rgleeson

I’ve enjoyed the many debates on here and HPC on deflation/inflation, especially when they have been heated. The ancients Greeks and Victorians understood the value of a good debate in advancement of human knowledge and understanding. There are many inflationary and deflationary pressures and how they affect the price of any given asset is not obvious, and ultimately the wider impact depends upon how our politicians act daily in their attempts to contain the crisis.

Before I invested in gold 16 months ago, I read articles by economists who predicted gold would rise with commodities, fall with them, and then rise again as its monetary properties reasserted itself. I've found this thinking persuasive and it’s why I didn’t sell out in the last 2 months. But what makes this really interesting, is the underlying causes which drive that prediction, which is happening all around us, which is really making the end deflation/inflation result irrelevant to the price of gold.

This is not a secret or a surprise to me. I'm actually more bearish than most here!

 

Many here think everything is going down except gold. I suspect absolutely everything may go down!

 

 

Sorry if I'm not all champagne smileys and hats in the air - as I have said many times, I am in the "buy 10% and hope it does badly" camp.

 

 

We clearly need a probably long, and certainly painful, period of "rebalancing" (paying off debt), so bad times are inevitable IMHO. This has been self evident for years now. I just cannot see any upside to the collapse scenario, whether you have a few sovs under the matress of not.

It's all relative right, as long as gold goes down much less than everything else, the net result will be the same

goldman + morgan?

GS are long gold now no?, they'll be laughing all the way to the bank

- That silver belongs to the investors, and so even if the banks that stores it should go bust, then its value will be returned to the investors

If the silver belongs to the investor, what security is used to obtain the leverage?

As an avid reader of the gold thread on HPC and now on here, I'm writing my first post in a state of panic.

 

Just checked my leveraged silver ETC expecting to find a huge increase and found all trading has been suspended. It transpires these are by not backed by physical, but by the ropey, teetering on the verse of bankrupty AIG!

 

Anyone else got ETC's?

Sorry for your loss.

That's another feather in cgnao's cap though and another example of how I haven't understood the extent of the derivatives meltdom. Who would have thought this investment would turn bad when it should be turning good?

beware hubris

Anything can happen after london closes, gold price does not rise in NY 90% of the time

This and the gold/silver boost certainly feels like good news, but a millionaire footballer parking illegally is breaking the law, but is gettgin fined £30 a disincentive? ie. What will the real punishment be for breaking the law. ps wasn't it illegal already?

Steve Netwriter posted this presentation before (i think), it goes into detail explaining the quo. They describe it as being illegal to naked short trade unless you had already been doing it.... seriously the mind spins just imagining that this situation is even slightly true.

http://www.businessjive.com/

Much more comfortable to assume this has been created by internet nutjobs and the casino is really not rigged against you.

All commodities are up at the mo, so we are still not seeing Gold decouple yet...

bbc news is showing no trade on crude, what's up with that?

Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This new rule is effective immediately.[/i][/color]

"new rule" - eh?

Is my clock correct, is it really NY open?

And another thing, on-margin hedge funds selling off are one common answer for the sharp drop. Now that is plausable statement for the $1000 to $800 drop, but what fund would still be invested after that 20% haircut, that would then be able to sell off at $800 to $750. They are all on 10-1+ leverage and should all be out right? If they had bought back, in order to sell off once more, shouldn't a price rise be evident?

http://seekingalpha.com/article/95496-the-...gold-and-silver

While I think the article has some flaws regarding reasoning of the difference between gold spot and coins (we can all buy close to spot through BV or GM and other such vehicles, or we can all take delivery of bars in the futures market), it does at least ask questions of the New York sell off that happened repeatedly through August and the concentrated short positions.

Does anyone have another plausable (non-manipulation) theory for the over-the-cliff daily New York sell-offs that happened repeatedly through the last few months? Im no trader, but to me they dont look like patterns from which maximum capital is being sought.

I have a question though. If am an all powerfull U.S goverment agency looking to control price for whateve motivation, through market makers, bullion banks or other, why not just frig the price electronically? Why not just expand on the well known'down tick' trick?

Perhaps the smoking gun is not in the futures market.

Well, if the pm market is indeed manipulated any gains today will be wiped out quicker than even the U.S. jobless data.

What the hell does the BOE base their interest rate decision on? You would think this stuff would need to be modelled in some super-computer hosted simulation, rather than a committee of old duffers...

Friends - I really think there's some horrific confusion creeping into this money supply debate...

 

I believe it's like this:

 

MONEY CREATION AND LOSS

1. A owns £100, so 'Total Money Supply' = £100

2. B borrows that £100 from A, so A now owns an IOU (which is £100 of money!!!!), so now 'Total Money Supply' = £200 [new money created]

3. If B pays back the loan (so A forced to then tear up the IOU), we're back to 'Total Money Supply' = £100 [new money destroyed]

4. A writes off the loan (i.e. A chooses to tear up the IOU), we're back to 'Total Money Supply' = £100 [new money destroyed]

 

TIME FRAME IS IMPORTANT

Time 1. going to time 2. involves an increase in money supply

Time 1. going to time 3. or 4. involves no change in money supply

Time 2. going to time 3. or 4. involves a decrease in money supply

 

DON'T CONFUSE MONEY SUPPLY WITH WEALTH (TOTAL ASSET VALUES)

An asset can be deemed to be worth £1,000,000 one day (owner is wealthy) and then 10p the next day (owner is suddenly not wealthy) - but money supply has not changed

 

DON'T CONFUSE WEALTH AND INFLATION/DEFLATION

Money supply dictates level of inflation or deflation in the long term, but several other factors come into play over shorter time frames. So its very risky to make arguments that directly connect loans, defaults etc and inflation

 

SO LOOKING AT WRENS RECENT EXAMPLE

I would change it to the following...

 

1 ) Loan -> inflation

[no: Loan -> increased money supply]

2 ) Paying back principal -> deflation, ie. reversal of step (1) and net neutral

[no: this reduces money supply back to where it started - takes years or decades for mortgages]

3 ) Interest payed -> no net effect on the money supply, just existing money changing hands

[yes]

 

But if

4 ) Default -> failure to pay principal, i.e. not a reversal of step (1), which default is net inflationary

[no: it is a reversal of step 1, and its short term effect upon inflation depends upon what else is happening in the economy]

5) Bank pays principal itself with existing money-> makes up for step (4) which gets us back to no net inflation or deflation

[no: same situation as (4) as IOU has been torn up]

 

Or

6 ) Bank is broke and cannot pay the principal itself -> net inflation, i.e. not a reversal of step (1)

[no: if bank goes bust, this is asset/wealth destruction which does not affect money supply, and any effect upon inflation depends upon what else is happening in the economy]

7 ) Central Bank gives new money to the bank to pay the principal -> net inflation, as step (1) is reversed but the man behind the curtain created an equal amount of new money!

[no: CB exchanges cash for the banks MBS's which are just assets whose price has fallen (so not influencing money supply at all), and the CB gets the new cash for this action by its own new borrowing via issuance of new long bonds (90% taken up by foreigners) which does create new money in the UK system. Again, any effect upon inflation depends upon what else is happening in the economy]

 

...at least that's how I understand it

Well I thought we were using inflation/deflation in the traditional and not modern sense, i.e. to refer to the money supply, not prices...

Collapse is very deflationary. The bank does not have time/years to play with the books and make up losses from future profits. The receivers will continue to collect debt repayments, but are very likely to call in every loan (where allowed by the T&Cs) causing more defaults. This allows the receivers to wrap up the bank quicker without having to wait years for debts to be repaid.

 

When a Central Bank provides a loan to a bank, the Bank does not lose much of its ability to lend. It is a much less deflationary.

Edit to add. Providing the CB provides a loan to cover 100% of the losses

Ah I see...

Edit:

OK I see in principle the theory here. But I doubt any goverment or central bank would allow receivers to act in this way due to the spread of systematic risk.

They didnt wrap up Northern Rock this way after all.

But the bank can only clear the debt from its own reserves if it’s an uncorrelated default. The situation today, is that the banks don’t have enough reserves to cover correlated defaults.

Any and all forms of loan termination (paying it back or defaulting on it) destroys that money (returns it to the future)

You may well be right that defaulting destroys money, but I don’t understand how, mind elaborating?

And if through weight of default they collapse or obtain capital from a central bank?

Perhaps it does in the case of hedge funds unwinding and paying back their loans...

There's two points here.

 

I) I'm not as narrowly focused on the money supply as some, since I believe there can be significant deflationary pressure even within a situation where the money supply is growing. This is because the overall amount of money may not be shrinking, but the flows are having to go into banks to rebuild balance sheets. So for instance, businesses and individuals pay more of their money in debt servicing rather than into the economy, the banks don't lend that interest back out as they are rebuilding balance sheets. Money supply doesn't fall but the effect is deflationary.

 

2) Secondly, some of the effects of what I refer to as wealth destruction take a long time to show up. Assets lose value and become hard to sell or unsaleable. Their value is still listed on balance sheets (including banks') but they can no longer be used to generate money and credit and sooner or later will have to be written down. Another angle on this is the huge amount of bad debt in the system. A lot of the money out there will not be repaid. At this stage banks haven't written it all off, but it is doomed to be written off because of the destruction of wealth in businesses and assets. All of this tightens credit conditions now without making money supply fall.

 

The proof will be in the pudding of course, but remember that my main point in this thread was that the central bank money that was being referred to as massively inflationary is far less so than pictured, since it is merely rebuilding banks' ravaged balance sheets as they are forced to deleverage. No-one has addressed that point, you've just found different ways to argue that there are still inflationary pressures - I happily acknowledge those other inflationary pressures, such as the money reservoirs abroad. I just want to assert that the inflationary role of the CB money propping up banks is being vastly overstated.

Bank lending is inflationary.

Debt payment is deflationary.

Default = no change (i assume)

When we talk about people hunkering down and paying back debts, that sure sounds deflationary... and if populations were able to pay back debts tomorrow through some miracle, then I would feel more confident siding with this arguement. However, the banks are in problems because such a large proportion of people, companies and other banks have v. large & long term debt which cannot be paid back quickly, or perhaps at all. So does the deflationary actions of the people paying back long term debt in tiny increments outwiegh the inflationary support of defaults????

This is odd.... there's a "market price" for metal..... but there's a price which you will have to pay if you actually want some.....

 

Now here's the curious thing: I went to the US Mint site this morning and wanted to see if they would sell a one ounce Gold Eagle. Yup, they will. But the price for an uncirculated 2008 Gold Eagle is not anywhere near spot ($790). They are asking $1,119.95 for a one ounce coin.

I'm find it tough to rationalize opposing thoughts on this subject. Is the price of coins high because there is a physical shortage, or because there is sufficient sucker market who are willing to pay a premium.

Is there a physical shortage? Well not for investment bars. BullionVault seems able to exectue purchases without delay at spot price, but in that case you are buying portion of an investment bar.

But many PM fluffers want to hold physical in their hand, and full bullion bars are out of the question, so they/we turn to coins

So it is quite possible without hard evidence of a physical shortage, that the range between investment grade and coins has increased representing the divergent opinion of the customer base that has access to coins vs. bars. The price of something is what the market will sustain.

If this is true the winners here are the mints, since they have increased their margin from spot to resale. My advice is purchase from BV and stay close to spot.

Physical disconnect:

http://silverstockreport.com/2008/disconnect.html

If the bullion vendors take payment but promise delivery in the future (and they arent taking a short position), then they must have a "paper" contract for delivery to secure thier future supply.

This is the event that could cause the unwind. But I wouldnt trust that supply to come through...

I have to say, I'm as excited aboout PM now as i've been in 12 months. The physical shortage hints to me that natural cornering of the market that some predicted could be at hand.

The alternative explantation, that the physical vendors have all gone Short doesn't ring true.

If I was investing in Silver (which I wish I had some money for) I sure as hell wouldnt be placing advance order for silver with vendors that promise delivery in 90 days, that sounds like a promise to pay bearer to me!! and introduces counter part risk!!!!!