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  • 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
  • The Gold Emperor Has No Clothes [View article]
    Actually gold performed quite well during the 70's and early '80s when we experienced runaway inflation. When Volker came in and put a stop to that and sound money prevailed and lost its luster. The real point is that there are times when it is prudent and profitable to own gold, times when it is profitable to own stocks and times when it is profitable to own bonds. No investment class performs well all the time and that's particularly true when you discount the value of your investments for inflation - which everybody should do.
    I continue to be surprised at those who report with excitement that the averages are making new highs; those folks don't seem to realize that, when adjusted for (CPI) inflation the markets are worth less than they were in 2000 and that they must increase by nearly 30% to get back to were in 2000. Even with the recent fall, those who have owned gold since the market's high in 2000 have done exceedingly well for the period and vastly better than either the stock or bond markets. I think that there is no question that 2000 to the present was a great time to be in gold.
    The question is when to get out? Here the answer is simple, when we get back to promote sound money policies. So long as officials at the Treasury are talking about things such as paying off our debt with a $ 3 trillion platinum coin and other goofy ideas and the Europeans have run out of ideas for dealing with their debt - other than the equally goofy idea that they can simply confiscate money from the wealthy, we are a long way from sound money.
    I would keep your gold and if you have none you should buy some - unless, of course you actually believe some of the goofy ideas might work.
    Apr 16, 2013. 04:47 PM | Likes Like |Link to Comment
  • Gold Is Worth $370 An Ounce [View article]
    I am afraid that is quite a simplistic analysis. One of the things is (for better or for worse) is a component of International Reserves, which are the reserves held by Central Banks. These reserves consist of convertible currencies, gold and Special Drawing Rights (SDRs), which can be ignored as holdings of SDRs are exceedingly small. These are called International Monetary Reserves and are at the bottom of an upside down pyramid as the basis for the creation of what we call money. In this refined world local currencies are not assets, but rather liabilities - as in US dollars for the Fed.
    In times past, gold has been a significant portion of these IMRs, but the proportion of gold has fallen from well over 75% to under 10% currently. In the process Gold has been vilified as a barbaric relic and worse. The other reality is that gold is very inconvenient to those who believe that the best way to prosperity is through the creation of additional debt - which is what the Fed, the European Central Bank and the Japan are doing presently.
    Unfortunately, history is replete with schemes to create wealth without actually working for it. Equally unfortunate is the fact that so far all of these schemes have failed ending mostly in massive inflation and, sometimes in massive deflation. During these periods there are massive wealth transfers and when the music stops, there is a lot less for everyone. Should you fear such a period, you might want to think about what you can do to avoid it and how you can keep some of what you have.
    Believing that things are worth what someone will pay for them it is clear that at this instant in time there is significantly less demand for gold than there was a month or a year ago. That tells me that there are a lot of people who now believe that the debt for growth and gain is not - as they once thought - nearing a crisis level, but rather, the "new normal". That, of course does not mean that they are right.
    There may also be more sinister reasons for what is happening because high gold prices and the belief that, perhaps gold is a better currency than say, the Dollar, the Euro or the Yen is antithetical to those Central Banks that are counting on fiat currencies as the way out. Indeed, the unprecedented magnitude of gold's fall in a very short period can only trigger suspicions that this move may have been orchestrated. One might also wonder who is buying for, as we all know, for every seller there must be a buyer.
    Apr 15, 2013. 04:47 PM | 4 Likes Like |Link to Comment
  • Gold miners (GDX -4.5%) are getting destroyed as gold prices cross into bear territory. Capitulation, if it’s here, would mean a true bottom in price, and Tocqueville Gold Fund's John Hathaway says that's what we’re approaching; he sees strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in mining shares - "a contrarian's dream scenario." [View news story]
    It is very hard to discern what is going on here; the Cyprus announcement certainly triggered some sales as did the technical analysis and the fear that more countries (Portugal? Spain? Italy?) will be forced to sell gold as well as the buoyant stock market and the reduced fear of inflation. Quite a lot for a single day.Bottom line, we haven't really solved any of the economic problems that loomed large yesterday, last week, last month and last year and until we do we still face inflation, deflation or both and if that is what lies ahead, then gold is the right hedge.
    Apr 12, 2013. 02:45 PM | Likes Like |Link to Comment
  • Gold Takes Out Major Support: Next Stop $1,350 [View article]
    I am sorry that 196 years is beyond my investment horizon and even a long term investor would seem to be a trader in that time horizon. The simple fact is that over shorter periods, like my lifetime (I was born in 1942) there has been times when equities provided good returns and times when they did not. That has been true of gold as well.
    I accept that one cannot generally buy at the bottom and sell at the top, but those who get the major trends approximately right do well.
    We will see what happens with the current short term trend that has US equities outperforming gold. Some of us have doubled our money in gold over the last decade and nobody has done that in equities.
    Apr 3, 2013. 08:47 PM | 3 Likes Like |Link to Comment
  • More on SocGen's bearish gold (GLD) call: The price is in "bubble territory," say the authors - driven there by fears aggressive QE would spur inflation. Instead, consumer prices have actually been trending lower for the last 2 years, and now economic conditions have improved to the point where the Fed can begin thinking about QE's end. "It seems unlikely that investors would want to add much to their long gold postions." [View news story]
    I continue to believe that the real danger continues to be deflation. That, of course, is the opposite of inflation - which is why most people have been buying gold. To those who ignore history, gold has always risen during periods of deflation. We are perhaps now at a transition point where people no longer fear inflation, but do not yet fear deflation.
    Apr 2, 2013. 03:40 PM | 1 Like Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    " is not necessary for the government to borrow or tax in order to fund its operations..."
    If that were true, there would be no borrowing and no taxes. Money would indeed grow on trees.
    That's right up there with those who think that minting a $3 trillion platinum coin (why bother with platinum, other than it sounds nice) to solve all our problems.
    Some printing of currency is always possible, so long as the amounts are relatively small and it is done for a short period of time.
    This has been done steadily throughout history; the problem is that once started it is hard to stop and there are no instances -so far - when it was stopped in time to avoid a major crisis.
    Unless you believe in the tooth fairy, wealth can only be created by work and the production of goods and services.
    Mar 14, 2013. 12:19 PM | Likes Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    The idea that there is not a Social Security Trust Fund is crazy. Currently (as of 12/31/2012) the Trust Fund holds $2,733,073,581 of US Treasury interest bearing obligations which are just as creditworthy as US Treasury Debt held by the public, although they are not marketable. The amount and interest rates are listed on the Social Security website.
    What confuses people is that when the Trust Fund buys government bonds, the Treasury gets the money and just like the proceeds of publicly offered Treasury securities the government receives the proceeds that are now fungible with all other resources.
    Absent some bizarre change in law, the Trust Fund's assets are just as safe as any other Treasury Bond. The doubters should ask themselves if there is an investment that is less risky than Treasury securities. I would argue that there is not as the Treasury can print the money to redeem its obligations.
    Whether or not these bonds may have more or less purchasing power than some other asset is another matter.
    Mar 9, 2013. 12:59 PM | 1 Like Like |Link to Comment
  • Investment Banks Are Now Very Confused About Gold [View article]
    In any bull market, like any bear market, short-term sentiment waxes and wanes and that is reflected in the market averages. National markets will tend to reflect national developments while gold will be impacted by worldwide developments and its performance is different depending on the currency in which it is followed.
    Long-term, gold has had an excellent run in all currencies and has done a good job of reflecting the what has been happening in the economies of the developed world; and, not incidentally, over the last decade has outperformed the developed world's equity markets by a considerable margin.
    What happens to gold is about what happens to debt in a world in which all currencies are also debt, but debt that has no maturity. To the extent that debt remains sound, economies will flourish and real growth will result. To the extent that debt becomes excessive, economies will stagnate and growth will be minimal if not negative.
    In that environment, gold will flourish, principally because it is not debt and its purchasing power does not depend on somebody's ability to repay it.
    To the extent one believes that sound money has returned or that its return is imminent, there is no reason to have gold; on the other hand, if one believes the opposite, then there is every reason to have gold. That's really all one needs to know and all that one needs to have is patience - until there is no longer a reason to hold gold.
    Mar 3, 2013. 03:48 PM | 5 Likes Like |Link to Comment
  • The Debt Paradox That Everyone Should Be Aware Of [View article]
    I agree. The point that I was making is that the Trust Fund will be spending the the money currently in vested in US Treasury obligations and that's why it should be accounted as part of the US Government, because that debt is no different from the from the debt held by the public. The fact that it is held by a government entity on behalf of third parties should not permit it to be disregarded as an inter agency obligation. Bottom line, our real debt is $16.4 trillion+ and not the lesser amount generally cited.
    Mar 1, 2013. 01:47 PM | 3 Likes Like |Link to Comment
  • 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, 2013. 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, 2013. 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, 2013. 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, 2013. 10:07 AM | Likes Like |Link to Comment