With the gold price reacting more like "any other commodity" recently, rising and falling with the risk-on/risk-off sentiment and the expectation of QEIII, the debate has sharpened on the reasons for holding it.
Proponents see it as a reliable store of value, especially in troubled economic times. They also note that future supply will be limited and uncertain, while future demand will keep rising.
Sceptics abound, however, and they include icon investors like Warren Buffett and Donald Yacktman. Essentially they note that there will never be any earnings from physical gold, only the uncertain possibility of capital gain.
Two contributors on Seeking Alpha have been debating the point, and their debate is instructive.
Tyler Greene is the sceptic; his latest point is that gold is "the worst inflation hedge ever".
Shaun Connell is the defender; he thinks Greene has it wrong.
Both however seem to agree on one point - gold is a fear asset. But for differing reasons.
For Greene, gold is a poor store of value, and a poor inflation hedge.
Connell disagrees, and says its use is amplified as a 'currency failure' hedge. It's the asset of choice if you think the world's economy has a bleak future and there is a realistic chance of a breakdown of civil society, he says.
Why should New Zealand investors hold gold? We seek your reasons in the comment stream below.
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79 Comments
IMHO gold's appeal is limited to too few people. Smart money parked in treasuries bringing rates down and slowing money velocity, forces deflationary conditions most everywhere, so no need for pure inflation hedge. During times when it would theorectically shine, basic elements for human survival will be the new gold; food, shelter, energy, meds and perhaps farmland, etc. In meantime, while the world pivots on a knife edge between greed and fear almost daily, I reckon fiat cash is still king.
As a hedge I prefer Acmena or Pittosporum. Grisilinia can also work nicely but requires more care at the beginning. Property has the advantage that you don't have to trim it, but the council makes you set it so far from the boundary it really defeats the purpose as a hedge. Gold as a hedge is very durable and attractive, and requires no maintenance. However the prohibitive insurance premiums and necessity for armed quards makes it an expensive option.
Heh. Nice one Vera. I recommend going edible for the hedge in that it gives a permaculture "third use" aspect, and if planned intelligently can provide fruit year-round with an underplanting of cruciferous and green superfoods such as kale and goji berry to optimise nutritional returns; as well as coppicing for firewood (both home use and income-producing).
The problem with paper bugs is that they can't resist trying to turn money into a wealth generation scheme to enrich themselves at every one else's expense. Sometimes they make mistakes, get too confident, overdo it and we end up with a global financial crisis. Financial engineering is just another term for a reverse robin hood. ie stealing from the poor and middle class to enrich the powerful few. Its a lot harder to do financial engineering when gold is involved
The more mistakes the paper bugs make the more the gold bug population grows.
Completely agree even Soros who has been publically talking Gold down has been actively buying.
http://www.gurufocus.com/holdings.php?GuruName=George+Soros
Follow what I do not what I say
Ivan - you should do your homework.
http://gold.bullionvault.com/How/GoldMining#section-GoldMining-GoldMiningNoMoreEasyGold
It's just like oil - we cherry-pick the easiest. first. It takes progressively more effort to get the next tonne, and the next, and.....
Some say gold has 'peaked' If that's the case, you can expect about the same again as is in existence - which a little less than two olympic swimming-pools in volumetric terms.
As with oil, you can force the pace across the top of the Gaussian, but (given that the area under the graph ALWAYS represents the total resource) that takes away from the tail-off. That makes the final drop steeper. When that 'steep' becomes vertical', you have no virgin resource left. Recycling options only at that point.
David you have yet to acknowlege Golds primary purpose. Its a monetary metal.
That is to say it is money. It is the currency of last resort.
Logic suggests it will in huge demand at some point in the future. Look at the facts;
! All debt backed fiat currencies are ponzi schemes
2 All ponzi schemes collapse by definition.
3 Almost all previous currency collapses have had a defacto backup (eg US dollar).
4 US$ is by far and away the dominant currency (around 2/3rds of world trade) it has no backup.
5 We are approaching the limit to which the US$ system can expand itself further.
6 In the absance of any backup currency to flee to, where do people put their wealth to avoid counterparty risk and remain liquid as confidence is lost in the system?
There is nothing more suited is there? Can anyone dissagree with any of the above points?
Absolutely correct Banksterbasher. After several attempts to undersign that in the past with this link: http://www.youtube.com/watch?v=qeQtpRGSI_8 I cannot believe David doesn’t mention that aspect in his article.
In the current worldwide situation a nation introducing a Gold $ currency: http://www.youtube.com/watch?v=GXC44l942bE would create a massive wealth benefit for it’s entire population.
Mr Ponzi was an enterprising chap from Chicago wasn't he? He developed the neat trick of paying existing investors interest with new investors money and keeping some for himself. It was such a good trick it continues to be tried today with even greater success.
I dont quite see what that has to do with the fractional banking system. Banks can create money out of thin air. They dont need any new punters to come along.
Fractional Reserve Banking is a Ponzi scheme, banks create new money out of thin air in the form of new loan princible, this must be paid back but with interest which is not created at the same time.
So where does the money come from to pay this interest portion back? It must be loaned into existence as well, this is where the new punters come into it. Without an exponentially expanding economy (exponentially increasing number of new punters taking out loans) the system collapses.
Not sure about the maths. If the principal is paid back that gives the banks cash to .relend so , although they need new borrowers I dont know that they need exponentially more. Same with the interest component. The system relies on growth to service the borrowings but simple compounding would do it wouldn't it?
Evening Waripori,
Think of it this way, if all money is created as a loan (which it is), then collectively, where is the money to pay back the interest portion of that loan, when it was only the princible was created to begin with?
Answer it doesn't exist, it has to be borrowed into existence as well, (akin to paying off your mortgage with your credit card) this can go on for a very long time until eventually the compounding (exponentially growing) debt berdon overwhelms then its all over rover.
The system has to keep growing to keep going!
This is the most important video you will ever see!
Getting back to the thread, what if I borrow some money from a bank ( which money they create by leveraging their deposits and capital ) and establish a gold mine. If I get luckier than I normally am and strike the mother load in my back yard, isnt the gold I dig up money?
Cant I pay my interest with that?
Are their not other commodities which could be considered money? Shells used to be quite acceptable.
Money is just the means of exchange isnt it?
In order to avoid being hoodwinked by simplistic illogical claptrap, I suggest reading the following post,
http://www.debtdeflation.com/blogs/2010/11/05/solving-the-paradox-of-monetary-profits-2/
The main reason the economic system relies on expanding economic activity is that it creates an easier environment for business.
banksterbasher; I would love to believe in gold, but...
1 & 2. USD is world reserve and required for settlement in purchase of crude and all mojor commodities. While this is case, struggle to see a collapse.
3. Don't know.
4. Its dominance mean nothing else is required.
5. Yuan, HK, Yen and Pound either already pegged, or enjoy 'symbiotic' relation with Fed. Most everything else floats against this 'bloc'. Until there is new paradigm (say, we've moved on from oil and are fully solar), nothing else nec.
6. US treasuries of late seem to be doing the job for those participating.
Theoretically it doesn't have to be a gold currency be sustainible there are other alternatives out there, its just the obvious choice in a currency event.
1 & 2 Irrespective of wether is the world currency or not, something that cant go on wont. I accept that having to use US$ to trade in oil and other comodities helps to prop up the integrety of the US$, but just watch, the countries who use it for trade are dropping like flies!
3 My point there is a US$ collapse will be particullarly messy.
4 Disagree, the econony is required to exponentially grow otherwise it will collapse.
5 Its that paradigm I am talking about, this will not be a smooth voluntary transition.
6 That is true, not a great return (a loss in real terms) but popular none the less.
regards
Open your eyes. In the past few months China has struck agreements with many of its trading partners to settle international trade in their own currencies, bypassing the US dollar. This is becoming a big trend and the US dollar will become more and more irrelevant.
The biggest buyer of US treasuries is the Federal Reserve.
idlebumski,
1... and the government behind the 'world reserve currency' is currently running a deficit on average every two weeks larger than the entire total worth of all the gold in the known world. This currency is supported only by the good faith and credit of the US government.... a good faith and credit that is being steadily eroded inch by inch... By the time its no longer the world reserve currency gold will be so expensive (multiples where it is now) neither you or me, nor any man on the street will be able to buy any....
Yes there is a fight going on between gold and the USD for surpremacy, and the USD isn't winning, nor can it in the end... current events form future trends and the world is decoupling from the USD... the largest economic block in the world - the Shanghai Cooperation Pact actively so.... by the time most people realise what is happening - it will be too late for them to take cover... that's my point...
Sure, gold was historically the most universally accepted currency. But mainly because it was the best by far method of paying soldiers and generals. Caesar and co would far rather have given all those legionaires free iPhones so they could check that their wages had been direct credited. I can imagine the military paymasters of yore calling it a "barbarous relic" long before Keynes. Gold is stuff. We've moved on. Get over it.
Proven failure Vera? I believe the long term score is .....
Gold 3500: Fiat zero, as in no fiat currency has lasted the test of time and kept any value, not a single one.
Paper money eventually returns to its intrinsic value - zero. But I can see you believe 'this time is different', and gold is no good as unlike fiat you can't have the flexibility to steal so easily via computer keyboard pushing. The way our current monetary system works, the careful savings of a lifetime - including your pension - can be wiped out in an eyeblink. I wonder if you have given thought to where the money is coming from to fund the 1.5 trillion (or 5trillion using GAAP) US government deficit? ... not to mention the trillions it will take to bailout Europe (the current half a trillion is laughable)....
We are just at the beginning of a return to gold.... which is why it is just starting to enter main stream debate... Gold is only 'acting as a commodity' because fake 'paper gold' is being used to make it appear so [via huge derivative transactions] while the authorities (CFTC, SEC, US Treasury, etc) look the other way. I suggest you look into the LIBOR rate manipulation and the gold price manipulation schemes... Eventually the derivatives market will blow up and the manipulation will end. What you are seeing now is the last effit to keep the canary in the gold mine alive by keeping the gold price down...
Your points are well made economist but I disagree that we are at the beginning of a return to gold backed currency. It has never been a competition between fiat and gold. Sure 99% of fiats that existed are consigned to history, thats just the nature of things. 99% of all species that have ever existed are now extinct but there are still species because the most adaptable survive. The fiats disappeared because kingdoms were conquered, empires crumbled for all sorts of reasons. The currencies' demise was an effect of that conquering and crumbling, not the cause.
People who say "this time its different" with irony or sarcasm are about to get seriously eggfaced because, well, this time it is different. Really different. The fire and tool-using revolution took a few million years; the agricultural revolution a few thousand; industrial a few hundred. Welcome to the digital information revolution. Homo sapiens inate desire to trade is not going away because of a few glitches with the exchange medium. The current system is seriously flawed; thats obvious. But the number of people who understand it, is fast reaching a critical mass, and they have the desire and the means to set up a new system that will last until the next time it to gets infested with unconscionable ratbags.
Gold might play some part in the new system, but it won't be a "gold-based" system. Been there, done that. A few here seem to really believe they are the only ones who understand that exponential growth has a limit. Yawn. This time its going to be real growth. Us growing up as a species and seeing the big picture, then the bigger picture. I get a real tingle of excitement at the thought I might hang on long enough to see my own species see the biggest picture of all.
The Euro used to be 15% backed by gold when it was first issued, to make sure it survived and was accepted, even in modern times. Any currency that starts out partially backed ends up with no backing (the ECB has sold off most of it now). Thats a regression, not progression, nor is it a failure of a gold system but the corruption of it by thieving wicked people.
Yes, fiat collapses because governments collaspe, for one reason or another. Even when governments collapse gold doesn't though - as it doesn't get its value from legal tender laws, making gold the stronger money. Gold has actually never left the international finance system. In the end yes - it has never been a real competition between gold and fiat - gold always wins. But its not really about the monetary system - its about human freedom, as I have pointed out before numberous times... DC refers to Warren Buffet but how about his dad Howard Buffett? Or Alan Greenspan?
http://www.fame.org/PDF/buffet3.pdf
http://www.constitution.org/mon/greenspan_gold.htm
The money powers that be act in their own self interest (why this is a surprise to some I do not know), they are not there acting to make a better world for you and I and a fiat system gives them the power to steal enormous amounts of wealth over time without you even noticing.
Why should ordinary citizens be at risk that our monetary system will implode so that banks and other financial players may reap unearned profits by taking on ever-greater risks?
The remonetarisation of gold is the answer to the GFC - it both solves the liquidity and sovereign solvency issues and restricts sovereigns to living within their means rather than stealing though the deceptive inflation tax, sure before we get there they will pull ever rabbit out of the hat they can and then some...
LOL
ex-paper bug.
Fantastic!... and I will supply you with 2300 chinese labour hours from my chinese friend's factory, (if you want the work done in NZ you will have to pay the travel costs of my 10 chinese workers of course). At 50c an hour that will cost me $1150 then all up - for your car and fridge (do you have a house you want to sell?, I might be interested - but only if its Auckland or close by it). I can do you 12 hours a worker per day, or 120 hours a day, and they self manage.
My point is really that 'hours of work' will never work as 'money' as they are not homogeneous and easily portable and you can't just store them up for retirement - so you can't save them. Your 'work hours' idea is really just called 'barter'. You are just trying to swap one good or service for another. Money is the intermediary, it's neither a good or service in itself... it shouldn't even get interest unless you put it at risk for a return... fiat paper on the other hand you have to put at risk as you need a return to maintain its purchasing power.... so you have to put savings at risk just to maintain purchasing power... and they wonder why so little people save now-a-days...?
On the other hand gold covers all these bases and more... or would you just prefer I wrote you a note with the digits 2300 - a fiat paper note then you could trade maybe? I guess I would need to enact legal tender laws first huh? ... which leads to the next questions.... If fiat money is good and would be preferred by the people, the why are Legal Tender Laws necessary? Also, if fiat money is not good and would not be preferred by the people, then why in a democracy should they be forced to accept it? The result, according to Gresham's Law, is that good money, such as gold-as-money, is going into hiding....
actually money is negotiable tender and you never specified where you wanted the labour etc... etc...etc...... but hey ...thus you now discover for yourself why 'work hours' will never be money...
In the end there is only two things that serve as 'money' (the precious metals, and specifically gold and silver and specifically gold more so) and for a limited time their paper proxy... the thing with the paper proxy though, is that it never has worked, not always because the economic theory fails (because you could come up with a paper fiat full reserve system that worked in theory) but for reasons of human nature like greed, lust and covetousness.
George Bernard Shaw, 1928 "You have to choose between trusting the natural stability of gold and the natural stability of the honesty and intelligence of the member of the Government (and banks). And, with due respect for these gentlemen, I advise you, as long as the Capitalistic system last, to vote for gold."
LOL
1 As mentioned above Fractional Reserve Banking is a Ponzi scheme, banks create new money out of thin air in the form of new loan princible, this must be paid back but with interest which is not created at the same time.
So where does the money come from to pay this interest portion back? It must be loaned into existence as well, this is where the new punters come into it. Without an exponentially expanding economy (exponentially increasing number of new punters taking out loans) the system collapses.
Completely different to the labor market. A FRB economy requires debts to keep exponentially increasing just to stay constant. So for someone to pay off their debt, someone else has to get into a greater debt for the system to keep going. More debt exists than money. This meets the definition of a ponzi scheme.
2 Ok, point taken you are right, but all ponzi schemes eventially collapse. Gold itself can not a ponzi scheme however. It can become overpriced though. Unless you are talking about the paper gold (etf's and gold leasing instruments) then yes they quite likely are ponzi schemes.
3 My point being a US$ currency collapse will get messy without a backup as it is subordinate to no other currency in existence, (this is where gold will come into play).
4 No it wouldn't collapse, because the work-hour is not debt backed, it is inert and unmanipulatable, much like a commodity currency, although so impractical that I find it hard to imagine it could get itself off the ground.
5 A collapse typically comes on rapidly, I agree a banks and trading system failure is not a currency collapse.
6 Just wondering how many work hours an oz of gold may get too!!?? Was around 30 ten years ago perhaps 100 today, and perhaps 5000 somewhere in provincial asia!
Great to see that this has made people think! Thanks for your response.
Morning mist42nz,
I beg to differ on the first point you made above. Banks totally do create new money out of thin air. With respect, without appreciating this fundamental basis of Fractional Reserve Banking the rest of my points will be lost.
The banks principle lending function is not as an intermediary between borrowers and lenders, they extend credit (ie issue new money).
Banks create brand new money by "extending credit" to borrowers; they simply type the amount into the borrowers account, and charge interest on it. At that same instance the corresponding amount shows as a liability on the banks books. As the loan is paid back this money is extinguished from the money supply. In theory if as many loans are taken out as paid back the money supply remains relatively static.
The Achilles heal in the system is that it is only the principle portion of the loan that is created not the interest portion, so to collectively to pay the interest portion of a loan back more money must be created by getting further into debt. The endgame to this system is a collapse.
I hope I have made my points easy to understand! Let me know if you disagree!
Everytime you use your credit card or take out a mortgage that is exactly what happens!
What constrains banks from lending wildly? Banking regulations that require a loan agreement, also the reality that if the loan isn't paid back they are on the hook for the loss. Banks don't get to use any of the principe of the loan they just get to charge interest on it.
Below are a few vids illistrating the process, I have found the point that the relevent section starts.
http://www.youtube.com/watch?v=EewGMBOB4Gg @6:55
http://www.youtube.com/watch?v=PlxKtDOkEj4 @6:45
http://www.youtube.com/watch?v=ZPWH5TlbloU @6:17
-bb
Banks create money out of thin air everytime they make a loan, they are allowed to and they do!
Banking rules require them to hold a certain amount of deposits as a reserve requirement, which allows them to extend credit up to an allowed limit over and above this deposit.
Those youtube clips above outline the process beautifully, in a much better way than my little brain can describe!
Ah Ha, but if you defult on the loan, the bank still has that liability on their books, this is a real loss for them, they feel the hurt if they don't get that loan repaid!
Ok, perhaps you can agree with me then, that if banks in fact can create money out of thin air and loan it out then, in fact that would create a ponzi scheme?
Here is another great explanitory clip http://www.youtube.com/watch?v=XnXZzx9pAmQ have a look at the first half at least its brilliant at illustrating how it all works.
In a system where banks only lend out money they have recieved as deposits, everything you said above makes perfect sense, and I would agree it could not be concidered a ponzi scheme.
However we do not operate within a system that restrains banks from lending only money they have on hand, we operate within a system that allows banks to lend money they do not have on deposit. It is this distintion that is vital to grasp to understand the true reality of the ponzi situation.
Of coarse on toop of this we will one day have to grasp the reality of having to live in a world with ever growing demands on our finate resources, and of the demographic blip with the baby boomers coming through shortly
We live in interesting times!
To be clear, banks require money they loan out to be repaid in full, of coarse!
My point above is that the money that banks loan out, gets created at the point the loan was made, introducing new money into circulation, increasing the money supply. Up until that point that money did not exist.
As the repayments of a loan are made, that money is then used to extingiuish the balance on the banks loan book, removing it from circulation, reducing the money supply.
Banks primarily do not loan out the money other bank users deposit into their account. Instead banks loan out new money in the form of "extending credit" (creating it out of thin air).
Sweet, so we both agree that banks create new money by loaning it into existence than.
The implication of this is that there is always more debt in existence than money. And that collectively debt can never be paid off because always more debt exists than money, and evermore money (and debt) is contiuously required to be created at evergreater amounts to carry on.
Irrespecitve of the labor market the maths don't stack up, it will end badly by design! A collapse is built into the system. This meets the deffinition of a ponzi scheme in my book!
Maybe banking regulations should be changed? Now when banks create a loan they are 'gifted' additionally the interest component required to pay it back to their books? That should sort out the ponzi scheme problem then? Its so simple, I can't believe nobody thought of it yet.
Check out point number 2 mist42nz on this page.
http://ournz.org.nz/policies/monetary-system/
Other parties that acknowledge we have a unsustainable monetary system that is destined for an inevitable collapse, and have solutions include;
Libertarians
Positive money party
New Economic party
Social Credit
Gramma not my strong mist42nz!
Newsflash mist, our money is not backed by anything! Nothing, zip, nada, zero!
What supports the system is the confidence in it, and legal decree, nothing else whatsoever. The integrety of our money is an illusion. Exactly the same as in a ponzi scheme, while there is confidence in it, and buy-in, it is able to continue. Nothing else.
Future earnings is just a promise to pay, this can vanish in an instant.
There is no constraint in the esculation of debt, actually the system requires us collectively to get more and more into debt at an ever accellerating rate just to remain constant. There comes a point where this debt becomes overwhelming and it becomes impossible to collectively take out more new loans fast enough to pay the existing outstanding loans. So somewhere between now and that piont confidence will be lost in the system, and then the whole house of cards comes crashing down.
In the same way other ponzi schemes work, more new players are needed to enter (in the form of new borrowers) at an ever accellerating rate to keep it going.
If it smells, walks, and quacks like a duck.................!
Sorry Mist, you're just plain wrong there.
It's a demonstrable Ponzi.
Blaming Governments, Local Governments, Bankers, the RMA, Greenies - or whatever - doesn't get away from the fact that either 'wealth' is underwritten (real), or virtual (unreal).
The problem is that the fiat system needs an infinite - repeat infinite - supply of 'stuff' to be underwritten real-time. The only shape of planet capable of offering an infinite amount of real stuff, would be a flat plane of infinite dimensions.
That was once a widely-held conception, but has fallen out of favour. As will the belief that economic growth is forever.
With respect mist, I beg to differ with your understanding of our monetary system.
"it's not the money or the fiat system itself " I have a problem with this statement. It is the creation of money itself by means of loaning it into existence that makes it explicitly a ponzi scheme, unsustainable, and by design a collapse is a mathematical certainty irrespective of how diligently it is managed. Our monetary has a collapse intrinsically built into it.
You have seen the above links I found helpful in understanding for myself how the monetary system works. The Zietgist one at the point I referenced shows the process from the FEDs own handbook. (past the half hour point it gets really abstract go further at your own risk!).
So my position is clear on how I understand it; Our currency is not backed by anything tangible, Private banks create money out of nothing (what I mean by thin air, from out their ar*se as I have heard others say). Of coarse there are rules, they need a contract and the banks do not get to use any of the newly created money only charge interest on it.
Now as time goes on if there were just enough loans taken out (increasing the money supply) than there were loans that were retired (reducing the money supply) this will cover the interest portion of the existing loans that need paying back. Too many loans coming into existence and inflation can take hold and bubbles can form, too few and deflation occurs and a debt spiral.
Getting to that sweet spot is the responsibility of the reserve bank, in NZ its a government entity which however works in isolation to the government and in the best interests of the banks which in the medium term also happens to be in the best interest of the government. The OCR is the mechanism that the central bank uses to reduce or increase the number of new loans being bought into existence.
I hope I make my understanding clear I took me a while to get it all straight in my head I putmy attention towards understanding it!
-bb
No no, I am not coming from a position of Prejudgement, that is not what I am saying at all.
My conclusions come from a base of evidence, logic and mathematic reason. I think I have offered you well resoned arguements as well as I can deliver them, I have provided you vids which supply evidence and support my method and conclusion, its a bit unfair to say I come from a position of prejudgement.
Here is my message coming from someone else who takes a scientific approach to the structure of the monetary system.
I challenge you to come up with one credible shread of evidence that challenges his method or his conclusions using scientific critical alalysis way you say you prefer to view things.
Please watch it from the begining untill he stops talking about the monetary system. Takes about 20 minutes.
http://www.youtube.com/watch?v=XnXZzx9pAmQ
I look forward to you responding with a credible critique, I bet you cant.
I think you are suppost to go through them all, in series. Its kind of like the Masonic levels, you become initiated to the new 'learning' at each level. Also fasinating the construction of each video with the careful use of implication rather than explicit statement, its genius. Horror movie monsters are much more frightening when you don't actually see them, in general. I expect the author knows very well his 'theory' is a cult.
Tell you what you two, if you can refute any of the claims he has made or his conclusions with respect to the sustainibliity of the monetary system, I will change my username for a month to any name you care to chose!
(There is a link at the very end of each vid, you may have to minimise the advert to see it).
I think its unlikely you would accept anything either of us said, and obviously if your not going to take it seriously its a bit pointless. The financial system is not trivial to understand after all. The link I posted above to Steve Keens site points out why making interest payments is not a problem for the monetary system, though it could become a problem for some government, especially in the Euro zone. The problem is the incentives which are created by the financial system (and I guess the political system as well).
If you want a very basic reason that the monetary system as a whole can't be a ponzi scheme, its because it can always pay in dollars. It doesn't need anything external to produce enough dollars to make payments of any sum. That can be true of isolated parts (such as a bank, investment scheme or individual) which can't do this, but not the whole (yes, the payout may be virtually worthless). In fact failure isn't built in, much as everybody would like something to blame.
BB - just to be clear, fraction reserve banking is not where the banks lend out deposits but where the bank system 'create deposits'.
For example, when a bank extends a loan for $100,000, it does so by crediting that person's account. After the loan has been granted, no one depositor has any less money on deposit than before the loan was made [unlike if I made you a loan - the money would be taken from my account and put into yours], so where did the $100,000 come from? It is 'created' by the bank as the result of a bookkeeping entry. The security for the loan is a charge over a tangible asset (such as a mortgage) or an intangible one (furture earnings of the borrower). In that sense banks don't lend out deposits - they leverage their deposits by creating loans, in the process (as the loan money is spent) it creates deposits in the banking system.... and so on. The are restricted by their reserve ratio requirements and monitored regularly by RBNZ so they can't leverage to infinity. In a very real sense all our money is debt. We have a 'debt standard fiat money system'. Our legal tender is valid for the payment of debts in that sense, but if everyone repaid their debt there would be no money left. I think it was JP Morgan who said 'gold is money, everything else is credit' funny enough that is still true today. No bank has the funds to pay all its depositors if most of them wanted to withdraw their money, because most 'money' doesn't exist outside computer digits. Thats why bank runs can collapse even the soundest of banks. Actual cash is only a small part of deposits.
The FED works in a similar way, QE is just buying assets - MBS, government bonds, foreign currencies (swaps), if the FED makes losses on these transactions, the loss is still very real, it is passed to the US taxpayer (as the FED must pass all profits to the US Treasury).
LOL
the whole concept of a 'bank deposit' is a material misrepresentation of what is happening (with roots back to the 17th century). A deposit in a bank is in fact and in law a loan to the bank. The money becomes the banks money and goes on the balance sheet as a liabilty. Thats why if you look at your bank statement it will show a credit for a deposit and a debit for a withdrawal (in accounting debit balances are assets, credit balances are liabilities) - thats because it is actually the banks statement to you - for the 'loan' you gave them. The bank pretends that loan is repayable to you on demand when it knows if a significant number of people wanted there money at the same time - it could never repay you.
Well the wife has gone out tonight - I've got nothing else to do....
Well actually, especially if they have an office in the City of London - they can rehypothecate (leverage) to infinity and there are no regulations stopping them from doing this. Which is why you can end up with derivatives growing into the hundreds of trillions of dollars many many times the GDP of the known solar system... and thats really the point, its the shaddow banking system thats blowing up the system and running out of control, its not the mum and dad property investor with a mortgage... the latter is just a drop in the bucket compared to what these investment banks are up to...
Gold is for when you're more concerned about the return OF your capital than a return ON your capital.
With negative real rates of return on bank deposits (after paying tax on the interest and taking into account the real rate of inflation, rather than the official rate), there aren't many other places to park your money.
Why should New Zealand investors hold gold? We seek your reasons in the comment stream below.
Well lets see, I have time on my hands tonight....
1. Its outside the banking system.
2. Its the only real alternative to fiat money (which has always ended in disaster)
3. In real terms it goes up in inflation and deflation.
4. Its probably the most underowned financial asset there is today. No kiwisaver fund in NZ has any gold in any form whatsoever.
5. Major central banks are buying.
6. The LBMA and COMEX has massive shorts in place by the big bullion banks and is leveraged around 100 paper ounces to every one physical ounce, although no one knows what is going on behind the senes in the multi-trillion derivative market - its a pretty tight club and they don't publish much.
7. Central bank gold that has been leased out is largely sold off now. They will not be getting that gold back by unwinding the lease, they will have to buy it in the open market. Oh well.
8. China is massively under stocked on gold as a foreign reserve asset, and they are looking to get out of USD. [The euro is providing a great alternative]
9. Its the only currency in the world they aren't creating much more of.
10. Given the need for much more QE in the future to fund even just the US deficit will require trillions more in money creation.
11. There is much political belief that politians will solve the debt crisis by borrowing much more. Yeah Right.
12. We know that a good portion of the gold in fort knox has been sold off (coin melt appeared years ago in the LMBA exchange) and no audit has been done since the 1950s. They are resisting an audit to this day.
13. The big pension funds in the world are looking for capital preservation. Many of them by themselves could by the entire available supply and have change left over to buy up all the silver bullion in the world at todays prices and still have change left over to pay out their annual bonuses.
14. Its on its way to becoming officially a tier 1 banking asset. This will eventually need to happen to bring confidence back to the interbank market as the banking system in the US and Europe is broke. [Mark to model is a fantasy].
15. Most of the world haven't got it as yet and are negative about gold (dispite giving returns way above other assets classes for the past 12 years).
16. The real revaluation of the remonetarisation of gold has only just begun, most of the gains are yet to come.
17. As gold becomes more scarce and banks are less willing to lease it out, this will increase the gold lease rate and therefore interest rates. At this point the willingness of somebody, somewhere, to contract to supply gold in the future will abate. Italy for one, with its huge gold holding and huge (and growing) debts, may soon be the first G8 country to advocate a higher, not lower, gold price.
18. The gold price manipulation (suppression) is breaking down (ditto silver) with countries like China taking physical possession within its own borders.
19. The exploration cost isn't getting any cheaper.
20. Finding new mines is becoming more and more rare.
21. The presidents working group on financial markets (plunge protection team) is running into trouble as more and more people realise what they are up to and that markets are manipulated.
22. The LIBOR financial mess is only the tip of the iceberg, much more is yet to come out.
23. When the Arabs will not take USD anymore, for sure they will still take gold for oil (which is what they wanted in the first place anyway), which is why the RBNZ btw should move to accumulate asap. Gold and oil will always flow, just never in the same direction.
24. The Russians have said they will take 100 tonnes a year (meaning they will actually be taking much more than that) for the forseeable future. Generally speaking Russians are smart people.
25. The recent opening of gold exchanges in Asia will reduce the dominance of western exchanges which suppress gold prices via paper manipulations and secret gold swaps by central banks.
26. Germany (and others) have been demanding the return of their gold from London and the US for ages, but still don't seem to be having much luck. Perhaps its gone? Or like Nixon, they know its far to valuable to let it go.
27. Much of the foreign reserves in gold central banks say they have they don't actually have as they put gold and gold receivables on the same line on their balance sheets on purpose to hide the fact they don't have it anymore, then they remain ultra secret about it. I mean if gold is a useless metal why would they guard that info like the nuclear launch codes? The reason is they use the gold lease transactions rate to keep down and manipulate the LIBOR. Crooks.
28. Switzerland banks have had a law passed that if you keep your gold with them - they have the option, at their descretion of just giving you cash when you ask for the bullion. Crooks. They too have sold the gold or want to keep it for themselves as they have a good idea what's coming down the pipeline and of golds true worth, which btw will be kept from the general public...
29. Gold is traded as a currency on the futures markets by kids in one arce trading rooms who think nothing of going long or short 1000 contracts. Hundreds of millions of ounces get typically traded everyday. Trillions of $$$ each year. Gold is a long way from being removed from the international finance system, its entrenched, and its been gaining ground on the USD. Sneaky.
30. And more importantly a purchase of gold is a vote for human freedom (see links above) and against tyranny....
sigh.. yawn... is that enough for you David C?
you go so close, Mist, then you so often drop the ball. What will your 'art' be 'worth' when TSHTF?
The price of scrap canvas and old dried paint, is what. Not worth a carrot to a hungry person.
http://www.radionz.co.nz/national/programmes/saturday/
the interview at 11.05. Listen to the all of it. Come on Mist - deep down you know what is happening, I've heard folk like you before. Quit the hiding from the truth - it's sometimes called denial - and just take it head-on. It's gonna happen regardless of the attitude held when it does.
Those 'few hundred you've 'made' tonight: you planning on spending them on something real?
Because you did nothing real to 'earn' them.
If you are comfortable screwing someone else in a zero-sum game, that's one thing (I couldn't be bothered spending my life that way) but if you think you've 'made money', and that it can now be 'spent', you're a fool.
The planet couldn't give a damn what you expect to purchase - it either can, or can't, supply you (and all the other blindly-expectant claimants) what is wanted. At the point where it can't, your 'money' is worthless.
They've some nice pro-Gold charts up at businessinsider.com this AM, put there by the Fed apparently.
and this is the type of thing that the banks get up to that I was referring to above;
http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-wh…
It was yet another backdoor bailout of bets gone horribly wrong... and this sort of thing has been going on for years...
Perhaps the next financial scandel to break will finally be the precious metals one. Its certainly been years and years in the making...
Grant Williams;
"If the long-stated claims about government-sanctioned, bank-led manipulation of precious metals markets put forward so eloquently by the likes of Ted Butler, Bill Murphy & Chris Powell at GATA as well as Messrs. Sprott, Sinclair, Davies et al are eventually proven to have any validity whatsoever, thefallout from the Libor scandal will prove to be (to use the words of Jamie Dimon) just another "tempest in a tea pot" as the precious metals are the very underpinnings of the entire global financial system. Conspiracy or no, it would be a blessed relief to get closure no matter what the truth turns out to be."
http://www.scribd.com/doc/99542840/Hmmm-Jul-08-2012
31. What are the requirements for Money? [Erste group research]
- easily divisible
- negotiable
- easily transportable
- durable
- track record of universal acceptance
- easily recognisable and verified
- high value density (ie high value to weight ratio)
- high stock flow (new production doesn't alter existing value in a meaningful way)
- low storage costs
- low transportation costs
- must defy random replication
Only gold and silver satisfy all of these.
"Fiat money has no place to go but gold", Alan Greenspan 2010
"No asset is safe now. The only choice to hedge risks is to hold hard currency - gold" - Zhang Jianhua, Peoples Bank of China.
"There are about 300 hundred economists in the world who are against gold, and they consider that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold." Janos Fekete
32. Gold is extremely liquid. According to the LMBA over USD15.2 Trillion was traded in the first quarter of 2011. Thats over USD240billion per day. (the daily turnover in apple shares is about USD5.5bln.
33. Gold and peace are inseparately linked. WW1 would have only lasted a few weeks as no one could have funded the war.
34. Economic justice and fairness for the third world. Gold currency alone allows poor countries to create a production base by attracting foreign capital.
35. Gold is absent counter party risk, nor has it any default risk. It is the ulimate 'cash'.
36. Gold protects long term purchasing power.
37. Gold is independant of political or economic 'in fashion' swings.
38. In terms of GDP income per capita, gold is cheaper now for the chinese than it has been in over a generation, and only slightly above its lows for India GDP per capita (India and China being the two largest markets for physical gold in the world).
39. Gold improves portfolio characteristics for reasons of diversification and insurance, being risk management.
40. The renaissance of gold in finance. In a study, the IMF forecasts a drastic increase in the demand for safe investments as well as a significant decline in the supply of such investments. Gold forfills such with no debate.
Tell me David, Can you think of any reasons why NZ investors should not own gold?
A case of, doth protest too much, Mr Economist.
I see no difference between points
11. There is much political belief that politians will solve the debt crisis by borrowing much more. Yeah Right.
and
37. Gold is independant of political or economic 'in fashion' swings.
Inflation, it seems, is not only confined to fiat currencies.
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