What is Pushing Down the Gold Price: Part II

This is a continuation of What is Pushing Down the Gold Price: Part I.

One factor is the lack of rapidly rising consumer prices. If consumer prices aren’t rising, then this eliminates the need to buy gold as a hedge. Gold speculators are like everyone else. They get frustrated waiting for a rapid price gain that isn’t occurring. They see the financial news where talking heads and prognosticators reiterate the conventional theory that gold is a commodity bought on fear, it will go down more according to the experts, etc.

Just as I was writing this paragraph, I received an email from a reader with a link to this Bloomberg Businessweek article. It asserts:

“Why is gold plunging? The most important factor is that global inflation is falling, reducing gold’s value as a hedge against rising prices. Gold bugs who were betting on an outburst of inflation are scrambling to reverse their bets and exit their gold positions at any price.”

Here is a graph showing the prices of copper and crude oil. These prices were rising prior to February last year, but since then have been in a falling trend with cyclical bounces making lower highs, and now a lower low in copper. The purchasing power of the dollar is seemingly doing fine, if not gaining. Why hold gold indeed?

Copper and Oil Prices

copperoilprices_4-17

Most people hold an imprecise definition of inflation. Inflation is not the phenomenon of rising prices, though this is a possible consequence of inflation (falling prices are another possible consequence as I will discuss in a future paper). Inflation is an expansion of counterfeit credit. This is typically when the borrower lacks the means or intent to repay. The inevitable outcome is defaults and losses to creditors.

The conventional view is not merely wrong descriptively. It is not just that prices don’t change as M0 or M2 “money supply” changes. The view also masks the problem with inflation: balance sheet stress. Every bank and financial intermediary can borrow enormous quantities of dollars at virtually zero interest, in order to buy every manner of asset. What happens if one of those assets should fall in price? The liability remains, of course. If liabilities > assets, then a bank is bankrupt.

Balance sheet stress can lead to forced selling, and not necessarily confined to the asset that fell initially. For example, a Japanese bank may have borrowed from the Bank of Japan in order to load up on Japanese government bonds. Then, they may have done a sale and repurchase agreement (Repo) to Bank B. B may have pledged the bonds as collateral in order to borrow and buy another asset.

As the Japanese government bond falls, the Japanese bank is now losing capital rapidly. If they are leveraged 20:1, then a mere 5% drop in the bond price will wipe out their equity in the trade (many banks, especially outside the US, are leveraged more than that). What can it do to stanch the bleeding? It could sell the bond. Alternatively, it might sell other assets that have gone up in price, and be happy to book a profit.

Still, the Japanese bank may have another problem. The Repo agreement may include a provision where it has a daily margin call, if the price drops. They may have to add cash or other assets every day that the bond drops.

On April 4, Japanese Government Bonds opened at $146.31 and hit a low of $143.18 (all prices from US futures markets), before recovering somewhat. By April 11, they closed at $143.77. Even assuming no intraday margin calls (the bank’s internal risk management group may be stricter than a third party creditor), the price fell over 2%. The government bond is defined as the “risk free asset”; 2% is a big drop. Incidentally, high volatility may itself lead to an increase in margin requirements. For reference, CME raised the margin requirements for gold futures on Monday by 18.5%.

That’s not all. Bank B may also be facing margin calls or other pressure to shrink its balance sheet. Its sale of assets could put pressure on other balance sheets.

The backdrop to this discussion is the chronic falling interest rate. Financial intermediaries are pressured to take on ever more leverage. The cost of borrowing is lower and they need more leverage to make the same return on equity. Also, the falling rate encourages them to borrow using short-term funding. The problem is that, if there is a glitch because the borrower needs to find more collateral, or the lender is having liquidity problems, then assets must be rapidly dumped (sound familiar?) in order to raise desperately needed cash.

The system, based as it is on high and rising leverage, low and falling rates, borrowing short to lend long, and financial engineering, has become very brittle.

Inflation, understood in this light, can pump up asset prices for a while, and then cause a violent crash. Inflation directly undermines the stability of the system.

There is another dynamic that we should consider for its role in the formation of the gold price. Let’s use Cyprus as a microcosm. Prior to March 15, the average Cypriot thought of gold as an inflation hedge. He may have felt that since prices weren’t rising that much, despite unconventional monetary policy, it was not worth holding. Today, he is regretting not having bought gold. Why? Because Cypriot banks defaulted, and gold is as good as ever.

I emphasize that the reason to own gold has nothing to do with consumer prices. The problem with the system is that every financial asset, except gold, is the liability of another party. Every one of them is leveraging up in a desperate attempt to chase yield and keep mismatching the duration of their funding to their assets, and their assets consist increasingly of counterfeit credit. The probability of default is rising. Gold is the only way to avoid risking default and total losses.

This risk creates a highly non-linear dynamic. A bank deposit or even a paper currency note can hold steady or maybe decline at a slow rate for a long period of time. Until, suddenly, it’s worthless. If I told you that I am selling a bond that will formally default tomorrow, what would you pay for it? The US Treasury bond will someday default, but the whole world bids on the Treasury bond and the price is rising.

“It’s not a problem until it’s a problem,” as the expression goes. Another way of expressing it comes from Ernest Hemingway, who famously wrote in The Sun Also Rises, “How did you go bankrupt? Two ways. Gradually, then suddenly.”

Before I answer my rhetorical question of the title of this article, I have one more question for every gold bug. When the final collapse comes, and the gold price is doubling every week, then every day, then every hour and then finally there is no gold price—there is no gold available at any price—will you sell your gold, and take your dollar-denominated profits? At what point will you recognize it for what it is and begin to think of your wealth in gold?

I asked what is pushing down the gold price. Now here is my answer, though it may not be what you wanted to hear.

You are!

Everyone who thinks of his wealth in dollars, whose balance sheet uses the dollar as numeraire, and especially, everyone who borrows dollars to fund gold purchases is contributing to the unsustainable spikes up and vicious crashes down that characterize the current market for gold. And I have one other unpleasant thing to tell you.

Volatility will rise, as the financial system gets closer to the terminal phase!

If you think that $250 down in a week is painful, you can look forward to $250 up or down in a day. Not necessarily this year, but it’s coming.

Once most of the speculators are flushed, then other buyers can begin to push up the price with their more steady—and unleveraged—accumulation. Patient, and relentless, these people think of their wealth in terms of gold. They are the driver towards permanent backwardation, as they are not motivated to sell by higher prices.

Unfortunately for the speculators, sentiment changed on Monday and there was heavy selling of physical metal leading the sales of futures.

46 replies
  1. schmidh says:

    Damn, I knew it was me! ;-)

    Thanks for your posting. You are so right. The last weeks Sprott was asking who in the hell is selling all that gold and silver. What a schmuck – he did!

  2. mossmoon says:

    I really enjoyed this. But as far as debunking…

    You are basically saying that the process of gold reasserting itself as money in a system of leveraged counterfeit credit will be highly disruptive and volatile.

    That is one of the best reasons to control the fiat price.

    That is GATA’s argument exactly. I knew you were a member! :-)

  3. petter_w says:

    Interesting article. I agree that the problem is how people view their wealth – in dollars not in ounces of gold. Gold is not an inflation hedge. It is the only true riskless asset – along with maybe silver.
    Yet dollars (electronic and paper bills) are still the most marketable good – otherwise people would not think in dollars – but in gold. And this despite all the craziness in the financial system.
    It will require some more folks to get cyprussed or some massive money printing to change this view.

    Question: What is your view on silver as a riskless asset? Do you think that in the case of massive defaults in the banking system and credit getting wiped out on a large scale that silver will outperform gold ?

    • Keith Weiner says:

      Petter: you make an interesting point that the dollar is more marketable than gold, though I must quibble that the dollar is not a “good” but a credit instrument.

      Yes, silver has no risk of default. Its price (in gold terms) could fluctuate. I suspect that the silver price will end up higher than its current 1/60 ounce and above its historic average around 1/16 oz of gold at the end of the day, but that’s not something I could prove.

      • mossmoon says:

        Why would you put the ultimate gold/silver price ratio at above 16:1? Especially given this…

        http://jessescrossroadscafe.blogspot.com/2013/04/world-production-of-silver-and-gold.html

        And this:

        The last 50 years of silver’s use primarily as an industrial metal has depleted government stockpiles and resulted in the silver not already in products winding up for the most part in landfills or lost altogether.

        I think you have used a silver stock-to-flow ratio of 20:1. That’s what, a stock of 15 billion ounces of silver.

        The high number for gold is 10 billion. Let’s say the silver number is off by 300%. That’s 45 billion ounces of silver, implying a stock-to-flow of 60:1.

        That’s a price ratio of 4.5:1, just to simplify. Of course prices (or purchasing power if you must) will probably overshoot in both directions, especially higher for silver given the massive recycling efforts that will take time.

        Given this, I don’t know how anyone could speak confidently about a price ratio anywhere near the historical low of 15:1.

        Could you explain your reasoning bringing you to a price ratio that won’t even reach 16:1?

        • Keith Weiner says:

          If price was a function of quantity then an ounce of platinum would cost hundreds of ounces (if not thousands) of ounces of gold. I don’t think one can analyze value based on quantities.

          The reason why I suspect the silver price (in gold terms) will be lower than it was in the prior centuries is that gold is more practical for smaller transactions than it ever was. Precise metallurgy, snap-off 1g wafers, and electronic methods to allow small fractions of an ounce may take some pressure off silver that would have served for smaller transaction values previously.

          Btw, if silver’s stocks to flows has fallen then that is a sign that it has been, to some extent, demonetized. That is not a prescription for a high (or relatively constant) price in gold terms at the end of the day.

          • petter_w says:

            Would it be correct to say that for the time being the dollar is the most marketable “good” – or credit instrument and that gold and silver are less marketable ? After all, if I want to buy something , I need dollars. The deflationist scenario where the system crumbels under its own weight of debt does not scare enough people, yet. The view that the physical dollar bills will be king in a collapse is supported by many, such as Bob Prechter. Even Antal Fekete recommends (or at some point recommended) to hoard dollar bills in small denominations.
            What speaks against this is that should the dollar centric banking system collapse (or when it does) society as we know it will be very different with long lines in front of the employment office and local soup kitchen as well as capital controls and possibly war. Would the physical dollar bills be king in this environment or will it be gold and silver. I think it will be the latter. This scenario is the opposite of the relative calm we see today. As longs as this persists, the dollar will still be the most marketable good / credit instrument. It requires some type of chock or catastrophic event to change this which forces the guvvamint to let the printing presses run 24/7 to ‘finance’ whatever it will do.

          • dbrillo says:

            Petter_w

            Why do you say you need only dollars to perform transactions?? Have you asked anybody if they would take gold or silver instead of cash?

            I bought a state of the art brand new metal detector last fall for a 1/4 ozt gold eagle.
            I negotiated price for my daughters braces for gold.
            I negotiated repairs on three vehicles for gold and silver.
            JP Morgand and Chase both accept gold for repayment of credit card debt or any other debt you may owe them.

            There are lists of resteraunts all over the US that accept gold or silver for food.

            In the state of Utah Gold and Silver are legal money for all transactions.

            I have used gold/silver in a multitude of transactions including filling up my tank at a SA gas station (three silver Kenedy’s) just to see if I could.

            I suspect you’ve never tried. I, for my part have never been refused. What’s the problem?

            Oh, I just remembered, my Chiropracter will give me an adjustment for an ounce of silver. That is our agreement.

            Cheers.

          • Uronlydreaming says:

            Same as dbrillo.

            I am using ag and au as money. Bought a good lot of hunting equipment including bow and black powder rifle. These will get me food which can be eaten, sold and bartered.

            The thing with metals is, if you really understand the truth that they are real money, you can, eventually, find someone else who understands and/or convince someone, that their 5yr old pickup truck, while useful, is constantly deteriorating. And while they can fantasize that its worth what everyone else is pricing them, the prospect of having real money in exchange, that won’t deteriorate – but stores wealth – can result in a significant discount (that far outweighs any premiums at the time).

            Example –
            * hunting gear, if new, $2200
            * same hunting gear, used $1500
            * Offer of $1200 accepted
            * Ag spot was $32.50
            * Explained premium, real money, storage of wealth, etc. and valued at $35/oz

            I gave this guy 3-10oz bars of Ag and $150.

            Now, hardcore metalbugs would get out their calculators and/or haggle over the premium, but some ppl just like the idea of trading in their useless deteriorating stuff for timeless, real money.

            Yesterday, on Craigslist, i got at least $1k worth of camo hunting gear for $430. I offered him Ag, he said no thanks. Point is, to TRY. Just don’t talk too loosely. You don’t want everyone knowing you as “the guy with the silver” when the dollar takes a swan dive.

      • muledeerman says:

        Hey Keith thank You for the articles.
        I dont know why holders of PMs are freaking out about lower prices.
        This is a gift. I buy regularly. Not using more cash than I foresee needing.
        I really dont know if or when I would ever sell them.
        Isnt this what we should, do is accumulate PMs?
        Isnt the point to trade in paper money?

        TJ from Louisiana

  4. tmiovas says:

    Just curious. There were reports that some institutions were forced to sell an awful lot of gold over the past several days. I think you covered this re banks being over-extended in debt and must raise quick cash somehow. But what would put them into that position? I think you said the bonds were going bad, so they had to sell something, but if gold is money, as you say, and I tend to agree, why sell gold instead of something else? But I think I do agree with you that it is those who want gold to make a profit (supposed profit) in cash bank notes that are causing the wild swings. I still don’t understand the metrics of gold to dollar ratios, though I do understand that gold can become the ultimate value when the dollar and other central bank notes become worthless and there is no gold to dollar ratio possible.

    http://www.futuresmag.com/2013/04/15/gold-crushed-by-400-tonnes-or-20-billion-of-sellin

    • Keith Weiner says:

      They have been selling equities in Europe and now in the US. They sell gold because it has no yield but it always has a robust bid and very tight bid-ask spread. This is not true for many other assets.

      As I said, I think it’s exacerbated by speculators who are almost disappointed that the CPI is low, and that the gold price has not moved up with the Fed’s balance sheet. Just today I saw some commentator say that the European Central Bank will increase its money printing and this will be “good for gold”!

  5. tyonker says:

    Keith I believe the “goldbug conspiracy” explanation of manipulated prices is based on selling unlimited naked short futures contracts, not as you suggest “dumping physical metals”. Is it not true that huge amounts of short paper silver silver and gold hitting the market would serve to lower prices? You assert that if only everyone thought in gold terms we would just go worry free through any correction. Given the current misunderstandings in the realm of money it’s not hard to see why people get fired up about gold and silver dropping. Dr Fekete’s thinking as to the basis and risk free profits is interesting. Can you tell me any reason that the search for risk free profits increases so dramatically from time to time? Where do you feel that prices for the precious metals are set? There is the london gold fix and the comex price and the price for buying retail gold seem to rely on the comex price. One last question, can you point me to an individual or company who has accumulated large amounts of precious metals by using the backwardation principles you espouse? By the way, thank you for your time and effort in trying to teach and help people to understand the seemingly unknowable. Sincerely.

  6. tyonker says:

    More thoughts on manipulation, you mention the cpi being low, yet one of the pet peeves of the goldbugs is that inflation numbers brought forward by the government are phony. I tend to agree with that assessment having recently gone to the grocery store myself. Then there is the admitted libor fraud and the banks admitted money laundering scandal. The MF Global debacle, Cyprus. The government is giving plenty of signals that all is not kosher in Emerald City.

    • Keith Weiner says:

      People can quibble all they want about prices, the bottom line is that crude oil is significantly cheaper today than in 2008, as is copper, etc. Those who hold gold as a hedge against inflation (so called) got frustrated and there are numerous articles in the mainstream that encourage this frustration, allude to it, exacerbate it, etc. Prices simply have not moved as the inflationists predicted.

      Huge amounts of naked paper shorts hitting the market would lower the price of the futures contract bid. If the real situation with metal was tight and getting tighter, that would be a massive backwardation. The gold market would not experience “lower prices”, it would experience a total seize-up.

      I do not contend that the search for risk free profits varies. I contend that sometimes the market offers them (i.e. backwardation) and sometimes not. Contango is not a risk-free profit; there is credit risk.

      • andrewp111 says:

        How low do you think gold can go in dollar terms? What is the minimum? We know from experience that the price dropped sharply during the financial crash in 2008. If there was a bigger crash, say an EU bank implosion 100x Lehman, what would the gold price be expected to do?

      • Econophile says:

        CPI is something that really irritates me. The gold bugs and many prominent Austrian economists have been dead wrong about prices. I hear all the time that the government jimmies the CPI to keep us in the dark about inflation. I don’t buy it. On a short-term basis I believe the CPI price index is correct. But does it mean anything? The real problem with CPI is that it doesn’t really tell us anything. If prices of goods are affected by supply and demand or production efficiencies, how does that really measure “inflation”? As you point out Keith, what really counts is true inflation, or money supply expansion, and that “price inflation” is just one effect of that malady. There are worse consequences than price increases, which usually occur in later stages of true inflation. In the long-term we can see that effects of true inflation as money is devalued relative to things like gold, copper, and bread. But it’s the counterfeiting that really harms the economy, resulting in malinvestment, destruction of capital, social mayhem, and poverty.

        • luveh2 says:

          Dear Econophile, the CPI is a government statistic; it is an attempt to supply an official (politically-determined) average rate of inflation, where inflation is redefined simply as rising prices. The purpose of the CPI is to give government planners justifications for interventionism. It serves no other purpose. The statistical definition has, once again, just recently, been redefined. Called “chain inflation”, it takes into account that people switch their buying patterns when prices rise. Fresh food becomes more expensive, for instance, so people buy cheaper canned versions. This is heralded as a an improved definition. No longer able to afford fresh roast beef, people can instead eat more canned dog food with beef by-products. No price increase problem to see here, just move along. Of course, there is also what is known as the fallacy of division. What is true of a greater entity is not necessarily true of its parts. If you are convinced you have the same standard of living and saving this year as last after a 2.5% price adjustment is made that is all well and good. But this average means there will be people, many people in fact, who do not have that average. Indeed, there may well be many, many people who face a much higher increase in prices, Since staples on which people’s lives depend are not counted, but the falling price of electronic entertainment devices are counted, it makes little sense for individuals to just automatically assume their price increases are “average”. I would not go to a tailor who will only sell me a suit for an average height and girth, a doctor who would only prescribe average dosages of medicines or an airline that would fly me only the average distance of all its destinations. The CPI is an average and is significant only as an arbitrary standard. The CPI+1 or the CPI-1 would serve just as well. If you are a central planner contemplating your next intervention decision for an entire economy, you may well want a number to hang your hat on. The CPI is political, and not economic, datum. It is meaningful only if it serves the purpose of providing ex post facto justification for policy decisions. And, if not, just redefine it until it does.

    • tyonker says:

      from recent article by the Proffessor himself:

      ” Bernanke is trying to stop gold backwardation by selling unlimited amount of gold futures contracts through his stooges, the bullion banks. He is underwriting losses they are certain to suffer in due course. We can take it for granted that they haven’t got the gold to make delivery on their contracts. In fact, delivery of gold will be suspended under the force majeure clause. Short positions will have to be settled in cash, to be made available by the Fed’s printing presses. Gold futures trading will be a thing of the past.

      Bernanke and columnist Paul Krugman, formerly his
      subaltern colleague at Princeton don’t understand that the issue is not the price of gold. The issue is backwardation or contango. In trying to wrestle thegold price to the ground the Fed makes “the last contango in Washington”* an accomplished fact”

      Go Doc Go! I think he understands this better than anyone. Can you say DERIVATIVE?

  7. bobpolack says:

    Keith, it was a really interesting article. I have been on the edge of having similar thoughts about holding physical PMs lately, but you articulated it, and very well too. Thank you.

    The key is whether or not you regard Gold as primary, or, as is the very-hard-to-break habit, you keep using the dollar as the measure of everything.

    But, I would also point out that one can be a monetary PM person and a “goldbug” at the same time. You still have to pay the utility bill in dollars, so it becomes a matter of where to get some of them in the interim.

  8. dbrillo says:

    Confirmed. I bought all the way up, and I’ve been buying all the way down at any price with cash from my local dealers (I have two). My closest dealer has shut down all sales to national dealers and customers (not enough inventory) so that he can supply his local customers here in MN.

    He said when the inventory is gone, he will temporarily shut down until he can justify paying high premiums for new stock that he will be able to pass off to customers and still make a profit.

    My brother was in there yesterday and the owner took out 3 100 ozt bars he found at bottom of safe he forgot he had. Not 5 minutes later, a man walked in and paid cash for all three.

    My brother was allowed to hold one by the new owner after they were placed in plastic baggies. Us poor folk don’t get to see much less handle gold in that quantity.

    Cheers, and thanks for the information that has cleared up a lot of questions I’ve been wondering about. This makes more sense to me.

    One question, ABN AMRO couldn’t make good delivery of gold to their customers and eventually had to pay them off in cash at current spot. On the one hand, it feeds to the conspiracy theory of rehypothication, but the fact remains, they had the cash to pay off their customers so no default. One wonders if this was illegal since customers declaring good delivery lost out on a weeks worth of decline in spot. I would think there would be a lawsuit there somewhere?

    • runeks says:

      I think legal tender law come into play here. I’m still looking for a definitive answer to what legal tender law actually constitutes, but my current understanding is that the money that is declared legal tender (which is the national currency (USD, EUR, GBP, etc.)) is required, by law, to be accepted by a creditor as payment of a debt. So ABN AMRO, owing gold to their customers, might have the legal right – because of legal tender law – to pay back their customers (creditors) in national currency (legal tender). I’m not absolutely sure about this, and I’m not going to pay a lawyer to find out, and I’m hoping to find a definitive answer to this, but it’s my current understanding that this is the case.

      • dbrillo says:

        Plausable, but I don’t think that is what the customer agreed to when they “assumed” they were buying the shiney. That being said, I’m too lazy to read the fine print perspectus, so your answer works for me.

    • dbrillo says:

      I like Contango. Sounds like an exotic female latino dancer. Watch the videos on this site. Every single one. You get the definition and explination and they are educational. In fact, many of the answers to questions here are contained therein.

      Cheers.

  9. Peter U says:

    Thank you Keith for a clearer explanation, amongst all the noise, of what is surely a problematic question: “What & Who caused it?”. I remain unsure as to the true reasoning behind this sudden move in the gold price (I watch this daily), but agree that liquidity pressures posed by leverage in bond markets has much to do with it.

    In practice though, are you saying that ‘n’ number of ‘speculators’ decided all at once to ‘sell’ 400 tonnes in two lots, 100 and 2 hrs later 300. Or might this be just one or two bullion banks, the Fed, BoJ or even BoE/ECB?

    BTW – I lean towards the Austrian school of economics where I believe the velocity of money is an important factor in forecasting inflation in a fiat currency system. At present velocity has trended down since 2000 even as the quantity has increased exponentially yet over the period prices have increased on all commodities.

    I don’t know enough about all this but continue my studies to gain a better understanding of macroeconomics. My next book is ‘Economics in One Lesson’ by Henry Hazlitt. When I have understood this one I’ll get back to you.

  10. JR says:

    Here’s the deal Keith. You’ll be saying much the same thing for who knows how long, that’s gradually, then all of a sudden, gold will be in permanent backwardation.

    I predict even you won’t predict that.

  11. curwar12 says:

    “Unfortunately for the speculators, sentiment changed on Monday and there was heavy selling of physical metal leading the sales of futures.”

    This last sentence was lost on me. Why not write: …and there was heavy “buying” of physical metal leading the sales of futures. Paper and physical are in disconnect are they not, even if your not a believer in conspiracy bullion bank involvement?

    • dbrillo says:

      “This last sentence was lost on me. Why not write: …and there was heavy “buying” of physical metal leading the sales of futures.”

      Because the bids kept collapsing lower due to excess supply, so gold was bought at lower prices favoring a “buyers” market. It was a sell off, not a buy up.

      If I’m buying gold I want it for the cheapest price. If there is a lot in circualation, I can negotiate the lowest price at three dealers in town.

      Today, there was no gold left except one dealer in town. His premium over spot was high for a reason as the only game left in town due to demand or “sellers” market bidding the price upward. I bought silver instead. He had no problem selling his gold to “other” buyers.

      Heavy buying would indicate large demand and short supply and prices would rise.

      Cheers.

  12. irasteinberg says:

    Seems like a lot of mumbo jumbo to me. Just buy gold and silver and hold it. When your neighbors and friends and just about everyone starts doing the same thing then it’s time to sell. That is about all you need to know to invest successfully in precious metals.

  13. AgPa001 says:

    The article is excellent as the comments too…as directed to prof people. I have only principles of economy theory, but one thing is for sure, if you do not consider the whole environment where economy develops, your descriptions and insights are of a closed system…and will work until the assumptions of the “system” prevail…World is ample and a new perspective is urgent…not Austrian, not socialism or the other ism…just “open” the system and the residual subsisting theory plus New World Order, in the correct ethical sense, will be good but as all human intent of universality, it always be not totally complete but more consistent and robust than the previous one… Economy as politics are more Art than Science…just an opinion…sorry so much if I offend you, not in my aim…TKY

  14. Keith Weiner says:

    Thanks for all the comments. I have a few responses:

    dbrillo makes an excellent point. There is no problem finding people willing to accept gold or silver. Sure, not a chain store because they don’t have a process for it. But many others would consider it. The problem is why would one pay in gold if one can pay in dollars? Gresham’s Law.

    tmiovas: gold always has a tight bid-ask spread, whereas other assets could have a much wider spread that would widen even more if they must suddenly sell lots of it.

    Peter U: I don’t take it for a fact that 500 tons were sold all at once. I know there are many saying this. The last time I looked into and wrote a short article, there was not even the slightest blip on the basis charts.

    curwar: it was not heavy buying that caused the price to crash, was it? ;)

    irasteinberg: sell gold in exchange for what? The bonds of insolvent governments who are increasing their unpayable debts exponentially?

  15. mannfm11 says:

    Has silver ever had a sustainable free market price of 16 to 1 or has this been a government fiat price in coinage? I have read in 1932, silver traded at 25 cents an ounce. Up to the time when the US government quit coining silver, they were making money coining it.

    Gold trades at a premium because it is a much more desirable metal than silver. There are no substitutes. it doesn’t corrode and it survives about anything. Most normal prices have been in the 50 to 1 range, give or take a few points. This could change if the surplus of silver dries up, but there has been plenty of gold stacked up for hundreds of years, so that is hard to argue. I suspect a high price of silver will merely force the development of substitutes.

    As for the rest of the article, I find little to debate. I own no gold and am aware that it is time to get some, damned the price. The door will slam suddenly, just as the door to get out of Greek bonds slammed suddenly, though there were chances to take losses along the way that were less than what will finally be taken. The debt of the US can only be pushed so far.

  16. danho194 says:

    What if the new oil and gas boom has actually made business more profitable by lowering gas prices and we will see a period where returns and interest rates will start to rise again? The problem of falling interest rates would dissappear for a while and gold would be less attractive at least medium term.

  17. ex nihilo says:

    keith, i’m aware i sound like a broken record by propagating the same conspiracy fact under nearly each of your essays, i.e. the bb’s are selling paper gold iou’s that will be settled in cash if no more gold can be found or stolen from other sovereigns to make good on deliveries. in one of your replies to my comment from a few weeks ago, i think you suggested, between the lines, that i might be a crank [not your word], it looks like i am not the only crank; and it would appear i might be in good company. no other than a.e.fekete in his latest piece “who said thy hydra would take it lying down” says this: “Bernanke is trying to stop gold backwardation by selling unlimited amount of gold futures contracts through his stooges, the bullion banks. He is underwriting losses they are certain to suffer in due course. We can take it for granted that they haven’t got the gold to make delivery on their contracts. In fact, delivery of gold will be suspended under the force majeure clause. Short positions will have to be settled in cash,..” in your opinion, is fekete a crank too? or not?

  18. Uronlydreaming says:

    A couple of things…

    Every time i get the jitters (which really isn’t often) watching metals dive, a couple of things occur:

    1. I think of selling half because i want a quick profit and imagine I can time the bottom and jump back in.

    2. I think of my friend’s late father, a big promotor/dealer in the antique world, who got caught hoarding loads of silver when the Hunt Bros failed to corner the market. Fortunately, he was still able to sell his Ag as service pieces and flatware replacement for much better than scrap, but at a snail’s pace.

    3. Keith reminds me of my original aim by reiterating that gold and silver are real money, using a cornucopia of historical references, analogies and technicals.

    4. I remember that I’m not broke and everything I’ve ever named on has eventually won out or come through (except often I’d bail early and miss it).

    The question is, am i informed or not? Do I understand what is going on our am I gambling? Do i believe in what is REAL and TIMELESS and TANGIBLE and UNTARNISHABLE and has been recognized as such by rulers and citizens of nations for m any centuries?

    I honestly don’t know exactly how things play out but I do know that I prepared even for deflation by entertaining many nice pieces of 14-24k under scrap which can be sold much higher than spot as jewelry.

    That’s MY hedge against deflation and a way to make the ride to the inevitable destination less bumpy.

  19. blackwater03 says:

    Keith, great info.

    I watched your lectures on Irredeemable Money and they were great.

    I think you have solved the insolvency problem with your gold backed bond. Now, can we get the politicians to go along with it before the system collapses? That might be more challenging than coming up with the solution.

    The pawn shop up the street raised their premiums on silver from $3.00 last week to $5.00 this week. Arrowhead Coin and Jewelry is out of silver entirely. And it didn’t sound like the pawn shop had much.

    Glad I bought when they have it and their premiums were $3.50-4.50 depending on what you bought. They still have gold.

    Glad I bought on Saturday last week and Monday this week during the big sell off.

    George T. in Phoenix.

  20. tyonker says:

    Did anyone else see the latest Dr Fekete article that refers to the manipulation as a fact? I think it was about the Hydra and
    no bs he calls a spade a spade.

    • danho194 says:

      A lot of people are saying it is manipulation, but as Fekete himself points out, any manipulation is counterproductive. Better to focus on fundamentals.

  21. tdcaMM says:

    Nice article Keith. Your point about GBs thinking of the wealth in dollars can be extended to gold mining stock investors too.

    Why haven’t miners offered to pay dividends in gold? Traditionally, there have been obvious logistical problems. However, that can now be over come with with certificates or DRIP like structures.

    If the demand were there, they would do it. Perhaps I am missing something,

  22. enduring88 says:

    I have recently terminated my near 20 year banking career in disgust at a system which has lost all credibility and my confidence.

    My entire life I have tried to build a future based on a system composed of inbuilt obsolescence and an inevitable time ticking explosion.

    More disturbingly few people realise the catastrophe upon us.

    Increasingly erratic and chaotic financial market complexities are symptomatic of an intrinsic decline in humanity’s guiding moral compass having the effect of prostrating us before the final strike.

    Paper everything is worthlessness in formation. All that will be left will be precious metals, commodities, land, physical structures, technology, ourselves and a very different world. In my mind the ‘greatest misery ever to unfold’ has happened and it is simply a matter of surviving through to the other end (after the anarchy).

    Recently I have discovered Professor Fekete who is an absolute gem find. I see Keith as being part of the global recovery phase. There are few people who understand the mechanics of what is happening, less still who are honest and barely any who genuinely care. Thank you Professors Fekete and Weiner.

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