GOLD

[azazel]

Gold silver and platinum was ramped today on Radio 2, Steve Wright in a factoids section. They said that precious metals retain their value in economic uncertaintys and encouraged the listeners to invest.

 

I don't know that the BBC should be doing this and the timing is interesting too. Not complaining as it will increase public awareness and demand.

[kernull]

damn, I missed crude bottom ...

[ConvertedGoldBug]

Gold silver and platinum was ramped today on Radio 2, Steve Wright in a factoids section. They said that precious metals retain their value in economic uncertaintys and encouraged the listeners to invest.

Here's an interesting thread on the GoldIsMoney forums:

 

http://goldismoney.info/forums/showthread.php?t=290835

 

Suggests that platinum has been included in a list of PM's that the US Government have suspended from selling, implying that stockpiles need to be maintained in case their usage is required for military action.

[azazel]

The price of coins on ebay seem to have stayed the same as before the hammering. Theres not much for sale either.

[bitbigt]

BigbigT - one quibble with what you say. People ARE selling houses even now - when they marry, divorce, die etc. This is reflected in falling prices and people taking losses on sales. This, therefore, DOES translate into reduced money supply in this area and is, potentially, a deflationary push (which may or may not be balanced by inflationary pushes).

Yes, some houses are selling from a position of negative equity, but that doesn't change M3 (the mortgage debt to the bank still exists). It only reduces M3 if the bank reposses and takes the loss in cancellation of the mortgage agreement. But what fraction of all houses with mortgages is that - perhaps less than 0.1%. And how much are those losses relative to the original mortgages - perhaps a few percent on average. This all has to be set against the fact that ALL houses with mortgages have given rise to a matching series of mortgages securities, the market price for which has dropped by many percent or even many tens of percent. That massive paper loss is what is monetarised when the CBs step to exchange it for fresh money (increasing M3) - generated by issuing new government bonds.

 

So we have something like (guestimated figures)

 

0.001 (0.1% of houses repossed and sold that are in neg equity) x 0.05 (5% negative equity upon sale) = 0.000025

vs

1.0 (100% of mortgage securities) x 0.05 (5% average reduced face value of those securities) = 0.05

 

...i.e., a massive net effect towards increasing M3

 

 

Falling prices also inhibit further lending, while the old mortgages still cost the same and have to be paid. So while the falling price itself does not constrict money supply, it maybe gives a hint as to what might happen next.

Lets consider a situation where everyone had 25 year mortgages, some new some half way through, and some nearly finished - with ZERO new mortgages being issued. By continuing to pay the capital repayment part of these, people are reducing only the mortgage related part of M3 by just 4% per annum (100/25). At the same time the 7% interest payments on those mortgages will be increasing the mortgage related part of M3 by 0% per year (if all were payed from saved or existing money) or up to 7% per year if payed from e.g., credit cards or other 'new money' that your employer has attained and paid you with (e.g., a large part of public employees wages). So existing mortgages will be reducing the mortgage related part of M3 by far less than 4% (and the mortgage related part of M3 is only a small part of it, so the % reduction in M3 overall is tiny).

 

But now we have to include the fact that new mortgages ARE still being issued, each of which creates an M3 increase equivalent to 100% of the mortgage amount. Normally, newly issued mortgages equal expiring old mortgages in number - i.e., 1/25 of them or 4% in the given example. But lets assume this is down 2 fold just now, to ~2%, compared to an average period. Then allow for the fact that these new mortgages are far larger in amount than the average existing mortgage, so we have to multiply this figure by a factor of maybe 3 fold, bringing us up to 6%. I.e., far outweighing the above 4% reduction, even in this time of a credit crunch

 

Additionally, we have the new money generation consequential to the points made above in response to Wanderer (CBs coverring banks mortgage losses with new money).

 

So guys, no matter how you slice it - even though existing cash is hard to get ones hands on (due to credit crunch & inflation leaving people poorer), this doesn't change the fact that new regular lending is occuring, plus the CBs are creating a lot of new money to 'buy' more confidence in the banking/financial system. The net result is a rapidly increasing total amount of money in the overall system. ...which sooner or (slightly) later can have only one effect on inflation, fear of inflation, oil/commodity prices and... PMs!

[wrongmove]

So guys, no matter how you slice it - even though existing cash is hard to get ones hands on (due to credit crunch & inflation leaving people poorer), this doesn't change the fact that new regular lending is occuring, plus the CBs are creating a lot of new money to 'buy' more confidence in the banking/financial system. The net result is a rapidly increasing total amount of money in the overall system.

 

On many measures (paticularly 'narrow money') contraction is very evident:

 

from Which inflation is it, anyway?

 

"........... Monetarists have different views on which money supply figures matter, and often disagree violently on the import of statistics. Nonetheless, few would argue that the changes in “narrow” money supply (M1 and M2) over the past few months speak to a scary trend, though a different one than you might have read in the headlines. In the US, M2 (cash, current account deposits, and short-term savings deposits) began falling off a cliff earlier this year. Growth in M2 spiked earlier in the credit crisis, reaching16% near the end of the first quarter. It has since reversed course with a vengeance - M2 contracted in the latest month.

 

Each month brings more negativity in the banking sector and tighter lending conditions. Changes in bank credit, a broad proxy for lending and money supply changes make for grim reading lately. Those too have dived, going from a growth of 12% last year to an 8% contraction (so far) this year. If you can’t borrow, you spend what you have, and “what you have to spend right now” would be another way of defining M2.

 

This 8% contraction in bank credit is the steepest fall for it in 40 years. This doesn’t bode well for growth figures given credit creation (lending) in a fractional banking system is a main conduit for money creation. The underlying cause of the contraction is, presumably, that banks are worried about having even the fraction of deposits required of them to be considered solvent.

 

Some monetary purists, we know, will point to the broader M3 measure (which the US no longer publishes) that rose rapidly last quarter. We think observers that view the recent surge in this measure as temporary are right. Most of the growth probably represents companies fully drawing down lines of credit before the banks cut back on them. It’s not “new” lending in the strict sense of the word, and does not therefore represent new stashes in longer term accounts being put to use. ................"

 

 

I can't really comment on the M3 theory, but the "thin end of the wedge" is deflating at 8% YoY. Pretty dramatic stuff.

[torino]

Man, I thought I was done regarding gold impossible scenario :

more to read!

I can't really understand who would benefit from gold speculators

having to sell - in the worse situation.

To be honest, if - this is a BIG if that is certainly impossible - gold

was to go really down, who would benefit?

 

Also, thank you for the comments on how to get a better response:

actually reading the threads brings in quiet a lot of insight into the emotions and thoughts

involved.

 

[wrongmove]

......

I can't really comment on the M3 theory, but the "thin end of the wedge" is deflating at 8% YoY. Pretty dramatic stuff.

 

I should also add that I'm not sure where the authors are getting their M2 number from, but it doesn't seem to be the FED

 

 

I tried to link to the st louis fed, but got this message "You have entered a link to a website that the administrator does not allow links to"

[bitbigt]

On many measures (paticularly 'narrow money') contraction is very evident:

from Which inflation is it, anyway?

 

Of course M2 (a narrow money measure) is decreasing - its a measure the spare money opeople have for spending. That's why its called the credit crunch.

 

But M2 does not include all the large scale new money - bonds from companies and from the CBs trying to buy confidence. That's where the inflation will come from, and that's why the governments stopped publishing M3 (to keep that fact hidden)

 

So the only way this article contradicts my view is in the authors belief that the recent new money increasing M3 is simply "companies fully drawing down lines of credit before the banks cut back on them". Well do you believe companies borrow if they don't need it? Do you not think the companies instead expect a rate reduction and easing of credit as the credit crunch passes and so would wait before borrowing. The authors argument seems pretty weak to me.

 

 

 

 

[bitbigt]

I should also add that I'm not sure where the authors are getting their M2 number from, but it doesn't seem to be the FED

...a useful primer for the subject:

http://www.moneyweek.com/file/5138/m3-0212.html

[wrongmove]

So the only way this article contradicts my view is in the authors belief that the recent new money increasing M3 is simply "companies fully drawing down lines of credit before the banks cut back on them". Well do you believe companies borrow if they don't need it? Do you not think the companies instead expect a rate reduction and easing of credit as the credit crunch passes and so would wait before borrowing. The authors argument seems pretty weak to me.

 

As I said, I can't really comment on that theory, but one possible explanation is things like SLS. The banks are currently able to borrow against MBS, which won't last forever. However, their net lending is reported to have gone negative last month. They seem to be using this money to shore up the balance book in the face of the write-offs/write-downs, rather than lending it out.

[Bobsta]

I tried to link to the st louis fed, but got this message "You have entered a link to a website that the administrator does not allow links to"

 

Was it this URL? http://research.stlouisfed.org/fred2/series/M2?cid=29

[wrongmove]

Was it this URL? http://research.stlouisfed.org/fred2/series/M2?cid=29

 

Yes - how did you do that?

[wrongmove]

Clarification - the 8% contraction is in bank credit, M2 is down slightly, but nowhere near 8%. So not so staggering as I first thought.

[bitbigt]

I hope this isn't patronising ...and I hope its correct

But I thought some might appreciate a worked example;

 

1. Starting situation

CB owns 0; BankA owns 100k; BankB owns 100k;

ManA owns 0k; ManB owns a house; ManC owns 50k; ManD owns 100k, so M3 = 350k

 

2. ManA takes out a 100K Mortgage Contract (MC) with BankA

CB owns 0; BankA owns MC worth 100k; BankB owns 100k;

ManA owns 100k; ManB owns a house; ManC owns 50k; ManD owns 100k, so M3 = 450k

...so M3 has increased

 

3. ManA buys a 100k house from ManB

CB owns 0; BankA owns MC worth 100k; BankB owns 100k;

ManA owns a house; ManB owns 100k; ManC owns 50k; ManD owns 100k, so M3 = 450k

...so M3 is unchanged

 

4. BankA converts MC into a Mortgage Backed Security (MBS) and sells to bankB for 100k

CB owns 0; BankA owns 100k; BankB own MBS worth 100k;

ManA owns a house; ManB owns 100k; ManC owns 50k; ManD owns 100k, so M3 = 450k

...so M3 is unchanged

 

5. Credit crunch hits and people loose faith in value of house prices and MBS prices (current credit crunch situation)

CB owns 0; BankA owns 100k; BankB own MBS worth 100k;

ManA owns a house; ManB owns 100k; ManC owns 50k; ManD owns 100k, so M3 = 450k

...so M3 is unchanged (note M3 is based on face value of MBS)

 

6. ManA gets divorced and is forced to sell house to ManC for 50k

CB owns 0; BankA owns 100k; BankB owns MBS worth 100k;

ManA owns 50k; ManB owns 100k; ManC owns a house; ManD owns 100k, so M3 = 450k

...so M3 is unchanged

 

7. BankB needs a 100k bale out loan from CB secured against the MBS, CB funds this by selling a new 100k bond to ManD

CB owns MBS worth 100k; BankA owns 100k; BankB owns 100k;

ManA owns 50k; ManB owns 100k; ManC owns a house; ManD owns bond paper worth 100k, so M3 = 550k

...so M3 has increased

 

And note: CB amounts do not appear in M2, only in M3 - thereby hiding that last M3 increase by not publishing M3 any more

 

 

 

 

 

 

 

 

 

[Bobsta]

Yes - how did you do that?

Just googled to find it, then pasted it in.

 

I have previously seen the behaviour you reported though. It's usually when linking to a site that has some potentially "dangerous" code in (ie some dynamic image generation sites). Not quite sure why you had issues with this URL and I didn't.

[wrongmove]

I hope this isn't patronising

 

Not at all to me! And quite convincing. Rereading the article I posted, it is interesting, but definitely seems to be written with an agenda.

 

Clearly though, deflation is not an impossibility. I should repeat, I am not a deflation fundamentalist, i am just trying to work outs its probability, and hence the correct hedging strategy.

 

 

M3 increases twice in your excellent example - when someone takes out a mortgage, and then when the bank swaps this mortgage for cash (and the CB sells on the debt).

 

M3 never drops in the example. I assume that drops occur when debt is repaid, which does not occur in your example (old loans that matured during the period covered, for example).

 

So for deflation of M3, presumably we need i) "manA no longer wants mortgage" and ii) "CBs no longer willing to accept MBS". Are these the things we should be looking for?

 

I think i) is happening, but ii) does not look likely. Interesting.

 

 

 

 

 

 

[wrongmove]

Just googled to find it, then pasted it in.

 

I have previously seen the behaviour you reported though. It's usually when linking to a site that has some potentially "dangerous" code in (ie some dynamic image generation sites). Not quite sure why you had issues with this URL and I didn't.

 

I had changed a few settings on the graph, that may have done it. I was wondering if they had upset the good doctor or something!

[bitbigt]

So for deflation of M3, presumably we need i) "manA no longer wants mortgage" and ii) "CBs no longer willing to accept MBS". Are these the things we should be looking for?

 

I think i) is happening, but ii) does not look likely. Interesting.

 

"manA no longer wants mortgage"

- if he already has one and decides to use other savings to pay it off then M3 is reduced

BankA owns MC worth 100k; ManA owns 100k, M3 = 200k

becomes

BankA owns 100k; ManA 0k, M3 = 100k

...not sure much of this is hapenning (other than small capital repayments per month), as people don't have such savings

 

"CBs no longer willing to accept MBS"

- this won't reduce M3, but it would slow its rate of increase

 

Think of it all this way - when a loan is taken out, the borrower is actually borrowing that money from their own future and placing it in the present. That's where the new money comes from ...the borrowers future. M3 can therefore only fall if

a. the borrower undoes the loan contract by paying it off with money that does not come from the future, or

b. the lender cancels the deal and accepts an amount less than the face value of the contract (so relieving the borrower from some of his debt to his own future)

 

Also keep in mind:

- the CBs are going to need to borrow more and more as the credit crunch continues, and when the credit crunch is past then everyone else will start borrowing again - so there won't be a drop in borrowing (M3)

- a lot of this massive CB borrowing is via bonds to foreign governments: meaning our country's future earnings will not be available for us to use here as they are owed to a foreign country. This will undoubtedly lower confidence in the pound in the future, so lowering its value and causing increased inflation (plus increased PM prices in pounds Sterling)

[lowrentyieldmakessense(honest!)]

the reason for the recent strength in the dollar?

 

link

In most recent Trading Thoughts we reported that the largest purchases of U.S. government debt by foreign official institutions had occurred in the prior week. Initially, reason for those purchases was a mystery. That is, until Russia decided to crush Georgia militarily. Russian army does not move into invasion mode without some prior preparations. Someone knew what was to happen. Massive amount of money flowed, at a $1.4+ trillion annual rate, into U.S. debt in less than a week.

 

Those financial transactions had two ramifications. First, a shortage of dollars was created which caused value of dollar to spike upward. Second, as payments for those bonds were made, a massive amount of liquidity flowed into the Street. That excessive liquidity quickly flowed into financial markets, causing a 300+ point DJIA rally. As news of the Russian mini-blitzkrieg spread, others fled to the dollar.

 

and for those thinking the commodity bull is over

 

 

 

 

In addition to the fact that the amplitude of the decline is generally within the ball park of other strong corrective declines, we would also point out that a number of technical gauges for Crude Oil are now fully oversold. In our work, we highlight Crude Oil as it has been the indisputable leader within the commodity complex. In the chart below, we show the 14 day RSI for Crude, a very medium term momentum indicator which is now down to a reading of +32.24. For the 14 day RSI, readings above +68 and at or below +32 qualify as important extremes. In the case of Crude Oil, the current reading is the single most oversold value seen since January 22nd, 2007.

 

LINK

[wrongmove]

"manA no longer wants mortgage"

- if he already has one and decides to use other savings to pay it off then M3 is reduced

BankA owns MC worth 100k; ManA owns 100k, M3 = 200k

becomes

BankA owns 100k; ManA 0k, M3 = 100k

...not sure much of this is hapenning (other than small capital repayments per month), as people don't have such savings

 

That's not quite what I meant. I was implying credit demand reducing (as is clearly happening in UK mortgage market, for example). i.e. manA decides to contnue renting.

 

Think of it all this way - when a loan is taken out, the borrower is actually borrowing that money from their own future and placing it in the present. That's where the new money comes from ...the borrowers future. M3 can therefore only fall if

a. the borrower undoes the loan contract by paying it off with money that does not come from the future, or

b. the lender cancels the deal and accepts an amount less than the face value of the contract (so relieving the borrower from some of his debt to his own future)

 

Rather a lot of going on at the moment. "BankA writes off MBS"

 

What about maturing loans that were taken out some time ago - i.e if their value approaches that of new loans issued?

 

 

Also keep in mind:

- the CBs are going to need to borrow more and more as the credit crunch continues, and when the credit crunch is past then everyone else will start borrowing again - so there won't be a drop in borrowing (M3)

- a lot of this massive CB borrowing is via bonds to foreign governments: meaning our country's future earnings will not be available for us to use here as they are owed to a foreign country. This will undoubtedly lower confidence in the pound in the future, so lowering its value and causing increased inflation (plus increased PM prices in pounds Sterling)

 

This is what happened in the last recession, early 90s - debt stopped growing, but did not shrink, and then took off again. Gold did squat. How would it protect me this time?

 

 

 

 

 

 

 

[UpTheKhyber]

Thanks for that UTK. You are probably right that I am too pessimistic. Especially when posting - I'm certainly not trying to play devil's advocate - I post what I think, but on a board like this, being non-pro gold can come across as being very bearish, which I am not either (I am not short gold, and certainly not planning to be, just not long either). In the "real world" I am considered a massively economic bearish by my peers, it is only here my views are considered bullish!

 

I am suspicious of gold as money, I could see it being a useful part of a barter system, but just a part. This makes me very skeptical of the rockets and forecasts of 10K gold etc.

 

I'm basically a 5-10%er, whereas you are a 10-20%er, not that far apart. I probably assign a slightly risk of deflation than you, and this would adjust the holding. Fiat is actually some form of 'protection' in deflation. (At the moment, i have other things to worry about, so I have no speculative money available and not much to protect.)

 

Thanks again for the reply. I'll check out the link when I get time.

It's hard work swimming against the tide of majority opinion on here, but it's great to have people like you asking these sorts of questions.

I would definitely reduce the proportion I would choose to invest in gold if I had lower liquidity, so 5-10% in your situation sounds perfectly reasonable.

Likewise, if I had more liquidity i would definitely invest a greater proportion, mostly because there's very little else out there which looks like it has any possibility of an upside right now...

The deflation question is an interesting one. I wouldn't want to call the outcome either way. Given the increased counterparty risk at that point I think gold could definitely be seen as a safe haven and do well in those circumstances. On the other hand, I'd also be looking to pay off as much of my debts as I can (mortgage, but pre-boom, so not too bad, in my case) ASAP and and have a reasonable liquidity buffer ready for that situation, so I'm also diversified into cash at this point as well.

 

This is what happened in the last recession, early 90s - debt stopped growing, but did not shrink, and then took off again. Gold did squat. How would it protect me this time?

IMO, as I alluded to earlier, a significant factor in this is down to dynamic between US T-Bills and gold; the two major popular global reserve currencies. When the return on US Treasure Bills is above the rate of inflation they are more attractive than gold. When they are not, gold is more attractive. Also factor in the amount of counterparty risk in global financial system and the current outlook for gold is very different than in the early 90's.

http://www.crossingwallstreet.com/archives...Bill%20Rate.bmp

[Timil]

I have 10% of my savings in shiny gold all that I can say is thank f*ck when I see the potential of whats unfolding all arou d me.

[Steve Netwriter]

Here's a couple of live gold charts

 

USA Gold Live

 

LiveCharts.co.uk - Gold

 

Thanks, but unless I can't find it, neither do gold in anything buy US$

Sylvester was looking for Gold in NZ$, as a live chart.

The only place I know that does gold in other currencies live is BV.

 

I would like to know if there are any more

 

 

 

[bitbigt]

"That's not quite what I meant. I was implying credit demand reducing (as is clearly happening in UK mortgage market, for example). i.e. manA decides to contnue renting."

...Yes - fewer mortgages are being taken out. I believe I covered that a few posts back. It means slower growth in M3 - but still growth, not reduction when you run some realistic numbers

 

"Rather a lot of B. going on at the moment. 'BankA writes off MBS'".

...not sure banks are writing off MBSs generally. They may be taking them onto their books at a reduced assumed value, but that doesn't reduce M3. Only letting the initial borrower off of his/her mortgage debt reduces M3

 

"What about maturing loans that were taken out some time ago - i.e if their value approaches that of new loans issued?"

...sorry, I don't understand. If you mean maturing mortgages, I again covered that a few posts back. M3 is reduced each month by the amount of capital that is paid off the loan. The last month is just one more small piece of the capital.

 

"This is what happened in the last recession, early 90s - debt stopped growing, but did not shrink, and then took off again. Gold did squat. How would it protect me this time?"

...what 'debt' exactly? Personal loans and mortgages, or all debt including that of the government? Also, is this debt in absolute dollars/pounds, debt corrected for inflation, or debt as a fraction of average income These distinctions are obviously important, and I'd be very interested to know this regarding the early 90's recession if you have that info available.

...Nevertheless, I think we've now agreed that if someone borrows $X then M3 goes up by $X. Also, if someone pays back $X of a loan, then M3 reduces by $X. So IF the real dollar amount of overall debt reduced, then M3 would fall.

...But we must not forget the massive extra borrowing the government is now taking on (to then additionally loan this to struggling institutions), so I really can't believe we'll be in a position where M3 actually falls.

...Furthermore, we have to consider all the money outflow to Asia (for cheap plastic stuff) that was hapenning but has now slowed, the net relative effect of which will be to increase the M3 growth rate (since its a dynamic balance between gains and losses)

...but in short, there's still a lot I'm learning about all this, so lets just let the data do the talking: shadowstats.com shows M3 is today increasing at 15% per annum. Lets just see how that changes over the next few years.

 

But getting to the heart of your last question: "early 1990's....Gold did squat. How would it protect me this time?"

I believe gold will

1. protect you from general money devaluation by simply holding its value over longer time frames (years - decades), since M3 definitely grows substantially over those longer time frames (and right now gold is at the very lower end of its very long term range of value in inflation adjusted terms)

2. protect you and also make you you richer in short time frames (weeks - years) when gold is rising rapidly in price, and this will happen in times of rapidly rising oil prices and when there's a fear of inflation and/or currency depreciation.

 

Given the past inflation pressure we've built up in Asia which is now coming back to bite us hard (something very different to the early 90s), plus the real current M3 growth of 15% (again very different to the 90s), then I have to conclude that we will have both strong rises in oil price, persistent high inflation, and depreciation of Sterling these next few years. So that's why I think gold will rise significantly. However, if I'm wrong and oil stays low, inflation just vaporises globally despite all the old and new money in the system, the pound stays strong, and we all pay back our loans, then I'll not make any money on gold ...but even then I will be certain to get the full real value back in 10 - 20 years time, even if that's something I then just then leave for the kids