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Author Topic: Gold: I smell a trap  (Read 78399 times)
miscreanity
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September 20, 2011, 12:53:04 AM
 #641

Dollars are not an IOU for gold. Does the issuer of dollars owe you gold? No. This used to be the case but not anymore. USD is fully a fiat currency backed only by it's value in exchange, which is backed by the businesses and consumers which use it.

cypherdoc is basically suggesting banks will purposefully destroy themselves to "save the dollar". I think such action would be good for gold as well. This will never happen though.

That's a reasonable way to look at it, just take it a step further. How do businesses and consumers save their accumulated wealth? A primarily transactional currency cannot maintain stable pricing (thus keeping the economy stable overall) while also acting as a store of value. Right now, everyone is jumping from one transactional fiat to another, or assets that don't perform as gold does.

Save in gold. Spend in dollars/fiat. Two sides of the same coin. It may be a chicken & egg issue as far as whether gold as money came first or some form of representative fiat did, but gold certainly came before the dollar. The dollar was initially backed by gold and silver. Just because a direct connection isn't present doesn't mean there isn't a relationship. The floating exchange forms a tie on its own, much like fluid coupling in a transmission.

Bitcoin (and any similar crypto-currency) is the only currency I know of that truly transcends that connection.
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cypherdoc
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September 20, 2011, 03:05:29 AM
 #642

cypherdoc is basically suggesting banks will purposefully destroy themselves to "save the dollar". I think such action would be good for gold as well. This will never happen though.

thats not right.  thats your interpretation of what i've been saying.  i'm saying the CB's of the world led by the Fed will actively try to save the USD world reserve currency system by targeting the gold price. 
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September 20, 2011, 03:38:40 AM
 #643

For those of you that don't already follow Mish:  No Hiding Spots Except Despised US Dollar: Equities Red, Metals Red, Energy Red, Grains Red.

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If you have not done so already done so, please consider the possibility there will be no hiding spots except for US dollars and short-term US treasuries (yielding nothing) in a renewed strong downturn.

I expect gold to hold up in a major decline, but I could easily be wrong. One encouraging sign is the $HUI gold miner index is down less than a percent even though gold is down by 2% and the S&P and Dow are down by almost 2% as well.

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September 20, 2011, 03:43:40 AM
 #644

Securitization has changed debt into a form of money - it now functions as such.

at the peak of the 2008 bubble securitization fx'd almost like money but this has not been the case since the financial crisis. this is where inflationists miss the deflationary argument.  they think these bad debts still represent liquid money and not debt.  most of these securities have become illiquid b/c everyone knows they represent bad debt and not money; which is why the Fed had to buy most of these bad securities from primary dealers.  but this monetization actually contributes to a deflationary spiral as they drive interest rates down to ZIRP thus disintermediating the interest rate function.  John Hussman writes very well on this subject.  all the Fed has done is replaced interest bearing securities with 0% cash and the banks make even less than they would have. they have no good investment options to put this cash into except maybe commodities since 2009.  even this has now come to an end. NIM or net interest rate margins get crushed hurting the banks which borrow short and try to lend long.  the Fed interventions further creates a deflationary spiral by encouraging speculators to pile into the debt mkts trying to front run the Feds actions that drive up the price of these bonds.  they don't care about the yields.  this steals productive capital from the private real economy and the lower interest rates perversely drive up the existing value of the fixed rate debt overhang of many corporations which they have to reflect on their balance sheets.  these same speculators would rather own things like UST's which are guaranteed by the US govt and are highly liquid moreso than gold which is why you're seeing the TLT go up while gold struggles.  these same speculators and banks won't lend this same money to consumers like you and me b/c they know we're toast; we have no good economic options available to us in aggregate going forward.

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There is a difference between debt that is simply extended credit which can be withdrawn, and debt that is effectively monetized by market actions. The Fed's printing is really just a formality, so it doesn't matter whether it continues or not (although pressure will persist for it to proceed).

no idea what you're talking about here.

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gold bulls are making a big deal about Operation Twist and how the extra liquidity is going to drive gold much much higher.

Cause and effect are reversed here. Again, the functional monetization has already taken place. Gold is not dependent upon the formality of the Fed introducing monetization to maintain liquidity; everything is already in place for gold's upward revaluation. The base monetary inflation is reactive and simply locks that fate in.

no its not if i understand you correctly here.  you're claiming existing debt is equal to money.  this is wrong.  during the good times debt instruments were so liquid they were almost considered like cash; no more.  the debt has become bad debt which is now defaulting and decreasing the virtual USD supply and thus the total amount of USD's in the system thus driving up its value.

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The question has been posed before, but wasn't answered: if gov't has the power to permanently maintain a low price in gold, why did it rise at all? In fact, why do these crises even occur?

perhaps the Fed regarded this as a small price to pay to reinflate the markets.  doesn't mean they are linear thinkers as well.  at this point they see the danger in letting it ramp to $2000 or higher.

these crises are occurring b/c of constant Fed intervention causing boom bust cycles by suspending the business cycle.

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Other than that, I agree with your and netrin's assessment. Also, gold will be sold - but with dollars unreliable as a store of wealth (again), that (massive amount of) capital will flow into gold.

deflation will prevent this from happening.  we're seeing the start of this right now.

Quote

The gold price analysis I'm describing has already been explained in detail; cypherdoc, maybe you could post your most clearly explained analysis to make assessing the accuracy of differing methods easier to follow.

my OP and this entire thread has been clear where i stand.  deflation, the end of the gold bull and a multi year rise in the USD.
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September 20, 2011, 07:04:38 PM
 #645

However, as has been pointed out various times in this thread, higher aggregates will evaporate in our economy, which was not possible in the Axis economies. Paper money just kept piling up.

those paper marks were not debt and could never be cleared from the economy thru default.  USD debt however is vaporizing as we speak decreasing the amt of virtual USD's.

Sure, if debt were simply debt. Securitization has changed debt into a form of money - it now functions as such.

There is a difference between debt that is simply extended credit which can be withdrawn, and debt that is effectively monetized by market actions. The Fed's printing is really just a formality, so it doesn't matter whether it continues or not (although pressure will persist for it to proceed).

gold bulls are making a big deal about Operation Twist and how the extra liquidity is going to drive gold much much higher.

Cause and effect are reversed here. Again, the functional monetization has already taken place. Gold is not dependent upon the formality of the Fed introducing monetization to maintain liquidity; everything is already in place for gold's upward revaluation. The base monetary inflation is reactive and simply locks that fate in.


the contraction in the shadow banking system of securitized debt argues against those same securities effectively acting as money.  they're contracting from defaults:

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September 20, 2011, 08:49:53 PM
 #646

cypherdoc is basically suggesting banks will purposefully destroy themselves to "save the dollar". I think such action would be good for gold as well. This will never happen though.

thats not right.  thats your interpretation of what i've been saying.  i'm saying the CB's of the world led by the Fed will actively try to save the USD world reserve currency system by targeting the gold price. 

You can't stop USD inflation ("save the USD") without removing the underlying monetary inflation.

Central banks could start to sell gold in massive amounts which could trigger a panic in global markets. It would also kill the governments if they were ever thinking of returning to a gold standard.

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miscreanity
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September 21, 2011, 12:31:32 AM
 #647

at the peak of the 2008 bubble securitization fx'd almost like money but this has not been the case since the financial crisis. this is where inflationists miss the deflationary argument.  they think these bad debts still represent liquid money and not debt.

Aside from this beginning of the paragraph, I agree. The deflationary argument isn't missed, it's just based on different assumptions. When assuming that the debt will be discharged at a loss, I arrive at the same conclusion you do.

Bad debt doesn't represent liquid money, no. It is just locked-up and unable to be either redeemed or made use of. The debt hasn't vanished: it's still tied to assets by the respective creditors and debtors; the creditor has been swapped out for another in the case of the Fed. It can't be made to disappear unless the Fed were to take all of the write-downs - forgive all the debt it's acquired. That would do a lot of damage, if not destroy the institution and economy in general. Or, the debt needs to be replaced with a liquid form of money.

Maybe we should offer our definitions of bad debt so we can be sure we're on the same page. My understanding of bad debt is simply a contractual agreement in which at least one party is not able to or is unwilling to meet the obligations to the other party or parties. Can it get more legalese?

There is a difference between debt that is simply extended credit which can be withdrawn, and debt that is effectively monetized by market actions. The Fed's printing is really just a formality, so it doesn't matter whether it continues or not (although pressure will persist for it to proceed).

no idea what you're talking about here.

The bad debt as money notion. Since the bad stuff is already out there and completely gumming up the works, the options for the economy are: die now (deflation) or die later (inflation, then deflation). The "formality" is that the Fed is only going through the motions of what it's officially supposed to do - dead man walking.

no its not if i understand you correctly here.  you're claiming existing debt is equal to money.  this is wrong.  during the good times debt instruments were so liquid they were almost considered like cash; no more.  the debt has become bad debt which is now defaulting and decreasing the virtual USD supply and thus the total amount of USD's in the system thus driving up its value.

If the debt is written off there are still assets that were associated with the debt, no? What happens to them? Is the creditor or debtor helped or harmed; was the debt "good" or "bad" from the creditor's perspective, or the debtor's? When does the transition from "good" debt to "bad" debt make that same debt disappear? Bankruptcy proceedings? What is the actual destruction process? If you can explain your understanding of the mechanism for this, I'd greatly appreciate it. As far as I see now, there is no pause or reset button for this game and the line between a mere asset and money remains blurred.

What's being described is like putting piles of cash into a safe and forgetting the combination to open it. It's no longer liquid but it's still there, you just can't get to it. Now what? Some form of common money is needed to keep the show going, pay the bills. Who would believe you when you tell them you locked your money in your own safe and can't get to it? (US to China: sorry, we can't pay because, uh...) You'll come off as either foolish, stupid or a liar. (War?) Wouldn't it be easier to duplicate the money that's locked up to act as a replacement until the safe can be opened? (Everything's fiiiiine, really! Nothing to see here, it's all good, we swear on the Founding Fathers! Just give us another month or twenty!)

Now that both sides (creditors and debtors) involved with the debt that's been tied up are in a frozen position (creditors receiving income & debtors using credit lines), they'll need liquid assets to keep going. How much will they need? Well, how much was held in reserve (if any), what's the minimum to maintain solvency and how much was the debt worth? Be honest - $700 billion, $2 trillion, $1.4 quadrillion? Ok, now can both sides survive a resonable time before reality sets in?

Repeat that situation millions of times, at all scales. Everything is already broken, the Fed is just handing out the playbill. It comes with a complimentary $1 billion for those who can afford seats to begin with.

Almost forgot the kicker: what happens when the safe is re-opened? Are the safe owners richer, or is it just an illusion? I think in percentages.

perhaps the Fed regarded this as a small price to pay to reinflate the markets.  doesn't mean they are linear thinkers as well.  at this point they see the danger in letting it ramp to $2000 or higher.

these crises are occurring b/c of constant Fed intervention causing boom bust cycles by suspending the business cycle.

So there wasn't danger in allowing gold to rise past $500/oz? $1,000/oz? $1,600? What happens when $2,000 is broken? Will the Fed see danger in allowing the price to go past $2,500 or $3,000? What I'm getting at is: at what point does the Fed finally decide, enough is enough?

If the Fed intervening is causing these boom/bust cycles, do you think it stands to reason that the problem might grow so great that the Fed can't manage the problem? When will the Fed get out of the way and allow the business cycle to right itself? Is that even possible now, or will the whole system snap in two?

my OP and this entire thread has been clear where i stand.  deflation, the end of the gold bull and a generational rise in the USD.

I was thinking more about the next two months, but that works. So a gradual or rapid decline in gold from here with a corresponding lift-off in USD?

the contraction in the shadow banking system of securitized debt argues against those same securities effectively acting as money.  they're contracting from defaults:

The chart shows securitized debt is contracting while traditional forms of debt are rising. The "bad" debt doesn't just disappear - the valuation is reallocated, often losing some of its attributed value along the way, but certainly not all of it.

Another issue is how these "defaults" are occurring. Where has it been stated that the debt is being defaulted on? Use of that term is dangerous; likely to cause a cascading panic among counterparties. Is the bad debt really being defaulted on through bankruptcy and write-offs, or simply being reclassified? Either way, the debt still doesn't just disappear. If it's an accounting change, then nothing has really changed.

Even in the case of bankruptcy and write-offs, the asset and/or debt involved reverts to one party. For the loser, it's like having grown and learned how to use a sixth finger, then being forced to cut it off because someone else wants it for skin grafting after his face was blown off when he lit a firework. Default causes some loss of value, but there is still a shift in asset allocation (again, assets don't disappear as if via magic) that proves detrimental overall.

I think I've beaten a dead horse enough for now. There are more immediate developments to pay attention to at the moment:

Persuant to the physical gold premium issue discussed earlier: $17 gold and $2.48 silver premiums in China. Spread far enough, the paper/physical connection fully severs and the banks lose all control. Demand must be alleviated in the short term.

One last point - has anyone been paying attention to the Japanese Yen? The final round may be in the chamber. Bernanke's playbook reads: kick USD up, smack gold down, announce terrible news that reverses those positions.

Bitcoin should also do well if there's more inflation in store...
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September 21, 2011, 04:33:09 PM
 #648

something very bad is going on at BAC right now.
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September 21, 2011, 04:49:00 PM
 #649

there goes WFC as well.  i doubt much QE will be forthcoming.
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September 21, 2011, 04:54:04 PM
 #650

this is deflation at work.  those excess reserves can't possibly come out from the banks.  look at the stock asset destruction of the banks esp this AM.  they NEED those excess reserves to stay alive.  they might not be enough...
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September 21, 2011, 04:58:21 PM
 #651

Moody's pulled the trigger.

http://www.marketwatch.com/story/moodys-downgrades-bank-of-america-debt-2011-09-21-1241330?link=MW_latest_news

A2 to Baa1

downgrades result from a decrease in the probability that the U.S. government would support the bank, if needed. However, the moves do not reflect a weakening of the intrinsic credit quality of Bank of America

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September 21, 2011, 05:00:37 PM
 #652


ah.  thanks.  didn't need the headline.  just saw the chart tank.
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September 21, 2011, 05:05:11 PM
 #653

note how the Marketwatch article came out 15 min after BAC tanked.  criminality at work.
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September 21, 2011, 05:20:26 PM
 #654

However, the moves do not reflect a weakening of the intrinsic credit quality of Bank of America

Bwahahaha!
miscreanity
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September 21, 2011, 05:39:51 PM
 #655

this is deflation at work.  those excess reserves can't possibly come out from the banks.  look at the stock asset destruction of the banks esp this AM.  they NEED those excess reserves to stay alive.  they might not be enough...

The capital that was in financials is moving elsewhere. Destruction of the banks by reallocation; wealth didn't disappear.

Banks can't use their excess reserves because they're needed just for survival. How can the banks continue to profit and keep themselves running? Government assistance in the form of funny money, whether that's from printing or forced guidance of the investment community - squeezing capital into banks and bonds by making other options unattractive.

We'll see in an hour or so.
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September 21, 2011, 06:28:36 PM
 #656

sterile UST shift from short to long.  net neutral.  not good.  kills NIM.  won't help.

TLT frontrunning has been significant.  the black hole persists.
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September 21, 2011, 06:48:05 PM
 #657

the markets are choosing UST's and the USD over gold and silver.  how unfair is that?
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September 21, 2011, 06:59:58 PM
 #658

the markets are choosing UST's and the USD over gold and silver.  how unfair is that?

The same thing happened with the announcement of QE2. US-related instruments went up (tin foil hat assumes PWG/PPT/G7/G20 efforts here), gold and silver were slammed - initially. Reality took over shortly afterward.

As the rest of the week/month plays out, intervention will give way to reason (then probably more intervention at the beginning of October).
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September 21, 2011, 07:32:08 PM
 #659

http://www.bloomberg.com/news/2011-09-21/lloyd-s-of-london-posts-697-million-pound-loss-on-disasters-1-.html

The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 95.6 basis points below the euro interbank offered rate, or Euribor, at 11:13 a.m. in Frankfurt, indicating a premium to buy the dollar. It widened to as much as 112.5 basis points earlier this month, the most since Dec. 2, 2008, according to data compiled by Bloomberg.
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September 21, 2011, 07:46:39 PM
 #660

The UK BOE will be creating more money to make asset purchases again soon.

The federal reserve will no doubt stop the treasury purchases and money will always to available for banks. After all the federal reserve was created in the banks interest. The announcement today, isn't it suggesting they are holding onto the debt securities for longer by replacing what they have with longer-term debts? I think they want to trick people into thinking they are somehow aiding the economy while not using monetary inflation. Nothing they do, aids the economy unless what they do is go away. Whatever they say, they will create more money and use inflationary policies because inflation is the only thing which keeps the banking system alive.

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