I remember about 15 years ago countries were very open about having to space the sale of their gold reserves over 10 years, to prevent the price from dropping through the floor. It was open manipulation, widely reported in the press at the time, and portrayed as a good thing (to spare the mining industry from the disaster that befell the US silver mining industry when that price collapsed in the 1970s - most of those mines are still closed). I think it had gotten as low as $335/oz.
Gold is not an investment. It never has been. It never will be.
That is just on futures, I am ok with this.
Wrong. A gold contract is 100 oz, it's a silver contract that's 5000 oz.
Funny Munny not withstanding. When I buy a gold coin I pay cash. 100% of the purchase price in cash. The coin goes somewhere safe and the cash continues to drop in value. Margin? What margin. I pay 100% of the purchase price in CASH. Frankly, I don’t know or care why anyone would sell a gold coin these days for Federal Reserve notes. Seems like a bad trade to me...
Up to WW II any creditable currency was pegged to a gold/silver standard, which would have included the money of Washington’s time as President. During the Revolution the Continental Congress tried printing paper currency not backed by real assets to pay for the war, and hence the term “not worth a Continental”. Then during the Civil War, both the Union and Confederacy issued paper currency unsupported by real assets. Depending on Union fortunes, the paper traded as low as 40% in relation to gold coins. By 1864 Confederate currency had a gold value of five cents on the dollar. The U.S. didn’t try anything like that again until FDR confiscated gold coins during the Depression, but silver coins were still minted and still freely circulated.
While WWII destroyed most economies of the world, the United States prospered. The only way to restart international economic activity was for the U.S. to take the lead, which it did with the Bretton Woods Agreement. Every currency had a fixed value in relation to the dollar, and the U.S. kept everything functioning by buying and selling gold at $35 an ounce. Therefore, once again there was a U.S. gold standard and the dollar became the world’s reserve currency. However, Americans could not take their Federal Reserve Notes to a Fed bank and trade them for gold.
The U.S. unilaterally abrogated the agreement in August 1971, allowed the dollar to float in relation to the trading whims involving all paper currencies. Until about 1968 people could still trade their Federal Reserve notes for Silver Certificates and trade those for packets of silver from a Federal Reserve Bank. When the government renounced that option, silver coins quickly disappeared from circulation. At this time the working careers of a single generation comprise the totality of comprehension for how the international community was to function economically without currencies emerging from things people can touch and see.
Unlike God’s spoken creation, money has no substance at any time. In spite of that people do exchange items of real value such as labor, cars, and food for words spoken over a phone by a twenty something Fed bond trader. This person calls a company such as Goldman Sachs that has an inventory of securities brokered for the Treasury Department, and pays let’s say $1 billion for securities. Until the trader speaks “$1billion”, the money to pay for the notes or bonds does not exist. Anyone else purchasing the bonds does so with dollars already in circulation.
One analogy to explain the looming inflation might be to consider a flood control dam. The water that builds up behind it during the winter and spring could be considered QE1, QE2, QE3, etc. The face of the dam would be the current moribund economic activity indicating a very low velocity of money as exampled by such questions as “Why do I want to borrow if no one wants to buy? or “Why do I want to buy when I don’t have a job?” Now stagflation happens when the reservoir gets so full with QE’s that some water just has to go over the top, even though economic activity remains anemic.
But when the economy picks up money begins to actively circulate. Now the increased velocity of money exponentially multiplies the QE’s, and the increased pressure shatters the face of the dam. Just as a wall of water scours out the stream bed and washes all before it, inflation now rages through the economy and destroys people’s financial asset values and their purchasing power.
Now all this seems fairly insane, until you realize that every member of the G-20 behaves in much the same way, and do understand their precarious situation. The national debt now exceeds GDP joining that of Iceland and Ireland. By 2037 the CBO reports national debt will become 200% of GDP to reach that of Japan. Since all currencies have about this same connection to reality, finding one or several of sufficient magnitude and viability to replace the dollar as a worldwide medium of exchange and store of value becomes perplexing. An individual country might think they have a solution, but they know they must also survive during the resulting chaos as all countries seek similar solutions. They see the daunting specter of disaffected holders sending trillions of dollar denominated bonds to the marketplace when there are no buyers unless prices are severely discounted. They are also frightened by the image of a devastated U.S. economy, because feeding the insatiable desires of U.S. consumers has been a mainstay of their prosperity.
I imagine something like the final scene in “The Good The Bad and The Ugly”. The members of the G-20 are standing in a circle with open graves behind them. They are all contemplating how they are going to successfully outdraw the other nineteen members and survive the resulting mayhem, which Lee Van Cleef’s character did not. I do not expect to survive the chaos undamaged, but I do intend mitigate the damage by eliminating debt and buying real assets as paper dollars become available to me.
Gold contracts come in 100 oz chunks. It is the silver contracts that are 5,000 oz based.
(I know you didn’t write the article, so just sayin...)
I’ve been long on gold since 2004. 380 an ounce.