odin

Fed Sends Gold Higher, But What Is It Good For?

Re: A gold standard.

> “Aye, there's the rub” as William Shakespeare might say. A central bank that operates responsibly with the fiat currency they bring into existance at will, over a long period of time, is probably about as rare as pink unicorns.

But as Churchill once said, democracy is the worst form of government except all the others that have been tried. What is the realistic alternative?

> Then the cost of things goes down, much as the cost of computers, TVs and digital cameras have gone down over the years or the features and quality has improved while prices remain stable.

The cost of electronics has not gone down because of the constraints on the money supply. Those are productivity gains that could come about only BECAUSE money was NOT in short supply (though labor arb is the primary reason). When money is scarce, people start hoarding currency and stop borrowing/investing and productive enterprise is severely impacted. Lowering or even keeping prices stable is not an end in itself just as moderate inflation is not the end of the world. Real growth and productive use of money is what matters and that is what will solve our current mess (basically time and growth will help erase these bad decisions as it always has).

> He also had popular speeches in favor of prohibition and against the demon rum. Popular speakers don't necessarily have the best policies, and the fact that someone made a popular speech isn't really a strong argument in favor of something. He was also an advocate of bimetalism with silver sharing the load along with gold as a medium of exchange. He was in favor of a statutory 16:1 exchange rate between silver and gold. His movement was also apparently instrumental in bringing in the Federal Reserve System in 1913 and I think that has been a disaster for our country.
---

I dont endorse WJB as a monetary expert but simply point out the populist argument of the day. The gold standard crushed the debtors and they clamored to get off the gold standard. Today, if we get back on the gold standard, cui bono? Constrain credit and the ability to create money beyond the point of reason, and its the "banking classes" that populists of today vilify now that stand to benefit (and even that as one-eyed men in land of the blind).

We also seem to be confusing fiscal spending with Fed's money creation role. Those two decisions have a link, but they are not the same. If anything, the Fed constantly rails against runaway spending (because those are future taxes in another guise and hurt the Feds ability to maintain both price stability and full employment). People distrust the Fed (a stakeholder in the system) to make decisions about the money supply yet feel very comfortable with randomness of gold supply (hoarders and mining) making the decision for them. I find that position difficult to understand. Would you rather the Fed NOT have the ability to flood liquidity at the tail end of 2008? What would have been the consequences -- how long could anyone have "enjoyed" the spike in gold prices?

> By the way, the booms and busts have been more frequent and more severe since the Federal Reserve was spawned. They were at the helm after all when our country fell into both “The Great Depression” and this “Great Recession”.

I'm not sure about the basis of the argument above. Does that mean that absent the Fed, everything wouldve been okay? Were there no depressions before the Fed was formed? Furthermore, a big reason for this particular bust has been the fact that the Fed was NOT regulating the money creation (via the shadow banking system).

> odin wrote: “One only needs to look at nations that have lost control of their money supply to see the consequences.”
> That's a rather ironic statement given that “nations that have lost control of their money supply” invariably have a fiat monetary system.

Here is the distinction. A car may go out of control. It doesnt mean that having control of the car is a bad thing nor does it mean having control causes it to go out of control. Unless you prove that giving up control of the car to some third-parties (from the Fed to the gold hoarders and miners in our case) is beneficial, I dont see the irony. Just to point out: It took a currency devaluation to regain some of the control of money supply and ease the depression in the 30s (along with confiscation pre-devaluation to prevent hoarding).

>I don't think anyone is advocating hoarding on either side, and I don't think a gold or silver or other similar standard promotes hoarding any more than a fiat currency would. It might seem that way in comparison to a country with a fiat currency that has gotten out of control. When hyper-inflation hits people tend to run out and spend their money as fast as they get it because it will drop in value so rapidly. That really isn't to be desired, however, as it causes many distortions in an economy and results in misery for its citizens.

When credit is scarce, what outcome is there? In the current fractional reserve system backed by a fiat currency, during times of stress, the fed can lower rates to disgorge holders of currency and make it expensive to hoard. If it cannot control rates, how will you prevent hoarding? By fiat (confiscation)?

Hyperinflation is a straw man argument. There are a lot of assumptions to get from today to a hyperinflationary world and we can agree that hyperinflation is a bad thing but nothing points to that case today. Not saying it wont ever happen, but it is not my base case today.

Fed Sends Gold Higher, But What Is It Good For?

I stand corrected re: the SGS data. It does show the M3 growth rates collapsing, but still in positive territory. (Barely, I track M3 independently and I calculate the YoY growth as flat to negative -- 0.2% in Oct, -0.2% in Sep.) If you'll allow me to edit my earlier statement: absent the growth in the narrow money, the broad money measures, which have embedded in them the narrower measures, would be contracting rapidly. (Another way to say it, is again, that the velocity of money is falling). I will also yield that M3 (which I dont really equate entirely with "spendable" money but will accept as an imperfect component) has risen ~4.5% since Jan 2008 -- most of which is because of the 25+% rise in M1. Furthermore, the absolute level of money supply is less relevant in the inflation debate because real GDP is growing alongside because of productivity gains.

My key assertion is that by the measure of the ability to buy things (which should, in my opinion, include credit), there has been a big contraction YoY and those headwinds will not go away anytime soon and all the money-printing has not made up for the loss of this buying power. The data in fact shows that the M0 growth is NOT working its way through the system (otherwise, the growth in progressively broader measures like M2 and M3 would be amplified not dampened).

Whether the amplification will occur over time is also a question -- in essence, by forecasting hyperinflation, we are essentially stating that lending conditions are going to improve AND the real economy will not grow fast enough AND that the fed will not pull back to compensate.

My bet is that if real GDP contracts, the velocity of money is going nowhere but down. And if there is growth that employs the full productive capacity of the nation, I dont see how real GDP cannot rise sharply and that the Fed remains inert. And if there are hyperinflation expectations, who wants to lend? In other words, I do not believe the financial system and by extension investors have the will to LEVERAGE as in the past to generate hyperinflation. If the banks are content to take advantage of the steep yield curve (which I believe is the feds intention -- to rebuild the balance sheets of the banks and allow time and growth to negate the toxicity still on the B/S), why do you believe that the velocity of money will go up? The Fed can press the gas hard but if the carburetor is choked for air, we're not speeding down the highway.

I am also skeptical of the political pressure argument. I dont agree that the Fed is entirely independent (nor do I really believe that it just goes along with political whims) but even assuming political pressure, inflation expectations -- esp. high inflation expectations -- play a big role in the electoral platforms. There are more and more people out there on fixed incomes. And they vote.

Fed Sends Gold Higher, But What Is It Good For?

JeffDB: I very much disagree that the growth in M1 has "more than filled" the gap created by credit contraction. This is not borne out by the data. (M3 measures tracked by parties outside the Fed are actually contracting. See SGS or other estimators of M3. More broader measures -- ones that include credit are even worse).

What I am trying to get at is we want to track purchasing power (which is not necessarily captured by these narrower measures) vs. goods available for sale. If the broader money in M2 isnt growing as fast as M1, it should tell us something about the growth of this buying power. If MZM is growing but M2 is not, that should also tell us something about the velocity of money. This is what answers the inflation/deflation question. It should be clear that even with Fed's money pumping, the "money supply" available to buy cars, houses etc. is lower than it was at the peak.

I dont think this is where the real debate is. The debate I think is whether the Fed can withdraw liquidity fast enough ONCE the economy recovers (as in we have a contracting money supply driven by a collapsing multiplier and partially offset by the money printing....but if the banks start lending again, if risk appetites rise, will the velocity rise cause so rapid an expansion in money supply that the feds cant compensate fast enough by withdrawing their liquidity programs). I think you will find that a lot of the programs initiated in the past year have been reserve neutral (new money was not created). There is some money printing going on....but (and _this_ is a market view which you are free to disagree with) I believe the fed has the tools to take liquidity out. I'm less sure that there wont be political pressure (as in will apart from ability), but the tools are there.

As to the question of looking at gold via the lens of a medium of exchange: it is no different than a fiat currency managed by a _responsible central bank_. It no more represents wealth creation than does fiat money. Those somehow sanctifying gold because theyve read the Fountainhead have a very superficial understanding of money. If you start pricing gold as if its a medium of exchange, what happens do you think when the world GDP grows but gold supply does not? (There is a popular and populist William Jennings Bryant speech about getting off the gold standard that can clue people in). What happens when world GDP contracts but new gold is discovered? Now, you can say that the central bankers are crooks (they are certainly not infallible but they do have a stake in the proper functioning of the system) but I wonder if its any better to put our faith the boom and busts of the gold supply cycle. One only needs to look at nations that have lost control of their money supply to see the consequences. Furthermore, the value of a currency (gold or fiat) does not come from hoarding. It comes from its ability to buy goods. Sure, if gold is in tight supply, it may rise in price (for a while). But if it causes a widespread contraction in the economy and puts people out of a job and causes riots, what good is it?

Fed Sends Gold Higher, But What Is It Good For?

I have never put this argument as eloquently before (especially the highlighting of a $12T credit contraction). Kudos. No one seems to track or pay attention to the broader money supply figures (including credit). Did we forget the purchasing power credit cards and HELOCs and 2nd mortgages brought to the american consumer? Or the monetary lubrication that the shadow banking system injected all over the world?

Re: gold investing itself even assuming a return to a de jure if not de facto gold standard:
People also extrapolate the data of a last few years to project supply (the best we can do). True, gold isnt printed, its mined. But what happened to silver as a monetary store of value when silver mines were discovered in the American west? If we are thinking of gold only in terms of a currency, we should know that there IS a growth rate for gold -- will it always be lower than the growth rate of global GDP? Are we so sure there is no more gold to be discovered beyond current mines?

Given that at the moment gold is not a de facto currency, it is worrisome that the demand trend is moving from jewelry buyers (longer-term, sentimental holders) and central banks (longer time horizons, fewer liquidity pressures) to investors (short-term, hot money buyers).... This is highlighted to me, especially by the ridiculousness of certain hedge funds creating "gold funds" or gold-class shares (2&20 really? For a one-way asset allocation decision or as a futures trading commission?)


On Nov 18 06:36 PM JasonC wrote:

>
> Yes it is absurd, because (1) dollar currency rather than monetary
> base is only $900 billion not $1.7 trillion - you could redeem every
> dollar in existence for gold below $3000 an ounce (2) the Fed owns
> 85 cents of US treasuries, 84 cents of mortgages, 15 cents of agencies,
> and 35 cents of other assets (loans to the banking system, foreign
> exchange, swap lines to foreign central banks etc), on top of the
> 40 cents of gold - for every physical dollar.
>
> Halve those figures if you like to cover all the core deposits rather
> than the physical currency, it remains true that all of the liabilities
> are over-backed by valuable assets. You have to pretend every other
> asset on the sheet is worthless and only the gold worth anything
> to support the idiotic $6300 figure.
>
> If you think $750 billion each of treasuries and mortgages aren't
> worth anything, go ahead and short them; it is a saner bet that expecting
> gold to go to $6300.
>
> And the Fed owns the same position in treasuries today that it did
> the day Bear went broke. It merely rebuilt the position this year
> that it sold off in 2008 as it moved its sheet to direct loans to
> the banking system. Remember those silly stories of last August about
> the Fed "running out of treasuries"? - lol The only new position
> is $750 billion of mortgage backeds. In case everyone just forgot,
> Fannie and Freddie are in receivorship and foreign holders are selling
> off their agencies; the Fed and GNMA have replace them as buyers.
>
>
> Everyone expecting inflation because narrow money is $1 trillion
> higher is ignoring the fact that total assets are $12 trillion lower.
> Why the former is considered more inflationary than the latter is
> deflationary is one of those magical mysteries of monetarist fanatics.
>
>
> No the Fed isn't going to monetize another trillion or three to fund
> the treasury. It hasn't taken a single action since the start of
> the crisis to accomodate the US treasury, which doesn't need the
> accomodating (because its credit is rock solid). All of its actions
> have been in support of the banking system and private credit markets,
> which is case everybody just forgot, are the ones who required it.
> It wasn't treasuries that went begging at 15% offered yields this
> time last year.
>
> Ideology is no substitute for objectivity in finance...

Gold Fever Spreads to India

What do central banks care about? Do they care whether they get an extra few points return on their FX reserves or whether there is employment, stability and sustainable growth?

Regardless of the recent strength in their currencies, the Asians have not forgotten the currency crisis. The stockpiling of $ they are pursuing and the undervaluation of the currency is not stupidity, they are plainly merchantilist policies designed to collect US$. This policy keeps the masses employed, stability in the financial systems and politicians in power.

While the market has looked at this news as unadulteratedly bullish for gold, it was always clear that IMF was not dumping 400 tonnes on gold on the open market. I'm not sure if anything at all has changed with this purchase.

The fact is that trade surpluses will trending down as US savings rate (post the clunker dip) start rising again. The priority of these banks will be to ensure that their respective currencies DONT rise too fast (and that the $ doesnt fall too fast).

5 Reasons to Avoid the Gold Rush

I think commentators really missed a major point -- the risk of owning gold. Its not that gold is not a good diversifier nor that it shouldnt be a part of your portfolio. But those who advocate a massive overweight in gold are completely discounting the risks of gold investing. Does no one ask why Paulson chose to pay higher fees and invest in the ETF? He's not paid to pick the beauty queen. He's paid to pick what others believe is the beauty queen. There is an exit strategy for the hot money crowd and its when retail goes gung-ho on gold. What really is the outcome -- however remote -- of one of these big holders trying to dump the ETF?

While its nice to think (just because the CCP says so) that China will put a floor under gold to escape the dollar, the exit trade _is_ a risk. The simple truth is China cant exist in a vacuum. The reserve currency is still the prerogative of military and economic strength and China is decades away from overtaking the US in both arenas. They will have to contend with an inverted demographic pyramid thats probably stronger than the one in Japan. They will have to deal with the health impact of two decades of heavy pollution. They will have to deal with a generation of wealth transfers from workers to exporters. China is a big nation -- one with many natural resources and bright people and it has a bright future, but these are real problems that are on the same scale as the ones that plague the US. Its relationship with the US is symbiotic. The moment China stops funding the C/A deficit is the moment it stops accumulating a surplus and its when US stops needing that funding (In a simple two economy model: US imports less, period. Its not a choice, its a tautology). Does it really make sense for China to do anything but make symbolic gestures against the USD unless it wants a domestic crisis on its hands?

Now, if collapse of society is where your bet is, then, by all means, push all chips into gold. (though probably not the ETF)

But inflation? Look at the performance of gold vs. consumable commodities (oil particularly) in the 70s. Gold isnt my first choice when I think of high inflation.

Why Gold Could Hit $1,300 This Year

Always consider the possibility (however remote you think it might be) that your thesis is incorrect. The proportion held by long-term holders: central banks (save for China/Russia), jewelry buyers, industrial users is steadily going down. The proportion held by "hot-money" investors -- ETFs, hedge funds -- has skyrocketed. Draw your own conclusions at what will happen IF that hyper-inflation/crisis deflation thesis is wrong.

Having said that, gold has a valid place in a well-diversified portfolio.

Gold Doesn’t Care If It’s IN-flation or DE-flation

No arguments here. But how stable is that demand? People rarely trade in and out of jewelry, whereas people trade in and out of ETFs daily.

My point is that the demand you see is a "hot" flow. You are seeing retail buying, Paulson & crowd buying: that demand could suddenly become supply. There was huge demand and rapid appreciation in real estate just a few years ago (and the transaction costs in trading real estate are MUCH higher). Follow the gold price spike in the Jan 80 -- the buyers at the top have yet to break even in real terms (and are barely up in nominal terms).

My point is not that gold shouldnt be bought for investment (as a small part of a overall well-diversified portfolio) or that it cant be traded over the short-term. SImply that if you are advising that it should replace income-generating assets in your portfolio, which I hope form the significant portion of any portfolio, with the expectation of multi-bagger gains, you are likely to be disappointed.


On Jun 24 02:34 PM Jeff Nielson wrote:

> Odin, investment demand has just ZOOMED past jewelry demand - in
> just TWO quarters.
>
> Q1 for 2009 data is now available on the World Gold Council site,
> and investment demand exceeded jewelry demand by 80%. Jewelry demand
> is now irrelevant to the gold market.

Gold Doesn’t Care If It’s IN-flation or DE-flation

Over the long-term, I am bullish on gold and believe it has a valid place in a portfolio.

Also agreed that it is hugely underrepresented in investment portfolios. However, one must be aware that jewelry demand (which forms a significant portion of overall gold demand every year) is inversely proportional to gold price. If you see gold buying in China, India and the Middle East, it is highly elastic and tapers off during price spikes. Furthermore, looking at the rise in investment demand, a great deal of demand is coming from the ETFs (GLD bullion holding stands at over 1.1K tonnes up 83% for the year). The majority of GLD holders are retail investors and the fast money crowd (HFs). That is not stable demand -- the sentiments there could change on a drop of a hat.

The biggest risks to gold is economic growth and stability. While we might trade around our opinions there, I wouldnt want to bet against it long-term. In other words, other than insurance (a low/mid single-digit %age of portfolio), it would not be part of my long-term portfolio. Trading opportunities do come along from time to time, but I bear no illusion as to gold saving my wealth during rampant hyperinflation (such "revolutionary" periods change too many variables).

5 Reasons to Avoid the Gold Rush

This is the state when inflation is not on the horizon.

I am bullish on gold because viewed as an asset class, it is hugely underrepresented in most portfolios. And as insurance against long-term mild-moderate inflationary scenarios, it does have a valid place in a portfolio. However, when I see the comments above, I become very wary. It reminds me of the Krugerrand buying in the 80s.

If by chance we get hyperinflation in this country -- do we really believe that an ETF will protect our wealth? Or physical coins for that matter? Just because of events last year (which are minor compared to a hyperinflationary, high unemployment, scarcity-ridden environment), the government stepped in and overturned all sorts of written/unwritten expectations investors had come to rely upon (short sales, contract law, "too-big-to-fail"). When a major upheavel occurs, the likelihood that gold will save your wealth is very small indeed.

Julian Robertson Bets the Farm on Inflation

China is not so much selling the long end, it is shifting its buying towards the shorter end. I recommend Brad Setsers blog for insight into TIC flows.

Until China develops domestic consumption (I am also skeptical of its stimulus), it needs to finance the US. Thats what keeps its factories humming and its population employed and copacetic (nearing the Tiannenmen Sq anniversary...that is especially relevant point).

Given the slowdown in the economies, its likely that China may accumulate less of a surplus (have to sterilize less) over the long run (in this scenario, people will have to give up the green shoots fantasy). However, that means that US is running less of a deficit (and that savings in this country are going up). I am skeptical that ALL those savings are getting channelled into stocks and real estate again. They will inevitably flow into treasuries to satisfy a risk-averse yield-hungry investor. (Where do you think MM funds, bank excess reserves are flowing to?)

Likely everyone is still risk-averse (from an inflation view) and wants to crowd the short-end of the curve...and granted the yield curve is steep at the moment. But given its steepness and a willingness on part of the Fed to keep rates low for an extended period (which they can, given the demand at the short end), the carry traders will get busy.

I would wait till the fat chairman sings before proclaiming the death of treasuries.


On Jun 04 04:08 PM Living4Dividends wrote

> Odin - I thought China had pretty much stopped its net buying of
> Treasuries. TIC data is confusing because China is selling the long
> end and buying the short end. As well, China is selling GSEs and
> buying Treasuries (Short end)

Julian Robertson Bets the Farm on Inflation

That is significant point. If Japan, arguably a much more riskier sovereign credit (in light of its slowing productivity, stagnant demand, already high savings rate, low consumption and high debt-to-GDP), couldnt reinflate and could continue to borrow at low levels in face of massive re-deleveraging, what makes the US an exception?

I'm not saying that we will follow the path of Japan (and the last thing we need is a bond bubble and another hit to bank earnings) but all I want to point out is that "4.5%" or thereabouts isnt a magic number in and of itself... That yield can only be too low or too high or just right in some context to which its trading.

Well, look, if you believe in the neon green shoots and think we are back to normal, the money-multiplier is back to normal, lending activity is back to normal, and that the US is continuing to run a easy monetary and easy fiscal policy in the face of those facts, then obviously inflation is the answer. However, the same crowd that points to inflation argues about an extended muddle-through economy and rise in risk. Shouldnt the equity/credit premiums rise in that context and depress yields on those assets?

If massive inflation is the worry, why not just re-leverage instead of trading stocks or shorting treasuries? Take out a massive mortgage, that auto loan, consume current productivity with bags, shoes, Wiis, flat-screen TVs (because you can discount future productivity heavily). I am skeptical of inflation in the near-term because I believe we are at the end of the line and risk premia have risen for good and the repairing of private balance sheets is inevitable.

On Jun 04 12:04 PM MinAkkar20 wrote:

> Japan's lost decade is used far too often as a comparison to the
> US. They aren't apples to apples. Japan: export driven, high-savings,
> aging population, no immigration. US: consumption driven, low savings
> (even now), high immigration / birth rate (relative to industrialized
> countries).
>
> Even Japan with its extremely high debt to GDP ratio doesn't come
> close to the size of debt that is being offered up by the US government.
> Eventually supply & demand must take hold. China can't stop
> purchasing treasuries altogether, but they surely could demand a
> higher return to offset the risk &amp; size of their holdings.<br/>
>
> And unless your equity portfolio outpaces what you could buy with
> it if you sold it, you aren't in the black. You are breaking even.
> There is no wealth creation with inflation - it just makes everyone
> feel good when they look at their 401k.

Julian Robertson Bets the Farm on Inflation

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..

Julian Robertson Bets the Farm on Inflation

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..


On Jun 04 11:08 AM Harry Tuttle wrote:

> I fully agree that it is a crowded trade, however, there is a lot
> of supply ahead of us which is usually not the case with most things
> one can short. By the way, Rosenberg likes treasuries. For what
> it's worth, I don't.

Julian Robertson Bets the Farm on Inflation

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..


On Jun 04 11:08 AM Harry Tuttle wrote:

> I fully agree that it is a crowded trade, however, there is a lot
> of supply ahead of us which is usually not the case with most things
> one can short. By the way, Rosenberg likes treasuries. For what
> it's worth, I don't.