Costata has been working on a few detailed responses to some of the comments in the last thread. But with the comments going over 600 in four days, and then Blogger swallowing about 140 of them on Thursday, I thought it would be a good idea to start a fresh open forum for Costata's replies and for all of you to continue the discussion.
Sincerely,
FOFOA
807 comments:
«Oldest ‹Older 601 – 800 of 807 Newer› Newest»Motley Fool and Joel,
It seems you are both suffering from two common, yet very blatant misconceptions:
1) Those who believe Marx accurately interpreted the evolutionary dynamics of a capitalist system also believe his (much more sparse) ideas about an eventual Communist utopia are also correct.
2) That economic theories and arguments should naturally be evaluated according to your subjective moral judgments about what's good or bad, i.e. material standards of living that resulted from "socialist" revolutions, "anti-American" sentiments, etc.
Joel, it's clear that when you alleged that Marx had a child slave and slept with her, that you were trying to say "someone who is so clearly a moral decrepit and exploits others should not have his theories of exploitation taken seriously". Which is similar to, "someone who chain-smokes should not preach the dangers of smoking to others".
What I was saying is that the above are logically inept arguments, simple as that. MF, you too are using a logically inept argument against Marx's theories about capitalism, except they are disguised more cleverly. The deaths of people from revolutions, wars, etc. during the 19th and 20th centuries has no logical connection to the arguments of Marx re: capitalism, just because some corrupt financiers claimed they were doing it in his name.
For example, I'm not going to bring up how many people die from environmental destruction, speculative finance, resource wars, etc. as reasons why Austrian economists are wrong about their models of capitalism. Those are issues we should definitely consider and there may be a distinct relationship, but it would be logically inane for me to do that.
Test (sorry, trying to make my life fully Art-free).
How to make your life Art-free (when you subscribe to email notifications):
1) Go to gmail settings, Filters tab
2) Click create new filter
3) Fill out "Art has left a new comment" (including the quotes!) in the "Has the words" field
4) Fill out noreply-comment@blogger.com in the "From" field
5) Click "next step"
6) Select action (most likely candidate: "Delete it")
7) do NOT check the "Also apply" checkbox
8) Click "Create filter" and enjoy the Art-free email comments
(seems to be working well so far)
MF,
re: my use of vague language, or "sophistry", or whatever label suits you now
As a follower of FOFOA, you should understand that it is rarely possible to be very accurate about the complex ideas/arguments you are making while also using very simple and clear language. That is actually the nature of human language in modern society - too complex, and you lose most "meaning" under layers of abstract concepts, too simple, and you really have nothing to say.
Personally, I err towards the complex language because I want to be as accurate as possible, and try to stay away from stuff like this:
"I do not care how intellectually appealing the ideas of Marx are ( ignoring the fact that it is mostly intellectual masturbation, since it has so many flaws).If the practical implementation leads to such a reduced standard of living that broad swathes of the population die from starvation then the system is deeply flawed. I do not care if he was a evil idiot or a evil genius, the result speaks for itself."
That is a pretty clear statement, MF, but it encapsulates more flaws than I wish to count. It uses various phrases of innuendo to create the illusion you are illustrating the flaws of Marx, but no one has forgot that you are refusing to go in-depth at all about those flaws (yet, for some reason, you expect everyone else has the "time" to give you just that).
In addition, you demonstrate your quality of being "results oriented", in so far as you use the short-term results of trying to implement a political/economic concept (which actually were not "results" at all...but that was explained in my previous post) as evidence that the concept is flawed. First, your subjective analysis of historical developments is not even close to being a scientific analysis even under the lax standards of social science.
Second, no one has ever said Marx's theory of Communism was correct, so that's a strawman to undermine his theory of capitalism. Also, I'm confident Marx would say the 20th century socialist revolutions represented his views of Communism effectively, which is probably why he said "If that is Marxism, I am not a Marxist" to French labor leaders at his time.
Third, you cannot flip a coin ten times in a row, watch it come up heads all ten times and then say, "see, the theory that a coin lands 50% on heads and 50% on tails is wrong... the results speak for themselves". That's being results oriented.
correction: "...did not represent his views of Communism effectively"
Also re: language, I even took the time to write an article about it awhile ago, since I understood that my writing isn't always the easiest to understand, but they still contained a lot of "meaning" (in Ayers' sense of the word):
Language, Logic and Lies
BitingSilverBug,
Thank you for your interest and involvement in this discussion. As I mentioned in the comments section of the first forum I have been saving every comment that I think demands a longer response. I have also been looking for comments that present each of the arguments for the 'Yes' case particularly well.
I believe that I saved every one of yours. My compliments, Sir. There is some meat on those bones. I'm working through the responses but I can't seem to force the order in which they come out.
The sheer volume of comments has also impacted on this project. We are well north of 1,200 now. As you may have realized I try to read every one of them.
Plese don't think I'm playing games with you or anyone else. I'll try to complete the longer responses ASAP.
Your last comment touched on two of the longer responses that are drafts at present. The other one has the working title "Politics".
Cheers
Ash,
This is what bothers me about guys like you. You are clearly a very smart (albeit misguided) person. But when you make comments like "in today's world, meaning in the reality that has evolved around us, no it can't be done at a global scale. Strictly speaking, the problem is over-complexity, and we have reached the scale at which any top-down orders imposed on global society will not be sustainable and/or work as expected. That includes both a system of financial capitalism and one of communism, and any other combination of the two you can imagine.", it drives me nuts. It is like talking to my 13 yr. old son. He refuses to tell me what he wants to eat, but refuses any suggestions given to him. So all possible monetary systems are doomed to failure due to our complexity. No system will ever work "exactly as expected". But who cares? Even if I believe your entire statement to be true, I am still going to opt for the system that works the best, and try and keep my hands back and don't leak on the curveballs that are thrown at me. What is your idea for a system? Do you have an idea that will work better than Freegold (even though your idea is also doomed to failure, lol...)? Or are you content to simply sit back and write flowery prose in your role as an agnostic economist/philosopher? If the answer is the latter, I'm done arguing about nothing, that is your field of expertise, not mine. What do you want to eat, Ash?
@Motley Fool
"Barter; gold and silver as ultimate barter items ( which follows naturally from marginal utility theory); gold and silver as money; fiat money backed by gold and silver at a fixed rate; fiat money backed only by gold at a fixed rate; fiat money backed by nothing and gold demonetized."
I disagree with this last part. Gold has never been demonetized since CBs have always held gold on their balance sheets as a reserve asset (even if some CBs grossly undervalue it ... like the Fed at $42.22)
Joel,
I had a similar discussion with DP awhile ago, and what I don't get is why you guys can't see any other outcome except global monetary system A or global monetary system B. Seriously, this is not like asking your kid whether he wants chicken or fish, and it doesn't really matter what you are "opting for".
I've been very concrete about what I think will happen in upcoming years, but mostly in past articles that I have posted. I mean, why would I just start rambling off on all of that when the specific issue here is the likelihood of HI and/or Freegold in the short-term?
You guys are asking me questions, and I'm answering them... and when you aren't satisfied with my answer, you start acting like I'm avoiding the question... you know, the one that wasn't even asked yet. I'd hate to have to figure out what to do at your dinner table, Joel.
Anyway, it would be best if you don't assume I am arguing for something that I have never even implied I am arguing for...i.e. a global communist system. And I'm not going to tell you that the world will end up on a gold or silver standard either, like many others here, because I think that's even less likely that Freegold.
It's quite obvious that a Freegold system would work the "best" for a global financial system in terms of relative stability, much better than the SDR or a gold-backed basket of currencies, but since when has something working well in the ideal make it likely to happen?
The whole point of the comment you quoted was that we have to evaluate outcomes from the material situation we find ourselves in right now... not 50 or 20 years ago. And, for better or for worse, that material situation is not looking good for people who would like to maintain some sort of global financial order, no matter how you spin the details.
Was just looking at some old articles, and here is an argument that some here may like (contained in a series about the application of Foucault's theory of disciplinary society to the debt-dollar financial system):
The Debt-Dollar Discipline (Part II - Conservation & Release)
The U.S. disciplinary order has also lost legitimacy in the eyes of many other nations, who previously were coerced to support the system. It was mentioned above that the value of the dollar will most likely increase in the short-term, precluding the disciplinarian's attempts at restarting credit inflation, but this process is by no means a vote of confidence in the dollar as a long-term store of wealth. It is a necessary function of global deleveraging, as the dollar still provides the best means of eliminating debts and transforming paper wealth into hard assets, but this window of opportunity is rapidly narrowing. Many countries have made clear that they are no longer willing or able to submit to debt-dollar hegemony in the near future.
The Federal Reserve's latest round of quantitative easing was ubiquitously rebuked by officials in Europe, Asia and Latin America. Brazil's finance minister has blatantly stated that "it does no good at all to just throw [debt] dollars from a helicopter". [15]. These states are simply attempting to maintain their own disciplinary mechanisms by separating out from the overarching debt-dollar discipline. They sense that structures preserving the latter are naturally collapsing, and a pre-emptive break provides their best chance to maintain a degree of national or regional order.
Russia and China recently announced that they would stop using the dollar to settle bilateral transactions, and instead use the yuan and ruble. [16]. Germany consistently expresses its disdain for the IMF and ECB's euro zone bailout facilities, which ultimately serve to prop up financial institutions operating in Europe. [17]. Numerous countries have also been engaged in ongoing discussions with the IMF about establishing a new reserve currency, and though this is unlikely to occur, it is symbolic of the debt-dollar discipline's demise.
Foucault perceived the disciplinary society exerting its power primarily by fixing "docile bodies" within time and space. [18]. These bodies would spend much of their lives in a highly regimented and confined existence, disciplining themselves to become "normally" functioning members of society. Debt-dollar discipline has not strictly operated through such physical requirements, but rather a pervasive psychosocial drive of consumers to extract ever-greater amounts of wealth from their environment.
As the complex structures supporting this financial discipline deteriorate, consumers will have to confront a profound new reality, one that they previously thought to be outside the realm of possibility. They must not only confront the fact that they have been deceptively enslaved, but simultaneously impoverished as well. Part III of this series will discuss the general ways in which financial power structures and disciplined consumers may react to the new realities faced by global society, introducing the insightful thoughts of Gilles Deleuze on what he ominously termed the "control society".
I tried, but I cannot resist. Ash, my apologies.
Joel, here’s Ash’s response:
Although in the question of mastication and sustenance I tend to believe that the aviary element would be greatly appreciated, it is certainly well understood that a bovine certainly could enhance the satisfaction of said meal. One must also not forget the complexity and refinement added by the introduction of fibrous material in addition to the base protein that has been referenced previously.
Joel was looking for: Yeah, chicken would be nice, but beef is good too. And some salad would go nice with it.
Hi DP, Michael
I was unable to continue the debate yesterday... hope it continues today.
Casper
Friends of FOFOA! I now have a blog!
robertmix.blogspot.com
My first article is up and it is about TEOTWAWKI, so it should be a crowd pleaser.
Future articles will be about GOLD, bearings, jokes, different countries, the BANKSTERS and all kinds of stuff.
Since I am using my real name at my blog, please don't mention this at ZeroHedge (where I am DoChenRollingBearing). Thank you very much.
...
It took me a LONG TIME, costata, to get through your piece and the several hundred replies...
But, FOFOA was right! You wrote a great piece on silver! My congratulations to you as well.
Gary
>>because the more time NIA members have to accumulate cheap silver, the more wealth NIA members will gain when hyperinflation hits the U.S
You are aware the NIA is a pump and dump scam aren't you? google it.
Long and Strong, based on lines on charts.
Not based on fundamentals, because those are horrific. A shotgun blast could probably hit 3 black swans in one shot.
But my trades are placed long. It is all about the USD (and the Euro).
Individual stock trading can "beat" the USD but overall, the "band on the titanic" play bravely into the water.
Comments appreciated. Anyone out there?
US Department of the Treasury, US Mint Overview of Accounting Treatment of U.S. Gold
"Overview of Accounting Treatment of U.S. Gold (Updated 11/30/2004)"
http://governmentattic.org/docs/US-Mint_Overview-Accounting-US-Gold.pdf
[Mrt: Deep storage stuff info]
@milked
You are aware the NIA is a pump and dump scam aren't you?
I am aware of that allegation. Only Peter Schiff has said so. His precious metals shop has had its own complaints of scams (you realize this don't you?)
Here is the NIA response:
http://inflation.us/stocksuggestioninfo.html
I am not defending them nor condemning them. Their predictions speak for themselves. They are just another in amongst 1000s recommending Silver (they called it the 'trade of the decade' at $17 - Sprott says 'investment of the decade').
Ash: It's quite obvious that a Freegold system would work the "best" for a global financial system in terms of relative stability, much better than the SDR or a gold-backed basket of currencies, but since when has something working well in the ideal make it likely to happen?
The whole point of the comment you quoted was that we have to evaluate outcomes from the material situation we find ourselves in right now... not 50 or 20 years ago. And, for better or for worse, that material situation is not looking good for people who would like to maintain some sort of global financial order, no matter how you spin the details.
It would certainly be nice for us to understand your helicopter view. Menu-selection method works for me if it works for you.
So, we have your starter selection it would seem. You'll take the Anarchy Salad*, right?
And would sir opt for the main course of Dollar Deflation Souffle, or perhaps the Dollar Hyperinflation Omelette? Initially I thought you would choose the souffle every time, but lately I've felt like perhaps you have changed your tastes a little.
The chef is open to suggestions for what might be your ideal dessert? It's quiet in the restaurant today.
* Warning: may contains bones and traces of nuts. Not suitable for vegetarians.
http://www.bi-me.com/main.php?id=10445&t=1
Syria switches currency peg from dollar to SDR
Source: BI-ME and agencies , Author: BI-ME staff
Posted: Tue June 5, 2007 12:00 am
"SYRIA. Syria will link the Pound to the International Monetary Fund''s special drawing rights (SDR) in July, abandoning its peg to the US Dollar, the central bank governor said.
...
"[The change] gives more stability to the Syrian Pound and it mitigates the risks of fluctuations of currencies like the Euro and US Dollar," Mayaleh said.
Asked about the weighting of the US Dollar in the Syrian currency reserves, he said: "There will be no change for the moment and we will keep it at 50:50 (US Dollar to Euro), but we might change it later on depending on any new development."
Syria has been reducing its US Dollar holdings since 2005, when reserves were entirely in US Dollars, Mayaleh has said. Syria was already pricing oil ــ a main revenue source ــ partly in Euros, he had said.
Central banks in the Middle East have been reducing their exposure to the dollar, which hit a record low against the euro in April.
Kuwait, the Middle East''s thirdÙ€largest oil producer, dropped its peg to the US dollar last month to combat imported inflation.
The United Arab Emirates aims to hold 10% of its reserves in Euros by the end of the third quarter of 2007, up from 3%, central bank governor Nasser AlÙ€Suweidi said in January."
@costata, do you rememebr how we spoke about CHina lifting japan currency in 2008 before Lehmans? Look at the last sentence:
http://en.wikipedia.org/wiki/Renminbi#Depegged_from_the_U.S._dollar
Depegged from the U.S. dollar
On July 21, 2005, the peg was finally lifted, which saw an immediate one-off RMB revaluation to 8.11 per USD. The exchange rate against the euro stood at 10.07060 yuan per euro.
However the peg was reinstituted unofficially when the financial crisis hit: "Under intense pressure from Washington, China took small steps to allow its currency to strengthen for three years starting in July 2005. But China "re-pegged" its currency to the dollar as the financial crisis intensified in July 2008."
On June 19, 2010, the People’s Bank of China released a statement simultaneously in Chinese and English indicating that they would "proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility." The news was greeted with praise by world leaders including Barack Obama, Nicolas Sarkozy and Stephen Harper. The PBoC maintained there would be no "large swings" in the currency. The RMB rose to its highest level in five years and markets worldwide surged on Monday, June 21 following China's announcement.
However China has simply shifted their reserves from dollar accounts to accounts in their competitor nations[citation needed], leading these other nations to invest in dollars to keep their own currencies down[citation needed]. The result has been an international currency war.
Hi Mortymer,
if you check the USD/CNY movement an compare it to the movement of prices of oil/gold/other commodities you can't help but notice that when China releases some dollars onto the world financial markets (USD/CNY going down) price rise and vice versa.
In connection to your findings (other countries buying those dollars) we can see that only the strongest economies (producing economies) can withstand the prinitng of their currency (to buy dollars) and absorb the full impact of dollars being printed.
Casper
DP, Aquilus,
Hilarious! However, I fear no matter how many times we pose the question, we will not get a specific answer. My guess is that he will go to bed happily hungry, every night, content in the thought that he will never be wrong about anything. Therefore, I hereby resign from further attempts to coax him to the dinner table. "He is a rhetorician, inebriated with the exuberance of his own verbosity"--Winston Churchill (another mass murdering capitalist bourgeois pig)
Wow, we have our very own acute case of Blogger mass psychosis/delusion here, but thankfully it's only infected 3 people so far...
Is there a reason why you guys don't explicitly state "the question" and instead use analogies to restaurant servings instead? Of course there is... but I don't really need to explain, do I?
Of course, I do. So the reason is because you haven't asked any such specific questions in this thread, and I only entered the discussion when Joel started attacking the morality of Marx in an attempt to undermine his material dialectic view of capitalism...
Then, MF joined in with some other bogus strawman arguments about Communism and people dying (yeah, that was actually his argument...their "standards of living" went to zero), so I had to explain how the logic was all screwed up...
Now, DP, it seems you have lost your short-term memory (to the extent it spans multiple threads), because I clearly stated there I believe we will most likely experience dollar deflation short-term, followed by HI in the future. Just when I think a position was made clear... suddenly you pop up and say I'm changing my tune. Then, of course you go replace the "Act 3" movie analogy for the "restaurant dessert" analogy to make me look into my crystal ball and tell you what your life will be like 20 years from now... sorry, still can't do it buddy.
But you already knew all of that, didn't you? Well, you should have, because I have said it many times and I have linked to articles detailing my views about everything from deflation and peak oil to the nature of complex language and systemic uncertainty. I don't expect you to read all of that, but, please, snap back to reality before it's too late!
Joel, allow me to quote myself again:
"I've been very concrete about what I think will happen in upcoming years, but mostly in past articles that I have posted. I mean, why would I just start rambling off on all of that when the specific issue here is the likelihood of HI and/or Freegold in the short-term?
You guys are asking me questions, and I'm answering them... and when you aren't satisfied with my answer, you start acting like I'm avoiding the question... you know, the one that wasn't even asked yet. I'd hate to have to figure out what to do at your dinner table, Joel."
Would you like me to be italicize/bold the parts that you somehow completely ignored in your last comment? Well I'll give you a hint, it was the entire thing.
Aquilus said, "Joel was looking for: Yeah, chicken would be nice, but beef is good too. And some salad would go nice with it."
Seriously, what? How can I make this any more clear, by typing in CAPS? What's "nice" and "good" for me has nothing to do with it. Now, if you guys insist on reducing every complex situation on Earth down into the simplest possible terms for your own sake of understanding, fine, but at least ask specific questions about the future before claiming those same questions are not being answered to your satisfaction. And no, "what do you think is going to happen in the future...?", is not a specific question.
Thanks.
Ash,
OK, I will make my questions much more specific for you, and ideally this will enable similarly "bullet point" responses to unfurl themselves.
1) How long is your definition of "short term"? Do you measure it in weeks, months, years, decades?
2) You believe dollars are the most suitable asset to hold during this period?
3) Your answer to (1) tells us when you also think HI comes, I assume. But I should for the sake of completeness check that you don't expect an equilibrium period between the two phases?
4) For this HI period, am I correct to presume you would change to advocating gold as the most suitable asset to hold?
Cheers
DP,
Thank you.
1) "Short-term" for me would be measured in months to years, but would never exceed five years. (medium-term would be about 5-10 years)
2) I believe that, starting now, they have the highest probability of retaining/increasing in purchasing power for many assets, consumer goods and, of course, debt payments in the short-term. For many people, it would be "suitable" to retain that purchasing power, but the level of "suitability" obviously depends on your specific circumstances.
3)No, I don't expect an "equilibrium period" between deflation and HI, meaning a few years where most prices stabilize and slowly increase as the productive economy starts to grow again.
4)Yes, gold will be one of the best monetary assets to hold during a process of dollar HI, if not the best, but of course I believe physical preparations are much more important and should be started now (which would include hoarding some other barter items as well).
Now, I am anticipating you may ask whether I think people should invest in physical gold right now, and as I've said in an earlier thread, I think that's a good idea for people with enough excess currency wealth that is not needed for daily/monthly expenses (including paying off debt). I would certainly advise gold over stocks, long-term bonds and RE. I also happen to think there is not much ex-ante difference between gold and silver, in terms of its ultimate purchasing power priced in dollars, except silver may fall behind some due to its more heavy industrial use. They may be relatively more valuable for different scales of trade, though.
See, much better way of going at it, right?
Ash, thank YOU
Sincerely,
DP :-)
(1/4)
@Michael H: Thanks once again for your thoughts. Much appreciated. ;-)
Given that you probably have seen me comment earlier but not reply to your comment of last night, apologies for the delay. The earlier comments were easy off-the-cuff; I could do them without much thought in between all that other boring stuff we have to do outside this blog! ;-) I wanted to be able to spend a little more time contemplating your last in case there are gems in there I haven't spotted before and we can polish up a little more...
Do you think so? I don't see it, but I might be wrong. I see reduced purchases of US treasuries from China. I also see, for example, Brazil printing money to buy USD.
Yes, Brazil are choosing to devalue themselves the old-school way - against the USD. I suspect this might be a little like Mission Impossible, but understandable in the context of the $IMFS.
China have stopped doing that (no longer recycling trade $ back into UST's). So are they now just piling up $ bills instead? Somehow I can't see them doing something like that. So what are they primarily buying with those trade $ now? "Anything tangible" might I guess be a good catch-all answer. But I would like to guess gold figures large in the mix.
In the case of the ECB, I understand it to be official policy to not keep much in the way of foreign currency reserve assets, but to instead exchange it into gold (and only gold). This implies to me that incoming trade surplus USD will be recycled back out into goods and services from outside the zone somewhere, and when the goods and services required are met then the balance of the surplus is parked in reserve gold.
Switching to use gold as the reference point, rather than USD, in this way means their monetary actions are not subordinated to US politics and policies any longer. If a lower exchange value is in their interests, adjust the assets:liabilities ratio one way, adjust it the other way if they need to see it strengthen. Let the US do what they like with their $. What are Brazil doing? Are they working towards their own freedom from the US by increasing their USD reserves and expanding their liabilities, or are they making themselves even more under the thumb? As I say, to me Brazil doesn't feel like it's a model to lead the rest of the world. It's old-school. No?
...cont'd...
(2/4)
"Do Europe really need the US market to sell into? If the US economy collapses in a Depression, is there sufficient demand for European (or other) imports into that market anyway?"
Maybe, maybe not. If I was in charge of european policy, and had some control over these things (two big ifs, admittedly), I would opt for a gradual transition away from the US market. What if german exports to the US were halted because of lack of demand, without another outlet for those goods waiting? What would the interruption of German industry do to the economies of the rest of Europe?
I agree. The euro has been operating for some time now and we're all waiting for this transition away from $IMFS to really take off at some point. It doesn't seem like anyone has been in much of a hurry, just waiting for the inevitable and preparing for it. This seems like a good fit with your plan. The longer it takes for the inevitable, the better.
"Except that the market the gold is marked to, is [currently] the $gold market price. So the $gold price goes up, and the $:€ exchange rate in the forex market perhaps goes up but to a lesser extent. No? In which case, the triangulated €gold price has gone up. And with that, the valuation of the ECB's gold reserves."
Unoftunately, we're getting more crossed up here; I think I was referring to a post-freegold situation in this case. When the ECB sells dollars to buy gold, the USD-price of gold would rise, but the euro-denominated supply and demand of gold would not change, so the EUR-price of gold would remain the same. The USD:EUR exchange rate would adust accordingly.
OK
"If the $ collapses in exchange value and will no longer purchase oil for cheap, while other currencies still will, what kind of war would the US want to wage with everyone else in the world anyway? Could they win without cheap oil?"
The US could not win any wars without oil. However, 'cheap' is a relative term, especially when you can print the currency in which oil is denominated!
OK. But if the USD no longer delivers gold to oil, will oil still price itself in USD? It feels like perhaps some oil would prefer to be paid in euro already, even while $gold still performs somehow (perhaps it doesn't perform for *all* oil??? I don't know...). You'd have to for some reason really want to do something like that when you don't really have to and you pretty much know it's going to bring you a world of pain. Why are all these oil countries indicating they are pretty much ready to line up and switch to euros? What do they know that we don't?
...cont'd...
(3/4)
"If the $gold market no longer delivers physical gold at some point, ..."
I think this is the end of the dollar, the last step in act II. Every avenue of resistance will be tried before we reach this step.
OK
"Europe aren't really "doing anything wrong" are they? They're just buying gold from the market, at market prices, and with $ as required by the market. It's not the ECB's fault if the $gold market model isn't sustainable."
Just like Iraq wasn't doing anything wrong, selling oil at the Euro market price. It wasn't Iraq's fault that the $-oil market isn't sustainable.
Ok, I'm not really suggesting that the US would invade Europe, but, as long as the US gov has some power and influence, going against them will have some reprecussions.
I'm also not saying that the US gov is all-powerful and will always win; they will lose when the time is right. I just think that intelligent oponents will play along with the USD until it collapses of its own accord.
It seems like it's stalemate. Nobody wants the $IMFS bomb to go off really, but perhaps everyone knows it's going to at some point. Similarly, the US probably knows it couldn't go on to win a war with the rest of the world to save the $IMFS, and the political will is apparently not there to head off the problem by switching the $ into a Freegold currency. So, everyone sits paralysed in the headlights, and waits for something to blow up somewhere, making it up as they go along whenever there's a stumble.
...cont'd...
(4/4)
"OK, so it would appear you foresee some other reason oil breaks away from the dollar, that isn't due to a failure of $gold to deliver as promised?"
Tricky issue, isn't it? Saudi Arabia is likely to stay with the USD until the ruling family can no longer get American protection to stay in power. Would a revolution in Saudi Arabia topple the USD?
My feeling is the most likely place is $gold fails and starts a chain reaction of events, but as you say the catalyst might be something else. There is a lot that could go wrong.
What does it mean, to fail to deliver $-gold? How would that look? How would oil react?
I wish I knew these details. It's what I live for! :-) If someone else reading along at home thinks they have a reasonable view on this, please feel free to chime in..?
In order to answer those questions, we'd have to know how oil buys gold. Do they go through COMEX? Doubtful, so COMEX could go cash settlement, and the dollar would continue. LBMA? OTC? Probably more likely. I admit I don't really know anything about these markets. Would the CBs backstop some gold-deals-gone-bad, with oil only, in order to keep oil flowing? Would they let all other bad gold deals go bust?
Personally, I believe oil trade is settled through the BIS. I believe it is settled in some subtle way involving SDRs, that are convertible into gold at a certain ratio and at the discretion of the BIS. ("Making sure the gold goes where it is needed.") I also have a suspicion that the US official gold price of $42.22 plays no small part in that. (BTW I note that $42.22 is roughly 1/35th of the spot price, and that 35x the spot price isn't far from $55,000.) Again, if you're reading along at home and believe you have a more concrete view of this, please do feel free to share it..? I don't suppose I would be the only person to thank you.
I'm not very good at predicting. But I do foresee unprecedented actions being taken at the end of the USD-timeline.
Derrrrr.... I'm wid you, T.C.!
Cheers,
DP :-)
DP,
I have more coming that I wrote before your previous posts, but blogger has been acting up.
"It seems like it's stalemate. Nobody wants the $IMFS bomb to go off really, but perhaps everyone knows it's going to at some point. Similarly, the US probably knows it couldn't go on to win a war with the rest of the world to save the $IMFS, and the political will is apparently not there to head off the problem by switching the $ into a Freegold currency. So, everyone sits paralysed in the headlights, and waits for something to blow up somewhere, making it up as they go along whenever there's a stumble."
This sums up my feelings pretty well. The players are moving towards the exits, but aren't leaving yet. Oil included.
Sort of like prisoner's dilemma, except that, instead of a reward, the first defector gets a punishment.
"BTW I note that $42.22 is roughly 1/35th of the spot price, and that 35x the spot price isn't far from $55,000."
You're getting into numerology now :) Coincidences happen.
More to come, as soon as I can post it.
DP,
More thoughts to share on Act II. Here is a possible failure scenario:
As victor said, the next challenge for the USD may be domestic inflation. It would come from China, in the form of rising prices for Chinese goods. So the US would see rising prices at Walmart and the grocery store, while housing continues to stagnate or decline. Credit will probably be declining, so deflationists will also be able to claim victory. Gold would continue to rise in USD-terms.
The question is, then what?
I'm not sure if this inflation will cause a crisis, or boiling-frog syndrome. I suspect the latter.
QE will continue, though it might be called something different. I imagine they'd still like to monetize US treasuries, even if they're forced to do it through back-door channels for political reasons.
Eventually we might see more fiscal stimulus -- increased payments to taxpayers to 'help' with fuel and food purchases, paid for by freshly-printed digits. Perhaps along with extension of unemployment benefits past 99 weeks, and expansion of the food stamp program. I see this developing slowly, though; perhaps after the next presidential election. The reason behind these programs will be to maintain order among the population.
I think the failure will come from interest rate (and other bond market) derivatives. The Fed has allegedly been selling treasury puts -- "hyperinflation insurance backed by hyperinflation", as FOFOA said. What this tells me is that the system will continue for longer than we think possible, on the back of declining interest rates. Until the system breaks, then it will fail spectacularly.
The next question is, how will this failure look? What does it mean for interest rate / bond market derivatives to go bad?
continued ...
1/4
I don't think the Fed will settle these puts in cash; they will pay out (fresh) cash for the actual treasuries backed by the puts. Settling the options in cash has the benefit that, if the strike price is only slightly breached, the total amount monetized per put will be less than if the entire bond is purchased outright.
However, I am assuming that many multiple more puts were written than exist underlying treasuries, since the intent was to move the market -- I imagine a larger 'tail' is required to wag that 'dog'. Since there are many more puts written than there are bonds, if you cash-settle you would be paying out many more instances of a smaller amount. Not sure which would be better, but I'm sure both would be substantial sums of money.
This brings up an interesting problem: if 10x's more puts were written than there exist tresuries, how does this market even function when the strike price is breached?
Say I own a treasury bond and it is protected by a matching put. You just own a put on the same bond, without holding the underlying. Interest rates rise, my bond declines in value, so I put it to the Fed at the strike price. The Fed pays me fresh cash. Then ... what? The Fed could sell the bond to you, to get it off their books, but that would only allow you to excercise your put right back to them. Perhaps more likely, the Fed would sit on the bond so that you cannot excercise your put. If there are more puts than bonds, as the strike price nears, maybe owners of naked puts will bid up the price of the bonds so that they may own the underlying in case the strike price is breached. It's enough to make my head explode.
(As an aside, here is a wild conjecture: is there any way that QE is a method of excersing these puts, out in full daylight, while lying as to why the actions are being taken? Did the banks blackmail the fed into initiating QE? I doubt it, but it is an interesting possibility to consider)
continued ...
2/4
Where are we: as principal treasury put strike price is breached, the bonds are put to the Fed. Most likely, the vast majority of put holders do not get to excercise their options because there is not enough of the underlying security. However, this means that the Fed ends up holding all treasuries, and paying for them in cash ... ?!
(Another aside: how fungible are these treasuries? Would the puts have to be an all-or-none phenomenon, or would the Fed be able to trick people by writing puts for very specific bonds, to limit how many options get excercised in the doomsday scenario?)
Another assumption I'm making is that the Fed won't be able to back out of this program; it will have to go down in flames. Basically, as each round of option expirations approaches, the Fed will have to sell a new wave of puts to keep the expiring puts from being in-the-money. Unless, that is, they somehow arrange for a massive spike in treasury prices so that they can buy back their puts before another round becomes necessary. But, if they didn't follow this course in 2008, why would they do that now? Why cash out your chips when you can double down?
OK, I think I'm almost there. I still can't exactly picture how and why rates would rise, and how the rise in rates would cascade into an explosion in the US treasury market, and how that would translate into other markets.
continued ...
3/4
BTW, I don't exactly agree with Ash's assessment of the fed-put situation, as described in
http://theautomaticearth.blogspot.com/2011/04/april-17-2011-bailing-out-thimble-with.html
He is focused on the short-term -- up to 5 years, by hisdefinition -- so I admit that he might be right. Another crisis could be arranged to make yields fall again, just like in 2008. But unless the Fed uses such a crisis to unwind its derivatives (and since they didn't do it in 2008, why should they now?), it will just kick the can down the road a few years. What next, recurring crises, at ever-narrowing intervals? Eventually the derivatives will go bad if they are not unwound. I think it will fail eventually, but maybe not for 10 years. When it breaks, it will break big.
end
4/4
Michael,
"But unless the Fed uses such a crisis to unwind its derivatives (and since they didn't do it in 2008, why should they now?), it will just kick the can down the road a few years. What next, recurring crises, at ever-narrowing intervals? Eventually the derivatives will go bad if they are not unwound. I think it will fail eventually, but maybe not for 10 years. When it breaks, it will break big."
This is no different from my argument in that article. In fact, I explicitly say that the Fed cannot allow many of the interest swaps to significantly increase in value, because then it would become clear that it is the Fed who has been selling insurance on its own portfolio, and investors would panic.
The ability for them to keep the ponzi afloat for the next 5 years (or 10 as you say, but I think that's on the high side), is a very important consideration, though, in terms of investments and preparations.
Ash,
OK, we agree then.
(I wrote the previous comment before reading your 'bullet points' to DP)
I say 10 years because I think 5 years is already much longer than I would expect, but that's been said since 2008, 2001, 1998, 1987, 1980, 1971 ... etc. etc.
Do you have any idea of how it would play out, once those puts go in-the-money?
DP said, "Nobody wants the $IMFS bomb to go off really, but perhaps everyone knows it's going to at some point... So, everyone sits paralysed in the headlights, and waits for something to blow up somewhere, making it up as they go along whenever there's a stumble.
I keep thinking Fukushima. Something somewhere has blown up and the cascade effect has yet to hit it's peak.
Ash: I "wholeheartedly" enjoyed 'Language, Logic and Lies'. (seriously, it was much easier to follow than the other).
@Ash
Thank you for your clear and direct style in the last message. Please keep that going forward if possible.
I will wait for the concrete argumentation behind the points before commenting further.
Euro's father favors rigging the currency markets -- gold too?
"Conservative economists have been raising alarms for months about the Federal Reserve's second quantitative-easing program, QE2. They argue it has lowered the dollar's value, leading to higher oil and commodity prices -- a precursor to broader, more damaging inflation.
Yet the man many of them regard as their monetary guru -- supply-side economics pioneer and Nobel Laureate Robert Mundell -- says dollar weakness is not his main concern. Instead he fears a return to recession later this year when QE2 ends and the dollar begins its inevitable rise. Deflation, not inflation, should be the greater concern. Avoiding the recession is simplicity itself: Just have the U.S. Treasury fix the exchange rate between the dollar and the euro."
Uhmmm... Ok? (wow)
Indenture,
Thanks for the link.
Chris Powell isn't thinking this through. He's making a bold assumption here:
"But such a scheme could hardly work as long as the dollar and euro traded freely against other currencies or against gold. For then the dollar and euro would be market-priced against each other through intermediaries -- particularly through gold, the other most liquid international currency.
Does Mundell's idea frankly contemplate the (continued) rigging of the gold market?" (My emphasis)
I think Powell is wrong in thinking this "could hardly work" but correct in his assessment of the impact. The peg would cause the currency adjustment to flow into gold and other currencies initially (for a few weeks at most). IMO the effect on the 'other currencies' would be short lived. They are simply not a deep enough pool to cope with the readjustment required. The issuers of those other currencies would have two choices. 'Print' or adopt the economic policies of the EU and the USG.
Only gold could absorb the impact. This peg would also turn the Euro-US$ into a 'single' currency. By default it would bring the Yuan into that 'union'. It's a bold proposal but it could work. IMO Mundell understands the exchange rate mechanism better than any other economist alive today.
It would end the currency war. Trying to extrapolate the impact on other markets (eg. bonds) would be an interesting excercise.
Hi All,
Denninger may have some idealogical issues with gold but he can use a calculator. This sounds about right to me:
http://market-ticker.org/akcs-www?post=186783
"Richmond Fed: More Bad News
Nothing good in here..."
Indenture,
On that Mundell proposal, it would almost be worth the grief on other fronts to be able to watch 5 years = short term, turn into 5 seconds = short term.
Michael
"Do you have any idea of how it would play out, once those puts go in-the-money?"
My understanding of the interest rate swap contracts being sold by the Fed is that they are merely promises to pay a variable indexed rate to the buyers, in return for a fixed rate. Of course, the Fed doesn't really have to pay anything (via PDs) if rates stay lower than the fixed rate, and the buyers end up paying the difference as sort of an insurance premium.
So they are not really option Ks, in which someone buys a right to exercise the put at a certain time. By the time Treasury rates start to significantly increase, I imagine the entire US and European banking system will be insolvent anyway and full-blown monetization of debt will by the only way to save it. If the process of HI hasn't already gotten underway, then the Treasury rate derivatives blowup will be more than enough to set it off.
Identure, costata: My interpretation -> Mundel understands what is going on and he sees the pegging of Dollar - Euro as the thing to do atm. Dangerous waters we are in.
One interesting:
http://www.321gold.com/editorials/thomson_s/thomson_s_052411.html
- "...do not fight central banks..."
- "...few believe or understand gold revaluation now..."
***
One old:
"...In another moment down went Alice after it, never once considering how in the world she was to get out again.
The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down a very deep well.
Either the well was very deep, or she fell very slowly, for she had plenty of time as she went down to look about her and to wonder what was going to happen next.
First, she tried to look down and make out what she was coming to, but it was too dark to see anything; then she looked at the sides of the well, and noticed that they were filled with cupboards and book-shelves; here and there she saw maps and pictures hung upon pegs.
She took down a jar from one of the shelves as she passed; it was labelled `ORANGE MARMALADE',..." ~AinW
Part 1/6
What drives the silver market?
A huge number of comments touched on the impact on the silver market of issues such as shortages, retail demand, paper silver, the GSR, backwardation and that “gold or silver” perspective I presented in the thought experiment. As you read the comments linked below you won’t necessarily see the words ‘force”, or ‘price driver’ or ‘demand driver’. But I think this is a fundamental issue that needs to be addressed before we can make any more headway in the discussion on the other topics I just listed. I also think that we have to compare the forces driving silver and gold (or not driving gold) in order to reach a more realistic perspective and a more complete picture.
I’ve already put up links to comments from people who have covered some of these issues in their contributions to this discussion so I will try to give a few more people a turn on the stage. ‘Louis Cypher’ made this interesting comment expressing the view that even if it is only localized you can face a shortage on a personal level. This comment from ‘ultarnerd’ offered some interesting thoughts on supply and sources of both scrap gold and silver in his region.
‘Chaiwalla’ served this stimulating brew on backwardation. I think this is another avenue, potentially at least, for the ‘spiders’ to manipulate the market in order to display what they want other players to see. For those who find the concept of backwardation difficult to grasp this post from Bron Suchecki is one of a series you can find at his blog. This is a good one to start with because it contains links to posts from FOFOA, ZH and Antal Fekete when there was a lively discussion about this some time ago. Bron also explains lease rates here.
Kid Dynamite weighed in on recent report of silver backwardation issue on his blog recently. I’ve highlighted a sentence about the comments at ZH because I had a similar experience while researching and writing the post for this open forum. There seems to be a lack of discrimination and curiosity among the “BTFD Silver Bitchez” crowd.
“Elsewhere, today, in ‘Misusing data to confuse silver noobs,’ ZeroHedge rants about the “doubling” of silver market backwardation. “While the near-far contract backwardation was about $0.75 yesterday, it has since doubled in less than 24 hours.”
Sadly, although there are multiple pages of comments on the ZH post, there is not a single reader who noticed that this “phenomenon” was taken out of context and isn’t even a phenomenon at all………. You can see prices for the entire futures curve yourself at the COMEX website. Tyler had his panties in a bunch about the July 2014 futures which, at the time of his post was trading at $47.50, vs roughly $49 for the near contract: the May 2011.
Continued/
\Continued
Part 2/6
When you look at the current data, what do you notice? Hopefully you notice a few things: 1) The July 2014 contract has a total volume thus far today of 8. EIGHT contracts. The May 2011, on the other hand, as I write this, has volume of more than 36,000. 2) The last trade time for the July 2014 contract was 11:12am Central time. As I write this, that’s 2 1/2 hours old! When you compare a liquid contract to a completely illiquid contract, you may occasionally get data points like Tyler stumbled across, but you have to be aware that conclusions derived from miscomparisons of this nature are nearly meaningless.” (My emphasis)
I put up a 10 point comparison of the gold and silver markets on a thread here a while back. That was posted when I wasn’t the mannered fellow I am at present. You see I’m still under the watchful gaze of Mrs costata who remains ready to ”put the slipper in” if I don't continue to be on my best behaviour in this forum. So here is a version of that comment ‘cleaned up’ in advance to save Victor the trouble:
1. Silver is rising in price because it is scarce. Gold is rising in price despite the fact that it is not scarce.
2. Silver is rising in price because there is a shortage. Gold is rising in price despite the fact that there is no shortage.
3. Silver will soar to an incredible price because it is consumed. Gold will soar to an incredible price despite the fact that it isn’t consumed.
4. The price of silver is supported by the enormous (and growing) industrial demand for silver. The price of gold is not supported by the miniscule industrial demand for gold, something else is supporting it.
5. Silver is real money, so it will benefit from the rejection of fiat currencies by the man in the street and it will be re-monetized as a result. Gold has been de-monetized so it will benefit from the continuing acceptance of fiat currency by the man in the street. (I touched on this issue in Return Of The King - here. And let’s not get too hung up on the word ‘money’ by the way.)
Continued/
\Continued
Part 3/6
6. Silver is an industrial commodity metal so it has risen in price over this commodity uptrend cycle along with most commodities. Gold isn't a commodity metal but it has risen as well.
7. Silver is rising in price because Central Banks and government Treasuries do not hold it as a reserve asset and therefore cannot use their reserves to suppress the price. Gold is rising in price despite the fact that Central Banks and government Treasuries do hold it as a reserve asset and could use their reserves to suppress the price.
(I’d like to digress for a moment. FOFOA put up a comment recently in which he pointed out that GLD could be likened to a central bank for the bullion banks. With around 1,200 m/t of gold it certainly has the necessary scale. The same could be said of SLV but with one big difference. As a silver “central bank” SLV has no competition from any true central banks whereas GLD does. If, for some reason, the ‘spiders’ wanted to take gold to very high levels, very rapidly the true central banks could release gold to temporarily flood the market. I’m not suggesting this is likely. Since the real central banks don’t have any silver obviously they cannot intervene.)
8. The price of silver will rise to vastly higher prices despite the fact that the stock will flow at some price level and there are potential sources of additional supply to the flow. Despite rising prices the aboveground stock of gold is simply not flowing or giving any sign of flowing. The flow of gold cannot be increased significantly by more recycling because gold is almost always recycled anyway (and always has been), the supply of scrap has topped out while new gold finds are barely replacing reserves. (This link will take you to an article with a novel twist on recycling gold.)
9. The fortunes of gold and silver are bound together by the gold silver ratio (GSR). If gold goes to a much higher price silver must rise as well. (There’s a ‘longer response’ in the pipeline on this ‘narrative’.)
10. Gold will soar to an incredible price because currency issuers will use it to capitalize a new IMFS. Silver will soar to an incredible price despite the fact that currency issuers aren’t demonstrating any intention to use it to capitalize a new IMFS.
Gregor Macdonald suggested the “gold or silver” perspective was a “false dilemma” and that bi-metallism was likely to re-emerge. I’m going to address that again in at least one of the other ‘longer responses’ but I think that a reasonable person would conclude from these ten points, taken as a group, that the “gold and silver” paradigm is on the thinnest of thin ice. This is the false paradigm in my opinion. The notion that these two metals are driven by the same forces and that somehow their ‘fates’ are inseparable. In fact the drivers of these two markets could not be more antithetical if it was a deliberate construct.
Continued/
\Continued
Part 4/6
We’ll return to some of those ten points again. Before we do I want to take a peak at one of the “big picture” claims that is said to be a driving force in the price of gold. I’m not going to go into great depth here. If you want to challenge my assertions about this issue the comments are wide open.
Many people claim that inflation drives the price of gold. It doesn’t. If you think it does please provide the charts and data and demonstrate causation. Now, that is causation not correlation. The connection I would draw between gold and inflation is that in any period where inflation is elevated and the gold price is rising it could be a symptom of rising concern about the safety of the currency. However, my research does lead me to the conclusion that you can demonstrate causation in negative real interest rates and a rising gold price.
Let’s be crystal clear on another point. Hyper-inflation isn’t inflation-on-steroids in my lexicon. It’s a crisis in the currency itself, a death spiral that can be arrested in a few ways that I’m not going to get into here. Can debasing your currency in other ways (aside from issuing too much of it) lead to higher prices? Sure.
From this point onwards as we explore the forces driving the silver market I’ll just refer to the gold market where necessary for context, comparison or to highlight a specific issue.
Now let’s get back to those ten points and consider what drives the silver market and the price of silver. This is actually an easy question to answer. It’s the bullion banks (and their associated networks), the fashion jewelry makers and, more than either of the other two, the industrial silver users.
Do you want proof? Silver reached $21.00 a couple of years back. Then during the first stage of the GFC the industrial users pulled back and the price of silver collapsed to around $9.00. (By the way, I’d love to see some reliable figures on the silver fashion jewelry market over the same period if anyone has those numbers.) Last year the industrial silver users increased their purchases as all of that “stimulous” (liquidity) lifted demand for their products. What happened to the price of silver? It went up, a lot. So, for the stragglers, industrial silver users buying = floor under the price of physical silver and/or rising price. Industrial silver users not buying = physical silver price collapse.
You may be thinking: what about the paper silver price? How can that run so high if it is not supported by the key drivers of the physical market? This is a complex question that deserves a, you guessed it, ‘longer response’ of its own.
Continued/
\Continued
Part 5/6
Within the physical silver market there are segments with their own internal drivers. Just because a trend is evident in one segment it does not mean you can extrapolate that trend to some kind of ‘grand unified theory’ for the whole market. This is the retail product buying silver bugs’ blind spot. In the post I tried to explain how this is a market segment that is vulnerable to supply bottlenecks and how those choke points can be exploited by the bullion banks.
From the post:
The Mints' demand for silver is ultimately driven by retail and wholesale customers. Mints tend to have a “feast or famine” sales pattern that makes it difficult to forward plan capital expenditure programs. They certainly cannot expand their overall production capacity quickly. Hence they are also highly predictable and another potential choke point that could be exploited in a corner.
Yes, you can have a tight supply situation in the retail silver market without having any significant tightness in the market overall as Bron Suchecki pointed out here.
“Everyone has to stop focusing on retail product supply or shortage, there is a much bigger wholesale market (1000oz bars) where I'm not seeing any shortage. Commentators play up the retail shortages (which are transparent) but either ignore or aren't aware of the opaque wholesale market supply situation. Poor information means poor decisions.”
Some of the players take full advantage of the silver shortage story. And guess what, they are at it again right now. Here is Andy Schectman of Miles Franklin being interviewed here by Jeff Clark of The Daily Reckoning about 10 days after my post went up.
Jeff: Some analysts say it’s a bottleneck issue, that the mints have enough stock, but just need more time or more workers to fabricate the metal into the bars and coins customers want.
Andy: No, I don’t believe that. What business do you know that if they had that much profit potential wouldn’t increase production and hire more workers to meet demand? To me, the “inefficient model” argument is an excuse.
Later in a response to a question from Jeff about where the “best” premiums are right now Andy goes on to say that “the very best buy in silver right now is junk silver”. Let me translate this dealer-speak for you: We have lots of junk silver to shift. (because of all the sterling silverware that came to market around 40 bucks???)
Continued/
\Continued
Part 6/6
Apparently the Perth Mint did not get the memo from Andy that there are no excuses for a production bottleneck.
“Significant physical demand for silver bars has been experienced, with the 10 ounce, 20 ounce, kilo and 100 ounce bars proving the most popular. However, this recent surge in demand has exceeded our capacity to produce them. In response, additional silver refining and barring equipment is being installed at the refinery which is intended to increase capacity to double the current level. It is expected that this new equipment will be commissioned and operating at full capacity in early July.” (My emphasis)
Let’s consider how the business of a coin dealer operates. These folks are not manufacturers or even retailers in the traditional sense of the word. They are dealers and traders not shopkeepers. They don’t have to be “price takers” like many retailers. If they are well capitalized, they have the option to hold on to any over-priced inventory and wait to see if prices recover. They don’t have to put their excess inventory on display. Before some of you jump in and suggest that I’m arguing that these folks do have excess inventory at present, for the record, I’m not saying that, merely that they will not tell you if they do.
What I am also saying is that some healthy skepticism is called for when you are listening to someone with a vested interest in talking their own book. By way of comparison another candidate for the world’s shortest book competition is “Realtors Who Think This Is A Bad Time To Buy Real Estate”. So try to put yourself into the dealer’s shoes for a moment. At minimum they will try to offload their inventory at break even by jacking up premiums to the spot price. If they have a cash flow issue they might try to offload at a loss to another dealer before putting their problems on display to customers.
Thank you to ‘David’ who contributed a link to this video. The speaker has some interesting remarks on silver buy and sell quotes. This fella seems to have been doing a bit of sleuthing as well with one of the bigger silver suppliers.
Production bottlenecks play right into the hands of dealers. Everyone knows the rule of supply and demand. Higher demand tends to lead to increased supply. At the risk of stating the obvious, with a production bottleneck increased supply isn’t possible so buyers are effectively bidding against each other.
Is that the end of the story? No there’s more to it than that but this longer response is already too long so we will revisit some of these issues when we look at the GSR, paper gold and paper silver.
@Costata: Addition to your 2003-2004 picture
BIS (2000-2004) - Withdrawal of ALL shares of the Bank for International Settlements held by PRIVATE shareholders
http://www.bis.org/about/shareswd.htm
=> So BIS shareholders are at the present only CBs.
BTW just a reminder :o)
BIS has 2 representative offices
July 1998 -> HK
Nov 2002 -> Mexico
http://www.bis.org/about/regional_offices.htm
Costata,
thanks for the 'cleaned up ready for Victor' version of your response. Here are some comments:
1. On backwardation.
Relevant is the LBMA, not the COMEX. At the LBMA, backwardation has persisted for most of this year. So a temporary squeeze in the swap market is ruled out.
Backwardation can only be caused by a shortage if there were no silver available at any price (such as in wheat futures when last year's harvest has been consumned, but this year's not yet brought in). Silver backwardation as a consequence of a shortage is nonsense (same if it were gold btw). There is plenty of investment silver that would be for sale at, say, 1500$/oz. So the price could rise, and there would always be enough material availabe for term structure arbitrage.
If silver is still in backwardation in spite of the arbitrage, it can only mean one thing: counterparty risk in the market for silver swaps, i.e. the risk that the silver principal of the swap will not be returned. Now this backwardation is at the LBM, and so it reflects what bullion banks know about other bullion banks.
2. Costata: However, my research does lead me to the conclusion that you can demonstrate causation in negative real interest rates and a rising gold price.
This is so important it deserves to be printed in bold face all over the place. It was discovered by Robert Barsky and Lawrence Summers in the 1980s. You could even write 'risk adjusted real interest rates' and you would agree that gold is even good to have in an old fashioned deflation ala 1930s. It happened that during the 1970s, inflation rose faster than inflation expectations and thereby caused negative real interest rates. But this is not the only way in which these can appear.
3. Costata: Then during the first stage of the GFC the industrial users pulled back and the price of silver collapsed to around $9.00.
Silver dropped from 21$ to 9$ (57%). Gold dropped from 1000$ to 700$ (30%). Who was it that pulled back in the case of gold?
...
4. Costata: Just because a trend is evident in one segment it does not mean you can extrapolate that trend to some kind of ‘grand unified theory’ for the whole market. This is the retail product buying silver bugs’ blind spot. In the post I tried to explain how this is a market segment that is vulnerable to supply bottlenecks and how those choke points can be exploited by the bullion banks. [...] Yes, you can have a tight supply situation in the retail silver market without having any significant tightness in the market overall.
Thanks to the universal 'paper' price of silver, even the little retail coin buyer gets the same good price as the industrial users, isn't this generous? Little re'tail' demand cannot wag the industry dog.
5. Costata: Andy goes on to say that “the very best buy in silver right now is junk silver”. Let me translate this dealer-speak for you: We have lots of junk silver to shift. (because of all the sterling silverware that came to market around 40 bucks???)
When he says 'junk silver' he refers to pre-1960s silver coins (900 fine) - I am not an expert as I was not yet around in the 60s, and not in the US anyway. The four week spike from 35$ to 50$ and back to 35$ was for day traders, but not for melting down the family tea pots.
6. In spite of the roller coaster (who denied that silver can be very volatile?), I think it is pretty obvious that the price of silver is driven by the demand for physical investment silver. Only a small part of this is coins, and the bottle neck in the mints did not manage to slow down the investment demand any significantly.
And it is all about physical silver because backwardation indicates counterparty risk in silver swaps, but paper silver does not have any significant counterparty risk - bullion banks can create it as necessary. When you look at the LBMA silver forward rates (SIFO) you can even see that the backwardation disappeared when (paper) silver got too hot between Mar 15 and Apr 30. But now that silver is back to its underlying steadily rising trend, backwardation is back, and it is all about the physical again.
Victor
Some people claim that a silver shortage is obvious because COMEX dealer inventory declines. I do not think this indicates a shortage either, but it is rather a consequence of backwardation. Here is what I wrote on another blog.
Victor
Jean-Pierre Roth: Seventy years after – the final collapse of the gold standard in September 1936
http://www.bis.org/review/r990622b.pdf
Mr Roth discusses demonitisation of gold in Switzerland
http://www.bis.org/review/r990622b.pdf
EVOLVING PAYMENT SYSTEMS, CENTRAL BANK MONEY AND THE CONDUCT OF MONETARY POLICY
VÃtor Gaspar1, Daniela Russo2 3; October 2006
http://www.dnb.nl/en/binaries/Vitor%2520Gaspar_tcm47-145691.pdf
"...5. Conclusion.
“Credit in business is like loyalty in government. (...) an immense system of credit, founded on the Bank of England as its pivot and its basis, now exists. The English people, and foreigners too, trust it implicitly. Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone: but what we have requires no proof. The whole rests on an instinctive confidence generated by use and years. Nothing would persuade the English people to abolish the Bank of England; and if some calamity swept it away, generations must elapse before at all the same trust would be placed on any other equivalent. (...) Those who live under a great and firm system of credit must consider that if they break up that one they will never see another, for it will take years upon years to make a successor to it.
Walter Bagehot, Lombard Street, (originally 1873), page 81, in Norman St John-Stevas, The Collected Works of Walter Bagehot, vol IX, London, The Economist, 1978.
We have argued in this paper that money is one of the fundamental institutions of society. Money is able to provide liquidity and to facilitate transactions because it is based on stability and trust. It is unclear whether our current system based on the co-existence of central bank money and commercial bank money is optimal. Given the present state of research it is not even obvious on the basis of what criteria one would evaluate optimality. What is clear is that the current system does work and that it does provide valuable services to society. Clearly there is tremendous value associated with the general agreement around such a SOCIAL CONVENTION. Building up an ALTERNATIVE would be, as Bagehot, warns us a LONG and DIFFICULT process.
From the viewpoint of central banking these remarks are truly fundamental. We agree with Padoa-Schioppa (2004) when he argues that the issuance of central bank money lies at the root of all central banking functions.
In this paper, we have also argued that the coexistence of central bank money and commercial bank money in payments systems enables it to supply an elastic currency responsive to the TRANSACTIONS needs of the economy. It allows the flexibility, dynamism, innovation and efficiency of an open market economy to be reconciled with the fundamental requirement of preserving stability and trust. We think it is not exaggerated to state that stability and trust provide the foundations for dynamism, innovation and efficiency...
"...According the modern theory of monetary policy, monetary policy can be best understood as operating through the control of interest rates. By systematically changing interest rates, in response to the relevant circumstances of the economy, the central bank is able to safeguard the value of the currency. In other words, the central bank is able to deliver price stability. At the same time, the central bank contributes to the overall stability of the economy, in general, and of the financial system, in particular.
In this paper, we have argued that an operational framework for monetary policy, based on the corridor system, for daily interest rates, is likely to prove robust to changes in payments practices and in the relevant technology. In a sense we would even go so far as to argue that the prevalence of the corridor system in industrialized countries today reflects the fact that such framework seems particularly well suited to work towards a concept of elastic currency. Moreover, the central bank, as a non-profit institution, is ready to adapt its way of operating to changing business circumstances. The importance of these considerations is reflected in the current practice of remunerating reserves or, alternatively, to allow averaging around zero or very low bank reserve levels. Clearly, control over the monetary stance depends on control over the opportunity cost of settlement balances at the margin. The operational framework can be designed in such way as to make average costs arbitrarily small. Therefore, the current concept will prove resilient as long as the banking system will continue to be the main provider of payment services in the economy.
It would be wrong to interpret our line of argument as providing reasons for complacency. Monetary policy has been able to remain effective and successful because it has adapted to a fast changing environment. The importance of the ABILITY to ADAPT to changing circumstances will remain KEY."
[Mrt: almost forgot, sorry, addition to above]
("...In this paper, we will be focusing on the concept of money as a medium of exchange or, more explicitly, money as a provider of liquidity or payments services. In sum, our concern will be with money as a facilitator for transactions. In almost all societies, documented through historical records, we find money. The reason for the universality of money is, in our view, precisely that it facilitates trade, it saves on transactions’ costs...")
...and now lets compare this with:
Date: Thu Oct 09 1997 19:00
ANOTHER ( THOUGHTS! ) ID#60253:
...[Mrt: shortened]
The western world today, as we know it does not use money ! They use "paper currency". To fully understand what that really means you must come to terms with this fact. " When you use paper currency you are placing a value using another persons concept of value" You are using a thought as a means of value! When an investment in stocks, bonds, bank accounts, CASH, businesses etc. is priced in US$ currency you are really holding the "intentions of providing value" locked away in the thoughts of another mind.
This type of human interaction works well for a time, as the last 100 years or so proves. But, it is highly unstable to say the least. It has it's own self distruct code written inside each mind. One day ( it has already started ) a type of nuclear chain reaction will occur in the currency markets as people start "unvalueing" the thoughts of others. Little by little all debts owed will be marked down .
Now that we understand that concept let's move on:
One of the great money troubles facing the western currency system today is that many third world people are starting to put a "mind value" on real money, gold. These people don't know the true value of gold money but they know it's worth a whole lot more than the world paper currency price now placed on it. And that brings us to the next problem; how can paper currency that represents "the thoughts of a nation blowing in the wind" be used to value real money of ancient world class proportions, gold? It cannot! Any price you can think of will do, as in no price will work!
How did we come to this unworkable mess?
The best way to rework the publics mind about gold money was by changing the way it was viewed.
"It's money of course but let's also call it a "commodity! Then we can place a "paper" value on it and denominate it in all forms of future contracts. It will lose it's true value as money in peoples minds and be priced in an unrealistic paper format." And here we are today!
The banks must sell all the gold they have to keep the system togeather. And once it is all sold and the financial markets implode the nations will use "whatever force is necessary" to pull the gold back in! That action in and of itself would show the true value of gold money!
What of the LBMA mess?
Gold is cornered. Plain and simple. No complicated theories, no options problems. The commodity value of gold was forced so low in paper currency terms that all of the new mined gold, going out some 10 years is spoken for. Between the third world buying physical gold and the jewelry industry ( same people buying ) there is none left for the oil states! They do value oil in terms of gold, but not IN the paper currency price of gold! How much is gold worth in terms of oil value? Just stop supplying gold to them in ultra cheep US$ terms and you will find out by watching the currency price of oil! In any event, LBMA has traded so much paper/oil/gold that any rise in the currency price of gold will implode them. The CBs must become the full primary suppliers of gold or the system as we know it is done.
One last note: No form of paper wealth will survive the financial crush once the CBs stop selling!
[Mrt: So, are we going somewhere between those two points of view?]
Mortymer,
One of Another's great quotes. But I find myself constantly wondering, given that gold is (I think)5X or so what it was when he wrote it, why hasn't LBMA imploded yet? I am certain if we had asked him back then if $1500/oz. was a high enough price to cause the implosion, he would have said yes. The CB's, for the most part, have stopped selling (did anyone find out where Mexico or India bought their recent tons), and yet LBMA lives on. Thoughts anyone, on reasons for the staying power?
Excellent points Victor!
Costata - it would have been prudent of you to investigate the term 'junk silver' before using it - from Wikipedia
"Junk silver is an informal term used in the United States, United Kingdom, Canada and Australia for any silver coin which is in fair condition and has no numismatic or collectible value above the bullion value of the silver it contains. Such coins are popular among people seeking to invest in silver, particularly in small amounts. The word "junk" refers only to the value of the coins as collectibles and not to the actual condition of the coins; junk silver is not necessarily scrap silver."
@Michael H,
"BTW I note that $42.22 is roughly 1/35th of the spot price, and that 35x the spot price isn't far from $55,000."
You're getting into numerology now :) Coincidences happen.
OK, well it seems we'll just have to agree to disagree that 42 might just be a very important number.
(Apologies to all for just another silly link...)
I did try to keep up with your paper trail derivatives story, but TBH it got a little complicated and my attention wandered to thoughts of "but this is all just paper, and can't TPTB make paper say and pay out [in paper] whatever they want?" That's not to suggest your idea for The Catalyst isn't viable, just that I have an inability to see it like you and Ash clearly do. I see them just chipping away little by little at their paper mountain of problems, gradually, or perhaps at some point and without warning spectacularly, uncovering the gold that was the real wealth underpinning the whole scheme all along after all.
"What I am also saying is that some healthy skepticism is called for when you are listening to someone with a vested interest in talking their own book."
We at Perth Mint really are a bit stupid. Instead of talking up the shortage, we are saying there isn't any wholesale shortage, it is just production, we are working on increasing production, and we don't increase premiums when we reach capacity but ration instead.
Stupid, or honest? :-)
@Ash,
Great posts, now you're talking! Couple of questions:
Your thoughts of an initial bout of deflation, I struggle with(housing excepted). The US Treasury, Fed Bank, and Government are replete with Keynesians (and socialists), and given that fact, deflation seems nearly impossible to me. Do you see QE actually ending, then, even in the wake of a withering economy, and if so, who do you see stepping in to buy the $600 billion in the next quarter that we have been buying (from ourselves, lol)? Alternatively, should QE continue, do you think that the economy can withstand the inflationary effects of that policy and still see deflation?
For those who were interested, Part II in the series on physical gold:
The Future of Physical Gold (Part II - The Evolution of Value)
Hopefully, it's a bit easier to digest than the first one.
Joel,
I do think it's likely that additional QE is put off until late this year or perhaps even early next year. However, even if QE3 comes in soon at the same level of QE2, I do not think it will overwhelm deflationary trends, especially if it is targeted at Treasury bonds.
I think it's important to note that with QE1 AND QE2 the Fed has not been able to produce "inflation" in the real economy outside of limited speculative bubbles in financial assets, and certainly not in RE, which is the largest "equity" asset of most Americans.
victor,
"Thanks to the universal 'paper' price of silver, even the little retail coin buyer gets the same good price as the industrial users, isn't this generous? Little re'tail' demand cannot wag the industry dog."
Just to clarify: are you saying that you agree with costata, that shortages seen in the retail sector are not a reason to expect higher silver prices?
"When he says 'junk silver' he refers to pre-1960s silver coins (900 fine)"
I expect you are correct that this is what he meant by 'junk silver', but it brings up an interesting point: junk silver is in fixed supply (they're not making it any more). So why are premiums on junk silver lower than on other silver products?
"Silver dropped from 21$ to 9$ (57%). Gold dropped from 1000$ to 700$ (30%). Who was it that pulled back in the case of gold?"
Excellent point. Keeping with costata's theme, I expect the answer is not "industrial gold users". Are you implying that the drop in silver was also not entirely due to industrial silver users?
Mortymer,
"Those who live under a great and firm system of credit must consider that if they break up that one they will never see another, for it will take years upon years to make a successor to it."
Perhaps this is the thought process behind why the rest of the world is still supporting the dollar, even after the founding of the Euro. It's not just about not going against King Dollar and drawing His ire -- it is about not undermining the confidence in the system, which would undermine all currencies and not just the dollar.
Question: are the capitalized words in the original, or did you add the emphasis?
Joel,
" But I find myself constantly wondering, given that gold is (I think)5X or so what it was when he wrote it, why hasn't LBMA imploded yet?"
My best guess is that the CB sales of gold in the late 90's / early 00's (Brown's bottom) patched the system together for long enough to make the transition between a declining gold price regime and an increasing gold price regime.
See the quote I pulled from Mortymer's comment above: I expect that 'saving the system' became a lot more important to policy makers than A / FOA may have at first appreciated, and unprecedented sacrifices were made to that end.
DP,
"I did try to keep up with your paper trail derivatives story, but TBH it got a little complicated and my attention wandered ..."
Yeah, sorry about that. I got a bit to rambling.
I'll have to do a bit more thinking, but where I ended up is this: if the Fed is going to go all in to support treasury prices, then we might see a bubble in US treasuries.
If that happens, we might see things that are just plain absurd. Like 30-year yields at 1.8% even while the core-CPI is at 4%.
"How is FreeGold going to extinguish thousands of years of history?" It is not.
The concept of money is, among other things, "remembered relative values". A plate trades in barter for a "thing or things of equal relative value, a bowl for example. Or an ounce of gold for thousands of years traded in barter for about 16 ounces of silver. Why? When miners extracted these metals, those were the ratios a given amount of labor produced.
Since there is so much paper gold in relation to physical gold
(100:1?) the physical will revalue upward in an unprecedented manner when people lose faith in the paper. The same can be said for silver.
Differences between gold and silver: Gold can sit at the bottom of the ocean for 100 years and not tarnish. Silver will tarnish. On the other hand, while the amount of gold in vaults increases, silver is consumed by industry.
@Michael H
I'll have to do a bit more thinking, but where I ended up is this: if the Fed is going to go all in to support treasury prices, then we might see a bubble in US treasuries.
If that happens, we might see things that are just plain absurd. Like 30-year yields at 1.8% even while the core-CPI is at 4%.
I'll have to do a bit more thinking, too, but in the meantime:
my attention wandered to thoughts of "but this is all just paper, and can't TPTB make paper say and pay out [in paper] whatever they want?"
I see them just chipping away little by little at their paper mountain of problems, gradually, or perhaps at some point and without warning spectacularly, uncovering the gold that was the real wealth underpinning the whole scheme all along after all.
Back to my Happy Place, to consider whether you're right and significant-and-sustained $deflation might be likely after all... Ommmmmm...
Cheers ;-)
DP,
"to consider whether you're right and significant-and-sustained $deflation might be likely after all... "
That's funny, because I'm not really thinking along the lines of $deflation. At least not in terms I'm used to.
I'm thinking along the lines of 'continuing decline of treasury yields', even while prices continue to rise, especially for food and energy.
I suppose by the strict monetary definition of 'deflation' -- declining credit in the economy -- I might be calling for $delfation, but I think this definition is practially useless.
Dear FOFOA,
It is a first time I have doubts in your sincereness and care for other human beings. It is due to reposting of article by Costata.
I have read the article of Costata to the section of "Thought experiment". At this point I just could not torture myself to keep reading this piece.
This article is written in such a way that some people like Eric Sprott and Robert Kiyosaki could sue Costata for misrepresentation.
Did Costata ask Robert what is the price level he thought of when he was saying that he will sell his silver to suckers?
Costata uses Eric Sprott and others when it suits him but completely ignores the fact that many people who he is quoting will strongly disagree with the message of his article. The best examples are articles by Eric Sprott. He said that gold WAS an investment of the decade and silver IS and investment of the decade.
To all people reading this article. Are you in the right metal? Silver may not be the right metal but the article by Costata makes me buy more silver when I see such misrepresentation of beliefs of Eric Sprott or Ben Davis. Ben was loading up on silver again at price levels of 35$.
Shame on you Costata and shame on you FOFOA.
The article is full of psychological tricks (word phrases that bring nothing to the discussions about facts) to make the reader feel bad about his beliefs including one that silver will regained its monetary status like gold.
I said it clearly belief. I believe in Freegold and Freesilver.
My reaction to this post? I will stop recommending your blog. I will still read it because I may find as usual many pieces that are gems written by you. However, your blog is no longer good for a person that is not sufficiently financially educated to know when they are being mislead by misrepresentations.
I am very disappointed.
best,
Radek
P.S. Disclaimer I own 50/50 gold/silver in nominal $terms and after this article I will up my silver holdings to ratio to 33/66.
BRON of the PERTH MINT,
You're not "stupid", just a LIAR.
Demand for retail silver products like 1 ounce rounds and 10 ounce bars has been going up for YEARS.
ANY normal business would have ramped up production facilities by now to take advantage of such a growing market for its products.
YET here you are disingenuously claiming that silver is plenty, just that you can't churn out enough saleable product because you don't have enough presses.
You are DISHONEST indeed. You work for the bankers and Wall Street who want you to disseminate the propaganda that there is plenty of silver when this is not true.
Yes, we know that you have sold silver that you don't have and you will pay for that, despite your best efforts to paper over this fact with big fat LIES.
As I said yesterday, the Fat Lady has sung and silver will be trading above $70 by October, in my opinion.
@Radek
Costata uses Eric Sprott and others when it suits him but completely ignores the fact that many people who he is quoting will strongly disagree with the message of his article.
This is so true - Coatata searches statements by people, uses them out of context - or to support a more fallacious straw-man argument - which he pushes over to appear to have beaten them with logic. It's horrendous.
Aside from a belief in FreeGold (which Costata has pushed me AWAY from) I am in complete agreement with your last post.
I'm surprised the FoFoA - a site I regarded very highly and recommended to many - has stooped to allow a posting of this very obvious Silver bashing. It is reaching to the farthest depths to export a false premise. Why? Why bother?
If you think you are impacting possession of Silver - I'd say "Yeah - now I am buying more". Like Radek - I am about 50-50 Gold/Silver but will seek to increase my Silver position in the next few months - IF I can.
Since there is so much paper gold in relation to physical gold (100:1?) the physical will revalue upward in an unprecedented manner when people lose faith in the paper. The same can be said for silver.
Of course. You said it FreeGoldAdvocate!
I see no historical precedent for FreeGold nor for a 120,000:1 GSR.
Indenture: I keep thinking Fukushima. Something somewhere has blown up and the cascade effect has yet to hit it's peak.
Going to take a world of cash to repair so much damage from the tsunami. I don't expect to see them buying more USTs any time soon? Selling, yeah I can see that I think. Hmm....
Ommm.....
@costata: Tough love, I hope Sharon continues to stand by you with the towel to mop your sweating brow. Why? Why bother? :-) It's unfortunate that the people you try to help are most often the people that don't quite see it as "help". [sigh]
It's not much, but you have the respect of this feckless pom watching on as you toil valiently at your task though, FWIW.
Ash,
I agree with you on RE, at least from a residential standpoint. Given that it is, for most, a debt based purchase, the QE money will not find it's way into the hands of those that will buy it, as I see a continued credit contraction. Commercial RE, on the other hand, may get bid up by foreign entities as it has in the past. Where I disagree with you is on inflation. I think it will take one or two more quarters for it to get really bad, but I see it in many more areas than just energy and food. I sold my five year old ski boat for 3,000 more than I paid for it, two years ago! Car prices are %15 higher every year. Walmart's inflation survey on their goods is + %15 year on year. If the CPI was restored to it's earlier, more accurate version (before they stripped out everything that mattered) it would be %8 plus higher. Throw in the fact that energy costs effect almost every good or service we use, those energy price increases will make their way into prices of everything else once inventories are drawn down. Also throw in the certain effect of a weaker dollar in a continued QE environment, and foreign money will be competing for our goods big time, adding fuel to the fire.
Hi Radek,
in defense of our host and Costata's effort(s) I have to say that your judgement of their motives may be wrong.
It think both have proven that they have no problems with the price of silver rising (in dollar terms) making it a "trade/investment of the decade".
It is apparent they don't believe in "FreeSilver" as you do and try to argue for their beliefs/reasoning with examples. One of the arguments is the fact that many silver owners intend to exchange that silver for gold at some GSR much lower than right now.
That may very well work for shrimps like us but for the "Giants" this is not a viable option. If you believe this then one of the point Costata tries to make is that at the end, silver may/will not deliver what many (FreeSilver advocates) suggest. In that regard taking advice from a person that "is going to exchange" silver for gold can be a bad move.
This nor thought from others are to be taken as a financial advise but merely as an observation of things unfolding.
Casper
continued...
read The Future of Physical Gold (Part II - The Evolution of Value)
on your website, will post a section here for all to consider:
As mentioned before, and contrary to what many official "Marxists" and "Neo-Classical" critics say, Marx did not believe a commodity's use-value had no role to play in the creation of surplus value within the M-C-M+ circuit. The following excerpts from Dr Keen's paper, entitled Use-Vale, Exchange-Value and the Demise of Marx's Labor Theory of Value, further explain Marx's initial analysis of surplus value in the industrial capitalist economy [emphasis mine]:
Marx: "We are, therefore, forced to the conclusion that the change originates in the use-value, as such, of the commodity, i.e. its consumption. In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use value possesses the peculiar property of being a source of value." (pg. 5)
Keen: "Marx specifically referred to the use-value of a machine being greater than its [exchange] value, and in contrast to his discussion of depreciation in Capital, dissociated the productivity of a machine from its depreciation. The use-value of a machine will differ from its exchange-value and, as with labor, we can assume that its use-value will be "significantly greater than its value." In practice this will mean that the amount it loses in depreciation will be significantly less than the amount it contributes to the value of output, and it will, with labor, be a source of surplus value." (pg. 7)
After that lengthy, yet "valuable" bedrock of wealth creation, we can return to the problem of insufficient aggregate demand in a capitalist system. In Part III, we will discuss how the creation of surplus value via production in the M-C-M+ (wealth accumulation/concentration) circuit implicates an inherent problem for the system, since wealth is only realized from this value when it is monetized in a market. Over-supply of commodities in the production process on a consistent basis leads to negative excess demand in the entire economic system, as a sum of the C-M-C and M-C-M+ circuits (a clear violation of Say's "Law").
What I don't agree with (or maybe understand) is the very last statement. Where is the oversupply of gold going to come from to create the "excess negative demand"? Fofoa, would love for you to weigh in here and on his article as a whole.
DP,
To clarify, usually I think of $deflation as 'increasing purchasing power of the USD'. Which I do not expect.
I do expect a steadily rising gold price, until the system breaks. Gold is the best asset to hold because it will do well before *and* after the transition, and the timing of the transition is uncertain.
@MichaelH: original is worth to read all, good reasonong there:
http://www.dnb.nl/en/binaries/Vitor%2520Gaspar_tcm47-145691.pdf
[Mrt: emphasis were mine, the last part was shortened cos was too long; picked for using those ideas versus those of Another - Thoughts about the subject]
MH: I do expect a steadily rising gold price, until the system breaks. Gold is the best asset to hold because it will do well before *and* after the transition, and the timing of the transition is uncertain.
Turns out we are of one mind, even if we end up at the same conclusion from different pathways.
Which was nice... :-)
Joel,
Thanks for reading. In terms of net negative demand, the thing to understand is that this has been an ongoing feature of capitalist production for some time now, and especially with the globalization of speculative finance. It does not mean there is over-production (over-supply) of every commodity, but that it is possible (and practically true) that the sum of all sectors have totaled negative demand, and instead of this imbalance quickly correcting itself, it persists and gets worse over time due to both endogenous financial forces and state-based policies.
Since this article focused on the creation of value at some length, I decided to focus more on financial dynamics and structurally insufficient demand in the next part (part III). I am happy to answer specific questions about my arguments presented in the article or here, of course, like yours.
re: inflation
I see the recent asset price inflation (including commodities) as being almost purely fueled by speculative debt, and therefore bubbles that will burn themselves out as investors cannot afford to keep servicing those debts and meet their margins. Similarly, higher consumer prices should also meet heavy resistance as wages/cash flows, other job benefits and welfare revenues remain suppressed (the latter due to alleged "fiscal concerns"). It is true that things like basic energy and food are necessary, but I think there is a whole lot of room for people to cut back on their consumption of those things without killing themselves.
I also think we should keep those prices in perspective. How much higher is oil than it was five years ago? It's not really. Per barrel it reached almost $150 in 2008 before crashing... so the difference now is that higher prices have become less affordable, and eventually demand destruction will be forced to take over at a rate that current deficits and QE cannot counteract.
Dear Casper,
I was not trying to figure out their motives I was just pointing out extreme misrepresentation of the people like Eric Sprott, Ben Davis, Max Keiser, and potentially few more. I have read and listen to those people a lot and the author of the post is doing just grosse misrepresentation.
The goal (freegold education) does not justify the means (silver bashing, misrepresentations of peoples views). Before this post I was thinking about buying more gold, now I have serious doubts.
I hope FOFOA reads it. I had a friend who bought 100% silver. I tried to convince him to read FOFOA blog. I will not do that again.
If I did not read many posts of FOFOA I would have immediately stopped reading this blog because I would be worried that FOFOA is doing the same misrepresentations like costata did.
Your remark about Giants. I would not be sure that Giants are not investing in silver. If you believe Jim Rogers then you have one Giant preferring to invest in silver than in gold. I guess Eric Sprott is not a small fish either. Mike Maloney (has 95% in silver) was mentioning about millionaires buying physical gold and silver for half million at the weekend like they would be buying books on Amazon. ;).
I am not going to sell my whole silver for gold. I buy silver as a hedge against mistake in my belief that FreeGold will actually take place. If I am wrong in my belief in FreeGold then silver industrial demand will be enough to cover my losses in gold. Gold is my speculative position and silver is my long term investment. I do not care about silver volatility or silver paper takedowns at low trading days since I buy physical only. The problem is that if reader does not know very well what is happening in silver market she/he will fall for manipulation taking place in this post.
Only 33% of my assets in precious metals will be used to play GSR ratio and only in extreme points like 100:1 or 5:1.
best,
Radek
Ash:
I spent some time looking over your latest essay but I have to confess I couldn't force myself to properly digest it. I know you've claimed that some things require lots of complicated language to explain, but surely the 'core' of a rebuttal of the Freegold thesis could be done in reasonably simple way? It still felt like an academic exercise in philosophical terms, and I think it is overweight on the word 'dialectic'!
It was my impression in reading your article that you batted aside core Freegold arguments without reasons that were clear to me - particularly, gold's NON-commodity status and the 'job' of gold envisioned by people who think that Freegold will occur at some point. Also I think your representation of Freegold as having debt-backed currencies is a little misleading, as the presence of debt is not a pre-requisite for Freegold's occurrence (gold as a reference point would, however, keep each currency 'honest' and readily appraisable for what it is).
Also your discussion of the concept of money differs from how the concept is used by FOFOA - just so you know. Perhaps giving some more thought to the Freegold perspective on how gold assumes its position would give you a different angle on things?
Can you tell me again why the view of gold as the ultimate reference point, and hence a 'cure' for the debt-riddled status quo, is flawed?
I'm not trying to be unpleasant or irritating - I just want to be sure that I understand your argument before making a judgement on its merit, and at present I can't penetrate the language to my satisfaction :)
J The Newer
Sorry, unclear sentence reworded:
Also I think your representation of Freegold as having debt-backed currencies is a little misleading, as the presence of debt is not a pre-requisite for the continued operatoin of a system with gold as a reference point (gold as a reference point would, however, keep each currency 'honest' and readily appraisable for what it is).
Michael H,
Just to clarify: are you saying that you agree with costata, that shortages seen in the retail sector are not a reason to expect higher silver prices?
Yes. The price of silver is going up for a very good reason. And this reason is not Mad Keiser and friends who are buying every single available American Silver Eagle coin.
So why are premiums on junk silver lower than on other silver products?
I thought this was very intuitive. A large bag of unspecified outdated coins is a product of lower quality than a freshly cast 100oz+ bar or an 'official' Americal Eagle or Maple Leaf coin.
Are you implying that the drop in silver was also not entirely due to industrial silver users?
Exactly. I guess that in early 2008, many hedge funds were short US banking stocks and long precious metals and commodities. There were two reasons for closing this trade in a hurry. First, once you are worried that your broker might not make it though the crisis, you better close the trade and take out the cash. Second, there was the explicit ban on shorting financial stocks.
As far as industrial users are concerned, perhaps Bron can enlighten us. Do the industrial users buy their silver in the day-to-day spot market, or do they have longer term contracts as the users of crude oil and industrial metals such as copper and iron ore have?
[...]if the Fed is going to go all in to support treasury prices, then we might see a bubble in US treasuries. If that happens, we might see things that are just plain absurd. Like 30-year yields at 1.8% even while the core-CPI is at 4%.
It is very difficult to predict what would happen. I guess that they would break the system if they continued this for too long. The velocity of money would start to increase too quickly.
Victor
Hi Radek,
You should hear Costata when he’s not on his best behaviour! ;-)
But seriously, if you think Costata’s argument is irrational, then maybe it’s not such a good idea to alter your investment decision based on it. I wouldn’t base my investments solely on what Eric Sprott says either, as much as I respect him. Silver may be an investment of the decade, but gold is the investment of a lifetime… and beyond.
As you must know from reading FOFOA, what seems obvious, is not always so. I think Costata did not ask Robert at what price he planned to “sell silver to suckers” because it was not relevant. The point is that he planned to sell it, not keep it. In other words he would exchange it for dollars or gold when he thought it had reached its peak. This is completely different to gold, which does not peak, but plateaus under freegold, and holds its value (in Oz) so there is never any desire to sell it.
At the start of this month, your friend, who you advised to buy silver, lost 35% of his “value” in dollars. If he’d owned gold he would have lost 7%. If you think about it, this in itself is a pretty good reason to think seriously about whether you are in the right metal.
victor,
"The price of silver is going up for a very good reason."
What do you see as the reason? (I'm sorry if you've posted it before, or if it seems like an obvious question, but I'm genuinely interested in your answer)
"I thought this was very intuitive. A large bag of unspecified outdated coins is a product of lower quality than a freshly cast 100oz+ bar or an 'official' Americal Eagle or Maple Leaf coin."
Agreed, but, it seems like premiums for the higher-quality products have risen, even as silver prices rose, while the premiums for junk silver have actually fallen (I think).
Is the answer to this tendency that the SLA has focused retail attention on coins etc., while ignoring junk silver?
"Do the industrial users buy their silver in the day-to-day spot market, or do they have longer term contracts as the users of crude oil and industrial metals such as copper and iron ore have?"
Good point. We would need to know more about how the industrial silver market works.
If this drop was, indeed, simply paper games, what does that say about the silver market? Is there any meaning to the fact that the swings in the gold market, due to these same paper games, are less pronounced?
"The velocity of money would start to increase too quickly."
Good point. Would there be any scenarios that would lead to velocity being contained? Like increased excess reserves at the Fed, contracting credit availability in the economy, speculative fervor in USTs ...
victor,
Sorry if I am asking too many questions. They are meant more as 'thinking out loud', though if you feel like making any comments in response I would appreciate them.
(I *am*, however, interested in hearing the reason you think silver is rising.)
sean,
This is completely different to gold, which does not peak, but plateaus under freegold, and holds its value
I honestly think this is plain false and contradicts several centuries of empirical data.
Yes, it is true that if you are not a sophisticated investor, then the advice to buy physical gold, to hold it, and not to trade, is very sound advice and will get you through the chaos in an acceptable shape - with a bit of luck even in a shape much better than just acceptable.
But as a scientific statement about the price of gold, I very much think this is wrong. As soon as the financial system has stabilized and there are again reliable financial contracts and positive real interest rates, the price of gold will go down. And it will do so substantially, perhaps 20%-50% from the peak (in real terms). This is the old Barsky-Summers story again.
Victor
GLD has been reporting an uptick in gold holdings, up 5 tonnes just today.
Victor, what should a sophisticated investor do during the transition?
Michael H,
Agreed, but, it seems like premiums for the higher-quality products have risen, even as silver prices rose, while the premiums for junk silver have actually fallen (I think).
Is the answer to this tendency that the SLA has focused retail attention on coins etc., while ignoring junk silver?
Does Mad Keiser have that much influence? Are he and his friends really strong enough to drive the premium? I don't know the answer, but I have the feeling that not only COMEX inventories, but also Mad Keiser is taken too seriously.
If this drop was, indeed, simply paper games, what does that say about the silver market?
Again, I am not at all surprised. Silver is a lot more volatile than gold because the market is smaller than the gold market - both the physical and the paper market. And watch out, COMEX futures are not paper games. By arbitrage, the futures contracts are coupled to the market for physical silver (or gold). The paper games are the OTC unallocated silver (or gold) holdings which are essentially bank credit denominated in ounces.
...
...
(I *am*, however, interested in hearing the reason you think silver is rising.)
LBMA silver has been in backwardation all of this year since January 19, 2011, except for a six week period between about March 15 and April 30. There is enough silver in the market to engage in term structure arbitrage. The fact that silver is still in backwardation means that the LBMA members have started to price in counterparty risk in their silver swaps, i.e. the risk that the silver principal of the swap will not be returned.
I interpret this to mean that some market participant is under pressure. They might not be outright short silver, but perhaps have too many outstanding silver loans compared to their physical reserve. I think the covering of this position (which may be a cloing of outstanding loans rather than a pure short covering) started in September 2010, but they got under pressure only this January.
It is a lot less serious than the regular squeezes in the market for gold swaps that we saw in 1997-2002 when various gold carry traders and perhaps a number of the bullion banks themselves blew up. If you compare the 1997-2002 GOFO chart with anything in GOFO or SIFO after 2007, you see that today things are way less dramatic. But, on the other hand, the central banks cannot help out with silver today as they did with gold in 1997-2002.
When silver spiked up towards 50$ towards the end of April, I thought this was the end of the covering and the price would collapse (at least for a while) as soon as they had finished covering. Backwardation had disappeared around March 15. But now that the price of silver has come down to the steady upward trend line (around 30..35$), backwardation at the LBMA has reappeared. So I don't think they are finished covering and we may well see another sequel of the movie. The end of April spike towards 50$ may well have been a 'pump and dump' in order to get rid of all the retail day traders in the futures market who made it even more difficult for them to cover.
In other words, I think that costata's original article basically gets it all wrong.
Victor
PS: Remember even if you listen to me, you will be losing your own money.
Dear sean,
Your comparison of loss in silver and gold has only one conclusion for me. It is easier to manipulate silver than gold in paper markets.
Making arguments based on prices and their fluctuations in fiat money should not be used at FOFOA blog ;). I prefer to buy something that has went down 30% then something which has gone down only 7% ;).
Because it is much easier to manipulate silver than gold then gold may be closer to its true value than silver (example gold goes up 10times, silver goes up 20times).
I am pretty sure Robert wants to sell his gold to suckers too. If you look at this recent post he says why GOLD and SILVER is a bad investment in his vie.
For me FOFOA is quite clear although usually very dense and I have to read him carefully.
If Silver gets monetary status from people around the world then it will plateau too. Its supply may be constantly being depleted by industrial use which make it more rare while being still in demand as a monetary metal. It will become more and more valuable.
best,
Radek
Hey Radek,
I have no objection when you say you would like to hedge your current position (whether in silver or gold).. nothing is 100% after all.
I also agree with Sean when he says Costata merely pointed out that many silver buyers intend to sell their silver when the price (they feel) is right. We don't hear much about anyone selling gold for silver. Of course, if they believe the GSR is going down then there wouldn't be a reason to sell silver for gold. :-)
I would also say that different people argue their position with different level of passion. Which of course doesn't make them right/wrong so one needs to look at their argument as emotionless an possible.
Casper
hi Radek,
I'm not sure why you want to put your savings into something that can be easily manipulated, unless you are expecting to sell your silver if the price jumps higher when this manipulation ends. But then these are not savings, these are speculations. When the silver manipulation ends and the price increases, what will you trade your silver for?
I used to have silver too, but the crash of 2008 made me realise that a large part of its value potentially depends on industrial activity, (as Costata mentioned just above, and you remarked as well). So if there is another crash or even an economic slowdown, the value of my savings would decrease quite substantially, and potentially at a time when I most need it. Not a very practical way of preserving wealth.
I'm not sure why you want to put your savings into something that can be easily manipulated
Easy (I don't think so)? Manipulated? - You mean like Gold???
The reason we invest in Silver is we see the light at the end of the tunnel Sean - we see the end of the manipulation - then the realization that the shortage is worse than anticipated (Comex default) - price goes up. It is being a 'forward thinker'. My suggestion is that you try it. If you aren't investing in Silver or Gold (because they are being manipulated - for the latter see GATA) - just what are you investing in?
P.S. So you stopped investing in Silver in 2008? How would you rate that financial decision in hindsight?
Hi Sean,
There are people who were going over board with silver and selling all their gold to buy silver. I could mention two people Chris Duane and Bix Weir. I have never sold any ounce of silver or gold. I accumulate it. Every time I buy precious metals I buy both and I try to figure out each time which ones are cheaper at the moment to buy a bit more.
I will not sell my gold and silver. I will spend them since they will be money. I would love to know when money in the shape of gold gets too expensive so I would then sell part of my gold to get more silver.
Piece by costata and FOFOA support of it makes me question if this blog is not just an outlet for bad guys. I gave my reasons earlier.
best,
Radek
Michael H,
Above, I did not even mention the classic argument for why silver may keep going up for quite a while. This is the original argument by Ted Butler, and I do think it has merit (yes, I also think some of his more recent comments are not worth paying that much attention to).
Ted Butler's argument was that the big players basically destroyed the silver market by selling off all the government stock piles and driving down the price so much that a large portion of all that silver was consumed by industrial users and has disappeared for good.
Now if there will ever be a time with a substantial investment demand for (physical) silver, this demand cannot be met by selling existing stock alone, but it has to draw on current mine production. This is basically opposite to the situation in the gold market in which there exists a huge investment stock that can potentially be unlocked by an increasing price.
So, essentially the same argument that says that gold is the better store of value in the long run, also says that silver has more potential (not necessarily limited to the short run).
I do not think that everything that Ted Butler has written about the subject is worth quoting here, but somehow costata has managed to misrepresent Butler's original idea, the one that has the greatest merit. No bullion bank or other insider who might try to corner the flow of silver is needed in order to make Butler's original investment idea come true. That idea works out fully automatically.
On top of this, some of the big people in the silver business (Sprott et al) may well have spotted the weak link in the market, the one somewhere at the other end of the LBMA that is now getting squeezed.
The observation that Sprott feeds selected sound bites to the silver bug community is probably accurate, but you also need to figure out for what purpose he is doing it and whom he is eventually going to rip off.
Victor
PS: All this is totally independent of the question of whether the CBs may eventually be forced to recapitalize the financial system using some sort of gold revaluation or whether one of the resource exporters might pull this trick.
On a different note, anyone interested in observing hyperinflation "live" should observe Belarus in the next few weeks.
You can see a good piece at ZH right now. Please note ste response of the state abd the polulation, as well as the (ironic) deflation in dollars (the "good" currency right now).
Sorry from the spelling above - sent from mobile device.
Hello Radek,
It sounds like Art has been rubbing off on you a little. You know, that Troll I banished? You think I am a "bad guy" for posting Costata's excellent article? Have you read some of his comments lately? They are fantastic, and I'm sure we'll see more posts from Costata in the future. Does this make me a banker? Ha! Not quite. You'd be surprised.
I don't address silver very often because I know how feisty and intolerant the silver bugs can be and, frankly, it is the least of my concerns what you do with your money. But just the same, I have made it clear on this blog many times that I have not bought a single ounce of silver since I first read A/FOA which was before I started this blog. And, of the large quantity of silver I bought before discovering A/FOA, I have now sold 85% of it.
Initially I was selling silver as one would withdraw money from a savings account to pay bills. But lately, thanks to donations from this blog, I have been able to swap some of it for gold! Yet I have bought gold, and not sold a single ounce of it, since starting this blog.
So this is my position on silver, and it has been discussed several times on this blog over the last three years, so it is no secret. Costata's article is consistent with my view of silver, and I think it's important that my readers are at least exposed to what I see that has led me to stay away from silver. And frankly, it's a view you aren't getting anywhere else.
Back in March of 2009 I wrote this: "The above quoted thoughts are considered taboo on most hard money websites, and they are rarely discussed. This leaves many newcomers with the impression that they do not exist. So I offer them to you as only an independent blog that doesn't rely on popularity or ad revenue can. Not as gospel, but simply as another piece to the puzzle.
"Perhaps in the paper market game, silver will see some wild fluctuations soon that will reward the bulls with paper profits. I hope so. And perhaps silver will play an important role in a future (temporary) barter economy. But in the end game, I tend to agree with FOA. Silver may well be "the poor man's gold". But just think about that statement."
But I suppose that, like Art, Radek, you'd rather I just STFU about silver, huh?
You know, Radek, maybe you'd be more at home over at one of Art's three blogs. I'm sure he'd be happy to talk with you about what a "bad guy" I am. ;)
Sincerely,
FOFOA
PS. For those of you that haven't yet been won over by Art the Troll, like Radek apparently has, I hope to have a new post up later today!
Victor: "As soon as the financial system has stabilized and there are again reliable financial contracts and positive real interest rates, the price of gold will go down."
So does the financial system stabilize when QEIII is enacted or when QEIII isn't enacted? Does Greece help stabilize the financial system? Sorry but I read the as soon as the financial system has stabilized part and I just had to laugh. I see nothing, absolutely nothing that points towards any semblance of stabilization (or equilibrium if you like). Every day it seems like some band-aid is paced over some economical problem so if there is some form of a stable financial system please let me know because all I see is country after country coming to grips with inescapable debt.
Now a new post IS good news ;)
know how feisty and intolerant the silver bugs can be...
FoFoA, I'm sure it wasn't your intent to generalize about all 'Silver Bugs' or to throw around labels. I don't consider myself 'one' and own the same ratio as Radek. I'll wager he doesn't either. He sees an injustice - and is speaking out. I am sure you would do the same. Whether he is right or wrong is up for discussion, no?
I have made it clear on this blog many times that I have not bought a single ounce of silver since I first read A/FOA which was before I started this blog.
Honestly, would you bother opining if Silver hadn't doubled (guessing) since then?
Meaning the stance is not against Silver - so much as that it has increased at a greater rate than the Gold you have 'invested' (let's not mince words) in.
This is a frustrating time to live in - no doubt.
No matter threat or abuse - I am not going to embrace Costata's piece. You shouldn't care so much.
Gary,
What gave you the impression that I care what you think? Radek repeated Art's position that my blog might be an "outlet for bad guys" and that got a reply out of me.
For the record, Gary, I don't care what you think, or what you are "invested" in, or how much gold you have. Funny that you are the first one ever to brag about how much gold you have on this blog.
I'm not here, like Art thinks, trying to convince you of anything. I've seen your list of all the "proven analysts" you are reading. No wonder you are so confused.
All I can say to that, and I'm sure some here would agree, is "been there, done that." I realize you are relatively new to this, Gary, and also surprisingly vocal and opinionated for being somewhat new. Oh well, as the song says, "don't ask me what I think of you, I might not give the answer that you want me to."
Sincerely,
FOFOA
@FoFoa
Touched a nerve with the 'doubling of Silver since' comment eh?
What gave you the impression that I care what you think?
How about because you are bothering to respond?
Funny that you are the first one ever to brag about how much gold you have on this blog.
I don't recall 'bragging' and I'm sorry if you saw it that way. I am sure I have far less than most here.
I'm not here, like Art thinks, trying to convince you of anything.
Nor I you, Sir.
...all the "proven analysts" you are reading. No wonder you are so confused
Please elaborate. Which ones and why? or is the hurdled insult enough of a response for you? If you'd rather throw a hissy fit - that is fine too. Everyone vents. Have another Fosters lager, mate.
And lastly, I don't think it is fair to lump Radek and I (or anyone else who doesn't embrace Costata's piece) in with Art.
Costata's piece has pised people off - and it is quite possible that it is fraught with inaccuracy. Blaming the volatility of Silver Bugs is a cope-out.
I am soooo FUCKING glad to see the end of the comments to this post.
No offence costata, you did a really great job representing the content of this blog in your post. It doesn't matter whether or not we agree or disagree with your position
The tone of the comments are something I've never experienced here .... they are insulting, derogatory and just plain mean.
Time to move on!!
BTW FOFOA you stay up too late, it's not good for your health!!!
VTC,
Interesting points you raised. I have a few more 'longer responses' to complete. I think there is at least one where your comment would fit in, if so, I will include a link to it.
BTW I agree with your observation about neg rates. Bron made a remark along these lines recently "bad information leads to bad decisions".
gary,
Sometimes I just shake my head in wonder at some of the stuff you post.
"Costata - it would have been prudent of you to investigate the term 'junk silver' before using it - from Wikipedia..."
A lot of people refer to the 90% silver, ex-circulation coins as "junk silver". It's just a term that's been around for a long time. It's not pejorative.
Michael H,
Some great points.
For the record, I wasn't attempting to suggest that the industrial silver users are the only buyer of importance but that they are the most important by far.
Viewed from my perspective of the silver market the BBs don't care which way it is headed as long as they are on the right side of the trade. With the exception of investors currently holding silver and the miners everyone else wants the price lower (including the jewelry makers).
Cheers
Thanks DP,
I tried to make it clear in one of the earlier 'long responses' that I am attempting to lay out the "NO" case. I don't mind the adverse reactions and of course I welcome the counter-arguments. That's why I try to find and link to the best of them.
I meant what I said (come to think of it, I always do) I like to hear the "YES" and the "NO" case for any financial commitment. When it involves a huge shift in emphasis I absolutely want the pros and cons.
If someone can show me the "NO" case for silver anywhere in the blogosphere I can stop investing time in this project and get back to my usual habit of researching and occasionally posting links to anything that I think is informative and/or newsworthy to the folks here.
For those folks that object to this project all I can say is this:
We aint done yet and there will be plenty more to outrage you coming soon.
Michael H and VTC,
I don't want to break into your conversation but I
VTC wrote:
"I thought this was very intuitive. A large bag of unspecified outdated coins is a product of lower quality than a freshly cast 100oz+ bar or an 'official' Americal Eagle or Maple Leaf coin."
I agree with VTC. Good insight. FWIW I think that the answer lies with the refiners. In deference to gary I will refer to it as 90 percent silver. NB: sterling silverware is 92.5 per cent silver.
Michael H wrote:
"Agreed, but, it seems like premiums for the higher-quality products have risen, even as silver prices rose, while the premiums for junk silver have actually fallen (I think).
Is the answer to this tendency that the SLA has focused retail attention on coins etc., while ignoring junk silver?"
Here's my thought. Think about the position of the refiners. If the demand is all large bar product from the Mints and they have enough feedstock coming from the miners they may not want the 90 per cent stuff.
There is also another possibility to consider that should give the silver bugs pause for thought. What if the refiners recently received a significant flow of silverware. What if that stock started to become a flow somewhere between $40 and $50 per ounce. Based on purity 90 per cent silver's closest "competitor" as a "supply" to a refiner is sterling silverware.
The Perth Mint owns a refinery. If this information isn't commercially sensitive I, for one, would love to know the composition of the feedstock coming into their refinery in the recent past and present. How about it Bron? Can you answer this question without compromising your position?
BTW Bron, I'll understand completely if you feel you should decline to answer (and no hard feelings).
Dear FOFOA,
I never thought that there will be a time I will write what I am writing now.
I have been around at your blog for more than a year. Always enjoyed your articles.
I stopped reading Art because he could not keep the discussion civilized. Therefore your allegations about Art influence on me have no grounds. I never have been to his blog. I stopped reading Costata because he was misinterpreting peoples positions.
I gave you my warning of a person who likes you that you are endorsing a person who is manipulating others position to get his message accross to people. I read a lot about silver so I am better person to judge this than you. I just give you one simple fact below.
Eric Sprott has said gold WAS an investment of a past decade and Silver IS an investment of this decade. Given this quote how do you reconcile what Costata has written about Eric Sprott position about silver?
I know that Costata is a very old reader of yours and his comments about FreeGold are always spot on. You are on the same page when it comes to FreeGold. I am just saying his piece about silver is full of misrepresentations of other peoples opinions. This for me is enough to stop reading him.
I am not sure if that info about banned troll was a veiled threat to me, but it is your blog so you can do what you want, including banning me. I will repeat what I have said by enodorsing costata and his piece you look more and more like an outlet for bad guys.
I feel sorry that you compare me to a troll. The only thing I can do to prove you wrong is to say the following.
Goodbye FOFOA. I wish you all the best. I guess one reader less is not much of the concern for you.
best regards,
Radek
Hiya Biting Silverbug ( and other silverbugs)
You make a very good point regarding control of silver with a relatively small amount of gold. Two further key points to consider for the price of silver increasing are... industrial demand is relatively price inelastic; the global industrial stock of silver is greatly reduced due to years of price suppression, as evidenced by declining available above ground stocks. Furthermore silver remains marginally produced, meaning even the $50 price was not high enough to entice silver only mining in order to rebuild stockpiles.
All well and good.
But now I have a question of my own for silverbugs. A thought experiment if you will.
If Bill Gates had a choice between receiving payment in gold or silver, which would he choose? How about -insert-billionaire-name-here- ?
Let's scale up a bit.
How about other commodities. If a multi-billion dollar steel producing company had to choose between payment in gold or in silver which would it choose? What about iron ore? Grain? Maize? Coal?
What about the biggest baddest commodity of them all , oil?
Let's scale up again.
What about countries that have net exports? Countries such as China and Germany and -insert-productive-country-name-here-. Gold or silver?
At the end of the day it is the producer of goods that decides what he deems as acceptable payment ( ignoring for a moment fiat legislation, bearing in mind it is possible to convert to either with minimal losses if both are priced correctly)
So when you can answer what these giants producers would prefer ( I am ignoring the giant consumers), then you will know what will have dominance in future.
Now having two stores of value is inefficient. Eventually arbitrage will let only one remain standing.
Which do you think it will be?
When that happens( over time), the store of value function of the other will be lost, until it is left with only industrial use pricing.
It should be fairly obvious I think gold will win. What do you think?
Bearing in mind the unique circumstances of silver it may rise to 5 or ten times it's current price, But that will only it's industrial pricing in my opinion.
Others here opine it will drop in price, significantly.
Honestly I don't care much either way, but I will watch the eventual result with interest; as a academic exercise.
Food for thought. :)
Peace
The Fool
Disclosure : The Fool owns both physical silver and physical gold. By weight more silver, by price more gold. The Fool intends to use the silver during the ensuing chaos in order to obtain what he may need by way of barter. The gold is The Fool's store of wealth.
Hi Ash
I have been busy the last few days. I have noted your response and as soon as I have written a reply I will post it.
Peace
TF
Radek,
I'm sorry I lost you. But I do agree with Costata on silver. It is not part of the reset the monetary system is undergoing. The volatility you see in silver is small-time games compared to gold. You may actually get a really great spike in silver... or not. Doesn't matter. The probability that you will cash out at the right time (esp. being in physical) is small. And the big ups in silver will be matched with big downs. The end will be down. That's why I published Costata's article. I don't want my readers to get the impression from my blog that gold equals "gold and silver." It most definitely does not. Even Eric Sprott is something like 70% in gold by his own words. Silver is a business to him. Just look, his name is on a silver ETF, yet he owns mostly gold.
If you are looking for silver activism against the bankers, there are plenty of places you can go. But this train of thought is on a dead-end track. If you are offended by my posting Costata's article, then you represent exactly why I posted it. If anything, I am more extreme than Costata!
Costata believe the fair value of silver is around $30 (in 2011 dollar). That's where he believes it will end up excluding (hyper)inflation. I believe the fair value of silver will end up under $10 as the commodity that it is, with a production cost of half that. To silver bugs like you, that makes me, not Costata, the extremist. Right?
If you think you can trade your way to riches, then buy silver. But beware, there are some with a great deal of market information that are playing against you, even if you are in physical. And they have control of a LOT of physical silver.
Sincerely,
FOFOA
To all the trolls we've loved before, ------> THIS <----- is how to respectfully disagree with someone's position, and walk away with dignity.
I may not personally agree with your take of the situation, Radek, but that is irrelevant.
Sincerely,
DP :-)
Dear FOFOA,
Please let me know if you want me to stop writing. I will stop immediately. You answered in a nice way so I would not like to leave your post without an answer.
I really do not mind you being extreme and holding a view that silver is worth 10$. It has some rational argument behind because allegedly the average production cost for silver is 5$. However, if you use this argument then we should also say that average price of gold production is around 600$. The silver story is as complex as Gold story and ridden with fraud as gold. We would need another FOFOA for silver to get the right picture for silver as we get from you about gold.
I will never attack you for having such a view about silver. I politely stated few times already on this blog that I simply disagree with you and also believe in FreeSilver.
I complained about Costata misrepresentation of other peoples positions. I did nothing else, because for me it is enough to invalidate whatever Costata has to say. The only interesting point made by Costata was that even if there is spike in silver it may be impossible to trade physical silver for physical gold. It is a valid worry that people who plan to trade their silver for gold should be aware of.
I think that default in silver may be the flash point that will kill the fiat monetary system. However, the flash point in silver may be beneficial only to gold for many reasons you elloquently stated. I always prized you for the ability to see into behavior of the people. However, my point is that we can not predict if silver will not regained its monetary status. We can not predict that elite will not be able to establish world fiat currency to keep the mankind enslaved for 40 more years. My investment in silver is a hedge against it as industrial demand will offset my mediocre gains in gold.
I am only disapointed FOFOA that you posted Costata article which may be right in his message but totallly manipulative in its methods. I was also hurt when you compared me to the troll because my intention was only to speak out when I see manipulation on Costata part. Again, feel free to tell me to shut up and I will go away.
You touched upon one aspect the availability of a lot physical to manipulate the market. I have one comment for you.
The elite has command over more physical gold (in terms of nominal value) than silver that it is not THEIRS. They will use the remaining gold on the balance sheet of the central banks to manage the price of gold while they are printing money for themselves to buy as much gold as possible. This is their way to steal people's wealth. Even if silver does not get monetary status there will be a spike in silver value that will allow me to adjust portfolio from 50/50 to 33/66 (more gold). Their abilities in flooding the market with physical silver is much smaller.
I do not plan to trade my way to riches. I have never sold any ounce of gold/silver I bought. I do not trade my precious metals. I am opting out of evil monetary system. I may only be tempted to sell part of my silver for gold or vice versa if any of the metals gets overheated. It is my warning to silver and gold bugs. There are people out there who are not religious about any of the precious metals.
best,
Radek
victor,
Thank you for your insight. It is very good to see different perpsectives.
"In other words, I think that costata's original article basically gets it all wrong."
But, would you say that costata's article is closer to what you consider the truth than most of the commentators out there? At least costata acknowledges that the bullion banks are not likely 'net short', as you also say.
From your comments, it sounds like the indicator to watch is the silver backwardation, and perhaps also the SIFO, and everything else is noise.
" As soon as the financial system has stabilized and there are again reliable financial contracts and positive real interest rates, the price of gold will go down. And it will do so substantially, perhaps 20%-50% from the peak (in real terms). This is the old Barsky-Summers story again."
FWIW, I agree with this statement in principle, though i think in practice it is irrelevant at this point. I think we have a long, long, way to go before we see positive real rates again.
And, really, when one says 'a free market for physical gold', it should be understood that free markets both go up and down.
victor,
Further thoughts about gold price declines after the stabilization of the financial system:
While I think broadly the 1980 playbook could be followed, I don't think we'll see something quite that drastic. The reason is that, in 1980, the dollar's function as a world reserve currency was being defended. It had to survive as a store of value, and so high positive real rates were essential.
In the transition we are facing, there will be no reserve currency. While currency managers would probably like their citizens to hold their currency for longer and longer periods, it will not be cetnral to the survival of said currency. So, perhaps the CBs will decide to not raise rates as far into the real positive territory, and so gold would not fall as fast and far.
The other thing that brought the gold price down after 1980 was forward sales by the miners. I wonder if we will see that again.
Radek,
In my post I allowed Maloney, Keiser and Kiyosaki to speak in their own voices. I quoted Sprotts' statement accurately and provided a link to the source.
I made no claim as to the views of anyone on any matter or thing that wasn't sourced from their public comments. Your charge of misrepresentation has no basis in fact.
Hi Gary, Radek,
I said to Radek : “I'm not sure why you want to put your savings into something that can be easily manipulated” because this was the reason he expressed for buying silver. If he believes silver can be “easily manipulated”, up and down, then it hardly seems a stable, safe investment to me. As for gold, if you read this blog a little, or some of the posts by Another, you will understand what the reason for the active gold suppression was, and why it has ended.
Btw, it’s not important, but I didn’t say I stopped investing in silver in ’08 – I said I realised that industrial demand could explain a large part of the price decrease, so I bought some then – but as a speculation, not an investment. I’ve sold most of it now. On the other hand I could have bought stocks in Apple and made a tidy profit – how come no-one talks about AAPL here? It’s just as relevant as silver.
I think part of the confusion here is the difference between investing for wealth preservation, and speculating. I came to this blog trying to learn how to preserve my wealth, and discovered Freegold, which includes a nice little one-off bonus :) “It need only be priced once during the experience of life, that will be much more than enough!" as Another is often quoted.
Radek,
as it happens I think FOFOA was a little 'artless in his comments to you. But I guess it must be frustrating to read a long-time reader write something like “Gold is my speculative position and silver is my long term investment”. Not that it affects anyone but yourself, but imagine you’ve been explaining to someone for a year why hyperinflation not deflation is on the cards - they agree, then go out and sell all their gold (and silver!).
No offense, but it sounds like you are following certain people such as Eric Sprott and (formerly) FOFOA because you think they are saying what you want to hear, ie: that you will be rich. My advice is to listen to people you disagree with (eg: Costata) and see if you can learn anything from them. Perhaps you can prove they’re wrong, in which case you’ve made your own case stronger.
Anyhoo, I see there’s a new Freegold article posted, so I’m off for some meat and potatoes :)
costata,
For the record, I wasn't attempting to suggest that the industrial silver users are the only buyer of importance but that they are the most important by far.
But you mentioned the 'crash' of silver in 2008 as an example of what a lack of industrial demand can cause to the price of silver. I pointed out above that gold also dropped, and I gave you a plausible reason for why this happened (hedge funds being forced out of the PM trade).
Now if you would like to convince us that it was lack of industrial demand that brought silver down in 2008, you need
a) to explain why gold dropped simultaneously although industrial demand does not play any significant role for gold
b) to understand the contracts by which the industrial users in aggregate buy their silver. If they buy spot silver, then, yes, your explanation is possible, but if they typically have 1-year contracts or longer, then it becomes less plausible.
Victor
Jthenewer,
"I know you've claimed that some things require lots of complicated language to explain, but surely the 'core' of a rebuttal of the Freegold thesis could be done in reasonably simple way?"
Maybe you could tell me a more simple way? I see the core of Freegold as being its theoretical foundations of dialectics and economic value embraced by the Austrian school. So I structured Parts I and II as rebuttals to those specific foundations, but I'll admit part I was much less specific and clear. Maybe part II is unclear as well, but I can't make it much better. The ideas of Marx are inherently "philosophical", so there is no way around that. I think you will like Part III better, though, because it focuses on more "real-world" evidence that helps validate the theoretical foundations from Parts I and II.
"It was my impression in reading your article that you batted aside core Freegold arguments without reasons that were clear to me - particularly, gold's NON-commodity status and the 'job' of gold envisioned by people who think that Freegold will occur at some point."
The whole point is that gold is very unlikely to ever get to its ideal role envisioned by Freegold, based on the evolution of financial capitalism to this point. I do believe that gold primarily acts as a traded commodity right now, subject to Marx's dialectics of value (use vs.exchange), and that this is unlikely to change as long as the financial capitalist system remains in place.
"Also I think your representation of Freegold as having debt-backed currencies is a little misleading, as the presence of debt is not a pre-requisite for Freegold's occurrence"
Well, the presence of debt is necessary for the global economy to continue growing, hence Freegold's incorporation of physical gold into the global financial system as a wealth reserve. I believe we would all agree on that. Since Freegold envisions currencies acting as the sole mediums of exchange, and I assume it would not be some type of "sovereign money" system, that would mean the currencies are still debt-based as they are now.
"Also your discussion of the concept of money differs from how the concept is used by FOFOA - just so you know. Perhaps giving some more thought to the Freegold perspective on how gold assumes its position would give you a different angle on things?...
Can you tell me again why the view of gold as the ultimate reference point, and hence a 'cure' for the debt-riddled status quo, is flawed?"
I understand how FOFOA discusses the concept of money, and I think it is flawed to the extent that he believes money can act solely as a traded store of value in our global financial system (which I believe stems from his acceptance of the marginal utility theory of value, and of course Austrian theory in general). That is referenced in-depth in the article where I talk about the distinction between the commodity (C-M-C) and monetary (M-C-M+) circuits of capital in the system, both of which are absolutely necessary, but have distinct purposes and are objectively valued.
Nothing can be the "ultimate reference point" for our global financial system and stop it from imploding, including gold. THat's the point I've been getting at, and it is once again based on my theoretical (Marxian) perspectives of financial capitalism. As I stated at the beginning and end of the article, the inherent problem is insufficient effective demand, and having a reference point does nothing to solve that problem.
costata,
Here's my thought. Think about the position of the refiners. If the demand is all large bar product from the Mints and they have enough feedstock coming from the miners they may not want the 90 per cent stuff.
I don't think that 'junk' silver is actually taken to the refiner to be melted down.
The reason is that the bags of junk silver are traded at the coin store level and priced by weight of their fine silver content. They are apparently somewhat popular with retail investors who want smaller coins than one ounce 'just in case'.
Now if you take these bags of junk to the refiner, the refiner will accept them only at a discount to spot (same as with sterling jewelry or tea sets). So you would be foolish to take them to the refiner rather than sell them to retail.
(I think this was different during the Hunt corner around 1980. At that time, if I remember correctly, the refiners could not get enough mine supply did take junk silver to be melted down)
Victor
FOFOA,
Even Eric Sprott is something like 70% in gold by his own words. Silver is a business to him. Just look, his name is on a silver ETF, yet he owns mostly gold.
Sprott's name is also on a gold ETF:
http://www.sprottphysicalgoldtrust.com/
FOFOA and costata,
But I do agree with Costata on silver. [...] That's why I published Costata's article.
I know and understand the arguments that (a) the CBs own gold, but not silver; (b) some big producers (oil) have demonstarted they want gold, but not silver; (c) gold is first choice ('focal point'); (d) the system needs to be recapitalized and those who will have to do it own gold not silver; and so on.
But this is not what costata wrote. He made up a story how bullion banks pump and dump silver and thereby rip off the retail crowd that follows dubious gurus ala Keiser. This made the article a lot less credible. I don't think you can understand silver without understanding backwardation. Costata did not even mention the word once. Sorry, but you simply did not score.
Victor
Ash:
Could you clarify your comments about 'debt', particularly why you think debt is necessary? It would be great if you could indulge me and explain, step-by-step, who would be lending what to whom, and why...
Maybe it's just me, but the ways people are using words like 'debt' and 'monetization' (and yes, 'money') are not always clear to me, and could, I think, lead to us talking past each other.
J The Newer
Hi Sean,
Let me explain you a bit more my position and address some issues where I think you are wrong.
I have read a lot of documents by GATA and one of my reasons to buy gold is because it is manipulated down. I do not believe that active gold suppression has ended. Neither GATA as they have just met with Ron Paul to get his help in trying to press FED to disclose their gold dealings.
Silver is being manipulated even more so I can get it cheaper than gold in terms of how far it is from its true value. The system will eventually collapse and I am immune to paper losses in the meantime. I keep buying both precious metals and accumulate them.
Gold/silver will not be manipulated up by the biggest manipulators (bullions banks and central banks) because it is an archenemy of their most precious asset namely fiat currency. If you do a bit more analysis on the recent silver price drop you can easily see that it was caused by large speculators killing small ones in the paper market.
The industrial demand for silver may have fallen significantly after Lehman brother collapse but there were also other factors like huge increases in short positions.
You also should be aware that a lot of silver is being mined as a byproduct of mining base metals. If economy tanks then silver production will go down too. I think you should not ignore this fact.
I own a lot of gold and I will not sell it. I will spend it like you spend money. However, I have to be honest to myself that holding gold is a speculative investment because I speculate that current monetary system will collapse AND the next edition will treat gold as money. If you look what they are doing in Vietnam banning usage of gold as money then you can not be certain that this approach will not be tried on a world-wide scale. Gold is valuable as money and nothing else. If for whatever reason gold will not remain even unofficial money in the new monetary system then you will be left with useless trinkets. This type of the ban on the monetary function of the gold may last our lifetime. It did happen in China so even if it is very unlikely it is not impossible. We speculate that gold will be officially acknowledged as money (reference point or gold-backing).
Silver I see as an investment (maybe not future money) because it has significant industrial component and I can not see any reasons for this to go away. It is an investment for me, because it has this industrial component.
I do not mind to listen/read to people I disagree with. However, if I see that a person acts as "the goal justifies the means" then I immediately do not trust this person and ignore completely. Eric Sprott, James Turk, Peter Schiff, Ted Butler, David Morgan, Bob Chapman, Jim Willie, Gerald Celente, Mike Maloney, Jeff Berwick and few more have shown courage and devotion to fight for ideas for the goodness of the mankind while caring about single human. I do follow them because I have never seen any acts that would suggest that they do not care about an individum. They have done together so much more research than I could ever possibly do in my lifetime. I follow them because I trust them to be not manipulative. It is an instict that has saved me from a lot of troubles many times.
My advice for you avoid people who strongly disagree with you if they are also manipulative because unless you can see through their psychological tricks and misrepresentations you may just get a wrong picture/advice/understanding.
Take care. Good discussion. Thank you.
all the best,
Radek
Michael H,
But, would you say that costata's article is closer to what you consider the truth than most of the commentators out there? At least costata acknowledges that the bullion banks are not likely 'net short', as you also say.
The question about 'net short' is the one I do not fully understand. Yes, you are right, I think all this can be happening without anyone being net short. But I still have some huge questions about bullion banking in aggregate that I have not been able to settle, and I may still come to the conclusion that there is indeed a very big entity net short. I will raise this in the discussion at some point.
It sounds like the indicator to watch is the silver backwardation, and perhaps also the SIFO, and everything else is noise.
I think SIFO is the number to watch because London is where it started. It was then arbitraged over to the COMEX about three weeks later. And COMEX backwardation is a nice confirmation that the LBMA figure is generally reliable. The OTC world (LBMA) is so opaque, you never know how they actually compute their SIFO rate. It could be the average of ten bullion dealers who get their swaps with the usual contango averaged with one or two outcasts who are being squeezed and who get swaps only in backwardation. Or it could be that the silver market in general is in trouble. Or they could even be rigging SIFO - remember the investigations into the alleged rigging of LIBOR.
But COMEX silver is in backwardation, too, and so it is plain obvious that if the SIFO figure were spurious, then everybody could go to the COMEX (where pricing is fully transparent) and trade against it and have a free lunch. This has not happened for about four months now, and so there must be some relevance to the quoted SIFO.
The other argument is Ted Butler's original one. Nobody needs to conspire in order to corner the flow of silver. This has long been taken care of by the events before 2000. As long as investment demand keeps up or even increases, the the market will automatically 'corner itself'.
Further thoughts about gold price declines after the stabilization of the financial system:
I basically agree with what you are saying. I think it is extremely unlikely that we will see a repeat of the 1970s with some Volcker 2.0 who eventually squeezes all the bad debt out of the system and rescues the dollar. So, yes, the system will need to be recapitalized and, yes, gold may go down from 15000$/oz to 10000$/oz after the change, but I am quite sure not to 300$/oz (all in today's purchasing power).
Victor
victor,
"costata ... made up a story how bullion banks pump and dump silver and thereby rip off the retail crowd that follows dubious gurus ala Keiser. "
Earlier you wrote:
"When silver spiked up towards 50$ towards the end of April, I thought this was the end of the covering and the price would collapse (at least for a while) as soon as they had finished covering. Backwardation had disappeared around March 15. But now that the price of silver has come down to the steady upward trend line (around 30..35$), backwardation at the LBMA has reappeared. So I don't think they are finished covering and we may well see another sequel of the movie. The end of April spike towards 50$ may well have been a 'pump and dump' in order to get rid of all the retail day traders in the futures market who made it even more difficult for them to cover."
Is this a distinction without a difference? Either the BBs pump and dump to rip off retail for their own profit, or they pump and dump to discourage retail and better cover their positions (reduce their losses?). While perhaps you view costata's story as sensationalist, the positions still seem pretty close to me.
Thanks again for sharing your insights.
"I believe the fair value of silver will end up under $10 as the commodity that it is" - FOFOA
FOFOA given that under Freegold we may see gold at $50,000 an oz. After the freegold reevaluation event, that would be, let's say, 5000 oz of silver for every one oz of gold. We (including governments) could buy 10 monster boxes for every one oz of gold.
Many here would like to see you FOFOA answer this problem, a strategic silver commodity grab in a post freegold world.
It has been posed in various ways during this discourse, yet remains unanswered.
Time for the glib cheerleaders to be silent.
Michael H,
Is this a distinction without a difference?
It is a question of relevance:
1) What I call Ted Butler's idea: Nobody needs to corner the silver market anymore, that has long been taken care of.
2) Backwardation indicates at least one party has been under pressure since January.
3) Pump and dump in April.
If you are a day trader, perhaps you care about (3). If you are interested in the future of silver, I recommend looking into (1) and (2).
I think we can now safely close this thread if you agree.
Victor
Hoo hoo hooooooo, all you silver bugs might be interested in Stephen Leeb's interview on King World News.
He sees potential banning of silver ownership, due to its importance as a commodity.
@Jonathan,
Why would you want all these 5000oz of silver, Jonathan? What will you do with it? Why will you need so much? Do you see its price rising fast again, post-reset? A good speculation perhaps?
What I see, post-reset, is much more stable commodity pricing than in the past. I see speculation becoming a dirty word. If you want to beat inflation and achieve certainty, you'll just buy gold and get on with your life.
99.7%* of people don't invest for the thrill of it, only because they are worried about losing out to inflation. They've got better things to do I think.
* H/T my personal favourite statistical source once again :-)
Hey DP
Hands up everyone here who would trade just one oz of gold ,for 10 MONSTER boxes of ag (5000oz of silver).
Now don't be greedy, just one hand please. No no put your toes down.
See.
I rest my case.
Hi Jonathan.
It was a Saturday night, so we should expect a small crowd. However, I was really expecting to see a strong showing of hands still for your vote by now. I only saw one, your own, which surprised me.
Jonathan,
To be fair, costata has said that he is working on a response to the comment you cite.
In the meantime, here are my thoughts:
Imagine if FOFOA had instead said that silver will go to $10 in 2011, and gave reasons why. Would your primary argument against him be that silver can't go to $10, because then someone with $50,000 in the bank could by 5000 oz of silver?
The fact that 1 oz gold could 'buy' 5000 oz silver is a consequence of the arguments FOFOA has put forth. The discussion should center on those arguments, which, as I understand them, are:
a) under freegold, there will be two moneys: one transactional currency and one medium of saving
b) gold will be the medium of saving, and backed by this demand will see its price rise to ~$50k real terms
c) silver will not be the savings medium and so will see its demand fall to the commodity / fashion jewelery / industrial demand
d) at this lower demand, silver will fetch a real price of $10/oz
When gold is views as savings money and silver is viewed as a commodity, the GSR takes on the same meaning as the gold:bananas ratio.
continued ...
1/2
2/2
However, your question does bring up interesting angles to think about the transition to freegold. Namely, it points to the fact that freegold may be more of a generational change than a flash revaluation.
As your comment indicates, there is still cultural memory of silver as a monetary commodity, and this will eventually be displaced. Doing so will take time.
Just like the financial excesses of the 90's and 00's would be unimaginable to someone who lived through the great depression, for example, so it may seem impossible for those who remember silver coinage to stop thinking of silver as money. For the young whippersnappers who were not around then, however, attitudes may be different.
@Jonathan, try playing this as background music while you're pondering the Freegold future that, just for one example, Blondie sees. It's all right there, buried deep inside your belly button - right under the bits of T-shirt fluff and biscuit crumbs. Honest to god it is!
Turn off tune out drop in. :-)
Hi Radek,
Thanks for your explanation, I understand now why you are saying you prefer to buy silver because it has been further manipulated down, and therefore has more upside potential. The point I’m trying to make though is that if it has been manipulated down once, what is to stop it being manipulated down again, or indefinitely? I guess it comes down to how strongly you believe the story of the COMEX potentially “blowing up”. The PTPB appear to have shown a lot of resourcefulness in getting silver to do what they want, and I’m worried they may continue to do so (eg: see radix46 post about the suggestion that owning silver could be outlawed… now THAT’d throw a spanner in your upside potential!!). Note that gold is a different kettle of fish in this regard… namely freegoldfish. As to how strongly you believe this I guess depends on how convinced you are by Freegold, and you don’t sound terribly convinced. You mentioned Vietnam banning use of gold of money but this is probably a special case, AFAIK they are simply trying to preserve the value of their currency and stop people running to what they know is real value… gold (perhaps they have been reading this blog!).
Basically, I understand what you are saying which makes sense in terms of speculating but I disagree with you where gold fits in that picture.
Cheers
sean
Jonathan:
If peanuts were devalued overnight to 1$ per kg, would you rush out and trade all your gold for peanuts, or would you first make a few calls and make sure everyone hadn't suddenly developed peanut allergies...
Jonathan,
As Michael H. pointed out I am working on responses to every issue that has been raised in the comments.
In the meantime I would like to share a true story with you. A friend of ours was in Beirut for a wedding the last time Israel attacked Lebanon. Her girlfriend, the bride-to-be, was blown to pieces in the first bombing raid.
Our friend was about half a kilometre past the bridge she crossed on the way into Syria when the Israeli airforce came screaming in and bombed the bridge.
The Syrian border guards were not letting people through out of love. As it happens they were accepting cash. But only hard currencies.
She was wearing plenty of gold under her burqa. If necessary she would have paid in gold. She also had to give cash "gifts" to various officials right up to the boarding ramp of the plane that brought her back to Australia.
Just sayin'
Just lost my post. But anyway, Michael H it is good to look at different perspectives, even if it does happen per chance to lead to a dead end; and looking forward to Costata's reply.
Interesting post from an old buddy of the FOFOA blog. He was a close associate of Jason Hommel at one time too and an ardent advocate of silver as money. The money that people power would use to lift the yolk of the conspiring elites and government off their necks. A soulmate of our very own Desperado.
Shelby Moore III writing here recently about silver.
A few snippets:
"You see there is no way silver can be money, because there simply isn't enough of it in bullion form to handle the $trillions in economic activity."
"The important is to treat silver as a very volatile way to increase gold ounces, not vice versa. You trade gold for silver, when silver is near the 200 dma, and you trade silver for gold, when silver goes parabolic. Simple." (My emphasis)
"The only reason silver had stability as money, was because the government subsidized silver. Hommel had proven that with his calculations of the relative value of USA silver coinage and the actual price of silver back in the earlier 1900s." (My emphasis)
Part 1/4
Precious Industrial Metals
The main thrust of this post is an observation about the importance of silver as a strategic resource. In passing I also want to acknowledge some issues that people have raised again recently.
Among the comments there were several references to the relatively small size of the silver market in dollar terms compared to the gold market. BitingSilverBug spoke about this here in the context of the GSR. This isn’t the GSR ‘longer response’. I’m still working on that one. This comment does provide a partial response to BSB’s musings about the ability for a tiny amount of gold to buy up all of the silver produced, if the GSR is high enough.
One of the reservations I have about this type of argument is that no one ever seems to provide a sound explanation of why a gold owner would want to make this exchange. You could also argue that there is so much fiat currency liquidity sloshing around the world that currency could buy up most ‘markets’ and most commodities (at least on paper). Frankly I think this is a barren area to explore but for the sake of argument let’s look into it a bit further.
The same logic would apply to any other market where a relatively small amount of gold could buy the “whole market”. However if someone attempted to do this using gold (or currency) how would they avoid bidding the price of their target sky high? If gold was bidding for silver in size you would expect that silver would go very high, very quickly. The bidder would quickly become the only buyer and the moment they stepped back the price would collapse back to fair market value (and probably overshoot below that figure for a while). This is merely an investment 1.01 principle ie. don’t run up prices in an investment you are trying to accumulate a position in.
So back to the original question: why would a gold owner want to exchange their gold for silver (or any other commodity for that matter) in the first place?
A few people pointed out that the consumption of silver is an important issue. In fact ‘victorthecleaner’ claimed that this was of far greater importance in Ted Butler’s arguments for silver investment than the “naked” short position. In one comment VTC accused me of “misrepresenting” Ted Butler by not discussing this in the post. In the ‘corner’ post my only interest in Butler was his “naked” short theory. I think airing his consumption theory would have taken the post in a different direction and away from the central theme of market manipulation.
Continued/
\Continued
Part 2/4
This quote is from one of VTC’s latest comments at open forum part 2:
“The other argument is Ted Butler's original one. Nobody needs to conspire in order to corner the flow of silver. This has long been taken care of by the events before 2000. As long as investment demand keeps up or even increases, the market will automatically 'corner itself'.”
comments
VTC if you think this is correct then you and other likeminded silver enthusiasts may be interested in the rest of this ‘longer response’.
These quotes are from VTC’s comment here.
“Ted Butler's argument was that the big players basically destroyed the silver market by selling off all the government stock piles and driving down the price so much that a large portion of all that silver was consumed by industrial users and has disappeared for good.”
“Now if there will ever be a time with a substantial investment demand for (physical) silver, this demand cannot be met by selling existing stock alone, but it has to draw on current mine production.This is basically opposite to the situation in the gold market in which there exists a huge investment stock that can potentially be unlocked by an increasing price. (My emphasis)
As it happens I think VTC and Ted are both wrong about the amount of the silver stock that has been consumed thus far and the total amount of the remaining aboveground stock. Did you know that Bob Moriarty of 321gold accuses Ted Butler of basing his estimate of the aboveground silver stock on silver bullion alone and excluding all of the silverware, silver jewelry and 90 per cent ‘junk’ silver coin. If true, how can this be an accurate estimate? That lower purity silver can be smelted and ‘bullionized’ or repurposed for industrial applications.
I can see that I am going to have to wade into this argument about the aboveground supply of silver and Ted Butler’s theory about consumption. From what VTC is saying it seems Ted thinks the year 2000 was a pivotal year. So we will have a close look at that year as well.
With diligence and a little luck we may emerge with some accurate numbers as opposed to numbers from Ted Butler that Bob Moriarty unkindly refers to as bulls#*t. Just to whet your appetite, here's a fun fact for you: Eastman-Kodak used to own silver mines many years ago. For a long time they were the No. 1 purchaser of silver in the world. Kodak produced a lot of useful data about the silver supply and the silver market during the 20th century. So let’s see if they agree with Ted Butler’s claims about consumption. As a contractor and research partner for the Pentagon/DOD they also had some excellent insights into that world as well.
Continued/
\Continued
Part 3/4
In another ‘longer response’ I’m going to share a methodology for estimating the aboveground stock of any metal except silver. But with a few small tweaks we can adjust this methodology so that we can apply it to silver as well.
Another matter that VTC raised in several comments was backwardation. Jon also raised this issue as well, here and Tom commented on it here. So I suppose we will have to take a closer look at this as well.
Before we consider the strategic importance of silver to industrial users I want to acknowledge that radix46 mentioned an interview with Stephen Leeb over at KWN where Leeb apparently suggested that silver ownership could be banned “due to its importance as a commodity”. I have deliberately avoided listening to that interview before posting this piece. I thought it might be interesting to see if Leeb’s thoughts intersected with any of the material presented here.
I think we only need to focus on one industrial use of silver right now. Its use as an electrical conductor. Silver’s importance in this one area alone is enough to underscore the strategic importance of silver in an industrial context. Here’s a link to a Wikipedia entry on this topic and another one on power transmission.
I imagine everyone knows that gold is the best conductor of the metals commonly used for this purpose but it is way too expensive to be used in most applications. Silver is the next best conductor and copper is next in line after silver. Silver is too expensive to use except for those applications where it is the only metal that can meet the performance and product specifications. Wherever possible copper is substituted for silver to reduce costs.
Aluminum alloys are almost universally preferred over copper for applications such as high-voltage power lines. These stranded aluminum cables are often interwoven with steel strands for added strength. Marginally reduced performance is an acceptable trade off for the huge cost savings.
Now here’s the bottom line. If anyone attempts to corner the physical silver market they are de facto attempting to corner the market in high performance, micro scale, metallic electrical conductors. Now I’m going to repeat that and put that sentence in a separate paragraph in bold, italicised type for the slow learners. Blogger won’t allow me to underline the words “high performance, micro scale, metallic, electrical conductors” or I would do that as well.
If anyone attempts to corner the physical silver market they are de facto attempting to corner the market in high performance, micro scale, metallic, electrical conductors.
Even if gold could be substituted for silver in these applications there simply isn’t enough of it aboveground or coming out of the mines to replace silver. Silver may be a much smaller market in terms of dollars but it is vastly larger in terms of physical volume.
Continued/
\Continued
Part 4/4
The gung ho sponsors of physical silver ETFs might like to reflect on silver’s importance to industry and consider the interests of another stakeholder in this market. While doing research for the post I frequently endured the comment section at ZeroHedge while trying to get a better sense of the thinking of the silver bugs.
Incidentally, what a travesty of the original blog their comment section has become. I remember the first few months after Tyler hit the blogosphere like a tornado. You could go into the ZH comment section and read explanations of different trades and derivatives from people who really knew what they were talking about. Some of those folks were extremely generous in the way they fielded questions from non-traders.
Anyway back to the subject at hand. Right after the USA began launching Tomahawk missiles at Libya I saw a comment from someone at ZH who seemed to be celebrating the fact that there is 1.5 kilograms of silver in each Tomahawk. The flavour of some of the comments was “Ha ha, no way that gets recycled”. I guess the same goes for the body parts of any people that the Tomahawks landed on. I remember thinking to myself “Do these silver bugs understand the implications of what they are saying?” I bet you have already guessed what’s coming next, yep, another single sentence paragraph in bold italics.
If anyone attempts to corner the physical silver market they are seeking to control a metal that has mission critical military applications.
And, of course, not just the US military. All of them. Wars have been fought for less good reasons than preventing someone from gaining control of a crucial military input. In the case of the US military, in an earlier time they even went to war over bananas. If you are interested you can read about that period of history here and here.
In my opinion Jonathan made an astute observation in this recent comment. I would like to conclude this ‘longer response’ by quoting his observation:
”Time for the glib cheerleaders to be silent.”
I couldn’t agree more Jonathan. It’s long overdue.
"...To separate U-235 from U-238 by physical methods, four techniques were attempted on parallel paths. Two of these ceased to be significant after the end of 1943. The two survivors were gas diffusion and electromagnetic separation. In the latter, gaseous compounds of uranium were electrically charged so that they would move along a vacuum tube and pass through a powerful magnet which made them swerve. The heavier U-238 compounds would swerve less than the slightly lighter U-235 compounds, and the two could be separated. Using the gigantic new cyclotron magnet at the University of California, which was r84 inches across, Ernest O. Laurence and Emilio Segre showed that it would require about 45,ooo such units to separate a pound of U-235 a day. The electromagnetic separator plant (called Y-12) as set up at Oak Ridge in 1943 covered 825 acres and was housed in 8 large buildings (t\vo of which were 543 feet by 312 feet). Several thousand magnets, most of which were 20 feet by 20 feet by 2 feet, consumed astronomical quantities of electricity in separating uranium isotopes into gigantic tanks. These tanks, weighing fourteen tons each, were pulled out of line by as much as three inches by the magnetic attractions created, straining the pipes carrying uranium compound, and eventually they had to be fastened to the floor. Since copper for electrical connections was in such short supply, 14,000 TONS OF SILVER from the Treasury reserve of American paper money was secretly taken from the Treasury vaults (although still carried publicly on the Treasury balance sheets) and made into wiring for the Y-12 plant. From this plant came much of the U-23s used in the Hiroshima A-bomb..."
http://ia600202.us.archive.org/6/items/TragedyAndHope/TH.pdf
Y12... Here are some details:
http://www.y12.doe.gov/library/pdf/about/history/07-10-11.pdf
Costata: I imagine everyone knows that gold is the best conductor of the metals commonly used for this purpose but it is way too expensive to be used in most applications. Silver is the next best conductor and copper is next in line after silver.
What purpose? Conductivity? Power transmission? are you referring to low voltage and low current? high voltage?
From Wikipedia on Silver : "It (Silver) has the highest electrical conductivity of all metals, even higher than copper, but its greater cost has prevented it from being widely used in place of copper for electrical purposes."
From another source:
"Gold is not the best electrical conductor. Silver is actually a better conductor. Gold is generally thought of as a better material to use because of it corrosion resistance.
The reason why gold is conductive is the same reason why almost all conductive solids (and a few liquids) are conductive. They have free electrons (valence electons).
Think of an atom. Around the nucleus, orbit the electrons. The electrons form into rings with a specific amount of electrons allowed in each ring. To be in good ballance, the atom wants to have the last ring to be completely full. So, elements that have a few extra electrons like Au and Ag try to get rid of them.
From Answers.com:
Which is the best conductor among these gold silver copper or aluminium?
Silver is, then copper, then gold, and then aluminum. Copper is used for wiring because it is cheaper than silver. Aluminum is not used very much anymore because it can be dangerous when installed improperly.
Costata: I imagine everyone knows that gold is the best conductor of the metals commonly used for this purpose but it is way too expensive to be used in most applications. Silver is the next best conductor and copper is next in line after silver.
What purpose? Conductivity? Power transmission? are you referring to low voltage and low current? high voltage?
From Wikipedia on Silver : "It (Silver) has the highest electrical conductivity of all metals, even higher than copper, but its greater cost has prevented it from being widely used in place of copper for electrical purposes."
From another source:
"Gold is not the best electrical conductor. Silver is actually a better conductor. Gold is generally thought of as a better material to use because of it corrosion resistance.
The reason why gold is conductive is the same reason why almost all conductive solids (and a few liquids) are conductive. They have free electrons (valence electons).
Think of an atom. Around the nucleus, orbit the electrons. The electrons form into rings with a specific amount of electrons allowed in each ring. To be in good ballance, the atom wants to have the last ring to be completely full. So, elements that have a few extra electrons like Au and Ag try to get rid of them.
From Answers.com:
Which is the best conductor among these gold silver copper or aluminium?
Silver is, then copper, then gold, and then aluminum. Copper is used for wiring because it is cheaper than silver. Aluminum is not used very much anymore because it can be dangerous when installed improperly.
costata,
I am looking forward to hearing about your findings on
1) silver supply, demand, and available stockpiles
2) backwardation
This will teach you a lot more about silver than any hour, week, month or year spent in the Zero Hedge discussions.
Victor
Costata,
Something to remember; unoxidized silver is the best conductor of electricity of the known metals. Gold is favorable(does not oxidize or corrode) only under conditions where oxidation can potentially form on the contact surface of a switch or electronic circuit. The oxidation does not affect the resistivity of the metal, but rather inhibits the flow of electrons through the layer of oxidation.
Interesting article, Mortymer. Careful, certain people are gonna think that the silver they used magically disappeared!
Just for clarity. "Special guards and accountants were assigned to the silver, and their responsible caretaking meant that at the end of the war, less than 0.0036% out of more than $300 million worth of silver was lost to the process, with the remainder returned to the Treasury" Quoted from Wiki.
Government library PDF...
http://www.y12.doe.gov/library/pdf/about/history/07-10-11.pdf
I've had a few discussions concerning "consumed" silver in the past. Seems a lot of folks think it is actually consumed, as in, gone for good. Not so, at least not in any significant amount. It's recycled. Certain processes make for uneconomic recovery, yes, but in the big picture it's not as big of an issue as many think. Some believe we're gonna run out of silver within 20 years, haha. Electronics recycling has a higher grams/ton than some mines, a new form of mining one could say:)
gary and /SleepingVillage/,
Thanks for the input on the conductivity of those metals. I will amend that comment when I do the compilation post. I don't think it changes the main point of the comment. If silver is also the preferred metal for these applications from a technical perspective it should strengthen the resolve of the PTB to ensure supply.
VTC,
I was at ZH to get a sense of the thinking and attitudes of some of more extreme silver bugs, but I take your point. Not much to learn on any subject from the comments at ZH these days.
Derek,
Amen. If buying silver would shut down the warmongers I would order a monster box tomorrow.
Holy blogger lag... Gary's comment was invisible to me when I submitted mine.
I agree, Costata, it doesn't change the main point of the argument. Suppose it would be good to consider that copper could be effectively substituted for silver in many(not all) applications, especially if silver is over $50/oz.
/SleepingVillage/
"Suppose it would be good to consider that copper could be effectively substituted for silver in many(not all) applications...."
I deliberately avoided touching on that point in this comment. I don't know how difficult that kind of transition would be. If you have any links to papers discussing copper replacing silver I would appreciate a link or the title of a paper I can try to obtain.
I'm looking around but I have not yet found anything useful.
Cheers
Pages 9 and 10 of Martin Armstrong's latest piece - a biography - should be very interesting to the silver boys.....
"The CLUB was now intent upon recruiting Armstrong. The trick, as always, was to reduce the reported inventories to create an illusion of a shortage. Silver was being shipped from New York to London to create the SQUEEZE" (Emphasis not mine)
Oh, it goes on passed page 10 I see....
"In 1997/98 'backwardation' helped silver prices soar"
"Suppose it would be good to consider that copper could be effectively substituted for silver in many(not all) applications...."
Certainly only a very small percentage...
Taken from various soirces on the web:
Silver is...a key component of electronics, X-rays, photography, computers, aerospace and medicine. Silver probably has the broadest range of applications of any metal.
Silver is the best heat conductor of all metals. (Solar, rear window defoggers etc.)
Silver is the most reflective metal on Earth
Silver is replacing the use of chlorine, which is now suspected to have long-term toxic effects, in water filtration systems for hospitals, apartments, pools, schools and municipalities.
Small concentrations of silver or silver salts kill bacteria by chemically affecting the cell membranes, causing them to break down. Bacteria do not develop resistance to silver, as they do to many antibiotics.
Silver has the highest electrical conductivity of all metals. In fact silver defines conductivity - all other metals are compared against it.
Used in:
- water filtration and purification used originally by NASA
- solar panels
- electrical components in computers, cell phones, ipods, iphones, televisions and wall switches
- cell phone covers to reduce the spread of bacteria
- conductors, circuit breakers and fuses
- robotics
- bandages for wound care
- catheters and cardiac devices
- bone prostheses, reconstructive orthopaedic surgery and dental fillings
- eye drops to prevent conjunctivitis in newborns
- prescription glasses and sunglasses (silver halide crystals are melted into glass to protect eyes from harmful UV light)
- lasers
- satellites and telecommunications
- batteries
- brazing and soldering
- catalytic converters in cars
- inks
- developing photos
- jewelry
- sterling silverware
- silver on glass windows to reflect away heat from the sun
- mirrors
- wood treatments to resist mold
- woven into athletic clothing to minimize odor
- food cutting boards
- food storage containers
- interior walls of refrigerators
- washing machines
- colloidal silver, a liquid containing silver used for medicinal purposes
"omposition of the feedstock coming into their refinery in the recent past and present"
Not much help I can give there, we don't do much silver scrap. We are primarily a gold refiner with silver as byproduct and refine gold scrap. No one with bulk silver scrap is going to pay freight to ship that to Perth, it just gets processed locally.
Sure, Gary, quite a few on the list cannot be substituted. The anti-bacterial properties for sure, one of my favorite qualities of silver:) Good thing over 90% of the silver can be recycled from all of the applications on your list.
Costata, I found an article where they explain how they're trying to develop ways to use copper in place of silver in printed electronic circuits.
http://www.us-tech.com/RelId/700104/pagenum/2/ISvars/default/Replacing_Printed_Silver_with_Copper.htm
Looks like the reason they switched to silver from copper in the first place was due to the copper needing to be slowly electrodeposited, and some waste issues. Copper can certainly conduct electricity well enough to serve in many applications.
Inkjettable copper nanoparticles:)
The way I see it is that we'll always find the cheapest way to do something. If silver's cost is too high, then a switch back to copper, even if the process is more difficult and expensive, will be done if it's more economically feasible. Not to mention new technological breakthroughs in nonotech and the like to find ways to make "less" go further. Then of course, the metals will still be recycled...as they are now and will continue to be as the cost-effectiveness of it allows.
/SleepingVillage/
Thanks for the feedback. Likewise gary, thanks for that list.
Bron,
Mon frere, do not sell yourself short. Lots of useful insights in this short comment of yours.
Bron said...
No one with bulk silver scrap is going to pay freight to ship that to Perth, it just gets processed locally.
Sounds like the silver scrap trade is rather opaque at present, if it is mainly a local trade. Very hard for the average punter to get an overview of scrap flows. Yet another advantage for the 'spiders'.
Obviously, freight costs are quantifiable. At a high enough silver price the freight cost becomes meaningless. Then, potentially, the scrap silver market becomes a global market rather than a local one (as long as the price remains high enough).
Very interesting implications IMHO.
Thank you.
Imagine that you are just now realizing that those dollars you hold are or are becoming worthless. Say it is very clear to see so a lot of other people are realizing the same thing. you go to the bank and remove all your frn"s. Upon arriving at the coin store you are dissapointed to see there is no more gold,It has already been scooped up. But there is some silver left. what would you do?
Also say the crash has happened.You have something that you"re neighbor would like to trade for. You tell him you will trade for gold but he says that he has no gold but he does have silver.What would you do?
There are some great minds on here. I hope they will take this thought experiment farther
confederate miner:
Assuming that there aren't other options for getting gold in place of silver in the scenarios you mentioned, I (and many others here, I'm sure) would take the silver. As FOFOA has said before, physical silver is much better than paper...
No gold, no silver to be had? The smart people will snap-up cases of cigarettes and other smokables, cases of wine and other drinkables, or any of the multitude of other luxury items that will always be in high demand.
Why not just get some gold now and not worry about it? You can get placer gold(fines and small nuggets) for below spot price and in small quantities if required. It should be easily bartered with at any time, and is easily divisible if you own a scale...
Part A - Leverage and Manipulation Revisited
(Part B - Artificial Markets)
Part A - 1/6
Year after year the talking heads and the “experts” in the mainstream media have been telling us that financial “innovation” was taking our economies to new heights of performance and success. Telling us that markets were becoming more efficient and all of the mergers and centralization would deliver “economies of scale”, greater "efficiency" and other benefits. Did it take you years of watching this unfold before you managed to cut through the noise and start trusting your own instincts? The instinct that this was all BS and there was something just plain wrong about what was going on. That’s how it was for me. Then I started looking more deeply into these “innovations” and came to appreciate that this wasn’t progress at all. It is exactly the opposite.
One of the reasons for doing this post was that it gave me an opportunity to highlight how pervasive the distortion of markets has become. Extreme leverage, lax (if not complicit) regulators and concentration of market power has become the norm rather than the exception. If no one got anything else from my post except this message I would consider it worth the effort.
From the comments on other forums about some of the material in my post I get the sense that people are still struggling to come to terms with the sheer scale and pervasiveness of the corruption. Moreover I get a feeling that although a lot of people “get it” there are many people who are finding it difficult to articulate what is wrong with these markets and why it is wrong.
It seems quaint and old fashioned to expect stock certificates to be handed over when you invest in a company today. (I have some thoughts to share with you about this in part B.) We are told that if the investment banks were to withdraw from any market it will collapse. They are the essential providers of “liquidity” and the “market makers” we cannot live without. The “fund managers” are the experts who can manage our wealth better than ordinary mortals. But 9 times out of 10 these funds cannot outperform the indexes. Where’s the value add for their rake off?
So here in part A we are going to continue the theme of market manipulation that was central to my ‘corner’ post. We will also look at the effect of leverage in the paper gold and paper silver markets. I’m going to attempt to articulate the core problems that some people are struggling to put into words.
In part B we will take a look at a physical market that was rendered artificial by a double cross and inside information. We will also look at the possible effects if that had been taken to a higher level by overlaying a paper market on top of the physical market. We will also anticipate the likely outcome of a collapse in that artificial paper market we have imagined and try to derive some lessons from that exercise and apply them to the paper silver and gold markets.
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Part 2/6
These posts are also part of a ‘mini-series’. The next ‘longer response’ in this series will present two theories about gold and silver that may help to explain their price trends and behaviour over the past few years. The final installment of this series deals mainly with the GSR but we will also discuss the validity of comparing the relative abundance and/or relative scarcity of two “things” and using it as the basis for an appraisal or valuation of either or both.
Normally I would provide links to several reader comments at this point. Because many of the comments touched on issues discussed in this whole series I will provide most of the links with the last ‘longer response’ in this series concerning the GSR. But this comment from ‘Jonathan’ was a real standout in tone and content. It exemplified the behaviour of some of my open forum guests.
Jonathan’s comment also summarized some of the points he made earlier that were presented more convincingly by others. He ended this comment with a nice little graphic too that must have a taken a lot of effort. If it was Jonathan’s work he clearly isn’t lazy. If it wasn’t his work then attribution and acknowledgement of the artist would have been good form. But apparently Jonathan doesn’t like links or citations. He remarks:
“Now point me back to read more articles.”
It’s difficult to reconcile his conflicting demands. Familiar territory for parents of toddlers. On the one hand he calls for the “glib cheerleaders to be silent” while taunting with his sarcasm and apparently demanding that everyone endlessly repeat themselves rather than using links to other essays. Perhaps he wants those long posts of FOFOA spoon fed to him like a child in a high chair. Well, your wish is my command Jonathan. Let’s see if we can get you fed and off to your cot without any baton twirling or glib sophistry.
By the time Another was sharing his THOUGHTS in 1997 and 1998, with a rapt though fractious audience, silver was completely demonetized and gold was a ‘money’ only at the highest levels of the financial and monetary system. I discussed this demonetization process earlier.
Another revealed many things but we are only concerned with two of them here. Firstly the news that the paper gold traded at the LBMA in that period was leveraged 100:1 over the actual physical gold. (We will come to the second revelation shortly.) Thirteen years later Jeffrey Christian of the CPM group, speaking at a CFTC hearing in 2010, seemed to be claiming that the silver market was leveraged 100:1 as well. Later he restated his position on this issue in an interview with Jim Puplava that Bron Suchecki discusses here. It appears that the exact amount of leverage used in this market is disputed.
In my opinion the absolute level of the leverage isn’t the critical issue. I think we should focus on the impact any amount of leverage could be having on price discovery in markets, the real (productive) economy and the possibility that it is distorting our perception of reality. This issue of leverage is multi-faceted. Your leverage could be my dilution. My leverage could debase your currency. Trading “paper” multiples of the underlying commodity could distort our perception of price. It’s a matter of both perspective and your position in the market as a producer, consumer, investor, speculator, saver and/or debtor.
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Part 3/6
Let’s try to bring a fresh perspective to the issues we are delving into with another little thought experiment. In the process we can also respond to the question about Freegold-RPG from Peter Schiff a few weeks ago. Do you recall his question? “How is this different to what we have now?” Did he even ask the right question? Before we could address Peter’s question I think we would have to ask: What do we have now?
For this thought experiment we will adopt Another’s 100:1 leverage ratio and apply it to a currency – the Federal Reserve Note AKA the US dollar. In Part B we will use the Reductio ad absurdum approach to test a few of the common assertions mentioned earlier about the alleged benefits of operating markets in the manner that we do today. As this discussion progresses we can also explore whether Another and FOA were right in believing that Westerners have a disastrously distorted perception of reality.
Thought Experiment
Imagine if someone could insert 99 counterfeit FRNs into the money supply of the USA for every real FRN. Imagine that they all traded at equal value, at one US dollar each. Assume that for whatever reason the Federal Reserve, US Treasury, regulators and senior bankers all knew that this is the status quo but 99 per cent of the general public was blissfully unaware of this reality.
Holders of the genuine FRNs and the counterfeit ones are exchanging them without any concern. They are even saving in both, borrowing and lending a mix of the two with interest payable in real and fake FRNs indiscriminately. Now consider this. One day someone comes forward and points out a simple way to distinguish the real FRNs from the counterfeit FRNs. A technique that is so simple the dumbest person in America could use it successfully. I mean really simple. Imagine that the real FRNs made a unique sound (like a bullion coin) when they were dropped on their edge onto a hard surface.
What would happen? I suspect the following would happen. The value of the counterfeit FRNs would go to zero very quickly once the technique for detecting the fakes became common knowledge. Obviously counterfeits have no protection under legal tender laws, quite the reverse in fact. No sane, law abiding person would take the risk of attempting to pass those fake notes or accepting them in payment. To stem the ensuing panic the US government and the Fed would have to guarantee to replace the fakes with real FRNs (or perhaps ‘new’ dollars) wouldn’t they? They would have no choice. If they didn’t underwrite the value of those counterfeit FRNs the value of the real FRNs would skyrocket because the stock of currency would be reduced by 99 per cent. That would be some hyper-deflation, wouldn’t it?
(This might sound farfetched but consider this. The physical currency is a tiny portion of the overall “money supply” in most major economies around the world. In some economies 95 per cent or more of the “money supply” is bank created credit “money”. Money that is lent into existence which in turn creates deposits.
The Austrian interpretation of fractional reserve banking in terms of currency became largely irrelevant to the actual operation of the banking system in recent years. However it remained entirely relevant to bullion banking at all times because you cannot print gold or silver. You cannot print your way out of a bank run on a bullion bank.)
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Part 4/6
Back to our thought experiment. Now imagine that 1 per cent of Americans and every Indian, Asian and Middle Easterner knew this trick for detecting counterfeit FRNs before it was generally known in Western undeveloping countries. (“Undeveloping” isn’t a typo by the way. Take a look around.) If you were an Asian or one of those one-per-cent-of-Americans how would you use this knowledge? Your fellow Americans, and/or your American and Western trading partners, are accepting the counterfeit FRNs freely. Why should you allow yourself to get stuck with the fakes? You might surreptitiously sweep each of those real FRNs that comes across your desk into a draw and pass on the counterfeit FRNs.
So Peter, this is what is different about Freegold-RPG compared to what we have now. A free market in each unit of physical gold without 99 pieces of paper gold to obfuscate the value of the physical metal. The paper overlay on a physical market turns it into an abstraction of reality. (We will look into this effect more deeply in part B.) As soon as you allow the traders and speculators to have unfettered access to these markets the producers (savers) and consumers are overwhelmed. Hedging and other legitimate commercial benefits become corrupted. The market can degenerate into a casino.
We are currently trading real gold and counterfeit gold as if it was equal in value and utility. Just like those real and fake FRNs above. As FOFOA pointed out in an earlier post: why do we have to specify “physical gold” when we talk about acquiring and owning gold? Do we need to write “physical” steak on our shopping lists? The references to the Matrix in many of the posts and comments at this blog are not misplaced.
At some point this paper gold market will collapse. (We will explore the possible causes in Part B.) This is why A/FOA argued that it was the longs who were going to be shafted, not the shorts. Those 99 units of counterfeit gold will be worth somewhere around zero. Just like those counterfeit FRNs. Unlike our thought experiment the USG isn’t going to step in and replace the counterfeit gold with the real thing for the paper gold holders. The USG gold will be used in a much more creative way that is central to the dialogue at this blog.
We don’t know what the price of gold would be in a purely physical gold market. (The same goes for silver.) The reference point for physical transactions is the spot price in the paper market. The physical gold price discovery mechanism is broken and most Westerners trade as if it was still functioning. Meanwhile the one-per-centers and the Easterners are scooping up as much of the physical gold as they can lay their hands on at a price that could, in the future, be seen as a rock bottom bargain.
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Part 5/6
Market Manipulation
A lot of people were shocked by the idea that the paper silver market could be leveraged to such an extreme level. We shouldn’t have been. This process of corrupting markets has been going on for a long time. These trends tend to become more and more extreme over time rather than self-correcting. In my opinion the situation is going to get a whole lot worse before it gets better. Here’s some more background reading for anyone interested. Firstly an essay by Martin Armstrong that I have linked before. His observations about the silver market are well worth reading.
How did we get to this place? I think Martin Armstrong gave an excellent potted history of the origins and evolution of this extreme cowboy (outlaw?) culture on Wall Street in this essay. He also touches on some of the other central themes of his writing in this essay. The government damaging markets, abusing its privilege as the lawmaker and encouraging cronyism.
Here’s a link to an excellent opinion piece from a stockbroker by the name of Marcus Padley talking about the changes in culture that occurred after 1986 when the stock trading floors in London were closed and the markets became electronic. He describes a similar change in the ‘business culture’ of brokers and dealers to the one Armstrong describes among Wall Street banks.
The real beginning of this disastrous FIRE dominated US economy commenced in the 1970s and gained traction in the 1980s when the taxation system began to be modified to favour capital “profits” and penalize labour. For those readers who enjoy analysis that is a tad wonkish this paper has a lot to offer. In short it demonstrates very clearly that for the past few decades the share of productivity gains and the overall slice of the profits has been increasingly skewed toward capital and away from labour.
There was a major change in direction of US government policy and financial services industry law around 1979 and 1980 with the passing of legislation that facilitated the development of the credit card industry by beginning to remove all controls on interest rates. The US states began to dismantle their consumer protection laws in order to compete for the establishment of the call centres and back office operations of the card providers. The organized crime syndicate loan sharking operations were on borrowed time. There was a new kid on the block.
Introduction, Secret History of the Credit Card. PBS Frontline: November 23, 2004: http://www.pbs.org/wgbh/pages/frontline/shows/credit/etc/synopsis.html
http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html
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Part 6/6
This period also saw the word “deregulation” enter the political arena as vote winner.
Another significant turn for the worse occurred when US banks began to routinely on sell securitized debt instruments and offloaded the management of their loans to “servicers”. They no longer had any skin in the game. Credit quality became a non-issue for them. MERS was an all time low for these jackals. They effectively broke the land title system in the USA by corrupting the title transfer system.
The repeal of the Glass Steagall Act in America probably did more damage to the international financial system than any other single act of recklessness by any government anywhere. From that point forward Wall Street made the rules. Once again this was a gradual process. Wikipedia describes some of the crucial events in this process here.
The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation[1]. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.
Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.[2][3]
The proliferation and the explosive growth of derivatives outside the public exchanges completed our migration to the dark side in my humble opinion. I commented on this in my post:
It appears that the volume in the OTC markets and shadow banking “dark pools” comes at the expense of both liquidity and stability in the public exchanges. As a result the price discovery function of the public exchanges may be seriously compromised. At the same time the off-exchange trading must reference, at least to some degree, the prices "discovered" on the public exchanges. What a fricken mess! But an ideal environment for market manipulation.
I’m going to repeat a few quotes, below and in part B, from that Spiegel interview I linked to in my post. The interview where Ekkehard Schulz, the CEO of ThyssenKrupp, was discussing two of the commodity metal markets – nickel and iron ore. I thought his observations were illuminating and acute.
If you haven’t already seen it I want to bring this comment to your attention from Bron Suchecki of the Perth Mint. He is talking about the bullion banks and compares them to spiders inside a sensitive web of market intel. He also shares a link to a paper from Ben Davies of Hinde Capital.
This is why I call silver a ‘trade’. The price could go anywhere if market manipulators are in control. It could become just like the nickel market that Ekkehard Schulz described where “the price per ton fluctuates between €10,000 and €50,000”.
Part B - Artificial Markets
Part B - 1/6
We are now going to attempt to deepen our insights into manipulated markets by using a part-factual and part-theoretical thought experiment to turn a real, solely physical market into an artificial construct. Before we do that we will look at how this physical market was rendered partially artificial by a double cross and inside information. A foretaste of what could have lain ahead if the “financial innovators” had gained control of this market.
The point of this exercise is to compare the features of our artificial market construct to the “real” markets we have to live with today. If this artificial market closely resembles actual markets then I think we have to consider the question of whether these markets are real or they are, in fact, just imitations of real markets. As the saying goes if it walks like a duck, quacks like a duck and looks like a duck, it’s a duck.
Commodity Markets
Ekkehard Schulz pointed to the wild swings in the price of nickel as an indicator of a market that has been distorted “by disconnecting prices from the real economy and the natural resources from real consumption”. If you go looking for other examples of markets that are disconnected from reality you will find plenty of examples. Here’s a few suggestions if you want to do some research. Take a look at the copper market where you will find a major international bank/trader setting up an ETF so institutional “investors” can gain exposure to that market.
Look into Carl Icahn’s efforts to monopolize water rights in the southern United States. Ekkehard Schulz also pinpointed the iron ore market as a target for JP Morgan. And let’s not forget the biggy, the grandaddy of all attempts to create an artificial market, carbon emissions trading. (Yes, I know some of you have a planet to save. The comments are open, so fire away.)
FOFOA shared a quote from a treatise by John Locke (1632-1704) where he discusses property and distinguishes socially harmful hoarding from that which is socially harmless.
”And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of. If he gave away a part to any body else, so that it perished not uselessly in his possession, these he also made use of. And if he also bartered away plums, that would have rotted in a week, for nuts that would last good for his eating a whole year, he did no injury; he wasted not the common stock; destroyed no part of the portion of goods that belonged to others, so long as nothing perished uselessly in his hands.
Again, if he would give his nuts for a piece of metal, pleased with its colour; or exchange his sheep for shells, or wool for a sparkling pebble or a diamond, and keep those by him all his life he invaded not the right of others, he might heap up as much of these durable things as he pleased; the exceeding of the bounds of his just property not lying in the largeness of his possession, but the perishing of any thing uselessly in it.”
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Part 2/6
I am going to try to demonstrate that this issue of artificial markets and hoarding of commodities isn't some esoteric argument or moral dilemma. It raises practical issues that we have to consider out of necessity. I also want to try to show that being in the right metal isn't merely a debate about investment potential.
In part B we are only going to delve deeper into one more example of financial “innovation” in markets before we try a little DIY artificial market construction. Let’s take a look at the concept of “naked shorting”. A topic close to the hearts of many silver analysts which I looked at in my corner post. A quick explanation for the uninitiated.
Assume that you and I both hold stock in a company that has 100 million shares on issue. I think it is worth $1.10 per share and you think it is only worth 0.95 cents. As they say it’s a difference of opinion that makes markets and horse races. I’m a buyer around $1.00 and you may well be a seller at that level. Now a third party thinks this company if only worth 0.90 cents. So they put on a covered short. They go to an institution that holds a big slice of the stock of this company and they borrow some shares for a fee. They sell those shares on the market at, say, $1.00 hoping that the price will fall to 0.90 cents and they can scalp a profit when they buy back the stock to return to the lender.
Naked shorts have carried this practice to a new level. They effectively issue their own stock in a company. They literally create it out of thin air. The famous investor Jim Rogers defended this practice on an episode of The Keiser Report from the 14.15 mark here. His argument seemed to hinge on the fact that the naked shorts would still be forced to cover anyway if their bets went against them. I’m going to speculate on a possible method that could be used by a naked short to have their cake and eat yours too.
When you have a brokerage account any stocks you hold are attributed to your account by the broker. But who is recorded as the actual owner of those stocks on the share register of the companies you hold shares in. According to this analyst it may be the nominee of a subsidiary of the Depository Trust and Clearing Company (DTCC). Who does the DTCC record as the owner of the stock purchased through a broker?
If it is the broker on one interpretation of the law this could make you nothing more than unsecured creditor of your broker dealer. If you have a margin loan with the broker and conduct all of your transactions and trading through that account. The broker-dealer can see all of your positions and front run your trades, borrow those stocks and so on. Once you factor in co-located servers into this picture it might put quite a different perspective on Jim Roger’s defense of the naked shorts. What if you are “lending” the stock that is being used to short a stock in your portfolio?
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Back to our naked short. He offers to sell perhaps 10 million (of our?) shares of that company stock. You and I are startled by this. Wow! Did we get our valuations of that company’s shares outrageously wrong. Owners of 10 per cent of that company appear to want to dump the stock. If we panic and dump “our” stock too it might crash the price and allow the naked short to buy back in at a huge profit. What if our broker-dealer also issued a downgrade for that stock at the same time? Revisit the brokerage account system described above. If we dumped that stock did we simply cover our broker-dealer’s “naked” short with a guaranteed profit for them?
Now we come to our second and final deeper investigation of a market that is naturally and realistically physical in character. You will have to take my word for the facts of this tale because I don’t want to make poor Jonathan’s head explode by asking him to read too much more background material. We will take this physical market, turn it into an abstraction of reality and render it artificial in order to speculate on the impact of this process.
Let’s head off to the Tsukiji Fish Markets in Tokyo. The largest physical market for tuna in the world where the Bluefin Tuna is traded. I’m only going to provide two links. Here is a video of this fish market in operation and this is an overview of this amazing creature. These fish are the Formula 1 racers of the ocean.
To begin our story - It emerged a few years ago that the Japanese fishing fleets were harvesting multiples of their quota of the Southern Bluefin Tuna from Australian waters. As you can probably imagine that put a huge hole in local fishery management plans. These plans were designed and implemented to make the resource extraction of this fishery sustainable. There were further revelations to come.
We then found out that one of the large Japanese trading companies was stockpiling frozen tuna. Literally the whole fish you saw in that video of the Tokyo Fish Market. Why would they put capital into such a venture with no prospect for an immediate return? Of course, it’s a better choice than gold because you can actually eat tuna. But it is still a potential supply overhang with relatively large overheads in keeping those fish frozen and in marketable condition. These traders had created a kind of tuna “ETF” except no shares traded on an exchange. It was a true “dark pool” with no way to know precisely who owns those fish. So why were they hoarding these fish?
Perhaps this was their plan. Knowing these fish were being over-extracted and the catch was being under-reported it follows that the price of tuna was artificially low. That’s the logic of supply and demand. When it became known that the quota was being exceeded the tuna fishermen might be forced to slash their take of the wild stock. With a much lower supply the hoarders could confidently expect those stored fish to be revalued upward.
If over-extracting this fishery depleted the wild stock to a sufficient degree the fishery itself might suffer a collapse in the population of these fish rendering continued extraction uneconomic. The trader controlling the tuna hoard could have made a killing. They might even obtain a corner on the tuna market in Japan and then drip feed those hoarded fish into the market to maximize prices.
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But why would a government and its regulators turn a blind eye to this type of market manipulation and betrayal of an agreement with a major trading partner? It could easily be justified if you understand how concerned Japan is about food security. (The same is true of energy security.) These are islands with a relatively large population to feed and limited land for agriculture and stressed fisheries. The hoarder could probably get away with placing his hand over his heart and claiming his actions were designed to increase Japan’s food security.
This inside knowledge of a crucial piece of market intel gave this trading company the ability to game the market. It damaged the physical market’s capacity to discover prices accurately. It made the market artificial. Think back to my corner post. The information the bullion banks possess about the physical gold and silver markets is light years ahead of this Japanese trading company hoarding tuna. The international banks are replicating this systemic advantage in an ever increasing number of commodity markets too.
Back to our tuna story. There was a huge innovation in Australia’s tuna fishing industry in the last couple of decades. (And more innovations from Japan.) The Aussie tuna fisherman figured out how to raise these tuna in pens in the ocean off Southern Australia. They also ‘lucked out’ in the feeding regime. They invented a pelletized feed that they could raise the tuna on. Sadly they couldn’t breed them in a fish farm. They had to capture fish from the wild population and rear them to marketable size. It takes around 4 kilograms of pilchards from South America to produce 1 kilogram of ‘Australian’ tuna. (These fish are high order predators and carnivores.) The price differential between a kilo of tuna in Tokyo and the pilchards and other inputs made ocean pen rearing a wildly profitable exercise.
Now I am going to play with the chronology a bit as part of another small thought experiment. Let’s assume that Wall Street and London stepped into this market. The Tokyo Fish Market is closed and the trading becomes electronic. With some generous allowances from the market regulators we could see 100:1 leverage in this electronic tuna market. Now we have 99 paper fish traded for every single real fish. How could you make an obviously physical market like this one completely artificial? Easy. We did the same thing with gold despite the fact that gold’s value derives from its weight, purity and other physical qualities just like a tuna.
Let’s look at some of the implications of this new paper tuna market. For starters the bankers and traders are now intermediating this market. It is no longer merely a physical market where the resource extractor-producers and the consumers are dealing more or less directly with one another. Sure there were brokers involved before but the interests of the operators are aligned with their respective clients and customers. As you can see from the earlier breeches of trust on quotas it’s hard enough to regulate a physical market. Now we no longer have to deal solely with price signals in physical tuna we have a paper tuna market generating its own price signals.
There is another key feature of this market that is analogous to the silver market. The restaurant owners and food service providers have similar constraints to the industrial silver users. They have bookings for tables and customers who will expect their sushi and sashimi on time. Is the demand relatively “inelastic” like our industrial silver users? Could a physical corner exploit the fact the demand for tuna is “time sensitive”? In my opinion the answer is crystal clear. Yes to both questions. Do you recall my rigged market dictum? “Those who can be screwed, will be screwed.”
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