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Gold Chart Gone Hyperbolic


Parsad

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Last post from me on this, well said OEC.

 

In my humble opinion, Fractional Reserve Banking/Central Banks and interest rate targeting are ENOUGH policies for a free market capitalism economy. When times are bad you can reduce rates, and once in a blue moon engage in some type of a fiscal stimulus (during wartime for example).

 

The issue is really that politics has dictated monetary policy.

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Parsad, as we are quoting Buffet...

 

Will the real buffet please stand up?

 

http://www.berkshirehathaway.com/news/feb03981.html

 

"Over 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal's demonetization by the U.S. Government. Since that time he has followed silver's fundamentals but no entity he manages has owned it."

 

This is as strong a statement as can be, he is telling you in simple english he purchased precious metals when they were demonitzed.

 

I think you're reading too much into it.

 

It's like saying that Buffett must actually love derivatives despite all that he's said because he owns some.

 

I think it just means that once in a very long while he'll find something that he doesn't like priced in such a way that he's ready to speculate with some money on it because the odds look good, but it doesn't mean he's changed his mind.

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Eric, Again, the way it instils discipline is that for a foreign nation to gain such a large percentage of the the host nations currency it would have to have been either through debt issuance or fair trade, hence the question should not be what happens when a foriegn creditor asks to redeem their cash in gold, but rather why the host nation owes so much to a foriegn nation in the first place.

 

Running up debts and deficits erodes the purchasing power of a nation, there are no free lunches.

 

I like to ask questions about my suspected weaknesses of a gold standard because I only get told about the strengths.  So I'm well versed in what's good about it, but I find supporters don't like to talk about shortcomings.

 

The first world war for example saw a massive amount of inflation in the United States -> Europeans moved their gold to the US and this caused a lot of problems.  That's one example of a weakness.  Another is this idea of "just calling in the loans".  What becomes of the people who took out the loans?  Is it a weakness in the system to offer loans to creditworthy borrowers only to destroy them when dollars are redeemed for gold?  Or is that a strength?  Does it affect the willingness of people to borrow to fund worthy projects?  Or does it wipe out worthy projects that are already funded?

 

Granted, I get the benefits.  But either supporters in general don't know of any weaknesses or aren't willing to voice them.

 

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I was pleasantly surprised by the logical and level-headed reporting on the current gold rush in my local, daily free paper, the Washington Post Express (the articles are short like Reader's Digest).  The gold rush was today's cover story.  Among the quotes:

 

"Worth it's weight?  When it comes to gold prices, no one really knows.  That's because gold doesn't have intrinsic value.  It doesn't offer an interest rate, like a bond, or represent a share of a company, like a stock.  It is inherently speculative as an investment:  You make money only if the price goes up."

 

"Ultimately, gold is valuable because we all agree it is."

 

For the article, see page 12...

 

http://www.expressnightout.com/printedition/reader.php?data-ipsquote-timestamp=2011-08-18

 

I never thought I'd see a day where the term intrinsic value was used in this free daily paper, so kudos to the Post Express!!

 

Finally, and I don't mean to sound flippant, all the arguments I hear about why gold is such a good basis for exchange would similarly apply to dinosaur bones.  Yet, I'll bet not a single gold bug would take seriously the notion of using dinosaur bones as a basis of exchange.  Hmmm.

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Until my cab driver starts chatting up gold or I walk into the bookstore and it's all "Get rich now investing in gold", I don't think we're there yet. (Yes, there are gold ATMs, etc but they are still curiosities, not ubiquitous)

 

Mark, you're in Toronto right?  I don't know about there, but it is getting crazy in Vancouver.  You can't read the paper, watch tv or listen to the radio without some ad for a gold exchange, article, story, etc.  Alnesh's brother-in-law's best friend started a gold exchange in Vancouver...had about $1M in revenues in the first 4 months!  Now all their buddies want to start one.  

 

People who were heavily into the "forex" craze a couple of years ago, have now filtered into gold, silver, precious metal exchanges, etc.  Those that lost small fortunes on forex are now into gold.  Family friends are always asking me about gold now..."Do you think it will go up more?  Should I buy some and put it away?"  Crazy!  Same sort of behavior I watched during the tech bubble.  Resource industry participants (CEO's, CFO's, directors, investors, newsletter writers, etc) all believe that it will continue to go up.  When you have such herd behavior, then it's time to completely step aside.  

 

Funny thing is, one of the smartest exploration company CEO's I know that we do some work for, has sold all of his properties or optioned them out.  He continues to hold his gold inventory, and has no intention of selling, but his company is very liquid now...perhaps ready to pick up bargains at some point.  They run their firm like a family business.  Probably one of the finest run little companies I have seen at their size, especially in the resource sector.  When a guy like him gets liquid, then things may just be getting frothy.  Cheers!

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Dinosaur bones!! You've got to be kidding me??

 

Can Dinosaur bones be connected to increase ones holdings? Can they be divided to engage in commerce? (I guess with a saw?)  Are dinosaur bones evenly distributed in the earth's crust at crustal abundance of .0011 parts per million?

 

How many dinosaur bones would it take to warrant a unit of trade? And how would we ascribe value to say the skull of a T-Rex vs. a spine of a stegosaurus. Look at all the list of different dinosaurs how will human beings decide what is worth more or less? http://en.wikipedia.org/wiki/List_of_dinosaurs

 

On the other hand a piece of gold mined in Mongolia can be melted with a piece of gold mined in Canada... That is an attribute of a medium of exchange.

 

I am not a gold bug but am finding myself defending its historical attributes only due to my spending more than 5 minutes reading about it's history and the history of the world's currencies while most value investors just assume that gold is worthless and has no intrinsic value because someone else said so. Investing is not analogous to physics, where one just needs to read the latest trade publication and be up to speed on the logic. There are some obvious fallacies in the current system that any person with time can spot. I urge you all to just take some time and read about it.  The logic prevails.

 

Eric, another good point and I have no problem voicing my thoughts on the potential downfalls of a gold-standard system, if you feel that way about supporters of the gold-backed monetary system it may be due to the fact that most are already familiar and are certain that a fiat money system exacerbates any potential "negatives" of a gold standard system.

 

To answer your question: In a time of war two things can happen. The first is that the Central Bank accepting the gold can keep it separate from the nations Broad Money, it does not necessarily have to include the gold being held as part of the domestic currency reserves. If however the foreign nation is in fact converting its gold to US Dollars, and then chooses to redeem them at a later date, that would undoubtedly cause a boom followed by a bust. But over-time with gold being finite, this could not happen too many times and each time it would happen the US would end up with more of the foreign nations gold making it an expensive process for the other nation. Let me explain:

 

To convert their gold to US Dollars, if that is the path they choose, they would have to either engage in trade, or pay some type of a fee to the US Central Bank, in gold. Moreover, if they converted most of their gold into US Dollars, then trade in their country would most likely occur in US Dollars, making it very difficult for them to wean off the currency. Remember, in a gold standard system, the government doesn't own the money, the citizens have a claim to the money. So a government can only decide to shift "All it's gold" if it is in fact the treasury gold that is not gold being used to support the circulation of the currency.

 

I am not discounting that during such times the broad money would increase, but this could be controlled with interest rate policies, and in the end the nation would only benefit as after the cycle ended it would indeed own more gold per capita on a permanent basis. The pain experienced by any bust in the US would be child's play compared to the pain being experienced by the foreign nation having to convert and redeem their national gold hoard due to internal issues. In other words, in these scenarios, the country accepting the gold would come out of it richer, and deservedly so for encouraging an economic system with confidence and a stable currency.

 

Who do you think is better off? A US Citizen from 1920-1934, or a German Citizen from that same period having to live through the hyperinflation of the Weimar Republic?

 

In regards to loan and underwriting standards. I think as a matter of fact the world today is a lot more addicted to debt than it has ever been at any point in history. The gold standard system just as it instilled discipline on a fiscal level also instilled more discipline on a personal level. That is why I said that any depletion of gold on the base money level would cause "loans to be called" and the system would revert back to its normal pace.

 

I didn't just say that to sound ambiguous or shallow, in a gold standard system loans are generally assumed by the speculative class or by a class of borrowers who have yet to demonstrate an ability to accumulate excess capital in the market and those loans come from the capitalist class that has demonstrated their ability to accumulate surplus capital, hence lend it out. In this environment, loans are not mandatory as they are today to conduct everything from payroll financing, account receivable financing to server financing.

 

Today the system is ridiculous, where the savers are punished and don't get to decide at what rates their money is lent out.

 

It all ties in together quite poetically, I may say.

 

 

 

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Today the system is ridiculous, where the savers are punished and don't get to decide at what rates their money is lent out.

 

Totally agree.  This is a problem with centralised planning, rather than anything else.

 

Any economic policy has two sides to it - Broken Window fallacy applies.  When Fed and central banks decide to keep interest rates low, they make the decision to rob the savers and enrich the debtors.

 

To believe that Gold standard worked at some point in the past and hence will work in the future is also illogical.

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$.02

 

Gold, like Dollars, Euro, Yen, has value only insofar as one has faith in that value.

 

How much faith do we have in the value of our paper currencies?

How much faith do we have in the United States to keep the sacred trust of the global reserve currency?

How much faith do we have in the European Union to exist as it does now in a decades time?

 

In our world that is more and more global we must understand that the faith that we are going to put into a common currency must be shared. Gold seems the only logical recipient of that faith for all the reasons mentioned earlier in these posts.

 

The giant gold cube argument is a non starter in that Buffett owns huge cubes of paper instead of metal. No difference.

 

 

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The giant gold cube argument is a non starter in that Buffett owns huge cubes of paper instead of metal. No difference.

 

Buffett owns businesses that produce products and services of value, and he only holds cash while waiting for those businesses to be available at prices below what he considers to be their intrinsic value. This is very different from "investing" in gold.

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Buffett owns businesses that produce products and services of value, and he only holds cash while waiting for those businesses to be available at prices below what he considers to be their intrinsic value. This is very different from "investing" in gold.

 

I see what you are saying but didn't Buffett diversify out of the US Dollar in 2003? If I recall he bought many other currencies including the Canadian and Australian dollar... Was this allocation different from "investing" in gold?

 

 

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I see what you are saying but didn't Buffett diversify out of the US Dollar in 2003? If I recall he bought many other currencies including the Canadian and Australian dollar... Was this allocation different from "investing" in gold?

 

As far as I know, he bought businesses in those countries, not just piles of their paper currencies to hold somewhere hoping to later sell it at a higher price to someone else. I think that's quite different.

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+1 Liberty. Not like he just bought the currency... I wonder what that gold would be worth if paper currencies truly dissappeared because we have an economic reset. How much gold would you need to buy yourself something that actually can produce something of value? The worth of gold would be the least of my worries. If you can't be optimistic and assume that in the end things will turn out ok, there really is no point in investing.

 

Just for fun, says it all :

 

http://goldprice.org/charts/history/gold_all_data_o_usd.png

 

This is rational. Really!

 

 

 

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As far as I know, he bought businesses in those countries, not just piles of their paper currencies to hold somewhere hoping to later sell it at a higher price to someone else. I think that's quite different.

 

http://money.cnn.com/2004/03/06/pf/buffett_letter/index.htm

 

"During 2002 we entered the foreign currency market for the first time in my life," Buffett wrote. "In 2003, we enlarged our position, as I became increasingly bearish on the dollar."

 

He noted that at yearend, Berkshire held approximately $12 billion in foreign exchange contracts, within five (unspecified) currencies. He also said Berkshire owns about $1 billion worth of high-yield bonds denominated in euros

 

 

 

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"Can they be divided to engage in commerce? (I guess with a saw?)"

 

Sure, they can be cut into pieces or pulverized into dust and then divided into whatever portions you want based on weight - just like gold!

 

"Can Dinosaur bones be connected to increase ones holdings?"

 

Sure, take the pieces or dust and pile them up or mix them together, then trade based on weight - just like gold!  Not that being able to "connect" two things together makes much sense as a basis for defining a proper medium of exchange. 

 

"How many dinosaur bones would it take to warrant a unit of trade?"

 

Any arbitrary weight of dinosaur bones you want can warrant a unit of trade - just like gold!

 

"And how would we ascribe value to say the skull of a T-Rex vs. a spine of a stegosaurus?"

 

You wouldn't need to ascribe different values to different species, just as you don't ascribe different values to gold based on where it was dug up.  Dino bones is dino bones.

 

Look, I obviously don't really believe we should use dino bones as a medium of exchange.  I'm just trying to point out that using gold is just about as illogical - the only real difference is that many people are used to using gold.  Both are rare, both are dug out of the ground, both have a finite supply, etc.  If those criteria are deemed as being the most 'logical' for defining a proper medium of trade, then it seems like dino bones are about as good as gold for purposes of transacting value.

 

Heck some people would laugh at the notion of using gold when we could all being using rocks instead...

 

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

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Tooskineejs I am sorry mate but in my humble opinion your latest response has really shot your theory in the foot.

 

A Dinosaur Bone is essentially a fossil, by grinding up your precious dinosaur bones you are basically losing any recognizable traits and essentially ending with a bag with dust made up of a dog's breakfast of abundant minerals... LOL

 

There would be no difference between your bag of dust and any other bag of rock dust on planet earth.  

 

Here is a lesson on how Fossils are formed:

 

http://www.enchantedlearning.com/subjects/dinosaurs/dinofossils/Fossilhow.html

 

We can go on and on about this and you can keep trying to find alternative mediums of exchange, your ancestors did the same thing for thousands of years, in the end you will realize that the closest thing to perfect is gold.

 

Relating to the comments about Buffet purchasing other fiat currencies as a "bet" against the dollar, there is a very good quote I heard from Tom Kaplan noy too long ago:

 

"All Fiat Currencies are Toilet Paper, but occasianlly some are double ply"

 

It's like choosing the tallest midget.

 

Relating to the comment about how "Rational" the gold move is, all you have to do is invert the logic. There is exactly the same amount of gold in the world today as there was 40 years ago, the reason gold has made that move is because in the last 40 years on a global basis, central banks have increased the supply of their fiat currencies. The price of gold is the best gauge we have for the pace of erosion of fiat money. G-D knows even the CPI is manipulated, and M1/M2/M3 do not represent financial assets which most of us view as immediately "cashable".

 

 

 

 

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One More thing, I never once said I believe in investing in gold. All I am arguing is that gold is definitely NOT in a bubble.

 

Gold is an alternative form of money that is experiencing a fundamental shift in demand as an alternative to fiat money 40 years after the experiment started which attempted to do exactly what some of you guys here have been attempting: discount gold's unique traits as the once and forever form of money, the only asset that is nobody else's liability to repay.

 

That experiment has ended TERRIBLY:

 

It has allowed our politicians to run up the largest deficits in our nations history.

It has made us lazier free market participants relying on imports and a serviced based economy.

It has turned money into something that is no longer cherished and let go of as quickly as it is earned leading the lowest savings rate in our nations history, the highest consumption rate, and insane volatility in financial markets that are so intertwined to the point that if someone sneezes in Beijing CSCO and WMT can lose 1-2% in value in a day.

 

It has has made debt and credit so ubiquitous that it is almost mandatory in order to live comfortably (for an average citizen).

 

 

 

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I don't follow? It is a matter of fact that demand for gold is up substantially and that there has been a "fundamental shift"

 

http://www.gold.org/investment/research/regular_reports/gold_demand_trends/

 

Central Banks are now buying gold with fiat money they can either print or "earn" through easy trade with their lazy western counterparts.

 

It is a matter of fact that up until 1971 gold backed the US Dollar which was the world's reserve currency, hence the world's currencies were somehow backed by gold.

 

Where do you get this "it's different this time" notion.

 

There has been a fundamental shift in central bank attitudes towards gold, they are now net buyers exchanging their paper money for it.

 

Also your response didn't acknowledge any of the flawed logic in your dinosaur argument.

 

 

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In line with our expectations, the second quarter marked another quarter of positive demand for gold from the official sector. Net purchases of 69.4 tonnes demonstrated that central banks continued to turn to gold to diversify their reserve assets.

 

2,500 tonnes is produced annually.

 

2,200 tonnes is consumed by the jewellery industry rain or shine.

  200 tonnes is consumed by the semiconductor industry rain or shine.

  150 tonnes is consumed by the dentistry industry rain or shine.

 

That's 2,550 tonnes.

 

And now we have Central Banks buying an additional 280 tonnes per year, after selling 20,000 tonnes between 1971 to 1999 LOL

 

I made no mention of retail or institutional or investment demand.

 

Sure sounds like a bubble to me!

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"It is a matter of fact that demand for gold is up substantially...Where do you get this "it's different this time" notion."

 

I don't disagree that "demand" is up in the literal sense.  If it wasn't, we wouldn't be seeing the hyperbolic chart that titles this thread.  The question everyone should be asking themselves is whether the demand is real or artificial.

 

People said the same thing ("demand is up" and "it's different this time") about the housing market in the first 2/3rds of the 2000's.  Then, when the articifically high demand (from speculators) evaporated, they realized it wasn't really "different" that time like they thought.  And people vowed never to repeat the mistake of getting caught up in another asset bubble.

 

But as observers of history and human nature know, we humans have a bad habit of quickly forgetting lessons we should long remember.

 

And now, just a few years later, speculation is running rampant in the gold market and talking heads on TV are predicting continued rapid price appreciation.  Many otherwise very intelligent people are convincing themselves* that fundamentals underlie the price movement and that this time it really is different (*A big flaw in the way the human mind works is that we like to make sense of things and when things just don't make sense, we often still rationalize reasons to make them make sense).

 

I'm not predicting where we are in the bubble or how far or for how long prices will continue to rise.  Heck, prices may go to $3k or $5k. Manias tend to last longer than rational people expect because rational people don't have irrational expectations.  But it will end at some point and cause pain for lots of people.  Then those people will vow to themselves to never repeat their mistake again...

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Perhaps what we are seeing here is not the inflating of another bubble (gold) but the bursting of the bubble that can be represented by Fiat currencies.

 

This bubble has lasted for 40 years and is the mother of all bubbles.

 

When I was a child I went to Jamaica and was amazed that their currency was 3:1 against the CDN and 4:1 against the US Dollar. 30 years later it's 87:1

 

Now we have developed nations around the world fixing their problems through printing... Geez, that's just what Jamaica did.

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