Gold: I smell a trap

[netrin]

So one of the going stories asserts that gold should hit infinity based on historical money supply. There's certainly a relationship, but it looks to me that prices between $500 and $5000 are equally good. The current price seems within a wide band of prices way back to 1934. Does anyone have an interpretation that I don't see?

Code:

Price per oz     Years       M2 Supply      $AU/M2
===============  ==========  =============  =======
$  20.58-20.72   1833-1932   (1.28-46.60)   0.44-16.188 ($21.32 1923, $17.06 1931)
$  26.33         1933        (32.22)        0.8171
$  33.85-35.27   1934-1967   (34.36-524.8)  0.065-1.026 ($31.69 1949)
$  35.94-41.09   1968-1971   (566.8-710.3)  0.051-0.072
$  58.16-97.32   1972-1973   (802-856)      0.068-0.121
$ 124.84-193.22  1974-1978   (902-1366.0)   0.091-0.214
$ 380.68         1979        (1474)         0.258
$ 612.56         1980        (1600)         0.383
$ 317.26-460.03  1981-1997   (1755-4033)    0.079-0.262
$ 271.04-294.24  1998-2001   (4377-5431)    0.049-0.067
$ 309.73-363.38  2002-2003   (5784-6071)    0.051-0.063
$ 409.72-444.74  2004-2005   (6412-6674)    0.061-0.069
$ 603.46-695.39  2006-2007   (7033-7438)    0.081-0.099
$ 871.96-972.35  2008-2009   (8153-8531)    0.102-0.119
$1224.53         2010        (8467-8814)    0.139-0.145
$1516.54-1900    2011        (8838-9314-?)  0.163-0.215

http://kitco.com
http://www.census.gov/prod/www/abs/statab.html
http://research.stlouisfed.org/fred2/data/M2SL.txt

[1714509305]

1714509305

[1714509305]

1714509305

[kjj]

About $5,000/oz gold...

There was an interview on King World News a while back, with one of the regulars.  I don't remember which one, maybe Jim Sinclair.  His idea was that the market was pushing towards a de facto gold standard, of sorts.

If you look at various central banks around the world, you can come up with a reasonable level of gold to hold to back a currency.  Around 20% seems pretty reasonable, and is within the ranges that other central banks use.  So, if you consider the dollars in the world, and U.S. gold holdings (Fort Knox, etc), and you want that gold to be worth around 20% of the dollars outstanding, gold would need to be around $5,000 per ounce.

Whoever it was, they explained it a lot better than this.  I'll see if I can dig it up.

[miscreanity]

Does anyone have an interpretation that I don't see?

Without the explosion of debt, M2-based projections would be somewhat valid for at least the US; building analysis on the US alone is misleading. Leveraged debt is the main determinant of gold's value today, not the existing monetary base as was before a floating rate was finally established in 1971.

Because there's been so much securitization of debt and subsequent internationalization of it, the range of backing necessary from a base money supply has been greatly amplified. Had the packaged variants been kept within individual nations' borders, one country's economy (e.g.: Greece or the US) could collapse without severely impacting others - in fact, other nations would then swoop in to pick up firesale-priced assets. That way, there would simply be a percentage change in global ownership. Since that isn't the case, those entities most closely-tied to the existing financial infrastructure will be dragged down with it unless the connection is severed by dumping depreciating assets sooner rather than later.

Martin Armstrong discusses the Euro's dilemma of being a unified currency with disaggregate debt (PDF link). In short, a team effort will have a much more difficult time making progress while carrying dead weight than if every member were under heavy burden, but moving under their own power as a group: with 10 individuals pulling a massive weight, if 1 falls down and doesn't get up, that magnifies the difficulty for the remaining 9 than if the 1 that fell down were to get back up again instead of contributing dead mass - not only has working power been lost, but the weight has been increased. The same problem is partially attributable to the situation US states face.

If the Euro were to struggle along with a unified debt, progression is possible. If it continues as is, with the PIIGS succumbing, there will be fewer nations left to pay down the debt. Imagine France and Germany having to take on the burden of the PIIGS debt. Instead of France and Germany having well under 100% debt-to-GDP ratios, they will shoot well over that level. No nation makes good on its obligations much beyond that point. Default or debasement of the prevailing currency become the only options, and the former is almost impossible - it's like a person forcing himself to face his worst fear.

Applying calculus limits to gold and fiat currencies, yes - the limit for gold's value in fiat terms (due to outstanding debt) approaches infinity. It is foolish to think that would actually be achieved, even with enormous debt monetization efforts. Eventually, the rate of change becomes too rapid for human accommodation: a hyperinflation becomes impossible to sustain and the subsequent deflationary crunch, that the hyperinflation delayed, finally occurs. A very high number in fiat terms, yes (much more than $5k); not infinity.

[netrin]

I don't know how/what global numbers I could reference. Any specific suggestions?

Kjj were you referring to M2? Because I think gold's price does represent about 20% of M2 dollars. But how does that relate to the amount of reserves the central banks hold? And why do banks hold gold, as insurance against the apocalypse? (Ben hasn't answered that for us) Today's gold price in dollars is half of the 1980's peak adjusted for M2, but double the trend since before Nixon. Is that doubling in anticipation of future inflation or just the century old price of gold?

NB: I've corrected many of my $AU/M2 calculations above.

[Melbustus]

Today's gold price in dollars is half of the 1980's peak adjusted for M2, but double the trend since before Nixon. Is that doubling in anticipation of future inflation or just the century old price of gold?

Wouldn't the pre-Nixon trend be pretty much irrelevant since the price was fixed by central banks that never set it according to true market dynamics?

[netrin]

Maybe but it still took 8 years before it reached today's price/m2 level. Maybe that delay had something to do with Roosevelt?

[Melbustus]

Maybe but it still took 8 years before it reached today's price/m2 level.

That is indeed interesting... Just goes to show how long seemingly obvious moves can take.

[miscreanity]

I don't know how/what global numbers I could reference. Any specific suggestions?

For a general source for global derivative debt, the BIS releases a semi-annual statement. The calculation methodology has been revised within the past couple of years (just like the official US unemployment calculations), otherwise there would be over $1,400,000,000,000,000 ($1.4 quadrillion) total outstanding instead of less than half that at $600 trillion.

And why do banks hold gold, as insurance against the apocalypse? (Ben hasn't answered that for us)

Tradition!

Actually it's because banks understand best what gold is and the purpose it has in an economy (sounds a mite conspiratorial). They could've leveraged every asset they wanted while not touching gold, and this gigantic shell game would be able to continue for some time yet. By creating derivatives based on gold, they've effectively turned water into wine - but at an enormous cost. So long as the cost isn't known, the party keeps going. Too bad for the world, the rumors have been flying, suggesting that not all is as it seems - and they're finally taking root.

[netrin]

Thanks. I've given BIS a skim and it fills me with Rathenau's delirium of milliards. I'm looking for more long term ~200 year data.

Yes, our 'modern' economy is truly dizzying. Friends not long ago were more likely to believe we live among or are ruled by aliens than accept fractional reserve, much less swaps and other abstract derivatives But I think people are getting a hint that something is http://www.youtube.com/watch?v=31IYm0gQS_A&t=22s

[cypherdoc]

the $DXY and the USD/CHF cross continue to rise.  Dow & oil futures are down.  

if the $DXY blasts off at the open as it has pretty much has since its rise from the bottom of the channel, i will be reininstituting gold/silver shorts.

[MatthewLM]

The downward moves in gold are very sudden and sharp compared to the upward moves. Coincidence? I think not!

[cypherdoc]

The downward moves in gold are very sudden and sharp compared to the upward moves. Coincidence? I think not!

what have i been telling you?

[cypherdoc]

SSRI, Silver Standard, nasty breakdown.  other gold/silver stocks heading down as well inversely to the $DXY whose rise is relentless.  i hear a sucking sound.

[MatthewLM]

The downward moves in gold are very sudden and sharp compared to the upward moves. Coincidence? I think not!

what have i been telling you?

That organised attacks on gold have been happening?

[cypherdoc]

The downward moves in gold are very sudden and sharp compared to the upward moves. Coincidence? I think not!

what have i been telling you?

That organised attacks on gold have been happening?

whatever theory you prefer, bubble burst or conspiracy, PM's are heading down. 

don't forget your original premise for buying gold and silver:  relentless Fed devaluation of the USD.  now what do you do when the USD is rising?  buy more or perhaps sell?

[MatthewLM]

Manipulation can only work so far. It will fail.

[cypherdoc]

Manipulation can only work so far. It will fail.

ooooook....

[labestiol]

so guys, just give me a few hours to see if my theory proves correct.  if it doesn't work by all means buy the parabola.  personally i'm going to give it a few days from today to let it work but you can all call me a tinfoiler if gold doesn't start going down after the announcement.

A quote from your first post. It was now more than a month ago, gold closed at 1739$. For now, you have to admit you've been wrong.
Even if days like this one give you confidence, it's a small sample.
We'll see which hypothesis (manipulation vs bubble) will be proved true, there's still a long way to go. 1 month is nothing.

[cypherdoc]

so guys, just give me a few hours to see if my theory proves correct.  if it doesn't work by all means buy the parabola.  personally i'm going to give it a few days from today to let it work but you can all call me a tinfoiler if gold doesn't start going down after the announcement.

A quote from your first post. It was now more than a month ago, gold closed at 1739$. For now, you have to admit you've been wrong.
Even if days like this one give you confidence, it's a small sample.
We'll see which hypothesis (manipulation vs bubble) will be proved true, there's still a long way to go. 1 month is nothing.

fine.  i admit i was off on the exact timing.  and i might be off on the whole concept.  i've always been open about that.  calling an end to an 11 yr bull mkt is outright difficult.  i thought it would be an interesting intellectual exercise if not a downright shorting opportunity.  it certainly has been the former thanks to miscreanity (but no thanks to you) and it may be the latter.

you, otoh, will have to give me credit if i end up being right on the price level for a major reversal.  i made the call at $1780.  pretty damn close.  so far, yes, i am confident with what i see.  time will tell.

[labestiol]

so guys, just give me a few hours to see if my theory proves correct.  if it doesn't work by all means buy the parabola.  personally i'm going to give it a few days from today to let it work but you can all call me a tinfoiler if gold doesn't start going down after the announcement.

A quote from your first post. It was now more than a month ago, gold closed at 1739$. For now, you have to admit you've been wrong.
Even if days like this one give you confidence, it's a small sample.
We'll see which hypothesis (manipulation vs bubble) will be proved true, there's still a long way to go. 1 month is nothing.

fine.  i admit i was off on the exact timing.  and i might be off on the whole concept.  i've always been open about that.  calling an end to an 11 yr bull mkt is outright difficult.  i thought it would be an interesting intellectual exercise if not a downright shorting opportunity.  it certainly has been the former thanks to miscreanity (but no thanks to you) and it may be the latter.

you, otoh, will have to give me credit if i end up being right on the price level for a major reversal.  i made the call at $1780.  pretty damn close.  so far, yes, i am confident with what i see.  time will tell.

Yep, we'll see. Whatever happens, it's interesting times.
And i thank you the intellectual exercise, i've learned from your opinion, even if i still don't share it.