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Gold Strikes Out On Its Own « Thread Started on Sept 2, 2009, 6:11pm »
It's commonly believed that gold has been in a bull market since the beginning of this decade. In at least one fundamental sense, however, it has not. If you price gold in dollars (or most other fiat currencies, for that matter) its price has indeed been rising, but that doesn't necessarily mean that gold has truly appreciated ... it could simply mean that the currency you're quoting it in has depreciated.
On way to shed some light on the question is to express the value of gold in something other than a fiat currency. For instance, a basket of physical commodities. That's what I've done on the chart below. Notice that as priced in this basket of commodities, gold essentially tracked sideways until near the end of 2008.
Since then, however, something new has been added. Gold has been appreciating, in real terms, on its own, quite apart from any illusion created by shrinking currency units. The chart shows an initial thrust upward, followed by a partial retracement. And just this week, after the cutoff date of this chart, gold spiked, rising sharply in price while most other globally traded commodities eased or traded sideways. A real bull market in gold may be just getting under way.
Joined: Jan 2007 Gender: Male Posts: 271 Karma: 16
Re: Gold Strikes Out On Its Own « Reply #1 on Sept 3, 2009, 9:49am »
Thanks for the chart!
Does DJC stand for 'Dow Jones Commodities'?
The next question is, "Is gold overpriced in terms of commodities?" I don't think a nine year chart can answer that question.
Paul Van Eeden did a similar chart, but for oil. He charted oil in terms of commodities. It tracked sideways until about 2008, then showed an increase in oil in terms of commodities. That suggested a little bit of Peak Oil was affecting price.
Question to the board: "Is gold over-priced in terms of commodities?"
The next question is, "Is gold overpriced in terms of commodities?" I don't think a nine year chart can answer that question.
Paul Van Eeden did a similar chart, but for oil. He charted oil in terms of commodities. It tracked sideways until about 2008, then showed an increase in oil in terms of commodities. That suggested a little bit of Peak Oil was affecting price.
Question to the board: "Is gold over-priced in terms of commodities?"
Yes, I should have mentioned it at the outset, but "DJC" refers to the DJUBS Spot Commodity index (formerly DJAIG).
You could make an argument that gold is a little rich compared to the average commodity, but as you point out, it would be hard to draw a firm conclusion based on somewhat limited historical data. I think there is some validity to the nine-year period though, if for no other reason than the relative consistency of the trend prior to 2008, even as the USD prices of the commodities swung violently.
We can go back more than ten years, but once you try and go back much more than that you start to run into issues with the consistency of the construction of the commodity index. The DJC goes back to 1991. There are other older indices but they themselves have undergone methodology changes over time. Probably the best strategy for examining time frames of more than 10-20 years would be to look at individual commodities, as Denarius does in his post. Then further back of course you run into serious government-induced abberations in the gold price like those in the 1970s and before (e.g. the 1976 legalization of bullion ownership in the US and the 1971 closing of the US gold window).
Even if you were to conclude that gold is overpriced in relation to commodites in general, though, that alone wouldn't be an argument against owning gold. I believe the same could have been said in the late seventies well before the blowoff top in early 1980. Then there is the problem that if you try to invest in other commodities you have to use vehicles like stocks or futures which introduce their own pricing factors (like the term structure for commodity futures, which erodes returns when most are, like now, in steep contango). Moreover, if you are bullish on commodities, you almost have to be bullish on gold now because the valuation gap is not that great, meaning commodity prices would not have to rise that much before rough parity with gold prices would be restored and thus again providing independent support for the price of gold. And finally, the conditions (as in the late 1970s) that led to gold prices reflecting the monetary premium could go on for quite a while.
The graph plotting USDs vs IMF SDRs was not updated. I suggest that may be a good exercise for the student
Comparing the two Global Gold Index graphs, we can see they match closely up to about 3Q 2007. From that point onward it appears as though the index scale has changed. Indeed, a different weighting and mix of world currencies apparently was applied then and so the graph of index values reflects that fact. There is somewhat of an explanation below the graph but specifics are lacking. So be it.
While the basket of currencies used as a basis of comparison for the gold price is itself variable over the years, it was sufficiently stable to use as a standard against which gold was valued. There was some amount of averaging as individual currencies rose and fell. After all, we are only looking at relative valuations here, not specific prices in a currency.
It may be useful to factor in some world index of monetary / price inflation over time to get an even better idea of the relative WORTH of gold as a store of value. But that may already be included in the GDP values if Real GDP numbers were used. Too bad that all inflation and GDP numbers are so "massaged" by their respective countries that this exercise is close to useless. Maybe some help can be found at
--- nowandfutures.com and/or shadowstats.com --- Let me know.
Now, about those USDs priced in SDRs . . . . .
I understand the mix and weighting of each currency in SDRs is due for its five-year update by the IMF in 2010. With the FOREX markets expected to get even more volatile in the coming months, that exercise should prove "challenging" to say the least. Might it all be part of another PTB Hegelian Dialectic to force an acceptance of their NWO version of money at that time? One wonders, but not too much. If they can bring the world's economies to the brink over and over again, nothing seems to be passed their consideration / nefarious plots.
[rant] Gold savers wait, secure in the knowledge that we are counter-parties to whatever flakey nonsense they dredge up next. Globo? Bancor? When all is said and done, the ancient traders understood more about money than all the present-day pundits with their PhD sheepskins proclaiming how much they have learned --- yet how little they know. [/rant]
Joined: Jan 2007 Posts: 789 Location: Here_&_Now Karma: 16
Re: How Could I Ever Forget ? « Reply #6 on Sept 7, 2009, 12:27am »
-
DABCHICK's GOLD INDEX
This index is intended to show how gold is valued throughout the world independently of the value of any country's individual currency. It is not really much use as a day-to-day indicator when currencies are stable relative to one another, and is best plotted as a monthly chart.
A case can be made that gold is due for a correction before heading much higher. In dollar terms. Kitco's Jon Nadler notes a nugget of deflationary news that could give the dollar a respite from its bear market and augur a spell of dollar strength near term:
... One finding that ought to have the inflation-leaning perma-bulls scratching their collective heads is the irrefutable evidence that M2 money supply has been contracting. That's right, contracting. Even in the midst of the Fed's asset shopping spree. At the worst rate in recent memory. Consumer credit imploded at five times the rate that had been expected by analysts. Wage and price pressures are pointing towards the floor for the time being...
UrbanSurvival Replaying 1929 - Long Wave Economic news & Analysis
Recovery Lie Revealed September 9th, 2009
Most people are willing to swallow - hook, line & sinker - the notion that there’s some kind of an economic recovery underway. However, the latest figures out in the Federal Reserve’s consumer debt report (a/k/a/ Consumer Credit G.19) shows that the amount of debt being created had started to collapse again in July.
Why We’re So Screwed
Consumer Credit: G.19 Federal Reserve Data 9/8/2009
June ‘09 July ‘09 Category -7.40% -10.40% Annual Rate of Change TOTAL Credit -6.40% -8.00% Annual Rate of Change REVOLVING Credit -8.00% -11.70% Annual Rate of Change NON-REVOLVING Credit
3.88% 3.43% New Car Loan Interest Rate 91.00% 92.00% Loan to Value % $28,215 $28,866 Amount Financed
A couple of things may drift to mind of even unaware people upon a quick glance at these numbers. But the major one is pretty darned simple: America has been a consumer driven economy. What’s this? Consumer credit is dropping at a pretty good clip, says this Fed report.
So let me ask you the Big Ugly question:
“If the consumer isn’t driving the economy, who is?”
—
Not being able to resist answering a rhetorical question,
"The PRINTING PRESS is driving the economy." (8~D)
So, it appears we have a race condition between in- & de- flation. Surprise, surprise, surprise -- NOT.
But consumer demand is just one factor in the 'flation scenario. It is being "encouraged" by money at zero interest for the big spenders, not us little consumer bugs. Trouble is, NO ONE is taking out the loans that convert credit into money. Bummer. Pushing on a string is not very effective now, is it. Being "zero-bound" is not very comfortable either. So here we are.
But that is just the economy; there are other forces at play that may at times have a profound effect on the $POG. I prepared the following earlier and see no reason not to stuff it in here as a complement to Finster's opening salvo.
---------------
Adrian Douglas: Barrick can't get gold needed to cover hedges
Submitted by cpowell on Wed, 2009-09-09 18:33. Section: Daily Dispatches http://www.gata.org/node/7773 By Adrian Douglas Wednesday, September 9, 2009
Today Mineweb published a report by its writer, Dorothy Kosich, covering the announcement by Barrick Gold that it will eliminate most of its hedge book:
But Barrick is not eliminating hedges by actually delivering gold. The company is instead raising cash to pay off its obligations. This is technically a default on the delivery of the hedged gold.
I recently wrote an article titled "A Run on the Bank of the Gold Cartel" in which I asserted that many factors are coming together to put stress on the physical gold market. See:
Paul Walker, CEO of the GFMS metals consultancy, said recently that the gold price has risen because there have been "large, lumpy transactions in a market that has a degree of illiquidity." I can't think of a better euphemism for a short squeeze. ---------- Barrick has announced that the company is not delivering the gold it has sold forward. The company is raising cash from the sale of stock so it might deliver cash instead of gold. I don’t know if this is a default under the terms of the company’s hedge contracts, but it is technically a default because gold was sold for future delivery and the future delivery is not being made. ---------- Essentially this means that some time in the past Barrick received cash for its yet-to-be-mined gold that the company now is having to pay back ... considerably more insofar as the company is recording a loss of $5.6 billion without a single ounce of gold being involved. This is not mining; it is gambling. And Barrick, and more importantly its shareholders, lost big-time. ---------- In theory Barrick should have to go into the market and buy gold to deliver into its obligations instead of paying cash. Of course this would blow the gold price sky-high and thus might bankrupt the company in the process. But this is not the end of the story because the counterparty to these hedges, probably JPMorganChase, no doubt also has obligations to deliver to some other entity the gold it was expecting from Barrick -- maybe a central bank. Will the counterparty also be able to settle its obligations in cash or will significant quantities of gold have to be purchased? Barrick may be getting off the hook but this technical default creates a shortage of physical gold.
> the last one in this chain of contracts is left holding a bag of paper < > that paper may even be gold ETF but it is still paper just the same <
Many other mining companies, such as AnglogoldAshanti, that had undertaken disastrously unprofitable hedges when gold was selling at multi-decade lows and below its cost of production have been delivering their [gold] production into their hedge obligations.
Barrick’s action is different -- a technical default on delivering physical gold that had been sold forward.
This is explosive news for the gold market.
The run on the Bank of the Gold Cartel is unfolding.
Much more gold has been sold than can be delivered.
The implications for the gold price are mind boggling. ---------- Adrian Douglas is publisher of the Market Force Analysis newsletter (www.MarketForceAnalysis.com) and a member of GATA’s Board of Directors. ----------
One more example of Mike's observation that more "trusts" are becoming more un-trustworthy -- and that is no longer a problem !!!
“If the consumer isn’t driving the economy, who is?”
—
Not being able to resist answering a rhetorical question,
"The PRINTING PRESS is driving the economy." (8~D)
So, it appears we have a race condition between in- & de- flation. Surprise, surprise, surprise -- NOT.
But consumer demand is just one factor in the 'flation scenario...
To boil it down to its essence: In our system money is lent into existence. Expanding the money supply therefore requires both a lender (banking system) and a borrower. For decades the latter has been the American consumer. But now he's all borrowed out. The Fed's money machine is jammed.
But not to worry, all we need is a substitute borrower. Enter Uncle Sam. Can Sam fill the consumer's awesome shoes? Can Sam borrow until he's broke too?
Stay tuned ... for the next exciting epsiode of "How We inflated the United States of America Broke", by Fed, Fannie & Freddie.
To boil it down to its essence: In our system money is lent into existence. Expanding the money supply therefore requires both a lender (banking system) and a borrower. For decades the latter has been the American consumer. But now he's all borrowed out. The Fed's money machine is jammed.
But not to worry, all we need is a substitute borrower. Enter Uncle Sam. Can Sam fill the consumer's awesome shoes? Can Sam borrow until he's broke too?
Stay tuned ... for the next exciting epsiode of "How We inflated the United States of America Broke", by Fed, Fannie & Freddie.
I really liked this Link that our own Bullau posted over at Agoracom:
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pea is still there somewhere - the pea being the fact that the Fed is creating money to fund the purchase of US debt.
Joined: Jan 2007 Posts: 789 Location: Here_&_Now Karma: 16
Re: Gold Strikes Out On Its Own « Reply #11 on Sept 9, 2009, 8:30pm »
- [QUOTE] .... it uses this three-step shell game to hide what it is doing under a layer of complexity: Shell #1: Foreign central banks sell agency debt out of the custody account. Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air. Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction. .... [/QUOTE]
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." -- John Maynard Keynes, The Economic Consequences of the Peace, 1919.
Chris Martenson is one-in-a-million ...... ...... and so is Ernest Hemingway, imo.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin." -- Ernest Hemingway
To boil it down to its essence: In our system money is lent into existence. Expanding the money supply therefore requires both a lender (banking system) and a borrower. For decades the latter has been the American consumer. But now he's all borrowed out. The Fed's money machine is jammed.
But not to worry, all we need is a substitute borrower. Enter Uncle Sam. Can Sam fill the consumer's awesome shoes? Can Sam borrow until he's broke too?
Stay tuned ... for the next exciting episode of "How We inflated the United States of America Broke", by Fed, Fannie & Freddie.
I really liked this Link that our own Bullau posted over at Agoracom:
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pea is still there somewhere - the pea being the fact that the Fed is creating money to fund the purchase of US debt.
Exactly, Crow. Net out the algebra and the government effectively has its own printing press. That raises the question, how far can it (will it) go? What if anything restrains this process? A couple things come to mind.
Other countries like China hold awesome amounts of UST, and have recently become vocal about their dollar debasement concerns. And they are in a position to act, too; All they'd need to do is start dumping and US interest rates surge. Even just ceasing to buy at recent rates could have a huge effect. Of course, there are countervailing forces for them to consider, too; as US security holders their own portfolio could be crushed, and they are not as yet prepared to do without US demand for their exports.
Monetization of UST and other debt also results in surging oil prices as the value of the dollar falls in global markets. This upsets Americans pretty visibly. While price gains can be blamed on "greedy corporations" and "speculators", scapegoating can only work so far; eventually high oil prices themselves bring about recession.
Even with these restraints, though, the Fed will push it as far as they can. The US government is the world's biggest debtor and cannot tolerate a deflationary rise in the units of its obligations. Conversely, it benefits from inflation and will see to it it gets it.
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." -- John Maynard Keynes, The Economic Consequences of the Peace, 1919.
Chris Martenson is one-in-a-million ...... ...... and so is Ernest Hemingway, imo.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin." -- Ernest Hemingway
"No one has a natural right to the trade of money lender, but he who has money to lend."
"A private central bank isuing the public currency is a greater menace to the liberties of the people than a standing army."
"We must not let our rulers load us with perpetual debt."
"Every one, through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands. This was a real tax on him ... and by a mode of taxation the most oppressive of all..."
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