July 8, 2013 at 10:27 am #8371
From time to time, it's nice to look at a series of graphs, and let them tell their thousand words worth – each – of stories. In this case, I star
[See the full post at: QE, The Velocity of Money And Dislocated Gold]July 8, 2013 at 3:59 pm #7903
The velocity of money has a huge impact. When I was in Western Australia recently (the home of the successful mining industry that has driven Australian prosperity), shop owners were telling me that business had not been so bad for 30 years. Why would this be so? Well, Chinese demand for commodities is down as their bubble begins to burst (because they’ve already grossly overbuilt infrastructure and stockpiled everything as well), so mining projects in Australia are being cancelled. This has not yet resulted in a loss of high paying jobs, but the fear that it will has resulted in discretionary spending falling off a cliff. In other words, the money is still there, but people have suddenly stopped spending it. that shift can happen on a dime, because it’s psychological.
Falling velocity of money acts as a major driver of economic contraction, and no amount of quantitative easing will make any difference, either in Australia or elsewhere. Once the economy begins to contract, a self-fulfilling prophecy to the downside is created, with business pessimism, higher unemployment, lower spending and more business failures.
Human beings are collectively very good at self-fulfilling prophecies in both directions. This is why we have the historical record we do of cycles of boom and bust. Those are merely emergent properties of operating at civilizational scale.July 8, 2013 at 4:58 pm #7904
Gold going down has importance and meaning and is telling us something, but when it is rising it is the foolishness of the uninformed that is at play. How amusing.
The violent collapse in the bond market, a most unusual and particularly violent down move of late is of much more importance to the future economic outlook in my view, Pimco alone has lost about 10% of its assets manged through redemptions in the past month.
How does this massive increase in Treasury yields in such a concentrated time period fit into this puzzle of the graphs. Should not yields be holding steady or making lows if the charts are telling us something? It is the US bond and Treasury market I am referring to with it’s US dollar reference point.July 8, 2013 at 5:39 pm #7905
Completely anecdotal, but I’ve noticed the same phenomenon happening on some of the bulletin boards where I buy/sell/trade goods.
Lots of quick sales and/or trades + cash used to occur up until a few months ago. Almost suddenly I noticed the volume of transactions drop off a cliff and many products seemed stuck in limbo with no buyers.
I had a few items I was trying to move, and despite the number of attempts to offer very lucrative “trade + cash” deals, I was almost always rebuffed with “sorry, just looking for cash”.
I’ve even noticed my contemporaries/friends tightening up on the amounts they spend when we go out, or avoiding going out all together. Yet they don’t want to admit to me (or more importantly, themselves) that all the doom/gloom I’ve espoused over the past 2 years may finally be coming to a head… but their actions speak volumes.
I can only assume people are starting to tighten up and/or deleverage. Still lots of “greater fools” out there, but pretty soon I think even they will start to figure out what’s going on.
VariableJuly 8, 2013 at 7:43 pm #7906
I would call for a huge sales tax to regulate the velocity of money where it begins (the checkout line), but the QE’s etc have already pushed the collective use of resources beyond anything that can be regulated with decent treatment of the populace. It’s all downhill from here, and maybe a sales tax-based culture will emerge in some distant time, when the remaining sub-billion population is rebuilding in Alaska or Antarctica on the only livable land left after the fires and desertification.July 9, 2013 at 12:28 am #7907July 9, 2013 at 1:10 am #7908
I haven’t noticed anyone tightening up on anything. It is still spend, buy, spend some more, go more places, eat at more restaurants. And rarely do I see anyone use cash, most people use credit cards. The Ponzi bubble, when it implodes, will be epic.July 9, 2013 at 1:10 pm #7912
So BASE includes EXCRESNS – Excess reserves deposited at the Fed.
This is essentially cash deposited at the Fed in excess of the reserve requirements. Why do banks deposit anything at the Fed if they don’t have to? The Fed currently pays 0.25%. Currently, a one-year treasury bill pays 0.14%, and short-term bank repos pay about 0.09%. In other words, the Fed is giving Banks a good deal, so guess what – the banks take it.
People aren’t borrowing – enough anyway – so the banks need to make money in order to pay their depositors that 0.01% they get from their savings account. So, banks take deposits, pay 0.01%, and get 0.25% from the Fed. It won’t make them rich, but its better than nothing, that’s for sure.
Anyone – how much does your money market fund pay you? How much does your savings account pay you? If you could get 0.25% for ultimately safe deposits, would you take it? I sure would. The Fed is the bank that will never go under!
The Fed started paying for excess reserves in October 2008. Short term treasury bond yields plummeted at that moment as money fled to safe havens, and it was at that moment that excess reserves category took off.
To me EXCRESNS is the place where a big chunk of QE money goes to…well if not die, then sleep. If the Fed decided to stop paying 0.25%, the excess reserves would flee from there into somewhere else that provided yield. Perhaps the 1 year treasury yield would fall even further.
QE does construct a bubble in the bond market, by propping up bond prices, and then most of the cash goes to park at the Fed, back where it started from.July 9, 2013 at 5:15 pm #7913
The best way to understand why gold is going down is to look at it in a simplistic way without getting too technical.
The average person is barely getting by and does not have enough money for gold.
For investment companies it does not bring in any revenue.
It is not a revenue generating asset.
It is for speculating and a hedge for the worst of times and when that will be no one knows but we do have an idea that.July 9, 2013 at 5:54 pm #7914
Why is gold going down?
My simple-minded view: the story that “money printing will inevitably lead to hyperinflation” started in 2009, gathered steam, peaking in 2011. Now, with no inflation in sight (never mind hyperinflation), the story appears busted. Gold owners (mostly the “paper” kind) have capitulated, first slowly, then en masse.
If gold is to bounce back, its quite likely that the goldbugs will have to come up with a better story than “QE will lead inevitably to hyperinflation.”
Deflation in the eurozone and threatened deflation in China has just added emphasis to gold’s move down.
This is my best guess anyway.July 9, 2013 at 6:58 pm #7915
I don’t think there is anyone that know how things will play out.
There will be a total collapse of the system.
We think it will be anywhere from 3 to 10 years.
I am not even sure if gold will shoot up even at those times.July 10, 2013 at 12:25 am #7918
Gold has no value as it can’t be used for anything, you dig it up and bury it! It is only perceived as having value. Only about 55% of gold is used, the rest is in vaults. Price rises when there is demand, and demand is fuelled by uncertainty in other markets. Now markets are rising (due mainly to global QE) gold is not now required as a hedge as better profits can be made on the markets.
if the markets stall again for whatever reason, economic or political, then gold will be in demand again and rise.
BobJuly 10, 2013 at 3:25 am #7919
You’re kidding? Gold has indestructible esthetic and market uses, and unlike legal tender, gold has permanent novelty value and universal trade utility by virtue of being recognised as an intransient product of labor throughout urban civilization.
The value of gold is irreducible because it takes effort to mine and refine, unlike the price of paper money, which may be devalued or hyperinflated away because it takes no effort to produce.
Gold has been successfully used as stable medium of exchange, store of value and unit of account for 6,500 years of urban civilization, and can never suffer hyperinflation by oversupply or collapse of confidence. Legal tender has often been reduced to waste by monetary policy, not so for precious metals.
All modern legal tender has only percieved value, because it is not a product of labor. If a zero dollar bill as legal tender is in circulation at positive velocity, would it be inflationary to circulate it? The Fed seems to think so.July 10, 2013 at 12:07 pm #7921
Anyone who thinks that gold is irrelevant should ask themselves why people like AH and JS thought that is was so important that they killed millions to get at it. The first one by raiding occupied central banks, pulling teeth and ransoming people, and the second by working people to death in the mines.
Here is a good read:
The fact of the matter is that there is a race on to grab as much of the metal as they can lay their hands on. Doubtless, in the USA, they will try to confiscate it once more.
BTW, no one ever found the gold that the Japanese robbed from the peoples of Asia. Interestingly enough, the Japanese did not need a Marshal Plan like Europe. How they managed to rebuild their country so quickly is a bit of a mystery.July 10, 2013 at 4:10 pm #7922
From 1,200 and ounce gold moved up to 1,250.
You can tell that it is a weak rally.
Next step is to pull back to around 1,100 or 1,000.July 10, 2013 at 7:19 pm #7923
“doubtless they will try and confiscate it once more…”
And the French built the Maginot Line in order to stop a certain German invasion that – went around it.
Might want to avoid Fighting the Last War. My guess is they’ll get grabby where the stored value is, and these days, that’s not gold, it’s pensions & retirement funds.
Just judging from current trends, its not hyperinflation we have to fear, its the all-seeing Eye of NSA. Imagine that married to a government hungry for tax money to keep itself in power and pensions, and I don’t see hyperinflation, I see financial repression, fleeing capital, defaults on social promises, pension funds containing real cash exchanged for future promises, and ever more burdened tax donkeys.
Just change a few keywords in the NSA Machine, and all those guys communicating with their tax havens suddenly have all their data turned over to the IRS.
Nowhere to run, nowhere to hide.
That all sounds pretty deflationary to me.July 10, 2013 at 8:00 pm #7925
You are thinking on a small scale when it comes to the usefulness of the precious metals.
On planet earth it is useful as a conductor of electricity.
The sun spews out gold that’s why it has the colour of gold and I am guessing that some of that rains down on earth.
Other planet need the stuff for other reasons.July 10, 2013 at 9:34 pm #7926
We are all creatures floating in an anchorless mental ether. This situation is very disquieting, which leads us to search for an anchor. Some find their anchor in religion, others in political-gods, others in gold. It is all quite delusional but functions to get us through the day. Perhaps most delusional is the deification of gold, which evinces the most cynical mental sloth and which au fond is the sublimation of a desire for power and easy speculative profits. It is rare and it is most definitely boring.July 10, 2013 at 10:31 pm #7927
Viscount St. AlbansParticipant
So true! Gold is the pimply silent kid’s bedroom pin-up girl. Truth and Beauty condensed into a conveniently fondled shiny disk. You can lick it, you can bite it, you can hide it under your pillow, and for the past 40 years, the police didn’t ask any awkward questions.July 11, 2013 at 3:13 am #7928
So true! Gold is the pimply silent kid’s bedroom pin-up girl.
Currencies are my favorite bedroom pinups. I love the pretty colors, engraved with the lovely intangelo process; the gorgeous queens in all their regal attire are most inviting and my favorites.
I don’t have pimples on my face but hemorrhoids on my rear. Never lick, fondle, bite or hide my pinups, but find them useful, with the aid of a few drops of witch hazel in soothing my rear from a flare up. I doubt if gold would be of any help at all in such a situation; just beyond me why the dim hoard it. Can’t even wipe an inflamed behind with it.July 11, 2013 at 3:54 am #7929
The traditional market function of gold that is most displaced is the medium of exchange function, it used to work better this way when it was used in coinage directly, or when taxes were payable in gold directly. If most gold is concentrated in ingots and stored in some vault, it can only function as collateral medium for credit emissions.
The dual functions of unit of account and store of value remain relevant as primary conduit of collateral confidence, as legal tender currencies are increasingly subject to inproper pricing and arbitrary debasements inherent in their means of production, whereas the costly business of producing and circulating gold cannot be fully centralised and appropriated by banking cartels. Circulating gold at any velocity does produce some wasteful thermal friction, unlike digital tender its a massive medium occupying an exact location, but this also makes it difficult for monetary authorities to destroy its value electronically.
More than a sublimation of a desire for power, its a demand for commercial trust and financial confidence that drives the ongoing quest for an honest money supply. Plus, gold has monetary hyperliquidity and unsubstitutable electrochemical properties. Silver has uses too as monetary medium, but more uses in industrial application.July 11, 2013 at 6:03 am #7931
The issue is not whether gold has a place in our society or not.
The issue is that it is monopolized and we have been saying that for a long time.
In this climate there is room for doing some speculation(gambling)
At this point in time the stock market,all commodities,homes,everything is speculation.
What is relevant is that you should have a good perspective of where everything belongs.
You should know where you stand in this gambling house.
Just a few weeks ago I told someone to short gold and he didn’t and I heard from someone else that he bought some gold.
This person lost a big chunk of money.
Because he does not know where he belong in this gambling house.
He belong in the corner where all the losers belong.July 11, 2013 at 10:53 am #7932
Just a few weeks ago …
That is precisely the wrong attitude. Do you seriously think that all these Indians, Arabs and Chinese operate to your time-scale?
If you want to speculate please go ahead and sell-short your promises to deliver. That is a trader’s take on matters. The one thing I am fairly confident of is that one day they will not sell oil for paper promises.July 11, 2013 at 1:15 pm #7933
* Is best understood simplistically and not technically
* Unlike the middle ages when gold was popular the average person now cannot afford gold
* Gold is for speculators in good times and hedgers in bad times
* Gold is going down because goldbugs cried hyperwolf too many times
* Gold has no value
* When the system collapses into a pile of goo gold will still have no value
* Gold has been loved for 6500 years not for what it gives but for what it takes
* Gold is valuable because unlike the Mona Lisa it can’t be created
* Gold is valuable because it is the product of labor and not libor
* Anne Hathaway and Jerry Seinfeld apparently killed millions for gold
* The US Government will confiscate all gold
* Gold was at $1200, is now at $1250 and may some day be at $1100
* The sun showers the earth with gold
* Gold is intransient and has indestructible aesthetic uses
* Gold anchors the souls of deluded men; It is the opiate of the asses
* Gold is surrogate lickware, fondleware and biteware for juvenile oglers that can’t get a real woman
* Gold makes a poor wipe
* Gold is more valuable as coins than as bars
* Asian societies like gold because their timeline is more recessive
* The velocity of money determines its impact; Falling money velocity accelerates business pessimism; Sales tax could regulate the velocity of money as it left the muzzle; When the Inuit rule the world they will have a sales tax
* People are tightening up; Even fools are figuring out that doom is upon us; They are going more places and eating at more restaurants
* Know one knows what is going to happen and those that do ain’t tellin’; At some point collapse will be between 3 and 10 years away
* An omniscient government is also omnivorous
* The NSA is as a great Eye, lidless and wreathed in Flame; It will pin you under it’s deadly gaze, naked and immovableJuly 11, 2013 at 2:04 pm #7934
The person that I am talking about was in it for the short run and all he could do was say I lost $300,000 from this deal and I lost $500,000 from that deal.
He was an idiot.
As for the future of the price of gold.
It could go either way but no one knows for sure how things are going to turn out.
I don’t think even the bankers themselves have a certain future.July 11, 2013 at 2:21 pm #7935
Since perhaps Feb 2013 gold has been in a downtrend. Trying to pick the bottom on the way down is tough – one might even say a fool’s game. Even though the price was good at that moment, the downside momentum hadn’t even slowed down. Today, on the other hand, momentum seems like it might have reversed. At least, the odds are better now than they were 3 weeks ago.
It is possible that gold has made a tradable bottom in the past two weeks. We will know more if/when it hits 1310. If the dollar continues down, it might easily rally substantially more. There are a large number of gold shorts out there that will start to cover, and the big banks are now net long, so its to their advantage to see the price rise.
The overall sentiment in gold is horrible enough – I mean really horrible, not-this-bad-in-5-years-horrible – that we might see a substantial rally off these levels.
A lot depends on how excited people are to own the buck.July 11, 2013 at 5:01 pm #7936
Yes it is a fools game.
This is the way I look at it.
For many years gold was on a up trend, maybe 10 years or more.
Now it is on a down trend.
The long-term down trend is continuing and for now I think it will still continue.
Yes it might go to 1,300 and 1,400 but it will continue with this down-trend.
We have to take things 1 day at a time.July 11, 2013 at 7:04 pm #7937
@TAE Summary – Thanks for that summary of gold!July 12, 2013 at 9:31 pm #7940
ralfyParticipantJuly 14, 2013 at 8:03 am #7941
That comment on 2 trillion in reserves manifesting into 20 trillion in potential credit/loans sent chills. What we could have here is one of the most tightly compressed monetary springs in all of history.
Would the hoarding of these reserves change course if the Fed put rates paid on them into negative territory? Seems that could put banks falling over each other to beat each other to all the origination fees such event might reap?
That said, there is another factor putting pressure on gold, which is ETF selling to meet cash redemptions. Even gold has been financialized beyond its physical quantities. Seems this exponent is only going to distort further…until equilibrium is achieved. Then what? Can’t print physical, no?
@ Golden Oxen,
Ya gotta admit, due to it’s density, gold does make a better door stop than paper 😉July 14, 2013 at 8:53 am #7942
Great article! I’ll be sinking my teeth further into that one tomorrow over a double shot of espresso. Keen is a credible source.July 14, 2013 at 1:05 pm #7943
Ya gotta admit, due to it’s density, gold does make a better door stop than paper
Some decades ago, I read that Prince Charles had a solid gold toothpaste-squeezer. Good investment, IMHO.
I did a quick search, and it seems he is using gold for all sorts of things:
Sadly, it is greedy morons like Charles III who determine the price of gold – not well-meaning but naive people like so many who post here.July 14, 2013 at 4:02 pm #7944
That comment on 2 trillion in reserves manifesting into 20 trillion in potential credit/loans sent chills. What we could have here is one of the most tightly compressed monetary springs in all of history.
The real chills come when you realize that their hidden losses are far greater than any of these numbers. That’s what these reserves are really for, survival in the face of debt deleveraging. That and highly leveraged bets: you got to make your $100 million a year somewhere, and it won’t come from consumer loans.July 14, 2013 at 4:41 pm #7945
The 2 trillion in excess reserves are in no danger of manifesting magically into 20 trillion in loans. Steve Keen wrote an article – its a bit technical, but not over the top – that at least to me convincingly showed that the 1:10 ratio of reserves to loans and indeed the whole theory of reserves driving lending was just wrong.
Here are two paras which give you a clue as to where Steve Keen is going:
The most recent proof of this is in an excellent discussion paper from Federal Reserve economists Carpenter and Demiralp, entitled “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?”. The first clue that it doesn’t exist is given by their abstract, which notes that, “before the financial crisis, reserve balances were roughly $20 billion”. If the textbook model were correct, the total stock of money in the USA would be $200 billion, versus the multi-trillion dollar level of even a narrow definition of the money stock. As the authors note, this makes a mockery of the textbook “Money Multiplier” model:
M2 averaged about $7.25 trillion in 2007 … bank loans for 2007 were about $6.25 trillion… if we consider the fact that reserve balances held at the Federal Reserve were about $15 billion and required reserves were about $43 billion, the tight link drawn in the textbook transmission mechanism from reserves to money and bank lending seems all the more tenuous.
So don’t be scared of the 2 trillion in excess reserves. Without borrowers, they aren’t going anywhere. On the other hand, if the banks found enough willing borrowers, 2 trillion in reserves would not be an effective limit on lending either.July 15, 2013 at 12:56 am #7946
Steve Keen debunking inflation and gold standard beliefs
Conversations w/Great Minds – Prof. Steve Keen – The New Modern Jubilee P2
Steve Keen point of view is very good to listen to but he is not always realistic.
I did like it when he said printing money does not create inflation.
So to gold bugs this is something to consider.July 15, 2013 at 2:55 am #7947
I am guessing that a negative Karma is not a good thing.
I have an idea as to why this is happening.
Because I say that the price of gold will come down and that’s why I get a negative Karma.
I am going to try something and see if it will work.
This year gold will shoot up to $10,000 an ounce.
I hope a few gold bugs will be happy.July 15, 2013 at 3:25 am #7948
Since 2000, core inflation in the USA has averaged just 2.5pc per annum (an increase of 38pc) while gold (measured in US dollars) has returned 12.4pc per annum (an increase of 356pc), nearly five times the loss of purchasing power in the dollar.
This fundamental disconnect between inflation and the price of gold cannot be sustained indefinitely: either inflation has to rise dramatically or gold has to fall.
In 1968, gold became freely tradable, having previously been fixed by the US government to the price of the dollar at $35 an ounce. Since 1968, the most credible measure of US inflation – the core consumer price index – has risen by 578pc, an average of 4.4pc per annum, suggesting a loss of purchasing power in the dollar of 85pc. This shows clearly why investors should be concerned about their wealth being eroded by inflation.
However, if we multiply the price of gold in 1968 of $35 per ounce, every year since, by the annual US rate of inflation, then we can calculate a fundamental value of gold based on purchasing power.
Such a calculation results in a fair value for gold today of just $240 an ounce, only a fifth of its current price of $1,280 an ounce. On any fundamental analysis, gold is a grossly overvalued asset.July 15, 2013 at 3:53 am #7949
Sir, If your inflation figures are correct, why has the cost of 1 oz of gold extraction risen to about 1200 dollars an oz??
Your inflation figures are absurd, try John Williams Shadow
Stats for better data.
At 240 dollar an oz every gold mine in the world would be closed, which also disproves your remark on any fundamental basis applied.July 15, 2013 at 4:18 am #7950
Viscount St. AlbansParticipant
When you’re betting with Mr. T as a spokesman for savvy market prescience, sleepless nights are warranted. I pity the fool. But the question lingers: Is it the fool who sells gold or the fool who accumulates it? Whom do you follow, the man wrapped in sparkling chains or his message? It’s typical of Bloomberg and all financial news. Carnival logic at play, complete with fireworks and a looping accordian waltz . Step right up; get your hot corn dogs; drop a dime in box, play a song about New Orleans.July 15, 2013 at 7:53 am #7951
The real chills come when you realize that their hidden losses are far greater than any of these numbers.
Referring to the Derivatives overhang combined with the Feds balance sheet, I presume?
I’m with you. Official CPI and John Williams stats vary lots.
One of my measures of inflation has used silver and what it will buy in pre 65 face value, on average. A quarter still buys a gallon of gas, and around the same quantity of food staples.
Though I can also see gold a bit over shot here. Most likely caused by the shunning of the buck over seas, and the economic uncertainty factor.
My back of the Mc Donalds wrapper still has gold production cost around mean $850-$950 in an environment of average demand.
That said, in the end, governments debauch currency. It’s a given…and it’s what PM’s are suited for. A bridge to what’s next.
You must be logged in to reply to this topic.