Gold: I smell a trap

[MatthewLM]

Bernanke is prepared to use more extreme monetary stimulus again. He is, however, getting the feeling people understand that quantitative easing was a fraud so things are risky for the federal reserve now. The next big bailout is for the Eurozone, of-course.

[cypherdoc]

http://www.ft.com/intl/cms/s/0/cb07c11c-edac-11e0-a9a9-00144feab49a.html#axzz1Zr6zi3bw

"The difference from the current gold bubble and the previous one is that investors are now armed with exchange traded funds (ETFs), derivatives that increase their ability to run from gold if necessary. Several hedge funds have become dominant holders of ETFs. Investors now are responding to uncertainty in the eurozone by selling gold and other commodities and buying less volatile US dollars. ETFs, the vehicles that helped push gold to stratospheric levels, are now pulling it down to earth."

[netrin]

Google Cached: http://webcache.googleusercontent.com/search?q=cache:sv_4qyg_qmoJ:www.ft.com/cms/s/0/cb07c11c-edac-11e0-a9a9-00144feab49a.html+Gold+bugs+beware+%E2%80%93+the+bubble+will+burst

[cypherdoc]

Google Cached: http://webcache.googleusercontent.com/search?q=cache:sv_4qyg_qmoJ:www.ft.com/cms/s/0/cb07c11c-edac-11e0-a9a9-00144feab49a.html+Gold+bugs+beware+%E2%80%93+the+bubble+will+burst

thanks for that.

i told you guys this would be the effect of derivatives of gold during a selloff...

[miscreanity]

Do you actually think USD will continue to appreciate long? I really can't imagine a scenario for such as the proposed solutions in Europe/America seem to continue to revolve around printing more money and preparing for more bailouts.

These markets are enormous. Collosal forces are in play and move glacially compared to typical human perception so it could last for months, all else being equal. Since there are other factors creating a race against time, I think either the European or US leadership hand will be forced within a matter of weeks.

[miscreanity]

http://www.zerohedge.com/news/gold-silver-speculative-longs-plunge-march-2009-levels

Thanks.

At the end of November, most December contracts are generally rolled into the next year. All of the big fraudulent games must take place before delivery cutoff in November - after that, it's mop-up. Year-end profit taking usually keeps the prices in check during December. The first quarter then follows with potentially large delivery months in which another round of stomping the grass to startle the snakes is embarked upon.

Banks are struggling for survival in an obsolete system while the decentralized tide of sentiment erodes the established power dynamic.

did you bother reading this post of mine:
http://www.hussmanfunds.com/wmc/wmc111003.htm

Yes. There wasn't anything to comment on, though I will point out this:

"Strategic Total Return has about 17% of assets in precious metals shares..."

you cannot evaluate gold in a vacuum.  it very much is influenced by multiple sectors and their interactions.  to ignore the widespread deflation going on worldwide is ludicrous.

Please read the following again, paying particular attention to the pricing notion which connects to and affects everything:

Gold is reasserting a monetary role: it is being propelled to act as cash, especially in reserve capacity, and therefore [it] will provide a basis for pricing rather than having a price attached to it; relative pricing will be determined by the base of available gold the same way we currently use the USD base money supply.

The distinction is that the influence is reversed from your perspective. Other sectors are influencing gold less, while gold is gradually influencing them more. There are worldwide changes that go beyond deflation or inflation. The same applies to the cause of inflation - it is demanded and will occur because of the policy response to that demand. It's been said before and I'll say it again: these are processes; nothing goes in a straight line.

i really think gold doesn't get this far.  with the ferociousness of the upward move in the USD along with worldwide and especially emerging mkt deflation its only a matter of time before gold gets dragged down just like silver and the stocks. 

The impasse. At least hold onto your physical, as a hedge if you want to think of it that way.

Gold is reasserting its monetary role whether the dollar goes up or down. If the dollar goes up, it takes a longer time than if the dollar were to go down. Having been forced to use dollars for decades, the world is fed up with being subject to the whims of the US and its increasingly manic behavior. Without a return to responsible monetary management, the USD will face decreasing global significance no matter what is done to make the dollar more attractive for investment.

Did the ferocity of the attack on Pearl Harbor cause the US to curl up and die? The US has been bullying the world and the world has been taking it for decades because of the leverage provided by America having the reserve currency. Nothing lasts forever. Derivatives are the western attack on the world's Pearl Harbor, and the world is finally rising to fight back - by making the USD irrelevant.

One more time: the substance could've been anything - nose hair, tree bark, large chicken talons. Due to physical properties, it happens to be gold. Deal with reality, not just the derivatives that behave as you expect.

how much pain [patience] are you willing to sustain?

No leverage, dividend returns and long-term accumulation (i.e. profitable) - remember? The only way the course of events can change now would be for something like an alien invasion to begin or the sudden disappearance of centralized governments and banks.

are the charts still lying?

Misdirecting. But that's just semantics.

USD up, everything else down.  yawn...

You weren't saying that yesterday when gold was up. Nice selective memory, USD fanboy.

http://www.ft.com/intl/cms/s/0/cb07c11c-edac-11e0-a9a9-00144feab49a.html#axzz1Zr6zi3bw

Another article that ignores supply and suggests that demand is the be-all and end-all.

i told you guys this would be the effect of derivatives of gold during a selloff...

It's easy enough to see that as the result. The fantasy realm is entered with expectation that the derivatives really are gold. You've made no distinction between paper and physical. Do you really expect physical gold to be obtainable at the prices quoted?

With debt being the real issue and fiat currencies being built up with debt, gold is the only realistic and universal alternative money (Bitcoin is not yet realistic because it isn't universal). That's why movement within the futures market is so vital to understand - it is the major gold derivative mechanism (few ETFs have similarly stringent requirements regarding physical metal).

Gold is money (it links physical reality and tangible wealth with the abstract monetary world) and remains constant with no counterparties while derivative debt collapses around it. The monetary masters of the established powers are simply adept at putting off the collapse and minimizing upside shocks from upward gold revaluation. It is folly to ignore reality.

Next year is shaping up to be a major battleground between the established money authorities and fiscal failure - greater than anything seen so far. Gold will probably experience a 50%+ decline sometime during 2012, if not a complete separation between paper and physical pricing. Psychology of the masses can be guided, but only within a given sphere of influence. The Chinese will not buy US propaganda, nor will South Americans. US futures markets and pricing can only be managed within the US.

If you are an American living in the US with your awareness governed by domestic media, the USD might appreciate indefinitely after a few more systemic shocks (at the Lehman or Greece scale). Reality will leave America behind if the nation continues to pursue this self-destructive course.

[Zibbo]

If the real price falls, it can't go much below the production cost (currently averaging about $1,100/oz).

Not saying that I believe gold will drop below that, but I don't see how production cost forms any real barrier for gold price. Surely the newly mined gold is only a very small part of the overall supply in the gold market? It doesn't matter if the miners refuse to sell below their production cost, if everyone else is. Or perhaps you meant something else?

[hugolp]

If the real price falls, it can't go much below the production cost (currently averaging about $1,100/oz).

Not saying that I believe gold will drop below that, but I don't see how production cost forms any real barrier for gold price. Surely the newly mined gold is only a very small part of the overall supply in the gold market? It doesn't matter if the miners refuse to sell below their production cost, if everyone else is. Or perhaps you meant something else?

Yes. The price can easily go down the production costs. It just wont.

[Iseree22]

Cypherdoc, do you know of the announcement that caused the SPX & other global equity indices, to rally 3+ % in an hour yesterday?

[cypherdoc]

Cypherdoc, do you know of the announcement that caused the SPX & other global equity indices, to rally 3+ % in an hour yesterday?

based on a rumor Dexia would be split into a good bank bad bank.  followed up by the supposed "realization that the Euro officials needed to do something".

don't buy into it.  these types of sharp straight up rallies occurred multiple times in 2008.  don't overleverage yourself so that your acct can handle these types of spikes out of nowhere.  looks like we're already turning back down.  look at the banks.

[cypherdoc]

my feeling is that if Ben is going to do anything he will try to stem a disorderly deflation and engineer it into a "controlled deflation".  you heard it here first.

slow rise in the USD with everything else including bonds slowly deflating much like a Japan over years time.

don't get the sense that i'm a USD fanboy.  i hate the Fed and our complicit gov't more than any of you guys.  they are robbing us all blind.  i'm just describing what i think has to happen and is happening as opposed to rooting for it.   i've always loved gold/silver but i don't see it being a solution to our problems.

we have entered the Age of Deleveraging and the debt has to be written off for the global economy to move forward.

i think if we do go to a new monetary standard of some sort it has to involve something digital like Bitcoin.

[cypherdoc]

@miscreanity:

ok, let me say it,  USD down, everything else up.

still doesn't change my theory that the USD is acting like the dog.

[Melbustus]

we have entered the Age of Deleveraging and the debt has to be written off for the global economy to move forward.

Perhaps this is one of the central subjective questions, but....How much debt has to be written off?

I looked around a little for current estimates of M2, M3, derivatives, etc, but didn't really find what I was looking for. Anyone have a good source?

Cypherdoc, do you have any theories or data about how much debt has to be defaulted on before a sustainable level is reached? What is a sustainable level, and is there long-term data to support that number (ie, can we simply look at leverage levels before the debt/securitization explosion of the 90s and 2000s as the "norm" that we will/should return to, and calculate the necessary debt-money supply deflation on that?).

[hugolp]

my feeling is that if Ben is going to do anything he will try to stem a disorderly deflation and engineer it into a "controlled deflation".  you heard it here first.

slow rise in the USD with everything else including bonds slowly deflating much like a Japan over years time.

don't get the sense that i'm a USD fanboy.  i hate the Fed and our complicit gov't more than any of you guys.  they are robbing us all blind.  i'm just describing what i think has to happen and is happening as opposed to rooting for it.   i've always loved gold/silver but i don't see it being a solution to our problems.

we have entered the Age of Deleveraging and the debt has to be written off for the global economy to move forward.

i think if we do go to a new monetary standard of some sort it has to involve something digital like Bitcoin.

What better way for banks and governments to deleverage through inflation that the citizens pay? Why would Bernanke engineer something that goes against the interests of the people that put him where he is?

[Iseree22]

Cypherdoc, do you know of the announcement that caused the SPX & other global equity indices, to rally 3+ % in an hour yesterday?

based on a rumor Dexia would be split into a good bank bad bank.  followed up by the supposed "realization that the Euro officials needed to do something".

don't buy into it.  these types of sharp straight up rallies occurred multiple times in 2008.  don't overleverage yourself so that your acct can handle these types of spikes out of nowhere.  looks like we're already turning back down.  look at the banks.

My 'feeling' is that equities are bottoming, treasuries and gold are topping. I guess we will see.  

[hugolp]

Btw, even the people at the Fed are admiting that price inflation is starting to get out of control: http://www.clevelandfed.org/research/commentary/2011/2011-20.cfm

Recently, inflation, as measured by the headline Consumer Price Index, has been running at a sustained clip—prices have risen over 4.5 percent in five of the past seven months, and in July they increased at an annualized rate of 6.2 percent.

[miscreanity]

If the real price falls, it can't go much below the production cost (currently averaging about $1,100/oz).

Not saying that I believe gold will drop below that, but I don't see how production cost forms any real barrier for gold price. Surely the newly mined gold is only a very small part of the overall supply in the gold market? It doesn't matter if the miners refuse to sell below their production cost, if everyone else is. Or perhaps you meant something else?

Yes. The price can easily go down the production costs. It just wont.

Agreed - the price can move lower. Production cost isn't a "hard" barrier; more like a pivot point. Only the strongest and most efficient of mining companies can withstand low prices and/or return for extended periods of time, though.

The reasoning for price not being able to remain below production cost comes down to simple supply & demand fundamentals.

If gold is in demand and there is enough supply to meet the demand, fluctuations in price will be minimal - price stability. With the kind of huge overabundance distortions in supply that have been masked by derivatives, in combination with rapidly rising global demand means that there will be major price volatility as capital flows into gold.

For whatever reasons, many analysts still dismiss the supply/demand dynamic of gold production as well as the metal's increasing monetary function, despite the data being obvious.

It might help to imagine an inverted crash.



As the supply/demand fundamental line rises, capital becomes increasingly attracted to it. The price swings will revolve around that line, growing more violent the more capital flows in.

Price can only diverge so far from the fundamental before it completely decouples into its own abstract exchange, the financial instrument related to the underlying component only being associated by name - not function (i.e. the "price" of gold fell to $1,535, but the actual item couldn't be bought for less than $1,650 - take that to extremes; an official price of $1,000 - dealer sale price to you of $10,000 or more).

We're just starting to witness the first real waves hitting - 4th quarter of 2010 was just a warning surge. After this year is over, we get slammed with a full financial storm. It will start to rip apart official market associations, and anyone not on financial high ground (by holding physical gold) will be swept away into decades of poverty (Bitcoin may not be a viable solution yet, but having some wealth in the system now could be highly rewarding even for "late" early adopters).

[miscreanity]

my feeling is that if Ben is going to do anything he will try to stem a disorderly deflation and engineer it into a "controlled deflation".  you heard it here first.

Yet again, boasting more brazenly than Al Gore: controlled deflation is not a new concept. I'm no angel myself, but if you're going to claim exclusive credit as if you're the only expert in existence, be sure to acknowledge the reality of independent discovery.

From about 2 months ago:

Since gold is held by central banks a form of reserve, wildly fluctuating prices for the metal in USD suggests one or the other is unstable, thus controlling the inevitable rise of gold is critical for the US to maintain an appearance of stability.

...

It bears repeating that the dollar is in a managed decline with gold naturally rising in direct opposition. This balance is rapidly growing beyond control of the forces that are attempting to make this a gradual transition because the global economy is far greater than any one nation. These things also take years to unravel, if not decades. A parabolic rise is only beginning to build.

The archives strike again.

slow rise in the USD with everything else including bonds slowly deflating much like a Japan over years time.

How? Deflate too fast and the result is at least civil unrest, at worst global war. Deflate too slow and there's a risk of pressure accumulating to a point where it simply overwhelms all efforts at controlling it, more likely arriving at the latter outcome. The pressure from deflation is strong enough that there is no way to maintain control without inflation, which brings its own set of problems.

The Fed isn't the only institution with a "self-preservation" incentive. Natural write-downs will be fought as financial entities have their own mechanisms that will oppose Fed efforts. Politicians have a self-preservation goal of maintaining office at the expense of all else. Other nations have their self-preservation plans that involve cutting Europe and the US loose, leaving them to sink or swim lest they drag the world down - inflationary effects coming from the EU and US will be retaliated for from those countries damaged by them (as we've seen from even the Swiss, the choice will be independent inflation methods).

It may have its own internal dynamics, but America is only one piece of the pie. As Jim Sinclair puts it: there is no practical solution. I'd like to add that there is also no timely solution.

we have entered the Age of Deleveraging and the debt has to be written off for the global economy [western economies] to move forward.

i think if we do go to a new monetary standard of some sort it has to involve something digital like Bitcoin.

(emphasis and bracket section added)

A reminder to keep the previous section in mind. Deeply indebted western nations are not the entire world. In fact, decentralization is creating pockets of independent, autonomous regions within the official lines on maps. Enforcement of rejected national laws within these regions rapidly escalates costs - the benefit shifts to the defiant entity.

Bitcoin is not a viable solution yet. It isn't universally recognized and there are certain structural concerns that still need to be addressed. That is certain to change over the course of a few years, but today it is unrealistic.

What better way for banks and governments to deleverage through inflation that the citizens pay? Why would Bernanke engineer something that goes against the interests of the people that put him where he is?

Bingo. Tax rates have already begun to see diminishing returns, so the "invisible tax" has to be ramped up. And again, dead on: Bernanke holds a pseudo-political position. He could be discredited and replaced in an instant if he bites the hand that feeds him. Dominique Strauss-Khan, anyone?

Btw, even the people at the Fed are admiting that price inflation is starting to get out of control: http://www.clevelandfed.org/research/commentary/2011/2011-20.cfm

So is this a form of legitimate concern from the Fed, mere lip service to keep the reins of control taught or a political effort to maintain relevancy? Will it matter five years from now?

[netrin]

@miscreanity: Other nations have their self-preservation plans that involve cutting Europe and the US loose, leaving them to sink or swim lest they drag the world down - inflationary effects coming from the EU and US will be retaliated for from those countries damaged by them (as we've seen from even the Swiss, the choice will be independent inflation methods).

Doesn't the swissy peg contradict your point? The USD was not drowning because of CHF appreciation any more than a boat forces sea levels to rise. The SNB only transfered potential wealth from its own importers and savers (and foreign speculators) to its own exporters. China has been depreciating its currency via USD/UST and is now appreciating a bit at the expense of exports to the US and EU but China's economic growth is still dependent upon the northern/western economies. I don't see any nation sufficiently independent of USD+EUR to swim freely. Economic freedom means to me allowing currency to appreciate and reap the benefits of global wealth rather than reacting as productive slaves to the consuming masters.

Bingo. Tax rates have already begun to see diminishing returns, so the "invisible tax" has to be ramped up. And again, dead on: Bernanke holds a pseudo-political position. He could be discredited and replaced in an instant if he bites the hand that feeds him. Dominique Strauss-Khan, anyone?

THIS is fascinating! a conspiracy theory with juice and teeth!

The US is chip leader and plays its cards remarkably well. Its debt to GDP and deficit to revenue are comparable to the piigs but somehow the bluff is working. Money is irrationally folding into USD+UST, a bubble if not for the imminent pop across the Atlantic.

Ultimately I see this playing out two ways with the same effect. Either the euro collapses and USD is king or the ECB gains dictatorial powers a la Fed. In both cases the masses become poorer and the banks consolidate control. The only question is whether the paper will be green with dead heads or also include rainbows and bridges?

[miscreanity]

Doesn't the swissy peg contradict your point? The USD was not drowning because of CHF appreciation any more than a boat forces sea levels to rise. The SNB only transfered potential wealth from its own importers and savers (and foreign speculators) to its own exporters. China has been depreciating its currency via USD/UST and is now appreciating a bit at the expense of exports to the US and EU but China's economic growth is still dependent upon the northern/western economies. I don't see any nation sufficiently independent of USD+EUR to swim freely. Economic freedom means to me allowing currency to appreciate and reap the benefits of global wealth rather than reacting as productive slaves to the consuming masters.

You're right, the USD wouldn't collapse just because the Swiss alone devalue their currency the same way the Fed has done to the dollar. It's when Korea and Japan and Australia and the EU and the UK and South Africa and Belgium and every other nation does the same to keep from being isolated in the markets they've become so integrated with; the lack of independence you pointed out. The Swiss move was brilliant, but won't change the trend towards currency devaluation.

As cypherdoc has mentioned, each intervention occurs in sequence - partially because each national entity has a different tolerance threshold (disparate monetary officials are forced to act), and because staggering provides maximum effect (two popular movies released at the same time will share the spotlight to some degree; released a month apart, they each garner the majority in turn).

With the US trying to escape its own debt grave by devaluing the currency, the world acting in aggregate to the same effect locks the former in - no change overall so equilibrium resumes, negating Fed efforts. If the Fed can maneuver and devalue fast enough, a window of opportunity develops from which the US can escape the debt burden before that option becomes completely impossible. Of course, if any sovereign defaults, it could trigger the final deflationary collapse; the US needs the system to hold together in order to save itself, but everyone will be worse off with a crash landing now that monetary inflation has begun.

China is in a dire situation financially right now (mostly among its own, not with foreign interests), but it also has been stockpiling assets. That will allow it to coast for a while, providing the precious commodity of time which so few others have any of. In addition, even though it will take a long time, internally it is capable of growing whereas the US can't even maintain itself. Being able to take care of issues in-house is always preferred over being subject to the whims of a foreign interest (EU/US debtors at the mercy of foreign creditors).

If any nation were to allow its currency to appreciate, it would come out the winner and probably hold reserve currency status should the base grow large enough. The problem is that it'd be an extremely difficult transition and individual citizens of any nation, especially those without an understanding of finance, can't be expected to understand such a move. It would appear as if the entire domestic economy imploded until internal dynamics kicked into gear - that could take months to years, by which time there would probably be a popular revolt. Catch-22.

Ultimately I see this playing out two ways with the same effect. Either the euro collapses and USD is king or the ECB gains dictatorial powers a la Fed. In both cases the masses become poorer and the banks consolidate control. The only question is whether the paper will be green with heads or with rainbows and bridges?

Which currency won't matter (SDRs?). The consolidation of power you picked up on is key. Undermining that base of power is the way out - crypto-currencies make central banks irrelevant; it'll just take patience and persistence (and hopefully not too much actual blood in the streets).