05 September 2011

Eric, Catherine and Kid

I forgot to mention I'd left some comments/speculation to this excellent article that looks at the Sprott three months to get my silver story, which includes some graphics of what 600t of silver looks like.

I also liked this blog post by Catherine Austin Fitts, keeping things in perspective:

"Gold is a metal.

If everyone takes all their money out of operating enterprises and puts it in gold and pays people to watch their gold or dig up the earth to get more gold, the economy will stop.

The top guys bubbled real estate and used the money to buy up gold and silver cheap while imploding the emerging markets and forcing their way into big real estate and equity positions there. Now they will allow gold and silver to rise and shift their money back into real estate and land. The emerging markets will continue to rise. And of course there will be interim pumps and dumps along with the way. And technology, including of weaponry, is the wildcard. Our current economy is operating on 50-100 year old technology.

Of course, without law, that which can be stolen and protected rises in value. Operating enterprises require the rule of law or expensive private armies to retain value when times are lawless.

Hence, there is no one answer, no magic bullet. If there is a core, it is certainly not a metal. It is, rather, intelligence both human and divine.

“Happy is the man that findeth wisdom, and the man that getteth understanding. For the merchandise of it is better than the merchandise of silver, and the gain thereof than fine gold.”

Great economies are raised one healthy child at a time. Sound currency certainly helps."


Kid Dynamite's post on the Gallup finding that "Thirty-four percent of Americans say gold is the best long-term investment" is also worth a read along with Adrian Ash's take on it, where he notes "that the gold bubble comes far more in media coverage than in actual investment decisions to date".

18 comments:

Kid Dynamite said...

Bron, the most astute reply I've seen to the Gallup poll was from a comment at MetalAugmentor:

"“It seems to me that all the survey accomplished was to identify what type of person is familiar with what investment category has been successful in the recent past”"

http://www.metalaugmentor.com/reviews/the-scariest-gold-data-point-i-have-seen/#comments

Justin said...

"If everyone takes all their money out of operating enterprises and puts it in gold and pays people to watch their gold or dig up the earth to get more gold, the economy will stop."

C'mon Bron, you know enough to know that this is a load of shite. Paying people, presumably in gold, to dig up gold is not stopping the economy, the miners require goods from other producers to dig. They will pay the other producers in gold.

Since when have you thought anything out of GATA was accurate?

Bron said...

Justin,

I think you're misinterpreting her. She is not saying that mining gold is bad. She is saying that if ALL savings move into gold away from other productive businesses, then the economy will stop.

The same applies if those savings are pulled out of productive businesses and entreprenureship and held as cash.

MikeB said...

Hi Bron,

Let me pull this thread a bit more. The quote about the economy stopping if everyone puts their money into gold hints at something possibly being unpatriotic/selfish with trying to protect yourself against losses due to dollar devaluation. I know that is not what she said but it popped into my mind and I imagine I'm not the only one. I also imagine such notions were applied to gold "hoarders" in the 30's?

How does one resolve the need to protect oneself by holding gold yet not contribute to "stopping" the economy?

I feel it is unfair for one to be put in this place, and wonder if there is a system that can be instituted where one would not have to make such a choice?

intuitivereason said...

Mike - part of the responsibility that comes with holding gold is that you are taking the capacity of the government to reduce the consequences of poor debt decisions out of their hands. In doing so, you take it on your own.

With privilege comes responsibility. If all people who hold gold do is look after themselves, then they will be very easily drawn as hoarders.

B said...

That's a pretty quote but Justin may be on to something. Read this:

http://solari.com/articles/Precious_Metals_Puzzle_Palace/

Bron said...

"How does one resolve the need to protect oneself by holding gold yet not contribute to "stopping" the economy?"

You can't and you shouldn't. The government has stuffed around with market signals by lowering interest rates creating a debt fueled boom. This has to be paid back one way or another. Those with net cash/capital realise this paying back means consumption contracts, means depression, means no business opportunities. So all they can do is park their capital. Gold is the only place it can go and "hide" until this crap is worked out.

That hiding, or hoarding, may well be painted as bad, but is just a reflection of how bad the economy is/will be. I don't think we have any other choice.

Catherine's words are just another way of saying that we shouldn't wish for a high gold price because it means all your other investments have declined. Just as no one wishes to cash in their life insurance, so no one should be hoping for high gold prices as gold is just "economy is big time stuffed" insurance.

Adrian said...

I liked this from Catherine "When you ship all your machinery abroad, it is a matter of time until your gold follows…."

How true is that...

MikeB said...

Intuitivereason,

So can you elaborate on what exactly is this responsibility?

Bron pointed out that if everyone hoards cash, that also stops the economy. So do cash hoarders also get imposed upon them this special "responsibility"?

MikeB said...

Bron said "You can't and you shouldn't."

This to me implies that the tendency to protect oneself with gold in the face of dollar devaluation is a natural one and probably inevitable.

I'm a dynamic systems and controls guy and the current financial structure seems like a inherently unstable dynamic system. My question is whether there is an alternative system that can be created that is more stable.

My analogy would be that of balancing a broom upright on the palm of your hand. Lets say when the broom is tilted ot the right, the economy is growing and when tilted he the left it is shrinking. Of course vertical equals zero growth.

So a government that wants steady growth would have the broom tilted to the right but only by a limited amount. Anyone who has ever balanced a boom on their hand knows this requires running to the right at just the right speed. Fast enough so the broom does not tilt even further to the right and slow enough so the broom doesn't go back to being vertical.

This is very difficult to do and because one can only run so fast, there is an angle which represents a "tipping point" beyond which you can't recover.

It seems the government let the broom tip too far resulting in an economic boom. There are hard constraints which prevent a boom from continuing indefinitely which I liken to something suddenly smacking the broom hard to the left.

This abruptly uprights the boom and actually angles it to the left. If the broom balancer does nothing broom angle will increasingly fall to the left torwards an "economic bust". This is inherently unstable because the more the broom falls to the left away from vertical the faster it falls!

To me this is like a bank run or a tendency to hoard gold for protection. The more people lose confidence the faster people run to withdraw their cash or put it into safe havens like gold and as a result the faster the confidence is lost. this behaviour defines the unstable dynamics of the system

Right now the government is running to the left trying to get under the broom in order to keep it from falling further. The angle is probably close to the "tipping point". Remember, the broom balancer can only run so fast and only for so long.

So even though the economy doesn't currently look like a 1930's depression (i.e. the angle of the broom isn't too far to the left, the government (fed+white house + congress+treasury) is running really fast just to keep it there, and probably doesn't have enough extra speed to upright the broom, nor enough stamina to keep it at the current left leaning angle.

So this leads us to the question of inevitability. It would seem eventually the broom balancer will get tired, the broom will fall further to the left past the tipping point, where there is nothing more the balancer can do but watch the broom accelerate it's fall to the left as he huffs and puffs unable to get back under it.

So if this "economic bust/currency devaluation" is indeed inevitable, and the tendency to gold hoarding is part of the natural unstable dynamics that now can't be counteracted by the government, then it would seem logical to try and protect oneself until the hard stop at the other end of the spectrum is hit.

I don't know very much about the hard stop at the left end of the spectrum but I would suspect it would be the equivalent of something suddenly knocking the broom to the right and starting economic growth.

Sorry for the long post. What do you think of my analogy and can you elaborate on:

1.) What are the dynamics that cause the economy to bounce off the bottom (i.e. when the broom hits the left hard stop) after gold hoarding has maxed out.

2.) Do you believe there is system that can be put in place that is more stable and keeps the broom from reaching the tipping point on either side of the vertical?

MikeB said...

Just thought of an addition to my broom balancing analogy.

When the government increases spending to boost the economy, it is like the broom balancer eating a candy bar which gives them a short boost of energy. This allows them to run a little bit faster to try and get back under the broom but they have to pay a price, increased debt. This increased debt is like hanging some extra weight at the top of an already left leaning broom.

What this means from a physics standpoint is that the balancer has to run faster to keep the broom at the same left leaning angle. So if the extra burst of energy is not big enough to upright the broom and allow the balancer to slow his run to the left, the sugar rush will run out but the extra weight at the top will still be there. The presence os this extra weight reperesents an increased force trying to accelerate the broom's fall to the left.

Similarly, efforts like QE are the equivalent to eating a different kind of candy bar. The sugar rush is the same and gives the extra energy boost but the price to be paid is further devaluing of the dollar and an increased incentive for people to convert to gold and reduce the money that would be available for productive means and economic growth. This economic depressing effect is also like adding weight at the top of the left leaning broom.

mortymer said...

@MIkeB:
http://www.bis.org/publ/othp16.htm

star-gazer said...

Re: Catherine Austin Fitts "How fast or slow the rise depends on politics as does the ultimate top. It is likely to end or flatten off when a new global currency system is implemented."

Right on! Politics, not investment 'fundamentals' or 'technical factors', ultimately drives the value (purchasing power) of gold. The big question is: what is the ultimate top? I suspect MUCH, MUCH higher.

Bron said...

I think it is a good analogy, Mike B.

Re Q1, I think this happens because there are always entrepreneurs who sense the bottom and thus see future opportunities or currently cheap assets. It is their actions that start the recovery, and at which point the gold price will start to decline.

Re Q2, I dont't think there is a system (although there may be better ones than the current) as ultimately you can't control for over confidence or over negativity. This human emotion element will result in some boom/bust cycle - I think the idea is to have a system that doesn't help to encourage either of these and hopefully act as a counterweight.

Is that a traditional gold standard, an Austrian gold standard, free banking or Freegold? I'm not resolved on that yet, but certainly the current system I think has proven it doesn't work.

Anonymous said...

Hello Bron,

Do you see any negatives with regard to the paper leverage against physical? On a recent interview on Financialsense, Jeff Christian says this is because gold & silver are "financial assets", and this is just the nature of these markets.

What is your view with regards to this leveraged paper trading?? Do you believe that JPMorgans silver shorts might be able to affect the silver price??

Does the degree of leverage matter? According to Jeff Christian, it can be 100 to 1. But would it really make much difference if it was a million to one. Who cares what the leverage is, because you can always settle in cash, in lieu of physical.

Thanks.

Bron said...

Jeff's reference to "financial assets" is just saying that gold is fractionalised. He seems to me to be more sanguine about this than I am.

At some point holders of paper will become less comfortable with the stablity of the system and want non-fractional metal, be that personal possession of physical or true allocated. Either way that will have a big effect on the gold price as leverage works both ways.

Anyone who can leverage has more market power so has more ability to influence price.

The 100:1 comment by Jeff Christian was only in reference to trading volumes, not actual financial leverage, see here for the actual leverage http://goldchat.blogspot.com/2010/04/london-unallocated-fractional-fubar-or.html

Anonymous said...

Hello Bron,

Thanks for your reply of 11 Sept. In the comments section of the "unallocated fractional" article, you say, "Thanks costata. It troubles me as well. The Mint has been under no illusions about London unallocated as the legals say we are an unsecured creditor and the bullion banks would never make any statement one way or another about what they did with it. We have operated accordingly."

Could you please elaborate on your comment. It is my understanding that all bullion at the Perth Mint is 100% backed - be it allocated or unallocated. However, I did hear a comment from a big bullion dealer who told me that he thought that some of the Perth Mint silver is stored in London. He left his comment at that, and said no more. Therefore, I deduce that if for some reason London could not deliver silver to the Perth Mint, then all holders (ie: myself) of unallocated silver, could end up holding not silver, but paper money??

I didn't concern myself with this, until now, where I read in your comments that "you are troubled" with regards to London.

Please advise. Thanking you.

Bron said...

Just as it would be impossible for a goldbug who would like to keep all their wealth in gold to live in modern society without a cash bank account, so it is impossible for us to operate in the gold market without a London metals account.

In respect of that, the comment "We have operated accordingly" should be read as "we operate prudently".

As to bullion banks not delivering to us, that could happen, but then we would acquire the physical on the market and take the hit if there was a difference between cash settled and physical price. This is the risk we manage "prudently".

However, in reality it is usually the other way, as the bullion banks are the ones coming to us for supply of gold. If perchance we needed silver and they wouldn't give it to us, then they don't get any gold. My personal guess is if they are in that much trouble they are going to stiff someone else before closing the door on supplier of gold, which they would desperately need in such a situation.

Remember the saying, he who has the gold makes the rules.