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Gold price correction to $1,115 Dec. 11
Saturday, December 12th, 2009 | Economics | Permalink | No Comments |
Gold prices recently dropped roughly $100/ounce. Though dramatic, it reflects a return to prices just one month earlier. No worries.
I’ve sold about a fourth of my holdings in case of a further surge in the dollar. If there’s another downturn in gold I can get in at a lower price. (All of this is inside a 401K retirement account, so there are no tax consequences for short term buying and selling.) I’m keeping the other three-fourths core position because I expect gold to hit $2-3000 by 2012.
Here’s Eric Janzen’s take on the recent dip:
If I sell gold today, what shall I buy with the cash that is not as expensive or even more expensive than gold?
In 1980, when gold peaked at $3,000 in 2009 dollars, investors had the option to sell gold and buy a 30-year Treasury bond that was so cheap they’d earn 15% interest until the year 2010. Today, when gold is supposedly a “bubble,” a 30-year bond earns only 4.3%, maturing in 2039. Is that cheap?
What’s cheap? Stocks? Corporate bonds? Real estate? Emerging markets? Commodities? Oil?
In the Asylum Market, all asset classes are correlated to government policy to dish liquidity to minimize the macro-economic impact of the latest crashing asset bubble and halt the process of asset price deflation and default.
Barrick’s finishes paying out its gold hedges
Wednesday, December 2nd, 2009 | Blogging, E-commerce, Economics | Permalink | No Comments |
Ed Steers Gold and Silver Daily:
The big, and just about the only story in the gold world yesterday, was the news that the Darth Vader of gold companies, Barrick Gold, after 20 years of screwing its shareholders in particular… and the entire gold industry in general… has finally and at last [?] paid out the balance of its hedge book. To tell you the truth, you can never be sure if these guys are telling you the truth or not. I don’t trust them as far as I can throw them. If AngloGold Ashanti does the same thing in the next little while, the world’s gold hedge book will fall to only a few million ounces… which is basically nothing at all. Hedging is dead, dead, dead!!! Anyway, Barrick’s stock price was up a bunch yesterday, so the market certainly liked the news. Here’s the Reuters story about it headlined “Barrick closes hedge book early, stock soars”… and the link is here.
And now, dear reader, as I’ve mentioned before about Barrick and AngloGold Ashanti, the reason that they are both in such a hurry to close their hedge books is because the gold price is heading north… big time… and they already know that. JPMorgan is Barrick’s bullion bank… and JPMorgan [as the biggest gold and silver short on the planet] would know well in advance that the price management scheme is about to end and would certainly want Barrick out of harm’s way before it did.
There’s widespread belief in the goldbug community of gold price suppression, most notably by heavy shorting. Maybe so, maybe no, but the market is so bullish now that any attempts at suppression may be doomed to failure, potentially launching a dramatic upswing in gold prices. We’ll see.
There’s always a chance of a downward correction in gold prices, but it’s limited. The reason I’m in gold is that the upside seems to me to be much, much greater than the downside.
Previously
North Korea revalues currency at 100:1
Wednesday, December 2nd, 2009 | Economics | Permalink | No Comments |
Washington Post - North Korea revalues currency, destroying personal savings:
“I worked like a dog for two months for the winter, but the money became useless paper overnight,” a resident of Sinuiju, a city that borders China, was quoted as saying on the Web site of Good Friends, a South Korea-based aid organization with informants in the North.
In a long view of history every fiat currency has come to an end. In the short term you always need savings in fiat currency, but it’s a lousy way to store wealth in the long term. Even without something as dramatic as a currency event your fiat money is eroded every year by inflation. Inflation goes hand-in-hand with paper money that can be printed at will.
Gold hits another all-time nominal high of $1,213 Dec. 2
Wednesday, December 2nd, 2009 | Economics | Permalink | No Comments |
CNN - Gold ends at record high above $1,200.
Gold is hitting record highs not just in U.S. dollars, but also in Swiss Francs, Euros, and Pounds.
Previously
Comex settling gold contracts with cash instead of gold
Tuesday, December 1st, 2009 | Economics | Permalink | No Comments |
Jesse’s Cafe Americain - Gold, Comex and the Exchange for Physical:
Some months ago a chap described changes in the comex rules for futures contract deliveries. Therein it was described that the EFP, exchange for physical, rules were amended to allow for delivery of GLD shares in lieu of bullion.
Well take a look at something new, at least for me, in Monday’s comex preliminary volume and open interest report. On page 3 of the attachment, notice that in addition to futures contracts listed under the EFP category, a new category is listed: “Delivery Cash Settled” = 2866 december gold contracts. Just so happens 2866 was exactly the number of delivery notices issued on FND as reported in the Nov 27 vol and op int report.
Conclusion: guess you can no longer get bullion via using comex contracts. This apparently is the next step in the evolution of gold trading.
Previous signs of constricted gold supply:
- U.S. Mint suspends Gold Eagle coin sales due to lack of gold blanks
- Gold hits another all time nominal high of $1,059 Oct. 7
- More signs of constricted supply in physical gold
Check that last link. It was in July - just five months ago - that Comex first failed to deliver physical gold to settle a gold futures contract. Instead, shares of the GLD ETF were used for settlement. Now Comex seems to be delivering little to no gold, using cash and ETFs instead. If a commodities trading market can’t deliver actual commodities then it’s just a gambling parlor with no connection to real world commodities that you can reach out and touch.
If this keeps up the value of physical metal - as opposed to paper promises of gold - could skyrocket. More on the difference between paper and physical markets here (second one happens to be a repeat of the above):
What the 1979-80 gold bubble looked like
Friday, November 27th, 2009 | Economics | Permalink | No Comments |
From iTulip:
People have no idea what a bubble is like. I lived through the gold bubble of 1979-1980.
- Gold was what people talked about at parties.
- Gold was quoted everywhere.
- Ordinary people knew about gold and silver prices.
- People who had gold or silver to sell would wait weeks for an assay because the smelters were backed up unbelievably. BTW, if you wanted to sell a bar, you were out of luck because it took too long to get the assay done and nobody wanted to bother.
- Rare coins, jewelry, all was melted down at the smelters, without discrimination. This was a mad panic to buy gold and silver.
- This is NOTHING like a bubble. Sure there is more interest in gold because it has gone up. Sentiment FOLLOWS price.
And from another commenter:
there are 2 all news a.m. stations in nyc. during the late ’70s each one announced the price of gold every 30 minutes [wcbs at 25 and 55 after the hour, wins at 26 and 56 after the hour] as part of their regular business segments. i’ll worry it’s a bubble when that starts happening again.
Previously - How will you know gold is peaking?
U.S. Mint suspends Gold Eagle coin sales due to lack of gold blanks
Thursday, November 26th, 2009 | Economics | Permalink | No Comments |
Reuters via GATA - No gold for coins again; will collectors settle for GLD shares?:
NEW YORK — The U.S. Mint said on Wednesday it will suspend sales of the popular American Eagle 1-ounce bullion coins as rising demand depleted its inventory.
“The United States Mint has depleted its current inventory of 2009 American Eagle 1-ounce gold bullion coins due to the continued strong demand for this product,” the Mint told its authorized dealers in a memorandum on Wednesday.
November sales to date were at 124,000 ounces, higher than the 115,500 ounces sold in each month of September and October, the Mint said. The Mint said it expects to resume sales in early December.
Increasing worries about inflation, a falling U.S. dollar and geopolitical tensions are prompting individual investors to take physical possession of gold coins and other bullion products due to the metal’s appeal as a safe haven in financial and political crises. Gold hit a record high at just under $1,190 an ounce on Wednesday due to a broadly lower dollar and renewed interest from central banks. Year to date, the metal has risen more than 35 percent.
How will you know gold is peaking?
Tuesday, November 24th, 2009 | Economics | Permalink | 1 Comment |
MoneyWeek - Three ways to tell when gold’s bull market is over.
Hint: we’re not even close yet. But one day it will be time to sell. That article has some insights on possible sell signals.
Incidentally, seeing people on TV hawking gold isn’t a sign of the peak. It’s simply a sign of the bull market, which I’m convinced has years to play out.
Likewise, seeing people offering to buy gold isn’t a sign of a peak. In the peak, prices will be ready to come down, so the buyers will get skittish or even start closing up shop. It’s only because gold is on a tear that so many people are willing to buy - even with a small price drop they can’t lose money at the margins they’re getting.
Most people are still in denial about buying gold as an investment. “Gold is in a bubble.” “Gold is for survivalists who think the world is about to end (and the related ‘you can’t eat gold’).” “The government is just going to confiscate gold.”
Others are negotiating. “I’ll buy it when it dips back down.” People have been saying that since gold was $800. Now it’s $1166. Like anything else, gold won’t go up in a straight line to the peak. There will be corrections. But there are plenty of people on the sidelines ready to buy those dips, including foreign central banks. The central banks have turned from selling gold to accumulating it.
The reason gold will keep going up is that the U.S. government and other major governments continue to print, borrow, and spend money they don’t have. The debasement of currency now and the further debasement that will have to occur to offset national debts are why paper money will decline and gold will rise.
Word of the Day: Diamagnetism (Metals)
Tuesday, November 17th, 2009 | Science, Word of the Day | Permalink | No Comments |
Via Wikipedia.
Levitating pyrolytic carbon
Diamagnetism is the property of an object which causes it to create a magnetic field in opposition of an externally applied magnetic field, thus causing a repulsive effect. Specifically, an external magnetic field alters the orbital velocity of electrons around their nuclei, thus changing the magnetic dipole moment in the direction opposing the external field. Diamagnets are materials with a magnetic permeability less than μ0 (a relative permeability less than 1).
Consequently, diamagnetism is a form of magnetism that is only exhibited by a substance in the presence of an externally applied magnetic field. It is generally quite a weak effect in most materials, although superconductors exhibit a strong effect.
Diamagnetic materials cause lines of magnetic flux to curve away from the material, and superconductors can exclude them completely (except for a very thin layer at the surface).
In 1778 S. J. Bergman was the first individual to observe that bismuth and antimony were repelled by magnetic fields. However, the term “diamagnetism” was coined by Michael Faraday in September 1845, when he realized that all materials in nature possessed some form of diamagnetic response to an applied magnetic field.
A thin slice of pyrolytic graphite, which is an unusually strong diamagnetic material, can be stably floated in a magnetic field, such as that from rare earth permanent magnets. This can be done with all components at room temperature, making a visually effective demonstration of diamagnetism.
The Radboud University Nijmegen, the Netherlands, has conducted experiments where water and other substances were successfully levitated. Most spectacularly, a live frog (see figure) was levitated.[3]
See also ferromagnetism and paramagnetism.
Previous WOTD - Veblen Goods and Giffen Goods (Economics)
Gold hits another all-time nominal high of $1,088 Nov. 3
Tuesday, November 3rd, 2009 | Economics | Permalink | No Comments |
Bloomberg - Oil Rises as Gold Climbs to Record on Bank’s Bullion Purchase:
Gold futures for December delivery rose $30.90, or 2.9 percent, to $1,084.90 an ounce on the Comex division of the New York Mercantile Exchange, a record settlement price. The contract touched $1,088.50, the all-time high intraday price. The previous record was $1,072 an ounce, set on Oct. 14.
Previously - Gold hits another all time nominal high of $1,059 Oct. 7
Inflation or deflation? Noriel Roubini says “deflation now, but maybe big inflation in a few years”
Wednesday, October 28th, 2009 | Economics | Permalink | No Comments |
Index Universe - Nouriel Roubini: Big Crash Coming:
IU.com: When you say “stay away from risky assets,” many people hear that and think, “Aha, gold!”
Roubini: I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
Inflation or deflation? Terry Coxon says “Inflation, but later”
Saturday, October 24th, 2009 | Economics | Permalink | 1 Comment |
Zero Hedge - Guest Post: When Will Inflation Really Hit Us?:
Previously - Inflation or deflation? The man with the dollar printing press says “inflation”
Inflation or deflation? How about hyperinflation
Monday, October 19th, 2009 | Economics | Permalink | No Comments |
W.C. Varones quoting John Mauldin:
“There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.
“According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively.
Got gold?
Previously - Inflation or deflation? Shadowstats says “inflation”
Barrick’s issues more stock to pay off gold hedges
Wednesday, October 14th, 2009 | Economics | Permalink | No Comments |
Barrick’s is the world’s largest mining company. They seemingly went from offering a gold hedge to hedge against lower gold prices to massively shorting the gold market. With gold on a huge upswing they had to sell stock last month to close some of their short positions so they weren’t wiped out. With gold rising, they’re forced to sell even more stock.
The Golden Truth - American Barrick Issues $1.25 Billion In Debt To Further Reduce Gold Hedge
With the ink barely dry on its $4 billion stock deal, American Barrick (ABX) announced a surprise debt deal to raise another $1.25 billion in order to further reduce its gold hedge book. The stock deal was used to extinguish Barrick’s $3 billion fixed-price hedges plus some of its floating-price hedge exposure, incurring 10% shareholder equity dilution and a $5.6 billion charge to earnings.
I hate to burst the egos of gold market analytic geniuses like Jon Nadler, Jeffrey Christian and Robert Prechter (note: sarcasm intended) - all three of whom believe the gold market has topped and likely to crash - but as a betting man I like the odds of placing my chips on the view of the people running the world’s largest gold mining company rather than three stooges who provide useless investment advice and don’t invest a nickel of their own money in the markets.
Inflation or deflation? No deflation since U.S. left gold standard in 1971
Friday, October 9th, 2009 | Economics | Permalink | 6 Comments |
Areas of the chart in purple are inflation. Areas in red are deflation.
In 1971 Richard Nixon closed the gold window. U.S. dollars could no longer be converted to gold. There was no longer a relationship between dollars and gold. The U.S. was off the gold standard. Since then we’ve never experienced a sustained deflation.
That’s been the consistent argument of iTulip founder Eric Janszen. See his article, The truth about deflation:
There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era where deflations exceeded 30% in some periods. Since then, no more 30% deflations. Rarely, for short periods when deflation has happened since Bretton Woods deflation has only once exceeded 10% in one month and has generally been limited to less than 5%.
Take-away: No gold standard, no deflation spirals. Ever again.
I tend to agree. It seems like once you can print worthless toilet paper money to your heart’s content there’s no reason to have deflation.
Gold hits another all time nominal high of $1,059 Oct. 7
Friday, October 9th, 2009 | Economics | Permalink | No Comments |
MoneyWeek - Gold hits an all-time high - yet no one’s interested:
I remain among my ‘cleverer’ friends (some of them owned Northern Rock) the eccentric who bought gold. I am still waiting for the day when they come to me asking for mining tips. Long may it be before they do so.
In any case, it’s important to enjoy the moment – we often forget to. But, come the morning after, as our wizened man from the 1970s will tell you, one would advise some caution. Gold has made a daily close at all-time highs, but we need to see a couple of weekly closes above this level to confirm things.
As I’ve often said, I still expect gold to go a lot higher in the longer term – at the moment I expect $1,400 by spring 2010. But it won’t get there in a straight line, and for now, the positions taken by the futures traders on the Comex suggest a top. If stock markets do turn down, they will take gold and gold stocks with them.
I originally said I’d buy gold after it went down a bit. Then I relented and bought my first gold ETFs in my 401K retirement account just below $800/ounce. I bought more in the $800s, then more in the $900s. I’ve picked up a bit more at the over-$1,000 price based on bullish trends. The upside potential seems much greater than the downside risk.
I’ve diversified my purchases into different ETFs - GLD, GTU, CEF, and lately all of it in SGOL (Swedish Gold ETF, which promises 1/10 ounce physical gold held in reserve for every share). GTU has performed the worst of the bunch, so I’ve reduced my holdings in it to almost nothing.
Note that gold investments are taxed at the higher collectible tax rate rather than the normal investment tax rate. I do almost all of my investing through my tax-protected 401K (more on that later), so it doesn’t matter to me, but it might matter to you. Consult a financial adviser or CPA for tax implications.
At this point silver may increase even more rapidly than gold. It has roughly doubled in less than a year. The CEF ETF includes some silver exposure. I also hold the SLV and SIVR ETFs. With ETFs diversification is good (see below).
Don’t forget energy stocks. There’s currency, there’s precious metals, and there’s oil and other energy equivalents. The last two are real. Everything else that’s based on paper and promises are potentially phony.
Speaking of which, for warnings on the SLV ETF see here. For very serious warnings on leveraged (AKA Ultra) and inverse ETFs see here. ETFs aren’t completely real - they’re based on markets and paper, too. For precious metals it’s always best to own the real stuff to eliminate counterparty risk. As always, my amateur investment advice is worth exactly what you paid for it. Caveat non-emptor.
Previously - Gold hit an all time nominal high ($1,008) on Sept. 30
China moves to become a global currency
Thursday, October 8th, 2009 | Economics | Permalink | No Comments |
Telegraph - China calls time on dollar hegemony
You can date the end of dollar hegemony from China’s decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.
Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.
“It’s the tolling of the bell,” said Michael Power from Investec Asset Management. “We are only beginning to grasp the enormity and historical significance of what has happened.”
Gold hit an all time nominal high on Sept. 30
Thursday, October 1st, 2009 | Economics | Permalink | No Comments |
Goldmoney: “An important event occurred yesterday, September 30th. Though it has received little attention, it warrants mention, and for this reason, I now highlight it. Yesterday gold closed on the Comex in New York at $1,008.00. It was gold’s highest ever monthly close.”
That was gold’s highest price in nominal terms (not adjusted for inflation). USA Gold: “The inflation-adjusted price of gold at its 1980 peak is just over $2350 — that leaves a considerable amount of headroom just on the basis of making up for past inflation, let alone the prospect of continued inflation.”
Good times.
Where do you put money if you’re concerned about bank failures?
Thursday, September 24th, 2009 | Best Of, Economics | Permalink | 10 Comments |
Over on this post Placebo has a question:
I’ve noticed you’ve posted quite a bit on banks failing. So where are you parking your money in light of this widespread problem? I know gold is one place …
Thanks!
Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured. Keeping your money in the bank is still safer than keeping it in your mattress where robbers and fire can take it. Bear in mind that the government recently stopped its temporary protection of money market accounts, so you may want to move money markets to an FDIC account or Treasuries.
Having said that, here are some things I’ve done in light of bank failures and other potential problems. All of my amateur investment advice is worth exactly what you paid for it.
Diversification
Over the years the money for the entire family - my wife and I, our children, my mother, and my brother - wound up in the same bank. That’s too many eggs in one basket. My wife and I recently opened a vacation and Christmas savings account at a credit union so that not all of our money is in one bank. As our CDs mature we’re going to move some of them to the credit union.
Incidentally, we’re discovering that the credit union has much better interest rates than our bank. So besides the protection of putting our eggs into different baskets we’re earning more interest.
Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment. That extra payment is also a form of savings - if I couldn’t pay my other bills I could call Honda Finance and tell them to not withdraw money from my checking account that month. I need to do the same thing with the mortgage.
Naturally you should pay off credit cards, not just now but always. You should never let money linger in your savings account at 0.5% when you have a credit card balance of 10%. Even in good times that’s bad math. In really super bad times it’s worse - the bank behind the savings account balance might disappear, but the credit card company behind your debt balance never will.
A little in cash
I keep a little more cash in my wallet than I used to a year ago. After payday I typically get $200-300 in cash from the bank.
In general, most people are too dependent on plastic for day to day expenses. It isn’t just bank failures that are a potential problem. A few years ago one of the satellites that processed credit cards stopped working. Some travelers found themselves out on the road with no way to buy enough gas to get to the next gas station, much less get home. If there’s a natural disaster that knocks out power no one will be able to take plastic. It’s been reported in some recent disasters and hurricane evacuations that ATMs ran out of money and there was no one around to refill them.
In an emergency where no one can take plastic many stores will run out of change. Avoid hundred dollar bills. Don’t depend entirely on twenties, either. Fives and ones are very useful, particularly now that many vending machines can take ones. Likewise, it’s good to have a roll of quarters in your emergency supplies for vending machines and payphones.
You say you won’t need a payphone because you have a cell phone? Think again. In the event of an extended power outage cell phone towers exhaust their batteries, rendering your cell phone useless. We now keep CB radios in both cars along with a roll of quarters.
A little more in cash
I’ve also moved a little more money to cash in a safe deposit box at the bank. Not a lot, but enough so that if we couldn’t use the debit card or credit card we’d be able to pay for gas and food for a couple of weeks. The safe deposit box is inside an alarmed, fireproof vault that’s hurricane- and earthquake-proof and that’s under the watch of an armed guard during bank hours. We also keep important documents and a backup hard drive in the box. Cost is $35 per year, a bargain.
The contents of the safe deposit box aren’t part of the banks assets, so they aren’t subject to bank losses. However, if the bank is shut by regulators you won’t be able to access the safety deposit box until the bank re-opens. Typically the bank is shut down before the weekend and the FDIC re-opens it after the weekend. However, there’s a possibility that might not be true in the event of some unforeseen series of events or national crisis. It’s something worth thinking about. Once again, don’t put all of your eggs in one basket.
What about inflation?
Inflation - not bank failures - are why you should move a portion of investment and savings intended for later use to something besides cash. Typically that means things like retirement funds or college funds with a long investment horizon.
Gold
For inflation protection gold is excellent and is on a roll. China, Russia, and Middle Eastern states are buying gold to get rid of their dollars. Hong Kong is recalling its gold to put into its own vaults. Barrick, the world’s largest gold miner, issued several billion dollars in new stock to close its gold short position. More arguments for gold can be found in this Doug Casey interview.
Think of gold as insurance. It might or might not dip a little in the next few months or next year, but it won’t get wiped out and it could do phenomenally well. The conditions that will cause gold to do well will cause a massive writedown in many of your dollar-denominated assets (which for most of us is all of our assets), which makes it an excellent hedge against not just inflation but against an extreme event like the collapse of the U.S. dollar.
Physical possession of metal is best because it doesn’t involve any counterparty risk. American Precious Metals Exchange sells bullion for a small premium over the spot price. The spot price assumes you’re moving gold within the assayed gold vault system in 100 ounce bars, so it’s fair to charge a premium over spot for things like U.S. gold double eagles or Canadian maple leafs.
For those of us investing in 401Ks there are ETFs (Exchange Traded Funds), which are traded like stocks but are based on holding commodities rather than shares of a company. I have shares of GLD, CEF, and GTU in my 401k and I’d like to add some SGOL. A conservative position might be 10-15% of your long-term investments.
Absolutely avoid leveraged and inverse ETFs, which are intraday plays for traders, not long-term investors. If the name mentions 2x or 3x it’s leveraged. Run away.
Other commodities and metals
I also have some other metals and energy ETFs, including SLV, OIL, UNG, and a little platinum. In the event of inflation commodities and metals should rise. Diversification here seems prudent. I wouldn’t mind picking up some uranium and some broad food commodities.
TIPS
Another, more conservative option is TIPS - Treasury Inflation-Protected Securities. They’re secured by the U.S. Treasury, just like traditional Treasury notes. The difference is that TIPS have a variable rate. They pay a low base interest rate plus the official U.S. government inflation rate.
Bear in mind that TIPS aren’t 100% inflation-proof for two reasons. One, the government manipulates the official inflation rate, whose definition keeps getting revised. (No, really. See Shadowstats.com. The official inflation rate hasn’t kept up with rising costs of health care, education, energy or assets in forever. Subsequently Americans have much less purchasing power now than they did a few decades ago.) Two, once inflation really gets going the government will likely shut the door on TIPS sales the same way they shut down inflation-adjusted Series I Bonds.
Still, TIPS are a simple, safe investment with no real downside that I can see. I have about 10% of my 401K in these via Vanguard Inflation-Protected Securities (VIPSX). Get ‘em while you can.
Not enough silver for the SLV ETF?
Tuesday, September 22nd, 2009 | Economics | Permalink | 1 Comment |
The Comex Delivery Report showed that 6 gold and 23 silver contracts were delivered yesterday. I see that the GLD ETF showed a big jump yesterday… up a fairly substantial 490,487 ounces… 15.3 tonnes. The SLV ETF, which is owed around 30 million ounces, showed no changes once again. Nothing has been added to the SLV since September 3rd… while 763,000 ounces of gold have been added to the GLD. If you think something stinks here, you would be right about that.
Over at the Zürcher Kantonalbank in Switzerland, they reported their activity as of the end of the business week last Friday. They showed that their gold ETF took in another 23,952 ounces, while their silver ETF added another 198,212 ounces. I thank Carl Loeb for those numbers. Except for one week, ZKB has added silver to their ETF every single week for the last four months! And, if my record keeping is accurate, the silver ETF… SLV… has had only six changes in inventory level in the last three months; three up days and three down down. At the beginning of that three month period, the SLV ETF had 280.5 million ounces. As of yesterday it had 280.6 million ounces. Something does not compute here… probably to the tune of 30 million ounces!
Ted Butler had concerns about SLV last year.
Gene Arensberg isn’t worried, at least not for the same reasons:
Silver ETF critics usually have an agenda, such as a competing product or a naturally suspicious bent toward bullion banks. But the largest silver ETF has invited a heightened level of blog-whipping lately for one important reason. As we reported earlier in April, SLV has already exceeded the amount of silver foreseen in its custodian agreement with JP Morgan Chase, London, (the agreement called for up to 270,484.574.5 ounces, SLV already holds 280,553,742.3 ounces and has held slightly more in the recent past with the same custodian). The trust as yet has not announced a new custodian or sub-custodian agreement (or the amount of potential silver which might be available under it). So that fact alone leads to some speculation that available metal is scarce. However, as we also reported then, Barclays said that its custodian had agreed to continue share creation support for the time being, (pending the sale of iShares), which will allow SLV to operate normally.
I like ETFs for getting exposure to metals inside my 401K retirement fund, but things like this concern me. I have some SLV in my retirement account. It looks like I need to diversify into other silver funds. I split the gold holdings in my 401K between three funds - GLD, CEF, and GTU - and I wouldn’t mind diversifying that a bit. There’s a new Swiss gold ETF (SGOL) that holds 1/10 ounce of gold for each share issued.
Last week gold opened and closed above $1,000. Today gold closed above $1,015. Good times.
Three tales of inflation
Tuesday, September 15th, 2009 | Economics | Permalink | 9 Comments |
Mises.org - Inflation and the Fall of the Roman Empire:
Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.
But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.
Prices in this period rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services.
FOFOA - Gresham’s Ghost:
Henry VIII and Edward VI, during their reigns, drastically debased the silver coinage of the kingdom through both weight and purity. In 1544, young King Edward VI issued a coin containing just one third silver and two thirds copper — equating to .333 silver, or 33.3% pure. The result was a coin copper in appearance, but relatively pale in color. A shocking debasement considering England’s first silver coins were .999 pure, followed by .925 which later came to be known as sterling silver.
Then, in 1552, a penny’s weight was cut to only 8 grains (0.52 g). The penny began at 22.5 troy grains of fine silver and was reduced to 15 grains around 1420, then to 12 grains in 1464, and 8 grains in 1552.
Theodore Dalrymple in City Journal - Inflation’s Moral Hazard:
In a naive way, I assumed that since most people’s income tended to rise with inflation, there was nothing to worry about. I did not suffer personally because of it, nor did most of the people I knew. If a product once cost y and now cost 10y, what did it matter, so long as your income had gone up by ten times, too? Since people seemed better off, at least measured by what they could consume, one could even assume that incomes had risen faster than inflation.
Yet this was a crude way of looking at things, as my father’s fate should have instructed me. He sold his business in the sixties, at the end of the period of price stability that had reigned throughout his life, for what then seemed a large amount of money. He was a man who, for both temperamental and ideological reasons, held a deep contempt for financial speculation and wheeling and dealing, with the result that he did nothing as inflation inexorably eroded his savings. He grew poorer and poorer through the remaining 30 years of his life, and might have sunk into poverty had he not moved into a house that I owned. And this after reaching a level of wealth that, relatively speaking, was greater than I shall probably ever know.
For a while, I was angry about what seemed my father’s improvidence and lack of foresight. As the current financial crisis has conclusively demonstrated, however, not everyone is blessed with foresight, not even those whose livelihood depends primarily on the claim of possessing it. My father was born of a generation that saw money as a store of value, a far from dishonorable notion—and one that, when it reflected reality, helped give a lot of people peace of mind. And as I reach the age when inflation might cause me some embarrassment, even hardship, my sympathy with my father’s plight has grown. I am no longer young enough to fight another day, economically speaking: the destruction of my wealth by inflation would be final. In an aging population, more and more people are in my position, which helps explain why an age of prosperity can be an age of anxiety, even without a financial crisis.
Previously
High gold prices force Barrick out of its gold hedges
Wednesday, September 9th, 2009 | Economics | Permalink | No Comments |
AP - Barrick Gold to eliminate hedges, plans offer:
Barrick Gold Corp., the world’s biggest gold producer, said Tuesday it plans to eliminate all of its gold hedges and raise $3 billion in a share offering to help pay for the move. The Toronto-based company cited the bullish outlook for gold. Its announcement came on a day the price of the metal rose above $1,000 per ounce to its highest level since March 2008.
Gold hedges are futures contracts that commit a company to selling the metal at set prices. While hedges guarantee certain cash flows, they often commit a metals producer to ship the gold at prices lower than the current spot price. Barrick’s decision to pay off its hedges amounts to a bet that gold prices will keep rising.
Jesse’s Cafe Americain - Barrick Capitulates:
Barrick Gold and their bullion bank partner J.P. Morgan were the target of lawsuits by the gold bulls, most recently Blanchard and Company, for price manipulation through the use of forward sales in their hedge book. The contention was that the selling was being used to manipulate the price of gold.
Barrick’s initial defense was that if they were acting in conjunction with the central banks, they were therefore immune from prosecution since the central banks are immune from prosecution. Details of that story are here. The public document that Blanchard had put forward was shocking in its implications indeed, and can be seen here.
Almost as shocking as the complete lack of interest and follow up in such a potential scandal by the financial community, market regulators, and the media. One has to wonder what Barrick’s management now sees in the precious metal markets, in order to accept this significant shareholder dilution to take down those fixed price contracts now.
Off the cuff, the Barrick statement implies that they will be purchasing 4% of total world production in the open market for bullion which is already tight at these prices in addition to taking an enormous amount of forward selling off the market. Unless, of course, they can take delivery directly from existing reserves, such as from the Fed via the IMF.
TruthInGold - Barrick Is Doing What?:
What’s even more extraordinary about this move is the implied message that Barrick is sending to the world about where they think the price of gold is headed. They wouldn’t be spending $3 billion in shareholder capital upfront to get rid of these hedges if they thought the gold bull market was over and the price was about to fall. This move by Barrick is a signal to the world that they believe the price of gold is going much higher in price and they are willing to spend several billion in order to reap the full benefits of much higher gold prices in the future.
For anyone doubting the legitimacy of the gold bull, would you rather place your faith in the idiots on CNBC or in the smoke signals being sent globally by one of the world’s largest gold miners?
Word of the Day: John Exter’s Inverted Pyramid of Assets
Wednesday, September 9th, 2009 | Best Of, Economics, Word of the Day | Permalink | No Comments |
John Exter’s inverted pyramid. The idea is that things high on the pyramid are derivatives of asset classes further down the pyramid. From FOFOA.
Note that in FOFOA’s expanded version of Exter’s inverted pyramid there are all sorts of derivatives at the top of the inverse pyramid. Those derivatives were wildly inflated and at one pointed passed the one quadrillion mark, which is greater than the value of all physical, privately-owned assets on Earth. See yesterday’s China authorizes state banks to renege on commodities derivatives.
How is that possible? It’s possible because derivatives and paper markets are often larger than the underlying physical markets. See paper oil vs. physical oil markets and paper gold vs. physical gold markets.
In a nutshell, the notional value of the paper market can be much larger than the underlying physical assets. Imagine a desert island with one coconut tree that produces one coconut per year. Now imagine that somehow that one coconut is supporting a hundred firms trading coconut stocks, coconut bonds, coconut futures, and coconut derivatives. All of that activity is resting on an inverted pyramid supported by a single coconut per year. Like gold, the coconut is real. The farther away from the coconut you go in the pyramid the more derived and abstract the value of the asset and also the larger the market, because the paper market is puffed up with hot air, empty promises, Armani suits and horseshit.
Anyway, the theory is that when asset values are inflated and risk is perceived as low money moves up the inverted pyramid (away from cash, gold and coconuts).
During a debt deflation (which is what we are in now), a panic, or a perceived high risk environment money moves down the inverted pyramid (towards cash, gold and coconuts, as well as other more fundamental, less-derived assets).
I agree with FOFOA that gold is not a commodity in the usual sense. Commodities are things that are consumed - wheat is eaten, oil is burned. Gold has some commodity uses in jewelry and industrial processes, but those uses are dwarved by its use as a store of a value and a form of currency. Even gold in jewelry isn’t really used up - it can be scrapped and re-used.
Previous WOTD - Eurodollar
More evidence of China’s gold accumulation
Tuesday, September 8th, 2009 | Economics | Permalink | 1 Comment |
The Telegraph - China, Bernanke, and the price of gold:
China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.
Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.
What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.
In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.
Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.
Russia has also been accumulating gold. In general, the central banks sold gold like crazy beginning in 1993 but have become net buyers in the last few years.
Gold breaks above $1,000 an ounce
Tuesday, September 8th, 2009 | Economics | Permalink | No Comments |
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