By David Chaston
In our first part, we looked at demand for gold. In that review, we found that volume demand is declining for jewellery, is stable and low for industrial use, has recently been negative for ETFs and large hedge funds. The only rising sector is for individual investors, but these rises aren't large enough on their own to grow total demand.
Demand has been stable for at least the last ten years. It ended at levels from where it started, having sunk minorly in the intervening years.
In our second part, we looked at the supply of gold. Here we found that output from mines is growing. In fact, given that it takes about five years to bring a new mine into production, and the substantial run-up in price all occurred withing the past five years, it seems reasonable to expect future mine output to grow strongly.
We also found that supply from recycled scrap is rising as well, no doubt 'encouraged' by the recent high prices.
For many years, governments had been net sellers from their official holdings and this added to market supply. However, this trend has reversed recently and governments have become net buyers and adding to their holding. But the net impact of this activity is very small.
Supply has been rising modestly over the past ten years.
In fact, over those ten years, supply has exceeded demand - just. Sellers have offered 36,200 tonnes, whereas buyers have taken 35,300 tonnes. And that includes the buying/selling market forays by governments.
Over this same period, the price of gold has risen impressively. But it is clear that it is not fundamental demand-and-supply forces driving this rise. It is 'fear', and from this review it seems fair to attribute all this to a growing body of 'small investors' who see gold as a safer store of wealth than the alternatives. (See also Bernard Hickey's interview with New Zealand Mint's Michael O'Kane on why New Zealand is seen as a safe haven for gold investors.)
It is also clear that the group has grown to be a significant influence in the market, buying more than 25% of all gold per year, taking up most of the volumes from other sectors that have been falling. (See also Amanda Morrall interview here with Pathfinder Asset Management's John Berry on investor enthusiasm and reasons for caution).
Gold is often touted as an important component of a balanced investment strategy, and the fast-rising recent price history has made that a compelling proposition. But physical gold delivers no income, only a capital gain or capital loss.
The state of the world economy, the levels of public and private debt, the size of the 'money printing' responses will all weigh on investor comfort levels, and directly influence investor demand for gold.
But it does appear that world gold supply is likely to continue to grow strongly over the next decade, with new capacity dependent on the current high prices holding.
Whether investors will continue buying at these prices is an open question - but gold demand by investors 'only' requires 140,000 more one-ounce buyers than one-ounce sellers per year to soak up the recent supply growth trends.
We maintain a daily review of the prices for coin, bars, bullion, and scrap and you can find that data here »
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104 Comments
Among all the factors - the fear factor is going to be dominant – I think.
Gold slowly claiming to US$ 1’700, then accelerating to US$ 1’800 mid-end February with the prospect of US$ 2’000 by April 2012.
Until new unprecedented events happing in
Iran I stick to my forecast – even then gold is on the up again.
Major major flaw in your arguement - I have not seen you mention cost of production anywhere. Years ago mines targetted resources containing 50g plus per ton of rock. Now resources with as little as a few grams PER TON are being mined. This is an inevitable consequence of mining a non-renewable resource (higher grades are mined first). Ergo cost per gram rises as more material has to be extracted - but of course it worse than that. One of the major inputs is oil (also a non-renewable resource). Guess what - the price of oil continues to rise (cheaper oil was extracted first). Four years ago cost per ounce in South Africa was about $500 - now its closer to $900.The pattern is repeated elsewhere:
http://www.mining.com/2011/06/23/south-africa-gold-miners-hammered-as-c…
Its pointless blathering on about more production coming on line unless you consider cost of production when dealing with a non-renewable resource. Even a small drop in the price of gold would rapidly shut down the most unproductive mines operating at the marginal extraction rates of a few grams per ton. Just look at what nearly happened to Oceania Gold when the gold price briefly fell in 2008/2009. The company was on the verge of going bust because its costs were suddenly close to the POG.
The realities of how incredibly expensive it is now to mine gold puts a floor under the price which you seem to have completely missed. There are lessons there for the extraction of ALL non renewable resources.
Nice to have you back, Andyh
Blathering is the right word.
Meaning the penny still hasn't dropped.
Fair comment - this thread suggests that they haven't gotten there yet.
I'm well enough along to have the time to educate - indeed I think the planet's stuffed if we can't - but it's a slow trip!
In the final analysis, these folk will probably go down still blaming some CEO, banker, pollie, or whatever. Blameshift, fear and ignorance are common bedfellows.
Go well AH - drop by if you're ever down this way.
The buying takes place because the lying govts and thieving reserve banks are debasing the paper money as fast as they can to wash away the mountains of debt.
http://www.marketoracle.co.uk/Article32746.html
and it would pay to read this by Sam Chee Kong
http://www.marketoracle.co.uk/Article32678.html
I think it is going to be very interesting when PAGE opens to retail investors in June 2012. I am hopeful that the gold manipulators e.g. J P Morgan and HSBC will get their just desserts and that COMEX will get the same treatment. This is a big plus for the retail investor. Even though David Chaston argues that supply and demand are currently balanced there is no way that I will sell any of my gold at anywhere near the current price. Let's see what happens post June 2012.
Gold stocks are rarely consumed...mostly hoarded and traded. I would expect "scrap" rercycling aka: trading to occur during times of high price volatility.
New mine supply in gold is remarkably stable and when compared to above ground stocks barely worth a mention. It will be extremely difficult to affect the above ground stock of gold with new mine supply so what we have left is basically gold trading. Calling it "scrap" is disingenous as gold has very little utility value anyway.
Price is another minefield.....more related to credit creation than the purchasing power of gold, which again has remained remarkably stable over time.
As for gold paying a return....it is a saving device not an investment.
David Chaston, like most in the West, still does not get 'it'. Gold as a monetary asset, in terms of the trillions that have been printed gold is now cheap. There is no way the FED will not print trillions more. They can not raise taxes or cut spending or save in the private sector enough to cover the US deficit therefore the FED will print trillions more (what else can it do? if it stops interest rates will soar and the world enters the great depression 2, if it continues they will kick the can down the road which is all they can do). They can not stop printing for any reasonable length of time in the foreseeable future. Ditto for the Euro. Ditto for the Yen (Japan has increasing public debt with a decreasing tax base). Gold is too cheap to give any major currency a sound backing anymore. The central banks in the West have leased more gold than they will ever get back, so their holdings are overstated. They are buying gold as it is becoming the only reserve currency. The Chinese moving in part from the USD to the Euro will not work for them, they already know this. When governments are forced to print and buy their own debt the beginning of the end of the monetary game has already begun... all they can hope for is the supression of the gold price to hide it for as long as they can...
Major miners (Newcrest and others Barrick, Newmont...) are signicantly missing production targets David - your info is out of date - http://af.reuters.com/article/metalsNews/idAFL4E8CN81920120123?sp=true
David, in all your discussion I can not see where you've mentioned central banks, centrals banks that have been hoarding gold for the past couple of years, particularly the Chinese. The demand for gold has totally changed since the start of the GFC, damn the industrial or jewellery uses, its investors that are the drivers of the price, and CBs and the Chinese are on the top of that list
The eurpoeans are now printing money (LTRO), so are the UK, Japanese, and US (who will undoubted beef that up again prior to the election)...so why would any sane CB even contemplate not buying more when most have run down their reserve in the 80's and 90's ?...the price goes higher until reality sets in for Govts...and that's some time away yet I suspect when you can print money with no limit other than the undoubted inflation coming a few years down the track
Grant A....good points but I am not so certain about inflation.
It's fine to "print money" or create more credit but, firstly you need that money to be borrowed out into the real world economy by credit worthy borrowers, and secondly the interest charges start as soon as the credit is created which requires even more credit creation...
With the leverage that is around these days and a falling interest rate structure, which basically makes yesterdays borrowing too expensive, I personally think deleveraging (deflation) is the likely danger/outcome, hence QE. But as we see in Europe it's not so simple to "print money" and make debt dissapear through inflation.
The other point I want to make is in regard to the "price" of gold. If the gold price in dollars rises we could say the dollar value has fallen. If this happens big time would you want to exchange your safe gold asset, which is holding value, for dollars falling in value at an accelerating pace?
That is the paradox of gold hoarding.
Buying physical gold is insurance against a very uncertain future and I think many would be prudent to do this, including central banks.
Even with China"s buying the supply side was strong enough for the price to drop 20% from its 12 month high. If China stops buying the price could drop another 20% and if they started selling it would be 1979 all over again. Commodity speculation is not investment.
Vera....very true, but remember that in 1980 interest rates were somewhere around 18%, not the same animal today and not likely to be repeated.
Stock to flows of gold mean it is a different beast than all commodities. It is this enormous stock of gold (and near zero marginal utility) that makes it a superb monetary instrument.
Paper futures trading in gold is not at all the same as the physical market and I would caution against speculation in the gold futures market, but it does move the price. It is this volatility that separates people from their gold.
As for China selling gold.....a big if and not likely. They are bulding the base for their currency, something to back the Renminbi into the future. A stabilizing influence.
Think what the street "price" of gold was in Zimbabwe in the 90's....was it a good idea to sell because the "price" was high? Think price in gold not price of gold.
At the peak of price in 1988, in real terms gold was about $915 in todays dollars. it looks totally overbought and I believe there is a lot of fear built into that price. In saying that, as this article states there is a lot of demnad from ETFs etc but every day when I check the price, if its good news for the global economy the price goes up, bad news it goes down. WHAT DOES IT ALL MEAN lol
MK....from wikipedia.
"On 21 January 1980 the gold fixing reached the price of $850, a figure not overtaken until 3 January 2008 when a new record of $865.35 per troy oz was set in the a.m. fixing. However, when indexed for inflation, the 1980 high corresponds to a price of $2,305.18 in 2011 dollars thus the 1980 record still holds in real terms."
I was there in Toronto when people were lining up to pay $800+ CAD for an oz.
Gold is not in a bubble...
Don't be fooled....the current monetary system is unstable and will need to be rebuilt. Gold will play an important role in the future. Mass flows of speculative money should be ignored by small purchasers of gold as insurance. We are witnessing a remonetization of gold.
Agreed splineman,
That's exactly what is happening. Only you are using CPI inflation stats... maybe you should be using wage price inflation - as that's more a measure of increases in nominal purchasing power in which case the previous high in gold is around usd 7000-8000 an ounce, then you have to add into the fact that back then it was basically just north america and the middle east buying, now the buying is accross the globe and has a much broader base (then purely communist countries such as USSR and China didn't participate) and today billions more have discretionary saving power, so usd10,000 an ounce in todays dollars isn't actually that silly... add to that that still practically no one actually owns gold now yet by comparison... None of the kiwisaver funds have any exposure etc... Gold is still in the early stages of perhaps the greatest bull run in world history (as all fiat currencies are being debased) and apart from the last couple of years has proceeded almost unnoticed... and today in the news India trades gold for oil with Iran... mmmm
It means the gold price is being manipulated Muppet King by the western banking cartel:
Evidence that this is in fact the case is overwelming, (yet the authorities do nothing) they are doing this to try and destroy gold safe haven status and to keep the USD in play as long as they can. Unfortunately the more money they print the more it fans the fire under the gold price.... so in the end all they can do is delay the inevitable, they themselves know this.
Kunst,
I don't think 2012 will be anything special. You forget that the FED has done a Trillion $ swap with the ECB just before Christmas, this can be leveraged up in the banking system and kick the can down the road into 2013 - and many countries in the euro and the USA have elections this year - so the game will be to hold it together.
As for gold hitting 2000 it just needs to increase the average of the last 10 years again this year to do that. Eventually its going a lot higher than that though.
economist - great to see other positive people like you and me. I’m getting extremely confused in judging of world events. Intuition my extremely good sixth sense vs. average intelligence – daily.
I assume – your extremely good intelligence vs. an average good sixth sense. :-))
I’m of the view that we can solve a number of problems, but too many worldwide problems are accumulating/ accelerating on too many fronts. While 2011 listed all these problems, in 2012 we are going to experience and feel many.
True Kunst, the world could go bang, but I don't think so just yet, at least not in 2012. Consider;
* For the US to mount a full attack on Iran it would to call up the draft - not doable in an election year.
* The ECB has been given plenty of money via a currency swap with the FED, enough to buy up all the greek debt indirectly if they wanted to. The game is to convert money created from thin air to steal real assets - like - oh, the greek islands? infrastructure? mining rights? They can only hope to achieve this if they bring them to the edge. The problem is the greeks aren't buying this. They should do what Iceland did, but they need to leave the euro and default on all of it.... but Greece is only the test case... it has the backing of the US as US banks are holding credit default swaps (CDS) which will take big hits - many billions if Greece defaults - enough for the FED to buy this toxic sovereign debt insurance from them (ie print trillions more)....
The economic problems could be solved by remonetising gold but they don't want this... meaning they don't really want to solve the GFC... or more to the point they want to solve it with their 'solutions' with the IMF etc.... but populations don't want it and don't accept it... making totalitarism necessary if they can get people to accept it as the 'solution'... but it is no solution - at least not for the average guy on the street.... but they need a crisis to justify it...
Economist – I accept your arguments.
Often my economical / political views I’m standing for happen postponed. On the other hand the majority of people make mistakes to compare events from experience, when the current situation is very much different.
The danger I see - many worldwide problematic political events will override social, economical, financial and environmental ones. These internal tasks combined leading to breaking point – causing a domino effect.
Yes I agree to a large degree, except things will not unravell as much as some are expecting in 2012. But this decade isn't going to be like the good times we have had over the past 30 years or so for all the reasons you mention... and the solutions are going to be more costly and take years to work through...
economist - sabre- rattling, climate change, trade and wars on resources, austerity, unemployment, criminality, unrests, man- made & natural catastrophes, pollution, greed & corruption – just to list a few.
Societies are fighting against - paying daily - prohibitively expensive - a lost cause in my opinion.
There are real soultions - but they are almost never put forth by the main media...just for starters - what about the usd 1 trillion US multinationals are sitting on due in taxes offshore (they don't get taxed on foreign earnings until it is brought back into the country) - in essense corporations get tax breaks for taking production off shore.... thats crazy....and how about actually procecuting wall street for fraud too... or what about closing some of the several hundred military bases overseas - they don't really need that many.... but ultimately we need a sound currency which when people save doesn't rob them blind.. then we can have proper resource allocation (no need for a CGT) system...
I appreciate your arguments, but I'm not sure gold is in for a huge bull run. Granted, paper money is worthless, and the system is now built on puffs of air, but the government can manipulate that air, and I believe they can and will do so effectively. Effectively by saying gold can go to $10000 you are saying that the whole financial system is crumbling, and I don't think that will happen. In saying that naturally I will hedge accordingly.
Hi Muppet King,
1. Paper money is needed to pay taxes, so its not completely worthless :-)
2. A day will come when they can't manipulate the gold price and it will rise accordingly to its true monetary value. They can only manipulate the price if people don't take delivery of the physical and accept paper gold as real gold (which it is not). The moment they cease to do that its over. The more they push the price down with derivatives the greater the actual physical demand. The trend is that more and more are taking delivery especially countries in the Shanghai co-operation pact (and its observers). That's what will break the manipulation system down. I wouldn't call a nearly 20% increase per year for the last 10 an intirely successful manipulation either...
3. The whole financial system is crumbling and past the point of no return, but they will keep it going for a few years yet... If the top 1% in the US just put 5% of their net wealth into gold - its all gone. 10000 an ounce would not be enough to back a one world currency which is what they really are after (with one central bank).
4. Good on you for hedging.
If the whole system failed we would not be going to war as we would need a supply chain to get and stay there.... even in hyperinflation like the Weimar republic or Zimb., or Yugosalvia they still had some system working... the system will restart its just the form it will take that's yet to be determined.... read the article by Howard Buffett (yes Warren Buffett' father) on gold redeemable money :
http://www.fame.org/pdf/buffet3.pdf
Top 1% isnt in gold its in US treasuries...they are brighter, thats why they are the top 1%...
.I also dont think it will keep going a few years.....but it has surprised me to manage 18 months, 12 past where I thought it would blow........so I really dont see 2012 being quiet....
Paper gold is a joke......I agree on that.....you need possession.....and no one must know or the Govn will come calling.
regards
1. The return on US treasuries is below inflation...with no indication of that changing any time soon... I wouldn't call that too bright...
2. The FED is the one behind the buying of US treasuries via the commercial banks and varies currency swaps (ie they are creating money out of nothing - which they will continue to do - and keeping US treasuries up - therefore interest rates low). They can monetise the entire deficit and indeed the entire debt if they want to (actually they can just push a button to do this electronically - they don't actually need to even hit the print key) and will do so to keep deflation away if need be....and save the banks so its got quite a bit to go yet... so don't hold your breathe.
3. The government is not going to come calling for what no one practically has...thats just silly... even when the USA banned private gold ownership that didn't happen - and people commonly held gold back then in the early 1930s... how many people do you actually know who have investments in the precious metals? Compare that to any other investment form - property... shares.... own business... bank deposits.... I could take a guess that its less than 1%...and of the 1% they probably - compared to heir total wealth, even then hold a very small fraction in gold/silver.... We could start with the RBNZ which hold billions in reserves but zero gold.... or the Chinese central bank which holds 5-6000 tonnes under the international average.... but anyway...
4. The reason why paper gold is a joke is because there is not the actual gold backing it - meaning gold should be much higher than where it is now, but they push the price of gold down to keep interest rates low and people in the fiat paper system... in the end it will not work and they already know that.... gradually things are spinning out of their control... thats what a rising gold price really shows...
regards
gold as a safe haven is over-valued IMHO...
You are suggesting its being held down btw? it seems so.....I dont agree...
I would have said its over-subscribed.....too many ppl not understanding liquidity traps and not looking at the wide scene ie the deflationary forces...aka a Great Depression...instaed they think printing == inflation....
Great thing about this is of course on any side of the "deal" there are two players both willing to bet but on opposite events.....Im bettin on massive deflation and house prices collapsing....gold dropping....Sure when we hit the bottom inflation will occur.....but until we get there cash and do debt is king.
USD in play, of course...its only safe as long as its the standard....the EU obviously isnt...its finished......there are no other currencies in play....so the USD is the leser of the evils.
regards
Respectively disagree steven.
Gold is the new currency just coming into play (thats why its traded on the currency desks of major banks not the commodity desks and why central bankers are buying and holding it as part of their foreign reserves), the USD is the one going out of play. I wouldn't hold USD if I was you.
Gold is not over-subscribed... where are you getting that info from when less than 1% of investors own it...???? No kiwisaver or managed fund in NZ has any real exposure to it???? Most people don't even know where to go to buy it if they wanted to??? The FED has stated they will not allow deflation (so they will print trillions more) regardless (and the have to to fund the government deficit and foreigners selling their treasury bonds)... thats how hyperinflation starts - then its always followed by a deflationary depression... Gold is way underpriced as a reserve currency, the USD way overpriced...and they continue to print more at a much faster rate than gold coming onto the market... demand for gold as a currency is only just beginning...
This is not the same circumstances as the great depression, although the end result will probably be the same...
regards,
Respectfuly disagree with your good self. I read your Ron Paul piece (about Gold) and this simply convinced me that he has read too many economics text books. This feeling was enhanced when his answer to a debate question (what would you be doing if you were not debating here tonight?) was if I was at home, and if the family had gone to bed I might read an economics text book. The text books tend to skip some of the contradictary results found in the underlying theory, with some form of general hand waving.
Its good to see some analysis of gold which contradicts the typical, gold is the new money, gold to infinity chant. But clearly the world economy is in deflation, and deflation doesn't drive prices up. There is obviously a lot of fear driving the gold market at present.
From our previous discussion about gold systems, you said that confiscation of gold is un-necessary. I totally don't understand how you get the non-gold bugs to accept a currency transition where they start off broke, and some gold bugs start off super wealthy. To me that makes the idea totally infeasable, you have to re-distribute the wealth in line with present values.
I also don't understand this whole gold is money idea, and Ron Pauls constant repitition of 'but you have to be able to exchange it at face value'. So is he actually saying 'you need to have a full reserve gold backed system', or just saying 'but the financial institutions need to maintain the impossible charade of having all the gold on hand while also lending some of it out'. No fractional reserve system is ever going to function like that, and obviously the non-insiders are going to be the ones left short when the financial system collapses. I think he doesn't want to talk about financial reform, because then he will get savaged by the wealthy in America.
Hi Nic the NZer (I too am Nick the NZer), lets just back the truck up a bit...
1. 'Money' is used as a financial intermediary (it facilitates trade) and its a store of value. Without money - what you have is barter - which is very inefficient. Gold is money as the market says it is, everything else is credit. Paper is paper. If you disagree thats cool, just give me something else that forfills the following;
- Is standard (diamonds aren't standard - there value depends on their size, shape, colour, oil depends on the grade, etc...)
- is divisable (diamonds aren't as their value depends on size)
- is easily recognisable and hard to counterfeit
- is accepted accross the world, in any culture
- is easily stored and transported (unlike oil which is flamable and expensive relative to value to transport around)
- is durable (food perishes)
- keeps its value over time (no paper has done this anything lose to gold)
- total supply is relatively steady over time - (amount in circulation can't be doubled overnight... etc..)
2. Gold confiscation is unnecessary. In the end, gold (money) is only the holding transaction intermediary between goods and services. You don't need to confiscate gold anymore than you need to confiscate all goods and services everywhere (that will not happen). For example - your wealth (and indeed most peoples) is more than the bank balances (money) you hold - you may own a house, car, bike, furniture, shares, samsung galaxy s2, etc... those things all have value. Under a gold system you could 'trade' or 'sell' any of those things for gold, so you haven't lost your 'wealth' (except maybe cash you held in the bank - but before this current monetary system is over you will loose that anyway (no matter what system its replaced with) - speak to anybody from the old USSR or Zimbabwe (I have friends who lived though both) or read accounts from the Weimar republic. The key to going though it is actually having hard assets and not bank deposits, its not necessary to go out and buy gold (although its not a bad idea if you have cash you are not going to use in a while). So what are 'non-gold bugs', as you put it, going to accept in exchange for their goods and services - useless paper? ... in the end they will not, they will want something that means the conditions under my #1 point above... think about it.
3. The world economy is not actually in deflation. Maybe you don't pay rates or drive a car or eat food so you may not have noticed this. Inflation really is the devaluing of paper money, deflation means money (cash) is gaining in value. I think the former. The US co understates inflation though varies ways... 'there are lies, more lies, then there is statistics' as they say... anyway - rising oil prices will pass inflation through the economy..., not to mention the trillions yet 'unprinted'... deflation will come eventually by only towards the end of the monetary system - if they let it go that far before changing it. Incidently gold goes up in deflation as well as inflation, infact evidence would suggest it performs better under deflation.... but anyway...
4. There are wealthy people who support Dr Paul. He is the only one that's actually proposing real change and understands the real issues. The others will just keep the status quo.
5. You don't need to have a fractional reserve system if depositors will deposit gold with the bank on length of terms the same as the bank will lend out. Generally depositors under our current system don't want to do that because the interest rates may change dramatically depending on inflation (they want to keep purchasing power and gain a bit more for sacraficing current enjoyment of expenditure). Under a gold money system where inflation is nil, this wouldn't be a bit issue. Under a fiat (non-backed) system inflation is always going to be an issue so interest rates will flucuate to much to risk long term deposits...
You make some good comments, but they can all be easily answered. My position still holds true. Non-insiders will always loose when the system collaspses - that's why we need a system that can't collapse - like all fiat systems do. It's the morally just and fair thing to do.
Nick
Hi Nick,
I disagree with some of the fundamentals here,
To address point 1, you can't win this debate by defining some perceptions and then claiming that they are obviously true, especially when they are obviously not true for many many people.
The following statement is equally as valid as yours,
"'Money' is used as a financial intermediary (it facilitates trade) and its a store of value. Without money - what you have is barter - which is very inefficient. Paper is money as the market says it is, everything else is credit. Gold is gold. If you disagree thats cool, just give me something else that forfills the following;"
Lets accept that nearly everybody agrees, money has some value, certainly at present and into the forseeable future. So you want to determine what property gives it that value, why is it generally accepted. Well if nearly everybody gives money value then the property which gives it value must be something that everybody knows about. That makes a mockery of the idea that debt backing, some link to energy, or gold or any other exchange value gives money value. The idea is ridiculus because most people are totally un-aware of the price of gold, how the monetary system works, how much energy might be extracted. I think the only common denominator would be that its validated by national monetary institutions. Some people do have other ways of valueing it.
I actually don't think that paper is money either, paper is a token representing the posession of some money. The money is the balances in the system of accounts. Making a cash withdrawl from a bank changes the form, but not the amount of money. In this sense a gold based or backed system certainly does not make gold money either, again the gold or the certificates would be tokens.
It should be very obvious that any instability in the monetary system is caused by the fractional reserve banking system, regardless of the monetary unit. This is true simply because if gold/fiat is the money then immediately once you have only a fraction of reserves in the bank, some deposit holders are owed something other than money, and some are going to be left high and dry. The base is simply irrelevant to causing instability in the monetary system.
Okay - I think you need to stop and rethink a bit, or maybe my explanation was unclear or I didn't define what I meant....
1. The free market (and I mean the combined decisions of free people) doesn't say that paper is money. That is just not true, and easily to prove - eg if you had one of those old NZ$1 bills - its no longer legal tender (I have some old 20cent coins in the back of my draw - now worthless of course - unless you will give me 20 cents for them?). Government says paper is money by law, and when the government changes the law - the old paper does not have value - or rather goes straight to the value the free market sets it (ie zero). It is true for all paper currencies.
2. You say that my list of qualities about money are not true for many people??? huh???
3. Gold does not need any 'national institution' to give it value. It just needs free people in a free unmanipulated market, which we don't have at present.
4. No - the credit is the balances in a system of accounts. You assume money are credit are the same. They are not. Paper is not real money as it has counterparty risk - it is only an asset as it is someone elses liability.
Yes the instability is caused by the credit creation system. What we have is really a credit collapse - not a real money collapse. Real money is still there, and real wealth is still there - houses are there, oil is there, its actually the credit system (and all paper is actually credit) that's destabilising... that's what the rising price of gold shows..
David Chaston totally gets it wrong in his above anaylsis.... he is basically saying that physical demand is met by physical supply but what he fails to account is that 99% of gold buyers don't take physical delivery - if even a fraction of them do then his anaylsis is totally worthless - or at best misleading to people - except those that actually understand the gold market - of which David is not one. The price of gold will be determined by how many of the trillions of $$ traded every year actually stand for the physical. At that point - when that exchange collapses paper will try and price in gold. Until that time the price will jump around a bit....we are only early on in this thing...
To address point 2, if this is the case then reform can't come until complete collapse. I guess we are not discussing reform then because most people still think their bank accounts are worth something.
To address point 3, deflation is obvious if you measure real monetary variables. As is well known now money is debt based, more debt = more money, less debt = less money (another reason the account balances are the money). Since most of the world is de-leveraging (NZ actually much less so than overseas) then its deflation. Look at any of the M3 measures. Obvious deflation in nearly every money supply. Yes, money (not only cash) is gaining in value, thats why lending terms are more strict, there is less of it and debt is being paid down.
The inflation of various commodities (including gold) is down to Fed QE, and its subsequent use to speculate on commodity prices. The CPI doesn't measure housing costs and never has, so it doesn't register the roughly 6% anual inflation in the housing market prior to 2008 and deflation since then. Thats true of every central bank CPI measure, its not just the Feds measure.
The QE money has not been used for lending however, if it was you might see real inflation levels. If there was any economic appetite for debt then doubling the monetary base could cause up to 50% inflation annually, but thats a totally different economic environment.
To address point 4, well if you are right about 2 Ron Pauls not going to 'reform' anything because this would be incredibly unpopular. People do think their bank accounts are valuable and want to retain that value, through any reform
To address point 5, "fractional reserve system if depositors will deposit gold with the bank on length of terms the same as the bank will lend out". yes, its called a full reserve system and it works on both paper and gold equally well (at eliminating financial instability). This eliminates the main cause of inflation/deflation, increased/decreased leverage, which occurs in any kind of fractional reserve system. The inflation and deflation has literally nothing to do with the fiat, or commodity nature of the monetary base.
People will either get educated and demand reform or reform will be brought to them via a collapse. I wish for the former but realistically it will probably be the latter... :-(
There are many different definitions of money - and most economists can't agree on the finer details, yes thats true....but most people would agree with all my #1 point requirements. Yes, paper could fit this as well if governments had some long term monetary discipline but in reality they never do...and end up stealing through inflation from the poor in particular - gold just works as money long term, paper doesn't last... part of the reason why is that gold imposses restraint...which is why bankers and governments generally speaking hate it...
Inflation has everything to do with fiat, because eventually governments that can spend more - do spend more - regardless of the savings rate - they can just create more debt endlessly.... (and over time they do just that).... Tim G told the Chinese at QE1 it was just a one off, after QE3, 4 and 5 do you think they will believe him? Do you think anybody will believe him? So they will want some 'real money' and gold fits the bill. For example all of Irans USD reserves can be confiscated by the FED (the Fed can do this and do practice this on a regular basis - just ring National Bank Treasury dept...) which is why Iran moves to gold - because it has no counterparty risk....
Paper has value because the government passes a law giving it legal tender status therefore valid for the payment of taxes.
QE has been lent to the banks which can they buy treasuries and the difference in yield is just another bank US taxpayer indirect bailout (the Fed passes all profits after operating expenses over to the US treasury). In a real sense the toxic waste the Fed buys off the balance sheets of banks is being passed to the taxpayer but most Americans are too financially ignorant to see it which is why they get away with it... but they are waking up... but yes - QE has not be lent out into the productive sector - that's why its not producing the growth they need... and a lot of businesses do not want to borrow anyway...
The aim should be to build a financial system long term that works and gold will do that, the problems arise when people move away from gold.... yes we need a full reserve system and fractional reserve banking should be illegal and classified as fraud.... moving from an debt based system to another debt based paper system never has actually worked in the history of this world.. . what you are proposing is just a theory which has never worked...
Deflation, deflation deflation... okay so if cash is gaining in value as the deflationists say it is - ..then prices should be getting cheaper... what exactly is costing less? I am paying more for petrol, more for insurance - car, house, contents, boat, landlord - (and Tower say it will be going up this year too), more for rates, food is about the same, airfares are about the same as a year ago, more to go to the movies, more for electricity, house prices haven't really come down around Auckland at least (where I live), rents don't seem to be coming down where I live either...labour costs have gone up... are you referring to the cost of big screen tvs coming down? ... pitty I don't actually buy one of those each month then... perhaps some people do?
So you are saying your expenses are decling in $$ terms - meaning from month to month your cash goes a bit further each month.... EXACTLY WHAT IN THE REAL WORLD are you buying that is doing this Nic? Most of the above have increased a multiple of the 'official 1.8'%
Huh? I can understand the money supply and credit contration due to repayment of debts but that doesn't necessarily cause deflation...
Well it's obvious enough to me. A lot of prices have increased, yes. Some businesses have put the screws on when their reduced turnover cut into profits, which has caused some of the inflation. Some of it has been thanks to QE, but despite all these stimulants to increased credit the world economy is clearly on a negative course.
You should cut out the central banks role when considering the 'price of money', and if you did that you might see why finance is harder to get, bank margins have increased, insurance costs have gone up. Money is more valuable, so they are not selling it cheap.
Most parts of the world house prices have been dropping, and NZ (and Aus) is far from typical in the way it has gone in the last 3 years. Its been much worse almost anywhere else. The other thing you should understand about the housing market statistics is that they are very weak, there is very little data. Large parts of the housing market have just disappeared. The defaults rate is strongly up as well, even in NZ, and it appears to be getting worse.
Just like the inflation is not balanced and even, deflation effects different sectors of the economy to various degrees. The CPI has always been a poor measure of the inflation of the monetary supply, so seeing cash going further is only one indicator. Eventually when businesses find they can't push up prices, and lay further staff off they will drop prices. You might see this as a never ending series of sales. I am in the UK, supermarkets compete on price very strongly here. In the great depression the effect was nearly immediate because the businesses had the most debt, but this time its more balanced between business and personal debt.
Yes, the accounting system is the money, most people will say their money is in the bank and the central bank always has M3 variables as part of the money supply.
Sorry Nic - I must disagree again and with about everything you say in this post.
'A lot of prices have increased, yes' exactly - its called inflation - and dispite you saying the reverse is obvious you fail to name exactly anything that is coming down in price - businesses will not sell at less than their cost and with the cost of labour and commodities trending up they can't just reduce prices.
Secondly, the central bank is responsible for inflation - it is the entity that controls bank reserves (for fractional leading) and it is the one who regulates the banks (and interest rates). Any sign or hint of deflation is just an excuse to print more - which is how all fiat money systems end. Lately Alan Bollard has mentioned QE but all he is doing is soffening up people to the concept, it's a common strategy used again and again - first they say they outright will not do it (a year or so ago when the IMF suggested it to NZ), then they say under some circumstances they might, then they say its a possibility, then they actually do it, and nobody objects....
Money is less valuable which is why they are selling it cheap (the cost of money is the interest rate). Loans are very easy to get (I just tore up another Amex card pre-approved application sent to me yesterday) - Westpac is back to offering 100% on mortgages....banks are falling over themselves to give credit... The default rate is small in NZ and interest rates are near record lows. Even in London, house prices have increased from last year - not fallen.Your facts are incorrect and don't reflect reality and your conclusions are in reverse. We are going into an inflationary depression.
Deflation destroys the banks - which means the Fed will not let it happen. This is not the great depression... we are in a different game here now...
The UK, Europe ad US are all in serious trouble. That we can agree on. Still you haven't considered my previous post question - why does the IMF ban member countries from attaching their currency to gold? I think the answer to that question will to a large degree settle the matter.
The accounting system is not real money - its just credit created from more credit from the banking system.
Regards,
Hi,
Deflation, is self-fullfilling, and is disasterous on Govn income, hence pollies etc are terrified of it....with good reason.....No one wants another great depession.......though im 99% sure thats what we are about to get.........
Inflationary depression.....thats just a wierd consept but interesting.....for instance I see a huge asset deflation (houses 50%+ down) but energy cant get cheap, not for long.....its in short supply.....but overall we will see a deflationary event....not inflation and it wont be minor or short.....
Facts, well dont cherry pick to justify or shoot someone....carte blanche.......
Gold standard, well I can see from your posts you appear to be a gold bug....
regards
Inflationary depression:-Zimbabwe;Germany;Israel etc, etc. The only deflationary depression I know of was the USA, which strangely was using gold as money. Gold goes up in a depression, who wouldve thought. You're suggesting it will fall, to what level? Gold will not fall in any meaningful way untill this whole shitstorm is over. Once it is over, gold will have done it's job of preserving wealth during a crisis, and will be swapped for productive assets.
Hi there Skudiv,
Hope you had a good day. Actually Pres Roosevelt via Executive Order 6102 on April 1933 made it illegal for US citizens to own gold, so they didn't use gold as domestic money for the depression. Nixon in 71 then took the US off the international gold standard as they had cheated and printed too much 'credit money'. France called their bluff I believe. Since Britten Woods all currencies are still derivatives of the USD, although prior to 71 all currencies really where priced against gold...
Hi Steven,
These posts are getting skinny. Im 99.99% sure we will get another depression. I don't know where you are living? I don't see houses 50% down - house prices in AKL have started to rise... rents cover mortgages in many parts of NZ. In Detroit house prices have collapsed as people have left the city - thus there is massive over supply. To say that house prices will collapse like you are saying means either that hundreds of thousands will leave NZ creating massive over supply or that rents will half or worse.... not likely - rents if anything will rise... there is a shortage of rentals where I live... and any house on the market seems to sell quickly.... and there aren't many on the market....
Are you aware of the USD16.1 TRILLION the Fed loaned out secretly since 2008 at zero interest to banks and corporations (more than the entire total mortgage outstanding debt in the US of A) but they was forced to acknowledge it under the Dodd-Frank sponsored GAO audit I am wondering? Or the 1 trillion currency swap the Fed did just before Christmas to save Europe - this will be leveraged up in the banking system at least 10 to 1 (yes - there's another 10 TRILLION). QE mega 3 has been going on behind everyone's back it seems.... and you can be sure as day there are trillions more to come yet down the pipeline as money is created out of thin air to save the 'to big to fails'. Are you aware that Bank of America alone has moved over 2 trillion of derivatives from its holding company onto its commercial arm - thereby attempting to gain access to FDIC guarantees? Are you aware that Uncle Sam now underwrites a good 90% + of all mortgages in the US? Are you aware that the US fed creates money off foreign bonds too? Well I could go on... it was the Feds printing that pushed up food prices (largely hidden from NZ by a high NZD) which drove Egypt to riots and revolution... but freedom is not what they ended up with.... serious riots are coming to Europe and the US that will make what we have seen to date seem so trival.... I was in a meeting after John Key got back from the USA - he meet with the Obama administration, Ben B, Tim G and their officials - not one believed the US would ever balance its books.... exactly where do you think those trillions will be coming from?
Inflationary depressions happen because eventually printing 'money' from nothing is like pushing on a bit of string... it just pushes up prices... each marginal extra amount creates less and less actual real growth...
Yes I agree - we are going to see a major deflationary event (if you read my other posts) - and that will be after a hyperinflationary event that makes currency worthless... the government will not be back in surplus by 2015...the IMF will be pushing NZ for billions more yet my friend... 1 trillion for the IMFs lastest war chest will NOT BE THE FINAL CALL FOR FUNDS BUT MORE THE BEGINNING....where exactly do you think that currency will come from?... Alan Bollard is already starting to warm people up to the idea of NZ QE... The whole world will be aflame in currency debasement as the system destablises....that's when people will vow never again accept paper as 'money'... and gold will take center stage again, as it has many times before, even to back a one world currency which the IMF and world bank are after.... so gold will go to multiple times what it is now.... for the record I didn't use to be a 'gold bug' as you put it, as most people are 'paper bugs' now-a-days because they don't get 'it' - but in time that's for sure going to change....for millions in the western world it will be too late for them by the time they do...one can but try and warn them...still few listen...
You can't offend me by disagreeing.
I will keep it brief, but some of my statements are very main stream.
http://en.wikipedia.org/wiki/Supply_of_money
Look at fractional-reserve-banking section.
Also the article by the telegraph, which is basically my position on the US. Note the Fed doesn't publish M3 statistics any more, which is the deflationary component.
Cherry picking with data is very dangerous practise, so you should not point to house prices in London and assume the same applies across the whole UK. It doesn't, London is different to the rest of the UK, incomes are much higher for a start. Also property prices have dropped basically everywhere else.
I had a bit of a look at some things. I think the main reason the IMF don't want a gold peg is because it opens up financial institutions, and reserve banks to attack by speculators.
We can argue black and blue about if M3 is real money or not. Its fluctuations in that which drive inflation / deflation though. I think if you asked most people they would tell you their money is pretty much all in their bank account though.
My description of how commercial bank money works is this, banks lend first, creating deposits in the process and seek the reserves later. I have not seen anything, either empirical or in the banking regulations which contradicts this, though I have seen pleanty of evidence this is how banking works, both empirical and in the regulations. The so-called money multiplier idea model of how banks work (putting the central bank in charge) has been shown by well respected sources to be a myth. Unfurtunately its probably one of the biggest conceptions in main stream economics theory.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
But you should realise Steve Keen is only recanting what others have said elsewhere.
Gold is a safe haven because you can't default on it, or create it at will, unlike T's or govt bonds. The wide scene is that in the Great Depression gold was money, and in fact it gained in value during the GD, from $21oz-$35oz. Gold gains purchasing power during economic crisis, always. It loses purchasing power during boom times. It's a crazy game, and who would want to own a lump of metal, but given the choice between a lump of metal which has been used as money since time began vs a piece of paper, that is in infinite supply, subject to loss through, default, bank failures, or inflation, it's no contest.
Gold can lose value and it can be confiscated by the Govn....
GD, well look more carefully, look how it did going into the GD, but also bonds and other assets once the deflation had stopped....the key is to buy and sell the right things at the right time.
"always" dont bet blindly....
"crazy game" in a deflationary event cash is king....gold to me is probably over-valued....but make your own call and take responsibility for the gains and losses you make and dont blame others or th Govn if you get it wrong.
My course is as little debt as posible and cash going into the event....at the bottom buy assets when they are very cheap......then, yes sure gold could be good....but not my play......I like things with an income....
regards
Cheers, In the rare (unlikely?) event that govt attempts to confiscate gold, "I lost it in a boating accident." I can't see any value in Tbills, and agree with the buying and selling at the right time. The right time to buy gold wouldve been '99 when it was the most hated asset class of all. The attraction to Tbills in a deflationary enviroment is that during deflation you have to have mass defaults, and bank failures, so people buy Tbills because the US "will never default" while gold has no couterparty risk. Now Central Bankers are preventing defaults, (and I suspect they must have quietly baild out a few TBTF banks recently) which takes pressure off the deflationary side.
As I have previously said, I'm targetting 5% into silver (because silver will benfit more in every scenario) and even now buying cashflow assets. Because even if we were to have deflation, I can't predict the timing, and if it happens 5 years from now, and I'm getting 20% cashflow then I'm in a much stronger position. I agree with the low debt thing, because with low debt, even though I never hold cash, I can always acess cash through the equity. So by purchasing an asset, and paying it off with spare cash, I cut my interest repayments, and still have access to cash if I want it (minus the bank haircut on valuation).
Demand and supply are fine ways to describe regular goods but are difficult concepts when it comes to investment assets. Sellers can become buyers and buyers can become sellers. This is particularly important for gold, where the change in supply due to production is tiny compared to the above ground stock of gold.
It is better to analyze gold from a valuation perspective. The gold backing of paper money around the world is the key factor. As I explain in a previous article as the base paper money supply is increased, the price of gold in fiat dollars must rise for paper money to retain credibility. Bernanke's statments today show that the money printing is not stopping anytime soon.
The news that India will buy Iranian oil with gold is earth-shattering! It is yet more evidence of the intensification of the run out of paper money and into gold. A coalition of nations including China, Russia, India and Iran are rejecting the US dollar and are setting up alternative means of settling financial transactions. Gold is an integral part of their plans.
Gold has never stopped being money and the gold-backing of paper money around the world is at dangerously low levels as the world's central banks print even more paper money.
International UK security co. Brinks maintain huge underground vaults out by changi airport in SPPore...they have 20 metre steel vault doors and are currently totally full..can't take any more..and this scenario is scattered around certain locations in the world.
currently, there is only enough physical gold above ground to fill 2 two olympic -size swimming pools and it's also getting more costly to produce.
some posters above are onto it when they allude to the fact that if all EFT's in paper gold had to become a reality there would'nt be the gold to meet it.
I hold a lot of stocks in gold co's including the worlds 3rd largest, Newcrest in australia..they reported y/day they are currently unhedged and making $1000 US per oz on the millions of oz's they pull up yearly.
Gold will become the gold standard again against the new currency regime that eventually appears out of the global wreckage....once the Chinois have enough reserves they'll pull the pin on the imperialist US and do something tricky to the Yuan/ Reminbi which'll finish off the dollar....why use missiles when you can use money is their logic.....i sleep well.
Yes agreed. This issue will be over what form the gold standard will take. Most investors and funds in gold are in the ETF's and they will loose - even though the physical price goes up. Both Singapore and HKG have taken physical delivery out of London and built their own vaults within their borders, many European countries still have their gold in London or the US (moved there during WW2 for safe keeping, they are trying to get it back and take physical delivery, the US not like this and is hanging onto it. In the end the US may issue a gold backed currency to replace the dollar before China does - thus the new reserve currency maybe another form of the USD - China and Russia may not accept this though and will demand redeemption in gold bullion if they know history (and the do of course). The US would still have to revalue gold up massively from current levels though to do this...
I don't believe a gold standard is possible at all. It is impossible to defend, price gold at $20k/oz and people will sell gold for dollars, causing inflation, set it at 2k and people will redeem gold, causing insolvency. Floating gold prices, can work in a similar way if Treasury depts build up stockpiles of gold, which can be used to settle foreign debts outstanding, in the event of a default, gold would have to go up a lot higher then current prices though.
Whichever way I look at it, gold will end up much much higher in the medium term. Once this crisis passes, (all things are just transitory) then gold will head the other way, for another cycle of mean reversion.
Hi skudiv, a gold standard is possible, but better yet gold as money is better. Once more it would be relatively easy to introduce - given the coming grief and disaster the current monetary system is going to give us. A full gold standard is based on the weight of gold being exchangable, the price doesn't float. If its set at the right level it will be fine.
I hate to be the one to point this out, but the current crisis isn't going to stop until the system falls over. Then we will transition to a new system. What that system will be is still up in the air. I don't think the Chinese or anyone really will be keen to have accept and hold another paper fiat system.
Hi skudiv, a gold standard is possible, but better yet gold as money is better. Once more it would be relatively easy to introduce - given the coming grief and disaster the current monetary system is going to give us. A full gold standard is based on the weight of gold being exchangable, the price doesn't float. If its set at the right level it will be fine.
I hate to be the one to point this out, but the current crisis isn't going to stop until the system falls over. Then we will transition to a new system. What that system will be is still up in the air. I don't think the Chinese or anyone really will be keen to have accept and hold another paper fiat system.
A gold standard would be easy to implement, but impossible to defend. "Hello I'm china, I have 2Trillion dollars I'd like to convert into your gold backed currency please. Thank you, now I'd like to convert these gold backed notes into physical gold please."
The system will definatly collapse, and no guarantees there would be a gold standard replacing it, why not have a population backed standard, where each dollar is backed by 1 person. I'd get rid of the whole money idea, and everyone get along, share the stuff, and let technology do the crap stuff, if it was my call.
Hi skudiv,
Why not have a population backed standard? Fair question I suppose. Not sure how that would work though - do you mean you would send some people overseas to Japan in exchange for your Toyota? or are you talking about a fiat paper system where a set amount is printed per population? and you would believe government and banks would restrain themselves to their population statistics then? You trust that they would not try and cheat? Would that apply to all governments including Obama and co? and also the dictatorships?
Didn't you mean to say 'hello I'm China, India, & the rest of Asia & the middle east and the people of Europe and the Americas and I have much more than 2 trillion to convert to gold...???'- although if much of it is in T-bills or actually any other paper debt denomonated it may not be quite so much when they come to actually convert it.
And how about all those trillions in sovereign wealth funds that are restricted to only invest in AAA rated investment grade assets/securities? Did you include those too? Exactly how many AAAs did you think will be around in a few years?
In the end the price would just revalue up as its remonetised, so don't think that's a big problem at all.
Yes, agreed - no guarantees what the system will be replaced with - no one knows the future 100% of course - but whatever it is;
- it would have to be recognised internationally, like the arabs would have to accept it in exchange for oil of course.. because most of us want their oil...
- have some history behind it (the more the better - countries aren't going to trust a newbe on the block with their trillions in reserves and savings - esp after the euro is toasted), and
- it would have to be protected against the stupid money/debt printing schemes and thus be tangible and relatively rare, unlike seashells or sand for example, and...
- it would have to be easily exchangable and transportable to pay bills across international boundaries...- oil is to difficult and expensive to transport, and it's bulky and hazardous to fly it, and its consumed which means the supply can change quite a bit....so can't see oil backing really working in the end...
- it would have to be imperishable or it preferable must not corrode, - like food, or get eaten by bugs or corrude like iron or something, I mean bummer if you were saving for your retirement or needed to save over a long period of time only to have it destroyed and
- if it didn't carry counter party risk (not an asset just because it is someone elses liablility... that would be even better too....
Nope - I have no ideas what that something could be... do you?
Maybe you didn't get the memo, so I will give it to you: The Fed is giving you the green light to buy gold. So are the Europeans. So are the Chinese.
In the U.S., Bernanke has decided to ignore the recent strength in the economy to keep rates low, and I don't blame him, because why risk derailing the economy now when inflation is still subdued? Bernanke has to wait for housing to come back and job growth to start. He can't rely on a couple of good months of data.
But you can't wait until things start overheating. You have to jump in now.
Europe? They are printing money right now -- we just don't hear or see the presses. Every statement from Germany, which is in charge, of late has suggested that it will do what it takes to restore growth if the ne'er-do-wells embrace austerity. You aren't going to get good growth without printing money.
There's no inflation over there. There's deflation. But once you start printing and you have low interest rates, as we have in this country and there, you are going to get gold buyers. I don't even know where gold will go if we scrap the euro. Don't even need that.
Which brings us to China. We have data from China that shows record buying by the Chinese into the Chinese New Year. We have rates coming down in China without a real stomping of inflation.
Guess what. That means buy gold.
I think a lot of people have been scaling out or selling out of gold. Just the other day, Dennis Gartman, who people keep saying has a decent record on gold, told you to dump the yellow metal.
Boy, do I ever want to take the other side of that trade. The three biggest economies in the world are all trying to reflate. Interest rates in two of these economies are at record lows, so you aren't making any money with cash. The mining companies I deal with are all hard-pressed to find more gold.
That's a recipe for a true run-up happening right now.
Dennis Gartman seems to almost always get the sell side right by rarely the buy side... in a primary bull market better to just buy and hold, rather than trying to enter in and out of the market....and it requires a whole lot less time, less effort and less stress...
It had a rest for a few months before the new year Gummy Bear Hero and actually thats 11 years in total, after a 20 year bear market.
The bull will turn to bear when they fix the GFC and it's never ending stream of children running around the globe... - the sovereign debt crisis, the baby boomer pension crisis, the money printing crisis, the reserve currency/forex crisis, the inflation crisis (hasn't got to that yet), the oil crisis (arabs will not accept paper for oil forever, believe me), ...plenty more steam yet... having said that though I hope it does have another good rest later this year... its still massively underowned - especially in Kiwiland (because kiwis just don't understand its value).
Natural gas is a commodity, gold is the only international currency that they can't print more of....Hmmmmmmm.
Hi Nic,
Yes I know deflationists are main stream. Most professional economists get it wrong most of the time though, so 'main stream' doesn't mean much.
I'm just giving London as one example, in general the UK, US or Europe will do worse than say NZ or Australia, Mexico, Chile, Norway, Switzerland...but I guess Im cherry picking again... I don't give too much credence to government stats - they hide what they want to hide and have changed the measures of so many things to distort what is really going on... my point is that in reality prices are not going down in a general sense (I don't know what makes you think they are?), infact in a general sense they are going up...insurance, rates, electricity, food, - this is obvious by anyone who actually buys stuff in the real world...
Deflation destroys banks... the central bank is there to protect banks (well the banking system)... central banks will not let too big to fail fail..... or lets put it this way - in the case of the Fed - its banking shareholders don't trade on inside info - they create the inside info for the Fed to act on and they will not let themselves fail... it's a banking cartel... they are all playing in the system on the same team... so its a tails I win, heads you loose game for them... its symmantecs to argue who in the system creates the 'credit money' whether its the central bank that runs and sets the rules and interest rates or the banks themselves. They are the same and have the same interests.
'I think if you asked most people they would tell you their money is pretty much all in their bank account though'. ... my point wasn't where most people think their money is but what most people think money is - and yes they think paper is money (they are paper-bugs) - I think if you asked most people they believe that the bank has the cash/paper for them (which it doesn't) ...my point was that most people would agree with my original specifications for characterists of money, which I think they would indeed do... they haven't made the leap yet that that is in reality not what they have in their bank accounts at all. Most will find out the hard way the truth in the end though...
On the IMF and gold - do you mean like George Soros and the Bank of England on the EMU?
Its late - my wife is calling me to bed...
Pretty much on the nail, hence my rec - so too is this LOL
BTW amongst the ephemera I collected as a kid is a 5 billion mark note from the 20's - there's a lesson there.
5 billion marks ! ....... pah , petty cash ..... Gummy's got a $ 200 trillion Zimbabwe note . Now that's a real lot of money in anyone's book ......
....... enough to buy 6 eggs , apparently ...... if they had eggs , which they don't ........ cos someone ate all the chooks ......
Still , we've learnt our lesson since the hyper-inflation of Germany , in the 1920's ...... now we add another five 0's to the banknotes ...
.... .. yiiiippppppeeeee , we're all rich ... ... rich , I tell ye .....
At least that plug nut Gonzo the zimbabwe minister of finance made sure the $200 trillion note was also the same size and absorbant quality of recycled dunny paper. I keep a wad of them on a nail in the long drop...you have to use them with Moogabages face the right way up.
Hi Nick,
I think there is a kind of contradiction in the statements "my point wasn't where most people think their money is but what most people think money is - and yes they think paper is money (they are paper-bugs) " and also that "that most people would agree with my original specifications for characterists of money, which I think they would indeed do". Because they could not possibly believe that money has these characteristics from the way the fractional reserve system actually works.
This says to me that there is a common missconception about how banking actually works. Typically I see this in examples of people who will repeat a near religious belief that incresing bank credit (and obviously debt) doesn't create an increase in spending power. In fact I see a full reserve system conforming to many common beliefs about the banking system, for example only the central bank can increase spending power.
It does matter who is in charge, because if its all one big banking cartel then you need to replace the cartel with different people and regulators. If its not a cartel then you can look at changing the system. Changing the system in a cartel will not change anything.
Deflation destroys banks, well clearly there was deflation and the question is was that problem solved? or is it on-going. Since the Fed never addressed any of the structural issues with their economies (unemployment and therefore mortgage defaults) I don't think anything has changed. Lots of the QE money appears to have been used as an alternate income source, but that will and has stopped and then the problems are destined to return (as I think they are).
Hi Nic,
No contradiction in what I am saying although maybe I could have said it differently. The contradiction is in what most people believe to be 'money'. Most people would agree money is
- something that's an intemediary in transactions and
- a stable store of weath to use for transactions at a later time - or passed onto children....
Most people would also believe that money is the cash they have in the bank represented by their bank accounts - as you suggest - I agree. However in a fractional reserve system as you are aware this isn't true - meaning what most people believe to be true isn't on this point.
Yes - I agree it doesn't matter who is in charge - whether the government runs the central bank or the private sector. Its the whole fiat banking system that needs to change.
It's funny how interest.co.nz claims to educate people on finance yet never brings up the monetary system is to blame - we don't need another tax (like CGT or land tax) to try and correct the ever appearing errors and misallocations of capital and savings in a fiat fractional system (where more money is created on top of more debt) we need to change the system itself to one that's honest, fair and works. Sooner or later this debate will be had. The big question is when? - will we wait until the GFC just gets worse and worse then blows up? Probably... if history is anything to go by....
There has been a correction in the US housing market - which by itself isn't overall deflation (that would be cherry picking) - unless the price of most things are dropping. It wasn't the drop in housing that sunk the US and European banks. It was really the fraudulant mortgages and derivative products (MBS/CDS) that multiplied the losses that did - 60% of which were packaged and sold into Europe, (knowing they would blow up). Ordinary mums and dads trying to pay a mortgage aren't behind it (although they get to pay for it). Is the problem solved? - no, of course not - the problem is just entering the sovereign debt crisis phase... this is where governments go to town and borrow more than the entire nation is saving - either by putting us at the mercy of foreign creditors (which is what JK is doing) or by monetising (what the US is doing now and NZ will catch up later). Fiat always ends in inflation - any sign of real deflation they will print like crazy.
Concerning IMF banning gold backing to a currency - I can't accept your comment as fiat is more easily manipulated (ie the reverse is the actual truth). The IMF/World bank wants to issue the next reserve currency (the SDR/Bancor) - they will not be able to do that if a country backs their currency with gold. (Have you read 'Confessions of an Economic Hitman' by John Perkins? - the IMF isn't the saviour it claims to be)
Good luck finding a solution to the fiat debt based problem. Let me know if you find a solution will you? (apart from the one I've already mentioned)... I'll then nominate you for the Nobel prize in Economics.
"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money" - Daniel Webster
Nick.
One more quote;
"The way our current monetary system works, the careful savings of a lifetime - including your pension - can be wiped out in an eyeblink." Lawrence Parks PhD
...well two more;
"You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of Government [or actually today the banking system elite]. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold." - George Bernard Shaw.
:-)
yes and history repeats... or if not then certainly rhimes... I wonder what thought you have given to the trillions sloshing around the world from sovereign and pension funds - that are only able to invest in AAA full investment grade investments? As more and more countries loose their AAA rating the push towards gold just becomes stronger and stronger...
Well, I will give up trying to convince you that a change is possible at all. Its unfortunate but you are not offering an alternative to what is in place today, simply because the implementation of what you are proposing requires nearly everybody to value their bank accounts as worthless.
Nobody thinks their bank account is worthless today, and I see no reason to expect 'hyper-inflation' now or any time in the near future. That doesn't make it a viable alternative in my opinion. Its not very constructive to present alternatives which can only happen following a complete collapse.
I suggest the modern equivalent of the Chicago plan, full reserve banking is a viable alternative, though obviously I would not be seeking a nobel prize for it.
http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform
The parallel with today are obvious, but there were various kinds of gold standard used then.
Well, what can I say?
http://www.silverbearcafe.com/private/10.11/gaoaudit.html
if usd16,000,000,000,000 isn't enough then I guess what is? no problem - even in a 100% reserve paper system the government can just create another 100 trillion...
I'm not saying change isn't possible - I'm just saying that it will not come from politicians who benefit from the government having unlimited spending power, nor from bankers who will not give up this power - full reserve or not... and most people don't get 'it'- the real problem...
I suggest the attached link for some well researched history of money (rather than the made up history often used to support gold money).
http://www.debtdeflation.com/blogs/2012/01/30/local-futures-interviews/
Exactly that's my point all along - money is all about trust - and in a fiat system you are trusting that the powers in charge don't take advantage of this power - but the reality in history is that they do - time and time again.
Gold redeemable money takes this power away from them. I can't believe any sane person who looks at the links mentioned below will respond with trust.... and thats the thing that destroys fiat systems... people stop trusting the paper as it goes down in value more and more... even in NZ this is a obvious... or any country with a fiat system...
Also this post was posted at 90 at 9 today:
http://www.youtube.com/watch?feature=player_embedded&v=jAdu0N1-tvU
..at the end of the day - its about freedom, fiat money empowers governments to remove it from the common people...
Well I listened to this guy harp on for an hour - he thinks he is so clever and has worked everything out. He's basically a monetarist Keynesian - advocating big deficits and a fiat system that's controlled by only modest printing... that's stupid as
1 The euro experiment is about to prove Keynesian wrong - it worked in the great depression as governments were running surpluses and only were like 3% of the economy and many people had 'savings' - now they have 'debt'.
2. He provides no real mechanism to restrain paper printing, other than lofty theories, which is what we in essense have now....thus it will not work - if he honestly looked at history he would realise that instead of being blinded by his own 'self-obsorbed brillance'. He doesn't understand history nor human nature.
3. He doesn't mention that it is the money powers who created this crisis on purpose. Perhaps he has no worked that out yet.
Since you listened to 1 hour of highly watered down theory I expect you now think you understand every thing he ever wrote. Clever you to be able to subsume decades of research in an hour.
Apparantly you have a similar understanding of anything Keynes wrote, and his thesis was not brief or back of a knapkin by any means.
"created this crisis on purpose", no I guess he might be a bit slow on the uptake there because he saw the crisis coming before it started.
http://rwer.wordpress.com/2010/05/13/keen-roubini-and-baker-win-revere-award-for-economics-2/
Of course I don't. Im saying government running massive deficits will not fix this GFC problem - it will infact make it worse in the end.
His theory on keeping fiat supply constant just never bears out anywhere over time in the real world.
Actually I think Bob Chapman was the first economist to predict the GFC and many years before this guy. He also predicted the collapse of the Euro when the euro began, which is only now becoming obvious to all.
There are always economists who predict everything. Sometimes they are right, sometimes they are wrong. Because they are right doesn't mean their analysis is even correct. I could predict it will rain tomorrow and come up with a theory that relates to the colour of underwear I'm wearing that day, if it rains tomorrow - it doesn't prove my theory correct, nor make me a brillant weather forecaster - but yet this happens all the time with economists.
Deflationists have been saying the same thing for years... same thing with property bubble sothsayers - they must be getting frustrated that their predictions are coming true...
Any hint of deflation and massive amounts (trillions) will be printed at an instant - until the powers that be have extracted everything they can from the system - then they will pull the plug... that's when we will have deflation... until then prices will continue to rise... you can't count core inflation that excludes food and energy for anybody in the real world...
Do you actually read anything you write? First the crisis is a massive conspiracy, then its predicted by multiple pundits. Pundits who claim its not a massive conspiracy. Well I guess they would say that because the only way they could have predicted a massive conspiracy is if they are insiders? Is that the new message Peter Schiff is a secret agent for the NWO.
Its very simple to see the gold market is driven by fear. Any outsider could see this, just from the people who tell you 'shh,... you have to buy gold...right now...'
I not sure what you are referring to Nic? This crisis has been written about and developed for decades. It has even been stated in writings by senior UN officials long ago - the intention to gut America and the west via outsourcing - removing their industrial base, increasing control via debt created from 'nothing' etc... Conspiracy? What conspiracy? You don't need to be an insider to READ. You mention Peter Schiff - I've never mentioned him, but perhaps you don't read and think, just are emotionally reacting.
At the end of the day if you are a deflationaist then of course you don't own any property do you? and you rent and have sold all your assets haven't you? and you have piled up money in the bank ready - so you can buy them back shortly at a fraction of the price? If not, I suggest you don't even believe your own opinion, and ditto for Steven Keen who if he has not done likewise and acted on his own beliefs then he is a fool, and because he works for a University is an even an educated fool - do you know if he owns any property in Australia - I am presuming he doesn't? - it's just a theory, like most academic economists - they don't even act on their own advice... which shows the real life value of it....
Gold and oil will always flow - but never in the same direction.... the west generally thinks like you do - they think they are getting a good deal when they will be trading gold for oil - they did gold out of the ground - they weren't using and get oil that makes their economy grow. The east think they are getting a great deal as after the oil has gone and been used - they still will have the gold.... but you still don't get it...paper is paper Nic, not real money...in time it will be obvious even to Steven Keen and people such as you so don't worry about it.
Good luck with your piles of 'money' in the bank then. I honestly hope you don't loose it in a banking collapse like people I know in other countries...
"He doesn't mention that it is the money powers who created this crisis on purpose."
Actually Keen is pretty explicit, when he predicted it, there is a crisis coming and there is nothing which will be able to be done to stop it, except government stimulus of some kind to the 'real' economy. Same with Peter Schiff (who I mentioned because he clearly predicted the bubble and believes in gold, and his suggested response is basically austerity). I doubt that Schiff understands this, but the response he is proposing is essentially no different to what is happening in Greece, and will equally exacerbate the recession in the US economy if applied.
Because you have only skim read anything Steve has been saying you miss the irony of making weather forecasting analogies. Very central to Steves thesis is that the economy can not be modelled as a series of equilibriums and can only be modelled as a dynamic system with many states. This makes the economy very similar to a weather system and the model Keen has built more like a weather model. Steve Keen sold his house
"paper is paper", I see you are now trying to construct a premise where by there is no money its all just a figment of collective imagination. Maybe if that concept catches on you will see your "gold revolution", but I can't really see a collective shift in opinion that what people have in their bank accounts should be considered worthless. Maybe we can get Bernard to setup a poll on the subject?
I have been paid once,
a) my bank balance increases.
b) my money is in my pocket (in cash).
c) my stock of gold is increased.
I don't mention a lot of things and this blog is already getting too long and I've barely scatched the surface Nic... Of course its the money powers that created this mess, and they were able to do it based on the fiat credit system. I agree with Keen and Peter that there is nothing that can be done to stop it.... and government stimulus will only in the end make matters worse. As governments borrow from the money powers - who create money out of nothing (but actually its just credit)... they put themselves more and more under their control. What TYPE OF SOLUTION IS THIS? if that's what Keen or yourself is suggesting. That's playing directly into their hands. Then they will only give loans if the government backs it with assets - so they will end up with the assets all bought with 'paper money' and all taxes will be paid to the WB/IMF/WG. The solution is just default on it (like Iceland I believe - which you never hear of now-a-days) and go to a new monetary system. Every time gold is used it actually brings prosperity and peace and stabilisation. Fiat paper always ends in disaster.
Monetariest are obsessed with the quanity of money theories... yet none of them seem to agree on actually what 'money' is in a fiat system... so they are trying to quantify something they can not define which is part of the fiat problem. That's partly why fiat systems implode, like this one doing. Its just an excuse for the money powers to take over the world.
Fiat money is really backed by taxes, therefore the money powers want a global tax to back their 'new fiat' money. Thats what the global warming scam was all about... but now its been exposed as a fraud they have renamed it 'climate change'. I mean you want to help save the planet don't you? In the end it will not work - just like the IMF tried with SDRs in the late 60s - no one wanted a set basket of currencies when they can just do that by themselves in the proportion of countries they actually trade with.
I think the gold revolution has already begun. There any too many black swans out there - and if what Iran has doen with India catches on accross the Arab world (meaning they want gold for oil) then gold will remonetise main stream more quickly than you can post a blog. I think its obvious what's happening.... but its still in its infancy stages and time will prove one of us correct... as for everybody else reading this I suggest you look, read, research and make up your own mind... I've been watching this unfold for years... now I'm just the guy standing by the tracks saying the bridge is out... gold and silver are your best protection for what's about to come this decade... government deficits will not rebuild the bridge... for those who don't get 'it' until its too late - maybe I can help you down river... if you don't drown first... I think reading these posts on this article will give you something to start to think through for yourself.... Obviously it will not cover every question on everything and there are many points not even referred to...
http://michael-hudson.com/2011/12/europe%E2%80%99s-transition-from-social-democracy-to-oligarchy/
As Michael Hudson points out Austerity is the favourity policy of financial elites and puppets to their propaganda. Ron Paul economics is only likely to hurt the majority of Americans. But of course wealthy elites would like you to believe that its either the only alternative or better still that its for the good of society.
'Its very simple to see the gold market is driven by fear. Any outsider could see this'
Really Nic? So Central banks (major buyers in the gold market) are buying gold out of fear then? That's an interesting point coming from a hard core paper bug... If that is true as you propose - YIKES! then the question is exactly what is it that central banks are fearful of? Loosing money? (not likely - they can just 'create' more endlessly at virtually no cost). Do they feel they are making an investment? (not likely - whats the point of investing if you are the bank that creates 'money').
Outsiders don't understand the gold market at all, less than 1 in 10,000 does. The price quoted (though up 15% last month) is a derivative from furtures contracts. Generally traders buy these futures contracts (or some other derivative product) to speculate on the price. They practically never take delivery. They may buy 5million in corn furtures for example then if the price goes up they sell at a profit. If they sell short they hope to buy back at a later date when its cheaper. Gold is different. If traders think the system itself is at risk - they close their trade positions and buy physical gold..... for delivery.... Scams like the COMEX and the LBMA don't have the physical to back the contracts....all they have is 'paper gold' ... the professional traders know this...
If Steven Keen has sold his house then thats great. At least he then is practising what he preaches.... so at least my repect for him just went up a notch.... most economists don't practice what they preach - I know and ASB one that was proclaiming a housing bubble when he was going out and looking for a house.... I don't see eye to eye with Olly Bigdady but he acts on his opinion. Front page Hearld today - Auckland suffers rental and listing shortage - real estate agents are cold calling door to door to try and get listings... doesn't sound like deflation still.... still I don't think rents will double as Olly thinks - though they will probably increase by double digits over the next couple of years... I think property is overpriced in Austraila (it was the only country to escape a correction).... a correction in housing is still not deflation though. Rents are rising.... Genesis just sent notice its putting prices up.... and so on and so on....
The only real difference between us is that you trust bankers like this one http://www.youtube.com/watch?v=vE4lCZXYnZ0&feature=player_embedded) and governments to run the monetary system and I don't. Your system would work if bankers and politians where honest, yes.
But you ignore history and reality http://www.silverbearcafe.com/private/10.11/gaoaudit.html
16 trillion will refinace ever mum and dad mortgage in the US at zero % interest by the way... the system is being destroyed on purpose - which was my orginal point earlier.... so trusting these same people when the do the same again and again is silly
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