News & Analysis
Gold Goes Up?
Gold offered a flutter of excitement to participants yesterday, climbing above the $1730 mark as the US trading session opened, marking a tentative improvement in sentiment towards the yellow metal, although its close at $1735 was certainly no game changer. Much hesitation still lingers and this was clearly reflected in the lack of follow-through interest. The gold market continues to look to external factors for direction, with yesterday's rally helped by a stronger euro and general risk-on sentiment following positive Eurozone headlines. – UBS Daily Newsletter
Dominant Social Theme: Gold is a punctured bubble.
Free-Market Analysis: Since 2001, we've held that the Western world – the world, really – is in a precious metals bull market. Just like the bull market of the 1970s, this will end in a tremendous blow-off that will leave some speculators very wealthy.
Business cycles in the modern era tend to fluctuate between fiat and precious metals. The simplest explanation is that the economy grows so distorted from fiat money injections that eventually businesses start to collapse and stock markets begin to reflect the over-bought reality of the economy.
This is what happened in the late 1960s and in the early 2000s. The pattern is clear. The "Nifty Fifty" craze collapsed in the early 1970s. The "tech boom" collapsed in the early 2000s. In both cases, the retrenchment that arrived came in the form of capital flight to precious metals.
Gold has appreciated around sevenfold since then and silver about tenfold. It seems fairly clear if one accepts the reality of such business cycles that gold and silver will continue to rise relative to paper currencies until a "blow-off" point is reached. We are probably nowhere near that point yet. Here's some more from the article:
Gold's relatively quiet consolidation phase of the last couple weeks is also well reflected in the options market, with volumes continuing to ease and hover at the year's low, amidst light liquidity. A break of the current range is much-needed to breathe life into the options market, with the $1750 and $1690 levels being eyed as the likely trigger points ...
Although gold sentiment remains positive, its on-going positive correlation with risk assets has made participants more cautious about transforming their gold views into trades. Gold's 20-day rolling correlation with the S&P500 Index has eased from the 0.79 high in early October, but levels are still quite elevated by historical standards.
Then there is also the uncertainty coming from Europe, with the next tranche of Greece's bailout programme yet to be confirmed and disbursed. Broadly speaking, Eurozone issues have slipped to the background of late, with the consensus that the situation will remain benign for the remainder of the year. But the potential for negative surprises, albeit considered relatively low at the moment, still adds to cautiousness in that gold's correlation with the euro has remained quite strong since October last year.
At this point, a lot hinges on whether gold can break out of this recent range. A break through key resistance levels would likely be the next important trigger to get buyers to pull the trigger. Then momentum, technical and options traders will be incentivised to jump back into the market.
This article is optimistic about gold's value relative to currencies, but it doesn't get at the larger issue, which is how and why fiat currencies operate the way they do.
Not only that, but it doesn't explain the length of the current business cycle. The 1970s golden bull lasted some ten years. This golden bull seemed destined to run for 15 years because the economy was even more distorted than before.
But central banks and other authorities have reacted so violently against the deflation of fiat distortions that this fiat-bear market seems destined to stretch far longer than that. In fact, we calculate that central banks have dumped in aggregate some US$50 trillion into the marketplace in the past few years.
This kind of unheard-of interference is stretching out the current cycle in ways that were previously unanticipated. There are all sorts of methods, in fact, to prevent the cleansing purchase of metals while attempting to sustain the value of paper money. In the second half of its daily update, UBS mentions one such move, as follows:
RBI Gold Development ... The Reserve Bank of India has directed that "no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchases at auctions and /or speculative holdings of stocks and bullion".
The RBI highlights the significant rise in gold imports in recent years as a "cause for concern". Specifically, this directive states that "no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold ETF and units of gold mutual funds".
... From our initial conversations with locals, the target of this new policy is the speculative element of the Indian gold market, with a particular focus on those trading on exchanges including ETFs. And so, the immediate outcome will likely be a drop in trading volumes on the local exchanges ...
All in, this highlights that gold still remains quite the headache for the RBI as they try to battle with their sizeable current account issues ...
Additionally, the Ministry of Finance is exploring the introduction of a gold accumulation plan (GAP). The target here is households who typically pool savings into physical gold. Instead through a GAP gold futures would be purchased which can be later sold or exchanged for coins/bars ...
The idea that gold will be held in paper form will be a challenging concept for many. Nevertheless, there is still the potential for the plan to gain some traction among the more sophisticated investors who are more open to alternative and new types of gold investment. This segment represents a much smaller portion of India's gold market and in a nation that has a strong cultural link to the physical metal, this type of savings plan will likely encounter much resistance.
To say this plan will encounter resistance is probably an understatement. Indians in particular understand the value of gold and silver and tend to keep their valuable investments close to them by wearing them on their persons.
Indians, like Asian populations, have long experience with governments and devaluations. The current cycle probably looks no different to many with cultures that have experienced previous monetary disasters.
And it IS a disaster of sorts. Of course, we have our suspicions it remains a kind of directed history. The current fiat depression is MEANT to be, created by a power elite that wants a broad-based financial catastrophe. Out of such a situation may come suggestions for a global currency, and perhaps its implementation.
Conclusion: In the meantime, we would tend to believe that gold and silver have a long ways to travel. The end of this cycle is by no means in sight.
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Posted by Danny B on 11/27/12 11:30 PM
This thread is a bit old but, I have some relevant news. We all know that bankers tried very hard to get rid of gold as a monetary metal. Here is an excellent article by Antal Fekete detailing the history of banker's efforts to get rid of silver as a monetary metal.
Click to view link
Here is an article detailing how custody arrangements have been weakened for people who hold metal in ETFs.
Click to view link
Another interesting development is from CME, one of the larger bullion banks. They have declared Force Majeure and discontinued bullion deliveries from their warehouse. They blame it on the hurricane a month ago.
Click to view link
"The force majeure will remain in effect until further notice from the exchange, the CME said. The delivery period for CME's December-delivery precious metals futures begins on Friday."
Why can't they just run a forklift into their bullion room? They have been delivering gold for the previous month. Why cancel delivery a couple of days before delivery day? I know what Jim Willie would say. He would say that they got caught naked.
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Posted by Danny B on 11/21/12 10:33 PM
Geitner wants to get rid of the debt ceiling. Barisheff says that he makes sense because he wants to do unlimited printing.
Click to view link
He mentions that gold would double.
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Posted by dave jr on 11/21/12 09:15 AM
aff,
spending vs saving functions of currency.
I do not see how the two can be seperated and not lead to disaster. Either a currency has value or it does not. Outside of everyday consumption, if a currency is apprieciating, people tend to save it. Likewise, if a currency is depreciating people tend to spend it, and these tendancies have a stabilizing effect. How can a currency be spendable but not savable or vise-versa? It would take a very draconian act to seperate the two and people would soon seek an alternative.
Here's a question. Is investing an act of spending or saving or both?
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Posted by Abu Aardvark on 11/21/12 06:22 AM
Bloomberg, Nov 20, 2012:
"Soros Buying Gold as Record Prices Seen on Stimulus (... ) Gold's 12-year rally, the longest in at least nine decades, is poised to continue in 2013 as central bank stimulus spurs investors from John Paulson to George Soros to accumulate the highest combined bullion holdings ever."
Click to view link
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Posted by Danny B on 11/20/12 11:09 PM
@aff,
do not despair. FOFOA is brilliant. The walk along the gold trail is a long one. Another never said that these things would come to pass in the near future.
Everyone sees the coming collapse of the bond market.
Click to view link
A very important nugget to take away from previous writings of FOFOA is; FDR confiscated gold and THEN repriced it. The price of gold floats today so there is nothing to gain by confiscation. NOW, it's become self-defeating. If GOV wants gold, it can just print the money but, this drives gold up.
This excellent article claims that Nixon closed the gold window because America was losing gold at the rate of 100 tons a day.
Click to view link
Bretton Woods didn't come about because bankers wanted a limit on their profits. It came about because they recognized that limitless currency creation INVARIABLY crashes.
ALL false money is credit. All credit is essentially information. When you come in for a loan, the bank doesn't print up a bushel of money. The bank transmits to sellers that you will create wealth in the future commensurate with your debts.
The bank passes judgment on your wealth-creating abilities AND your character.
This is absolutely CRITICAL to understand. Capital never willingly self-diminishes.
Capital always seeks morality in commerce.
Douglas Mac Arthur said that economic decline always follows moral decline.
A poll of investment bankers showed that they felt that they had to cheat to succeed.
It may be true in today's culture.
Click to view link
There is $ 1.5 trillion in cash sitting on the sidelines. Blankfein says that he wants it. Lacking faith in an immoral system, capital has withdrawn. Gold rarely goes up or down. Gold is a barometer for confidence in fiat and the general economy.
GOV capital controls are spring up everywhere. Capital flees in horror.
Bill Bonner, Addison Wiggin, and Porter Stansbury are hard at work showing capital where to flee.
Click to view link
Barter is the most honest manner of exchange. Gold is the most desired tangible facilitator. You can bet your last farthing that the parasites don't want honesty entering the equation.
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Posted by aff on 11/20/12 05:51 PM
There have been some very acitve members of forums I read recently trying to heavily promote 'freegold'. The concept is something along the lines of gold being the principle store of wealth but not used for day to day transactions which would still belong to fiat.You'd need to read up a fair bit to get the proper gist of it. I am very curious if DailyBell has opion on this.
My own thoughts are a bit divided. Initially I thought it sounded really good but now I am suspicious it is a banker ploy to retain control of money after any spectacular revaluation of precious metals. I also dislike how they reserve special status for gold and seem to play down others such as silver as an obvious example.
On the other hand they do seem to propose ideas that on the face of it might reign in the bankers for example claims that monetary policies will no longer affect peoples savings.
Would love to hear the thoughts of DailyBell and other enlightened commenters
Reply from The Daily Bell
We are with Rothbard on this. Money is in demand as a medium of exchange. Certainly, nobody ever sat down and "invented" money with the idea of bifurcating it (savings versus spending). It is fashionable for sophists to propose such ideas - but such ideas likely have ulterior motives.
"Money is a commodity ... It differs from other commodities in being demanded mainly as a medium of exchange. - Murray Rothbard
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Posted by clark on 11/20/12 03:58 PM
UBS: "The target here is households who typically pool savings into physical gold."
Who does that? Especially the pooling part. Villagers? Is it really a typical thing?
UBS: "GAP gold futures would be purchased which can be later sold or exchanged for coins/bars ... The idea that gold will be held in paper form... "
Is that, kind of, sort of, a limited state imposed gold standard?
How would a state 'benefit' from an attempt to impose a gold price (price controls) soon thereafter?
Some beginning answers I found: Are Capital Controls Coming to America?
Click to view link
Are they placing any similar controls on silver?
I read a financial article awhile back, as I recall: the author said there were a couple of countries (in North Africa and South East Europe?) with languages where the word silver was the same as the word money.
I thought that was impressive. After all, words and their meanings are important.
He gave no link, so I have only his word it's true.
If so, that seems to carry a bit more weight than the words of one man, J.P. Morgan Chase saying, only gold is money.
I wonder how many other languages are like that?
What does the ordinary Indian think of silver compared to gold?
DB: "The end of this cycle is by no means in sight."
It will outlive many. ?
Does that mean real estate will not fall in price, generally, until the end of this cycle?
Are the prices of gold and realestate bound by fiat money printing, i.e. the prices rise until the printing stops? Or, the prices continue to rise for awhile after the printing stops as a sea of money from outside the country comes rushing back? Keyword: awhile.
A take away from seeing a photo of 700,000(?) Argentinians protesting, it takes Huge and lasting price increases without corresponding wage gains to get most People to notice they are being ripped off. I wonder if that's just a Western thing?
The DB article about the Indians makes it seem that way.
Reply from The Daily Bell
"I wonder if that's just a Western thing?"
No.
