Posted on 08/19/2012 5:41:20 PM PDT by SeekAndFind
China's problems are gold's problems
Investors who love gold tend to think of it as a sort of bomb shelter. It's supposed to be a secure place to park your money when the rest of the financial world is blowing up.
So some may find it surprising that in a year when Europe's troubles have thrown the global economy into fits, gold has been a loser's bet. The price per ounce of everyone's favorite rock is down about 7percent for the year and is off 15 percent from its September peak. According to a report released yesterday by the World Gold Council, total demand for gold fell 7 percent in the second quarter of 2012 compared to the year before.
Let this be a reminder that, no matter how long it's been around, gold just isn't that special. It's a commodity that responds to the laws of supply and demand. Unlike commodities such as wheat or oil, which you can at least eat or burn for fuel, gold pretty much lacks any inherent value beyond what the market assigns to it. And in the past decade, much of the new demand that set gold off on a wild tear from around $300-an-ounce at the turn of the century to almost $1,900-an-ounce last year has come from two places: India and China. Combined, they account for 45 percent of the world's demand for gold jewelry and bars.
(Excerpt) Read more at theatlantic.com ...
When one or more get into trouble or have trouble meeting an obligation or with some deadline, those effected take advantage of the high metal prices and start selling gold to cover losses and buy more time.
If Romney wins, markets should respond favorably and then gold will lose some luster. Otherwise, if and until then, the price heads up as the dollar is devalued.
I had to pay a considerable premia when I bought in to the market. How much should I charger to sell it back over spot?
I’m planning to purchase some gold next month so that when the value of the dollar tanks I can cash it in and pay off my mortgage.
Note that nice descending wedge there to boot...
“All bubbles come to an end.”
Yes, they do, but gold isn’t in a bubble. The current global bubbles are:
- debt; bank, government and private throughout most western countries
- especially US Treasuries
- US dollars
Those invested in bonds had better watch out... The 40 bull market in bonds will blow up within the next few years when bond holders figure out the true risks of holding them when interest rates ultimately climb.
Greetings Goldbugs:
IMHO, the goldprice.org dollar value price only demonstrates the decreasing value of and relative confidence in the fiat US currency. Price will head north again.
The US Money Markets And The Price Of Gold - Tyler Durden on 08/18/2012 22:19 -0400
http://www.zerohedge.com/news/us-money-markets-and-price-gold
It seems an investor better gauges the precious metals market emotional drive using the Gold/Silver ratio filter. Over the last 5 years the best gold “buy” opportunity was April 2011, ideal silver was last quarter 2008; the lifetime trend since 1984 still favors silver.
No matter the 2012 election outcome the market will go emotional before 2013. Use Gold/Silver ratio and take advantage of precious metals buying opportunities.
Cheers,
OLA
Sorry, properly sourced article:
http://sibileau.com/martin/
The US money markets and the price of gold
Published on August 19th 2012
There are currently three potential policy measures that would have a relevant impact in the commodities markets
What do USD money markets have to do with gold? Money market funds invest in short-term highly rated securities, like US Treasury bills (sovereign risk) and commercial paper (corporate credit). But who supplies such securities to these funds? For the purpose of our discussion, participants in the futures markets, who look for secured funding. They sell their US Treasury bills, under repurchase agreements, to money market funds. These repurchase transactions, of course, take place in the so-called repo market.
The repo market supplies money market funds with the securities they invest in. Now…what do participants in the futures markets do, with the cash obtained against T-bills? They, for instance, fund the margins to obtain leverage and invest in the commodity futures markets.
In summary: There are people (and companies) who exchange their cash for units in money market funds. These funds use that cash to buy –under repurchase agreements- US Treasury bills from players in the futures markets. And the players in the futures markets use that cash to fund the margins, obtain leverage, and buy positions. What if these positions (financed with the cash provided by the money market funds) are short positions in gold (or other commodities)? Now, we can see what USD money markets have to do with gold!
Let’s propose a few potential scenarios, to understand how USD money markets and gold are connected:
If money markets have liquidity, there is abundant cash to buy US Treasury bills (i.e. the repo market is more liquid), and to finance those who short commodities in the futures markets. This is negative for the spot price of gold. If money markets lack liquidity, shorting commodities becomes more difficult. This is positive for the spot price of gold.
If the US Treasury bills become riskier, on the margin, the incentive to buy them will be lower and either money market funds will reallocate the cash towards commercial paper or they will face redemptions from fearful investors. The repo market will then lose liquidity. This is positive for the spot price of gold.
Alternatively, if the rate paid by the US Treasury increases AND the risk of these bills is NOT perceived to be higher (something possible in these rigged markets with doubtful ratings), investors will be more eager to place their cash with money market funds (falling prey to an illusion) and the liquidity of the repo market will increase. This is negative for the spot price of gold.
Why do we bring this up? To be honest, it is not the first time we do so. We have introduced the topic in our letters of July 2nd, July 30th and August 6th. We bring this up today because we want to raise awareness on some measures under consideration by the US Treasury and the Federal Reserve, that will have a direct impact on the USD money market, and hence, the repo market and the price of commodities. These policies are:
1) Minimum Balance at Risk (MBR): Kills USD money markets = lowers liquidity in repo market = Positive for gold
This has been in the works since 2010, but is only now taking shape. On August 15th, Bloomberg had a post on this under the title “Fed’s Dudley backs money fund rules to protect US Economy”. If enforced, there will be a minimum balance, which holders of money market fund units will not be able to redeem, but after a lock period. Effectively, under distress, redemptions will be restricted. As well, there are other potential measures, like floating the funds’ Net Asset Value and capital requirements. But the MBR one is the most relevant: It will make market participants see money market funds as a risky investment.
Personally, we do not see the motive behind this move because if, as some deduce, policy makers in all honesty believe that the savings currently in these funds will be reallocated as a result to bonds or stocks (boosting asset prices), they are being naïve at best and utterly idiotic at worst. Whoever invests in money market funds does so to make an extra buck on liquidity. If he/she cannot make it, then the funds will simply remain in a chequing account. Would banks use these funds in the chequing accounts to lever up their investments? Into what? Money market funds? The recent experience in the Euro-zone (discussed further below) shows it is not the case. Banks will not lend more just because they have more deposits available.
In any case, this policy would drain liquidity from the repo market and financing positions in the futures markets (i.e. shorting gold, for instance) would be more expensive. This would be positive for the spot price of commodities.
2) Introduction of Floating Rate Notes by the US Treasury: Positive for USD money markets = Negative for gold in the short-term, positive in the long-term
We introduced this point in on August 6th, after reading a series of articles at Zerohedge.com. Floating Rate Notes are variable rate notes. If floating rate notes were issued and interest rates rose (either driven by the Fed’s policy or by the market) they would have a strong bid from money market funds, bringing liquidity to the repo market. This could continue supporting speculative shorts in the futures markets, which would be negative for spot commodity prices in the short term.
However, if these rates are seen to be sticky, the Fed would have to intervene, targeting rate caps. But to guarantee the cap on the price of a good, one has to offer unlimited supply of that good. If the Fed had to guarantee a cap on NOMINAL interest rates, it would have to offer unlimited supply of US dollars. It is now easy to see why, in the long run, issuing floating rate notes would therefore be positive for the spot price, in US dollars, of commodities.
3) Zero interest on excess reserves: Would kill USD money markets (just like it did in the Euro zone) = lowers liquidity in repo market = Positive for gold
After the July 5th decision by the ECB, to pay nothing on its deposit facility, Euro-zone banks’ deposits at the European Central Bank plunged (see below, source: Bloomberg), by the tune of EUR484BN!!!
Did this money go to stocks? No! To bonds? No! Where did it go then? To a chequing account at the ECB. In the process, the Euro money markets died and the repo market suffered heavily. We had warned here that this measure would only make Euro banks less profitable and hence, riskier.
Because commodities are not traded in euros, this has not impacted the commodities market. But should a zero-interest-on-excess-reserves policy be implemented in the US dollar zone, the effect on the repo market would be to drain liquidity, a negative for futures markets and a positive for spot commodity prices.
In conclusion, there are currently three potential policy measures that would have a relevant impact in the commodities markets. Forewarned is forearmed.
Interesting strategy. What will you cash in your gold for?
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Jordan has been reading the advice of too many Freepers. I’m surprised he didn’t mention lead and brass.
He also apparently doesn’t have a handle on the currency markets. As the major currencies are devalued the price of gold increases. While demand a is factor in the gold pricing equation currency valuation has a greater effect. The other indicator is oil.
Gold and oil prices rose in tandem. The correlation was not perfect but it was apparent. A curious thing happened. As the Euro became troubled and European bonds became scary, money fled to US treasuries. That resulted in a decrease in he rate of weakening of the US$ and that resulted in a plateauing of the US$ price of gold.
The total US debt is now barely shy of $16 trillion. The only way that debt will be repaid is with cheapened $$$. That means in the long term, gold will continue to rise. Those who buy and hold will do well
Since my mortgage is expressed in dollars I would sell the gold for a now-large number of dollars and use those wortheless dollars to pay off my mortgage (and other dollar-denominated debt). If I had any left over I might pay off someone else's obligations (allowing them to keep a roof over *their* head) in exchange for them owning me some *BIG* favors.
During the Great Depression a lot of people who lost their homes would have kept them had them employed this strategy.
Why would the Rothschilds short the Euro and Soros buy gold and dump financial stocks if the price of gold is going to falll? The answer isn’t some cockeyed paranoid conspiracy theory, it’s because they expect the Big One to start in the Middle East. EU countries are stocking up on oil for the same reason.
Greetings The Duke:
Asked my favorite coin dealer how he entered the coin business.
During the first progressive Depression, he watched in horror as his parents sold their Chicago home for $80.00 in US gold coins. Four one ounce gold coins purchased a modest home in the Roosevelt era.
FWIW, this dealer has a $100,000.00 US bill for sale in the shop; no price posted. Very fitting with progressive Wilson; guess a $200k ought to have Barry.
Cheers,
OLA
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