PM End of Week Market Commentary - 4/18/2014

davefairtex
By davefairtex on Sat, Apr 19, 2014 - 11:35pm

This week gold was off -23.80 [-1.81%] silver down -0.31 [-1.51%] GDX -2.68% and GDXJ -5.15%.  On Tuesday gold sold off quite hard.  To me this was not entirely unexpected, since gold had been rallying on declining volume, which is generally not a bullish sign - this sort of "rising on low volume" (i.e. tepid buying interest) just encourages the shorts to eventually jump in, just like they did.  Now gold is below all 3 of its moving averages, and seems to be on the path of re-testing 1280 support.

US Equities/SPX

After last week's unpleasantness for equities, SPX rallied for four straight days, completely erasing most of last week's move down.  If SPX can move above its (lower) high of 1872, it stands a good chance of making yet another new all time high.

That said, the former market leaders have not shown much of a recovery - IBB (biotech index) has barely moved up, and stocks like Facebook and Linkedin have had difficulty as well.  These are just indicators of a "risk off" situation in the overall equity market.  Compare their charts with the chart of XLU - the utility company index, which is the antithesis of a dotcom momentum stock.  When XLU is rising and the tech darlings are dropping, its a sign that traders are becoming substantially more cautious.

Miners

Mining shares had a bad week, with GDXJ leading the parade lower by making two new cycle lows and severely underperforming GDX.  This is a clear "risk-off" signal for PM.

GDX did better, remaining just above support, but if it breaks below 23.50, most likely we will see some heavy selling in the senior miners.

The USD

The buck managed to rally all four days this week, but the rally was quite modest and reclaimed less than half of last week's decline.  The buck looks ill and would seem to be on its way to testing 79 support.  It is more of a case of three steps down and two steps up though; it appears to be in no hurry to get there.

Of course that picture could change if the ECB actually starts printing money, but in looking at the macro charts for the Eurozone, all we can see right now is credit deflation and a declining ECB balance sheet.

Rates & Commodities

TLT was down this week, closing off -0.61% all because of Thursday's price action, where bonds were down a big -1.10%.   While the TLT chart still is quite bullish, TLT may have made a swing high on Thursday, which might signal something positive for equities: cash flowing from bonds needs to go somewhere.

Commodities moved a bit higher, up +0.51% and are right at a breakout point.  A commodity breakout should be positive for PM.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract were basically unchanged, down -0.08 to +8.84 above COMEX.  Delivery volumes of gold at Shanghai dropped further, and are now down to about 20k contracts per day, which is the lowest they have been since Nov 2013.

* The GLD ETF dropped -9.28 tons this week to 795.14 tons.

* Registered gold at COMEX remains at 25 tons of gold.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1294.90 and silver 19.60:

    PHYS 10.74 -0.41% to NAV [flat]
    PSLV 7.76 +1.69% to NAV [up]
    CEF 13.79 -5.94% to NAV [up]
    GTU 45.00 -6.12% to NAV [down]

ETF premiums are mixed, mostly up, but only modestly.

Futures Positioning

The COT report is as of April 15th.  Managed Money bailed out of longs and increased shorts in equal proportion, with a net change of -8.5k contracts.  Producers did the reverse, covering shorts and increasing longs, net change +9.3k contracts.  Producers are now moving back towards a net long position again, which is a rare place for them to be.  The most interesting component, the producer shorts, are now at the lowest level since 2007 - which is as far back as this timeseries goes.  That's not a guarantee of something good happening, but its an indication we're much closer to a low than a high, since producer short side interest tends to be lowest at the troughs in the gold price.

In other words, these guys are good at picking the bottoms, and they look like they are indicating we're at or near one right about now.

This is probably the most bullish thing I have seen about the PM complex this week.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term UP, long term UP.

Silver: short term DOWN, medium term NEUTRAL, long term NEUTRAL

The moving averages are at inflection points right now, so it is easy for price changes to move them around. I'm not sure I would take the changes too seriously right now, until a trend starts to develop in one direction or another.

Summary

Gold sold off this week after several weeks of a low volume rally.  Silver sold off too, but looked worse, making a new low.  GDXJ broke lower as well.

Looking at the various ratios and averages, gold's 20 EMA is now pointing down after gold's big hit on Tuesday.  The GDX:$GOLD continues moving lower and is bearish, and so is GDXJ:GDX.  The gold/silver ratio is also bearish, having made a new cycle high earlier this week.  While the moving averages generally are neutral to positive, the ratio charts are all saying "risk off" in PM.

Producers have reduced their short positions to an all time low, which is usually a sign that we're relatively near to a low point.  This is a bullish signal, but its not as good of a timing indicator the way the ratio charts can be.

Shanghai premiums are positive and largely unchanged, gold delivery volume continues to shrink, and GLD tonnage dropped.  It looks like physical premiums are generally positive, but the demand picture in Shanghai is weaker than normal given the low delivery volumes.

The bearish ratio charts turned out to be the decisive indicator last week, and the miners are definitely leading gold lower, especially the junior mining shares.  Hopefully they'll also tell us when gold makes a bottom, so we can get in on the trade when it appears.  Given the positioning of the producer shorts at COMEX, that shouldn't be too far away, but you never know how long these things take to play out.

 

52 Comments

KennethPollinger's picture
KennethPollinger
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Indications and Allocations

 

 

 
A Wonderful (full of wonder) Easter to all.
 
 
In Death of Money, Jim Rickards, in the Conclusion of his book, after discussing three paths that the dollar will most likely take, (SDR=world money; some type of gold standard; social disorder) summarizes 7 mileposts, "indications and warnings," that we should be aware of in order to preserve WHATEVER wealth we have.
 
SEVEN SIGNS: (Indications and Warnings)
 
1. The price of gold. A rapid price rise/fall watch
 
2. Central Banks continue to acquire gold, especially China
 
3. IMF governance reforms.  Issuing SDR-denominated bonds
 
4. Regulatory reform failure.  Bank lobbyist's defeat the needed reforms.
 
5. System crashes.  Flash crashes, closure of market exchanges, etc.
 
6. End of QE and Abenomics.  Sustained reduction in US or Japanese asset purchases.
 
7. A Chinese collapse.  Financial disintegration by the wealth-management-product
       Ponzi scheme.
 
Page 298: " Not all of these seven signs may come to pass. The appearance of some signs may negate or delay others. They will not come in any particular order.
When any one sign does appear, investors should be alert to the specific consequences described (in the book) and the investment implications."
 
 
FIVE INVESTMENTS
 
% of INVESTABLE assets:
 
1, Gold. (20 %)  Whether inflation or deflation, gold preserves wealth.
 
2. Land. (20%)  Undeveloped land in prime locations or land with agricultural potential.
   
3. Fine art. (10%). Find pooled investment vehicles offering superb returns..
 
4. Alternative funds. (20%) Hedge funds and private equity funds, with specific strategies;  long-short equity, global macro, and hard assets with targeted natural resources, precious metals, water, or energy and transportation.
       Manager selection is critical and is much easier said than done..  The benefits
       of diversification and talented management outweigh the lack of liquidity.
 
5. Cash (30%).  Reduces overall portfolio volatility. An excellent deflation hedge and embedded optionality.  The challenge is being attentive to the indications and warnings and making a timely transition to one of the alternatives mentioned above.  Constant attention to the 7 signs above and a certain flexibility in outlook are required.
 
 
Easter comments by Ken.
 
 I presume that the EEE community is made up of people with a fair amount of assets.
All of Rickards suggestions are valuable to those of us fortunate enough to have saved some money for such diversification.  HOWEVER, how about half or more of the population who have hardly one year's retirement income?
Or who cannot find work or make even a "living wage," not to mention the meager minimum dollar amount
for many businesses? What can we say to them?  Buy a few silver coins?  Are these people doomed to suffer even
greater challenges, without even thinking of all the folks in the third world countries.  "The poor ye shall always have with you."  Have they had the time to read or hear The Crash Course? or, purchase and read The Death of Money? Probably not, and even if they did, what can they DO about it?
 
The best I can think of this Easter is to keep all these folks in our daily and especially Easter prayers, for spiritual fortitude in the next 2-3 years.
 
 
 
 
 
profile_mask2.png

Ken Pollinger <[email protected]>

9:51 PM (7 hours ago)
 
to LevDennisJoseph
 
 
 
 
Obviously #s 1,2 and 5 are fairly easy to grasp.  However, 3 and 4 present many problems
 
.For example, how does one "find" the pooled investment vehicles and what is the minimum entry cost?  And how know which are the best in terms of safety and returns?
 
And re: Hedge funds and private equity funds??  There are thousands upon thousands, or hundreds upon hundreds in specific areas.  How discover the better ones, with the right management?  Financials are frequently misused, etc.
And if the market totally collapses or there is a 50% downturn, then can one get out in time?
 
Interestingly, Mish and Chris state, I believe, that they are into precious metals BIG TIME, not just 10-20% of investable assets, quite contrary to Rickards. I think I've heard them say 80-100%???  Not sure of this.
 
So what are the "indications or warnings" that Chris, Mish and others want?  Additions to Rickard's list?
 
Again, I cannot recommend Rickards book enough.  It will "blow your mind apart."  I'm actually surprised it was
allowed to be printed.  I'm sure it will be translated into the major Chinese language very quickly.
 
Any comments on all this??   What to do? THAT is the question?
 
Hope this is helpful somehow.   Ken

 

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Hrunner
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MFA at work

Let's recap Dave's summary:

Fed continues money printing unabated (fugedabout "taper", Fed is reinvesting proceeds into asset purchases at sustained high levels- look at the Fed balance sheet, not what Yellen's yellin')

Incredible instability in the Ukraine, bringing a multi-national armed conflict into ever higher probability,

All other central banks furiously printing to keep up with each other via ZIRP or near ZIRP, mysterious bond buying from Belgium, Chinese central govt bailouts.

Indian government near ready to relax gold embargo and release the floodgates for Indian demand.

Gold crosses key technical level of 1320, which should at least get the robot chart traders hot and bothered.

High energy i.e. mining costs continuing unabated, even rising on fundamentals and global instability fears.

And........

Gold gets smashed to 1280.

Stock market tries to correct multiple times, on obvious weak fundamentals, and mysteriously recovers.

Dollar tries to correct multiple times to rational levels (do I need to reprint the St. Louis Fed money supply and velocity charts yet again?) in at least the low 70's (and lower), and mysteriously recovers.

Mysterious Force Alliance (MFA) at work again it seems.  All is well.  Please continue to buy JPM and Walmart.  And stay away from that nasty, barbaric gold.

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Hrunner
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Kenneth, Helpful and Not

KP,

Thanks for the teaser from Rickard's book, and it definitely gives some food for thought.  But it also highlights the frustration that some authors leave me with, in that many recommendations are vague, non-specific and not easily actionable.  Believe, I deeply respect Rickard's intelligence and experience. 

To wit, my thoughts on the list, and would be interested to hear yours and others:

SEVEN SIGNS: (Indications and Warnings)
 
1. The price of gold. A rapid price rise/fall watch
Gold seems to waterfall and rise a few times each week.  And has been for a couple of years.  The Globex 2,000 contracts dumps are well documented.  Yes, there are also rapid rises as well.  What is the definition of "rapid"?
 
2. Central Banks continue to acquire gold, especially China
Central banks have been acquiring gold for years, especially China.  As Rickards points out, Russia up 70%, China up multiple 100's percent.
 
3. IMF governance reforms. Issuing SDR-denominated bonds
I don't follow IMF closely.  But I assume they often issue updates on governance, perhaps some minor, others major?  So when can we say is the inflection point?   I suppose the SDR-denominated bond is a landmark.
 
4. Regulatory reform failure. Bank lobbyist's defeat the needed reforms.
 This has been going on for 100 years.  What specific difference should we look for?
 
5. System crashes. Flash crashes, closure of market exchanges, etc.
We seem to get NASDAQ, and even NYSE flash crashes with some regularity.  Again, I ask, what specific metric?
 
6. End of QE and Abenomics. Sustained reduction in US or Japanese asset purchases.
Hasn't happened and ain't going to happen.  This is one of my biggest disagreements with Rickards.  I don't think he appreciates the commitment the Fed and government PTB to status quo at all costs.  His point about confidence is well taken, but surely he understands the Fed will do "whatever it takes" to print their way to prosperity and maintain the status quo, the control and power of the current PTB players. 
 
We now know they effectively printed trillions of USD during the last financial crisis to provide liquidity to the EU, however, no one knew about until many months after the fact and only because Bloomberg News relentless pursued them for many months.  Do you not think they will repeat this playbook, behind the curtain, with better subterfuge?
 
Money printing will not stop until catastrophe hits the planet.  Political revolution with strong charismatic leaders, global war, natural disaster, disease pandemic.  These are the only forces that will change the monetary regime. 
 
And I'm not betting on political reform at this point.  We, the citizens of the Earth, already know all we need to know to theoretically motivate big reforms, and we are doing nothing.
They are doing the same old thing, with higher amplitude and higher propaganda levels, and higher capture of the media.
 
7. A Chinese collapse. Financial disintegration by the wealth-management-product
Ponzi scheme.
 See above Number 6.  China central bank and government has an even tighter grip on their domestic banks and media than the U.S. Fed (hard to imagine if that is possible, but at least the U.S. has an alternative media such as PP.  For yet a little while, until the Neo-fascist tool kit called "hate speech" and "domestic terrorist" laws are enacted). 
 
Recognizable "Chinese collapse" ain't going to happen.  Sure there will be individual bank failures, which will be promptly rescued by the Chinese government via money printing and bank takeovers.
 
What stops Chinese government and central bank is mass riots, mass strikes, mass protests, mass disease and death, mass starvation.
 
I think the fundamental disagreement I have with Rickards,, and I'm not even sure it is a disagreement so much as it is a call for clarity, is the notion that we will have a kind of 'repetitive scenario' of calm cycle of monetary collapse ("monetary collapse has happened with regularity every 40 years").  The tone I get is one of "ho, hum, just another monetary collapse, the 'rules of the game' will just be changed by the PTB and we will just embark on a peaceful journey down growth river with some mild adjustments.
 
I was a bit disappointed that Chris did not challenge this Rickards notion more, since to my understanding, the theme of PP is that the next 20 years will not look anything like the previous 20 years does not translate to slight adjustments in the monetary system.
 
Now I appreciate you can charge me with putting words in Chris' and Rickard's mouth, I'm just telling you what messages I am getting, and would appreciate some clarity if these are not the messages.
 
The message I get from Rickards (and I have listened to multiple of his interviews because I appreciate his articulate and careful words) are that SDRs are just a ho-hum outcome of a monetary collapse that will be embraced by all, with some ho-hum adjustments by U.S. citizens now using 'just another currency'.  Which Rickards has said in other venues means very high inflation. 
 
I don't think this will go down that smoothly at all.  For two fundamental reasons.
1.  We live in a new world where no single entity (CBS, NBC, Pravda) controls information.  The internet changed all that.  Word gets out.  Monica Lewinsky ignited an impeachment of a sitting U.S. president based on a report from a website by a guy named "Drudge".  Yes, half the U.S. may be walking robots/ useful idiots that think Obama is just a great guy trying to help the "folks", and that all our ills are caused by rascist white men that hate blacks, Mexicans and women.  And that if all the hard working 'folks' just hand over their cash to the great, benevolent government to redistribute, all will be sugar and lollipops. 
 
But I guarantee that the other 150 million know what is bullsh#t and what is not.  And they know a lazy-ass thief from a decent human.  So I don't they are going to peacefully accept a transition of control over U.S. money from one reckless and immoral tiny group of humans to another reckless and immoral tiny group of humans.  And believe or not, I don't think Americans have a monopoly on outrage and a sense of fairness, so I think the same dynamic will play out globally.
 
What I see coming is a more state-centric U.S.  The Bundy incident is just a sign of this.  The rising anger and impatience and desire for substantive reform is palpable, at least to me.  This could mean Utah and Georgia saying 'go ahead New York and California, go your own way with your EPA gestapo and police state, your gun confiscation and garden and raw milk out-lawing, that ain't working for us so much any more'.  We have seen that future and it looks like Detroit.'  That same dynamic could play out throughout the world, Eastern and Western Ukraine, city-states in Argentina.  I'd be interested to know what economies look like in that future.
 
2.  As I mentioned above, and Rickards even says himself, I thought a major theme was "you can't print your way to prosperity" and "you can't solve structural problems with cyclical solutions"
 
Distilled down, SDRs are simply another form of money printing.  Is that not a cyclical solution?  What is fundamentally different about money printing USD, Euros, Yuan and funneling them to banks and irresponsible, overspending governments versus printing SDRs and funneling them to banks and irresponsible, overspending governments?
 
If our true problems are financialization, market and monetary distortions, failure to live in balance with our environment, and coming to a structural end of cheap and dense energy, please tell me how printing SDRs instead of USD is going to provide stability and prosperity?
 
I think Rickards is trying to predict the next 3 years, which, again I appreciate and respect.  I don't know about y'all, but I'm planning on sticking around for 20 or more years.   And trying to prepare for that, and for my children's next 70 years.
 
Blessed Easter to all.
H
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Jim H
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negative GOFO

We don't hear about the GOFO rate from Dave because he deems it meaningless, and that is his prerogative.. but other commentators, including Dave Kranzler, think it is a relevant signaling mechanism for tightness in the physical Gold market.  It must be remembered that when our Dave talks about entities buying and selling.. this is happening in the paper futures market.  The underlying physical market dynamics are much more opaque, which is why insights into Chinese physical demand, as documented by the likes of Alasdair Macleod and Koos Jansen are so valuable.  In any event, here is what Dave Kranzler said recently about the GOFO rate, which I believe to be a meaningful indicator of real time availability of large format London good delivery Gold bars;

  http://seekingalpha.com/article/2147083-the-factors-that-will-drive-gold...

 

The first indicator is the fact that the LBMA GOFO (Gold Forward Rate) has gone negative since April 3. Not only is it negative, but the degree of negativity is increasing. The GOFO rate measures the interest rate on a gold/U.S. dollar swap transaction. When this rate is negative, it means that holders of U.S. dollars are willing pay interest in order to borrow gold, using dollars as collateral. I discussed the GOFO rate in detail last July.

When the GOFO rate goes negative, it's an indication of a shortage in the availability of physical gold that can be used for delivery into buyers who want to take possession of the bars (as opposed to leaving them in a custodial vault). In other words, its an indication that there is a short-term shortage of supply vs. demand. It's rare when the GOFO is negative (see the graph in my linked article). But a negative GOFO rate correlates highly with rallies in the price of gold (graph sourced from the TF Metals Report):

To me, GOFO is one of the spots where the truth peaks out of the system.  Very much like the (non)taper truth peaks out in the TIC data for Belgium (Belgium is magically making up for much of the tapered FED buying), GOFO is the place where the system works against the manipulators... they can't get the Gold for delivery, to satisfy the demand that the extreme price suppression has created, without effectively advertising a yield on Gold above and beyond the yield for cash.  The yield is necessary to induce holders of Gold, like Western and European central banks, to lease yet more Gold.   

       

 

 

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earthwise
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Bravo!

Very thoughtful post, Hrunner.   I, like you, give great weight to what Rickards has to say, but the points you make regarding the shortcomings of what he posits are spot on. It just goes to show that nobody, no matter how knowledgeable and insightful, knows what exactly is coming. Bummer.

I also concur with the rest of your assessment FWIW. Things will not proceed smoothly. There's no way to unwind decades of irresponsibility that exemplifies modern societies from top to bottom without a downward slope accompanied by some jolts along the way.

Hunker down and buckle up.

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gold smashes

As smashes go, the move down to 1280 didn't seem all that traumatic.  Its the buying before the smash that was anemic.  Any chart reader could have seen that - indeed, I saw it and I'm no great genius.  [To me, its like blaming the 1929 crash on mysterious forces - rather than placing the blame on the bubble that preceded it.  We are often looking in the wrong place when we decide to place blame.]

Definitely the bad things take place during London hours.  And it definitely did happen again last Tuesday.  And it for sure was organized.  But - if organized smashes require "help" from mainstream media propaganda, it suggests a lack of power on the part of the organizers rather than omnipotence.

Here's my thought on the whole "gold isn't behaving how Hrunner thinks it should be" line of thinking:

Most markets behave like this.  They don't behave the way we think they should.  Check your history.  They never have.  If they did, we'd all be freaking rich, because trading would be the simplest thing imaginable.  And mathematically, that can't work out.

Now then, if there is official manipulation happening at the margins in the equity market, it won't be able to stem the tide once the trend decides to change.  The market is much stronger than official buying once it really decides to go someplace.  And likely it will go there in a big hurry.

Again, my opinion.

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nzagorov
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Correct - in one of the

Correct - in one of the interviews Chris did some time ago he told his cash is 75% and over in gold/silver.

Even more - the ration of silver/gold in his portfolio is 10/1 - as he mentions silver would be the investment in this decade.

I am also interested in investing in hedge funds, but I do not know how to pick the right one.

Is there anyone who can provide some info on this?

Thanks

Niki

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Physics and Markets, not Hrunner

Dave,

Gold isn't behaving according to the Laws of Energetics, Laws of Thermodynamics, 30,000 years of economic supply and demand laws, innate instincts and patterns of human behavior and laws of efficient market operations.

Hrunner's opinion has nothing to do with it.  Hrunner is an observer and commentator.  Hrunner is merely pointing out the divergence between the above laws and the posted nominal price of gold. 

I think you and I would agree we can defy the above laws of physics and economics for a time.

It is possible to live well for a year eating your seed corn.  And the DF crowd would perhaps say "see, there is nothing wrong, look at all the food we have.  Markets are normal.  Concern to the contrary is paranoia and conspiracy".  But unfortunately for the folks with this outlook, winter comes, and then spring comes and then you have no seed corn, then you starve.

You may think it is unreasonable or impossible for the government to manipulate markets.  You may not have read about the following entities:

The Working Group on Financial Markets

Definition of 'Plunge Protection Team - PPT'

 A colloquial name given to the Working Group on Financial Markets. The Plunge Protection Team was created to make financial and economic recommendations to various sectors of the economy in times of economic turbulence. The team consists of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission.

Investopedia explains 'Plunge Protection Team - PPT'

 "Plunge Protection Team" was the nickname given to the Working Group by The Washington Post in 1997. The team was initially perceived by some to have been created solely to shore up the markets or even manipulate them. The team was created in response to the 1987 market crash.

http://www.investopedia.com/terms/p/plunge-protection-team.asp

Claims about the Working Group, which are labeled conspiracy theories by some writers, generally include that it is an orchestrated mechanism that attempts to manipulate U.S. stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures—acts which are forbidden by law. In August 2005, Sprott Asset Management released a report that argued that there is little doubt that the PPT intervened to protect the stock market.[11] However, these articles usually refer to the Working Group using moral suasion to attempt to convince banks to buy stock index futures.[12]

 

Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, opined that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." His statement has been used to claim that the Fed actually did act in that way. Some mainstream analysts call those claims a conspiracy theory, explaining that such claims are simplistic and unworkable.[13] Author Kevin Phillips wrote in his 2008 book Bad Money that while he had no interest "in becoming a conspiracy investigator," he nevertheless drew the conclusion that "some kind of high-level decision seems to have been reached in Washington to loosely institutionalize a rescue mechanism for the stock market akin to that pursued...to safeguard major U.S. banks from exposure to domestic and foreign loan and currency crises."[14] Phillips infers that the simplest way for the Working Group to intervene in market plunges would be through buying stock market index futures contracts, either in cooperation with major banks or through trading desks at the U.S. Treasury or Federal Reserve.[15]

The Exchange Stabilization Fund

The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply.

As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in special drawing rights (SDR) from the International Monetary Fund.[1]

The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve Act of January 31, 1934. 31 U.S.C. § 5117. It was intended as a response to Britain's Exchange Equalisation Account.[2] The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce from $20.67. The act authorized the ESF to use its capital to deal in gold and foreign exchange to stabilize the exchange value of the dollar. The ESF as originally designed was part of the executive branch not subject to legislative oversight.

The Gold Reserve Act authorized the ESF to use such assets as were not needed for exchange market stabilization to deal in government securities. The Fund had no statutory authority, however, to engage in other activities that it began to undertake.[citation needed] The principal such extraneous activity it devoted itself to was lending dollars to politically favored governments.

A change in the law, in 1970, allows the Secretary of the Treasury, with the approval of the President, to use money in the ESF to "deal in gold, foreign exchange, and other instruments of credit and securities."[5]

 

The U.S. government used the fund to provide $20 billion in currency swaps and loan guarantees to Mexico following the 1994 economic crisis in Mexico. This was somewhat controversial at the time, because President Clinton had tried and failed to pass the Mexican Stabilization Act through Congress. Use of the ESF circumvented the need for approval of the legislative branch. In response, Congress passed and President Clinton signed the Mexican Debt Disclosure Act of 1995, which implicitly accepted the use of the ESF, but required reports to Congress every six months on the status of the loans.[6] At the end of the crisis, the U.S. made a $500 million profit on the loans.[7]

 

On September 19, 2008, U.S. Treasury Department announced that up to $50 billion in the ESF would temporarily be made available to guarantee deposits in certain money market funds.[8]

http://en.wikipedia.org/wiki/Exchange_Stabilization_Fund

Dave, manipulation of gold price by the government is official policy, not Hrunner theory.

I refer you to a detailed treatise, Gold Wars, by Ferdinand Lips, that is highly foot-noted and documented, covering the price suppression in $35 gold days by the London Gold Pool (which failed eventually due to - you guessed it- Laws of Physics, Laws of Supply and Demand).  The fabrication, I mean "creation" of the Comex and private U.S. gold ownship in 1974, 1975.  And the official statements of U.S. Fed and government officials about the need to control price and discourage gold competion with fiat currency.

http://www.fame.org/pdf/Gold%20Wars%200-9710380-0-7%20%20-%2001.21.02.pdf

As far as laws of human nature, do you not understand that the trajectory of humans in position of power, is to push the limits of the tools available until they reach a brick wall or a countervailing force?  Do we need to go over the immediate history of the U.S. IRS bullying of the Tea Party, the now completely political and activist Department of Justice, the NSA spying program collecting every phone call and email without a warrant, and the accelerated use of drones to kill 'enemies of the state'?

And yet, the same benevolent and fair-minded government will step away and not intervene in the stock market, the gold market, the silver market, the bond market?  Do you think a rapid rise in gold price and a parallel drop in the stock market and bond markets would have any political repercussions?

Do you think the politicians in power use the levers of government for political reasons?

There are forces in the market, it's simply that many of them are not market forces.

Market forces, indeed.

H

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Jim H
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Well said HRunner

A perfect metaphor;

It is possible to live well for a year eating your seed corn.

But isn't this the story of everything these days?  In the US, we have been eating our seed corn for 30 years.. using up the privilege of reserve currency status, replacing markets that were reasonably free with manipulated markets, using up the vast reserves of ignorance and blind trust within the US about what money is and how it works... all the while propagandizing against the evils of deflation;

  http://www.zerohedge.com/news/2014-04-19/everything-we-are-told-about-de...

The conventional view of deflation is that if it sets in, “the banking industry, the financial markets, and much of the rest of the economy will be wiped out in a bottomless deflationary spiral.” But as Hülsmann goes on to argue, such a spiral would not prove fatal to the lives and welfare of the general population. Rather, it would destroy “essentially those companies and industries that live a parasitical existence at the expense of the rest of the economy, and which owe their existence to our present money system.”

Let us be more explicit. Severe deflation threatens at an existential level bankrupt banks and the bankrupt governments that perpetuate their existence. Deflation is a mortal enemy to the heavily indebted state and its embedded parasites, but it is a friend to the saver and to anyone with a positive net worth. Because it is so dangerous to the debtor, (unelected) central bankers clearly feel they have no option but to incinerate savers at the altar of perpetuating an unsustainably indebted banking and political elite.

 But we can see behind the curtain now... it's easy if you look and open your mind.  The seed corn analogy is perfect;

http://www.zerohedge.com/news/2014-04-21/what-do-janet-yellen-uri-geller-and-jesus-have-common

When Credit Turns Bad …

In a better world, credit depends on savings… which represent real resources. This restrains credit growth, because there are only so many real resources… and only so much savings representing them. But in the world created by the Fed, credit has no savings behind it. It is just notations in the banking system… with no effective limit on the quantity of credit available.

That is how $33 trillion came to exist. It pretended to be real savings… representing real resources… which were then put to work to make the autos and houses that people wanted, but couldn’t afford.

In other words, the system created new claims on resources… which drew resources into the real economy. Neither past earnings (savings), nor current earnings (output) supported this economic expansion. Instead, it was all a claim on future earnings.

This is all a way of saying the obvious: If future output cannot keep up with this $33 trillion of excess debt, this debt must go bad. That is, of course, the problem. The economy limps along… even with $1 trillion of extra QE money per year. It depends on more credit and more debt just to stay in the same place.

Every year, more resources must be drawn from the future and enjoyed in the present. Every year, the claims on future earnings increase… and every year the debt becomes even more unsupportable. Somehow. Someday. Those claims on the future will be marked down.

There is only one way out.  The bankers know this, and they are no longer shy to even speak of it openly;

http://davidstockmanscontracorner.com/rudolf-havenstein-draghi-speaks-de...

“…(growth is constrained by) a debt level, which, both for the private and public sectors, is still elevated. And with low inflation, the real value of this debt does not go down as fast as it would if inflation were higher, so it makes the adjustment of the debtors, the deleveraging, more difficult.”

Historically, such primitive inflationism was the province of cranks and demagogues. From the pages of American economic history the likes of William Jennings Bryan, Father Coughlin and Huey Long come to mind.

But now such tommyrot is spoken out loud by the head of the ECB and self-evidently embraced by the Fed, the BOE, the BOJ and most of the other major central banks. This would be dangerous enough in the world of 25 years ago where central bankers had enormous sway, but had not yet extinguished all semblance of independence and honest price discovery in financial markets. After all, the “bond vigilante’s” of the early 1990s were not exactly compliasant tools of central bank policy.

But in a world where money markets and capital markets have become totally drugged, house-trained and subordinated to central bank policy the official embrace of such rank inflationism is down right alarming. To my knowledge, such incendiary words have not been uttered aloud by any important central banker in modern times.

 

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ah negative GOFO

I've tried to actually correlate negative GOFO to something.  So far, no luck.

Not as true with premiums in Shanghai.  They seem to correlate pretty well.

So yeah, I tend to follow stuff that is more predictive of outcomes.  Assertions by people that "this indicator is really important" I just don't find compelling.

My thought is, if physical demand is not being met, you'll see it reflected in premiums.

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laws of physics

Gold isn't behaving according to the Laws of Energetics, Laws of Thermodynamics, 30,000 years of economic supply and demand laws, innate instincts and patterns of human behavior and laws of efficient market operations.

Hrunner's opinion has nothing to do with it.  Hrunner is an observer and commentator.  Hrunner is merely pointing out the divergence between the above laws and the posted nominal price of gold.

Taleb wrote about people who expect markets to follow laws of physics and the laws of efficient market operations.  He called them "Dr John".

Markets are us: primarily emotional, subject to fear and greed, and driven by the whims of people at any given moment.  Those that expect markets to reduce to a physics equation are doomed to fail in analyzing market behavior.

Gold is a particularly funny thing.  As we know, above-ground supply is massive, and gold is not consumed, so mine supply is not the strong driver it is for commodities that are used up.  Again, I go back to premiums.  If we see premiums start to explode, then we will know there is a real shortage of gold.

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manipulated markets

Dave said,

Again, I go back to premiums.  If we see premiums start to explode, then we will know there is a real shortage of gold.

I just don't agree.. premiums, like anything else, can and will be manipulated, especially in China.  All indications are that China does not want to upset the cheap Gold apple cart.. at least not yet.. why would they let premiums signal if not to their benefit?

http://www.zerohedge.com/news/2014-04-21/china-goes-dark-pboc-keep-goldb...

So now that everyone is breathing down the PBOC's neck to finally reveal - with a five year delay - just how much gold it does hold, the Chinese central bank has done a U-turn on its indirect transparency and, as Reuters reports, has begun allowing gold imports through its capital Beijing, sources familiar with the matter said, "in a move that would help keep purchases by the world's top bullion buyer discreet at a time when it might be boosting official reserves."

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the "everything can be manipulated" argument

I just don't agree.. premiums, like anything else, can and will be manipulated, especially in China.  All indications are that China does not want to upset the cheap Gold apple cart.. at least not yet.. why would they let premiums signal if not to their benefit?

"Everything can be manipulated."

This is an argument I hear often, in defense of the various "proof by vigorous and repeated assertion" claims by some of the mainstream goldbugs.  Down the rabbit hole we go, with lots of emphatic, dead-certain-they-are-right statements, and very little in the way of actual evidence.  Why no evidence?  Well, "they" are so powerful, "they" make all the evidence simply disappear, neatly circular logic that requires you to take the claim itself on faith.  Anything that goes against the faith is clearly manipulation.  With such a construct, it is impossible to provide any evidence that could ever disprove the thesis.

"I know cold fusion to be impossible.  Therefore, any evidence to the contrary must be manufactured."

Now then, does China manipulate premiums?  That's a new claim I haven't heard.  "Oh we can't rely on evidence, all that evidence can be manipulated."  Of course when the evidence proves what the mainstream goldbugs WANT it to prove, then of course that's rock solid stuff, take-it-to-the-bank guaranteed truth not open to challenge.

Amusingly in this case, its the same metric.  Its just not valid anymore because its not saying what the mainstream goldbugs want it to say.  That's a game I learned as a child: "heads I win, tails you lose."  It requires you to have no memory of the past.  "But wait, just last week you liked using premiums as an indicator."  Ah, but that's before it started being manipulated.  How silly of me.  Heads you win, tails I lose.

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That's exactly it Dave

You choose to use premiums as your meaningful metric.. but you have your own no proof construct by which you disregard the negative GOFO.  It's no different than me saying that the China premium is BS.  You say GOFO is BS... and that is your right.  You have no proof that it is.  Craig of TF metals has a pretty neat chart that shows a strong correlation between negative GOFO and Gold's tendency to go up;

 

http://www.tfmetalsreport.com/sites/default/files/users/u2/4-14gofo_2.png

I don't really know if the China premium is manipulated or not.. I am suggesting that it could be manipulated by China if they wanted and if it served their interest, since it is a control economy.  I gave a link to an article that suggests China does want to maintain some opacity in terms of their internal Gold market.        

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More on negative GOFO

Again, negative GOFO is a signal we don't talk about here because Dave denies it's relevance.  I think it is a real signal, and so do many commentators much smarter than I, like James Turk.  

 

link:  http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/4/21_Gold_Market_Now_Seeing_Deepest_Backwardation_In_8_Months!.html

Of course backwardation has been happening for months now, but not because gold stopped being money.  A gold backwardation for one or two days as occurred at the lows in gold in 1999 and 2008 is exceptional.  But the prolonged backwardation that we have seen for several months now is irrational, which is why I have chosen “The Money Bubble” as the title of my new book. 

Mainstream thinking about money today is no different than the misguided mainstream thinking and erroneous conventional wisdom that prevailed during the dot-com bubble and every other bubble.  In other words, reality has not changed, and months of backwardation is not a “new normal.”  Rather, central bankers worst nightmare has arrived.  The strong hands who own physical gold do indeed choose to own physical precious metal rather than profit from the arbitrage.

These strong hands cannot be sufficiently enticed by the profit of the arbitrage to sell their metal and hold a national currency along with some promise for future delivery.  So it seems we are getting close to the moment when the central planners can no longer keep gold at these low prices.

But the important question remains unanswered:  How much longer can the central planners hold out before gold zooms higher?  Unfortunately, no one knows.  And central planners can do irrational things.

For example, the US government dishoarded 10,000 tons of gold from Ft Knox in the 1960’s in a vain attempt to keep gold at what was then an outrageously undervalued price of $35 per ounce.  But the US does not have a monopoly on silly decisions.  The Soviets sold off two-thirds of their gold reserve in 1990 in an attempt to keep their centrally planned economy from imploding.  But as we all know, it imploded anyway.

So the bottom line is that we have to look beyond the stupid actions of central planners, and focus on value.  Clearly, both gold and silver remain undervalued, and months of backwardation shows that central planners are fighting a losing war that is ready to blow up at any time.”
 

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I sent some of our discussion

to Rickards so that he might respond, if he wishes.  We'll see.  I'll bet he does.   Ken

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negative GOFO: how much do you believe?

Jim-

You choose to use premiums as your meaningful metric.. but you have your own no proof construct by which you disregard the negative GOFO.

Wait, you didn't actually ask me to try and prove a negative, did you?

Your chart about positive and negative GOFO - if there's a pony in that pile of manure, its a pretty small one.  But here, here's that GOFO chart alongside gold for 2013.  I suppose if you are really looking for a correlation (a la the Texas Sharpshooter) you might find one, but as a trade predictor - if its there, I don't see it.  Compared to the mysterious london forces which are clear money makers, this one would seem to be a bit of a dud.

Let me rephrase in a way that might have more impact:

Do you personally trust this indicator of yours enough to go long COMEX gold every time GOFO goes negative?  And what's your sell point?  Basically, tell me your algorithm for using this magical negative GOFO value.

And if you don't trust it enough to trade on - why not?  From your enthusiasm, it would seem like free money if the correlation is that strong.  Free money would seem to be a pretty useful thing.  Even if they are fiat dollars that goldbugs treat with such utter disdain.  :-)

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Physics and Emotion

Dave,

I agree with you and perhaps Taleb, but only in part, in that markets are partially governed by emotion.  Admittedly it took me a long time to fully appreciate that economics and markets don't function like true science like physics and chemistry that follows natural laws that care not a whit about my emotions and have inviolate laws that are objective "out there" and must be followed.   Hard science is only about discovering and describing e.g. codifying these laws that already exist, again regardless of human beliefs and emotion.

Economics is in large part about trying to explain why humans behave in the way that they do.  Usually after the fact.  And that's a problem for a "science".  A key feature of science is proving a law by constructing a prediction, or multiple predictions, that will happen if your new laws are correct.  Refer to Einstein's prediction of the sun bending light due to relativity.  Einstein called his shot.

Economics, not so much.

That's why "economics" as a "science" seems like chasing your tail at times.  But I try to look at the whole in a balanced way and realize that what economics and markets really are is an unpredictable mix of physical laws and human behavior.

Can you completely fabricate a market demand by playing on human emotions, using marketing and propaganda?  Yes.  Exhibit A- Pet Rocks.

Can you buy wheat or gold that is physically not available?  No, no matter how much propaganda, or spin, or technical charting, or government policy, or CNBC articles, or Federal Reserve statements are made.

Gold has physical properties, not emotional properties (discounting the fact that is often shiny- due to its physical properties) that has made it highly prized and useful as money for thousands of years.  And no amount of propaganda or emotion will change that.

As far as that "massive supply", by my calculations, at 170K metric tons, and 7 billion individuals on planet Earth, that equals less than 1 troy oz per person.  Please check my math and correct me if I'm wrong.

Does less than 1 oz per person sound like a "massive" supply to you?

Enjoy your Tuesday,

H

As far as this

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gold supply: massive, or miniscule?

Hrunner-

As far as that "massive supply", by my calculations, at 170K metric tons, and 7 billion individuals on planet Earth, that equals less than 1 troy oz per person.  Please check my math and correct me if I'm wrong.

Does less than 1 oz per person sound like a "massive" supply to you?

An interesting question.  So to first determine if supply is massive, we need a yardstick to measure it.  In this case, its demand.  We need to understand how many "supply-days" of gold there is out there, and measure that against other commodities to see how that compares.

So let's look first at oil.  According to the EIA, OECD combined has about 55-60 days of oil inventory on hand.  OECD has maybe 2.5 billion barrels lying around, with a consumption rate of 40 or so million barrels per day.  Any shortfall or surplus in production is therefore reflected in prices pretty quickly.

Any guess as to how many supply-days of gold we have lying around?

13,500 supply-days.

Yeah, so compared to oil, gold's supply is massive.

What's more, since it isn't mostly used in useful products, the only real factor used to value gold would seem to be the current human emotional attachment for owning the yellow metal.

And we're back to my original point: trying to place some sort of framework valuing gold that involves the number of ounces per person in the world, or some such seems doomed to failure.  Its all about enthusiasm, plain and simple.  Fear & Greed.  End of story.

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Gold is not Oil

Dave,

You make the same mistake that many "commodity" analysts make, you claim that gold is just another commodity. 

That is simply incorrect.

Gold has commodity properties, yes, it is mined as a natural resource, yes, the smart people wearing suits and ties and publishing stock exchanges call it a "commodity".

But, that's like calling the Mona Lisa a "paint storage device".

A definition or view may have technical correct aspects, but is so far from reality as to be laughable.

Dictionary.com definitions:

1. an article of trade or commerce, especially a product as distinguished from a service.

2. something of use, advantage, or value.
3. Stock Exchange. any unprocessed or partially processed good, as grain, fruits, and vegetables, or precious metals.

These definition fall a bit short, in that a commodity is a simple product that is elemental, or easily interchangeable material, one for one.

Now what it different about gold, what could it be....?

I will give you a tiny hint.  Let's look at another definition.

1. any circulating medium of exchange, including coins, paper money, and demand deposits.

3. gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value.
4. any article or substance used as a medium of exchange, measure of wealth, or means of payment, as checks on demand deposit or cowrie.
5. a particular form or denomination of currency. See table under currency.

Yes, that is the definition of money.  Now, some would argue about these definitions, like Mike Maloney, who I believe would say that fiat paper is currency, not money.  However gold is money.  These are interesting questions, and, with much respect to Maloney, I tend to fall on the utilitarian side of the definition that anything that people agree is money, is money.

However, Dave, you need to really think through which "commodities" have monetary properties and which do not.  I think it is plain that oil has no real monetary values, whereas gold has all the monetary values.  When you are talking about supply flows of oil, you are talking something that is constantly burned up to worthlessness, versus gold which is highly prized, not burned up and stored (actually carefully stored in secured vaults) for its monetary value.  That simple fact explains the flow-reserves you superficially argue.

Try this simple test to understand money.  Assuming you could not be paid in digital or paper currency, and had to pick an entity on the commodity board for your paycheck (or customer payment), what would choose?

For your $1300 paycheck would you want delivered to your house-

1.  13 barrels of oil?  2.  Several large bales of cotton?  3.  Dozens of board feet of lumber?   4.  6 or 7 pork bellies?  or 5.  One American Gold Eagle?

Does this help you understand the difference between a "commodity" and "money"?

At the end of the day, people want to be rewarded for their hard work and creativity.  They want to store extra fruits of their labors for a rainy day, to buy a house or other useful product in the future, to pass on wealth to their children.  These are all accomplished with money, not generally with commodities.  Perhaps the things Rickards mentions, fine art, land could also be used.

If we had responsible government and business leaders, fiat currency could in theory be used as money because it would truly be rare, reliable, portable etc.  I think you know that we do not have a responsible government or business leadership.  The hard earned money in your bank account and retirement fund is being destroyed at an ever-increasing rate by our government.  Actually, to follow the PP recent themes, it is being transferred (stolen) from you and handed to other folks (thieves).

When the present fiat currency collapse reaches it natural conclusion, paper or digital dollars will be worthless, since they will be more like lumber and cotton (actually much less useful than lumber or cotton).

However, the world will still need money, the same as it always has.  Where will that substance with all the important qualities of money come from, I wonder?  Seashells?  Zinc U.S. quarters?  Will people be carrying around bottles of crude oil to exchange value for value for goods and services?

Where will the money come from?  Good question.

 

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The Meaning of Money

Try Chp. 7 in The Death of Money that might answer some of these debates.

Chp 7 about the IMF might also be very helpful.

 

Enjoy.  Ken

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gold pricing is almost entirely emotional

Hrunner-

So we both can agree that the supply of gold really is massive, compared to oil.  And clearly, gold is not oil, since gold has no real utilitarian value in industry the way oil does.  If all the gold in the world vanished overnight, we'd have a far easier time than if all the oil vanished.

So since gold isn't used for any real activity the way oil is, the only value is that which people's emotions and feelings attach to it - otherwise known as fear & greed.

As a result, the market and pricing for gold isn't driven by industry, its driven by emotion & feeling.  People are scared of inflation, they buy gold.  If they feel relaxed, they don't.  [I recognize that's reductive, but its mostly true and perhaps good enough for this discussion.]

And this emotion and feeling-based pricing is why the gold market is least likely to reduce to a simple physics equation, or a mine supply equation the way oil might, but instead moves on fear & greed to a much greater extent than other markets.  And the massive supply is one artifact of that.

I saw an article that put the total above ground silver supply at 748k tons.  With gold supply at 170k tons, that gives a gold/silver ratio of 4.35:1 from a simple "physics equation" supply comparison.  So at a 66:1 GSR, it would seem like either gold is dreadfully overpriced, or silver is underpriced - or both.  But that neglects that pesky emotional component to gold pricing.  To be reductive again, gold is pretty, while silver is useful.  In that contest, "pretty" clearly wins (emotion trumps physics) and so we get 66:1.

http://www.tfmetalsreport.com/forum/4591/silver-above-ground

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Gold More Simply

Dave,

Okay, you ignored all the points about the utility of gold as a unit of money, and followed with misstatements about my view regarding the scarcity of gold, so I will distill ideas down to as simple statements as practicable.

Gold supply is scarce.  Gold is not in massive supply.  

There is an emotional undercurrent to all markets.  Yes, humans are emotional beings.

There is an overarching factor of physics in commodity markets.  Physics is independent of human emotion.  Supply and demand must be obeyed by all markets.  Supply is the physics of elements on the Earth, and the relative effort, including time variables, to produce them.  Demand is related to the absolute number of market participants, the relative situation (the drug tamiflu is in high demand during flu outbreaks, low demand during normal times), and yes some factor of emotion, fear of losing the opportunity to buy, greed, all of which are not quantifiable.

Everything you are willing to buy is scarce at some level, or else you would not buy it, you would walk out your front door and pick it up and take it home.  Talk a walk in the woods sometime and look around.  Observe what is scarce and what is common.

All commodities are scarce.  Some now becoming increasingly scarce at a more rapid pace, due to PHYSICAL properties of the nature of the Earth's crust, the relatively PHYSICAL amounts of a commodity, other PHYSICAL properties of a commodity.  It takes a relatively long time to grow an oak tree, thus oak lumber is relatively more expensive than pine lumber, which grows much faster.  Supply and demand.  PHYSICS.

Gold is a rare element.  The rarity of gold is one of the many properties that makes it useful as money.   Silver is almost as rare.  Yes, other elements are rare, i.e. "rare" earths, but they have not been used as money because they don't possess all the monetary properties.

Gold is not sold on a purely emotion basis.  Art is sold on a very emotional basis.  Movies, rock songs and paintings are sold on the basis of emotion, desireability, peer pressure and heavy marketing campaigns.  Do not confuse gold with a movie or book. 

Most humans find gold is attractive, true.  Additionally gold is especially chemically stable and resistant to oxidation, so it is used in jewelry and artistic ways.  So is stainless steel.  Stainless steel is not used as money.  Because it is not rare.  Gold is money.  

Gold is expensive because it is rare and it is money.  Not because of some crazed hypnotic effect that forces people to buy it.

There is a fundamental desire of humans to have the ability to store their wealth in a form that cannot be destroyed.  In order to be used in the future.  In order to have an insurance policy in the event bad things happen like a health condition or natural disaster.  People have a noble instinct to help their children succeed and providing them with stored wealth for all the above reasons gives parents great satisfaction.

Yes, we have options on how to do that- build a house with your wealth, purchase land, start a business, pay for skills and education that can be useful in the future and for the rest of your life.

But money has always been a central way to achieve wealth storage.

And money has fundamental utility like a knife or frying pan.  It is useful, like a tool.

Gold is money.  It has intrinsic utility.  As is.  Lumber and cotton do not have intrinsic as is utility like gold and silver.  Effort and enery must be further applied to lumber to make a house, or a chair, or a pair of jeans.

The current global population is coming to an end of the monetary experiment with the latest flavor of fiat money.  There have been many fiat money experirments in human history, without exception ending in destruction of the fiat money because of the eventual degradation of the currency due to the weaknesses i.e. greed, power-seeking and narcissism, short-sightedness and just plain old evil behavior of humans beings  The current fiat money system is on the exact same path, however different from previous fiat money systems in that it has been put on steroids by fractional reserve banking, massive credit expansion fueled by cheap energy, and the digital age where currency can created at essentially zero cost and moved around the globe at essentially zero cost.

At the end of monetary regimes, people go back to money that they trust.  And that is precious metals.

We are at the end of the current monetary regime.  You know that (I assume).  I know that.  Chris knows that.  James Rickards just wrote an entire book about that (The Death of Money).  The Chinese government clearly knows that.  Most (many?) rich people know that.  The Russians know that.  I believe the Fed and many in the U.S. government know that.  The reality is that a majority of the world's population doesn't know that.  In large part due to a lack of infomation, normalcy bias, comfort in their current living standards, and most perniciously becuase of a deliberate effort by their governments and business leaders to suppress information and create propaganda to intentionally mislead these undereducated people.

The people who do know the truth are buying scarce gold at a prodigious pace.  The contervailing tectonic force of propaganda and fake paper market manipulation and spin and lying and corruption is in overdrive to suppress the preceding fact, since the general public awareness of that reality would ignite a run on the gold market.  And that would bring the end very rapidly.  The Fed doesn't want that.  They have a weak-minded and wrong game plan that if they obfuscate reality and prop things up long enough they will buy enough time for growth to magically return.  The odds are astronomically against them, but they must think the odds are in their favor.

As with all tectonic forces, one eventually loses and one wins.  There is massive pressure building up on one of the tectonic plates, those pressures being credit-debt-money supply, indebtedness, market distortions, energy depletion and environmental degradation.

Gold is money.  Gold has always been money.

Gold trades as a money-commodity, not a commodity.

The current Keynesian and U.S. centric monetary experiment is coming to an end.  I don't know exactly what will replace it.  I do not know when and over what time window the "end" will be declared.

The people who do understand that the Keynesian experiment is coming to an end are simply differing on how soon and over what time period.  That governs the relative demand of gold currently.

The rest of the world's population is very vulnerable and will be very angry at the immorality and treachery of their current leaders when the truth is revealed.  By physics, not emotion.

H

 

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gold & silver: physics vs emotions

Hrunner-

Let me move past all that chanting-round-the-goldbug-monetary-fire with a few simple questions:

If gold pricing is all about physics of rarity and the utility of money rather than emotion, why is the gold/silver ratio 66:1, while the actual supply of gold:silver about 4.35:1?  Wouldn't the physics of rarity ensure that the price of gold to silver be relatively close to 4.35:1?  They are after all both monetary metals, right?  So presumably their monetary utility should be identical.

Alternate question: if the rarity of silver:gold in the earth's crust is 16:1, why aren't gold & silver trading at that ratio right now?

I think: people just like gold more than silver.  Its prettier.  And the inescapable conclusion from this is, the market is driven primarily by emotion & feeling.  Its aesthetics, preference, greed, fear, you name it.  But clearly its not about some calculated rarity & physics.  Otherwise they'd be locked in to a 16:1 or a 4.35:1 price ratio.

Or perhaps you have another explanation?

Understand I'm not saying gold is worthless.  I like my gold a lot.  Just that - pricing (and the market) is driven by people's feelings more than physics.  And as we know, feelings can be very powerful things: in both directions.  Example: love, the most powerful force in the world.  This is related to: the love of gold over silver - makes the GSR 66:1 instead of 16:1 or 4.35:1.

With markets, its critical to acknowledge what is really happening and from that draw conclusions about what that means, rather than simply quoting from goldbug scripture about monetary this or rarity that.  The market is telling us, people love gold a lot more than silver - enough to totally distort the linkage in gold's favor vs. silver regarding rarity.  So what dominates here?

Its feeling.

 

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Dave

Alternate question: if the rarity of silver:gold in the earth's crust is 16:1, why aren't gold & silver trading at that ratio right now?

They may exist on planet earth at a ratio of 16:1, the the difference is extraction costs is more like 1:60. Gold has to go through cyanide processing and environmental cleanup and the costs for mining and basic refining I guess are just that much greater as the math suggests. Don't expect to ever see a ratio of 16:1 because that doesn't really seem to be in the cards. 

In the next few weeks I will try to put together one of these charts (below) for gold and finally update my silver data. It really makes you question the validity of some of the manipulation theories suggesting silver should really be valued at $50 or more. Looks to me that the profit margin for silver at that price would be pretty extreme. It will get there for sure in the next few years as production costs are exponentially increasing... but not today or tomorrow.

I believe commodity prices are manipulated to to the extent that they are priced as low as the possibly can to stimulate economic growth... cheap oil = growth, cheap copper = growth, cheap silver = growth.

Therefore, as the chart suggests, prices are trying to find a balance between economic growth and incentive to produce the commodity itself.  Right now, growth is the priority and incentive is left in the rear view.

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Hrunner
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Gold and Silver

Dave,

First, I'm not chanting around any goldbug fire according to your narrow view, I'm giving a historical account of human monetary history.  We are discussing rational properties of what makes objects have utility as money and defining the differences between basic commodities and monetary commodities.

For the record, I have never been a goldbug in your pejorative sense of the word.  I never really wanted to own gold.  If I had my wishes, I would live in a free society where money was simply a utility that was managed in constitutional framework so that money would be stable, utilitarian and trustworthy.  I would prefer for myself and my fellow citizens to be free to live and work based on our talents, our efforts, our desires, our free will choices.  To create, improve, love, laugh.

The current evil that has a grip on our global leadership has forced me to possess precious metals as an insurance policy that I believe, based on large amounts of personal research and contemplation, to be prudent and responsible.

The spot price of silver and gold is the product of the creation of virtual commodities futures, in the vast majority of cases backed by nothing but a promise (reminds one of fiat currency and debt, no?), by a select and priviledged group of entities, notably bullion banks, and based on trading activity on exchanges set up by the government based on the Commodity Exchange Act of 1936 and refined several times by the government in collaboration with financial institutions using such "improvements" as the creation of the CFTC to provide regulatory oversight (most often staffed by former bankers and financial executives) and electronic trading exchanges replacing outcry pits.

These commodity markets have a long history of manipulation.  The Maine Potato Bust, a manipulation of the potato market by J.R. Simplot, is one of many well-documented commodity market cornering schemes. 

The current spot price of silver is a highly manipulated false price signal that is the product of the facile use of electronic exchanges, used by entities whose manipulation is in alignment with federal government policy, and aided and abetted by an intentionally absence of independent regulatory oversight.

The key difference between these periodic schemes and the current market manipulation schemes is two-fold.  First, the stakes are orders of magnitude higher than previous market manipulations- the monetary and financial system of the modern world is at stake, including the fundamental levers of financial and political power which rest upon the ability to create thin-air money and trade that fabricated money for real assets and political power including electing the "right" people.

Damage from previous market manipulations might mean that some traders and producers would lose some money, and some markets might suffer delivery failures.  The fallout from failure of the current scheme is the realignment of global political and financial control.

The second difference is that never have manipulations been so well-aligned and approved, even guided by government and regulatory groups who are supposed to be representatives of the people and watch over these markets and enforce fair trade rules.  These government groups are now representatives of financial groups and opposed to the best interests of the people.

As far as supply, you and both should concede no one knows with certainty the true above ground supply of silver.  What I do know with certainty is that huge amounts of silver have been consumed to make photographic film, medical products, solar panels and electronic products.  Gold is consumed quite differently, a tiny amount for electronics and medical and research uses, and some amount for jewelry.

I (and most Indians and other Asians) don't consider jewelry to be "consumed" because in their (our) view it can serve as both decoration and store of wealth simultaneously.

In lieu of responsible government oversight and silver stock accounting (you would think that would be a part of their responsibilities, wouldn't you), a credible analysis by Ted Butler, taking into account the aforementioned significant consumption of silver versus silver production estimates the above ground stocks of silver at 1 billion ounces.

By my calculation that is 0.14 ounces of silver per global citizen.  Massive supply indeed.

Using the oft-cited amount of above ground gold at 170,000 metric tons, or 5,465,626,990 troy oz.  That makes the silver to gold ratio 1,000,000,000 to 5,465,626,990 or approximately 0.18.  Which is less than your 4.35 to 1, less than the mineral abundance of 16 to 1, and of course much, much less than 66 to 1.

All market manipulations can create false prices for a time.  Bubbles exist for a time while they are being blown.  Witness the very recent housing market bubble, a central bank-fueled bubble that existed for several years, even though the fundamental valuations were false and due to fabricated data about the credit worthiness of home buyers and abetted by fabricated or malpractice generated debt instrument ratings by ratings agencies.

Market manipulations and bubbles last for a time.  Until they are burst by physics.  The silver and gold market manipulations will not last forever.  They will be burst again by physics.  Last I checked solar panel manufactures use actual silver, not fabricated virtual silver for production of silver panels.  I have found, your experience may be different, that virtual silver doesn't conduct electricity nearly as well as metallic silver.

And wealth savers that distrust paper receipts of ownership of precious will want to have physical gold in their possession.  And when the number of physical buyers exceed the supply of physical metal, then true market forces will re-assert themselves.

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HRunner ...You are Spot On

You made the case perfectly for owning Hard Gold and Silver Insurance. Anyone who does not see and acknowledge the PM market manipulation is operating at a severe disadvantage.  

It makes me think of worker ants (technical analysts) diligently building their colony and seeing their universe as ending at the periphery of their work zone. But some enlightened ants look up in the air and see the huge mass of the farmer's boot getting ready to squash their colony. "Holy shit" they say, there are forces greater than us that are going to change the outcome. 

If you think that markets are honest, that there is true price discovery, or that you can out-think and out-smart the manipulators, then you best take a step back and look up, because there are forces much greater than you on this planet. It is very humbling to admit that you are not in control. 

So what to do?  Don't play their game! Don't waste time trying to figure out the markets because the outcomes are based on the whimsical machinations of FED officials, and a bunch of sub-idiots trying to interpret what they are saying. Instead........ Buy your PM insurance. Put it away for safekeeping. And focus your energies and talents on building local wealth like gardens and solar and community.  

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Challenge!

I challenge the idea that gold will lead to a stable monetary system because it has a limited supply and therefore prevents governments from printing fiat money.

Like Bit-coin, gold is in limited physical supply; but just like bitcoin it is (almost) infinitely devisable.  Therefore even though the total amount of gold is fixed, its value is not.

In a free-market system of price discovery the correct value is whatever the buyer is prepared to pay for it. If we all agree that gold no longer is desirable then it will sell for less.

The Left Brain gets trapped in it's self-referential hall of mirrors. Gold is valuable because everyone values gold.

Will this be the case in the future? Best ask the Kids.

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Wildlife Tracker
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When a crime is committed,

When a crime is committed, investigators always look for something called a motive. Why commit the crime? Where is the incentive?

People keep mentioning market manipulation and I wonder, what is the motive to manipulate? Okay, for gold and silver you can make the claim that they are making them unattractive alternatives to the dollar. Certainly we see that motive in India with the import ban on gold bullion. That is a good motive, but why have we seen the same price action throughout the commodities?

Look at the 5-year for these base metals. Nothing but declining prices or stagnating prices. Oil prices too have been stagnating, rather than growing despite the natural need for prices to grow as production costs are rising.

http://www.kitconet.com/charts/metals/base/spot-copper-5y-Large.gif

http://www.kitconet.com/charts/metals/base/spot-aluminum-5y-Large.gif

http://www.kitconet.com/charts/metals/base/spot-lead-5y-Large.gif

http://www.kitconet.com/charts/metals/base/spot-nickel-5y-Large.gif

http://www.kitconet.com/charts/metals/base/spot-zinc-5y-Large.gif

Typically, base metals will be priced relative to the amount of metal available on the market. The amount of aluminum has been growing in the market (less demand), and we see the price of aluminum fall. This makes sense. However, we look at lead and we see that prices are stagnating despite the market availability for the metal to be falling. This doesn’t make total sense.

http://www.kitconet.com/charts/metals/base/lme-warehouse-lead-5y-Large.gif

http://www.kitconet.com/charts/metals/base/lme-warehouse-aluminum-5y-Large.gif

So what happened around the same time that all these commodity prices started falling? QE 3 happened as shown in this silver chart…

  http://s28.postimg.org/j2dqe3yn1/qe3.png

There is an absolute trend change in the pricing of these metals with the announcement QE 3 in 2011. We know that QE 3 is a growth stimulus program and we know that lower commodity prices help to stimulate growth. It would make sense that QE 3 is contributing to the suppression of the metal prices based on its purpose and motive.

So in my opinion, the need for growth is motive for market manipulation of commodity prices, rather than evil or to piss off metal investors. That is important to recognize because we have seen little to no growth in the economy despite these hostile actions to commodity prices.

So as I tried to infer in the earlier post, be careful about some of the price manipulation crap being tossed around the internet. Silver should not be valued at $100 or $50 because the market does not need it to be at those prices and the miners certainly don't either.

There is a lot of incentive to produce silver at $30-35, but not much at $19.50

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Wildlife Tracker
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Gold also has value

because it's tradeable energy as a result of the initial energy costs invested to extract it in my opinion.

For example, there are only 2-4 ounces of gold in one of these babies at a time

That's why it costs producers $1,300 to pull it out of the ground.

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gold & silver vs industrial metals ratios

Hrunner-

You always force me to think, I like that.  However, this is going to get technical.  I'm at a disadvantage here, since your appeal to emotion is an easier sell (we all love to hate the Fed, after all) and I'm going to get numerical and scientific and I know going in that won't sell quite as well.  I know there are a few of my fans who will wade through the whole mess, and I thank you guys in advance for that.  :-)

So let's go from first principles.  If gold's price is manipulated lower, then silver's price must be manipulated EVEN LOWER.  How can we best prove if this is true or not?  (HughK and his focus on falsifiability come to mind here).  We need a yardstick, something physical yet most likely un-manipulated, to measure the price of silver against.

I'm going to pick copper, lead, and nickel, just at random from all the metals commodity price data I have lying around.  And since our thesis is, silver is the most manipulated metal ever, what we should see is a massive spike lower in its price when we compare it to the other, non-manipulated metals.  My data is from the USGS, and it is the "average price per ton" per year, and it is located here (using Copper as an example): http://minerals.usgs.gov/ds/2005/140/ds140-Copper.xlsx

All right, if your eyes haven't glazed over by now...copper, lead, and nickel:

Silver/copper ratio.  We see the trading range for silver/copper ratio for the past 110 years to be (about) from 40-100.  Although this chart says current ratio is 123, the data is old (annual USGS data last updated end of 2012).  Copper @ 3.08/pound, silver @ 235/pound = current ratio of 76.

Conclusion: after the big silver hammering in 2013, silver/copper ratio is in the middle of its historical range.

Now then, the silver/lead ratio.  The data here is old too; lead @ 0.97/pound and  silver @ 235/pound, that yields 242.  Conclusion: silver/lead at the higher end of its trading range.

Nickel.  Nickel @ 8.32/pound, silver @ 235/pound, giving a ratio of 28.24.  Conclusion: silver/nickel is in the middle of its 110-year trading range.

So if you compare silver (the most manipulated metal ever) using lead, copper, and nickel as our unmanipulated yardsticks, it would appear that it was silver that was overpriced (relative to our yardsticks) back in 2011-2012, and that whatever happened to it in 2013 simply dropped it back within its historical trading range.

My conclusion:

Either physics of metals extraction exists and over time encourages all "physical things" to move relatively in concert, or it doesn't.  Physics of metals extraction and pricing over the past 110 years should have created a rational trading range for the industrial metals - and it certainly seemed to do so, right up until the fun in 1981, and the less vigorous party in 2011.

In my opinion, these charts show that it was the monetary metals pricing that went nuts in 1980 and again to a much lesser degree in 2011 due to the emotion attached to those monetary metals.

Now I'm guessing that "the faithful" will simply point out that The Fed could also be manipulating the prices of literally everything lower just to hide their manipulation of gold & silver, but...I think that's a "bridge too far."  (Really?  Manipulating the price of lead?)

My conclusion is, if official manipulation of the metals occurred, they simply ended up dropping the price of the monetary metals back into their historical trading ranges with respect to the other industrial metals, which presumably continue to operate under the same laws of physical metal extraction that they have operated on for the past 110 years.

Which brings me back to my original point.  A pop higher in monetary metals over and above their historical relationship to the other non-monetary metals is due entirely to emotion.  Not physics, emotion.

One corollary though is, the emotion-driven bubble in 2011 wasn't anywhere close to what is was in 1980.  If it happens again, silver really could hit $100.  And that's without assuming hyperinflated dollars - that's calculated in today's dollars, just looking at the relationship between silver & the other metals.

Please understand, I'm not against emotion, or gold, or silver.  I'm just about seeing truth as best I can.  We need to understand what really drives prices, and if we make stuff up and then believe in it like cargo-cult worshippers, we only hurt ourselves at the end of the day.

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gold: cost to produce providing value

Tracker-

gold has value because it's tradeable energy as a result of the initial energy costs invested to extract it in my opinion.

I go back and forth on that.  Consider the devil's advocate position: all those McMansions in the exurbs took a certain amount of energy to build.  If some fundamental thing on the ground changes (like the price of oil), the cost of construction of those houses won't put a floor on their value.

Simply because something is expensive to build or extract doesn't necessarily limit how far down the price might drop if people (for whatever reason) decide they aren't as interested in it anymore.

BTW I liked your silver costs-to-produce charts!  More charts, please!  And sources for the data too, if possible.

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Wildlife Tracker
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Thanks Dave

I submitted a post a few hours that would have fit nicely into your post Dave and I hope that the "powers that be" approve it soon. It had a few too many kitco links I guess. Oh well. [update: earlier post approved -- TPTB]

Regarding the silver miner profitability chart:

For the annual report of each company I used this formula (modified from Steve St. Angelo's break-even formula)

(Total mined ounces for the period * average or realized silver price for the period) = estimated revenue from silver

(Estimated revenue from silver / sales of products or net revenue for the period) = % revenue generated from silver

(Net profit/loss for the period * % revenue generated from silver) = profit/loss from silver

Profit/loss from silver / total mined ounces = profit/loss per ounce

(Average or realized silver price for the period - profit/loss per ounce) = Break-even silver price for the period (mining costs represented in the chart)

The chart represents the average of 12 silver producing companies (7 being top producers). Not all of them had reports dating back to 2005 so that affected the results. I also threw the break-evens of a couple silver juniors which could change the results slightly.

Anyways the trend is there and very real

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Hrunner: He doesn't get it; he'll never get.

I've followed from the sidelines davefairtex's involvement in the gold discussion for quite some time now and I can only conclude that he'll never get it:

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too technical

earthwise-

I'm guessing you found my post too technical.  :-)

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earthwise
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Yeah, that's it Dave.....

.......us morons jes' cain't figger sum stuff out, but issa good thing we gots y'all ta hep us with smart stuff and all.

Actually, I understood that post and all of your other posts as well (at least the ones that didn't put me to sleep), but if it makes you feel better to dismiss me as ignorant please be my guest. Just one more thing you'll be wrong about. It was about your being allergic to facts that don't fit your beliefs.

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A data-driven argument deserves a data-driven response

Let's stop this nascent argument before it gets out of hand by reminding everybody of the ground rules here at PeakProsperity.  Criticism must be fact-based.  I will quote from the Forum Guidelines:

         "Posts must be data-rich, fact-based, and constructive, especially if they are critical . . . . We  
         expect users to take reasonable care to make sure that their posts are accurate and always use
         verifiable facts to support an argument."

Without taking sides in the issue itself, it appears to me that Dave has carried his burden of carefully stating a position, and referencing specific evidence to support it.  If you believe that he is wrong, it is your job to refute his argument using your own theories, supported by facts and data which answer his.

After any user has carefully constructed an argument, to respond by floating out a post that only says "you don't get it," especially when accompanied by any form of sarcastic humor, is dismissive and disrespectful to the person who spent time formulating an argument and assembling facts and data to support that argument.

Now, if you understand the other person's argument then you have a special duty to use your understanding for the benefit of the group.  If you are not willing to do this, then you should not post any comment.

Finally, if you believe that the issue has already been fully addressed, then you should post a link or reference to that prior conversation.

In short, through our forum rules we are trying to cultivate an environment where there is great respect for data-driven arguments:  a data-driven argument deserves a data-driven response.

If anybody has any questions or comments, feel free to contact me directly.

- Jason

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meeting me halfway

earthwise-

I'm glad you understood my post.  I sincerely hope you will respond to what I wrote with a level of effort that meets me halfway.

If there's a timeseries you'd like me to chart, if I have the backing data, I'd be happy to do it.  I don't mind you showing me that I'm wrong, because as soon as you show me, I instantly become right because then I will know the truth.

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HughK
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Openly racist
earthwise wrote:

.......us morons jes' cain't figger sum stuff out, but issa good thing we gots y'all ta hep us with smart stuff and all.

Hi Earthwise,

I find this section of your quote to be openly racist.  That's all I have time to say because this is a busy Friday at the end of a busy week.

Cheers,

Hugh

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your silver costs chart

Tracker-

Uh, don't tell me you actually pored over 10 years of annual reports for 12 companies, extracted the relevant data yourself, constructed the chart and posted it???

Wow.  That's pretty cool.

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HughK
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davefairtex
davefairtex wrote:

Tracker-

Uh, don't tell me you actually pored over 10 years of annual reports for 12 companies, extracted the relevant data yourself, constructed the chart and posted it???

Wow.  That's pretty cool.

I'm also very impressed by the work that must have required, WT!

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Wildlife Tracker
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I made it last year

I spent a weekend on it. Posted it in several different places and on youtube, so it did get some viewing miles.

When the price started to decline pretty hard in silver I had to be confident in my investments and nobody had done this research for me (to the extent that I wanted). I was able to extract a lot of information and develop sound opinions based on what I found. It was worth it to me ;)

 

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Hrunner
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Everything is manipulated

Dave,

I appreciate your charts, and your points, and gave you a thumbs up for a sincere, heartfelt post.

However, I believe your argument contains assumptions that are incorrect, and statements that don't accurately track the case that I have tried to make that markets are the result of temporary emotion but must be connected to the physical world eventually.

To break down some of your assumptions:

"We need a yardstick, something physical yet most likely un-manipulated, to measure the price of silver against."

When you assume that copper, lead and nickel are "yardsticks", technically you mean the PRICE of copper, lead and nickel, are these unmanipulated "yardsticks" that live outside the world of human reach and especially the long arm of the Keynesians.

Let's pull back the lens at look at the price of, well everything:



As you may know, there were horrific periods of inflation post Nixon closing the gold window, due to post-war financing, extremely loose Fed monetary policy, we can discuss all the factors, but bottom-line, there was the highest inflation in the modern era.

And inflation was stomped out (temporarily) by Paul Volckers raising the Fed rate to an unbelievable 20% --  the price of money is manipulated.  So because of Paul Volcker inflation crashed back down post 1980.

The prices of lead, nickel, zinc, copper, silver, gold, actually the price of everything was (and is)technically all manipulated due to the Fed's actions.

As an example, let's look at the price of lead, regardless of price of silver

The price of lead went up really high in the mid 70's and in 1980 when inflation was raging.

So the overlaying inflated, manipulated lead and copper prices on top of manipulated silver prices does not particularly make the point that silver is not manipulated.

If you want to prove that reckless progressive government and an irresponsible Fed with loose monetary policy can make prices go really high, including silver, lead, nickel, zinc, them congratulations, you proved it.

That's not my main argument with your graphs.

My main beef is that you ignore the fact that the giant spike in 1980 was due to a completely artificial silver price due to the Hunt Brother silver cornering attempt, which failed, and silver eventually fell back to trend.

The "historic" part of the chart should focus on the contemporary period, say from 1960 to present.  You should have clearly annotated the 1980 spike with a big red pen that says "one guy in Texas bought a billion ounces of silver and artificially spiked silver prices".

If you focus on the important part of the chart, from approximately 2000 forward, it was clear that silver, and gold were steadily rising, clearly in response to massive amounts of Federal Reserve monetary easing and the parallel rational diversification out of fiat money into monetary metals.  The following charts illustrate that point.

And silver, looks radically different (or not!)

So price going up steadily with increasing money supply, real actual inflation and real potential inflation, in the face of collapsing actual economic activity.   And then, magically, price just drops.  Well, this must be because demand for monetary metal investment, by the world's new largest gold consumer, fell off a cliff.

Umm, not so much.

Silver has equally had large increases in investment demand.

So the question we need to answer, is why, with steadily increasing money supply, and steadily and sharply increasing gold demand, did gold price fall in the last two years?  Ditto for silver demand and prices?

You need to frame your arguments and thinking under a key principle.

The price of everything is manipulated.

Dave, your remarks about price manipulation demonstrate, to my mind, that you don't understand the heart of Keynesian economics.  The core, guiding principle of Keynesian economics is that there needs to be a central planning, controlling force to keep its foot on the pedal of "aggregate demand", because, as we all know, we can't leave the free market on its on own to set prices.  And we damn sure can't let banks (and big corporations) fail.

If we did, that evil business cycle would cause us to have periods of expansion and periods of contraction.

Of course, as a next step, the central planners must build a cockpit full of blinking gauges, all ingenious devices of their own design, such as GDP, U3 unemployment, housing starts, money velocity, CPI, inflation, the list seems endless.

Our confident Keynesian drivers in the cockpit constantly pull a lever here, apply brake pedal there, grab a throttle knob here. 

But the big pedal that connects to the engine is the price of money.

The troubling question I still have, with all this magical control over the economy, and especially the business cycle, is "What happened in 2008?"

(And also, What happened in 1999?  What happened in 2006?  And in 1970. And in 1984.  And in 1980.  But we digress).

Simply put, the Keynesians magically always know what the price of money should be.

And they set it.  Thus they affect, more precisely "distort", the price of money.  Which affect the price of everything.

In a healthy economic world, the price of any good or service would reflect the of supply and demand of that good or service.  Money would be a stable, utilitarian tool that simply serves as the medium of exchange, and as a reliable marker of wealth to serve its original purpose to allow the easy exchange of goods and service.

Money in our time has become a Frankenstein monstrosity that Dr. Frankenstein, I mean Dr. Yellen, with her colleagues, has built, based on her own whims to do her bidding.

Dave, I respect your work and your writing and your discussions.  I believe you have sincere opinions you try to support with data.

My main concern is that propagating the theme that these markets are mostly unmanipulated, freely traded markets, and that there is not a titanic struggle going on between those that believe in massive amounts of control and wealth accumulation, to their own benefit, at expense of the health and welfare of their fellow citizens is dangerous.  Analagous to any treatable condition, the first step is diagnosis and realization.

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Hrunner
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History is Data

Jason,

Thank you for your reminder, and for the record, I agree with your principles.

I would underscore the fact that an analysis of historical facts, human behavior, historical records of tactics and methods used by people in position of power, and reactions of groups of people are all "data".

In order to interpret our world, and make plans accordingly, a wholistic framework has to include both physical and psycho-social phenomena.  I think that is the exact point under discussion by Dave and others when talking about the mix of emotion and physical supply and demand to set prices in markets.

I think Chris acknowledges by his actions as much since he (appropriately) has guests who study all of the above when talking about global warming, world events on Off the Cuff, etc.

I hope your framework is wide enough to include data that can be put on charts, and some data that isn't.

[Moderator's note:  Yes, of course.  Perhaps we should use a more inclusive word than data, like "evidence."]

Enjoy your weekend,

H

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Jason's right

When it comes down to name calling I really get turned off and lose respect for PP.com.  Can't there be a filter

for this bullshit??  Maybe send the post back for editing?

I finally finished The Death of Money and, once again, highly recommend it to our community, for better or worse.

I believe it REALLY is a Graduate Course in Political Economy and might aid some of us to understand better

what's going on, macro-speaking.

P.S. I personally prefer gold because I'm running out of SPACE to store silver.  A small safe can hold mucho dinero of gold but silver eats it up too quickly.  So, not just "emotion," but practicality.  Ken P.

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1651
Now THIS is how one debates...

I hope you're all old enough to have seen these debates on SNL in their entirety:

Petey1's picture
Petey1
Status: Bronze Member (Offline)
Joined: Sep 13 2012
Posts: 69
Can we trust anything?

I see some good discussions here but if everything is manipulated and corrupt how can we even trust the data given to us. Sure some might be correct but how can we be sure of anything anymore. Election votes, inflation, shale amounts, climate change, reasons for war and everything in between. 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5531
rate manipulation: yes

Hrunner-

Hey, thanks so much for your response.  It was very kind and I appreciate that.  You wrote:

Simply put, the Keynesians magically always know what the price of money should be.  And they set it.  Thus they affect, more precisely "distort", the price of money.  Which affect the price of everything.

We agree 100% on their desire - and demonstrated willingness - to control the price of money and thus control credit growth, which tends to drive monetary inflation.  I've posted several times on how effective that control has been over time, and how lower rates have led inexorably to credit growth, at least until Peak Debt hit.  We're two peas in a pod here.

And so yes, I believe the price of pretty much everything was manipulated (as a side-effect) higher during inflationary periods.  So in that sense, most definitely, the price of lead was manipulated as a side effect right along with the price of silver.

I also agree that silver (vs everything else) went absolutely ape in 1980, and that its normal trading range vs the other metals was generally far lower.

My only point I was trying to make with my charts was that silver wasn't specifically singled out in the grand manipulation of everything that has been going on almost forever.

Or rather, if it has been singled out, it somehow has managed to stay within its normal trading range vis a vis other non-monetary metals which, presumably, were not singled out for specific price manipulation by the central authorities.  [Who tries to suppress lead & zinc?]

And these charts argue against the ability of the central planners to meaningfully affect prices of individual commodities via specific price manipulation over the long term.  [Manipulating everything via rates, or intraday - a different story entirely]

What do you think?

 

Edwardelinski's picture
Edwardelinski
Status: Gold Member (Offline)
Joined: Dec 23 2012
Posts: 325
Petey1 wrote: ... how can we
Petey1 wrote:

... how can we even trust the data given to us. Sure some might be correct but how can we be sure of anything anymore. Election votes, inflation, shale amounts, climate change, reasons for war and everything in between. 

Due diligence my friend.  It's always been a requirement in business.  We all need to mine the available data and make our own conclusions.  No, you can't trust all of the published data, but could you ever?

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Sense and Nonsense

Dave,

Yes, agree with your post.  I think you express something better than I have so far.  That we need to distinguish between between short term and long term.

Short term, prices of gold and silver can behavior contrary to the laws of supply and demand. 

Long term, they must obey the law of supply and demand

Which was the point about the disconnect between gold price and demand and inflation.  Commodities, house prices, equities, have been trying to deflate for years.  The events in 2007 and 2008 record that.

My thesis is that should have deflated much more.  Many entities should have gone into bankruptcy, because, well they were insolvent.  Starting with large commercial banks, but by no means ending there.  Any business dependent on cheap money and distorted credit lines should also go bankrupt.

The events of 2008 and following, represent the Fed "catching the falling knife" and reversing the deflationary spiral with massive, historically unprecedented "liquidity" injections.  The wiggle in the total credit graph shows that perfectly.

So the stock market is "re-inflated", the bond market is re-inflated, commodities are "stabilized" (my interpretation) due to synthetic, liquidity-driven demand, the housing market is re-inflated (with government distortion- Fannie Mae ring a bell?), the car market is "re-inflated" (with additional government distortion, I mean "investment"- remember "Cash for Clunkers").

But somehow, the only money equivalent, the number one signal of currency destruction, the number one safe haven of central bank printing, precious metals, are "deflating".

"Coincidence is the word we use when we can't see the levers and pulleys"

Emma Bull  http://izquotes.com/quote/26937

In all candor, I don't know what's coming.  I don't have an NSA supercomputer and domestic spying assets to tap into the emails and phones of the U.S. Treasury. the Federal Reseve and the offices of JP Morgan to expose to sunlight what is and is not actually happening to the people's money within the powerful structures.  I have been associated with powerful groups, so I can speak with some direct experience regarding the behavior of egotistical humans in positions of power.

(Personal Views Ahead Warning)

So I have to use what data is at hand, imperfect as it is.  And my research. And my observation of the average and standard deviations of human behavior.

As said before, I want to live in a world where gold stacking is unnecessary.  If money were stable and reliable, government was small, powerful, functioning as a rule keeper, honest and efficient, we all could focus on the things we do best as human beings, enjoying each other and God's green Earth.

I don't know what is coming.  Whatever it is, it looks extremely consequential to me.  Like watching that drunk teenager driving their car with bad brakes at 2AM in the night, on a winding road.  It may work out, but it looks bad to me, based my experience and understanding of physics, it looks like tragedy is around the next bend.

I do know that historical gold and silver are some of the best, if not the best alternatives to currency destruction.

My anger and passion is directed at malicious lying that intentionally delivers harm, by all the propaganda and manipulation, to people who should be armed with the truth and allow to make their own informed personal decisions.  That's the domain of our battle right now.  If something is good, it can bask in sunlight and doesn't need to be hidden.

Gold is not the singular answer to me, I view it as a tool in the toolbox.  It may get confiscated.  I'm mentally prepared to lose all of it, but not happily.  I think that fits with the themes here at Peak Prosperity.  I'm working on putting more valuable tools in my toolbox, specifically spiritual relationships, a strong family, community building, physical health, hard assets, skills.

But I'm happy to continue to walk down the road with you, want to hear what you have to say, are observing and synthesizing.

Enjoy your weekend, Dave,

H

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