Do We Goldbugs Finally Have Your Attention?

Seeking Alpha ^ | 11/13/2009 | Andy Sutton

[SeekAndFind]

The past two weeks have brought two massive paradigm shifts to a Gold market that has been morphing literally on a daily basis for the past few months. During this time, the pundits and purveyors of misinformation and tripe have done their best to ‘student body left’ Gold back into obscurity as an ancient, barbaric relic. They certainly get an ‘A’ for effort. Now that Gold has made its debut above $1100 an ounce, they’ve switched their tactic and are now calling it a bubble. We’ll deal with why this cannot be the case in a bit.

For the past 9 years now, students of history and common sense have been literally shouting from the rooftops that Gold was the place to be as the monetary tradewinds shifted back in 2000 and the fiat inflationary cycle began to go parabolic. While the multi-trillion dollar deficits might be a surprise to many, for those who understand how these things work, it is just a mundane repetition of history and yet another confirmation that man cannot alter the laws of economics or his own intrinsic predilection to ignore events past.

From 2000 up until recently, there was a constant battle going on. Central banks and the IMF would sell off their physical Gold to suppress the price. Between 1999 and 2002, Gordon Brown, then England’s Chancellor of the Exchequer made the extremely wise decision to sell a good chunk of Mother England’s Gold (395 tonnes) in the $275-$300/oz area. The people were so enthralled by this obvious economic genius that they made him the Prime Minister. All sarcasm aside, this was only one prong of the tactic to suppress Gold prices.

The second prong consisted of large New York and London banks mercilessly shorting Gold in the paper futures markets. For most of the last nine years, the bulk of these futures contracts were rolled over or settled in cash; taking delivery wasn’t really en vogue. There have been many people such as Jim Sinclair working hard in the trenches to educate people on the merits of taking delivery and fighting the cartel by taking their playing chips off the table. Gold in your possession cannot be leased out by a central bank to various third parties, nor can it have futures contracts written against it.

Despite even these Herculean suppression efforts, the price of Gold made the journey from $275 to $940 in fairly short order. Surely, there were many gut checks in there; days when the metal lost 5% and the pundits would scream the bubble had burst and it was all over, now please buy some mortgage backed securities. There were some epic struggles like the Battle for $700 shown below.

Through the past nine years the game was played under the rules of central banks and the IMF. In the past two months, countries, large players, and even Gold producers have turned the game on its head. Suddenly everyone wants physical metal, not paper promises. And don’t give us the 90% bars either; we want the good stuff. Suddenly, there are instant buyers for IMF sales that were previously guaranteed to suppress prices. Suddenly an IMF sale sparks a rally to a new all-time high. China tells NY and London banks to take a long stroll off a short pier by issuing a directive to its state banks to walk away from commodity derivatives contracts. And, even more telling, central bank selling has been dropping steadily over the past few years and has been nearly nonexistent in 2009.

And finally, Barrick is closing its infamous hedge book. What was once a 20 million ounce boat anchor on the price of Gold has become a multibillion dollar boat anchor around Barrick’s neck and they’ve finally had enough. The book, now around 3 million ounces will be closed by next year according to Barrick boss Aaron Regent.

Oddly enough, it is not the collapsing US Dollar that is driving this decision, but rather a realization that Gold production likely peaked in 2001 and that even a tripling in exploration budgets across the mining sector has yielded precious little in the way of new discoveries. During this entire time period, demand for Gold has been rising consistently, thanks in no small part to the continual abuse of paper currencies by governments around the globe. The existence of serious supply-demand dislocations immediately rules out the prospect of a speculative bubble. Granted, there are plenty of smaller players who are dabbling in Gold without the slightest bit of understanding as to why they’re doing it. The next correction will undoubtedly send many of them running back to mainstream newsletter writers demanding a refund. After all, they were supposed to be living on the beach in 6 months; the advertisement said so!

The shattering of the old paradigm as it relates to Gold is very similar to a paradigm that was shattered with regard to stock investing nearly a decade ago. In that case, the conventional logic was that the market always went up in the long run. And for 18 years, that had absolutely been the case. Even the crash of 1987 hadn’t done much to derail the bull market. However, when we crossed into the new century, the paper paradigm changed with the major indices going nowhere in the past 9 years and change. Yet many conventional financial professionals are still investing as if it were 1995 then blaming the markets for client losses when they should be blaming their own inability to see that our world has changed dramatically.

Unfortunately, another of the very negative sides of the attack on Gold have been the ad hominem attacks on proponents of Gold-backed currencies and those who promote the reality that Gold is in fact real money. The attackers use the term ‘Gold Bug’ to paint a picture of little men sitting in fallout shelters wearing tinfoil hats with stashes of food, water, and enough weapons to make the debate about Iran seem pretty foolish. That just isn’t the way it is. Simply put, a Gold bug is someone who understands Gold’s historical role as money and seeks to educate others in this regard while protecting their own assets from the abuses heaped on paper currencies by their custodians.

So today I, an admitted Gold bug, ask: Now… do we finally have your attention?

[Swing_Thought]

Which of the hundreds of new currencies would you use?

(I doubt there would be hundreds.)

Obviously, I'd use the currencies I needed to use to obtain what I need. I'd keep my cash in currencies that I trusted, and if I needed something only available in another currency, I'd trade my preferred currency for that currency and then trade for the good.

But I suspect that, in time, there would be a few currencies that would be universally accepted.

[Toddsterpatriot]

The fed has complete control over M1, and decreasing but significant control over the other forms credit money.

Excellent!

The Fed is attempting to control interest rates

Exactly! They can't control interest rates.

Those that are educated in history and economics (not you?) will understand that the cause and effect between increasing the supply of fiat money and the corresponding decrease of its value does not happen simultaneously

Really? If you double the money supply you don't instantly double prices?

Gold is a good proxy however for what's happening to the value of the dollar.

The Fed doubled their balance sheet and gold didn't double.

When you go to the gas station or grocery store, how do you pay for your purchase?

Irrelevant and stupid. When you go to the gas station can you pay with Japenese Yen?

I'm not suggesting Yen should circulate along side the dollar. Aren't you arguing gold should circulate along side the dollar?

[Toddsterpatriot]

Obviously, I'd use the currencies I needed to use to obtain what I need.

Your paycheck is in "JP Morgan dollars".

if I needed something only available in another currency, I'd trade my preferred currency for that currency and then trade for the good.

With a bank as the middleman? Doesn't sound very efficient.

[dollarbull]

Excellent!

Great retort. And your point is?

Exactly! They can't control interest rates.!

Another great retort. What's your point here? The fact that the Fed tries and fails to control interest rates (in the same way the Soviets tried and failed to control production and everything else) somehow means they aren't a socialist command economy like structure? They will fail because non-free market forces don't work - doesn't mean they won't try.

Really? If you double the money supply you don't instantly double prices?

Go back and re-read what I wrote [am i having a battle of wits with an unarmed person?]

I'm not suggesting Yen should circulate along side the dollar. Aren't you arguing gold should circulate along side the dollar?

I tried to help you, but I guess I'll have to be more clear. Look up the definition of currency vs. money. Gold is money, it's not currently currency within the US. I'll hold gold as my money and so with other smart people. You can use fiat toilet paper as yours - let's see how they both do over the next 10 years?

[Toddsterpatriot]

Great retort. And your point is?

You understand the Fed doesn't control money supply.

Another great retort. What's your point here?

You understand the Fed doesn't control interest rates.

I thought you were blaming them for setting rates too high (or too low) and increasing the money supply too much (or too little)?

Go back and re-read what I wrote

Sorry, too many people on FR who don't understand economics think that an increased money supply must mean higher prices. I'm glad you don't agree with them.

Gold is money, it's not currently currency within the US.

Do you want gold to be currency within the US?

I'll hold gold as my money and so with other smart people. You can use fiat toilet paper as yours

What makes you think I'm holding fiat money?

[dollarbull]

You understand the Fed doesn't control money supply.

You understand the Fed doesn't control interest rates.

Go back and read what I wrote (3rd time's the charm?). Try to understand "control" vs. "influence" & try to control". Try to undertand that the Fed is a soviet style command economy organ of the state. I'm done with this point. Hope you get it.

Do you want gold to be currency within the US?

Doesn't matter what I want. The market will decide.

What makes you think I'm holding fiat money?

Because you're not very bright? Sorry - you walked into that one

[Toddsterpatriot]

Try to understand "control" vs. "influence" & try to control".

Yes, the Fed can influence but not control money supply and interest rates. Glad you agree.

[expat_panama]

Gold has been money for 5000 years.

 

Lots of things have been used for money over the centuries.  On Yap Island they even used massive limestone wheels.   It actually worked better than gold because it was so hard for the government to confiscate it for back taxes.

 

 Gold cannot go to zero value.

You and I though away gold all the time.    Since gold can be hammered down to a thickness of just a few molecules it's used for lines and letters on packaging.  That gold stripe on your shampoo bottle is pure gold.

No matter what you say, the  money you use is dollars that are nothing more than numbers on a bank ledger.    You can convert them to gold, but you'll have a hard time using that gold for money without taking a hefty loss.

[Swing_Thought]

With a bank as the middleman? Doesn't sound very efficient.

That's okay. I'd happily trade a little efficiency for a more stable currency not subject to the whims of vote buying politicians and gutless central bankers.

[Swing_Thought]

I tried to help you, but I guess I'll have to be more clear. Look up the definition of currency vs. money. Gold is money, it's not currently currency within the US. I'll hold gold as my money and so with other smart people. You can use fiat toilet paper as yours - let's see how they both do over the next 10 years?

Or we can go back a hundred years or so to when the fed was created. Let's see, gold was 20 dollars an ounce. Now it's ELEVEN HUNDRED dollars an ounce. Yep, the dollar has held up well against gold, huh?

Good thing the fed's on the job for us with those backed by nothing FRNs. Don't know what we'd do if we had to use that relic gold as currency.

[dollarbull]

Wow, where to start on this one. OK, school’s in session:

1) See post 130. Then get your dictionary and look up the terms “currency” and “money”.

2) After that, try to comprehend the distinction between something that has been money for 5000 years, and something that was money 5000 years ago.

3) Then, finally, think about why if I lose something, or even intentionally throw it away, that does not mean it has zero value.

I’ll borrow a line from our friend TP. “Glad I could help”

[expat_panama]

Yo Todd, we got a money definition problem here and maybe you can explain this better than I can.

Most people say money is a  and a medium of exchange, unit of account, and a store of value. 

Dollarbull and Swing_Thought know gold isn't a medium of exchange because they never use it to buy anything.  OK, they might trade it for something, but  baseball cards work too and they aren't money.  Gold can't be a unit of account either; if say, dollarbull said his house was worth 100 ounces of gold this past year then we wouldn't know if it was worth $76k or $114k.  

Dollarbull says is "I'll hold gold as my money" --as if it were a store of value.   My dear sweet mother-in-law (rest her soul) 'stored' about a hundred grand in gold when it peaked at $880/oz in 1980.   In 1980 the DOW was at 800 but I digress...

Ping me if you have any luck.

[Toddsterpatriot]

Let's see, gold was 20 dollars an ounce. Now it's ELEVEN HUNDRED dollars an ounce.

Wow! 6% return a year.

Yep, the dollar has held up well against gold, huh?

Who holds dollars long term?

Don't know what we'd do if we had to use that relic gold as currency.

Yeah, crushing deflation is so much fun. LOL!

[dollarbull]

My dear sweet mother-in-law (rest her soul) 'stored' about a hundred grand in gold when it peaked at $880/oz in 1980. In 1980 the DOW was at 800 but I digress...

I guess ignorance runs in your family? LOL. Who would backup up the truck on an asset at the tip top of its parabolic blowoff capping the end of its secular bull run? Oh right, your ancestors.

If you knew your history you'd know that there's a time and purpose for every investment class. The past decade and most of the next, is the time for gold. How's the DOW done over the last 10 years? Gold's been a great store of value the last decade - watch it do what it does best while your fiat unit of account melts away

[Toddsterpatriot]

Who would backup up the truck on an asset at the tip top of its parabolic blowoff capping the end of its secular bull run?

You're not buying gold at $1100? When did you stop buying?

[dollarbull]

You're not buying gold at $1100? When did you stop buying?

Read carefully. Backing up the truck and buying are not the same thing. Panama's grandma put 100K into gold @ $880/oz in 1980? $100K was a lot of money in 1980. It's amazing that she was able to nail the intra-day high for gold on that $100K trade - that's great timing.

We're a long way from this gold secular bull market's version of the 1980 blow off top. The public doesn't even know how spell gold right now.

[dollarbull]

Wow! 6% return a year.

Who cares what gold was trading at in the 1930s before that decade's version of Ben Bernanke confiscated it. What's the return been since 2000 (of whatever year one bought it)? That's what counts. My guess is you still haven't bought any yet - please remember to tell me when you do so.

[Toddsterpatriot]

Read carefully. Backing up the truck and buying are not the same thing. Panama's grandma put 100K into gold @ $880/oz in 1980?

Read carefully, it was his mother-in-law.

We're a long way from this gold secular bull market's version of the 1980 blow off top.

So what is the blow off top price? Or will you only know when it gets there?

[Toddsterpatriot]

Who cares what gold was trading at in the 1930s

Swing_Thought cares what it was worth in 1913. Maybe you can clear up his confusion?

[dollarbull]

So what is the blow off top price? Or will you only know when it gets there?

LOL you're giving me too many soft balls. I'll know it's the top when guys like you and panama throw in the towel and start buying gold. There can't be a top until the public gets in big.