Posted on 11/13/2009 6:45:21 AM PST by 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?
Comparing the price of gold from the year that the federal reserve act was passed to today gives us the full picture of just how poor a job the fed has done with the dollar. Using our definition of money, a medium of exchange, unit of account, and a store of value let's consider just how well the dollar still fits the definition:
Is the dollar used as a medium of exchange? Yes, though due to it's performance on the other two money characteristics (see below), this may not be the case for much longer.
Is the dollar a good unit of account? It's a pretty horrible unit of account, actually. It's value fluctuates widely, and while we know the long term trend is down, we don't know how fast the fed will reach their ultimate goal of zero. So we have to give it a big fat NO here.
Is the dollar a good store of value? Here, by anyone's accounting, the answer is another huge NO. When I said; Let's see, gold was 20 dollars an ounce. Now it's ELEVEN HUNDRED dollars an ounce.Your answer was; Wow! 6% return a year. You're looking through your FRN prism. Gold IS a good store of value. A more reasonable way to look at it is that the dollar has LOST 98% of it's value (so far), since 1913, as measured by gold.
So, the dollar itself only meets one of the three characteristics of money, and that one characteristic it DOES still meet - medium of exchange - is in jeopardy. A reasonable person can see the problem. The dollar is losing it's money status.
Now my guess is that you might want to want to come back at me with a "how well does gold fit the definition of money". Before you go to the trouble let me point out for you that your analysis will be distorted if you view it through the FRN prism. As a medium of exchange in this country, gold served well until it was outlawed by FDR, and the reason it doesn't function as such now is because of legal tender laws and this little thing called taxes, which is what happens when you try to use gold as money while the fed is destroying the dollar's value.
Also, we know that gold's history as a unit of account will look poor as viewed through the FRN prism, but again, we have to look at what actually happened. While gold was illegal for American's to own it's price in dollars was suppressed. When the top of that pressure cooker finally blew, not surprisingly, gold's value in dollars skyrocketed. It then settled down and only fairly recently (this decade), as the dollar's value accelerated it's slide did gold start it's bullish move.
Finally, as a store of value, well, no explanation needed there, right? Here, even you dollar defenders have to admit - gold IS money.
In all seriousness... I do hope that if you don't yet own any that you are buying some gold. The dollar might very well be dying.
Are you under the impression that there was no inflation or deflation under the gold standard?
It's a pretty horrible unit of account, actually. It's value fluctuates widely,
The dollar fluctuates much less than gold does.
we don't know how fast the fed will reach their ultimate goal of zero.
You think the Fed wants the value of the dollar to be zero?
Gold IS a good store of value.
Because it's never been worth zero? LOL!
Excellent-- hey Todd, I knew you'd be able to explain that even though gold may be a great commodity for speculation, money is something completely different. I don't know what it was you said but thanks just the same!
your post 40 "NO I did not bring it up..."
your post 33 "...why do we have the GDP numbers, less investment, and unspeakable unemployment numbers?"
Guys like Obama can say something and turn right around and deny they said it, but we can't.
dang— cheap Chicom keyboard, sorry about that last post...
I'm pretty sure a high-intensity X-ray would detect it.
Look up "Industrial radiography".
Back toward the end of the era when those of British ancestry ran Rhodesia, the folks with a lot of money bought very, very nice boats.
The plan was that when the time came to go, they just get in the boat and sail away, then when they got wherever they were going, they would sell the boat and they’d have money to start over.
Called them “crash boats”, as I recall.
You alluded to something similar in FEAT.
I don’t think X-rays would penetrate very far into a gold bar.
They had a long way to go from Rhodesia to the ocean! But it was done a lot in South Africa.
Gold and tungsten have different densities (gold at 19.32 g/mL and tungsten is 19.25 g/cm3) --off by four parts in a thousand. Any decent engineer could measure that in his kitchen, but an easier way is using off the shelf kits with a magnetic/xray/density mix and that can be carried into the vault. More info here.
Personally, I'd have thought the simplest way would be by melting point. With gold at 1064 °C and tungsten at 3422°C (hotter than the surface of the sun), just stick a white hot needle into the bar...
up this morning
Gold Price Change due to Weakening of US Dollar
+3.70
Gold Price Change due to Predominant Buying
+6.60
Gold Price: Total Change
+10.30
Forget gold’s spike to $850 which was all of two days. The highest inflation adjusted one month average for gold was about $700 back in the early 1980s. If we reach a one month average of $1800 next month then we will be the same when inflation is taken into account. So we are not that far off from a new AU peak...not that it will happen next month
My numbers $700 and $1800 might be off a bit but you get the idea
Hey a blast from the past --a four month lag time is hard on the old memory but we were talking about how gold isn't money because it's not a unit of account and it's not a medium of exchange. We were also talking about the fact that no matter how many times this is said. the info never makes it across so that's why I asked Todd to see if he could explain it.
Looks like nobody can get it across, seeing how after four months not even Todd could clarify it.
btw, that "$400/oz later" is a fantasy. November's close was $1,372 and yesterday it was $1,427. The math is easier for me to do than explain but I get $55. While that may be a 13% annualized rate of return, we get a -81% annualized rate if we look at how gold's fallen since last Wednesday. A serious look tells us that precious metals are not a 'store of value' when the amount stored changes at rates jumping from +13% to -81%.
Uh-oh! Look what happened a year and half later. Higher prices everywhere!!!
Please point out the conflict you think you see between these two statements.
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