19 May 2010

How to identify a gold bubble

There is no bubble in gold. Watch the first past of this news story on gold buying in China. When you see similar crowds in Western countries desperate to hand over paper banknotes for gold then you'll know we are in a bubble.

h/t to Sharelynx


  1. No.. I'd say that looks more like a clip of China preparing to transition to something other than the USD as a stable backing for their currency...

    That random thought aside, how could a Australia actually make a transition to a gold standard from where we are now?

  2. Australia transition to a gold standard? No.

    If Federal Govt keeps on with "super taxing" miners, Western Australia will split from the federation and will transition to a gold standard. We have the gold, a gold coin mint, and are net exporters.

  3. Bron, have you heard the 'debate' on financialsense.com between Bill Murphy (GATA) & Jeffery Christian?

    I don't take everything GATA says as gospel but I have to say Christian puts up a very weak argument. If this guy really is a big wheel in the banking business, as he says he is, it doesn't say much the banking business.

  4. While what you suggest is a possibility, neither event (secession, establishment of a gold standard) is anything more than that even if the super tax goes ahead.

    That said, I wasn't so much asking about the likelihood of it occurring as the process required, and potentially the consequences of doing so in a world of fiat currencies.

    I'd expect that any foreign purchase of currency would have to be paid for in gold for it to work.

    And even if WA went down that path, would they not first need to work towards a far wider distribution of gold currency in the population for it to transition smoothly?

  5. Justin, yes I listened to the whole thing and it wasn't much of a debate. I think GATA lost on a few of their claims and Christian really wasn't questioned about London unallocated being fractional and how much and was that a systematic risk. The 100:1 was a smokescreen really as we all know there are many more derviaties and long and short margin positions on gold, how fractional london unallocated is is a far more important issue.

  6. Chris,

    I asked http://www.goldstandardinstitute.com/and their comment was:

    "It could not be a one size plan fits all. A transition period, or a collapse followed by immediate implementation would involve separate approaches. The Gold Standard Institute is working on an outline for the second scenario as we assume that this will be the most likely situation. However, even that would have to take into account the individual situation of the area."

    My own comment would be that the first problem is the whole fractional/debt based nature of money. Probably the first step is to remove any guarantee, implied or explict, on bank deposits and inform the population that they are on their own and that those deposits are backed by debt and thus they need to assess the liquidity of the bank.

    This would probably result in a run towards cash, either physical or bank deposits 1:1 backed with cash but so be it. The game of maturity transformation http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html needs to be explicitly understood by depositors.

    Once this has played out you then have the issue of converting or backing the real cash money (not debt money) with gold. Note that current Aussie cash stands at $46 billion, so a fair issue just with that, although it does equal approx 1000t and Australia mines 250t per year, so maybe doable.

    Certainly Government would need to sneaky around and sell all foreign reserves and buy gold with it before a public statement about gold standard.

    Just my uncombed thoughts at this time on it.

  7. Bron,

    Just out of interest, is the Perth Mint experiencing any marked increase in demand for retail product?

  8. Thanks Bron, will have a look. So in terms of a before tshtf approach, the government would need to gradually require a reduction in the coverage rate so that coverage was brought towards 1:1 over a period of time.

    Given our current gold reserves (80t according to wp, no idea on reliability of that) we'd be looking at purchasing most of our own gold over a period of ~ 4 years, or trading for it.

    So.. a four year plan towards a fully covered, gold backed currency? Even if things went wrong worldwide part way through, we'd be better placed because of the effort put in.

    Disturbing thought following - does that result in us getting invaded in 5 years time? Somewhat of a rhetorical question..

  9. costata - we have only seen strong spike in interest from Europe for obvious reasons, but while demand continues to be good allround, no real sudden increase in US or Australia. I track US coin premiums via ShareLynx and they are around 4.5% when during GFC they went to 8%.

    If the Government did make the decision to move to a gold standard or even more gold backing/reserves, then at the same time I would be advising them to drop the confiscation clause out of the RBA Banking Act and come out with a strong statement that we would not confiscate. At same time get Perth Mint Depository to target wealthy in Asia, thus turning ourselves into the Swiss of Asia. We become the wealth safe haven for the Asian elite and then are left alone. Maybe that is too idealistic of me. Anyway I stand ready to advise :)

  10. Bron,

    The analogy with Switzerland is not as farfetched as it sounds. Unfortunately I think Singapore has the same idea.

    Does our Govt have the imagination to drop the confiscation clause and promote true wealth creation? Mmmmm

    Re: Comment from Chris about Aus gold

    I have been told that when the RBA started selling Aus gold reserves in earnest there was a reference by a Treasury official to "gold in the ground" as a way to replenish the reserves if necessary.

    I don't think 100% backing would be necessary. IMO if we defied the IMF rules and let the miners pay their taxes and royalties in metal it would suffice over a few years.

    Bron, perhaps the WA Govt should vote with its feet and accept royalties in metal. I'd pay to see the expressions on some of the faces in Canberra.

    Come to think of it, that is not so silly when they own the Perth Mint and can monetise the reserves whenever they wish.

  11. I believe that quote from the RBA may have come from the announcement when they said they had sold 160t (80t left).

    I certainly believe that gold in the ground is a factor and probably is a fair reason, except that the mines only produce 5t a week. This may sound like a lot, but in a war situation that doesn't pay for a lot of imports. You also have the potential issue of "peak gold" and if Australia's gold production started to decline then the RBA may have to rethink its policy.

    It is an interesting idea to pay royalities in gold, problem is the WA Govt need cash to pay its bills, so it would just want to sell it off anyway. Interestingly, the WA Govt does get a bit extra from the miners, by way of Perth Mint's refining fees. In fact as we do all of Australia's gold the WA govt is making money off other state's miners, at least one way we get some back. Unfortunately refining fees are bugger all as the industry worldwide is so competitive so it is small $$ for the WA Govt.