PM End of Week Market Commentary - 9/19/2014

davefairtex
By davefairtex on Sat, Sep 20, 2014 - 5:46am

On Friday gold dropped -9.00 to 1216.90 on heavy volume, while silver was crushed, dropping -0.73 to close at 17.79 on very heavy volume.  While gold made a new low by a few bucks, silver broke below its 2013 PM crash low of 18.17, and once that happened the buyers just vanished.  Silver closed almost at the dead lows for the day.

A big problem with silver is that its long term chart looked bad going into the week - the long term descending triangle revealed a trend of steadily dropping buy-side interest.  This, combined with new highs by the buck, and yet another drop in commodity prices caused the silver longs to just throw in the towel.  That's how I read it anyway.

On Friday mining shares fell also, with GDX off -2.03% on very heavy volume, and GDXJ finally falling below support and losing -3.56% on heavy volume as well.  Silver's big plummet caused the gold/silver ratio to skyrocket, closing up +2.21 to 68.40, a new high.

For the week, gold was down -14.60 [-1.19%], silver dropped -0.83 [-4.46%], GDX off -5.51% and GDXJ down -3.07%.  GDX was the big loser, with silver in second place.

The USD

Yet another strong week for the dollar, closing up +0.62 [+0.74%] to close at 84.86.  Previous high was 85 last seen June 2013.  A break above 85 - and the next resistance level is around 88.  If the dollar does break out above 85, I believe it will continue to drive PM lower.

PM is definitely reacting to moves in the buck; when the dollar corrects, PM stabilizes and even rallies, while when the buck breaks out, PM continues to fall.  Things don't move in lock step, but this is in general how the market is currently reacting.

Helping the dollar skyward was the falling Euro, which dropped -1.50 [-1.16%] and is right at long term support.  As we have seen with silver, dropping through long term support can cause disciplined traders to toss the offending position over the side, which would move the buck higher - likely pushing PM and commodities lower still.  As a trader friend of mine would say, there is "a lot of air" between the 128 level and the next reasonable stopping point just north of 120.

Ordinarily I'd say the chances of a good bounce off support would be high at this point, but given how sustained the drop in the Euro has been - there must be some major force moving capital out of Europe.  The risk is, it may well just continue and if it does, that will drive the Euro right through support, causing the buck to break out.  I feel risk of this is higher than normal right now.  The currency moves have been strong and steady in the last few months.  Something is definitely afoot.

After breaking 95 support last week, the Yen seems to be in a free-fall vs the buck, down -1.57% this week.  Since its peak in October 2011, it is down almost 44%, with most of that coming in the past two years.  As a reference point, the Fukushima disaster happened in March 2011.  If you are a traveller from Japan, everything in the US is 41% more expensive than it was just two years ago.  Now THAT's inflation!

To add insult to injury, the JGB 10 year is yielding 0.55%.  Why on earth would you leave your money in Japan if you can move it offshore, avoid the massive loss in purchasing power, and earn a larger return?

Below is a chart of the BOJ's % ownership of the total outstanding Japan sovereign debt.  This is likely why rates remain low, yet the exchange rate move shows that money is clearly fleeing Japan.  For reference, Japan's Debt/GDP is 238%.

Miners

Mining shares continued dropping this week, with GDX off -5.11%, while GDXJ was off only -3.07%.  GDX is being sold hard, and is more or less in free fall after the FOMC minutes release on Wednesday, and GDXJ, after grimly holding on for so long has finally broken support and is also starting to sell off.

If gold somehow manages to stop dropping (which likely depends on what happens with the buck), we could expect GDX to find support at its May/June lows.

US Equities/SPX

SPX broke to a new high on Friday but could not hold its gains, resulting in a failed rally.  On the week SPX was up +25 [+1.25%] closing at 2010.40, while the VIX dropped to 12.11.  US equities are starting to benefit a bit more from the continued dollar rise vs last week, but they seem to be having a bit of trouble moving higher.

Rates & Commodities

Bonds may have put in a low this week, with TLT up +1.08%, printing a nice hammer candle.  All the gains came on Friday, when TLT moved up a big 1.27%.  If you were Mrs Watanabe (http://www.investopedia.com/terms/m/mrs-watanabe.asp), and you bought TLT back in October of 2011, you would receive over that period: a 10% capital gain, 9% in interest payments, and a 44% gain from the exchange rate move.  Contrast that with the JGB return of 1.5% - total! - over that same period!  Perhaps you too would be "buying the dip" when TLT drops 6%.

Commodities dropped once again, off -1.58%, breaking below the lows set in December 2013.  Dollar up, commodity index down.  Commodities broke below their 2013 lows during the same week that silver broke below its 2013 crash lows.  Not a perfect correlation - but its not bad either.

Oil was mixed this week; WTIC was down -0.38 to 91.77, while Brent rose +1.38 to 98.39.  Both Brent and WTIC are still looking to form a low, and its not clear just yet if it has done so.  Both WTIC and Brent weekly charts look relatively weak and/or unsure - there are no definitive "nice hammer candles" in oil as there is with the long bond.

Physical Supply Indicators

* I could not calculate SGE premiums this week - they changed their website around and I need to update my code.  As of Wednesday, premiums were +5.72 over COMEX.  Deliveries of spot gold over the past few weeks have also climbed as gold has dropped in price.

* The GLD ETF lost -11.96 tons, with 776.44 tons remaining.

* Registered gold at COMEX remained the same, with 31.44 tons remaining.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on September 19) of 1218.60 and silver 17.88:

  OUNZ 12.16 -0.04% to NAV [neutral]
  PSLV 7.28 +4.82% to NAV [up]
  PHYS 10.06 -0.65% to NAV [up]
  CEF 12.58 -7.58% to NAV [down]
  GTU 41.75 -7.35% to NAV [down]

ETF premiums were mixed, with the two Sprott funds gaining, and the two non-deliverable funds losing.  My interpretation is that the physical delivery option in the Sprott funds is substantially more attractive, especially for silver.  The spread is huge: +4.82 for PSLV, and -7.58% for CEF, and it has widened as prices have fallen.  This suggests to me that the fall in the paper markets are now outstripping the demand for actual (deliverable) metal.  Someone is buying the dip, and is using PSLV to do it.

Futures Positioning

The COT report is as of September 16th, when gold was trading around 1235 and silver around 18.70.

The COT reports are starting to become interesting.  Managed Money added 14.9k shorts, and dropped -5k longs, moving closer to a "historical bullish indicator" level for gold.  Based on this week's bearish price action, I'm guessing that next week's COT report will show Managed Money about where they were in December 2013.  Producers haven't changed as much, closing 5.8k short contracts - ringing the cash register on their hedging positions.

In silver it is even more interesting.  As of Tuesday, Managed Money is even closer to its December 2013 historically bullish level - and after Friday's Earth-Shattering Silver Kaboom, they are likely well into new territory of short interest.  Managed Money added 5.2k shorts, and dropped -757 longs.  If Managed Money adds another 6k shorts by next Tuesday, we'll be where we were back in December 2013, right at the lows for silver.  This hints that we are approaching a turning point - at least the conditions are setting up for such an event anyway.

That said - I have one caveat: blindly buying because of this COT report is risky given how strongly and consistently the dollar has risen.  If the dollar breaks above 85, PM could just continue moving lower, regardless of how historically short the COT report says Managed Money is.  With the right type of prodding, historically short can always get even more historically short!  Another trader saying, I'm afraid.  They come from having a large number of surprising, unexpected events happen to us, "against all the odds", and it almost always seems to involve losing money.

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

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

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

Down.  Moving averages are all pointing down.

Summary

This week gold dropped, and silver broke down out of its long descending triangle; as a result, traders capitulated selling silver hard.  GDX is in free fall, and even the surprisingly resilient GDXJ has finally succumbed to the pressure and is starting to sell off again.

From the moving average perspective, gold and silver are bearish in all timeframes.  The gold:silver ratio jumped +2.27 to 68.40, a new cycle high.  GDX:$GOLD dropped hard and looks more bearish, but GDXJ:GDX has risen and actually looks bullish - it is the odd man out.  SIL:$SILVER moved sideways, and still looks bearish.

The COT reports this week saw Managed Money loading up short in both silver and gold, and it is my guess after this week's price action that Managed Money will be holding historically high levels of short interest in both gold and silver - although we have to wait a week before the evidence appears.  This indicates to me that we could be approaching a turning point in the near future, since Managed Money tends to be leaning short the most at a time when the market is at its lowest point.

Shanghai premiums are up this week, GLD tonnage dropped, and the Sprott ETF premiums were up.  Physical demand continues to pick up.  It is definitely positive right now.

The Euro and the Yen are causing problems for PM priced in dollars, as well as with oil, and other commodities, which also continue to make new lows.  While that COT report suggests we are nearing record short interest in both gold and silver, if the dollar keeps rising, Managed Money will keep piling on the shorts, and PM probably will continue dropping - as will the rest of the commodities.

My suggestion: wait for the dollar to show signs of a reversal, just in case this is some 2008-style move in progress.  If the buck moves to 90 off some horrid European Lehman-style event, we could see gold - well, we could see gold a whole lot lower.  That's what the correlations are telling me right now.

But once the dollar reverses, everything will be aligned for a strong move higher.  When that happens, it should be an excellent buying opportunity...

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26 Comments

hammer6166's picture
hammer6166
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Silver paper/physical

"This suggests to me that the fall in the paper markets are now outstripping the demand for actual (deliverable) metal."  The word "demand" may be tripping me up.  I think you are saying that there is a ~12% premium spread between "physical" (+4.82 for PSLV) and "paper" (-7.58% for CEF). Did I read that right?

A few postings this week here at PP have foretold of physical delivery problems. I haven't been able to find any current indications there are delays with physical delivery. Has anyone experienced a delivery delay recently?

Arthur Robey's picture
Arthur Robey
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Stirling Job Dave.

Something is definitely afoot.

Concur: Conjecture- Europe is about to be crushed between the USA and Russia/China and their affairs are in a complete muddle. So the money flees to the Centre.

Someone is buying the dip, and is using PSLV to do it.

Who would have the means? JPM/FED?  Max Keiser says that someone has massive naked shorts to cover. Or is that old news?

I shall wait out until this thing hits tippity bottom. (O Great Vacillator). But that is as stupid as thinking that you can bail out of a bubble before everyone else. Pure hubris.

I am scratching my head trying to remember why the dollar is a debt instrument and therefore a claim on the Real wealth. If all these dollars are flooding back into the USA, that means that the dollar denominated value of all things good has to rise. Further it means that Big Ag is poorly served (Export competitiveness). I should imagine that there is a lot of lobbying going on at the moment for the FED to "Do Something". But what?

In the meantime someone is making out like bandits. My guess is that he dresses in pin stripe suits.

 

davefairtex's picture
davefairtex
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paper & physical

hammer6166-

No, I'm not saying the premium is 12% for physical vs paper.  :-)  However when you look at it as the spread between delivery vs non-delivery ETFs among ETFs that have a strong reputation for holding title to actual metal, then yes it does seem to be a 12% spread.  Delivery ETFs are holding their value far better.

Before the crash, PSLV had about a 3% premium, with CEF maybe -5%.  After silver broke 18.17, PSLV premium moved higher while CEF's premium broke lower.

In the past, I haven't seen PSLV premiums actually rise during a metals crash - really, ever.  It usually plummets, right alongside CEF.  Paper PM holders historically bail out during a metals crash.  But the PSLV holders didn't this time around, which got my attention.

This is something new, and it says clearly there are traders/buyers willing to pay a premium for guaranteed access to physical delivery, at least today anyway.

PSLV is decent sized but not massive - it contains about $900M in silver, or 49M oz, 6% of annual mine supply.  It wouldn't take JPM to cause the premium move in PSLV.

Arthur-

Your intention to "wait for the bottom" before buying is admirable.  Actually identifying the bottom is a task that is fraught with peril, and has occupied generations of traders and countless man hours devising schemes for identifying said bottoms!  Reading tea leaves, examining entrails, and poring over charts, none of it results in a sure thing.  But the attempt is worth making - it surely beats the strategy of buying silver "because its cheap."

Why is that?  In a long downturn, cheap becomes cheaper, gets even CHEAPER, becomes "the cheapest in four years", then it progresses to "it can't possibly get cheaper than this", right before it drops some more, confounding all prognosticators who finally give up and scream manipulation - right as it hits its low and bounces.

davefairtex's picture
davefairtex
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possible silver low

Early in asia trading silver sold off hard, hitting 17.32 at one point on some really high volume.  It has since rebounded all the way back to 17.70 - a whole lot better showing than we saw on Friday.  Buyers are starting to appear.  That doesn't mean we're out of the woods, just that I'm seeing actual sustained buying today as opposed to Friday's price action which was really bearish.

If silver can close the day at or above 17.80, its a positive sign.  But I am getting ahead of myself...

Arthur Robey's picture
Arthur Robey
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Harvey Organ

I hate to be an optimist but if Harvey has this thing pegged, I cannot see the Gubmint letting me get away with my ill gotten hoard.

Dec this Year China runs out of silver and demands delivery.

We didn't start the fire! (Oh hang on- I think we did)

KennethPollinger's picture
KennethPollinger
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Harvey is something else

He seems to make a lot of sense, no Chris, Adam??????

Your thoughts on this info would be appreciated.

Harvey certainly suggests a good rationale for some of the global hotspots--US seemingly pushing for war--as a cover up on all this? or to circumvent the outcome?  Dec 22 here we come!

davefairtex's picture
davefairtex
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just how important is gold?

So Harvey has been talking about an imminent COMEX default and GOFO rates for a long time now.  No default has happened.

As a goldbug (and I suppose I am one too), you have to figure out for yourself, "just how much does gold matter to the rest of the world?"  That level of importance drives the enthusiasm the Central Planners have for manipulating prices, engaging in conspiracies, and the rest.

If gold is the single most important monetary thing ever, then those Central Planners will move heaven and earth to keep the price of gold low.

If its not that important - if, lets say, those central planners are much more focused on credit creation and debt, then the likelihood of them moving heaven and earth to restrain the price of gold is not so high.

Occam's razor suggests our current central planners are almost entirely focused on three things: credit creation, debt, and currency exchange rates.  That's what they talk about, that's what they (quite visibly) spend their money on, and that seems front and center of the dialog.  Sometimes, things are exactly the way they seem to be, a Purloined Letter right there in plain sight.

Now then, will this 40 year experiment of an unbacked currency complete with debt bubble work out satisfactorily?  I say no, it won't.  It will eventually blow up.  At that point, having wealth stored in gold will be quite a useful thing - among the many sorts of "real assets" one can possibly own.  But until that final denouement, I believe our central planners will be focused on credit, debt, and currency rates because those are the powerful levers they have used to control the economy for the past 40 years.

These levers have worked for them for decades, so they're going to keep pulling on them until catastrophe strikes.  And gold will remain an afterthought right up until then.

At least that's my view anyway.

Harvey believes the monetary world (including the attention of our Central Planners) revolves entirely around gold, so his viewpoint makes sense - from that perspective.  I just don't share his belief system.

KennethPollinger's picture
KennethPollinger
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Dave, As usual . . .

your insight about Harvey is very useful.

Harvey's belief system: the monetary world (including central planners) revolves ENTIRELY around gold.

YOU see the central planners focused on 1) credit creation, 2) debt, and 3) currency exchange rates.  Does this equal YOUR belief system?, or just what you observe?

Harvey seems to be in sink with Rickard's hypothesis of the importance of gold, especially to China, and possibly Russia: eg., The Big Reset, by Willem Middelkoop.

Can we add a 4th above: gold/silver rates?  The non-visible focus of the suppression hypothesis? to round out and maybe balance our insight??  

Thanks for the time to respond before and perhaps, now.  Ken

Jim H's picture
Jim H
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Gold and Silver

Dave said,

Occam's razor suggests our current central planners are almost entirely focused on three things: credit creation, debt, and currency exchange rates.  That's what they talk about, that's what they (quite visibly) spend their money on, and that seems front and center of the dialog.  Sometimes, things are exactly the way they seem to be, a Purloined Letter right there in plain sight.

Dave, you are either completely enveloped by the psy-ops, or you are a part of it.  Gold is the most important of all exchange rates... because Gold is the money that they cannot print.  Your lack of admission of the truth of manipulation will cause many who read you to lack the will to develop a position in Gold and Silver in the face of the onslaught of propaganda, of which the $$ price is only a part.  

  http://srsroccoreport.com/silver-vs-copper-manipulation-the-tale-of-two-...

  

The world has been BAMBOOZLED to believe in a FAIRY TALE, a DELUSION, and a PONZI SCHEME that will all end badly.  The real value is found by holding investments that store wealth.  Paper assets today are mostly future liabilities with a BIG SUCKER stamped across each one.

For the price of silver to fall 51% compared to copper’s 22%… SOMETHING FISHY THIS WAY BLOWS.

Why?  Because silver suffered a 103 million oz structural deficit last year, while Copper still had plenty of warehouse stocks in reserve.  So, the world continues to consumes its remaining cheap above ground silver stocks as if there was no tomorrow.

At some point, the LIGHT will go off and the world will wake up to the fact that GOLD & SILVER are stores of value and not stupid pieces of metal regurgitated by the NITWITS on the financial media.

Unfortunately, there won’t be much silver to go around at this point…. and there LIES THE RUB.

 

   

sand_puppy's picture
sand_puppy
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In defense of Dave's gold view

Not being a trader, and being of limited financial background, it is hard to weigh in when experts disagree.

Buuuuut.... Dave said:

Now then, will this 40 year experiment of an unbacked currency complete with debt bubble work out satisfactorily?  I say no, it won't.  It will eventually blow upAt that point, having wealth stored in gold will be quite a useful thing - among the many sorts of "real assets" one can possibly own.  But until that final denouement, I believe our central planners will be focused on credit, debt, and currency rates because those are the powerful levers they have used to control the economy for the past 40 years.

These levers have worked for them for decades, so they're going to keep pulling on them until catastrophe strikes.  And gold will remain an afterthought right up until then.

So that is where gold stands in my estimation, too.  

With one addition clarification: that one of the CB levers that is working quite well is that of keeping gold as an afterthought -- which is Jim's point.

 

KennethPollinger's picture
KennethPollinger
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Does China really have that 10 year Silver loan

to the USA?  Evidence, please.  That is, according to Harvey.

Jim H's picture
Jim H
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If Gold is an afterthought for central bankers...

Then why do Russia's central bankers feel so differently?

What makes Russian central bankers different than US?  They both have fiat currency systems to protect.. but obviously, Russia, and the central bankers of many other countries, don't treat Gold as, "an afterthought".  Instead, they spend Billions of dollars worth of their nations money on Gold, year after year after year, especially since the financial crisis of 2008.    

YOUR central bankers, and your Treasury (ESF) want you to think Gold is an afterthought. That is the psy-op.. right there.  That is the mind game.  The price of Gold is firmly in their sights, and firmly in their grasp until such time as the US-based paper futures market no longer holds sway.  Dave can crow all he wants about the price being set by legitimate, or purely "financial" market participants looking to profit short term... I don't buy it, and I will point out the fallacy of this view as much as I have energy to do so.   

davefairtex's picture
davefairtex
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what does the fed think anyway?

Ken, JimH-

Yes, definitely my belief system is that our friendly central bankers don't focus their energies on gold.  It is driven by my observations, and my assessment that Occam's Razor is probably the best tool to use in most cases for understanding policy.  Not always - but most of the time.

My belief is the Fed focuses the vast bulk of staff time and management thinking on analysis surrounding interest rates, credit creation, and currency manipulation, since that is what they really believe to be the most effective strategy to manage the economy.  If they think about "gold suppression", its probably only when gold goes nuts like it did in 2011.

The issue here is not whether owning gold is a good idea for you and me.  I believe that it is.  (Doesn't matter how many times I say this, Jim seems never to quite pay attention).  The issue is, whether the FED focuses its policy efforts and energy on gold price suppression.  I do not believe they do.  I believe they regard goldbugs as a bunch of crackpots, and then they devote their staff time and thinking to interest rates, jawboning markets around, credit creation, debt monetization, equity market-pumping, and the like.  If there was energy put into manipulating markets in secret, I think it is far more likely to be focused on US equities than on gold.

From reading and listening to Harvey, it seems that he would have you believe that the vast majority of time the Fed management spends is on strategizing on how to hose the goldbugs, listening to reports of successful (or failed) daily gold and silver manipulation, with cheers erupting at every drop in the price of gold.  In Harvey's world, gold is the top agenda item at every Fed meeting.  "What is going on with gold" is always the first thing every Fed president thinks about when they wake up, and the last thing they think about before they go to sleep.

I just don't buy it.  That's my belief system, but - I just don't buy it.  We're not on a gold standard, so they focus on the levers that have worked for 40 years post gold standard.

I do believe that the Fed views gold as a "backup plan" in case the whole fiat thing goes sideways.  But its only a backup plan for them.  I suspect the fiat thing will go sideways at some point.  Someone will go one step too far (Japan, perhaps?) and it will all end badly.  But I'm not the Fed.

As a matter of curiousity, I did a quick bit of math on what Russia (the poster child for gold accumulation) has been accumulating.  The chart below has the foreign currency reserves as well as the number of gold ounces (multiplied by the gold price).  So you tell me.  Where has Russia put the bulk of their efforts in reserve accumulation?  "FC" = "Foreign Currency"

Since 2005, Russia has bought 300 billion in paper, and only 40 billion in gold.  OMG Russia is a closet bunch of paperbugs!!

FWIW, Russia has accumulated more gold (as a percentage of total reserves) than paper over time.  They started with 4% in 2008 and are now up to about 10%.  But its worth noting that - in the poster child for gold accumulation - gold remains a small percentage of Russia's reserves.  They are now up to 1100 tons of gold; about 1/3 of Germany.

To me, it looks like Russia is constructing a hedge.  I agree with their policy.  They're a resource producer/exporter, and having the option of going to a gold-backed currency makes good sense for them.  But its just a hedge.

Ultimately, I am not suggesting we follow what the Fed is doing.  But assuming that everyone out there is out to get us just seems silly and overdone.  Why not just quietly accumulate more real stuff on price drops, and wait for the fiat thing to end badly, which based on current policies it most likely will.  Why overcomplicate it all with secret agendas and plots that just serve to distract?

KennethPollinger's picture
KennethPollinger
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Contributions of Rickards/Middelkoop

Well guys, this is getting more and more interesting! (and maybe personal).

I'd like to summarize where I PRESENTLY stand re this issue of belief systems.

1. #5 Harvey video shakes some of us up.

2. #6 Ken asks questions

3. #7 Dave responds, insightful, but missing something?

4. #8 Ken asks about Dave's beliefs: Is it JUST a) credit creation, debt, and currency exchange rates? Or, maybe there should be an added feature: hypothesis of gold/silver suppression?

5. #9 Jim jumps in, again, thankfully: GOLD IS THE MOST IMPORTANT OF ALL EXCHANGE RATES!! (See Nixon speech about taking us off the gold standard--is this an example of currency exchange rates??)

6. #10 SandPuppy: gold as an afterthought.

 Dave again: The Fed focuses on the levers that have worked for 40 years post gold standard, keep gold as an AFTERTHOUGHT.

7. #12 Jim, once more: HOW about Russia (and China and other central planners) buying up gold?? JUST a "mind game?"

8. #13 Dave here: Russia and China buying gold as a hedge (against the devaluing of their treasury and more holdings).  BUT the last paragraph is really something: "Why complicate it with secret agendas and plots that just serve to DISTRACT."

7. ENTER: Rickards and Middelkoop.  Rickards: Currency Wars; and, The Death of Money.  Willem Middelkoop: The Big Reset: War on Gold and The Financial Endgame.

From my reading of at least these three, another important hypothesis (not a secret agenda nor a plot) seems reasonable in light of all the above.  It's called the IMF and SDRs (not very secret!!) hypothesis.  See Epilogue of Willem (pages 194-196).  Basically, "we have entered an era of virtual global state capitalism." 

And: "Since the fall of Lehman, central bankers are desperately trying to avoid a collapse of the financial system. Governments and central bankers know the whole economic system will fall apart once they stop printing money.  This leads to the only logical conclusion that we are stuck with infinite QE, etc.

... this crisis has the capacity to end in an all-encompassing distrust of paper assets.

"Central bankers are therefore very much aware that is is essential to come up with a reset plan before this occurs. . . . they will do everything possible to modify the financial system in order to avoid another 2008-style collapse...when they introduce their reset plans."  The "IMF and SDRs could give enough extra time to work on a broader solution for the worldwide mountain of debt. without the system collapsing completely." (It's in their interest for it NOT to collapse totally)

See Chapter 6--The Big Reset, really excellent, Dave.

Seems to me Dave focuses on the SHORT term view and some of us on the LONG term perspective.

Both are needed, without calling each other names and implying hidden intentions.

At least I hope you all can read the three books, in depth, mentioned above, and THEN respond to my feeble attempt to make sense of all this.   Good luck, Ken

Like most of you I still agonize about how much of my portfolio should be in gold/silver. Sprott says 70%, is this true? But yuan, in case? Sure, land, real estate, maybe art, and SOME metals (Rickards), and some agricultural companies (without ever saying which ones!)

Part of me wants to take back some monies in TIAA-CREF and buy gold but then maybe cash is KING. Finding balance in all this is problematic.

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davefairtex
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nice summary

Ken-

Nice summary.  I'd add that I also believe we should individually follow China and Russia and construct for ourselves a hedge as well.  I believe they are doing the smart thing.  But - like China and Russia - we should not put all our money in gold, or really, in any one place.  Diversify!

But between where we are now, and The Great Reset (in whatever form that will take) probably lies deflation.  And the buck is the likely winner during that period of time.

And the buck isn't winning because of manipulation; that is all about the deflationary forces in play right now, and the large amount of dollar debt out there.  And that deflationary downdraft will drag gold right down with every other asset class.  And again, that's not manipulation.  Imagining manipulators around every corner might cause you to miss the very real deflationary dragon breathing fire in your face.

People say "gold is money" and that's true - to a point.  But unfortunately its not the money in which your debts and expenses are denominated, so if you end up having all your liquid net worth in gold, and yet you have dollar debts and regular dollar expenses, it is like having all your cash in Pounds.  You are at the mercy of the pound-dollar exchange rate, and if the rate goes against you for any length of time, you are not a happy camper.  Cash buffer large enough to survive the deflationary period is very important.

So my advice is avoid the quasi-religious gold fortune-tellers who invoke manipulators to explain every gold price drop, and use gold the way Russia and China do - as a sensible hedge against a system reset.  Russia and China also have paper too, so don't be afraid to have some of that as well.  And gear yourself up emotionally and realize the forces of deflation easily could hammer your gold position between now and the monetary "system reset" which is likely to happen, but it may not happen next month, or even next year.

I am diversified.  So when my gold position drops, I know my dollar position is actually improving, so it is less stressful to me.  Likewise, I have some of my money in a foreign currency, and some in USD.  I have enough to pay my expenses for a year, which gives me peace of mind.  If I had every penny I owned in gold, I'd be much more nervous.  For me, this is about sizing my position so I can sleep at night.

This is not just about getting to the end point, it is also about enjoying the journey.  We shouldn't just be hanging around waiting for the Earth Shattering Kaboom.  Let's have fun along the way too.

If we all come out of this with half of our skin intact, we'll be doing better than 90% of the rest of the people out there.

Or in war-gaming terms, the victory conditions in this particular scenario don't require perfection in execution!

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
Dave--YOU DID IT AGAIN

Thanks for your thorough response--very,very helpful!!  I need to meditate on this some more.

And maybe this will also help. Is the IMF plan B?

The Big Reset

 

Buy online

 

OMFIF: US and the IMF move towards acceptance of renminbi in new version of the IMF’s Special Drawing Rights (SDR)

Posted: 13th Sep 2014
Author: Willem Middelkoop

Schermafbeelding 2014-09-13 om 10.42.52The London based financial think thank OMFIF carried out an 11-day tour of Asia on 14-25 July encompassing six financial centres. The tour benefited from 48 top-level conversations among them heads of central banks and sovereign funds, other senior government and central bank officials, leading investors, pension funds, economists and academics. OMFIF concludes that the renminbi is part of a multiple reserve currency system already. One Chinese official said that the renminbi could succeed internationally only if it was a ‘quality currency’, which could point towards some form a gold backing in the future . According to OMFIF’s monthly newsletter the number of countries holding renminbi in their official reserves has risen to around 40. And most important from our point of view, the US and the IMF appear to be moving towards acceptance that the renminbi could form part of a ‘redrawn version of the IMF’s Special Drawing Rights‘, which could replace the dollar as the world reserve currency one day.

OMFIF has published ten points on the global economy to sum up the main issues and conclusions discussed during the tour;

1- Policy divisions between western and Asian economies seem to be growing. Increased Asian confidence and resilience are accompanied by belief that the west (and especially Europe) has lost its way. One Asian sovereign fund leader contrasted Asia’s emphasis on long term returns with the short-termism and greed of western investors. ‘The result of the global financial crisis was that the man in the street was devastated while bankers enjoyed their bonuses.’ He highlighted the difference between western rigour on Asia over the 1997-98 financial crisis and European compromises made toward indebted countries in the EMU crisis.

2- The decoupling danger appears most acute for Europe, since the US and Asian economies were seen as more closely aligned. There was talk that the Asian economy, in terms of trade flows, was more integrated than that of the euro area – despite the lack of a common currency. One leading Asian central banker was gloomy about the European outlook, where he said ‘years of restructuring’ were needed, even though economic output (in contrast to Asia and the US) had not yet returned to pre-crisis levels. The most likely scenario for currencies was a firmer tone for US and Asian currencies (with the exception of the yen) and a weaker euro.

3- Belief is growing that prolonged international monetary stimulus seems to be running into diminishing returns and could become self-defeating. There was worry about the long-term impact of very low interest rates on pension funds and insurance companies. Monetary policy could become tighter in Asia to ward off overheating, but countries could not allow exchange rates to take the full strain, so management of capital flows were necessary. Although Asian foreign reserves can be regarded as excessive, this is no longer a major concern for most central banks, which appear wary about losing reserves as a result of foreign exchange or political upsets.

4- The Chinese economy is slowing, but the authorities seem to be in overall macroeconomic control. Growth is likely to be around 7.5% again this year. Main areas of concern are the property market and shadow banking. There were some worries that the authorities are not proceeding fast enough with interest rate liberalisation to accompany capital account liberalisation. The two reforms need to move in tandem so that allowing more capital to leave the country can be accomplished without suffering setbacks. China will be cautious on the latter while refining procedures on the former.

5- Japan seems to have turned a corner with more vigorous implementation of Prime Minister Shinzo Abe’s economic reform measures this summer. Japan seems likely to tolerate a further weakening of the yen as US monetary policy gradually tightens over the next 12 months and the Bank of Japan maintains large-scale purchases of domestic government bonds well into 2015. Although core inflation fell to just 1.3% in June, officials say the rate should be rising towards the 2% target level from the fourth quarter onwards. Officials are relatively confident that Japan is not moving towards permanent current account deficits.

6- There is considerable suspicion about the IMF and an excessively Washington-focused view of 6 the world. Quota reforms and governance changes at Bretton Woods institutions remain stymied by congressional refusal to ratify them. The result is frustration in leading Asian countries and a number of moves – whether through the Chiang Mai reserves-pooling initiative or the latest plan for a Brics bank – for emerging markets to lower their IMF dependence. The result may be deadlock, as the emerging economies themselves lack a consensus to move forward meaningfully on genuine alternative structures.

7- Internationalisation of the renminbi is proceeding on many fronts. The Chinese authorities now accept that the renminbi is, de facto, part of a multiple reserve currency system in which the dollar continues to play the leading role. One Chinese official said that the renminbi could succeed internationally only if it was a ‘quality currency’. The number of countries holding renminbi in their official reserves has risen to around 40. The US and the IMF appear to be moving towards acceptance that the renminbi could form part of a redrawn version of the IMF’s Special Drawing Rights.

8- Internationalisation of the yen seems to be taking on a new form. Tokyo Ministry of Finance 8 officials are stepping up efforts to market Japanese government bonds to central banks and other foreign public sector investors, but purchases of JGBs will take off only after a rise in longer term interest rates from present levels below 1%. A return to more normal JGB interest rates of above 3% – which will prove loss-making for present holders such as the Bank of Japan – is not likely for at least two years. Part of the BoJ/MoF strategy of encouraging Japanese private sector portfolio shifts away from JGBs into equity-type assets is that the BoJ can bear such losses far more easily.

9- Asset managers across the region – both public and private sector – are becoming increasingly internationalised, with some of the older-established funds serving as benchmarks for newer, less mature funds. Large state pension funds in Japan and China are being reformed to bring their asset allocation practices more in line with international standards, with Canadian pension funds – where the proportion of foreign equity ownership is much higher than in Asia – seen as a particular benchmark. Diversification into Asian currencies is an established trend, part of moving away from the dollar as the region’s main transaction currency.

10- Despite general Asian self-confidence, there were warnings that the region could over-stretch itself. Among the challenges are: crossing the threshold to developed country status; improving institutional governance; coping with ageing populations and rising inequality; and promoting financial development. Lack of financial markets may hinder more general economic and trade integration. Cross-border flows were said to be much greater than before the 1997-98 Asia financial crisis – emphasising the need for macroprudential controls now sanctioned by the IMF.

 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Dave's Russia chart vs mine, and other topics of PM interest

Some folks viewing this thread may have noticed that Dave's data on Russian reserves looks different, with respect to Gold, vs. mine.  Did you realize why?  It's because Dave's chart shows Russian Gold in dollars, and mine shows Gold in ounces.  Dave's chart is showing the Gold holdings of Russia in terms of the dollar exchange rate.... kind of ironic since one of Dave's points as I understand it is that the FED doesn't care about this exchange rate. 

Simply stated, by denying that FED/Treasury led market manipulation exists, a person lacks the ability to understand how close we might be to the singularity of a paper vs physical disconnect, or even the awareness that this is coming.  

  http://www.paulcraigroberts.org/2014/09/22/rigged-gold-price-distorts-pe...

...The fact that the price of gold is determined in a futures market in which paper claims to gold are traded merely to speculate on price means that the Fed and its bank agents can suppress the price of gold even though demand for physical gold is rising. If there were strict requirements that gold shorts could not be naked and had to be backed by the seller’s possession of physical gold represented by the futures contract, the Federal Reserve and its agents would be unable to control the price of gold, and the gold price would be much higher than it is now.

So, are there signs of tightness in the physical market?  You bet.  Let's take Silver phys... I studiously watch the Texas Precious Metals website because they have a policy of only shipping that which they have in stock, hence you can readily see what is in stock and what is not.  For months and months now, they have not been out of stock for any major items.  That trend has shifted with this latest deep Gold and Silver smash... here is what I am seeing in Silver;

 

Thur  9/18     11 bulk forms of Silver coin in stock, none out

Fri  9/19    Austrian Phil monster boxes out of stock,   10/11 in stock now

Mon 9/22   No change, 10/11 in stock

Tue 9/23   No change, 10/11 in stock

Wes 9/24  All Texas rounds out of stock, $500 bags 90% dimes/qtrs out of stock, 7/11 in stock.

But remember, the price is telling us some kind of market truth... nobody wants Silver.. the streets are literally paved in the stuff!   

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
exchange rates, failures to deliver, coin shops

JimH-

My sense is, the Fed doesn't seek to actively manage the silver/dollar exchange rate.  They do seek to actively manage interest rates, credit creation, market expectations, and the overall level of the equity market.  Just listen to them, and you'll know what they are after.  Right now, they're super worried that the US market isn't pricing in a rate increase, so speaker after speaker from the Fed goes out there and points this out.  They are terrified that the US equity market is too optimistic, and when the Fed actually raises rates, it will go into shock, tip over and sink, much to the chagrin of the Fed who seems quite proud of where the equity market is today.  Its pathetic, in a supposedly "free market" society to have the central bank worried about such things.

As for me - I definitely care about the silver/dollar exchange rate, because I have expenses in dollars.  If all my expenses were in silver, I wouldn't care in the slightest.  This is one thing about the goldbug article of faith "silver is money" that I just don't like.  Its not grounded in today's reality, because it doesn't recognize that as long as you have debts and expenses in USD, you are tied to this exchange rate.  If your expenses are in USD, then every month you need to acquire USD (either through work paid in USD, savings of USD, or sale of assets and conversion into USD) in order to live.

Gold and silver are great hedges against the system reset we all believe is coming (and if you don't have a hedge in place, prices today are a reasonable buy point, I believe) but they are not money.  Money is whatever you need to have every month to pay your mortgage, your rent, your food, etc.  To pretend that the USD isn't money is just silly.  I'm sure I'll get called a paperbug for stating this obvious fact, but as long as we all have monthly expenses quoted in dollars, we'll all need dollars, every month.  Even Jim.  He'll need dollars too.  Sheesh.

Regarding Jim's impending Commercial Signal Failure in silver - from what I can tell, every single time the price drops, people go to their local coin shops to buy more silver.  (Buying when the price drops is a reasonable reflex, I do it too.)  Silver coin buyers did this during the 2013 crash as well.  In fact, here at PP we had a whole discussion about this - how some people felt that the coin shops running out of silver coins presaged a failure to deliver in the larger silver market.

The problem with using coins as your metric for the failure to deliver is, the inventory of silver coins isn't that large.  A burst of buying causes it to run out quickly.  The bulk of silver supply is in 1000 oz bars.  So, to detect an imminent Commercial Signal Failure in silver, I'd look at the supply of 1000 oz bars.  First stop would be Sprott and PSLV's premium, second stop would be if the larger coin shops had COMEX bars in stock, third I'd check the larger dealers.  Then I'd watch to see if, over time, the scarcity was remedied by mine supply, or if it persisted.

Right now, a west coast shop has COMEX bars for 57 cents over COMEX.   http://www.golddealer.com/product/1000-oz-comex-silver-bar/.  So my sense is, no impending failure to deliver.

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Gold does not go Poof
Dave,
You are right and you are wrong about money.
 
You are trapped in the same trap as the vast majority of Americans, in thinking that a historical situation will carry on forever, the so called normalcy bias.
 
I know that eloquent spokesmen like Mike Maloney have made the statements that "only gold is money", and I admit I cringe at that statement sometimes, but I equally cringe at your statements that a fiat currency that is being debased at exponential rates is perfectly good "money".
 
The money v. not money debate is the same off point discussion that inflation v. deflation is.
 
Rather than get into a semantics discussion, why not open clear eyes, and see what is and what is not.
 
Let's look at a few basic facts.  First, the historical and universal qualities of money:
1 Widely marketable (acceptable and recognizable for exchange)
2 Transports easily
3  Rare
4  Assayable
5  Durable and easy to store
6  Easily divisible
7  Fungible (all units are similar)
 
Gold and silver have functioned as money, over millenia, because they have all of the above qualities.
 
Almost nothing else (physical) comes close.
 
Fiat paper money (and credit money, which we will come to in a minute) are relatively recent inventions.
 
Fiat paper money and credit money, like most liberal, progressive ideas, are ideas that are fine in theory, and simply work out poorly in practice.
 
Kind of like the communist ideas of "if we just take excess profit (whatever that is) from people who are high producers and redistribute to low producers, everyone will be happy".
 
Or "if we just negotiate with terrorists, they will understand that we don't hate them and they will get along with us and not cut off our heads".
 
Good ideas for grade school (and some prominent universities and political parties), bad ideas for the adult world.
 
In my experience, communism breeds narcistic brutal dictators and impoverished nations, and terrorists want to cut off my head no matter what I say to them.
 
So, unlike Mike Maloney, I agree with you, conceptually, in a theoretical world, that paper fiat credit-units could function as money, but you and I and Jim H. don't live in a theoretical world.  
We live in a real world.  
 
I would concede that fiat money, specifically the USD, has basically functioned as money, because it has had, at least on the surface, the appearance of, and to some extent, the reality of, all the above qualities number 1 through 7.  At least during most King Dollar/ petro dollar times, which include the last 60 years.
 
Gold and silver, sitting (forced these days) quietly in the background, also have maintained all the above qualities number 1 to 7, as they have for all of human history.
 
The key misconceptions that you, and the majority of Americans hold, is that fiat dollars and gold are equal in their stability and intrinsic qualities, and that they are born and die equally.
 
This is simply wrong.
 
Gold and silver are born out of hard human and machine labor, requiring vast amounts of intelligence, exploration, permitting, building, digging, purification, heating and melting, molding, and finally minting, not to mention transporting at several points in time, from the original loads of rock from earth works to moving ingots across the globe to investors and minting companies, and finally to you and me.
 
This hard work, which is increasingly getting harder due to the peak resource paradigm of lower quality ore, which we all know about.  And at the same time, the energy required to extract and purify gold and silver is getting more expensive, driving up the costs and thus lowering the supply at any given price.   This trend could be reversed in theory, if there were a surprise energy renaissance, but none of us see that on the near horizon.
 
The ability of gold and silver to maintain the 7 qualities of money is dependent only on physics.  
 
I don't see the laws of physics changing any time soon, so I have confidence that tomorrow gold and silver will still have all the qualities of money.
 
What you (and admittedly the majority of dollar users) don't understand that fiat paper money's ability to maintain the 7 qualities of money is dependent not on physics, but on human competency and moral behavior.
 
I have conceded that theoretically, fiat paper money could, and historically has, functioned similarly to gold and silver as money.  The two key words are "theoretically" and "historically".
 
Fiat currency is only valuable, and 'rare', if the caretakers of the fiat paper money are exceedingly careful to ensure that the amount of money in circulation "matches" or is representative of the the total true wealth in existence.
 
Unfortunately for you, me, Jim H, and all users of fiat currency is that our caretakers, specifically the United States government and the Federal Reserve, are horribly corrupt and at the same time, completely incompetent. 
 
USD are created at the present time, not to be an accurate representation of wealth in order to facilitate the economic exchange of goods and services.
 
USD are created at present for two main reasons - to keep failing banking institutions solvent, and to allow the U.S. government to continue to spend more money that it takes in in taxes.
 
We can argue about the morality and wisdom of the current situation, but these are the simple facts.
 
The creation of new credit-money in 2014 and the expansion of the credit markets has nothing to do with representing a certain amount of wealth creation, as happens in a normal and correctly functioning monetary system, and everything to do with debt expansion.
 
The most charitable explanation I can give is that our current money creation system is based in debt and future promises to pay, and we have financial caretakers that assume our future ability to create wealth will eventually match, i.e. "catch up" the present rate of credit money creation in the form of government direct debt and financial obligations.
 
This assumption is laughable.
 
Since we have a GDP of about 15 trillion, with on-book government (federal, state and local) of close to 50 trillion, and future retirement and healthcare obligations of 120 trillion, in the face of a system that is becoming more indebted by the day.  I'll leave it up to you whether you think the financial masters are correct.  I do not think so.
 
You also ignore the fact that most of modern economy functions on USD that are actually credit money, the so called lines of credit.  
Again, if you do not believe this, please go back and study the sources and events surrounding the 2008 financial collapse.  
 
The 2008 collapse was not a crisis of "where did all those printed up dollars go that I stuffed under my mattress, I need to spend them to remain solvent".  This was a crisis in 'I will not create more digital credit-dollars for you because I do not trust in your future ability to pay" crisis.
 
While not paper currency and coinage, these lines of credit "spend like money".   They function identical to fiat currency that is earned by hard labor and put into a bank account.
 
If you don't think so, go out and see if you can buy watermelons with your credit card.
 
I think if you try, you will find the answer is yes.
 
The same watermelons can be purchased with a withdrawal of dollars from your savings account.
 
So I hope you understand that your credit-money spends exactly the same as your earned money.
 
One small problem.  Credit money can go away with an immediate 'poof' if the creator or financer of the line of credit decides to withdraw it.  This is true for Visa, your local bank line of credit for local businesses, the big commercial bank members who hold lines of credit including manufacturing and financial corporations, or the Federal Reserve and its funny money balance sheet that expands by buying U.S. Treasurys and MSBs.
 
It is interesting.  I have held gold and silver in my hands, have moved it from one container to another, but I have never seen it go "poof".  Maybe you have.
 
Other dollars that go poof: the value of your house and property in USD, your future earning potential when you lose your job, the value of non-essential items such as jet skis and pleasure boats.
 
Call me old fashioned, but I like to buy and save things that don't go "poof".  As a person with a fiduciary responsibility for my family, things that go "poof" make me nervous.  
 
In addition to the going "poof" phenomenon, the simple fact is that a reckless and irresponsible government and reckless and irresponsible Federal Reserve can destroy at least two of the above qualities of money for USD- rare commodity and wide exchangeability.
 
If the government continues to spend more than it takes in by grotesque levels, and the Federal Reserve continues to enable the reprehensible behavior of monetizing US debt and supporting banks and financial systems by printing USD and creating vast amounts of unbacked derivatives and paper commodities through naked shorting, the USD will die a hyperinflationary death.
 
This is mathematically certain.
 
In contrast to the theoretical world you and the Federal Reserve live in, in the actual world, fiat currency has universally been debased due to the irresponsible behavior of those in charge of the paper (or minted) currency. 
 
This has been true of the Romans, the Germans, the Chinese, or the U.S. government.
 
I appreciate you don't respect my psychoanalytical approach to looking at things monetary and governmental, but in my psychoanalytical construct, based on my experience and study of history, I find nothing to suggest that the current human beings in charge of the monetary system have somehow evolved into superhumans that don't have all the flaws of every human culture previously.
 
Perhaps you see some remarkable qualities that I am missing.  Oh yes, I forgot, we now have really fast computers, and the internet, and the smartest, most "progressive" president in history who clearly does not have all those old pesky shortcomings that those ancient peoples had of dishonesty, greed, narcissism, or power-seeking, so all is well.
 
And just a quick walk down the comment section of any well read blog or website tells you that, should the remarkable superhumans in charge somehow fall short, thanks to the miracles of public schools and great universities and the modern welfare state, the general population has reached a new enlightened state of education, careful thought and critical thinking, tempered with charitable concern for the feelings of their neighbors on the blog or down the street.
 
These inconvenient facts destroy your theoretical world that we can be blissfully happy with our fiat currency.  Apparently your logic is that because I can go down to the 7 Eleven and buy a gallon of milk today with my five dollars today, or pay my rent with a neat little check made out in dollars today, or that greedy and corrupt financial leaders suppress the gold and silver price by naked shorting and manipulative algorithms, that fiat USD are perfectly good money.
 
You may be right now, but I don't only live for the now.
 
Until they find a way to print unlimited oceans of gold and silver, or find a way to make gold and silver go poof, I will be happy to collect those 'worthless' items that I can't pay my rent with, or buy bread with, or buy that internet trinket from China with.
 
Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Many good points HRunner...

I am sure you are aware that many of the points you make are in sync with the Austrian school of economic thought.  Menger said,

  Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. These choices, he wrote, are determined by individual subjective preferences and the margin on which decisions are made (see marginalism). The logic of choice, he believed, is the essential building block to the development of a universally valid economic theory.

http://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html

HRunner said,

I appreciate you don't respect my psychoanalytical approach to looking at things monetary and governmental, but in my psychoanalytical construct, based on my experience and study of history, I find nothing to suggest that the current human beings in charge of the monetary system have somehow evolved into superhumans that don't have all the flaws of every human culture previously.

FWIW, I am with you and the Austrians Hrun. 

Rather than attack points of difference with Dave, which I am often wont to do, I am going to just expound on what I am thinking and doing right now, from where I sit as one who holds wholeheartedly the belief that the FED and the US Treasury are behind the manipulation of the precious metals pricing.  Because I don't usually take the time to explain the background, I think I get misinterpreted by some, maybe even by Dave, as a guy who is just mad because he put all his money into PM's and now the price has gone down.  This is not the truth at all... BECAUSE I understand what is going on, I actually am sitting in > 50% cash in my brokerage account, waiting for a bottom in PM's.  Bottoms are very hard, possibly impossible to pick... but we can try to read various tea leaves.  As for physical, I have been dollar cost averaging since 2009, and I thank the heavens for the ability to buy even more physical today at 2009 prices.  But even now, with Silver at $17.50, well below the price of extraction, and with fresh signs of physical shortage showing up, I am not going, "all in".  I am not going all in because I fear that we are in fact getting set-up for brief but brutal post-taper, stock market led dump of all markets that could result in a final capitulatory spike low on the PM's.  My going all-in point will come depending on how TPTB play their hand with the manipulation - because the possibility does exist that they will push the metals down so hard prior to the stock market crash that they get the timing messed up and the physical market binds up prior to their ability to generate the spike low in the paper markets (and thus explain said spike low based on all those poor comex traders getting margin calls and having to dump).  TPTB sometimes goof up their timing you know.... like having Bldg 7 "fall down" hours after the other towers.

On all fronts, the degree of desperation in the efforts of TPTB to maintain the facade of a functioning economy is increasing;

            http://investmentresearchdynamics.com/censusbureau-con/

    In fact, the Census Bureau reported new home sales in the West rose 50% from July and 84% year over year.   This is outright fraud, here’s why:  in my latest homebuilder report, I feature a builder with significant operations on the west coast.  This builder specifically cited a weak outlook for sales.  Furthermore, based on regional reports from both the Bay Area and Southern California – which I’ve detailed in some previous posts – the housing markets in both those areas are starting to deteriorate significantly.

Finally, the Census Bureau is reporting a sizable drop in months supply of inventory.  Again, I defer to what the actual new homebuilders are reporting.  Every single new homebuilder company with public stock is reporting their highest amount of inventory since the housing bubble peak.  Every single one.   How is it earthly, let alone mathematically, possible that new home inventory dropped in August?   That’s right, it’s not.

In order to maintain the illusion of the dollar's primacy, they hit the "alternative" monies Gold and Silver even harder than the simple dollar strengthening would require... but Gold and Silver and the dollar at not the same, as HRunner so well describes;

The key misconceptions that you, and the majority of Americans hold, is that fiat dollars and gold are equal in their stability and intrinsic qualities, and that they are born and die equally.
 
This is simply wrong.
 
Gold and silver are born out of hard human and machine labor, requiring vast amounts of intelligence, exploration, permitting, building, digging, purification, heating and melting, molding, and finally minting, not to mention transporting at several points in time, from the original loads of rock from earth works to moving ingots across the globe to investors and minting companies, and finally to you and me.
If you want to store some of your labor... the fruits of your labor.. as money, the fact is Gold, and to my mind especially Silver (because it is so industrially as well as monetarily useful) are much better ways to do this vs. debt-based fiat.  Because it takes energy to dig out Silver, and because it is a primary ingredient in the predominant solar cell technology, it is literally stored energy.  Because it's scarcity is regulated by nature, and not man, it is not subject to the vagaries of being printed.  Honestly, I am more afraid of the fact that dollars can be, "poofed" into existence vs. the idea that they can be "poofed" out of existence  blush
 
Price.  Let's talk about price.  My contention is that price has been manipulated so brutally since 2011 that the current price is no way reflective of supply vs. demand balance.  As one who believes manipulation is and has been occurring, I believe that a break in the manipulation can and will result in a very large stepwise rise the price of Silver and Gold.  I don't know how large the rise will be, and I don't really care about the multiple.  I don't know when the, "commercial signal failure" will happen, and by pointing out that one online coin shop was starting to show shortages in physical I was not saying that this was happening now, or would happen tomorrow.  What I AM saying is that TPTB are now pushing price into a territory where the small contingent of the awake, in the US, like ME, even in our downtrodden PM stupor after three years of brutal price suppression, are starting to buy up the available stocks.  This is a vitally important point to understand... it does not and will not take the broader public's involvement to run out the stocks of phys.. just the very small contingent of folks like myself and HRunner, who can and will buy that next incremental monster box or 90% bag is all it takes.  That is how scarce this stuff really is.    
 
A demand spike for physical is the endgame here.  Regardless of the fact that TPTB can and do pave the streets in paper Comex contracts, the fact remains that there are 7 billion humans on the earth, and only 800M ounces of Silver mined yearly.  Unlike Gold, there is not a huge stock of Silver.. let's just call it one year's mine supply.  There is only 1/10 ounce per person available out there, worldwide. Let that sink in, as you consider the ever increasing demand for physical Silver coming from China and India;
 
https://www.bullionstar.com/image/2173
 
Don't be fooled.  Silver is a scarce commodity.  Once the physical starts to run low, the premiums will rise and the actual low price to get real physical will have passed, regardless of the paper Comex price.  Today, you can still get beautiful coins in large quantities for around $2.60 over spot, even less for plain maples... but this will not last, unless TPTB take their foot off RIGHT NOW.  I am kind of hoping that they don't take their foot off, to be honest.   
                   

                 

 

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1512
Dollar cost averaging

I love to read you guys debating while I try to keep up with what's going on.  I reserve judgment on many of the finer points of the debate, but with the following I'm in 100% agreement:

Bottoms are very hard, possibly impossible to pick... but we can try to read various tea leaves.  As for physical, I have been dollar cost averaging since 2009, and I thank the heavens for the ability to buy even more physical today at 2009 prices.  But even now, with Silver at $17.50, well below the price of extraction, and with fresh signs of physical shortage showing up, I am not going, "all in".  I am not going all in because I fear that we are in fact getting set-up for brief but brutal post-taper, stock market led dump of all markets that could result in a final capitulatory spike low on the PM's.  My going all-in point will come depending on how TPTB play their hand with the manipulation - because the possibility does exist that they will push the metals down so hard prior to the stock market crash that they get the timing messed up and the physical market binds up prior to their ability to generate the spike low in the paper markets (and thus explain said spike low based on all those poor comex traders getting margin calls and having to dump).  TPTB sometimes goof up their timing you know.... like having Bldg 7 "fall down" hours after the other towers.

Convinced that we're in the ball park of "A" low (though perhaps not "THE" low), I'm making a fiat-for-gold/silver conversion in the next few days.  In fact, I'm doing my dollar cost averaging purchases for the next several months in the next few days.  I'm not "all in" either, and would love for nothing more than a precipitous drop in gold/silver corresponding to a general market collapse in the near future. My not-set-in-concrete plan has been to continue to make dollar cost averaging purchases until gold hits $2,000/oz, then reassess (switch to silver exclusively, cash, ammo, food, land, etc?). The high in gold in 2011 near $1,900 almost triggered my reassessment and I am constantly amazed how much I've been able to accumulate since then after I thought I was just about out of the game. 

Tom

"Welcome to the Hunger Games. And may the odds be ever in your favor."

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
strawman-fest

Hrunner-

So let me start out by saying we really do agree on most of the matters of substance.  Fed has serially debased dollars since 1911, continually manipulated the economy, is in business solely to make the bankers happy, gold has reality independent of men's foibles, fiat money's "artificial scarcity" depends entirely on men acting morally, and so on.  Agreed so far?

Now then, given you're such a smart guy, it really astonishes me that you have managed to get it into your head that I think some pretty odd things.  Let me do you the courtesy of pointing out where you got confused:

You are trapped in the same trap as the vast majority of Americans, in thinking that a historical situation will carry on forever, the so called normalcy bias.

Eh, no.  As I said just yesterday, I'm expecting a big reset at some point in the not so distant future.

The key misconceptions that you, and the majority of Americans hold, is that fiat dollars and gold are equal in their stability and intrinsic qualities, and that they are born and die equally.

Uh no.  I don't believe anything of the sort.  Unless you'd care to provide a quote where I said such a silly thing...

In contrast to the theoretical world you and the Federal Reserve live in, in the actual world, fiat currency has universally been debased due to the irresponsible behavior of those in charge of the paper (or minted) currency.

Two-part sentence, second part first.  Our friendly Fed has been quite irresponsible; I've said that many times, I'll say it as many more times as necessary.  Quite.  Irresponsible.  First part: I don't live in the same world the Fed lives in, even though I do refer to their macro database a whole lot.

These inconvenient facts destroy your theoretical world that we can be blissfully happy with our fiat currency...

You're half right.  As long as we have debts denominated in dollars, and daily expenses denominated in dollars, we must use dollars to live.  That's not theory, that's just reality.  Reality is not the same thing as being "blissfully happy" - its simply a requirement of existing.  As in, "I'm blissfully happy that I'm breathing air every few seconds so I don't die."

The more debts you have, the more expenses you have, the higher the pile of dollars you'll need as a buffer if things go bad.  Chris and I disagree on how long the period of deflation will be - he thinks it is probably just a couple of months, I think it could be longer, but we both agree that you need a pile of cash long enough to last through that period.

Until they find a way to print unlimited oceans of gold and silver, or find a way to make gold and silver go poof, I will be happy to collect those 'worthless' items that I can't pay my rent with, or buy bread with, or buy that internet trinket from China with.

Amen brother!  Me too!  I like gold, my wife Eleanor likes gold, and even my dog Falla likes gold.  As I mentioned just yesterday, I have this gold & silver hedge against a system reset.

How is it that I can both acknowledge the reality that we need a certain number of dollars to live our daily lives, and at the same time own gold as a hedge against a system reset?

Probably because I live in the real world!

There now, wasn't that fun?

 
Arthur2014's picture
Arthur2014
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
money as a social entity

Dear Hrunner,

my following remarks may evoke the impression that I want to take a position strictly opposed to yours. But I just want to figure out a quite adequate description and a quite good analysis.

Personally, I have not (yet) taken position for or against hedging with gold respectively for or against gold as a legal tender / as a circulating currency.

Hrunner wrote:

...First, the historical and universal qualities of money:

1 Widely marketable (acceptable and recognizable for exchange)

2 Transports easily
3  Rare
4  Assayable
5  Durable and easy to store
6  Easily divisible
7  Fungible (all units are similar)
Gold and silver have functioned as money, over millenia, because they have all of the above qualities.
Almost nothing else (physical) comes close.

The physical qualities you enumerate / you specify focus on money as a thing. You refer to the physical stuff money should be made off.

I want to bring in another aspect: There are different kinds of ontological entities: things, properties, relations etc..

As far as money has a social function it is a relation (not a thing): a relation between creditor and debtor. / a relation between a person having a claim (on goods) and another person having an obligation (for example the obligation to pay for received goods or to pay taxes)

Hrunner wrote:
Gold and silver are born out of hard human and machine labor, requiring vast amounts of intelligence, exploration, permitting, building, digging, purification, heating and melting, molding, and finally minting, ...
This hard work, which is increasingly getting harder due to the peak resource paradigm of lower quality ore, which we all know about.  And at the same time, the energy required to extract and purify gold and silver is getting more expensive ...

The amount of work / the labor costs one has to invest does not / do not determine the value of the resulting product

Artists (composers, musicians, painters, performers etc) and scientists often make the experience that the value of their exertion / labor is not recognized / appreciated by society or within their scientific community. These are the common cases when their work is rejected.

Concerning gold: Much exertion does not imply that there is any demand and that anyone is willing to pay any price at all.

As to the difference between value and (market) price. Investing more labor does not guarantee that the produced good can be sold for a higher price. Manufacturing costs / costs of production do not determine the attainable market price. Otherwise one could artificially augment the exertion in order to attain a higher value and eventually a higher market price.

In the case of two comparable goods the one with the lower production costs has a decisive advantage.

At least t in developed counties staple foods / basic foods have an enormously high utilization value but nevertheless they are quite cheap.

Since potable water is essential for human survival it has a tremendous value. The required exertion affects its price, but not its value.

The amount of work / the labor costs one has to invest does not / do not determine the value of the resulting product

Hrunner wrote:

Credit money can go away with an immediate 'poof' if the creator or financer of the line of credit decides to withdraw it.  ...

Other dollars that go poof: the value of your house and property in USD, your future earning potential when you lose your job, the value of non-essential items such as jet skis and pleasure boats.

Gold is really non-essential. It has almost no practical value / no value in use in everyday life. Its worth and acceptance rely on social conventions no less than any other kind of money made off any other physical stuff must rely on conventions because money is a social entity..

I don’t dispute the chemical advantages of gold but its physical and chemical qualities do not determine the social function.

I suppose that it is exactly its dispensability for practical purposes / applications which qualifies it as stuff because it is not consumed as other commodities (grain, water, silver etc.) are.

Thanks to its very favorable chemical properties gold as stuff cannot go poof. But its social function could vanish: For example in the case that possession and hoarding of gold is forbidden or in the case that mankind voluntarily turns away from the usage of gold.

As well as human beings could simply lose interest in smoking cigarettes. Ironically, the value of cigarettes goes poof from the moment on when cigarettes themselves no longer go poof.

What do you think about my remarks?

Best regards

Arthur2014's picture
Arthur2014
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
“Why Warren Buffett Hates Gold”

http://www.fool.com/investing/general/2014/09/13/why-warren-buffett-hate...

“Why Warren Buffett Hates Gold”

The article only repeats old statements from 1998 which can as well be read in the Wikipedia article on Buffett:

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

“Buffett emphasized the non-productive aspect of a gold standard for the USD in 1998 at Harvard:

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

In 1977, about stocks, gold, farmland and inflation, he stated:

Stocks are probably still the best of all the poor alternatives in an era of inflation – at least they are if you buy in at appropriate prices.

Tobacco

in 1987, Buffett was quoted as …:

I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.

—Buffett, quoted in Barbarians at the Gate: The Fall of RJR Nabisco

Speaking at Berkshire Hathaway Inc.'s 1994 annual meeting, Buffett said investments in tobacco are:

fraught with questions that relate to societal attitudes and those of the present administration. I would not like to have a significant percentage of my net worth invested in tobacco businesses. The economy of the business may be fine, but that doesn't mean it has a bright future.

—Buffett, Berkshire Hathaway annual meeting (1994)”

 

The same might in principle hold for gold: The societal attitude towards gold might change. The majority of people might no longer treat it as money / as extinguisher of debt and therefore  lose interest in hoarding it.

Arthur2014's picture
Arthur2014
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
Mourtaza Asad-Syed: Gold Investing Handbook

I have only read the table of contents on the amazon.com-website. It made a positive impression on me because its bibliography on academic studies (page 155ff) also includes papers taking a critical / skeptical stance towards gold.

Mourtaza Asad-Syed:

Gold Investing Handbook: Protect your assets from the upcoming US debt default!

Paperback: 184 pages

Publisher: Investment & Strategy; 978-2-9700978-0-8 edition (September 1, 2014)

ISBN-10: 297009780X

ISBN-13: 978-2970097808

http://www.amazon.com/dp/297009780X/ref=cm_sw_su_dp

 

Perhaps the experts among us want to comment on it.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
gold and value

Arthur2014-

Your observations could be summed up by saying "what happens if we wake up one day, and nobody cares about gold?"  (Reductive, but that's the core of the argument).

Baseball cards, paintings, rare wine - all of those things have value because we as a society place such a value on them generally because of scarcity.  They certainly have zero utility value.

Could we boil that down to wanting to have something that other people don't have?   I think so.  That seems to be a basic element of human nature.  We could as a society stop caring about such things.  We could also wake up one morning and decide as a species that we weren't going to be greedy, or short-sighted, or indulge in any number of other human vices.

Its possible.  But - do you think this is a likely near-term outcome?

Gold has a 6000 year track record of being valued by society.  I'd say that's likely to continue.

As a trader, I've been taught to respect the trend, until it is shown to have changed.

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