Tuesday, September 18, 2012

Deutsche Bank explains why we hoard gold

Deutsche Bank: GOLD IS MONEY
Matthew Boesler|Sep. 18, 2012, 5:53 PM
Business Insider (Video & images added by me)

Is gold money?

It's become a tireless debate: goldbugs seem to cling to the shiny yellow metal with a religious fervor not usually displayed by anyone toward other asset classes, and it's been known to frustrate some who don't share their views.

Gold often gets lumped in to investment forecasts with other "commodities" – real, consumable things like oil or food.

But Deutsche Bank analysts Daniel Brebner and Xiao Fu say gold is seriously misunderstood, and in a new report – wherein they update their gold target to $2000/oz sometime in the first half of 2013 – they explain that "gold is not really a commodity at all."

(From Fallacies)

The undisputable evidence for the case that gold is money, according to the Deutsche Bank analysts:

While it is included in the commodities basket it is in fact a medium of exchange and one that is officially recognised (if not publically used as such). We see gold as an officially recognised form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves.

(From Euro Gold)

That's their take. But there's more – the analysts differentiate between "good money" (gold) and "bad money" (fiat paper currency):

We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies. In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.

What's interesting is that all of the arguments against gold propogated by the anti-goldbugs – that it's not really a consumption good, that it serves no industrial purpose, etc. – are all the exact reasons why Brebner and Xiao call gold "good money."

The analysts elaborate on this point in the report:

In our view the ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. There are very few media which can do this. Fiat currencies physically have no use other than that which is prescribed to them by government and accepted by the public. That fiat currencies cost little to produce is of a secondary concern and we believe, quite irrelevant to the primary purpose.

Gold is neither production good nor consumption good. Jewellery we see as a form of storage or hoarding (the people of Portugal have all but exhausted their personal gold stores – hoarded in the form of jewellery – having converted them to survive the crisis). If gold did have a meaningful commercial use we believe that it would make the metal less attractive as a medium of exchange as the value of the metal in whatever market it was used in could periodically interfere with its medium-of-exchange role...

Other characteristics are important of course in fulfilling the requirements for ‘good’ money: indestructibility, divisibility, transportability and universal acceptability.

Hat tip:


From Kicking the Hornets' Nest:

In Gresham's law there is good money and bad money. There are two moneys, not three. Good and bad, not good, so-so, and bad. The bad money drives the good money out of circulation. In other words, the bad money circulates (and becomes the medium of exchange) and the good money lies very still (becoming the store of value). Look at this latest Eurosystem quarterly report again:

And from The Return to Honest Money:

As I mentioned above, in the same way that a medium of exchange is to one extent or another also a store of value, stores of value are also to one extent or another media of exchange. The question is one of degree, and this is how, through market forces, we end up with "two monies." Being the focal store of value does not make something the best medium of exchange, and vice versa.

This might be a good time to take another look at the ECB quarterly statement. There it is, two monies. One on the left, one on the right. Separate roles.


This is how you have a true competing currency. Not two currencies competing for the medium of exchange crown. But a separate medium of savings competing against the medium of exchange for "pole position" on the 'Time=t' axis:

This is Freegold, and it is unfolding today. It requires no activism or political/legal changes at this point. It is, how do you say, baked into the cake already? And once again, these posts briefly explain how we aren't quite there yet, how Freegold is different from what he have today, even though it is "already in the pipeline."


Monday, September 17, 2012

Gold hoarder dies alone - RIP Walter Samasko Jr.

Dead Nevada man's home filled with gold

CARSON CITY, Nev., Sept. 16 (UPI) -- A Nevada recluse left behind a stunning treasure when he died this spring -- officials say they discovered $7 million in gold bars and coins in his home.

Walter Samasko Jr. died in his Carson City home in May. His body wasn't found until June after his neighbors complained of the odor emanating from the house. That's when the gold was found stored in his house and garage, the Las Vegas Sun reported Sunday.

Carson City Clerk Alan Glover used a wheelbarrow to schlep the gold, which included coins from Mexico, England, Austria and South Africa dating to 1872, to his truck for the trip to a safe location.

The newspaper said Samasko hadn't worked since 1968 and was living off his investments, which included stock accounts of $140,000 and $25,000.

"Nobody had any clue he was hoarding the gold," Glover said.

Samasko, whose age wasn't reported, had no will and did not appear to have any close relatives, though a first cousin, substitute teacher Arlene Magdanz, was tracked down in San Rafael, Calif.

"Oh, my God. Oh, my God," she told a lawyer who was the first to give her the word about the treasure.

Gold worth millions found in Carson City man's house after he died

CARSON CITY — Walter Samasko Jr., a recluse, died at home in May, but his body wasn’t discovered until June, when neighbors complained of the smell coming from his house. There was only $200 in his bank account. But there was a $7 million surprise at home.

As the house was being cleaned for sale, officials discovered gold bars and gold coins stored in boxes in the garage and in the house. There were so many coins that Carson City Clerk Alan Glover used a wheelbarrow to haul the gold to his truck and deposit it for safekeeping.


"Nobody had any clue he was hoarding the gold"

Zenscreamer wrote, "Well, maybe his coin dealer did..... ;-)"

This reminded me of a great coin dealer story:

Very thank you – The Story of Mr. Chang's Gold

The following is an excerpt from a 2002 speech given by coin shop owner, Burton S. Blumert, titled "The King Doesn’t Like Gold, Never Has, Never Will – Unlike Mr. Chang".

The last small rally that gold enjoyed carried it to $306 per ounce (it has since fallen back to $290). One of the reasons given for the run-up was that new money was pouring into gold from Japan and China.

We don’t get much reliable information about those markets but I’ve experienced very strong inclination among Asians towards gold.

Which reminds me of my favorite Chinese customer, Mr. Chang.

I don’t remember when he first became a customer but it had to be a decade before 1974. He barely spoke English, and I’m not even sure he was legally in the US. He worked in food service at United Airlines, and his wardrobe was Shanghai c.1930.

We didn’t have much in common. His English was primitive and my Chinese non-existent.

The only thing we shared was his interest in gold and my desire to sell it to him. In those days we were prohibited from selling anything that could be considered a bullion coin. That didn’t matter to Mr. Chang.

There was only one coin he would buy and that was the US $20 Liberty Head coin. He was familiar with it from China and to him the Liberty $20 gold coin was gold and gold was the Liberty $20 gold coin. Any other gold item might as well be counterfeit.

Through the years I saw him almost monthly. He brought his paycheck, would negotiate price, and then decide how many coins he wanted. (The $20 Liberty cost about $50 each.) I would give him change against his check.

Originally, I was amused that he came with his own balance scale. It was made of bamboo with a plate at one end and a weighted rock at the other. It was designed to balance the $20 Liberty. If a coin failed, it was either shaved or counterfeit.

After about a decade I became annoyed with his scale. "Mr. Chang, when in heaven’s name will you trust me and not need a scale?"

He considered the scale just part of doing business, but he got my message and was embarrassed. Although his scale was present for the next purchase, I never saw it again after that.

In those days it wasn’t easy getting information about the gold price. There was no US market and the London AM and PM fixings were sometimes available on the radio but it often required seeking the financial pages of the Wall Street Journal to learn the value of an ounce of gold.

Mr. Chang followed the price very closely. He would call almost daily, and ask, "Wuddah prica London gol?"

Upon getting the information he would respond: "Very thank you," and that was that. There was never any doubt about it. It was Mr. Chang on the phone.

Then we didn’t hear from Mr. Chang for months.

"Has anyone heard from Mr. Chang", I asked? I was sure he was ill or worse.

Then one day there he was. "Wuddah prica London gol?"

I had answered his call and asked, "Mr Chang, have you been ill? We’ve missed hearing from you."

Dead silence.

How in heaven’s name did I know it was him, he wondered. Gold dealers are amazing, with wondrous perceptions. I guess he believed that every customer said, "Very thank you."

Mr. Chang retired. I don’t know if he had social security checks coming in, but his gold coins provided for his retirement. He came in as regularly as when he was a buyer. Only this time with one or two gold coins to sell. As he came in the front door, I noted he had coins in his hand, wrapped in tissue paper. He pretended he might be buying to keep me honest, but of course I knew that was not the case.

Then we learned from one of his old Chinese cronies that Mr. Chang had passed on. In fact he had gifted several coins to the friend who gave us the sad news. We dearly missed Mr. Chang, although "Very thank you" had become a part of the language in our office.

Some year or two later a young Chinese woman, whom I later learned was Mr. Chang’s grand niece, came in. She was an accountant and evidently had found Mr. Chang’s check stubs with Chinese characters on them breaking down how he had spent each check.

She was convinced there were gold coins some place and wondered if we were actually storing them. It was clear that she was not part of Mr. Chang’s inner circle.

She left rude and angered.

As if rehearsed, my employees looked at me and in unison we all said: "Very thank you."


I first posted this story a few days after Burt Blumert passed away in 2009. Here's the original post.


Sunday, September 9, 2012

Perception vs. Reality Open Forum

50 Years Old

The phrase 'Paradigm Shift' just turned 50. The book that coined the phrase and changed the way we view the world from a steady, cumulative progression to a series of revolutionary punctuations (called paradigm shifts) in between periods of relative complacency, was first published this month in 1962.

Coincidentally, something else that also began at the same time as the concept of the 'Paradigm Shift', according to the ECB's own historians, was the road to the euro.


A big THANK YOU to everyone who sent donations for the fourth anniversary of my blog! I have a couple big posts already in the pipeline for you, but due to delays beyond my control I decided to put up this open forum. You can, of course, discuss anything you want, but I came up with the topic thanks to a couple of recent personal encounters with the problem of perception versus reality.

One was the case of a person who is apparently completely unaware that there may be a vast difference between his own subjective perception of a situation and the objective reality, or at least the common perception of everyone else. The other was an encounter with a flaw in my own perception, which I quickly corrected. But don't worry, it had nothing to do with the subject matter of this blog. ;-)

So please feel free to share with us your own experiences with the difference between perception and reality. And any of you who would like to argue that perception is reality, I welcome that too. There's so much information we can take in today—thanks to the internet—that shapes our individual perception. How do you deal with it? Do you aim to take as much input as possible from every possible angle? Or do you believe that the more information, the more you need to filter?

Or if you'd rather just talk about gold, here's a fresh item to kick off the discussion. It's a NY Post article detailing an assessment by veteran analyst for Citigroup, Tom Fitzpatrick, that gold may reach $2,500 by the 1st quarter of next year. Now, although the nominal price is low by our standards, what strikes me as significant is simply the scale and the timing.

That is, to see a mainstream analyst calling for a 50% move within roughly 6 months in a major/global market like gold is pretty robust. And yet it doesn't garner near the sort of attention that a similar scale prediction would rouse were it in another market. I guess reality still has some work to do on public perception.

Gold could hit $2,500: Citi analyst

Gold has had a good summer, rising more than 9 percent, but that move may be just the start, according to a bullish Citi precious metal analyst.

Tom Fitzpatrick believes autumn will be golden in the beginning of a run-up that he says will culminate with the yellow metal hitting $2,500 an ounce in the first quarter of next year. The price now stands at $1,736 an ounce.

In his client note this week, Fitzpatrick compares this upcoming rally to gold’s huge move higher in 2007. The report is based on technical analysis of precious-metals market moves that could cause a six-month gain of more than 60 percent, just like the bull run five years ago…