Tuesday, July 23, 2013

The Funeral



Over the weekend I attended a gathering of my whole extended family. It was a funeral. At dinner after the funeral, one relative whom I had gotten heavily into gold back in the $7 & $800s of late 2008/early 2009 cornered me and asked me what I thought of the recent gold price decline. He doesn't know that I have a blog. Actually, no one in my extended family does.

I assured him that I am not concerned about the price action as evidenced by a recent gold purchase and no sales of any of my gold. He told me that he hasn't sold any either and he's not that worried because it's still much higher than when he purchased it. I told him that I had a theory about the decline and he asked what it was. I told him it was a little too complicated to explain while whispering at the corner of a crowded dinner table. Then he explained to me that he thinks someone is manipulating the price.

He relayed a story that he has already told me a couple other times about how he used to invest in or trade commodity contracts back in the 70s or 80s (I'm not sure exactly when it was). In particular, he liked to play in sugar back then. He explained how he would buy "sugar contracts" and how the big players had many ways to manipulate the crops, the reporting of the crops, the supply lines etc… (reminded me of Trading Places). He had actually been quite lucky in sugar as it went his way and he made a big profit, but since then he has decided that he was just lucky for being on the right side of a manipulation meant to screw someone much bigger than him on the other side.

Then he asked me about my theory again. I don't have many opportunities to practice a simple, short explanation, so I took the bait the second time using his story as a launchpad. Here's what I told him.

I explained that the fundamental purpose of what he was doing back when he was buying sugar contracts, whether he understood it or not, was to be kind of a "shock absorber" between the producers and the users of the actual physical commodity. Anyone who invests in, trades or speculates in the paper proxies for these commodities, contracts in particular, is ensuring relative price and supply stability for those who deal in the real item, both the hard working producers and the hungry consumers.

This can be a little confusing because he probably thought that, by buying sugar contracts for profit, he was actually competing against the users of sugar and putting additional pressure on the producers. He probably imagined himself as a player in amongst those who create and use the real physical item. But what he was actually doing was joining a pool of traders and speculators who will take upon themselves any price shocks that occur, leaving the real users to their mostly-pleasant existence. Among that pool of speculators there will of course be winners and losers. Meanwhile, the real users are all winners in that they weren't interested in sugar for its profit potential from price and supply volatility, but for its usefulness as a food product.

Using my hands I showed him how we have the sugar growers and producers on one side, and we have the sugar consumers on the other side. And then in the middle we have the traders and speculators like he was doing who absorb any shocks in the supply line by claiming the profits and losses from volatility for themselves. These speculators deliver price stability to the producers on one side (by giving them a financial market in which to hedge their production income) and supply stability to the consumers on the other side (by keeping the price to the end user commensurate with the current supply flow).

There is also the warehouseman who adjusts which commodity and how much of the real, physical commodity he stores in his warehouse according to the basis—the changing level of the contango (and occasional backwardation) created by the speculators. The warehouseman is on the same side as the producers supplying the market rather than being in the middle with the traders and speculators because, like the producers, he avoids the price volatility by simply acting upon the immediate income guaranteed by the difference between present and future prices offered by the speculators. Whenever there is slack in the supply line, he takes up that slack by expanding the inventory in his warehouse while earning an income from the speculators that resembles a fee for storing the product for a period of time.

Likewise, when there is no slack in the supply line signaling demand that is greater than new production and which is reflected by a low or nonexistent contango (fee for storing the product paid by the speculators), the warehouseman drains his inventory by selling into the tight flow and relatively high demand. I say relatively high demand because, in the case of commodities like sugar, rather than being a sudden spike in demand, it is actually a drop in new supply often caused by normal seasonal changes, but sometimes caused by unexpected things like bad weather which can destroy a whole season's crop. But to the consumer, the shock of a sudden reduction in supply is absorbed by the warehouseman who is able to provide this service because of the financial basis provided by the traders and speculators in the contract market.

Once my relative had this picture in his mind and understood where he fit into the picture back when he was "trading sugar contracts," I switched to gold. I explained that gold doesn't need this pool of traders and speculators acting as a shock absorber in between those who deal in the real metal for its primary useful purpose. Because gold isn't consumed like other commodities, there is always plenty of supply at the right price and therefore no essential need for either producers of new gold or warehousemen reacting to a basis derived from paper proxy trading.

But even though gold is different from all of the other commodities, I explained, we still have this same basic structure today (using my hands again) with the producers and warehousemen (the bullion banks) on one side, the end users of the real metal on the other side, and the traders and speculators in the middle. Then I explained to him that "my theory" was that the recent price decline was actually just the death throes of this basic structure. Because this structure is not necessary for gold, and because it still exists today, what we are seeing in the price decline is this whole middle area (using my hands again) of paper proxy trading going down. But this, I explained, has little to do with the real item on either side, which I told him is why he bought physical gold coins instead of any kind of paper gold substitutes back in 2008.

There are something like 5 ½ billion ounces of already-mined gold in the world, so after this basic commodity structure disappears in the case of gold, the owners of that tremendous and overwhelming stock of gold will become the suppliers replacing what is more of a one-way commodity-like supply flow today. So, unlike with sugar where you need a constant new supply on one side because the real product is consumed on the other side, with gold this one-way flow is unnecessary since the real "end-use" of gold is to hold it and then, at some point later, to sell it to someone else.

So the "end users" of gold actually appreciate the relative tightness in new supply that tends to increase the price over time and ultimately turns them into suppliers sometime later. It is a virtuous loop that is not in need of a shock-absorbing pool of traders and speculators like the one-way flow of commodities that get consumed either by industry or consumers. And that, I explained, is my explanation for the declining price of these tradable paper proxies. This basic commodity market structure is not needed for gold and I interpret the recent dramatic price decline as a sign that the "market-organism" is in the process of phasing it out.

I explained that the dramatic price drop was kind of like "bad weather" to the gold mining companies and that, as you'd expect in this commodity-style market structure, there are indications that the warehousemen are now draining their inventories so that we, the end-users, don't feel the tightness in the supply flow. But far from this plunge in the price indicating the funeral for gold-the-metal, the evidence says that it's merely the funeral for the commodity-like structure of the outdated gold market.

Whoever is sitting on those 5 ½ billion ounces of already-mined gold, including the central banks, is apparently not casting it into the streets in disgust. It's apparently mainly the holders of paper gold promises doing the casting, and that's why the price crashed. So what we appear to be watching is the failure of a general market structure that was misprescribed in the first place.

I explained that my view of this is not based solely on gold theory and a narrow view on only the gold market, but instead it comes from a comprehensive thesis that also reveals many other "stress fractures" appearing right now that support the idea that a major change is unfolding. And that, I told him, is why I'm still buying physical gold even as others are selling their paper gold and mining shares in disgust.

I told him that what I expect is an almost-overnight revaluation in physical gold. He asked how high I thought it could go. I said that he would laugh if I told him, but that it was quite high. Then he brought up $10 per gallon gasoline. So I had to explain that I wasn't talking about $5,000 gold with $10 per gallon gas. I said that right now an ounce of gold could buy 12 or 13 barrels of oil but that I expect it to buy MUCH more after the revaluation.

So, in conclusion, I told him that the counterintuitive conclusion that kept me buying physical gold even as the price declined dramatically was that the price action reveals the rejection or phasing out of the current commodity market structure of the gold market which, in my view, will lead to this revaluation in the actual physical item which will reform the physical gold supply line from a one-way flow into a virtuous circular loop where the "end users" are also the majority suppliers, but at a much higher value relative to everything else. I can't say that his head exploded all over the dinner table, because it didn't, but he did change the subject at that point. ;D

Sincerely,
FOFOA

PS. It is tempting to think about the various indicators that we observe as the cause of what we expect to happen, but I don't think about them in that way. Instead, I think about them as being similar to the gravitational effects we can see that let us know that a black hole exists even though we can never see or fully understand the black hole itself. These things we watch are simply a few of the visible symptoms of a vastly more complex yet invisible black hole.

I came across a couple of paragraphs in a book last night that, to me, resonated with my view of the unknowable complexity that must underlie what we see happening today, and I wanted to share them with you:

"Not everything that happens during the day is an omen portending a good or evil development in the future, but everything has meaning to one degree or another, for the world is an ever-weaving tapestry from which no thread can be pulled without destroying the integrity of the cloth. The breadth of Creation makes it impossible for us to step back far enough to see the story that the tapestry tells; the intricacy of it, from the macro to the micro to the subatomic, makes it impossible for us to comprehend the megatrillions of connections between the threads in just one small fragment of the whole.

Yet there are uncanny moments when each of us recognizes that the surface of events is just what the word denotes, a
surface under which lie layers beyond counting, that what's really happening is always more than what appears to be happening, that the apparent meaning of an event is only the smallest part of its fullest meaning. In such moments, most people—wise or foolish, simple or smart—truly feel the wonder of the world and perceive poignantly but briefly that at the heart of our existence lie mysteries so supremely grand in character that we cannot comprehend them in this life. The tendency then is to treat this revelation as an aberration, to react with fear or pride, or both, and to attribute the experience to mere confusion, stress, one glass of wine too many, one glass of wine too few, or any of the innumerable unlikely causes."
–Dean Koontz

PPS. If the current commodity-like gold market structure is being "put down" by the market-organism as I think it is, would you view that as a natural death or as more of an execution?


657 comments:

«Oldest   ‹Older   601 – 657 of 657
LZ said...

@M

If China's inflation slows, that would mean they are adjusting the peg higher to make the Yuan more valuable which in turn makes the dollar less valuable.

China will not adjust the peg higher. U.S. dollars will flow out of their forex reserves and they will not choose the path of deflationary collapse. They will allow the yuan to plummet in value.

MatrixSentry said...

M,

A ponzi only falls apart when the investors find out and flee. In China's case, they found out, but they are not fleeing. Instead, they continue to feed money into the pozi for some reason.

China has to feed their own economy. They support the Ponzi because it sends dollars back to the US where they can be spent again on imports from China. I think they continue until they judge their gold reserves are sufficient to thrive when countries settle trade balances in gold bullion.

I see them just as I see myself and my own balance sheet. I have a target in ounces of gold that I need to counter the loss of paper wealth I will suffer as a consequence of Freegold. Also, I have a target that reflects what kind of lifestyle I expect to live in a Freegold world. I accumulate gold until I have achieved my target. This Ponzi facilitates the acquisition of gold at an extreme discount. I am happy that the Ponzi continues for this purely selfish reason.

I suppose support continues in some fashion until it is no longer possible or offers any advantage. It is clear to me that support is in the process of being removed.

michael3c2000 said...

A ZH reposting mentioning Bretton Woods, BRICS, G20's meeting, gold market developments, monetary systems etc. A nice short summary with charts by Russ Winter on 'coincidences", coordination and consequences. Some recent news is compellingly, suggesting early September and beyond, or sooner, have very eventful and productive interactions:
http://www.zerohedge.com/contributed/2013-08-11/g20-showdown-dollar-hedgemony

M said...

@ 罗臻

In 2005, the Chinese allowed the peg to adjust 21% up from where it was.

The Chinese are the creditors. They decide where these dollars are going to flow into. Unless another dollar holder jumps ship first.

Either way, its the (trade deficit/debtor) dollar that is susceptible to a run and collapse. Just like the currencies involved in the Asian financial crisis in 1997. Back then, those countries were running trade deficits and govt debt. The tables have turned.

M said...

@ MatrixCentury

Yeah, i pretty much agree. There was some stories not long ago that suggested it is the Chinese themselves that are smacking the paper gold price and not only the Fed.

The longer this goes on though, the messier and more complicated it will be for China and the US. Moreso for the US.

Michael dV said...

There really is not tax for saving in gold in the USA...until you sell it.
For FGers there is an assumption that the taxation issue might not be a factor post transition. If you are acquiring as the POG drops the only issue is a loss of fiat value of your gold..
Anyone who believes that the fiat system can persist for a long period of time is not likely to be a gold saver. For anyone who believes the fiat system will fail and recognizes the universal value of gold, these times can only be seen as an amazing few last days to get what last gold you can at prices that will amaze your grandchildren (and your Thai 'nurse' as you while away your last days in the old folks home for freegolders.)

Ken_C said...

I view tax on gold as DOUBLE taxation. Taxes are paid on the fiat dollars that you earned to exchange for gold and then more taxes are paid when the gold is exchanged back for dollars. I really don't like giving the gov any more money to misallocate.

Roacheforque said...

So we have about a month before the ever so obvious "direction" of the BIS places the US FED in the position of actually tapering (that which can "never happen") such that a new system can possibly be incubated.

And JPM has massively turned 180 degrees to corner the LONG position.

Today, that appears to be LONG paper gold, but are they LONG paper or LONG physical.

Today these are one and the same.

Tommorrow?

Michael dV said...

PhilO
just do not sell your gold.
easy...no tax!

Anand Srivastava said...

PhilO, but you don't mind paying the inflation tax.

Woland said...

an off topic note to prospective Freegold missionaries:

Most followers of Fofoa have learned that missionary work is, more
often than not, both a thankless task and ultimately unsuccessful.
Several have asked, is there some "shortcut" text which could aid
me in helping to explain Freegold to a friend, to which the usual
reply is, "No, it's too complex, and they really need to RTFB."

If the purpose is to impart the full range and depth of the topic,
then I would say that such advice still holds. If, however, the
goal is to introduce the basics, I suggest that a short recent essay
by our Dutch friend Jaco Schipper might be of some help. It is
entitled:

"Zijlstra's Legacy and the 21st Century Renaissance of Gold".
(just Google Jaco Schipper to get to his blog)

(Oh, and happy proselytizing!!) {;<)>>



KnallGold said...

Wondering what a quick upshot would do to demand and the durance of the remaining stack ...

Meanwhile, Günther Oettinger (EU commissioner and former gov. Baden-Württemberg) also wants to save the euro without the IMF. Seems to be a broader opinion within Europe.

http://www.fr-online.de/wirtschaft/oettinger-will-euro-rettungsprogramme-ohne-iwf-beteiligung,1472780,23966144.html

Tony said...

@ Woland,

I wholeheartedly agree with your sentiments. If I could share, I had success with my brother by introducing him to FOFOA's interview piece from a year ago:

http://fofoa.blogspot.com/2012/07/interview.html

I think it's about as concise and easy to understand as anything posted here. And while it wasn't enough to explain the intricacies of freegold, it was enough to whet his whistle and eventually turn him into an evil gold hoarder, jerk, time misallocator and brainwashed cult member :)

Edwardo said...

Hmm. this sounds, um, interesting.

Some of you may have noticed that taper talk, strangely, doesn't seem to have dissipated all that much. At the same time, as we look at, for example, the ten year, it has not backed off much from its recent highs. These two phenomena, taper talk and rising bond yields, are at odds with one another and something has to give. Let's suppose that some tapering is, in fact, in the cards, for this September. How could such a maneuver be pulled off, even if only temporarily?

The Fed and its friends can't stop taking up Uncle's debt this we know, but the recent figures about the U.S. budget deficit shrinking give them some cover to do so.

My view is these numbers are nothing more than the result of anomalous activity/ transitory factors and/or dodgy accounting. However, The Fed's credibility is increasingly on the line. All they have is jawboning to work against a mountain of evidence that suggests they are a one trick (cash for trash) pony and their gum flapping isn't working so well with rates anymore. They would like to be able to appear as if they weren't a one trick pony but they are very quite boxed in.

Here's a scenario that might buy them some time.

Let's imagine the Fed does taper early next month, and-who would've guessed it- by late October/Early November the stock market is sitting 25-30% lower (but, as per the paper at the link, blame can be ascribed to those damn leveraged ETFs for the severity of the sell off) In the meantime, the nasty sell off has scared a lot of money back into bonds, which buys The Fed time to continue with their modest tapering. All this amounts to ye olde "deflationary head fake", since it wouldn't be long before the the sand castle begins to crumble and the taper not not only must be tapered but entirely reversed and then some. Now excuse me while I dust off my tin foil hat.

Edwardo said...

I see the link didn't work.

Tony said...

@ Edwardo,

Any chance of getting us a new link? Your posted "this sounds, um interesting" link is broken

Edwardo said...

Okay, I give up. If you haven't figured it out the recently released Fed paper that I can't seem to link to is on how leveraged ETFs can act like portfolio insurance did during the '87 crash.

Tony said...

Edwardo,

This works:

http://www.federalreserve.gov/pubs/feds/2013/201348/201348pap.pdf

Edwardo said...

Try this.

Bright aurum said...

KnallGold said..
Wondering what a quick upshot would do to demand and the durance of the remaining stack ...
Only speaking for myself, I`ll quit buying. So far I`ve done my best on this downturn alleviating my regional gold provider this horrible and heavy burden.

said...

Edwardo

Do you by chance know how debt that has to be rolled over plays into the expenses portion of the government books? The deficit could be $0 but if we have to roll over 2 trill in short term paper, I assume that wouldn't be counted and we would still have to issue 2 trillion in paper to pay off this debt.

burningfiat said...

Regarding shortcuts to FG enlightenment:

http://fofoa.blogspot.com/2010/06/its-debt-stupid.html

is not bad! It may be FOFOAs only attempt at a short summary (along with a really long explanation of why it can't be summarized for the western mind :) ).

Freegold Summary:
Debt into Equity
Separation of the monetary functions:
Store of value --> Gold
Medium of Exchange --> Fiat
Unit of account --> Split between Fiat and Gold depending on time preference
All (or most all) debt paper will burn
Gold will be repriced once, enough to make your nose bleed, not as a commodity or money, but as a real wealth asset, kind of like the Mona Lisa, only better

Edwardo said...

Alas, Luke, I don't know the particulars of how debt that has to be rolled over plays
into the expenses portion of Uncle's books.

Anonymous said...

Edwardo said...
“Some of you may have noticed that taper talk, strangely, doesn't seem to have dissipated all that much.”

I think it has something to do with the trade deficit. If the trade deficit is higher than the rate of increase of new credit than the US is essentially able to export its inflation. Print more than the trade deficit and the portion above that line results in inflation at home.

The danger for the US is that from a fiscal level it needs to export dollars for stuff in order to maintain the current level of government spending. But once the level of government spending cannot be absorbed by our trading partners the government has three stark choices. The first is to somehow increase the tax revenues. The second is to reduce spending. The third is to just print the new currency and start down the road of hyper-inflation. The third path also has the benefit of removing via the combined effects of inflation and capital gains what little private capital still exists while making fix rate debts of both the government and public easier to pay off.

This though will completely reverse the trade deficit into a surplus as all the foreign dollars attempt to buy stuff of value within the US. Ideally assets with legs so they can be exported. Possession is 9/10th of the law. If the US puts up capital controls look for a completely shutdown on imports. Stupid move but heh this is government we are talking about. It’s all those evil capitalist speculators don’t you know, let the congressional witch hunts commence.

So my guess is that the FED may want to taper in order to preserve the money power in the hand of the international banking cartel, while the soft money camp will take the path that ultimately forces a currency reset that extracts wealth from the 9.99% via inflation while eliminating burden of their debts in terms of purchasing power.

This then sets the stage for a monetary reboot to either a new ‘debt’ based monetary system or an ‘asset’ based monetary system of which gold is a clear leader as the focal point of all other lesser assets with ratios TBD based on the desires of physical gold holders. My guess is that having been burned by the debt based system the world will seek an asset based system of one sort or another.

That is my read of the various BIS papers anyway. Having gold as both an un-taxable store of value and unit of account makes a lot of sense. While gold’s purchasing power relative to all other assets will naturally fluctuate overtime as a great pricing mechanism for the relative abundance and scarcity of lesser assets the world will finally have monetary base that is rock sold and grows at most by 3% per year.

I think the end game is fast approaching.

M said...

@ Edwardo

The Fed might talk taper and even slow down. But it amounts to nothing if the taper doesn't get ahead of inflation. The gold price went up as they raised rates in 2004 till 2006.

Taper talk scares the bond speculators that are front running the Fed. Some of the bond specs havn't even jumped back in as indicated my lofty 10 year.

Bright aurum said...

@spaul67
I like your comment 99.9%, though other readers may want to shift the point to 9.99% :-)

enough said...

Saudi prince defects: 'Brutality, oppression as govt scared of Arab revolts'

Saudi Prince Khalid Bin Farhan al-Saud has announced his defection from the royal family, referring to his “suffering” under reign of al-Saud and called on other princes to break their silence.

http://rt.com/news/saudi-arabia-opposition-prince-374/

http://www.hurriyetdailynews.com/saudi-prince-defects-from-royal-family-report.aspx?pageID=238&nID=51544&NewsCatID=352

Bright aurum said...

@ enough
The country is owned by its monarch.. so what else to expect? What is your point enough? Is the king`s policy harsh enough or is it gentle?
How long will it take for the king to find a warm place like Haiti to send people to on a one way trip?

enough said...

The point is Saudi is the key to the petro dollar and its reserve currency status. Discord in the House of Saud means potential complications with Saudi lynchpin support of the $IMF

Bright aurum said...

Indeed.
A weak leaf of a weak branch of a great tree has fallen. So what? I would wagger its one of a long line of undersexed princelings unable even of hoping to have any chance of succession to the throne.

Ken_C said...

anand srivastava said...
PhilO, but you don't mind paying the inflation tax.

who says? I don't like paying any tax; inflation or otherwise. to be double taxed is double bad.

Edwardo said...

M,

A taper is nothing but a delaying tactic, a time buying device whose success depends primarily on good timing. As a strategem, it has the advantage of not costing a dime, but it only works if A.) once an (asset) deflation takes hold, there is the customary response to, so called, risk asset bubbles popping. The Fed would be relying on a felicitous temporal correlation such that domestic institutional money takes up the slack for The Fed's reduced buying. And they would be relying/hoping is more like it, for a continuation of what has allegedly transpired of late to help reduce the budget deficit.

However, the rest of the world might identify domestic private bond demand as just what it is, an opportunity to sell bonds, in which case The Fed's gambit won't yield the intended dividend even if the timing is decent. It seems to me this sort of maneuver is about all they have in their ever shrinking ditty bag.

enough said...

aurum,

are you one of what you describe? Else how would you know?

M said...

@ Edwardo

"The Fed would be relying on a felicitous temporal correlation such that domestic institutional money takes up the slack for The Fed's reduced buying."

Well the Fed is dreaming. Like usual..

The threat of taper or even actual taper will scare the bond speculators away because there is no profit in buying in front of the Fed and selling to them. The bond speculators are the ones that are making the bond market look like a bull market. Which attracts institutional deadbeat money into the market. Once the illusion of this bull market is exposed, the longer term institutional money will start to incur losses on their bond positions. This is when the real bear market will kick off. Without the Fed providing the profit for the specs, bonds will be priced by fundamentals again. Yield minus inflation. The exit of the specs (which is happening now) will put depreciative pressure on the dollar which will cause price inflation to rise (70's style). The more price inflation we get, the more the bond bear market will gather steam. Everyone will be heading for the exist. The Fed could try and jump back into the market to try and attract the specs back or they could keep selling to try and raise interest rates to halt the exit. The former will never work and the latter will bankrupt the US government and the economy 10 times over. This is the box that the Fed is in.

In summery, the institutional money has to exit the bond market before it can enter it again. At this time, not only are they still in there, they are still entering it.

And in my opinion, once the exit from the bond market starts is when the real bull market in gold starts which will end in freegold.

Edwardo said...

M,

Yes, The Fed's in a box. More precisely, the dollar faction is in a box. And the scenario I just described would involve money that is now going into stocks heading exclusively into U.S. debt instruments. If TA has anything to say about it, the ten year is poised to go higher since it's in a continuation pattern that appears to be working off its overbought condition. This could be evidence of a sort that some sort of taper is coming that will repel the specs even further from the bond
On the other hand maybe bonds are going to sell off taper or not. TA is, in this case, dispositive.

As for a resumption of the gold bull market. It's possible, but I think it's improbable because, at this point, who is going to feed physical in sufficient quantities to keep the paper gold market viable?

michael3c2000 said...

When the Federal Reserve Bank is absorbed by the Department of the Treasury, to what extent will it's debt be written off? Is there a tie in to the offshore accounts controlled for private profit, that will no longer facilitate the offshoring of jobs, downsizing of opportunity and outsourcing of common sense? Tapering is code for neutering of the Fed?

Bright aurum said...

@ enough
My country was 500 + years under a muslim`s sultanate yoke so the knowledge of how these people think, their 'moral' code and strive in life it is kind of 'ancestral' to me. I was raised by my grand grandparents and one of my grand grandmothers was fleeing the massacres then.

Bright aurum said...

M said...
...And in my opinion, once the exit from the bond market starts is when the real bull market in gold starts which will end in freegold...
So you`ll be joining the 10000 + to 300 +/- to freegold club, will you not?

Michael dV said...

bright a
would your last name end with ian?
That would work out about right if I have the dates roughly right.

LZ said...

M,

How do you explain the 75% devaluation of the U.S. dollar in 1932? It was the world's creditor nation. China is in the same position today as America was at the end of the 1920s: an undervalued currency built up huge currency reserves and now their trading partners are all devaluing.

KnallGold said...

Commodity trader Mihir Dange is now waiting 2 months to receive his physical, bought at 1200-1250, interesting numbers. And they begin to speak up ;-)

http://www.bloomberg.com/video/trying-to-make-sense-of-the-gold-market-2WL2EiG7T62eesbObxnmRg.html

Bright aurum, congrats for discipline and buying low. We were informed though that westerners start to buy Gold only when its rising.
What I wanted to say is, if we'd have a quick upshot, could it actually accelerate the demise of the Gold market, making a brisk supply situation even worse?

This contrary to the standard scenario of reducing weight in the flow, back to contango, less physical offtake, renewed trust in paperGold etc..

It was suspected that a lower POG would do more damage, and I'd agree. But what if the damage is already done? Would the price not become irrelevant anyway? We've seen it at the last upsurge that this standard scenario didn't take over again.

And there is a late stage possibility in this drama, if there's wide expectation that after paperGold's death a reval will come this could lead to a sudden hamster behaviour some day. A surge in POG being the catalyst, even if it makes no real sense at first. "better buy a bit higher NOW, before its over". Spot the dog, finally wagging the tail

We'll keep that certain Doors song in petto for the day ;-)

Edwardo said...

Mr. Dange must be buying a lot of physical and/or he must want it in very particular forms because yesterday he could have had, at a discount, in excess of 1/10 of a ton of Maple Leafs from Apmex.

M said...

@ 2 Chinese Characters

What are you suggesting the USD devalued against by that much in 1932?

It certainly wasn't against a debtor nations fiat currency.

M said...

The rest of the world paid for US exports with gold back then. That is where the 20,000 tons came from.

Bright aurum said...

@ Michael dV
You got it just about right, but is the opposite of ending.
Keep on reading the stars :-)

@KnallGold
I may not be right, still I`ve got the intuitive feeling that is the perceived 'volatility' that saves the 'gold market' this far, so the tide will turn when the time is right. You can brouse this blog for Costata`s bullion bank spider web analogy.

Michael dV said...

Mr Dange is probably just not that important. If he was one of the 'right people' (Saudis, Chinese or other super producer) there would be an effort made to see to it that Mr. Dange got his gold.
The metal is in low supply. Demand for physical is high. The paper price may have become irrelevant.
When one of the 'right people' does not get his gold...THEN we may see a problem.
Until the I keep buying in small quantities and so far I have not been denied. Apmex has been on time every time...so far. But I do not stress the system.
I actually believe it is already 'over'. The ref just needs to blow the whistle, the fat lady sing and the 'For Rent' sign go out on the home of Comex. It is like loosing a friend who dies far away, you think of him as living because you have not yet received word he has died. Enjoy the peace of the moment.

byiamBYoung said...

@ Michael dV,

" It is like loosing a friend who dies far away, you think of him as living because you have not yet received word he has died."

Nice analogy. Our other dear old friend sure has been looking kind of green (pun intended) lately, too, hasn't he? News of his passing will no doubt also be a surprise, but not altogether unexpected.

The time draws near for a yet unnamed nurse to put her hand on the good Dr Ben's shoulder and give him the knowing look that will compel him to cease the frantic chest compressions.

As we sit in the vast uncomfortable waiting room, shuffling through the same old magazines over and over.

Cheers


ampmfix said...

Nice magazine analogy.

I knew an old lady that had senile dementia and her family kept feeding her the same magazine over and over.

Maybe she saw something new each time around? or maybe not?

Not sure that is very different from our garbage fed lives. Let's have the change, likable or not!

byiamBYoung said...

@ ampmfix,

I more than share your frustration.

I used to watch the POG. Now I hardly look at it because it has become irrelevant.

I watched the GOFO go tits up. Now it just sits there.


I watched GLD drain and drain and drain. I bet it will keep draining like this on into the distant future. I thought it would accelerate. Well, there's a reason people don't pay me for my prognostications :/

I thought there would be upheaval when SuperBen announced QE 4eva. Nope.

And good lord, look at Japan. How in the world is that basket case still dogpaddling over there in their radioactive flotsam and jetsom?

Got me. All I know is that my family thinks I have climbed to the high branches of the crazy tree, and every day that we get up and the local DJ's are still cackling like hyenas and cracking bullshit jokes, I look crazier to them.

It's apparently true what I once heard: The truth will set you free, but first, it will make you completely miserable.

Well, cheers anyway. Buy gold!

M said...

@byiambyoung

Well said.

These are boring times....

Indenture said...

Thanks Woland,

"The essence of the problem that Zijlstra kept pointing at cannot be dismissed: gold disciplines the external spendthrift of nations. Remove the check that enforces a balance and a chronic imbalance follows. It is precisely this aspect that defines Zijlstra a proponent of an impartial application of rules for governments to abide by, whether one country considers itself “first among equals” or not. Gold as such, is only a check that ensures the balance.

To adapt to these wretched circumstances however, there are at least two policies to consider. First, a policy mix that ensures a balance of payment equilibrium must be pursued. Second, a central bank must insulate its balance sheet and along with it, the value of the currency it issues, for “fiscal shocks” through gold. Instead of collateralizing a currency with government bonds, foreign or domestic, a more solid footing must be arranged for. Summed up: to maintain an international balance, both temptations of becoming a creditor and debtor must be resisted.
"

http://www.jcaschipper.nl/2013/07/dr-zijlstras-legacy-and-the-renaissance-of-gold/

Bright aurum said...
This comment has been removed by the author.
Bright aurum said...
This comment has been removed by the author.
Bright aurum said...

I know that the Turd`s site is not held in high regard around here. But still this analysis makes you think what is the point of the big four US bullion banks to go long COMEX futures if they would be ultimately cashed out say at 300 $ POG?

LZ said...

@M

Yes, the US devalued against gold. China is adding gold reserves, but it's biggest asset is still Treasuries. So does the U.S. in 1929, with a huge pile of gold and a credit bubble, look better or worse than China in 2013 with a pile of USTs and an even bigger credit bubble?

LZ said...

To be clear, I don't think the yuan may devalue versus USD at the end of this cycle, but I see the system as rotting from the outside in. The yuan, among other currencies, will revalue first and each one that falls brings us one step closer to USD revaluation. Western bankers and politicians would crow if the yuan collapes, but they'd be facing a yuan heavily backed by gold and a very low-debt rebalanced Chinese economy ready to boom again.

Kid Salami said...

More comedy gold.

"Now I hardly look at it because it has become irrelevant."

That's right - the price at which participants around the world are exchanging (admittedly, claims on) gold, the thing that this blog is about, is... wait for it... "irrelevant".

Not "the price of gold should be looked at in conjunction with other factors, such as the availability of physical as can be derived by us shrimps from metrics like gofo and futures contango/backwardation and various anecdotal evidence, and COT, and T bond prices, and stock prices, and silver/HUI prices and public central bank activity and blah blah blah" but IRRELEVANT.

Irrelevant. Ha ha. I believe the word is fundamentalism.

PS. I'm ALL IN gold. I just accept that I don't know everything and, hence, don't talk like an evangelist.


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