GOLD

[drbubb]

$400 oil and $8,500 gold - in such an environment the Dollar will have little value,

and America's suburban living arrangement will truly be on the rocks

 

When I have some more time (next week) I will produce some charts to support it

[G0ldfinger]

The FSA is bullshitting around.

 

http://www.bloomberg.com/apps/news?pid=206...&refer=home

``Hypothetically, if a bank's share price dips below its rights issue price, the FSA officially doesn't have to do anything,'' said FSA spokeswoman Teresa La Thangue. ``It's completely up to the underwriter. Unofficially, we monitor the situation very closely.''

EDIT: Apart from this, quite interesting that gold is already $10 down overnight.

[azazel]

Yes, very unusual price drop last night in Asian trading.

[UpTheKhyber]

Now that's a prompt reply . To explore this further...

 

Not convinced by the idea it gets worse every cycle. The 1970s was pretty awful - some of the fall-out depends on other conditions. but this is an awful one largely because governments (and the electorates and media who should monitor them) have been unusually supine in the face of banking power.

This is just referring to the exponential nature of inflation if you increase the supply of high-powered money each cycle. Exponential rises are bad in the long run if the rest of the system (e.g. other economies you trade with) don't inflate at the same rate as you. As an example of how the can be bad for a country: with gold as the international reserve currency, the unsustainable nature of US inflation was so obvious that in the 70's they had to move off the gold standard. This led to the US$ being used as the defacto replacement gold standard, with the resultant pathological effects on international money supply (as described in item 3 onwards in this link - http://www.goldmau.com/content/contributor...lf/08-04-11.php). The resultant effect of this has been that the US been drained of much of its wealth. Doesn't seem like very sound monetary policy to me.

 

The other problem is that because banks know they will get bailed out, there is a moral hazard introduced. Banks will supply far more credit than they would otherwise dare, and the credit expansion and contraction caused by money-as-debt/fractional-reserve banking works as an even more effective money pump towards the very rich. Assets/commodities get inflated in price, eventually most people become asset rich and cash poor (assuming they don't MEW it all to hell in which case they end up asset-poor and cash-poor) and have to sell those assets, usually after the assets have crashed in price. The rich, who have been able to retain lots of liquidity then scoop up those assets at bargain prices. The resulting polarisation of society into super-rich and poor is usually pretty bad for everyone but the super-rich.

 

Some truth in that, although I'm less bothered by it than some. I think state spending and modest inflation can be perfectly acceptable as I don't regard protecting rich people's wealth as the most important aim of society. But the danger of allowing deficit spending and inflation is that it does tempt politicians to abuse the opportunities it creates.

IMO it's regressive taxation. Effectively it acts as a flat rate tax. This hits those with the lowest disposable income the hardest.

 

It's not the monetary system itself which is corrupt but the people who administer it. There were plenty of corrupt and awful states who had gold coinage, after all.

The current monetary system is definitely corrupt; it's far more biased in favour of the bank than even a casino would dare. At least casinos are fairly up-front about relieving you of your money, and you're not forced to play. Gold as money at least has no in-built bias. Yes coinage is still open to abuse through debasement, but that's not a problem with gold per-see.

[alexreeve]

I think state spending and modest inflation can be perfectly acceptable as I don't regard protecting rich people's wealth as the most important aim of society.

That presupposes that it's the rich peoples wealth that is at risk from inflation. Money in my bank increases at 6% per annum, my pay rise is usually 3% per annum. If RPI is at 4%, people living off large assets can weather inflation far better than someone living on a wage. In fact it just fools working people into thinking they are making progress because they are getting more money each year, when in fact they are getting poorer.

 

State spending is clearly necessary, and beneficial; however the system as implemented in the UK spends: far too much, primarily on things with almost no economic return, and charges people who can afford it the least proportionately more than those who can afford it the most.

 

I think (current) state spending and modest inflation are clearly unacceptable as I don't regard protecting rich people's wealth as the most important aim of society.

[alexreeve]

Highest prediction yet?

 

http://news.goldseek.com/RichardDaughty/1213250520.php

 

And what will be the high price of gold? Easy! Since the dollar is an abused fiat currency, and since all the thousands of fiat currencies in history went to zero value, the ultimate price of gold, in dollars, is infinity!

 

The only question is how long before it happens? Another easy one! Sooner than you think!

[Magpie]

This is just referring to the exponential nature of inflation if you increase the supply of high-powered money each cycle. Exponential rises are bad in the long run if the rest of the system (e.g. other economies you trade with) don't inflate at the same rate as you.

 

Don't get me started on exponential graphs. The curve gets steeper as you go on, right? But then if you redraw the graph starting at a later point, suddenly the whole thing looks completely different. Any steady change has an exponential effect. People too often look at an exponential graph and conclude that therefore everything is getting worse and worse, because they're drawn with "now" at the right hand end, the steepest point, so "now" looks worse than the past.

 

The resultant effect of this has been that the US been drained of much of its wealth. Doesn't seem like very sound monetary policy to me.

 

I think this is a fairly inevitable result of having one fiat currency as the reserve and is one of the flaws in the current system - combined with the decline of the US empire of course. I saw a great article on this, in fact I think Steve Netwriter linked to - I'll try to dig it out.

 

The other problem is that because banks know they will get bailed out, there is a moral hazard introduced. Banks will supply far more credit than they would otherwise dare, and the credit expansion and contraction caused by money-as-debt/fractional-reserve banking works as an even more effective money pump towards the very rich.

 

IMO it's regressive taxation. Effectively it acts as a flat rate tax. This hits those with the lowest disposable income the hardest.

 

You have a point here, but I'd argue that's all because of the way the system is currently administered (eg repeal of Glass Steagall, minimal regulation of banks, allowing offsheet nonsense, zero regulation of hedge funds etc etc) rather than because of 'money-as-debt' per se. Overall it would be hard to argue that the fiat money era has made the poor poorer, although it may be an accident of history that incomes have generally increased.

 

I do have some sympathy incidentally with the argument that more (or eventually all) money should be government issued through a national dividend or whatever - I think something like that is a more progressive argument than arguing against fiat in general and trusting in gold.

 

The current monetary system is definitely corrupt; it's far more biased in favour of the bank than even a casino would dare. At least casinos are fairly up-front about relieving you of your money, and you're not forced to play. Gold as money at least has no in-built bias. Yes coinage is still open to abuse through debasement, but that's not a problem with gold per-see.

 

No, but when we had gold we still had corrupt governments and we had a huge disparity between rich and poor. My argument isn't that the current system is perfect, but that it's mistake to think that gold+free markets would magically fix the problems. For me, returning to the gold standard is a fantasy that distracts people from analyzing more realistic alternatives and monetary reforms.

 

 

 

[Magpie]

That presupposes that it's the rich peoples wealth that is at risk from inflation. Money in my bank increases at 6% per annum, my pay rise is usually 3% per annum. If RPI is at 4%, people living off large assets can weather inflation far better than someone living on a wage. In fact it just fools working people into thinking they are making progress because they are getting more money each year, when in fact they are getting poorer.

 

That depends entirely on whether cost inflation is higher than wage inflation. For most of the century wage inflation has outstripped cost inflation, leading to rising real incomes on average. So what you are saying has been factually inaccurate for most of the last century, although it is probably the truth right now.

 

One of the big mistakes we have made in the UK is to allow too much of this extra income to be absorbed by banks via the interest on ludicrous property prices. If we had a better regulating lending system, then we might actually be able to see the effects of that increased real income. As it is we just spend it on mortgages and rent.

 

[wren]

The current monetary system is definitely corrupt; it's far more biased in favour of the bank than even a casino would dare. At least casinos are fairly up-front about relieving you of your money, and you're not forced to play. Gold as money at least has no in-built bias. Yes coinage is still open to abuse through debasement, but that's not a problem with gold per-see.

I tend to agree with you here. The rest of my post is not directed towards you specifically, but to all.

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

I admit that I haven't even attempted a serious study of this problem.

 

But I wonder whether if monetary anarchy were permitted, it would result in a fairer and economically more effective system.

 

I suspect the "currencies" would most often be silver and gold for practical reasons which are familiar to us.

 

Maybe gold inflation is generally 2% per annum but I don't see that that is necessarily a problem. I don't see why 0% inflation would be a problem (not that that would be possible).

 

Why is the "creation" of "money" from nothing such "an essential and good" thing?

 

It seems to me that it is fraud on a grand scale. And of course, a fraud that most ordinary people are entirely unaware of.

 

Okay, shoot me down.

[Magpie]

Maybe gold inflation is generally 2% per annum but I don't see that that is necessarily a problem. I don't see why 0% inflation would be a problem (not that that would be possible).

 

The problem in the past was that it didn't allow flexibility in the money supply - if the economy grows faster than the gold supply you end up with deflationary conditions which can be problematic in a variety of ways. Inflations and deflations are both a pain in their own ways. The ideal system would be perfectly regulated to grow and shrink with the economy at exactly the right rate. Neither the current system nor the gold standard can deliver this.

 

Further back in time, before we had a banking system in the modern form, it was extremely difficult to raise money for capital projects. The leaders of states (kings or whatever) tended not to sit there and think oh dear, no money to spend. They either taxed, or went to war to get more gold. You can argue about whether fractional banking, usury, issuing of equity shares or whatever is the solution to freeing up capital of course..

 

Why is the "creation" of "money" from nothing such "an essential and good" thing?

 

It seems to me that it is fraud on a grand scale. And of course, a fraud that most ordinary people are entirely unaware of.

 

I think one of the epistemological problems people have is the idea that money can be 'real', rather than 'nothing'. Money is actually a representation of future exchange value. Whether it uses a real object as a reference point or floats in relation to all goods, it is still 'nothing' in and of itself. Objects that we want to have or to use have value. Money merely represents that value. Sometimes we use goods such as gold which are in themselves valuable to represent value, and this creates a different system than if we use something nearly worthless like paper. But money is not in itself real and is always created by social convention.

 

Money creation (as in fiat, fractional reserve etc) can be a good thing and it can be a bad thing, depending on what use it is put to. A silly example I often refer to is babysitting circles who use tokens to exchange babysitting nights. They have created a kind of money from nothing. It has enabled them to exchange goods and services. That is a useful thing. At a broader level you need money that is accepted by all, either because it is state sanctioned or because it is in itself acceptable. Gold fulfils the latter conditions so would do well in a state of monetary anarchy, but does that make it innately superior to something that is state-sanctioned? And more importantly would monetary anarchy make for a better run society? I'm not convinced.

[narco]

The cartel have a golden opportunity here to slam dunk gold within the next couple of hours.

 

The dollar has strengthened, gold is teetering on the trendline and lease rates popped up yesterday. I reckon they may have a go...... I'd imagine theres a lot of buy orders in at $850.

[id5]

The problem in the past was that it didn't allow flexibility in the money supply ...

 

Question, are you talking about a gold backed fiat currency or a gold/silver/copper with no fiat currency?

[Magpie]

Question, are you talking about a gold backed fiat currency or a gold/silver/copper with no fiat currency?

 

Good point, I sometimes blur the issues. Although, shouldn't the distinction really be between gold + fractional reserve, rather than gold + fiat. The latter could be taken simply to mean that people exchange notes for actual gold reserves, rather than for fractional reserves, which is a more complex issue.

 

But in any case I'm talking about both - gold-backed fiat with fractional reserves is flexible, but only up to the point where the gold supply and fractional reserve will allow expansion to, then it becomes a rigid barrier. Some would argue that this is the point where an economy naturally needs to hit a barrier in terms of monetary growth. I would argue that sometimes it is, sometimes it isn't, and when it isn't you get unnecessary deflations. Look at the 1873-96 UK depression for an example of a deflationary depression that certainly wasn't helped by the monetary system.

 

Remember, I don't think any monetary system is flawless...

 

[marceau]

The cartel have a golden opportunity here to slam dunk gold within the next couple of hours.

 

The dollar has strengthened, gold is teetering on the trendline and lease rates popped up yesterday. I reckon they may have a go...... I'd imagine theres a lot of buy orders in at $850.

 

 

You're absolutely right. Gold is on its knees at the moment waiting for the cartel to finish it off.

 

The problem for the cartel is those buy orders at $850, even if gold does drop it's probably only going to be by a 'massive' $15-20 before we have a lovely double bottom on the charts and a solid gold set up for a rally back to the highs.

 

Should be a very interesting day today.

 

Edit: Here we go, $850 coming.

[drminky]

That depends entirely on whether cost inflation is higher than wage inflation. For most of the century wage inflation has outstripped cost inflation, leading to rising real incomes on average. So what you are saying has been factually inaccurate for most of the last century, although it is probably the truth right now.

 

 

In the Case of the US, REAL wages peaked in 1971, within a year of coming off the gold standard. Since then, real wages have declined, despite the massive secular boom from 1981-2000. Doesn't really support the Keynsian case that inflation and fiat has been better for the poor than the rich. Seems quite the opposite in fact. In fact, inflation really benefits those that are already asset rich, and punish those who hold most of their wealth in cash. And guess who disproportionately hold most of their wealth in cash? The lower middle class, the working class and the poor..

 

 

 

[wren]

Thanks for your reply. This is the sort of answer I expected. But quietly I'm hoping to hear some less conformist answers.

The problem in the past was that it didn't allow flexibility in the money supply - if the economy grows faster than the gold supply you end up with deflationary conditions which can be problematic in a variety of ways. Inflations and deflations are both a pain in their own ways. The ideal system would be perfectly regulated to grow and shrink with the economy at exactly the right rate. Neither the current system nor the gold standard can deliver this.

Is it really so essential that the money supply growth equal "economic growth", which latter is probably open to subjective interpretation?

Further back in time, before we had a banking system in the modern form, it was extremely difficult to raise money for capital projects. The leaders of states (kings or whatever) tended not to sit there and think oh dear, no money to spend. They either taxed, or went to war to get more gold. You can argue about whether fractional banking, usury, issuing of equity shares or whatever is the solution to freeing up capital of course..

But disappropriation of goods or labour without informed consent amounts to stealing. This is why I think it's fraudulent.

 

In a fair system they would need to convince people to make the investment, through a share issue, for example. Of course, then the shareholders share the risk which requires some convincing.

I think one of the epistemological problems people have is the idea that money can be 'real', rather than 'nothing'. Money is actually a representation of future exchange value. Whether it uses a real object as a reference point or floats in relation to all goods, it is still 'nothing' in and of itself. Objects that we want to have or to use have value. Money merely represents that value. Sometimes we use goods such as gold which are in themselves valuable to represent value, and this creates a different system than if we use something nearly worthless like paper. But money is not in itself real and is always created by social convention.

But for humans social convention is a reality of life. Any perceived future exchange value relies on trust, and betrayal of trust is generally regarded as dishonest.

 

In ancient times in Finland, squirrel skins were used as money. That might sound quaintly risible, but shooting or trapping a squirrel requires quite some effort.

Money creation (as in fiat, fractional reserve etc) can be a good thing and it can be a bad thing, depending on what use it is put to. A silly example I often refer to is babysitting circles who use tokens to exchange babysitting nights. They have created a kind of money from nothing. It has enabled them to exchange goods and services. That is a useful thing. At a broader level you need money that is accepted by all, either because it is state sanctioned or because it is in itself acceptable. Gold fulfils the latter conditions so would do well in a state of monetary anarchy, but does that make it innately superior to something that is state-sanctioned? And more importantly would monetary anarchy make for a better run society? I'm not convinced.

If there's some agreed standard of exchange (so-called "money", either by social convention, or nowadays by fiat), to create "money" from thin air amounts to stealing.

 

Thanks for your reply. My comments may seem simplistic but I'm trying to get to the fundamentals.

 

Note: I won't post anymore today. I'll be ready to continue the discussion tomorrow. Maybe this "what should money be?" question deserves a separate thread.

[narco]

The problem for the cartel is those buy orders at $850, even if gold does drop it's probably only going to be by a 'massive' $15-20 before we have a lovely double bottom on the charts and a solid gold set up for a rally back to the highs.

Bashing gold down to $850 will buy them a few extra weeks but it will definately put a floor under the price.

 

It will take a serious amount of gold to cut through below $850, so let's see what they got then.

[Magpie]

In the Case of the US, REAL wages peaked in 1971, within a year of coming off the gold standard. Since then, real wages have declined, despite the massive secular boom from 1981-2000.

 

Do you have any stats to back that up?

 

[narco]

200 DMA quickly approaching now. Seems to have taken forever!

 

[Magpie]

Actually rather than disrupt this thread, I'll move to another thread

 

What Should Money Be, as wren suggested...

[marceau]

This is quite interesting. You could see the early buy orders hitting the price as we went through $860. They bounced the price straight back up by a couple of dollars.

 

I fully expect gold to continue downwards, but I think the bears are going to have a hard day from here on in.

[Justin Thyme]

Courtesy of the Fat Prophets

 

Comment of the day, 12 June 2008

 

The inflation dragon could be waking up.

 

Its Friday the 13th tomorrow and a big number is on the way; the US CPI; expectations are already high at 0.5% month on month. This is coming off the back the previous month's benign 0.2% rise.

 

Given that the both the Fed and the ECB have now pegged their credibility on their ability to bring inflation expectations down. In light of volatile oil and inflation numbers in recent months, more hawkish monetary rhetoric is here to stay, even if oil prices retreat or the CPI is better than expected.

 

At this point it is unlikely that oil prices will retreat. Rather they will continue to rally towards $150. With oil front page news the world's economy will move a step closer to a collapse and inflation will be a topic for everyone to discuss.

 

And barring some statistical quirk it remains unlikely that US inflation will be low.

 

There is no doubt that a high number this Friday will see the market pressure the Fed to make good its threats.

 

For the Fed, all this inflation scaremongering is well and good on paper. There are a number of problems that are lurking beneath this sudden holier than thou vigilance the central bank has adopted.

 

Firstly how far must they raise rates in order to curb inflation?

 

Answer, by more than they are prepared to effect. Rates will not change the cost of supply rather they will affect the cost of servicing demand. Rates have also just been cut 3% since the 18th of September 2007. To really have an impact on inflation the Fed must raise rates aggressively to halt domestic demand in its tracks sending the world spinning into a recession even a depression.

 

Typically once inflation takes a hold of an economy it’s too late to stop it.

 

Raising interest rates has another major consequence in the markets; that is the impact on Equities. Increasing interest rates is not good for equities as they directly impact earnings by raising the cost of servicing debt. Add to this the pressure on earnings already associated with an economy in recession and you almost have a perfect concoction of reasons to sell equities. All you are waiting for is FEAR.

 

So will the Fed raise rates enough to combat inflation?

 

Or will they baulk when the stock market falls like an anvil from the sky?

 

They will baulk, they cannot afford to risk a catastrophe in the equity markets

 

The day they baulk is the day that gold will take off.

[wrongmove]

Gold Fever

 

BBC 2, 19:00–19:30 on Fri 13 Jun 2008

 

The Money Programme's Max Flint travels to the gold mines of Nevada and the souks of Dubai to find out why. He meets the investors who are converting their savings into gold and puts claims that it even improves your complexion to the test. With reports suggesting that a recession is looming, there's never been a better time to examine the eternal allure of gold.

 

 

 

Are programs like this a bit of a danger signal (shoeshine boy moment), or does the bull still have decades to run?

 

 

 

 

[UpTheKhyber]

Don't get me started on exponential graphs. The curve gets steeper as you go on, right? But then if you redraw the graph starting at a later point, suddenly the whole thing looks completely different. Any steady change has an exponential effect. People too often look at an exponential graph and conclude that therefore everything is getting worse and worse, because they're drawn with "now" at the right hand end, the steepest point, so "now" looks worse than the past.

This is true if you look at one curve in isolation. The key point I am making however is that a nation's currency is not an isolated system. If you inflate faster than your trading partners then all kinds of international monetary imbalances occur, and the imbalances increase exponentially. Initially it's hardly noticeable, but when it gets out of control it does so catastrophically quickly.

 

I think this is a fairly inevitable result of having one fiat currency as the reserve and is one of the flaws in the current system - combined with the decline of the US empire of course. I saw a great article on this, in fact I think Steve Netwriter linked to - I'll try to dig it out.

I'll be interested to read that.

 

You have a point here, but I'd argue that's all because of the way the system is currently administered (eg repeal of Glass Steagall, minimal regulation of banks, allowing offsheet nonsense, zero regulation of hedge funds etc etc) rather than because of 'money-as-debt' per se. Overall it would be hard to argue that the fiat money era has made the poor poorer, although it may be an accident of history that incomes have generally increased.

I've seen the same stats as drminky re: the US since it went off the gold standard. Can't remember were now, but a quick google should find it.

 

Again, I don't really buy that fractional reserve or fiat has made people richer, or improved investment in productive enterprise in real-terms. Going back to you point about the Industrial Revolution, I would argue that by far the main growth factors involved in the industrial revolution were a combination of the agricultural revolution (mechanisation of farming, making millions of people available for work in factories), stealing things of value from the natives as european countries built their empires, forced inequitable trading (get the natives to sell you raw materials and sell them back value-added finished goods), and engineering breakthroughs such as efficient steam engines, spinning machines, and iron making processes.

 

As I outlined earlier, i believe fractional-reserve banking is extremely poor at targeting capital at productive activities, instead undermining such investment by inflating the cost of goods of services and therefore reducing the payback of any investment which is made in productive activities. That the average person became richer is down to efficiencies in production, investment in which was IMO not aided, but taxed by the banks and government through fractional-reserve and fiat.

[gwizzie]

Gold Fever

 

BBC 2, 19:00–19:30 on Fri 13 Jun 2008

 

The Money Programme's Max Flint travels to the gold mines of Nevada and the souks of Dubai to find out why. He meets the investors who are converting their savings into gold and puts claims that it even improves your complexion to the test. With reports suggesting that a recession is looming, there's never been a better time to examine the eternal allure of gold.

 

 

 

Are programs like this a bit of a danger signal (shoeshine boy moment), or does the bull still have decades to run?

 

I was thinking that. But on the other hand gold hasnt really made a parabolic move yet, and when demand increases supply is unlikely to meet it