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Peter Schiff collumn on Gold World

 

Since early last year, when the financial crisis began to bloom in earnest around the world, one refrain that we have heard repeated often is: "history has consistently shown that stoking aggregate demand through robust monetary expansion is the only proven means to quell a slowing economy." Informed by this central precept of Keynesian economics (first described less than 100 years ago), governments from Washington to Tokyo are now relying on deficit spending, credit expansion, and monetary stimulus to prevent their economies from falling into what they argue would otherwise be an inescapable downward spiral of demand destruction, falling prices, economic contraction, and corporate and personal bankruptcies.

 

The miracle tool that permits all of these aggressive government responses, and which many consider to be the crucial advancement in modern economics, is known in academic circles as an "elastic money supply." The expansion of the money supply (through money printing, debt monetization, or increased lending) is credited with limiting the severity of the free market boom and bust cycle and keeping the global economy on an even keel since the Second World War. Advocates of the tool argue that it has ended the economic miseries supposedly common in unchecked free market capitalism (think Dickens).

 

However, in order to provide this apparent benefit, governments had to discard what they perceived as a burdensome relic of the past: inelastic gold-based money. When civilization first began 5,000 or so years ago, societies almost universally developed mediums of exchange to replace the gross inefficiencies of barter-based economies. Many things were tried (shells, beads, cooking oil, salt, etc.), but eventually nearly all civilizations settled on precious metals -gold, in particular - as the best form of money based on its durability, uniformity, scarcity, and divisibility.

 

For 99% of recorded history, emperors, kings, and parliaments "struggled" with the limitations of gold. If Henry VIII, for instance, wanted to spend money to stimulate the English economy, he had a few choices as to where to get the gold: tax his citizenry, borrow from the bankers in Holland, dig for gold in his own realm, or seek to plunder gold from foreign sources through war or blackmail. All of these options involved significant costs and pitfalls. Henry's easiest means to expand his money supply was to debase his gold by secretly mixing in base-metal alloys. However, such a ruse was easily detected by sophisticated market participants, who would subsequently shun Henry's coinage. The result was that the governments of the world could only spend what they had.

 

Despite these "limitations", the global economy expanded significantly over the centuries. The march from ancient, to medieval, to renaissance, and ultimately to industrial economies occurred without the ability to easily or rapidly expand money supplies. This is because the key to economic growth is not to push up aggregate demand, as the Keynesians would argue, but to increase the efficiency and amount of goods produced. As a result, despite wars, pestilence, natural disasters, and famines, the general march of economics had always been upward. During that time, money generally increased in value as greater efficiency expanded the number of goods that a given weight of gold could buy.

 

But modern economists tend to ignore the period of history before the Great Depression - which is, in fact, most of history - and instead focus solely on the period since the supply of non-gold "fiat" money has been expanded at will. Although the drift began before the Second World War (with the devaluations of the Roosevelt Administration), the end did not come until 1971, when President Nixon officially dissolved the linkage between the U.S. dollar (the world's reserve currency) and gold. Since that time, the supply of U.S. dollars has expanded exponentially and has resulted in the currency losing more than 80% of its value.

 

The Keynesians argue that this controlled devaluation has created consistent growth, in excess of inflation, and has greatly minimized the depths of economic contractions for all global recessions since the Second World War. To them, the nearly uninterrupted expansion over that time is absolute proof that the active management of fiat money is the economic equivalent of penicillin.

 

Such a view completely ignores economic fundamentals and the many other coincidental factors that have contributed to strong growth in the second half of the 20th Century.

 

Not insignificantly, the absence of warfare on a global scale has allowed an unprecedented level of international economic cooperation and has not resulted in the wasteful destruction of capacity that was seen in the first half of the century. Automation, computerization, plastics, transportation, and digitization all helped to significantly expand productive capacity. Western countries counteracted growing government burdens through social changes, such as bringing women into the workforce. In the last 30 years, the latent industrialization of the emerging economies and the ultimate dissolution of communism around the world brought about the largest influx of production that the world has ever seen.

 

I would argue that these forces have been so powerful that they have largely outweighed the harm done by currency debasement. We can only imagine the global prosperity that may have resulted if the world's reserve currency had increased in value. Instead, Keynesian economists largely ignore these factors and pin the successes of the past 60 years on the back of wise monetary policy.

 

This is a dangerously selective and myopic view of history. What is closer to the truth is that the world has embarked on what will likely be a relatively short-lived experiment in trading worthless currency. Yes the post-War recessions have been mild by historical standards, but these benefits have been allowed only by the creation of a much more devastating correction that is just now beginning. Fiat money has simply allowed problems to be swept under the rug. But there is a limit to how much dirt any rug can hide.

 

There are precedents for money debasement as a sustained policy, but they have been much smaller in scale and they always end badly (French Revolutionary Assignats, Weimar Germany, present day Zimbabwe). The current experiment will go the same way. When it will end is hard to say, but end it will.

 

When the dust settles the world will once again understand that money must have a value that is not arbitrary or subject to the expansive will of central bankers. When that day comes, gold will re-emerge as the single most reliable form of money. (This is not to say that we will abandon electronic transactions in favor of the scale and the change purse. It simply means that the underlying value of the electronic pulses will be tangible.)

 

Wise investors will see this change coming. They will stock up on gold now, while the price is still deceivingly low relative to the collapsing U.S. dollar.

 

Peter Schiff

President, Euro Pacific Capital

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No hurry. This down trend is not as steep as previous ones due to investor concerns about inflation. We might have to wait some time for 650. ;)

 

What do you think will happen to the pound in the mean time? If Brown continues with his economic miracles, gold may end up more expensive in Sterling terms.

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According to my trading software, someone/ thing bought $29m of PHAU (Gold ETF) at 4 pm today.

 

That is hefty vote of confidence if correct but I'm not sure it is.

 

Can others see this trade too or is something wrong with my data?

 

I can't believe it.

 

Considering how many gold bugs there are on this site I am surprised no one has replied to this.

 

It is by far the largest trade this year in this ETF. The average largest trade is about 0.5m so this is ABNORMAL.

 

Why?

 

 

 

 

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Considering how many gold bugs there are on this site I am surprised no one has replied to this.

 

It is by far the largest trade this year in this ETF. The average largest trade is about 0.5m so this is ABNORMAL.

 

Why?

 

Very speculative; but if you wanted to manipulate the gold market, would it be preferable to buy/sell ETF's ? As at the end of the day, you are trading pieces of paper rather than the real thing. I'd happily sell IOU's if I know that in a worse case scenario I would default.

 

Are ETF's backed by leased gold? Didn't somebody mention in January that a gold ETF apparently added more gold to their fund than was available for sale?

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Considering how many gold bugs there are on this site I am surprised no one has replied to this.

 

It is by far the largest trade this year in this ETF. The average largest trade is about 0.5m so this is ABNORMAL.

 

Why?

 

Why indeed. Why not Physical.

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According to my trading software, someone/ thing bought $29m of PHAU (Gold ETF) at 4 pm today.

 

That is hefty vote of confidence if correct but I'm not sure it is.

 

Can others see this trade too or is something wrong with my data?

 

I can't believe it.

 

Can't see it - http://finance.yahoo.com/echarts?s=PHAU.L#...ource=undefined

 

Volume at 4 = 655450

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Incase it hasnt already been posted http://www.telegraph.co.uk/finance/persona...e-for-gold.html

 

 

Goldilocks and the bear case for gold

 

 

The primary risk to the gold price is a return of the "Goldilocks" economy, according to analysts at a firm of asset managers

 

A Goldilocks economy – one that is neither too hot nor too cold, sustaining moderate economic growth, low inflation and low interest rates – would "completely remove the safe-haven investment case for gold as a form of insurance against inflation or as an alternative currency", said the commodities and resources team at Investec Asset Management.

 

Real yields could once again be obtained in cash and bonds, and equities could begin discounting economic growth, the analysts added.

 

"Under the Goldilocks scenario the US Federal Reserve's balance sheet will quickly adapt once economic activity begins to improve as the Fed reduces the money supply dramatically and curbs any major inflationary cycle," Investec said.

 

"Furthermore, under this scenario all other central banks will do the same. Inflation would be averted, and economic growth could continue."

 

The bank said the current high price of gold was driven by demand from investors putting their money into the classic safe-haven asset. But it added: "Should investment flows into gold cease or turn negative, we believe that this drying up of investor demand will have repercussions for the gold price.

 

"A return of risk appetite or improvements in other asset classes could result in an unwinding of investment buying and put considerable downward pressure on the gold price, particularly if global economic and financial conditions begin to show meaningful signs of improvement."

 

Although Investec has identified factors that could push the gold price down, the bank's overall stance on the precious metal remains bullish. It said: "We continue to believe that gold can perform well in either an inflationary or deflationary environment.

 

"This supports our positive outlook for the commodity and for gold equities. Quantitative easing programmes are also supportive for gold."

 

The London afternoon gold fix was $891.00 an ounce

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London Bullion Fixings Wed Apr 29 10:36:34 BST 2009 from Goldline

 

Gold AM Fixing: GBP 605.866 USD 894.500

Platinum AM Fixing: GBP 736.600 USD 1,085.000

Palladium AM Fixing: GBP 146.650 USD 216.000

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... a ratio of 1 really did seem improbable to me not so long ago, but I don't know now :)

Come on!

 

The degree of leverage in the system has ever increased since 1913. That's the fundamentals behind it.

 

djiagoldlongtermlh3.png

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i still think 50oz

 

http://www.safehaven.com/article-13227.htm

 

The value of Gold priced in Sterling, however, remains below its eight-decade average in terms of housing. One ounce of metal now buys one-third of one per cent of the typical British pile, compared to the 1930-2009 average of 0.4%.

 

Given UK housing's habit of over-shooting both at the top and the bottom, however, returning to that extreme valuation beneath 100 ounces between 1980 and 1983 would see real-estate sellers now switching to gold today treble their investment once more before housing turns higher in terms of ounces of metal.

 

You might charge that Britain's housing stock has gained in real utility since Margaret Thatcher took power. But running water, gas and electric were supplied long before, and central heating became commonplace during the '70s. Still "the barbarous relic" squashing house prices back towards Great Depression levels, approaching - but not quite reaching - the 76-ounce level hit from 1934-1938.

 

In nominal prices, average UK home prices have risen 350 times over...going from £545 just before the Second World War to some £190,000 this month. Gold Prices, in contrast, have risen some 140-fold to stand near £610 an ounce at today's London close.

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wow - look at that, the very second i buy (well, order) gold (only 1 oz), it drops like a stone - typical.

do you think bairds will be annoyed if i just cancel the order or is that a bit cheeky?

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Yes it's cheeky, I would honour the order if you want to buy from them again. Remember it will eventually go much higher.

 

wow - look at that, the very second i buy (well, order) gold (only 1 oz), it drops like a stone - typical.

do you think bairds will be annoyed if i just cancel the order or is that a bit cheeky?

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Yes it's cheeky, I would honour the order if you want to buy from them again. Remember it will eventually go much higher.

 

 

true, its only a few pounds, and the price has stabilised again to $888 which it seems to do quite often.

i'm getting a gold noble - they look cool and its a good price on bairds.

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I was about to buy a couple of gold pandas for £660 each when the price dropped to £652. Pound was up higher at $1.49 and gold was at £597. I think i will wait for the GD Americans to spank it down this afternoon. If GM motors goes pop PGMs might go down. I still fancy some palladium. Ho hum...??? :unsure:

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There she goes.

 

I was about to buy a couple of gold pandas for £660 each when the price dropped to £652. Pound was up higher at $1.49 and gold was at £597. I think i will wait for the GD Americans to spank it down this afternoon. If GM motors goes pop PGMs might go down. I still fancy some palladium. Ho hum...??? :unsure:

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"down down deeper on down" - This is from "12 Gold Bars" by SQ isn't it? Quite apt.

 

Really who knows, these aren't fair market conditions. I've just done my bit and bought some more through BV and I'll bag a panda this afternoon depending what the chart does...

 

down down deeper on down.....What you think, lower?

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"down down deeper on down" - This is from "12 Gold Bars" by SQ isn't it? Quite apt.

 

Really who knows, these aren't fair market conditions. I've just done my bit and bought some more through BV and I'll bag a panda this afternoon depending what the chart does...

 

It was released on the album "On the level" in 1975. It may have been on 12 gold bars too!

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