Magpie

I do like the Art Cashin quote in that article: "People can't stand two things - randomness and responsibility." Very wise comment.

Aha, sorry. I do sometimes read the articles, honest, just a bit busy this morning Yes, I can certainly agree that some are more mad than others.

Yep, I accepted it was real in the first line of my post. I just think it is over-used as a justification when the market does something the investor didn't expect - so "my good calls are the result of excellent chart-reading (or whatever) but my bad calls are the result of the PPT" - a version of gamblers delusion. I'm sure the PPT occasionally intervenes, but I doubt it happens as often as some would suggest. There's a similar problem with constant appeals to the gold 'cartel'. Might be some truth in it, but you can get too attached to it as a one-size-fits-all justification for gold prices being below their 'natural level'.

An interesting phenomenon - a real entity that tries to prevent major crashes. But also a handy fantasy for certain investors to explain every market move that goes against them.

Exactly - there is a solid reason for the oil price to rise in relative terms. I don't think oil will be completely gone for a good while yet, but we are getting into a more complex period for it. I mostly saw white swans when I lived a white swan country. Can't think of any reason why I'd ever see a black swan, can you?

The great thing about watching markets is you learn to spot balderdash a mile off. At least with housing people waited until there was a bubble till they started claiming the top was a permanent plateau. He's getting his balderdash in early, saying that when it does eventually reach a top, it won't fall. No, but a big surge in price would probably create one, unless there's some kind of ban on idiots buying gold that I haven't heard about. If the fair price is, say $2000, it's likely that the big run up to that would mean we overshot to $3000 or more before coming back down to earth. But maybe it's different this time...

On Oil vs Gold, doesn't the fact that Oil is getting close to depletion mean that there is a better reason for its price to escalate than gold? The world economy depends on oil, if its gradually running out, of course the price will rise.

Yeah yeah, tell me about it.

Yes, fair point - I should say the most recent example, and therefore the obvious comparison. Seems like balderdash to me. On a very basic level - in any bubble people will find reasons to explain why the price is justified, and also why it won't drop. "It's different this time", "A new permanent plateau" etc etc. The point is that a very sharp or sustained rise up in gold is likely to attract the bubble mentality and push it beyond whatever its 'natural' level is, and then at some opint the bubble is likely to collapse. That might not happen, but Jim's justifications do nothing to persuade me it couldn't happen. Of course that's no reason not to buy now, as I doubt $1050 was the peak - just something to be aware of.

Good points. I suppose gold would be most use in an intermediate situation where fiat currency collapsed or all but collapsed but society managed to survive without lawlessness. In that case gold might become emergency currency, might even be the new standard. It's all very notional though.

I thought it was an obvious copper-bottomed scam. The guy running it was using the rhetoric of gold and free currencies and all that to run a profitmaking scam, more or less a pyramid scheme. He learned his trade in the 'Hawaiian Mint" or wherever. The genius of it is that once the scam collapses, he can blame the evil federal government and know that most of his customers will swallow that rather than accept they were being duped. The US anti-government right-wingers seem to be easy marks for that kind of scam - they basically trust anyone who 'speaks their language'. That's why there were so many bible salesman type scams in the 30s and 40s. people who are deeply distrustful of government or strangers or commies or whatever, become stupidly trusting when presented with someone talking in terms they can relate to. Edit: Bear in mind there were also Liberty Certificates, which supposedly were exchangeable for gold or silver, but that were highly unlikely to ever be honoured.

I think you have to distinguish two questions. What happens when a currency is degraded? And what happens when it collapses. For the former, gold, might be protection, although it seems a bit erratic in that respect to me. The only really good evidence we have is from the 1970s which ended up being a bit of a rollercoaster, with a lot of people getting burned. For the latter, I'm sure some physical gold would be good, but I'd be inclined to also go for some tinned food, guns and bullets, petrol etc also. Not much good having gold coins if a mob of Mad Max lookalikes can come and take it off you by force. Fiat currencies do collapse in the end, but its generally more or less related to a collapse in civilisation. I do think this might be one of those times when gold comes into its own, and I still expect it to go further. I'm interested by the deflationist argument but at the end of the day I think like it or not we're going to see rising inflation and I suspect gold will go up a fair way from here. But I also expect that boom in gold to become hysterical at some opint and end up crashing and burning again. As GF says, the crucial thing there is when that happens. A big difference between a gold crash from $1500 and one from $15000.

Nice one. But what does gold actually insure you against? The collapse of fiat? The collapse of society? it's insurance against inflation of course, but one that can backfire badly. If I had trusted it as insurance against inflation any time from 1980 to the late 90s, I think I'd have cancelled my policy long ago and found a new insurer.

I was following up a train of thought on those two in the Socratic fashion. As it happens, I feel fairly reassured that people here have looked into these questions and understand them - I have had some very clear explanations, interesting to hear. I'm not anti-gold, I'm a gold sceptic. I've encountered some very intelligent goldbugs and also some boneheads. At various stages in my internet rambling I have seen people assuming that unallocated gold was safer than fiat currency, trusting that the Liberty dollar was an idealistic scheme rather than a scam, or whatever. But in this case, I think you guys seem to know your stuff and that my doubts were unfounded. I suppose my interest in gold is very much a theoretical one. I'm fascinated by the economic and philosophical questions it raises. Not that concerned about the investment side of things. But as I know and think a fair amount about it, it makes sense to me to occasionally ask pertinent questions that people may not have considered. At times it may seem like trolling, of course. But don't mistake it for anti-gold sentiment. Would someone asking questions in 2005 about what would happen to Northern Rock in the case of a property crash have been "anti-property"? Gold inspires a degree of fanaticism, and historically this has sometimes blinded people to risks. In this case I don't think that's the case, but no harm in asking the questions from time to time.

Overall I think you guys have persuaded me that Goldmoney would probably survive a crash - seems as though there are enough safeguards there, unless it's such an awful crash that no-one at all is buying (pretty unlikely). I do think the feedback mechanism caused by them selling to cover orders would be significant, but that would occur however gold was being sold to a reluctant market, I guess. I'm not entirely convinced by the 'bailment' legal status of the gold, but hopefully that will never be tested. :smile:

Very true.

Ah, that might help to protect GM in this scenario then. I think they'd survive to be honest, I just imagine that a rapidly falling market would cause a lot of stress and cause a lot of customers to be dissatisfied with the potential delays and limits that would be created. I'd be far more genuinely worried about a gold service that didn't allocate gold as then I'd be concerned that they were operating a fractional system.

Goldfinger suggested shorting as a solution, not me. The problem would arise when large amounts were involved in a market with many sellers - if the next day's fix is lower than the cash price they have to pay out today, then their cash reserves are at risk. Given the speed that gold moves at, that could be a bigger risk than one would wish to see. Of course I don't - I'm just niggling at the Goldmoney business model to see if it as robust as people think. If the model isn't robust enough to cope with a major fall in price then there is a problem. Also if there is a risk of a feedback mechanism turning a moderate fall in price into a bigger one, that's also worth a moment's thought. I'm looking at extreme cases. On the other hand, at one stage the financial institutions would have said that a collapse in the mortgage market and near-bankruptcy of major banks was an extreme scenario, so it seems a good year for wondering about such extremes.

That's interesting about bailments - I'm not a lawyer, but I know stuff like whether the goods are consignments or bailments or on or off the balance sheet can make a big difference. I would say that they are going to some lengths to establish that a court would treat it as a bailment, which suggests to the sceptical mind it isn't an open and closed case. For instance I immediately see some problems: "The first is a clear documentary statement about who owns the bailed goods. This is stated in BullionVault's Terms and Conditions here, and it is unequivocally you. That fact is also evidenced on the contract between BullionVault and Via Mat." Fair enough, but the legality of that contract could be disputed. "The second is the company's balance sheet. This is a public document where the assets belonging to the company are annually listed and filed at Companies House. Creditors are entitled to expect that assets listed on the balance sheet protect them from a company's insolvency. But your gold does not belong to Galmarley and has never been on Galmarley's balance sheet. No creditor of the company can claim to rely for protection on gold which the company never claimed as an asset. " This is pretty important and reassuring. "The third is the fact of your payment for a custody service. This is evidence that the gold is your property in BullionVault's safekeeping. It evidences the nature of the agreement - i.e. that you are paying for the protection of your property, and not transferring your property to BullionVault for gain. The custody fee is deducted from your cash balance and posted monthly to your statement." Here things get a bit slippery. A bailment is "transfer of possession of something (by the bailor) to another person (called the bailee) for some temporary purpose (e.g.. storage) after which the property is either returned to the bailor or otherwise disposed of in accordance with the contract of bailment." Now if I'm an investor, the gold has never been in my possession, so did I ever own it and transfer possession of it to BV? Is it clear that I am paying for protection of my property (as I clearly would be if I deposited jewellery in a bank vault) or could it be argued that Bullion Vault has transferred ownership to me, then I have allowed them to retain possession "for gain". Since most investors won't ever see their gold, and most sales of the gold will be through BV to other investors, is this a clear case of bailment? Or is there another legal principle that could be taken to apply? As I said, I'm not a lawyer, but I'd be interested to see what a sceptical lawyer made of that last paragraph.

Well, for a start, if they need to start shorting in a turbulent market, it increases their chances of making cash losses that increase the danger of going out of business.

That's a fairly good precedent, although the physical situation is a little different. Yes, actually that's a fairly clear legal way of putting it, thanks. Though if I were a creditor I might try putting the argument to a judge that Goldmoney were effectively operating a currency backed by gold, or operating as a bank, rather than as a vault. Might not work, but there are some slippery lawyers out there.

No, I mean in the notional scenario I'm describing where prices are falling fast, Goldmoney would have the problem of giving people money back for their gold, whereas BV could simply leave it between customers, no obligation on them to give out money, so less danger of a cash crisis in the company.

a) the first one isn't necessarily gone in a bank liquidation, under state guarantee systems, at least. ownership in bankruptcies is very often subject to legal challenge by other creditors. So it's all fine because everything is covered by shorts and derivatives? No danger of anything going wrong there then. And wouldn't such shorting increase the feedback loop I was talking about? Yes, that's what you would say to the judge. Meanwhile the creditors would question the legal basis of this and at best the judge might freeze the gold. There is an obvious legal difference between the case of bank vaults and deposits, and this might guide the legal outcome, but taking your word or Goldmoney's word that your ownership is secured and has a sound legal basis seems a tad risky to me. The law doesn't always operate according to common sense.

I'm not arguing for keeping gold anywhere in particular, just exploring possible weaknesses in the business model.

It is actually. When a company goes out of business there are always legal issues surrounding ownership of the assets. If I sell my product to a company to fulfil an order but they haven't paid yet, in theory those are my books. But the law doesn't always treat it as straightforwardly as that. I know the law on bank deposits. I don't know the law on the contents of bank vaults, and I don't know for sure that a judge wouldn't choose to treat the gold as a deposit rather than as contents of a vault in any case. You may have a certificate and assurances that this is your gold from the company - but does the law necessarily treat it that way? Any precedent cases?