Gold Goes Gaga Over Global QE

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machinehead's picture
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Gold Goes Gaga Over Global QE

It made the front page of the WSJ today: Central Banks Open the Spigot, blared the headline. The kickoff was from a most unlikely source: the Bank of Japan, which dramatically slashed its policy rate from 0.1% to 'virtually zero' [is joke, is joke!], plus announced some new bond buying.

The USA, not accustomed to being No. 2, is the next blue suede QE shoe to drop, says the WSJ:

Central bankers elsewhere are strongly indicating that they are preparing to open credit spigots to reflate their economies at a time when fiscal policy is stalled or contracting.

In the U.S., Fed officials are signaling that the huge bond-buying effort they ended in March is likely to be resumed, perhaps as soon as its Nov. 2-3 meeting. 

http://online.wsj.com/article/SB10001424052748703298504575534271590665434.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

These actions occur against an ongoing backdrop of covert competitive devaluation. Today US Treasury Secretary Tim Geithner referred to large economies [e.g. China] keeping their currencies undervalued as a 'damaging dynamic.' Geithner also said 'the greatest risk to the world economy today is that the largest economies underachieve on growth.'

Meanwhile, on the monetary front, Bloomberg reports that Banzai Ben Bernanke is pounding the table (if not actually taking a victory lap) for another dose of QE:

Oct. 6 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is leaving little doubt that he has enough support for more unconventional easing as soon as November.

In one week, New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans advocated further Fed action. Bernanke himself said Oct. 4 that restarting large-scale asset purchases would probably spur growth, after saying last week that the central bank has a duty to aid the economy as U.S. unemployment holds near 10 percent.

Dudley’s speech was “a strong signal” that the FOMC will restart asset purchases at its next meeting on Nov. 2-3, Goldman Sachs Group Inc. economist Edward McKelvey said in a report this week.

“As vice chairman of the FOMC, he is one of the three most senior members of the committee,” McKelvey wrote. “He would be highly unlikely to give a speech of this significance without the concurrence of Chairman Bernanke and probably other key members.”

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aKLfrjoBty8w

What's it all mean? To me, it smells like government panic. En masse, the global fiateers and fiaticians have worked themselves into a lather over tepid growth, and have decided to do something. Some are pursing competitive devaluation through purchasing foreign exchange (for instance, China); while others (e.g., Japan and the US) pursue their remarkable idée fixe that fractional interest rates will revive moribund economies. I happen to think the former approach is more effective, although both are inflationary in character and overlap somewhat.

What these desperate policies portend is a scenario in which nearly all fiat currencies are falling in purchasing power. This is the message of the relentless rising gold price. A notable exception is the euro area, which is pursuing deflationary austerity policies. Consequently, euro gold remains below the €1000 level which it attained this summer.

A telling leading indicator of global currency depreciation can be seen in commodity indexes such as the CCI. It has recovered over 70% of its drop between July and December 2008. Chart:

http://futuresource.quote.com/quotes/chart.action?symbol=CI+A0&chartMinutes=&chartAggregation=W

Ominously, crude oil is strengthening again, hovering at a 5-month high of $83/bbl today. Crude oil chart:

http://futuresource.quote.com/quotes/chart.action?s=CL

Central banks see the situation this way: growth is weak, unemployment is high, capacity is slack, inflation (according to their manipulated 'that don't count' measures) is nonexistent. So they are going to pour on the monetary coal. Once they start, it will be extremely difficult to stop anytime soon -- big egos are on the line. In fact, in a Ponzi economy, any attempt to withdraw stimulus will cause an immediate wilt into recession.

But gold is front-running the central banksters. Gold says that, given the usual lag times, witless central planners are going to stoke a monster inflationary bubble next year. By the time they react to it, it will be way too late. Gold will be above $1,500, crude oil above $100 -- and the next recession could be at hand too! 

What's a central planner to do? PUNT! Laughing

 

Davos's picture
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Re: Gold Goes Gaga Over Global QE

Unmitigated disaster. 

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Re: Gold Goes Gaga Over Global QE

To me, it smells like government panic

Massive unstopable debt deflation has a tendency to do that as it chews up massive quantities of fantasy fiat .  Fractional reserve lending running in reverse. 

After the Fed has purchased all the outstanding govt debt, they'll declare bankruptcy and reorganize as a chain of payday loan offices.

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Re: Gold Goes Gaga Over Global QE

From what I have been reading, money printing never stopped. It was just called something else.

http://kingworldnews.com/kingworldnews/Broadcast_Gold+/Entries/2010/10/4...

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Re: Gold Goes Gaga Over Global QE

The World Monetary Earthquake

Within a single week 25 nations have deliberately slashed the values of their currencies. Nothing quite comparable with this has ever happened before in the history of the world.    This world monetary earthquake will carry many lessons.

http://www.hindecapital.com/docs/hil_reports/HindeSight%20Investor%20Let...

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Re: Gold Goes Gaga Over Global QE

Actually, you are just breaking even if you own gold. 

Most people see this rise in gold price as gold bugs making money.  What they don't realize is they are just keeping what savings they have as world fiat currencies deteriorate. 

You guys that posted know this.  I am just writing this for new folks and lurkers.

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Re: Gold Goes Gaga Over Global QE
docmims wrote:

Actually, you are just breaking even if you own gold. 

Most people see this rise in gold price as gold bugs making money.  What they don't realize is they are just keeping what savings they have as world fiat currencies deteriorate. 

You guys that posted know this.  I am just writing this for new folks and lurkers.

+1 - but it'll wipe out any fixed debt and then some. Anything else will be a leak or at best a nominal leak.

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Gold Question For The Braintrust
docmims wrote:

Actually, you are just breaking even if you own gold. 

Most people see this rise in gold price as gold bugs making money.  What they don't realize is they are just keeping what savings they have as world fiat currencies deteriorate. 

You guys that posted know this.  I am just writing this for new folks and lurkers.

A question to the braintrust: what is the mechanism in which the price of gold is automatically correlated to changes in a currency's purchasing power? Can anyone elaborate on this mysterious mechanism inherit to gold?

Personally, I think this concept is flawed, especially within a shorter-term context. If this was truly a macro-economic mechanism, why wouldn't all assets priced in the depreciated currency move in tandem with the price of gold? 

More accurately, one might say that the price of gold reflects trader fear of currency depreciation, right? I might 'buy' that explanation, but if its true, it would imply this move in gold is based on the belief that gold protects purchasing power from short-term inflation. I'm not aware of any evidence suggesting this is the case. 

I'm sincerely seeking an explanation to this. Thanks for your input....Jeff

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Re: Gold Question For The Braintrust
JAG wrote:
docmims wrote:

Actually, you are just breaking even if you own gold. 

Most people see this rise in gold price as gold bugs making money.  What they don't realize is they are just keeping what savings they have as world fiat currencies deteriorate. 

You guys that posted know this.  I am just writing this for new folks and lurkers.

A question to the braintrust: what is the mechanism in which the price of gold is automatically correlated to changes in a currency's purchasing power? Can anyone elaborate on this mysterious mechanism inherit to gold?

Personally, I think this concept is flawed, especially within a shorter-term context. If this was truly a macro-economic mechanism, why wouldn't all assets priced in the depreciated currency move in tandem with the price of gold? 

More accurately, one might say that the price of gold reflects trader fear of currency depreciation, right? I might 'buy' that explanation, but if its true, it would imply this move in gold is based on the belief that gold protects purchasing power from short-term inflation. I'm not aware of any evidence suggesting this is the case. 

I'm sincerely seeking an explanation to this. Thanks for your input....Jeff

JAG: I'd point out there is a direct correlation. People are flocking to gold because they are fearful that the Fed and other CB's have lost it. I'd also point out that across the board commodity prices are up. Gold, unlike oil isn't hit with demand destruction when its price kettles the economy. Look, I hate gold. Despise it. Think it is @$$inine but there are just sometimes you have to get past your dislike for something.

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Re: Gold Question For The Braintrust
JAG wrote:
docmims wrote:

Actually, you are just breaking even if you own gold. 

Most people see this rise in gold price as gold bugs making money.  What they don't realize is they are just keeping what savings they have as world fiat currencies deteriorate. 

You guys that posted know this.  I am just writing this for new folks and lurkers.

A question to the braintrust: what is the mechanism in which the price of gold is automatically correlated to changes in a currency's purchasing power? Can anyone elaborate on this mysterious mechanism inherit to gold?

Personally, I think this concept is flawed, especially within a shorter-term context. If this was truly a macro-economic mechanism, why wouldn't all assets priced in the depreciated currency move in tandem with the price of gold? 

More accurately, one might say that the price of gold reflects trader fear of currency depreciation, right? I might 'buy' that explanation, but if its true, it would imply this move in gold is based on the belief that gold protects purchasing power from short-term inflation. I'm not aware of any evidence suggesting this is the case. 

I'm sincerely seeking an explanation to this. Thanks for your input....Jeff

JAG,

Good point and I think the answer is that other assets priced in the depreciated currency do move in tandem with the price of gold, on a long term basis.  The problem is that most other assets do not function very well as a payment mechanism.  This is partly due to physics - it's a bit tough lugging your house accross town or accross the globe so you can go exchange it for other things.  And it would be dangerouse to store your wealth in any of the perishable commodities; oil is difficult, expensive, and dangerous to transport/store.  You get the point.

There is nothing magical about why gold holds its value against a depreciating currency.  If it didn't exist, we'd be talking about the "Silver" standard, and if that didn't exist, there would be something else.  Some form of natural element or compound can function as money, and whichever compound has the best "money"-like qualities (fungibility; durability; transportability; and scarcity) will evolve into the "gold" standard no matter which planet we're on.

I wish I had it in front of me, but Marc Faber's "Tomorrow's Gold: Asia's Age of Discovery" (which by the way, is not about gold, and is hardly about Asia, and which is hands-down the best economic-history book I've ever read) has an absolutely mind-blowing chart of wheat priced in gold, through the centuries.  Although there is some variation, which if I remember correctly corresponds to a 25-year cycle (or 50-year- I cannot remember right now), wheat priced in gold hasn't changed since the days Moses first poured himself a bowl of Cheerios.

So, you could have held gold all that time, or you could have tried to hold on to the same value-quantity of wheat.  I'm no food expert, but I'm pretty sure you could still actually have the gold, but there is no way the wheat would still be around.

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Re: Gold Goes Gaga Over Global QE

FB,

Thanks for the reply. I understand and agree with your observation about gold preserving purchasing power over the long term (generational time-scale). I think that correlation is well established. I also agree that on that same timescale, gold is the purest form of money. But both of these qualities of gold are completely absent within a shorter timescale context; such as a lifetime. 

For example, you only have to go back to the 90's to see the 'price of gold / purchasing power of currency' concept breakdown, as the money supply was increasing exponentially while the price of gold dropped during that decade. So there really is no empirical evidence that this concept is valid.

Re gold as money: what can I buy with it? Can I pay my taxes with it? Technically the answers to these questions is yes, but only if my form of gold is US coin and only if I'm willing to accept coin face-value for my gold. So from a realistic perspective, gold is not an effective form of money in the world we live in currently. What is really ironic, is that the only thing that I can legally "purchase" with my gold, is the same "worthless" dollars that I'm seeking to avoid by holding gold in the first place.

Which brings us back to my original question; what is the mechanism that prices gold? Are macro-economic factors really a component in the pricing of gold, or is the price of gold entirely determined by a market mechanism like everything else?

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Re: Gold Goes Gaga Over Global QE
JAG wrote:

FB,

Thanks for the reply. I understand and agree with your observation about gold preserving purchasing power over the long term (generational time-scale). I think that correlation is well established. I also agree that on that same timescale, gold is the purest form of money. But both of these qualities of gold are completely absent within a shorter timescale context; such as a lifetime. 

For example, you only have to go back to the 90's to see the 'price of gold / purchasing power of currency' concept breakdown, as the money supply was increasing exponentially while the price of gold dropped during that decade. So there really is no empirical evidence that this concept is valid.

Re gold as money: what can I buy with it? Can I pay my taxes with it? Technically the answers to these questions is yes, but only if my form of gold is US coin and only if I'm willing to accept coin face-value for my gold. So from a realistic perspective, gold is not an effective form of money in the world we live in currently. What is really ironic, is that the only thing that I can legally "purchase" with my gold, is the same "worthless" dollars that I'm seeking to avoid by holding gold in the first place.

Which brings us back to my original question; what is the mechanism that prices gold? Are macro-economic factors really a component in the pricing of gold, or is the price of gold entirely determined by a market mechanism like everything else?

You have a point, but it's not that simple.  Yes, you can only exchange gold for the same worthless dollars you are seeking to avoid in the first place, but you do maintain the advantage of liquidating only the gold you need to liquidate and keeping the rest of your wealth in gold.

If you fear currency debasement, or a deterioration in the rule of law (which usually go hand in hand), it has been shown to be an effective shelter for wealth storage.  Even taking for instance the collapse at the end of the 1970's, I am not sure you would have been better off in dollars.  If you had $10,000 at the peak of the gold bubble back then and held it in bonds, I know those bonds would have lost a tremendous amount of value in the ensuing 2-3 years as yields skyrocketed to what, 14%?  Alternatively, keeping it in gold was also a pretty bad play, but you would not have been any worse off, and perhaps would have been a little better off.  Somebody would have to run the numbers for us..  Remember, that was a period of severe uncertainty, not unlike today. 

So what is the mechanism that "prices" gold?  I would say fear, uncertainty, and lack of alternatives.  All subjective, of course.  That is the nature of the beast.

 

 

 

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Re: Gold Goes Gaga Over Global QE

One real-world mechanism which prices gold is the capital and labor required to produce it. In some places miners can pan for gold; in others, capital-intensive deep mines are required, but the ore concentration is richer. 

Nowhere is gold free for the taking. A global market assures that gold will be produced from the most competitive sources. But all of them have capital and labor costs involved in producing and refining it. This puts a floor on the price of gold. If gold's price falls below the marginal production cost, then mines shut down and capacity is restricted.

The pricing mechanism for gold is not so different than that of any commodity. If nuggets of gold were commonly found everywhere, it wouldn't be worth much. But gold, as far as we know, has always been scarce and has required costly effort to produce.

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Re: Gold Goes Gaga Over Global QE
machinehead wrote:

One real-world mechanism which prices gold is the capital and labor required to produce it. In some places miners can pan for gold; in others, capital-intensive deep mines are required, but the ore concentration is richer. 

Nowhere is gold free for the taking. A global market assures that gold will be produced from the most competitive sources. But all of them have capital and labor costs involved in producing and refining it. This puts a floor on the price of gold. If gold's price falls below the marginal production cost, then mines shut down and capacity is restricted.

The pricing mechanism for gold is not so different than that of any commodity. If nuggets of gold were commonly found everywhere, it wouldn't be worth much. But gold, as far as we know, has always been scarce and has required costly effort to produce.

Thanks MH!  I had totally forgotten about the floor and was focusing on the "ceiling".

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Re: Gold Goes Gaga Over Global QE

Steel, rebarprice chart, 2000-2009

 

 
Producer Price Index

Ok I am building a decorative pillar & saddle security fence. It requires a lot of rebar & concrete. I put it off becuase of the "crash" & bought Gold instead. Looks like Gold does more than hold it's own to me. My building project has become a lot cheaper in Gold dollars.

I will take the Gold & exchange it for the funny paper to change this to rebar & concrete which I will enjoy more having my nice security fence than the other two forms.

Thank you Chris & Davos & others here for the help. 

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Re: Gold Goes Gaga Over Global QE

Looks like yesterday was a short-coverin' thang in PMs.  They're bouncing back up today (Friday)...

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Re: Gold Goes Gaga Over Global QE

Gold sort of boiled over with excess bullish sentiment on Thursday morning, then got spooked by unemployment claims which were a bit lower than expected. 

Friday morning is the opposite story: job creation is negative; QE II is lookin' good; the dollar's down and gold is off to the races, after not even closing its upside gap on the morning of Oct. 5th (said to be a sign of technical strength).

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=gld&sid=0&o_symb=gld&freq=1&time=4

 

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Re: Gold Goes Gaga Over Global QE

Check out the grains!

:O

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Re: Gold Goes Gaga Over Global QE

Grains have contributed to a MONSTER pop in the Continuous Commodity Index, up nearly three freaking percent today.

Be sure you're sitting down before looking at this chart link:

http://futuresource.quote.com/quotes/chart.action?symbol=CI+A0&chartMinutes=&chartAggregation=W

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