GOLD

[Gatesy]

2008-2009: Rising Inflation Expectations Amidst An Inflationary Storm

by Jordan Roy-Byrne

September 26. 2007

http://www.trendsman.com/v1/members/archiv...nsEditorial.pdf

 

 

Conclusion

The Federal Reserve's ½ point rate cut triggered a 27 year high in the price of gold, and

all time highs in Oil and Wheat, to name a few other things. Amazingly expectations of

inflation are foolishly absent. The dollar just hit an all time low. Foreign currencies are

hitting all time highs. Monetary inflation is at a multi decade high. Commodity prices are

at multi decade highs. Inflation? Anyone? Bueller?

 

 

 

Hats off to the Ferris Bueller's Day Off nod ! Class.

[ologhai]

If you are having these thoughts, perhaps this is because you don't really understand what you are getting into ?

 

Does this necessarily follow? Don't even the most knowledgeable investors have doubts about particular investment choices?

 

Having said that, I'm not (by any means) claiming to be knowledgeable!

[Gatesy]

Does this necessarily follow? Don't even the most knowledgeable investors have doubts about particular investment choices?

 

Having said that, I'm not (by any means) claiming to be knowledgeable!

 

I agree. Clearly any invesment decision carries risk. The distinction between gambling and risk taking investments to me is very fuzzy. Someone who follows horse racing, say 'professionally', with a passion and is extremely knowledgable about it, and places bets based on that knowledge is defined as a gambler; but he is obviously making judgements and is including in his decision making the risks that he will not win. Is that any different to researching the case for and against gold, including the wider economic situation as best you can, and taking on the risk by investing in it?

 

Perhaps the point is fair that if one doesn't feel they understand the case for gold sufficiently then they could indeed be classified as taking a gamble, but by that token why is the horse racing expert defined as a gambler and not an investor?

 

I would say the biggest uncertainty affecting people's decision making in investing in gold currently is the outcome of the inflation/deflation debate, it certainly is mine; and anyone who claims to not have uncertainty in this area or any other, to me is not assessing the risks adequately; nothing but nothing is without uncertainty and risk, the trick is to make a judgement based on your expectation of how great those risks are. On this note though I believe those who are siding with gold have decided that the risk of continued inflation not occurring, whether that be a Bernanke keeling over and a Paul Volker taking over or something, is on balance worth taking, or that indeed a deflation in other sectors will not have an adverse impact on growth in the POG.

[Gatesy]

Europe and US unite on stronger dollar

http://www.ft.com/cms/s/0/1f5097f2-1c6f-11...0077b07658.html

 

The US is still a long way from agreeing to intervene in currency markets or identifying desired exchange rates. But both sides believe fundamentals and central bank policies are turning in the direction of relative dollar strength. After cutting interest rates aggressively, the Federal Reserve has indicated its desire to pause. Meanwhile, the ECB is softening its hawkish tone, and could shift further if weaker growth reduced inflation risk.

 

This to me is about a weaker Euro rather than a stronger dollar. More loose global monetary poilcy; bring it on.

 

 

[marceau]

It looked to me like we just bounced down off a trend line at $874 and validated a new downtrend. If so it could be another bad day for gold in NY, possibly another test of $850 or below.

 

Be careful.

[Magpie]

If you are having these thoughts, perhaps this is because you don't really understand what you are getting into ? So from that point of view are you doing anything other than gambling ?

 

As a sceptic I'd say having doubts is a sign of healthy thinking - you have to question your own assumptions. Those who act with total certainty may make a lot of money, but they may also lose big time if they fail to spot a change that makes their opinions incorrect.

[Magpie]

I've bought gold using Bullion Vault and silver using GoldMoney.

 

I'm not raising this question to make you nervous, but how safe do members think that these 'paper gold' institutions really are. Is there any guarantee in place that protects investors if they were to go out of business?

 

I know some of them issue you with the precise details of the gold they have allocated you while others don't. I guess the former seem a bit safer.

 

Any thoughts? I know the rules if a bank goes out of business. I don't the rules about these places.

 

[Pixel8r]

I'm not raising this question to make you nervous, but how safe do members think that these 'paper gold' institutions really are. Is there any guarantee in place that protects investors if they were to go out of business?

 

I know some of them issue you with the precise details of the gold they have allocated you while others don't. I guess the former seem a bit safer.

 

Any thoughts? I know the rules if a bank goes out of business. I don't the rules about these places.

 

Hi,

 

I don't believe that BV and GM are paper gold. You can withdraw your gold/silver and the amount of holdings is regularly audited. There are things in place for if the company goes bust. The gold and silver held is actually held in your name at the vaults, not the companies.

[gwizzie]

I'm not raising this question to make you nervous, but how safe do members think that these 'paper gold' institutions really are. Is there any guarantee in place that protects investors if they were to go out of business?

 

I know some of them issue you with the precise details of the gold they have allocated you while others don't. I guess the former seem a bit safer.

 

Any thoughts? I know the rules if a bank goes out of business. I don't the rules about these places.

On the flip side. How do you go about selling the gold under the bed when the time comes? please excuse my ignorance if there is an obvious answer other than ebay!

[alexreeve]

I'm not raising this question to make you nervous, but how safe do members think that these 'paper gold' institutions really are. Is there any guarantee in place that protects investors if they were to go out of business?

 

I know some of them issue you with the precise details of the gold they have allocated you while others don't. I guess the former seem a bit safer.

 

Any thoughts? I know the rules if a bank goes out of business. I don't the rules about these places.

 

I think it is mostly banks that deal in "paper gold".

Goldmoney take great pains to distinguish between the idea of held on account (ie IOUs) and that of title to actual quantities of gold.

 

http://www.goldmoney.com/en/guarantee.html

 

You, not GoldMoney, are the absolute owner of your gold and silver. GoldMoney stores it securely on your behalf.

 

Title to the gold and silver bars in allocated storage at the vaults at all times vests only in the various GoldMoney users. When you purchase precious metals through your GoldMoney account, you actually hold and own the metal in your name.

 

All of the gold and silver bullion owned by our customers is stored free and clear from any creditors' claims against GoldMoney or the operator of the vaults.

 

When you purchase precious metals through GoldMoney, the gold and silver bullion is stored securely at the VIA MAT vaults located near London and Zurich. VIA MAT International is part of Mat Securitas Express AG, of Switzerland, one of Europe's largest and oldest armoured transport and storage companies.

[Magpie]

Hi,

 

I don't believe that BV and GM are paper gold. You can withdraw your gold/silver and the amount of holdings is regularly audited. There are things in place for if the company goes bust. The gold and silver held is actually held in your name at the vaults, not the companies.

 

Yes, the auditing seems to be fairly well done.

 

I suppose there's two separate questions here.

 

Firstly - what you basically have if you have money there is an IOU. I suppose the only situation in which I can see a problem is if you phsycially needed your gold and either they didn't really have it (looks unlikely given the auditing) or there was a physical problem - eg breakdown in society (er...).

 

Second question - how do they make a profit, and does the business model work in a gold price crash? I guess they buy enough gold to always have some on hand to sell to the customers, then you pay a slight premium on the spot price or you pay fees for transaction and/or storage. So they must always either have a surplus of gold, or they have to buy gold as you order it. What happens if the price of gold falls a long way (further than it has in their time of operation)? Say more people want to sell than buy and there is a kind of run on the bank - lots of people want their money out quickly.

 

Then they might be in a situation where they have to sell the gold to raise currency to meet those calls. At which point they might for instance be selling gold they bought at $1500 for $1000 and realising big losses. Or maybe they then can't sell the gold as there aren't enough takers - they now have a problem with paying people back their cash.

 

There may be no danger of this given the rises in price so far, but unless there is enough money in the business to cover this scenario isn't there a danger of a cash crisis, where you could get your gold in theory, but they can't cover people's claims for money? So perhaps the danger isn't so much of them not giving you your gold back, as of them not giving you your money back?

 

Just thinking aloud...

[Steve Netwriter]

It looked to me like we just bounced down off a trend line at $874 and validated a new downtrend. If so it could be another bad day for gold in NY, possibly another test of $850 or below.

 

Be careful.

 

The way I draw it, it just got taken out

$874.5

[Gatesy]

Yes, the auditing seems to be fairly well done.

 

Firstly - what you basically have if you have money there is an IOU. I suppose the only situation in which I can see a problem is if you phsycially needed your gold and either they didn't really have it (looks unlikely given the auditing) or there was a physical problem - eg breakdown in society (er...).

 

Or it gets nicked.

[Steve Netwriter]

Yes, the auditing seems to be fairly well done.

 

I suppose there's two separate questions here.

 

Firstly - what you basically have if you have money there is an IOU. I suppose the only situation in which I can see a problem is if you phsycially needed your gold and either they didn't really have it (looks unlikely given the auditing) or there was a physical problem - eg breakdown in society (er...).

 

Second question - how do they make a profit, and does the business model work in a gold price crash? I guess they buy enough gold to always have some on hand to sell to the customers, then you pay a slight premium on the spot price or you pay fees for transaction and/or storage. So they must always either have a surplus of gold, or they have to buy gold as you order it. What happens if the price of gold falls a long way (further than it has in their time of operation)? Say more people want to sell than buy and there is a kind of run on the bank - lots of people want their money out quickly.

 

Then they might be in a situation where they have to sell the gold to raise currency to meet those calls. At which point they might for instance be selling gold they bought at $1500 for $1000 and realising big losses. Or maybe they then can't sell the gold as there aren't enough takers - they now have a problem with paying people back their cash.

 

There may be no danger of this given the rises in price so far, but unless there is enough money in the business to cover this scenario isn't there a danger of a cash crisis, where you could get your gold in theory, but they can't cover people's claims for money? So perhaps the danger isn't so much of them not giving you your gold back, as of them not giving you your money back?

 

Just thinking aloud...

 

If you check out the Gold Money daily limits page, you'll see how it works.

http://support.goldmoney.com/article.php?id=087

 

They make money on the difference between the buy and sell price.

 

 

[marceau]

The way I draw it, it just got taken out

$874.5

 

I know, was really impressive, the first genuinely positive thing I've seen gold do for ages. I honestly thought gold was going to plunge earlier, it was perfectly set up for a fall through $850.

 

Gold is also doing the running on its own at the moment, oil and the euro aren't moving, could be seen as dangerous but I actually think it could be positive.

 

I'm still going to be cautious until I can better determine the trend.

[dst]

Just thinking aloud...

 

The breakdown of society: I just assume this will not happen.

 

Making money

There is a difference between BV and GM, BV is a market place where you are not necessarily buying or selling from BV directly but off another BV user. BV charge between 0.8% - 0.02% on the transaction. Plus they charge for storage 0.12% min $4 per month.

GM - I don't have an account, i think they charge a higher spread when buying.

 

Liquidity

 

From a BullionVault email 27/02/2008

 

We like to stay broadly balanced in both cash and gold at all times,

to offer you consistent, instant liquidity whether you’re a buyer

or a seller. When BullionVault's customers are net buyers we go

to the main market to buy gold. Steady net selling from you makes

us sell the surplus of gold, receiving a top up in cash from the

main market.

 

There is more in their FAQ/help (link from home page) see "What about liquidity? How can I be sure I will get a fair price when I sell?"

 

[Pixel8r]

Yes, the auditing seems to be fairly well done.

 

I suppose there's two separate questions here.

 

Firstly - what you basically have if you have money there is an IOU. I suppose the only situation in which I can see a problem is if you phsycially needed your gold and either they didn't really have it (looks unlikely given the auditing) or there was a physical problem - eg breakdown in society (er...).

 

Second question - how do they make a profit, and does the business model work in a gold price crash? I guess they buy enough gold to always have some on hand to sell to the customers, then you pay a slight premium on the spot price or you pay fees for transaction and/or storage. So they must always either have a surplus of gold, or they have to buy gold as you order it. What happens if the price of gold falls a long way (further than it has in their time of operation)? Say more people want to sell than buy and there is a kind of run on the bank - lots of people want their money out quickly.

 

Then they might be in a situation where they have to sell the gold to raise currency to meet those calls. At which point they might for instance be selling gold they bought at $1500 for $1000 and realising big losses. Or maybe they then can't sell the gold as there aren't enough takers - they now have a problem with paying people back their cash.

 

There may be no danger of this given the rises in price so far, but unless there is enough money in the business to cover this scenario isn't there a danger of a cash crisis, where you could get your gold in theory, but they can't cover people's claims for money? So perhaps the danger isn't so much of them not giving you your gold back, as of them not giving you your money back?

 

Just thinking aloud...

 

It isn't an IOU, the bullion is kept at the vault with your name on it. If they got into problems you could claim your bullion from the vault.

 

On your second point they restrict the amount you can sell on a fixed (locked) price. This amount is listed as 2000 grams of Gold or 1500 oz of silver.

[Magpie]

If you check out the Gold Money daily limits page, you'll see how it works.

http://support.goldmoney.com/article.php?id=087

 

They make money on the difference between the buy and sell price.

 

Makes sense - but doesn't answer all my questions.

 

The question is "Is this business model resilient in the event of a major gold price fall?" (in the way that so many practises in the housing market clearly weren't).

 

So there's one answer in that document:

 

"We may lower these daily limits at any time during periods of unusual market activity or high order volumes."

 

So they limit the amount you can sell, and can even suspend your right to sell. Presumably any more than a temporary suspension would kill their business as they need people's trust that they can sell as well as buy.

 

So if prices fell and kept falling they'd be put in the position of having to sell gold in a falling market to raise cash. Their sales (and those of other similar companies) would create a feedback loop pushing the price down further. They are also at this stage having their cash reserves depleted. If in a prolonged fall they start to have problems selling the gold, they either have to impose further suspensions and risk a serious 'run on the bank' or they have to try to pay out cash they don't have.

 

That seems to me at least a possibility, albeit one that would only come about in a serious price fall (like say 65%, as happened within living memory...)

 

Also, suppose they went out of business either for this reason or for extraneous reasons. No problem, you own the gold, right? But now you have to go get the gold. Plus they have other creditors whose only hope of getting any money lies in claiming against their assets, and the only assets they have are your gold. Does their legal assurance it's your gold hold up in court. Could creditors get the return of gold suspended, so it turns into a bankruptcy where you only get a share of the gold after a delay, while the gold price keeps falling?

 

I'm just thinking aloud but I think it's worth pondering whether business models developed in a benign period are robust in a downturn - I guess the housing market proves that.

[Steve Netwriter]

Rising costs hit laptop makers

 

By Kathrin Hille in Taipei

 

Published: May 7 2008 23:35

http://www.ft.com/cms/s/0/a5ae004e-1c53-11...0077b07658.html

 

Retail prices for laptop computers are set to rise as contract manufacturers move to raise prices for the first time in the face of soaring raw material and assembly costs.

 

Quanta, Compal and Wistron, the world’s three largest notebook contract manufacturers by output, are in talks with their customers – branded computer vendors such as Hewlett-Packard, Dell and Acer – on how to share the burden of rocketing prices for key materials. Labour costs in China, where the manufacturers have their main production bases, are also rising.

 

-----------------------

 

The Bernanke Monetary Policy Conundrum Heading for a Crash

http://www.marketoracle.co.uk/Article4624.html

 

How important is this?

 

Very, I mean crash imminent (Q2/3) very important. It is clear to see that borrowing conditions for business have not improved even with the Fed liquidity/solvency actions and the cutting of rates. Around 60% of domestic banks are making it difficult or impossible (likely the latter for all but the highest quality of business) to borrow. In fact conditions for business requiring credit have deteriorated substantially even in the face of a higher demand since the last survey.

.

.

How big a problem is this?

 

Unless business can borrow (either to offset costs, rollover previous borrowing or get ready for expansion) then 1929-33 looms large.

.

.

Whatever he does, unless lending conditions change markedly and rapidly in this quarter , it will be ineffective. Bernanke will no longer have to refer to history to see a deflationary depression, he will be living it.

 

 

 

 

 

[G0ldfinger]

...

Any thoughts? I know the rules if a bank goes out of business. I don't the rules about these places.

Indeed, the important fact is that they are NOT banks. While you are only a creditor of your bank, BV and GM just store something that is owned by you. This is a completely different animal, and the laws protect you from any losses as long as no fraud enters the picture. I think BV and GM are the closest to actual physical possession after coins and bars stored in a safe.

[Magpie]

There is a difference between BV and GM, BV is a market place where you are not necessarily buying or selling from BV directly but off another BV user. BV charge between 0.8% - 0.02% on the transaction. Plus they charge for storage 0.12% min $4 per month.

 

That could be a fairly significant difference as they presumably couldn't be forced to give you money for your gold if the market seized up and there were no buyers.

 

[Magpie]

Indeed, the important fact is that they are NOT banks. While you are only a creditor of your bank, BV and GM just store something that is owned by you. This is a completely different animal, and the laws protect you from any losses as long as no fraud enters the picture. I think BV and GM are the closest to actual physical possession after coins and bars stored in a safe.

 

How do the laws do this, and how do the laws that apply to BV and GM differ from those that apply to banks?

 

[Steve Netwriter]

Makes sense - but doesn't answer all my questions.

 

The question is "Is this business model resilient in the event of a major gold price fall?" (in the way that so many practises in the housing market clearly weren't).

 

So there's one answer in that document:

 

"We may lower these daily limits at any time during periods of unusual market activity or high order volumes."

 

So they limit the amount you can sell, and can even suspend your right to sell. Presumably any more than a temporary suspension would kill their business as they need people's trust that they can sell as well as buy.

 

So if prices fell and kept falling they'd be put in the position of having to sell gold in a falling market to raise cash. Their sales (and those of other similar companies) would create a feedback loop pushing the price down further. They are also at this stage having their cash reserves depleted. If in a prolonged fall they start to have problems selling the gold, they either have to impose further suspensions and risk a serious 'run on the bank' or they have to try to pay out cash they don't have.

 

That seems to me at least a possibility, albeit one that would only come about in a serious price fall (like say 65%, as happened within living memory...)

 

Also, suppose they went out of business either for this reason or for extraneous reasons. No problem, you own the gold, right? But now you have to go get the gold. Plus they have other creditors whose only hope of getting any money lies in claiming against their assets, and the only assets they have are your gold. Does their legal assurance it's your gold hold up in court. Could creditors get the return of gold suspended, so it turns into a bankruptcy where you only get a share of the gold after a delay, while the gold price keeps falling?

 

I'm just thinking aloud but I think it's worth pondering whether business models developed in a benign period are robust in a downturn - I guess the housing market proves that.

 

No.

 

They could need to reduce the daily limit if there was a lot of selling and no buying.

That simply means they would sell into the market at the start of the next day, and you'd get that price.

 

Yes of course the price of gold would go down if there was a lot of selling.

 

There is risk with every system. That's why I always suggest diversification.

 

I even have some rather risky fiat money

 

[Steve Netwriter]

How do the laws do this, and how do the laws that apply to BV and GM differ from those that apply to banks?

 

Is that a serious question ?!

 

[Magpie]

One more thought on this.

 

Goldmoney is effectively acting like a bank before fractional reserves - the banks used to store the gold and give you a certificate, which you could spend or use to reclaim the gold. They always had enough gold.

 

Then they started to use fractional reserves, which introduced a risk, because too many people might want their gold at once.

 

So GM is going back to the original model, right? It's simply storing your gold and will give it back, no risk. But there is a risk - they don't give you a certificate, they give you currency. The gold fluctuates in currency terms, so the certificates you have aren't a fixed quantity. The risk here comes in a situation where gold falls in terms of currency and they have to give a lot of currency out in a hurry, whilst not being able to exchange their gold for currency to cover this.

 

I think it's an extreme scenario and their procedures may make them (and investors) safe. But it's not the identical level of safety as the no-fractional-reserve bank.