Image via WikipediaThere were two financial assets which boomed in late 2008. One was Treasury debt, the other was the US Dollar. While Gold and everything else was falling out of bed, the trade-weighted US Dollar index - the USDX - soared 21 percent from 73 to 88.2 between early August and late November 2008.
Compare that to what is happening now. Treasuries are soaring but the US Dollar is, at best, flat. And Gold in terms of EVERY major paper currency has gone ballistic. This time, things do look different. More...
You have heard both of these terms used, probably in the same day and maybe even by the same talking bobblehead on financial TV. Risk on, risk off. "Gold is up because risk is being bought today...Gold is up on safe haven buying...Gold is down because the Dollar is up on safe haven buying...Gold is down blah blah blah".
So which is it really?
First off you need to understand that we live and have lived most of our entire lives in a fiat money system where the governments have decreed their currencies as the only ones that can be used and that these currrencies have absolutely zero value behind them except for the ability of the issuer to tax. These taxes pay interest and (were supposed to) pay down principal. Secondly you need to know that these governments hate Gold because it competes with their fake currencies. This is obviously because the governments can print their currencies at will whereas Gold must actually be mined with a cost of time, labor and capital.
That said, Gold is NOT a risky asset though Washington and Wall St. would like everyone to believe this, they want to keep you in "the system", THEIR SYSTEM!.
In fact, Gold is simply money, real money. It has value because it is a "thing" that best fits the description of money. It has value because it has a cost to produce or obtain, it has value simply because it "is". In today's monetary system Gold is best described as a "safe haven" because ALL of the other currencies are not safe. Back in the old days (prior to 1932 or thereabouts) Gold was not a safe haven, it was simply money. It was "cash".
In the sense that you saw a bear market in stocks or bonds or real estate on the horizon it was a safe haven just as today when a money manager goes to a high "cash" position to avoid a market downturn or panic.
Gold WAS "cash" and "cash" was readily exchangeable into Gold. Bank runs occurred when rumors started that their bank was running out of Gold, not Dollar bills.
If a bank made bad investments in loans or bonds or whatever, they were required to pay in Gold which in turn would spark fears that they were low on Gold!
Gold has always been a safe haven because it was "cash", however in today's world it has taken on a new definition of "safe haven". It's safe haven status now includes safety VERSUS "cash". VERSUS any and ALL paper currencies no matter which one you are using.
"The Money" needs to be replaced with something investors and savers will "trust". THIS will happen because the current system has been abused to the point of collapse and will end as ALL Ponzi schemes have ended.
The MOST IMPORTANT characteristic of "money" in the near term is it's ability to "store value". It is for this reason that savers and investors have for 10+ years running been turning their paper currencies in for Gold, they fear losing their purchasing power.
Gold has not "gone up", it is the global paper currencies that have gone down because of overissuance!
Truly THE most important benefit to purchasing, holding and owning Gold right now is to "make it" through to the next monetary system with your wealth in tact, period! The current monetary system is in it's "death throes", a new one WILL be devised and the easiest, safest and surest way to have a head start in this new system is with a pile of Gold (and Silver). The way to be a "charter member" of the next banking system is to have ownership in the production of both Gold and Silver.
If you understand the most basic of basics (the money), then you understand all that is needed from a financial standpoint.
Gold (and Silver) are nothing more than your "bridge" from this monetary system to the next. Your mining shares because of their operating and financial leverage are what will increase your "current wealth" and make you WEALTHY as and when the next system gets up and running. Hold as much as you can and sell as little as possible to survive until the "revaluation", your true wealth depends on it!
It seems that The Perfect Storm has arrived for gold, with silver right behind it. Kicking the financial can down the road in Europe is hitting the wall … with the monster US financial market problems becoming more glaring by the day. The reasons for owning both precious metals are becoming clearer by the day too.
And what an irony. A visible Muppet host on CNBC spoke of the "crowded" gold trade this morning. Her commentator colleague then said he was short silver. The irony is that both gold and silver are among the least crowded trades ever.
For one, the open interest in both precious metals is light years off their highs. Two, the bullish sentiment indicators are lackluster at best.
And three, there is more talk of the price vulnerability floating around than talk of grandiose higher prices. Most of the market commentary is about the risk of owning gold on the downside.
Image via WikipediaMike Pitts is no economist, but that hasn't kept the retired small-town cop from taking a prominent role in a quixotic campaign to push the U.S. monetary system back to another century.
Pitts, a South Carolina statehouse representative, introduced a bill in April that would make gold and silver coins legal tender in the state. Similar efforts are underway in more than a dozen state capitals, fueled by Tea Party support and antipathy toward the federal government.
The ultimate goal is to return the nation to the gold standard, in which every dollar would be backed by a fixed amount of the precious metal. Economists of all stripes say the plan would be ruinous, but that view is of scant concern to Pitts.
"Quite frankly, I think that economists from universities are thinking within the confines of their own little world," Pitts said. "They don't deal with the real issues."
Proponents of the laws believe that returning America to the gold standard would force the government to live within its means, curtailing runaway spending and inflation.
Lately, the idea has been gaining currency — and not just among the Tea Party activists who have been pushing the gold standard as part of wider efforts to rein in federal power. More...
Image via WikipediaTrader Dan
Once again we have a front row seat in the battle between China and the US when it comes to the Federal Reserve’s global inflationary policy, aka, Quantitative Easing 2.
With the Fed persisting on conjuring “wealth” into existence and working to manipulate and deliberately distort the long end of the yield curve, China is fighting to contain the effects of excess liquidity coming its way. It is almost as if Bernanke has uttered the command to: “Release the Kraken”, in this case the terrible Titan being the inflation monster.
The Chinese authorities have good reason to fear the rise of this beast as it, perhaps above all things at the current moment, has the single greatest potential to create unrest and social disorder in their nation. The Fed has been exporting inflation around the globe and nowhere is that showing up more forcefully than in the rising cost of food. Yes, basic material costs are soaring in China but the authorities can live with that – it is food that worries them seeing that the average Chinese worker spends a much larger percentage of their overall income on food than do their counterparts here in the US.
In yet another attempt to try to rein in price rises, the Chinese raised bank reserve ratios to try to slow down growth somewhat and perhaps pull back some of the fuel that might be contributing to the problems that they are dealing with. Of course, once the news hit the wires, out came the hedge fund algorithms, terrified to death that the world economy was now going to collapse, with the result that commodity sector was hit with massive selling all across the board. Down went gold and down went silver and down went the CCI.
Personally, while I understand what the Chinese authorities are attempting to do, I do not think that they are going to be a match for Ben who can manufacture more Dollars faster than Agent Smith could replicate himself in the Matrix. The Chinese are going to need their own version of Neo to combat Ben’s printing press; either that or they are going to have to upwardly revalue the yuan at a faster pace – something that the US schemers have no doubt long intended as part of their QE plan. I am sure Chuckie Schumer will be happy as he has been a one note Johnnie when it comes to blaming China for the US economic woes. “it’s all that currency manipulation by China”. Yeah sure – the US monetary authorities are pristinely pure having never even considered manipulating the US markets.
The move lower in gold takes it back down to the lower portion of the trading range that has contained it for most of this month now with important chart support near $1350 serving to hold it for now. There are plenty of bottom pickers active near this level but the key is whether the funds will sit tight or decide to liquidate some of their longs. Should they do so, price will fall to $1345 which is near the 100 day moving average and has been a level which tends to attract buying from those with a longer term investment view. A breach of that level would be much to the bears’ delight as that would set it up for a drop down towards $1325 – $1320. Asia of course would also be delighted as it would become picnic time for them, with the table being set by hedge fund algorithm selling.
First order of business for the bulls will be get price back above $1365 if they can hold it above $1350. Next they would need to regain $1380 to reaffirm a trading range market.
Along this line I am watching the Euro gold price to see if it can hold its ground above the €1000 level. If so, (the PM Fix today was €1021), that should also shore up the Dollar price of gold. Europe has been the epicenter of a great deal of economic fears so how the price of gold reacts in terms of the Euro will give us a clue as to how the investment world is thinking about the overall health or lack thereof of the wider global economy. Keep in mind what I have written so many times over the past years – the problem with most gold analysts here in the US is that they are too US Dollar gold price focused. All such Elliot Wave claptrap projections based only on the US Dollar price are worthless because gold is an international commodity, or perhaps even more appropriately, international currency.
Silver lost chart support at $28.50 but so far is holding more important support near the $28 level. Silver bulls would not want to see the metal close below that level as it would drop it back down towards $27 where I would suspect we will see very substantial buying emerge. Long term oriented investors would welcome such an occurrence should it indeed take place. The tightness in the physical market suggests that this is once again more of a paper trade thing related to the Comex that we are seeing and not a true reflection of the underlying physical market.
The HUI – what else can be said about the price chart except it stinks but then again, what is new about that during times of gold and silver weakness. It looks like it might want to drift down towards 500 if it violates this week’s low early next week. The 200 day moving average comes in close to that level and should prove to be a solid level of chart support as it has tended to hold dips in price over the last year and a half or so. Also, 500 was tough resistance on the way up back in late spring of 2010. It held on a dip September and October of last year so unless we have some sort of change in the fundamentals for gold and silver that I am currently unawares of, I would expect it to hold. The weekly chart shows an uptrend that is still intact but I would feel more comfortable if it would at least recapture 530. It will need to climb back above 550 to get me excited again. Read More...
More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With Paper
Duncan Davidson My bet that by 2020 we will return to some form of gold standard is looking better. Something is up when gold is being hoarded to such an extent that the futures exchanges cannot fulfill with metal but have to try to stiff the contract holder with paper. Now, they have done this in the past, and gotten away with it, but according to this story, never so aggressively.
Another aspect of this story is the collapse of Barrick’s hedging strategy. Barrick Gold (ABX) is the largest gold mining company and had been following a really dumb hedging strategy which had been to take naked short positions (shorting gold they did not possess). In a world of gold hoarding, they may not be able to cover, even at a loss. The strategy was so risky that a conspiracy theory had evolved that Barrick was front-running the US government to keep the gold price down. Lending support to this is the question: why would a gold production firm try to cap the gold price? An answer which does not require the conspiracy is that Barrick had less gold in the ground than it wanted to reveal, and so was engaged in a confidence game of the first order. The weak Dollar (driving gold up) and the hoarding has called their bluff.
Gold-backed currencies, unlike fiat currencies, have the irreducible endpoint of debts being paid in gold, which has retained value throughout history. Fiat currencies have no such endpoint. You can make the argument that fiat currencies are backed by the productive capacity of the issuer, and that they have some irreducible value based on taxing that production. History has tested that case, and found it wanting. You see, fiat currencies tempt countries to over-extend.
What happens when the debts of the issuer are vastly beyond their productive capacity? Well, the country defaults, and the fiat currency is forcibly exchanged for scratch. A 2008 paper by Harvard Professor Rogoff and Prof. Reinhart, both members of the NBER (which calls recessions and recoveries) entitled This Time Is Different demonstrates that instead of fiat regimes making good, they have defaulted over and over throughout eight centuries of financial crises:
We find that serial default [repeated sovereign default] is nearly a universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.
Before we take comfort in the US being already an advanced economy, the imperial power of its day has typically defaulted after over-extending. Rich European countries have defaulted, including Austria, France, Portugal Spain and Germany. The reunified German defaulted in 1873, bringing the whole world into a long depression, including the United States. In the last century, Germany defaulted twice: 1932 and 1939. Russia three times, beginning in 1918. England in effect defaulted in 1931.
So now the gold hoarding makes sense: other sovereign powers are preparing for - or at least hedging against - the inevitable sovereign default of the US. The more Obama buries the US in ever more present deficits and future commitments, the closer this becomes.
Niall Ferguson’s piece in Newsweek, which I discussed yesterday, fits into this context. He was talking about Imperial powers getting over-extended, and the first thing that falls is to pullback on excessive defense spending and foolish Imperial wars. Even as Obama pitches tonight a three-year vague commitment in Afghanistan, the hand writing is on the wall. Sadly, the US is so over-extended the wars are but a small pullback in the vast future deficits from social commitments. This won’t end well.
Because it is basically unchanged after 136 years of continuous production and because there is a healthy, liquid market for it, a good example of this case can be made by tracing the price of "The Gun that Won the West," the Colt Single-action Army revolver. The venerable Peacemaker turns out to be a better gauge of inflation than gold is and a better investment. President Ronald Reagan even named a missile after it.
The correlation of gold and guns can be traced back at least to 1873 when Colt's Manufacturing Company of Hartford, Conn., introduced the most technologically advanced handgun of its time, a six-shot revolver that used metallic cartridges. The Army adopted it as its standard side arm, a position it held until 1892. The innovation of metallic cartridges made it easier to reload in a hurry. Reloading had always been an issue because it was slow, unwieldy and required some expertise. Now anybody could do it.
In 1873 the Colt SAA sold for $17.50. The complete kit with a holster and some ammunition could be covered by a $20 gold piece. The $20 Double Eagle of 1873 contained 0.9675 ounces of pure gold. Today an ounce of gold is about $1,090 and a new Colt SAA can be special ordered from Colt's custom shop for about $1,500.
As a collector's item the Colt fares even better. A recent check of Collectorsfirearms.com found scores of listings at a wide variety of prices from $1,699 at the bottom to $175,000 asked for a Colt "Pinch Frame" called "the Holy Grail of single action collecting." This gun carries the serial number 58. So your $20 gold piece spent on this gun in 1873 would have returned 874900%.
Gold Double Eagle $20 coins from that year can be found on line for $1500 to $5000 depending on condition about the same price as Colt SAA's of similar age and condition.
Gold's price is fixed
Gold was in the midst of one of its many upheavals when the Peacemaker arrived. In 1873, Congress put the United States on the gold standard with the Fourth Coinage Act, which de-monetized silver and made gold the only metal by which to fix currency. President Grant signed it into law in February of that year. Gold was set at $20.67 an ounce where it stayed until 1934 when President Franklin Roosevelt devalued the dollar to 1/35 of an ounce of gold. During this period gold lagged behind the handgun.
What To Do If the Fed's Wrong On Inflation
Jamie Cox of Harris Financial explains the apparent disconnect between the high price of gold and the Federal Reserve's lack of alarm about inflation. Interview with Simon Constable of "The News Hub."
The handgun/gold equation was introduced to me by Bob Taber in 1987 when he and I worked at The New York Post and an ounce of gold was worth about $370 and a Colt SAA had jumped to $763.
Bob did not specify a Colt Single Action Army. He merely said, "A damned good handgun is worth an ounce of gold. That's always been true."
Bob was a night-side copy reader at The New York Post and a fantastic character and a holdover from the days when The Post was considered a leftwing newspaper. He'd had a journalistic career that included following Fidel Castro and Che Guevara in the Cuban revolution from the mountains to Havana as a special correspondent for CBS television. He also wrote a book on guerrilla warfare, "The War of the Flea" that is still read by the military and intelligence services.
There is film of Bob interviewing Castro after the fall of Batista in 1959 that can be seen in the documentary "David Halberstam's the 50s". In it Bob holds a microphone and sports a beard even bigger than Castro's.
He had survivalist mentality, a guerrilla fighter's point of view. I generally believed what he said on matters dealing with firearms. More than 20 years later I put his statement to the test.
For the most part, it's still true. It does depend on the gun and what you consider to be "good." A Glock similar to the one Plaxico Burress was carrying when he accidentally shot himself in the thigh at a nightclub, can be found on line for a little over $500 and the gun that made Dirty Harry's day, the long-barreled .44 magnum Smith & Wesson 629, sells for about $825. The other gold-standard pistol, also made by Colt's, is the .45- cal. Colt Automatic Pistol. The Army bought about 2.7 million of these from 1911 to 1985 when it was replaced by the Italian-made Beretta 9-mm which can be bought for about $750.
The Colt .45 ACP could be called the standard now and it hits the price of an ounce of gold pretty close to the bull's eye if you go for a top of the line model, but don't go too crazy. A Web site sells the stainless steel Colt 1911 Gold Cup Trophy 45 for $1050 /quotes/comstock/13*!gld/quotes/nls/gld (GLD109.81, +0.07, +0.06%) .
Gold and politics
Gold, despite its longevity as a trustworthy container of value, has proven more readily manipulated by the government than handgun prices. Congress was in inflation-fighting mode in 1873 when it voted to cease using silver to back paper money and established gold as the sole criteria. This act created a controversy that lasted for decades between those who were pro-inflation and those who were against it.
Silver had its own fanatical backers and they were for a bi-metallic standard that favored easy money. Farmers liked inflation because it raised the price of crops and lowered the cost of debt. Laborers and factory workers also wanted inflation to make it easier to pay off debts. Silver was favored by politicians from states producing silver and by many Democrats, and Southerners. The issue was embodied by William Jennings Bryan, who ran for president and lost on the Democratic ticket in 1896, 1900 and 1908. His acceptance speech at the Democratic National Convention of 1896 ended with the famous, "You shall not crucify mankind upon a cross of gold!"
The gold believers, sound money advocates, won the day. This victory kept the price of gold artificially low as evidenced by the 1956 price for the Colt Equalizer of about $125 when gold was still set at $35.
The victorious pro-gold standard bearers held sway until 1971 when President Richard Nixon took the U.S. off the gold standard altogether. He was concerned, among other things, that foreign governments held more U.S. currency than the $10.5 billion in gold the Treasury had on hand. A run on the bank was not out of the question. From then until now the dollar would float against other currencies on the open market.
The inflation that followed these policies would have done Williams Jennings Bryan proud -- from 4% in 1971 to 11% in 1973. And Nixon was a Republican!
Gold was traded freely again and rose quickly. But the Colt stayed ahead where it remains to this day. By 1980, gold had topped $600 an ounce as inflation headed to 14%. Today the standard, blued single-action Army six-shooter goes for $1290, or $1490 for the nickel-plated version. Can gold be far behind?
"While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing...That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset"
Chikako Mogi Reuters TOKYO -- As the dollar's dominance fades with the emergence of a multipolar world, gold may stand to gain the most of all assets, thanks to an unlikely quality -- neutrality.
While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing. China among others is considering how to diversify its more than $2 trillion in foreign exchange reserves, and talk of using other currencies to trade oil or commodities continues to circulate.
Supply constraints mean there is no chance of a full revival of the gold standard era, when currencies were pegged directly to gold, but investors say gold's duel role as both currency and asset make it an almost irresistible buy for years to come as financial geopolitics add risk into global markets.
"That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute. "The realization that gold can be turned into anything spread quickly and widely as people used it to raise dollars last year when they were short of dollars."
Gold plunged almost 20 percent in October 2008, taking a hit when investors dumped assets across the curve for cash as liquidity dried during the height of the credit crunch.
But in comparison to other asset classes gold did well, with broader commodities and equities hitting multi-year lows in the unwinding of complex positions built over the past several years.
"Globally, gold has been bought as it is re-evaluated as a stable currency," said Osamu Ikeda, general manager at Tanaka Kikinzoku Kogyo, Japan's biggest bullion retailer.
It is also seen as a simpler investment after huge losses on sophisticated financial products endangered the global financial system and plunged the world deep into recession.
After the October 2008 plunge, gold returned to the upward momentum that had carried it to a record high in March 2008, defying the downtrend in most other assets.
The Reuters-Jefferies CRB Index, a global commodities benchmark, fell to a seven-year low earlier this year just as gold was again trying the $1,000 mark.
A big part of gold's gains have been attributed to the declining dollar. The dollar index, a measure against six major currencies, fell about 14 percent since March this year while gold rose about 13 percent during the same period.
"What has been a textbook reference of gold as a currency has been given life, especially after the Lehman shock. And that has concurrently highlighted its character as an asset that performs differently from other assets," said Shuji Sugata, a manager at Mitsubishi Corp. Futures & Securities.
"Given its price movements against other assets and the declining confidence in the dollar, more funds have begun to include gold in their asset portfolios," he said.
The launch of gold-backed exchange-traded funds has also altered the way gold is viewed.
Such ETFs grew explosively over the past year after the financial crisis as retail investors entered the market, giving significant support to gold prices.
"Prior to ETFs, it was supply/demand balances and currency, gold's inverse relationship with the dollar. The launch of ETFs was an additional supportive factor for gold just as scepticism was growing about the dollar's dominance," Sugata said.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, saw its holdings rise to a record 1,134.03 tonnes on June 1, a 44 percent rise on the year that contributed to gold's 16 percent rise in the same period.
The growing number of investors means price action could also add to gold's volatility.
"I think the moves to the upside will be far quicker in their velocity, hitting $1,100 very shortly and then far higher over the next few years," said Peter McGuire, managing director Commodity Warrants Australia.
Image via WikipediaThere were two financial assets which boomed in late 2008. One was Treasury debt, the other was the US Dollar. While Gold and everything else was falling out of bed, the trade-weighted US Dollar index - the USDX - soared 21 percent from 73 to 88.2 between early August and late November 2008.
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