Julian Robertson: US inflation is a big risk, Japan may sell US long bonds

[Guest Broxburnboy]

"Cows have more intrinsic value or utility to them than gold.  You can milk them, you can slaughter them for meat and leather goods, and you can use them for labor (e.g., pulling plows)"

 

Gold actually has a lot of utility and intrinsic economic worth. The metal group that includes copper, silver, gold and platinum have unique properties, the demand/supply fundamentals for which drive the industrial use price. Gold is a better conductor than silver (ask any audiophile which is the preferred plating for connections) and silver a better conducter than copper, but copper is used in electrical wiring because it is many times more abundant than either silver or gold and hence cheaper.

We can say that gold will always be worth more than silver and silver worth more than copper on its intrinsic superior value and  particularly since the available supply of gold cannot be inflated. Similarly, coins were originally made of these three metals, but always denominated in that order. As Fiat money lost its value, gold coins were withdrawn from circulation first, then silver coins and eventually copper coins will be replaced by a baser metal... reflecting this relative worth.

Gold is similarly valuable for its property as the most malleable of the precious metals, it takes a smaller amount of gold to plate cutlery than silver and it does not oxidize. Platinum owes its higher price to its relative scarcity and the demand for its use in automotive catalysts. The price of platinum is restrained by the fact that higher amounts of gold can be substituted for platinum in these catalytic uses.

A gold wafer is permanent, it does not oxidize like silver or copper or die like cows. If you buy one ounce of gold now for 1000 bucks and one cow for 1000 bucks, I can gaurantee you that in 20 years the cow 's worth will be zero as it is depreciating asset, a liability because it requires maintenance and storage. A gold wafer is an asset as it can be leased for income and will still be the same gold wafer 20 years or 2000 years hence.

The supply of gold cannot be inflated by central bankers and cannot be deflated by realizing paper losses.

[ERICOPOLY]

or die like cows.

 

Cows breed.

[Guest Broxburnboy]

or die like cows.

 

Cows breed.

Yes, the supply of cows is elastic, putting downward pressure on price as the new supply of  cows come on line (cow inflation). This

is a problem with using most biological commodities as a store of value... supply is not constant.

 

The supply of gold is static, it is practically indestructable (supply can not be decreased and is finite and relatively small.. )

[ERICOPOLY]

or die like cows.

 

Cows breed.

Yes, the supply of cows is elastic, putting downward pressure on price as the new supply of  cows come on line (cow inflation). This

is a problem with using most biological commodities as a store of value... supply is not constant.

 

The supply of gold is static, it is practically indestructable (supply can not be decreased and is finite and relatively small.. )

 

From what I have read (which may be wrong), silver is being consumed and thus has an edge over gold if that is what you find valuable.

[rmitz]

"Cows have more intrinsic value or utility to them than gold.  You can milk them, you can slaughter them for meat and leather goods, and you can use them for labor (e.g., pulling plows)"

 

Gold actually has a lot of utility and intrinsic economic worth. The metal group that includes copper, silver, gold and platinum have unique properties, the demand/supply fundamentals for which drive the industrial use price. Gold is a better conductor than silver (ask any audiophile which is the preferred plating for connections) and silver a better conducter than copper, but copper is used in electrical wiring because it is many times more abundant than either silver or gold and hence cheaper.

 

Actually, silver is a better conductor than gold.  The problem is that it corrodes much more easily, and thus is harder to use in many practical applications.

[ERICOPOLY]

This is a problem with using most biological commodities as a store of value... supply is not constant.

 

As for supply...

 

At $1,004 per ounce, there is only enough gold in the world to support one billion people, each with an individual net worth of $5,000.

 

The total amount of gold is only worth $5 trillion ($5,000 evenly distributed across one billion people).

 

So there are easily one billion people on this planet with that much money.  What will the rest of the people do?  On a gold standard, how could redemptions be met if everyone demanded payment in gold?  That was the problem with the US under Nixon, the gold standard failed because there was not enough gold to meet redemptions.  If we put the world on the gold standard, will things be any better?

 

 

 

 

[benhacker]

rmitz,

 

You took my line, I was about to correct the common misconception.  Any audiophile knows that there is indeed very very high end cabling for coax and even speaker wire that is made with silver as the conductor... the sh1t just costs $100 / m so no one really owns it. ;-)

 

I saw a set of speaker cables once that cost $145/foot... no joke.  I wish I knew what company sold that...

 

Ben

[Guest Broxburnboy]

 

At $1,004 per ounce, there is only enough gold in the world to support one billion people, each with an individual net worth of $5,000.

 

The total amount of gold is only worth $5 trillion ($5,000 evenly distributed across one billion people).

 

So there are easily one billion people on this planet with that much money.  What will the rest of the people do?  On a gold standard, how could redemptions be met if everyone demanded payment in gold?  That was the problem with the US under Nixon, the gold standard failed because there was not enough gold to meet redemptions.  If we put the world on the gold standard, will things be any better?

 

 

There is no requirement that all the wealth in the world be ultimately reduced to gold. What is needed is a universal store of value which has an high intrinsic value that is stable, portable, and universally accepted hence handy for a means of exchange and daily commerce (rules out real estate, and biological commodities). Its quality should be constant and easily measurable (rules out diamonds and other precious metals)

The ideal (but not perfect) commodity is gold, it fulfills the requirements more than other commodity. It is actually too valuable to be used as money in everyday commerce, so throughout history, its relative, silver, whose intrinsic worth is less and whose supply is far greater and subject to fluctation, has been used as a proxy for smaller amounts of gold.. it is the original universal fiat for gold.

Fiat currencies, when backed by real wealth (gold or other) have temporarily transplanted silver as a fiat for gold and inevitably debased as the supply is inflated beyond the ability to redeem at the stated rate.

First the ratio of notes to golds is changed then the currency goes of the gold standard altogether, but continues to be widely used as money (because there is so much already in use as money) but at a deteriorating rate to gold (this is monetary inflation)

In a world of sovereign currencies inflating and deflating at different rates, the dominant currency and hence the default world banker is the country whose currency is universally accepted and retains its relative purchasing power best (this can be measured by comparing the their exchange rates vis a vis gold).

This is currently the US dollar, but some alarming trends are emerging... the rate of inflation of supply is increasing even against other sovereign currencies at the same time the means to redeem are eroding... recession, unemployment, destruction of wealth through foreign wars.

Other countries are seeking alternative means of settling trade balances (settling accounts in local currencies and trading international commodities in Euros, rubles, yen and yuan). The demand for dollars as currency is dropping, even as the supply is increasing and hence its value relative to other, stronger currencies and the ultimate store of value, gold, is dropping.

This monetary phenomenum... the rising USD price of gold.... appears to those who believe the US dollar is the ultimate store of value as a bubble in a useless commodity driven by the mania of an increasing number of "goldbugs".

[ERICOPOLY]

This monetary phenomenum... the rising USD price of gold.... appears to those who believe the US dollar is the ultimate store of value as a bubble in a useless commodity driven by the mania of an increasing number of "goldbugs".

 

I wouldn't credit the goldbugs for recognizing that the dollar ought to slide against relatively stronger currencies.  The goldbugs are simply the ones that only see one way to go:  gold at any price.  They don't focus on what is happening to gold vs Swiss Francs, they are satisfied it seems only that the USD is depreciating and gold is going up.  That's why I think they are wackos.  If they instead saw merely that gold is but one of many options, they could be deemed to be reasonable people.  Ask a goldbug why gold has skyrocketed in USD terms and they say "monetary inflation".  Ask them why it has skyrocketed in Swiss Francs and they say "  ", they dodge the question actually.

 

Warren Buffett for example has been expecting a USD decline for years, but we get more intelligence from him than simply "buy gold".  He sees the problems in the USD, but he is not a goldbug.

 

[Guest Broxburnboy]

The Swiss Franc until recently was partially backed by gold at a fixed ratio and hence traded internationally with the price of gold. It was seen as safe harbour internationally and became the favorite safe haven for those who wished to preserve their purchasing power, notably rich Americans. That is until nine years ago when the gold peg was dilluted (The Swiss debased their currency)

 

"The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum of 40% be backed by gold reserves.[4] However, this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following a referendum regarding the Nazi gold affair with Swiss banks and an amendment to the Swiss Constitution.[5] By March 2005, following a gold selling program, the Swiss National Bank held 1,290 tonnes of gold in reserves which equated to 20% of its assets.[6]"

 

QUOTE FROM:

 

http://en.wikipedia.org/wiki/Swiss_franc

 

Gold consumers do not buy gold at any price, but their willingness to pay an ever increasing number of USD for it, reflects their observation that the rate at which the USD is being debased is increasing, and in my own case I am willing to pay a speculative premium for gold now, based on the likelihood of the USD losing its reserve status and hence subject to a (probably) sudden drop in demand.

Keep in mind that the biggest "goldbugs" are central banks... and the International Monetary Fund. The United States Federal Reserve the biggest holder of physical gold and leases it to US banks, chiefly JP Morgan which is the most active trader of gold derivative contracts.

Strange that these deluded "goldbugs" are in charge of the US Monetary supply.

 

 

[ERICOPOLY]

The Swiss Franc until recently was partially backed by gold at a fixed ratio and hence traded internationally with the price of gold. It was seen as safe harbour internationally and became the favorite safe haven for those who wished to preserve their purchasing power, notably rich Americans. That is until nine years ago when the gold peg was dilluted (The Swiss debased their currency)

 

"The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum of 40% be backed by gold reserves.[4] However, this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following a referendum regarding the Nazi gold affair with Swiss banks and an amendment to the Swiss Constitution.[5] By March 2005, following a gold selling program, the Swiss National Bank held 1,290 tonnes of gold in reserves which equated to 20% of its assets.[6]"

 

QUOTE FROM:

 

http://en.wikipedia.org/wiki/Swiss_franc

 

Gold consumers do not buy gold at any price, but their willingness to pay an ever increasing number of USD for it, reflects their observation that the rate at which the USD is being debased is increasing, and in my own case I am willing to pay a speculative premium for gold now, based on the likelihood of the USD losing its reserve status and hence subject to a (probably) sudden drop in demand.

Keep in mind that the biggest "goldbugs" are central banks... and the International Monetary Fund. The United States Federal Reserve the biggest holder of physical gold and leases it to US banks, chiefly JP Morgan which is the most active trader of gold derivative contracts.

Strange that these deluded "goldbugs" are in charge of the US Monetary supply.

 

 

 

 

Removing the gold peg only means that it is now mechanically possible for the Swiss Franc to fall in price vs gold.

 

It does not explain why it is happening.

 

Why is it happening to the AUD?  Why is it happening to the CDN?  Neither of those two countries have recently moved from the gold standard.

 

They are not undergoing monetary inflation on the scale of the US.

 

An explanation for the scale of the price movement in gold vs a basket of important world currencies needs to be more sophisticated than merely "US Fed action". 

 

I think the problems with the US management of the dollar and deficits explains why it is depreciating vs a basket of world currencies.  That makes perfect sense.

 

But it's a different conversation entirely when discussing why gold is blowing away that same basket of world currencies.  You mention that gold is trading at a premium, and that is part of the explanation.  The other part of the explanation is probably that (along with many commodities) gold was likely trading at a severe discount earlier in the decade. 

 

So rather than "monetary inflation" as the answer, it is more likely that it isn't even the biggest factor behind the gold movement -- a huge part of the swing is likely going from a position of discount to a position of premium.  After all, the other world currencies have seen nowhere near the rise that gold has seen.

 

Similarly, Fairfax stock might rise 80% from some low point earlier this year.  Somebody could say, "it's because they made a lot of money", which is true, however it's significantly due to the discount vs premium factor.

[Guest Broxburnboy]

 

 

 

 

Removing the gold peg only means that it is now mechanically possible for the Swiss Franc to fall in price vs gold.

 

It does not explain why it is happening.

 

Why is it happening to the AUD?  Why is it happening to the CDN?  Neither of those two countries have recently moved from the gold standard.

 

They are not undergoing monetary inflation on the scale of the US.

 

An explanation for the scale of the price movement in gold vs a basket of important world currencies needs to be more sophisticated than merely "US Fed action". 

 

I think the problems with the US management of the dollar and deficits explains why it is depreciating vs a basket of world currencies.  That makes perfect sense.

 

But it's a different conversation entirely when discussing why gold is blowing away that same basket of world currencies.  You mention that gold is trading at a premium, and that is part of the explanation.  The other part of the explanation is probably that (along with many commodities) gold was likely trading at a severe discount earlier in the decade. 

 

So rather than "monetary inflation" as the answer, it is more likely that it isn't even the biggest factor behind the gold movement -- a huge part of the swing is likely going from a position of discount to a position of premium.  After all, the other world currencies have seen nowhere near the rise that gold has seen.

 

Similarly, Fairfax stock might rise 80% from some low point earlier this year.  Somebody could say, "it's because they made a lot of money", which is true, however it's significantly due to the discount vs premium factor.

 

We're beginning to cover old ground here...

Other currencies are also being devalued by their central banks mostly  in an effort to  retain the favorable balance of trade against the US...  Canada does it through both monetary and fiscal policy. The Bank of Canada does it by manipulating interest rates on CDN denominated debt, to fine tune the relative supply and demand for CDN soverign debt in USD. Fiscally, the Federal government is running ever increasing deficits and cutting taxation revenues in order to devalue its currency lockstep with the US dollar.

The end result is that most currencies who benefits from a USD trade surlplus will devalue there currencies.

Only the value of Gold remains constant and indeed it has trended upwards in price in all these currencies, even though to a different degree.

 

This will be my last post on this thread, as the discussion seems to be getting circular and indeed is rehashing old points made in previous threads. I hope my comments have been received as meaningful contributions and at the very least stimulated those so inclined to do some more due dilligence in the fascinating subject of money, banking, fiat currency, exchange rates and gold.

 

Cheers to all