEX Inventories Signify? [View article]
    I am surprised to disagree with this author as he, invariably - in my opinion - gets it right. What may be happening and what I believe is happening is that people are becoming increasingly wary of lending their gold in the fear that they may not get it back and do not want cash settlement.
    The big problem with a cash settlement is the determination of the cash amount to be paid, a calculation that does not necessarily (actually is not likely to) provide enough cash to purchase the gold in the spot market. Indeed, were that the case, the exchange would always be able to simply use the cash settlement (that they would have paid to settle the contract) to buy gold in the spot market. The fact that they are unwilling to do so tells us that they are concerned that the cash settlement amount might not be sufficient to purchase as much bullion as the investor "owned" in the futures market. To the extent that the investor, like Kyle Bass, is not indifferent between a cash settlement and a physical settlement, this will push up the spot price of the metal.
    This is why declining quantities of registered gold is significant.
    Aug 8, 2013. 03:29 PM | 1 Like Like |Link to Comment
  • Gold/GWP: Why Gold May Still Have Further To Fall [View article]
    I am left unimpressed by this analysis because it fails to identify what, over the very test of history has been the driver of gold prices or their relation to currency, which is the only way to understand gold.
    Bottom line gold has been widely (and for centuries) recognized as money. It is not a particularly good means of exchange relative to currency - whether in the form of paper notes or bank deposits - but it has always flourished as a store of value when currencies have been debased. Indeed, it is one of the principal methods of measuring the extent of the debasement.
    It is also true that currencies are not being continually debased even though that might seem to be the case currently. During periods of stability (sound money) gold has languished because it has had no role to play, but in periods if instability that has not been the case.
    Most people worry about currencies being debased by inflation, because that is generally how most debasement occurs. Until 1971 there had always been at least one currency exchangeable for gold at a fixed price and those currencies that could be exchanged for gold were always than those that were not. In addition, the central banks of those nations that did not offer to exchange their currencies for gold held significant amounts of gold. Indeed, until the early 1980s the central banks of the developed world held more than 50% of their assets in gold. Others, like Iran/Persia held valuable jewels in their central bank in addition to gold as backing for their currency.
    Both jewels and gold have three additional and important attributes: they are limited in supply, cannot be created by man and do not represent anyone else's liability. All other financial assets, including cash, represent someone else's (unsecured) liability. For this reason gold is also a hedge in deflation as other people's (and governments') liabilities become suspect.
    If you look across the ocean to Europe, or to Japan, this is what is happening now; the ability of governments to repay what they owe is becoming suspect. The analysis is exceedingly simple: if your borrowings are growing faster than your revenues (GDP in the case of a country) a debt default is an unavoidable consequence. Although small, Cyprus provides the perfect example of how this happens and I can guarantee you that were you a Cypriot you would be happy to have owned gold in one form or another, because the Euros that have not been lost (confiscated) in the failure of your bank cannot be spent (with small exceptions) outside of Cyprus. In fact they are Euros in name only because real Euros can be carried or transferred and spent anywhere.
    We may think that can't happen here, but if it can happen in the European Union, it can happen anywhere. That's why gold - some, at least - makes sense. And if that is true, gold is going much higher.
    Jul 14, 2013. 06:01 PM | 3 Likes Like |Link to Comment
  • Gold Likely Entering A Deflationary Spiral [View article]
    Deflation always last for a long time. Have a look at Japan; we are at 25 years and counting. Look at the Great Depression; the World War impacted the economy, but deflation lasted at least 10 years and arguably until 1947.
    Jul 1, 2013. 08:09 PM | 1 Like Like |Link to Comment
  • Gold Likely Entering A Deflationary Spiral [View article]
    As I have commented previously, everyone understands that gold is a good hedge in inflationary times and as the prospects for inflation are waning, people are selling gold. It has been my view that we have been and are still in a deflationary cycle and that is why I maintain an investment in gold.
    Because historically there are so few deflationary cycles (relative to inflationary cycles), few people understand what happens in a deflationary cycle. The principal outcome of a deflationary cycle is the destruction of debt because with falling prices all debtors get squeezed as the cost of debt service rises. Many do not survive. One can try to guess who the survivors are going to be (and there will be some) but all debt will become suspect and one doesn't want to be holding bad debt when the music stops. In addition, during a deflation debt defaults start as a snowball and turn into an avalanche because of the way in which all credit is connected.
    In this respect it should be noted that even cash money is debt. To survive, it is important not to own an asset that is somebody else's liability. One can think of a number of assets that would qualify - art, high quality gems and the like, but of all of those only gold has a uniform price, is liquid and easy to transact. That is the basic argument for gold.
    The other, and simpler, argument is that invariably a return to sound money (which has always involved the use of gold in past deflations). The most recent example is the world-wide deflation of the '30s which was eventually addressed by devaluing all currencies relative to gold. Were we (the world's central banks) to return to the holding of gold as a significant part of their reserves (which can consist only of gold and foreign currencies) the price would need to be set at around $10,000 per ounce to produce the balance between gold and foreign currencies that existed in the 1980s and '90s.
    Jul 1, 2013. 05:54 PM | 3 Likes Like |Link to Comment
  • Gold: Double Bottom Or Double Trouble? [View article]
    It is pretty clear to me that we are in full "bubble" mode now just like we were in 1999-2000. For those who remember those days, the measure used to evaluate companies was not earnings but "cash burn" and most of the darlings of that era are no longer with us.
    In such an environment the market becomes devoid of all rationality, but eventually the euphoria will wear off - when the supply of "greater fools" dwindles.
    The market top that occurred in early 2000 came much later than might have been expected, but those who believed in the cool-aid paid heavily.
    As we look at the developed world today, there is not a lot to offer comfort. Europe is now officially in a recession, unemployment in Spain is now 27%, Japan appears to have started a program to export its deflation, etc., etc. For my part I cannot find any hard data to support current market valuations and when the bloom is off that rose, I think that we will see a return to gold.
    May 20, 2013. 10:08 AM | Likes Like |Link to Comment
  • Short Gold For The Long Haul [View article]
    You are right that any point in time an asset is worth no more than someone will pay for it. You are wrong when you say it is not a currency; when I go to Europe, I must change my dollars for Euros before I can buy something. So too with gold, I must change it to the currency in which the goods are priced so as to buy something and that has never been a problem.
    I would suggest that a large number of purchasers of gold have been motivated by the belief that gold protects against inflation (which indeed it does). However, now that the threat of inflation appears to be receding, those who bought to protect against inflation are selling.
    It is my view that the threat has never been inflation, but rather deflation. Indeed the Fed and the ECB and the Bank of Japan are doing everything they can to create a bit of inflation and they are failing because the forces of deflation are so strong.
    Eventually, people will come to understand gold's role in a deflation and that in a deflation all debts become suspect and many do not pay as expected. They will then look for assets that are not someone else's debt and discover that gold is one of those.
    May 7, 2013. 08:26 PM | 12 Likes Like |Link to Comment
  • The Fed Didn't Cause The Gold Bubble - Or Any Other Bubble [View article]
    I think that we need to understand that the Fed is very limited in the actions that it can take. First, they may buy securities (typically, but not always as it turns out) in the marketplace. Most, if not all, of these purchases come from financial institutions, principally banks. What the banks do with this money is critical: they can lend it (and indeed they can lend up to 10 times the amount of money that they receive from the Fed) or they can do nothing and keep the money in reserves, earning interest from the Fed. When they do the latter, it is not inflationary (it may even be deflationary) and has no impact on the demand for goods and services. It does, however, do a couple of other things, the most important of which is to increase the value of financial assets and housing. This is because it keeps interest rates low, encouraging people to take more risk with their financial assets (so as to get a better yield) and by decreasing interest rates, mortgage rates decrease thereby increasing the price that people are able to pay for housing - which will cause home prices to rise.
    In addition to purchasing securities from the market, the Fed may also buy securities directly from the Treasury - which provides the government with financing and does not drive up interest rates; indeed, the money that the Fed lends the government is effectively interest free as the Fed is required to pay the interest back to the Treasury.
    Unlike open market purchases, this is inflationary as this money flows into the economy as government expenditures.
    Apr 22, 2013. 10:41 AM | 1 Like Like |Link to Comment
  • The Gold Emperor Has No Clothes [View article]
    The simplest and most direct road to collateralizing debt in most Western nations is through a revaluation of existing gold hoards.

    You are absolutely right about that. That is a principal reason to own gold. I would rather it be confiscated that losing my wealth in other assets and there is a reasonable chance that it might not be confiscated and if it is confiscated it will not be without payment of some sort.
    Apr 17, 2013. 06:19 PM | Likes Like |Link to Comment