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The Definitive Gold Thread - Bubbles, Standards, History & Facts

kevsta

RBL CHeck Failed
kevsta
Joined
Jun 28, 2007
Messages
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I started this thread because the Gold standard thread has degenerated into a permanent derailment by certain individuals who have nothing else to say on the subject and can only cry "Conspiracy theorist!"

I would therefore request that we please stick to the topic and related information here because I think this subject is going to become more and more important and prevalent with time, and given JREF's status, there will be members of the public wandering in from time to time, looking for factual information.

Discussion on all aspects of Gold including projected future prices, whether it is "in a bubble", supply and demand fundamentals, alleged market and price manipulation, central bank usage, history etc etc is all welcomed. Tangential irrelevant derailments are not.

Detractors always (and will surely continue to) attempt to ridicule the whole subject and any ideas surrounding it along with anybody who would dare discuss it, as uneducated, uninformed and primitive, but rarely ever even attempt to counter facts with anything substantive.

Despite what various people here will claim, there are many intelligent, informed individuals who have been, and who still are in favor of Gold being in some way incorporated into world monetary system(s) as a value benchmark in one form or another. It is my opinion, and that of many others, that our current FIAT monetary system now faces overwhelming challenges and that major reform is inevitable at some point, the only question is what and how.

Many people seem to subscribe to the theory that it is impossible for the US to ever default, because they have the advantage of printing their own money, and so can always print more to pay back debt, however what they miss is that there could (and in my opinion will) come a point where nobody will accept it any more.

What then?

I would like kick off the discussion by quoting from a prominent figure in the growing public discussion around the subject, from a piece published today, and invite comments and discussion from interested parties.

Please note I will be always and immediately request that continued derailment efforts are dealt with by Moderators as per forum rules (11).

Who Will Bail Out the Fed? Full article here

By Jim Rickards, Sr. Managing Dir. Tangent Capital

November 23

From Occupy Wall Street to the halls of Congress there is anger at bailouts orchestrated by the U.S. Federal Reserve. These bailouts have not been limited to banks but include brokers, money market funds and foreign corporations. The Fed has released details grudgingly and some disclosures were forced by the Dodd-Frank legislation. Gradually the bailouts have been revealed as if a veil were slowly being drawn to display a densely formed mosaic. The bailouts have enriched stockholders, bondholders and CEO’s while unemployment remains at depression levels and forty-six million Americans survive on food stamps.

But what if the Fed itself needed to be bailed-out? The Fed may be a central bank, but it is still a bank with a balance sheet and capital. A balance sheet has two sides consisting of assets and liabilities. The Fed’s assets are mostly government securities it buys and its liabilities are mostly the money it prints to buy them. Capital consists of the assets minus the liabilities.

The Fed has capital of about $60 billion and assets approaching $3 trillion. If the Fed’s assets declined in value by just 2 percent, that decline applied to $3 trillion in assets produces a $60 billion loss—enough to wipe out the Fed’s capital. A 2 percent decline is not unusual in today’s volatile markets.

If the Fed begins a new round of money printing and the Treasury continues with trillion-dollar plus deficits, there may come a time when even the credit of the Treasury and Fed are called into question and the money printing circus grinds to a halt.

At that point the Fed could “phone a friend” at the IMF and be bailed out by a kind of IMF funny money called “special drawing rights” or SDR’s, or the Fed could use its nuclear option and go back to the gold standard using the gold in Fort Knox. Given the limited amount of gold and the huge amount of paper money that would have to be backstopped, the new gold price would be $7,000 per ounce or higher.

These kinds of spikes in the price of gold during money crises have happened before – in 1930’s and the 1970’s. Those crises were forty years apart and the last one was forty years ago so a new crisis in the near future would be right on time.
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Given the assumption that: "This time is [never] different"

..I and many others think it is very naive to assume that the (arguably) failing status quo will continue forever, especially in the light of the unsustainable debt loads and trajectory of the USA and the majority of the developed world.

There was an interesting interview on Bloomberg last week with Jim Rickards & Jim Grant (Grant's Interest Rate Observer (est 1983 - www.grantspub.com ) which in my opinion gives a sensible rational starting point for discussion of the role of Gold (or not) into the future.

http://www.bloomberg.com/video/79944740/

looking forward to topical discussion with you all.
 
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If you would like to see a recent debate between a greenbacker and a goldbug then the "How the banks create money" thread might prove illuminating. The debate starts to get interesting around about HERE.

(There are a lot of irrelevant posts between those of the two debaters but you should follow the discussion easily enough).
 
psionl0 said:
If you would like to see a recent debate between a greenbacker and a goldbug then the "How the banks create money" thread might prove illuminating. The debate starts to get interesting around about HERE.

(There are a lot of irrelevant posts between those of the two debaters but you should follow the discussion easily enough).
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thanks, I was looking at the end of that thread yesterday and it's straying into Satanic & wierd religious arguments, and so i bailed.

from the post at the end of your link

In general, when I hear complaints from 'goldbugs' about the current system, I find the arguments are often well informed and informative. The goldbug offered solution though, like many other 'solutions', is bast-sh** crazy, return to using actual gold (or silver) to trade in?!?
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I am not suggesting this, nor are any of the proponents I would quote. I dont think anybody would seriously suggest actual metal usage, rather a valuation / benchmarking system designed to take advantage of the metal's more timeless properties and remove some of the more "human" elements of our system.

Obviously as I said here I am aware of the overall banking and fractional reserve arguments / discussions too but would like to steer clear of that in this thread if possible because it is a huge subject worthy of it's own discussion, and because of the "baggage" it inevitably brings. ;)

I would also agree with this:

If you are confused it is because you are stuck in the false dichotomy of we can only have what we have now, or ... wait for it ... 100% Gold Standard money. NO! There are tons of other possibilities to consider and almost all of the more well-known ones are preferable to the two options listed above. They are still wrong, but markedly better all the same.
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clearly this is the 21st century, and almost everything has changed, so it is silly to assume that a modern version of old ideas isnt possible.
 
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Define "timeless" property. persistence ? Limited amount ? A laundry list would be appreciated to pinpoint out the strength and weakness of such a change, versus current system.
 
kevsta said:
I am not suggesting this, nor are any of the proponents I would quote. I dont think anybody would seriously suggest actual metal usage, rather a valuation / benchmarking system designed to take advantage of the metal's more timeless properties and remove some of the more "human" elements of our system.
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To be fair to Tippit, nobody is advocating that we should lug gold coins around when have to pay our bills. We would still be using paper or electronic money like we do now. The difference is that these forms of money would be 100% guaranteed redeemable for a certain weight of gold. People would store their gold in repositories that would issue the paper money or provide electronic funds transfers facilities. As for borrowing/lending, finance institutions would only be able to lend their own capital or money invested with them by depositors.

A system that requires no central bank and no government interference has a certain appeal about it. Absent FRB it is also likely to be much more stable than systems in the past. The only two problems are that it is not known what the effect of a small but sustained deflation would do in the long term and there is no safe way to transition to gold. The best answer I have seen to the transition question is "wait until after the global economic collapse". Well I personally would like to see a solution before the collapse.

BTW there is no room in such a system for either fiat money or money created out of debt. If we allow these to happen then we still have a financial system that is subject to the whims of bankers and governments.
 
Aepervius said:
Define "timeless" property. persistence ? Limited amount ? A laundry list would be appreciated to pinpoint out the strength and weakness of such a change, versus current system.
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Gold has several qualities desirable in money—it is rare, durable, divisible, fungible (each unit is exactly identical and equivalent to other units of gold), easy to identify, easily transported and possesses a high value-to-weight ratio. Because of its rarity gold reliably imposes scarceness, which is what has made it useful as money.

That gold continued to be a store of value post gold standard was unexpected by many economists.

In the early 1970s, when the dollar's link to gold was cut, economist Milton Friedman predicted that the price of gold would collapse.

The Nobel laureate believed that the gold derived its value from its relationship with the dollar; without gold backing, there would be far less demand for gold.

There would, of course, continue to be industrial demand for the metal, but without monetary demand provided by the dollar, the vast supply that had been accumulated during the preceding centuries would overhand the market, depressing the gold price for the foreseeable future.

Friedman could not have been more wrong. It was the dollar that collapsed in the 1970s, while the gold price in dollars began a bull run that was not eclipsed in nominal terms until late last year.

A similar and still widely held view in the world of mainstream financial analysts is that gold has been "demonetized." The argument goes like this: central banks decide what money is; central banks have determined that gold is not money; therefore gold is not money. [Bernank vs Ron Paul]

Only the stupid gold investors haven't figured this out. This view of the gold market sees the price of gold as determined primarily by central banks (who own an estimated 10–17% of above-ground supply).

The critical variable is how they will time the sales of their gold hoards without causing a selling panic as market participants realized that their gold coins and bars have no monetary value.

But why is gold a better store of value than most any of a vast number other nonmonetary goods?

Why were Milton Friedman and the other economists wrong? Their error was the assumption that political institutions have the final say over what is and is not money. But this is not so: the market has final say.
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Detractors always (and will surely continue to) attempt to ridicule the whole subject and any ideas surrounding it along with anybody who would dare discuss it, as uneducated, uninformed and primitive, but rarely ever even attempt to counter facts with anything substantive.
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in the interests of balance, here is a detractor in action today.

Roubini: Supporters of a Gold Standard Are ‘Lunatics and Hacks’ via @YahooFinance

Rickards has invited Roubini to debate him, as yet Roubini hasn't accepted.

Roubini famously predicted Gold was in a bubble at $1000 per Oz, and that "Spam" was a better investment

Investors should thus be wary of getting the gold bug and being stuck with this barbarous relic. The recent swings in gold price—up 10 percent one month, down 10 percent the next—prove the point that gold has little intrinsic value and that most of its price movements are based on beliefs and bubbles.

As an insurance policy against the tail risk of eventual inflation, it may be useful to hold a small amount of gold in one’s portfolio, but stocking up portfolios with a fiat currency that has marginal practical use, a zero nominal interest rate, high storage costs, and the price of which is subject to volatile whims and bubbles is totally irrational.

If you want to hedge against inflation, stock up on Spam or other canned food or buy futures on commodities that have more physical uses and consumer demand.
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psionl0 said:
I'm sure the stuff about Germany is just as reliable.
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Check the source. It's a rather reliable one. The Economist doesn't just print random nonsense. Argument from authority is a logical fallacy; I'm just pointing out that it's not like a link from goldprice.org, or something.
 
Almo said:
Gotta love that gold standard...

http://www.economist.com/blogs/freeexchange/2011/08/second-time-farce

This article talks a bit about how the gold standard helped precipitate the economic problems in Germany that assisted the Nazis in their rise to power.
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I usually like the Economist too, but I seem to have developed a serious mental block towards anything that starts out by quoting Paul "Space Alien Invasion would save us" Krugman.

we discussed this also on the other thread, in amongst the bickering and trolling.

One of the problems we seem to have in these discussions is determining whose analysis is likely to be reliable, but given that Krugman has said on several occasions that "a war would be the answer as it would force spending", along with the fantasy Space scenario above, using his analysis to then attempt to pin blame for WW2 on the Gold standard seems a bit far fetched to me?

frankly he seems to be suffering from early onset of dementia.

I will attempt to soldier through the article and consider in more depth, but it may take me some time.
 
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I wouldn't call myself a goldbug anymore at this point. I've decided I just want to make money, and after the shock I got in 2008 when my gold tanked 30%, I realize people still consider gold a way to offset broad market losses, and that, for now, the dollar is considered a safe haven. I think when you're beholden to an investment in a near-cultish way, you're bound to lose money.

I fully expect QE3 to come, for the broad market to rally, and gold to continue skyrocketing.
 
tempesta29 said:
I wouldn't call myself a goldbug anymore at this point.
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I actually wouldn't call myself a goldbug at all, others probably would and do though. In actual fact I would align myself with Mike Maloney and Robert Kiyosaki's thinking, business cycles. These things run in fairly predictable long term cycles, understanding where we are and how to position yourself and when to swap between them is the key to potentially fabulous wealth over a long period.

If anybody is interested in this whole topic I would thoroughly recommend taking the time to watch this video through. IMHO it may well be the most important thing you ever do.



If anybody does watch it and wants to argue or debate anything, here or offline, email etc, I am all ears, PM me or whatever.

tempesta29 said:
I've decided I just want to make money
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agreed, who doesn't? my problem is that I don't trust "money" any more in this stage of things, and don't want to store wealth gains in an acceleratingly devaluing storage medium.

tempesta29 said:
and after the shock I got in 2008 when my gold tanked 30%.
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if people are only ever expecting something to go in a straight line in one direction, then of course violent corrections can be disconcerting. obviously timing has a great deal to do with this, people who were already 300% up in 2008 weren't nearly as bothered on being back to only 200% up in 08/09, and now it is all a distant memory again.

anybody who had just purchased at $1000 got a shock watching it run down again to $720 in Oct 08, and not best $1000 again until Sept 09.

tempesta29 said:
I realize people still consider gold a way to offset broad market losses, and that, for now, the dollar is considered a safe haven.
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for now, yes. but only in the same way a lifeboat with only a small hole in it was on the Titanic. If Europe was all good with a strong currency right now, I think this would be a very different story.

tempesta29 said:
I think when you're beholden to an investment in a near-cultish way, you're bound to lose money.
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in most cases I agree with you. longer term goldbugs (who didnt buy at the 1980 peak of course -which is the one thing detractors always say) are unlikely to lose much anymore though IMO.

tempesta29 said:
I fully expect QE3 to come, for the broad market to rally, and gold to continue skyrocketing.
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I agree. I believe the politicians of the world have two basic choices now, print trillions of currency units of every kind, or preside over the greatest deflationary collapse ever known by mankind, on their watch. probably not the sort of history entries they wanted to write about themselves.

so history suggests they will choose option (a) and that if option (b) does come it will be in spite of every attempt to forestall it. it is the actions taken to stall (kick the can) that I am betting on occuring, and that are the driving force behind a rising gold price, ie ZIRP, QE of various kinds, and bailouts of every kind.
 
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Russia Today coverage of Rickards / Roubini Twitter "debate"



hopefully this will get debated properly, I have never, once, heard a single good response to the obvious counter that the Depression was not "caused by Gold" but by the incorrect setting of the price, following a massive inflationary printing binge for WW1.

I don't think Roubini has one either, hence his use of Ad Homs and attempted ridicule instead. how deflationary would the Gold standard have been if the price had been set at $50, not $20.67?

to people on my side of this debate, this is every bit as ridiculous as paperbugs think gold is, and having now had 40 years of their pseudo science (modern economics) which is now going up in flames, this "superior than thou" attitude is pretty funny.
 
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