Thread: gold, silver, the ratio, platinum european fears, and central banks

Originally Posted by InfleXion

Welcome to CoinTalk, julius

The critical component of a gold standard is that all units of currency are backed by the same amount of gold, regardless of how much gold. It is the peg / fixed ratio that makes it work. You are correct that there is not enough gold to back all the currency at today's prices. What would need to happen is that the price of gold would have to rise to the point where all the gold available adds up to the same price as all the currency it is backing. This is one reason why many think gold is very undervalued, and goes a long way to explain why China is buying it at an exponential rate.

JPM inherited the short position in silver from Bear Stearns when they went under, and arguably that short position contributed to their demise with $21 silver. So why do they keep it? Conventional wisdom says because they think it will be profitable, however when your company is not obligated to divulge losses, and has a free money line from the Fed that is no longer a motivating factor. The rest of this post is my speculative opinion, but this leaves the next most likely explanation because they want to keep the price of silver low.

Why? Because silver is direct competition for the USD, and threatens all fiat currency as a sound alternative. Silver is more of a threat than gold because gold is not realistic for hand to hand exchanges like silver is. Gold is realistic as a peg, but silver is what people can really use as a highly liquid alternative to the system, the peoples' money. At least for as long as the price doesn't get to high. The Fed does not want that competition, because sound money would block their ability to print money from thin air and to allow for all the things that this money enables to go on, and they can't hold the short position outright themselves so they have their primary dealers do it for them. So they keep the price artificially low and extremely volatile to influence perceptions and keep people wary of it.

EVEN IF the USD FRN's were backed by gold, that would have no affect on the ability of Washington to go into debt. "Printing money" is not printing notes, it is selling debt. How would a gold standard stop Washington from selling debt? The real currency of international business is government bonds, not currency. Changing currency is nothing, and if you cannot prevent the issuance of debt then you have accomplished nothing.

You might say they would be limited by having to pay off debt with gold backed notes, but they don't, they would pay it off with more debt.

Btw just a note from the CME. I am not talking for them, just general impressions I have from the seminars I attended and people I talked to.

The CME really could give a crud about the physical market. All they are doing is creating a market in which their CUSTOMERS can go to offset their exposure in a cost efficient manner to offset their exposure to items. In a perfect world its nice if it were tracking to physical purchases, but its not truly necessary.

That's it. They are not trying to be a market maker in ANYTHING. They DON'T CARE.

This is the major point most here I believe don't get. Theirs is a financial market that allows people who participate to exchange risks. They actively encourage speculators to make the market more efficient and liquid. It lowers the spread and enables deals to get done.

All of their rules are set FOR THEIR FINANCIAL MARKET BENEFIT and to ensure the contracts being traded will be paid for. People talk about changes to the margin requirements, well those calculations are public knowledge and are predictable based on volatility for anyone wishing to research it. If you wish to predict market changes, its doable. Its not a bunch of "market manipulators" wishing to affect markets, its a market with predefined parameters as to margin requirements that change based upon market volatility to ensure all money is collected.

Again, they could GIVE A RIP if you use their market price for any reason. You are NOT their customer, so you have no say so. Don't like the price, think its too low/high? Go fly a kite and ignore it then. YOU are not paying them a cent, so they could care less.

That is the general impressions/answers I got. They were couched nicer, but is the general feel. Small time speculators in PM is of no concern to them, and they really don't care if their market price is used by them or not. Their rules are ENTIRELY crafted for their market, which is designed for risk mitigation to function, to work. It was never designed to be a price setter of physical PM at local locations, but again they tailor it to TRY to track that, but that is a secondary issue.

Bottom line, ignore the CME then. If dealers price on it and you believe its too low, take advantage of that fact and buy then. If you think its too high sell then. But the market was never created or operated for you.

The USA #1 (8133.5 tons) holds more gold than the next three countries at the top of the list of gold ownership, Germany #2, Italy #3, France #4. China is #5. In fact thne USA holds 1/3 of all the gold in the world!

8133.5 tons x 2000 x 12 Troy oz X $1600 = $312.33 billion! Still not enough to even make a dent in the national debt. Releasing all that gold would drive the price down, at least in the short run.

Tying the dollar to the gold standard is not an option. There's not enough gold in the world to cover the debt of the USA. And there is certainly not enough to back the entire economy of our country alone.

There are seven Billion people in the world. Let's say one person in three wanted to own one ounce of gold. You would need over 97,000 tons of the yellow metal to meet demand. The top 13 countries (including the USA) own a combined 23,000 tons.

To me that means gold is grossly under valued.

Originally Posted by JimOfOakCreek

There are seven Billion people in the world. Let's say one person in three wanted to own one ounce of gold. You would need over 97,000 tons of the yellow metal to meet demand. The top 13 countries (including the USA) own a combined 23,000 tons.

To me that means gold is grossly under valued.

But they don't. Its easy to make this red herring argument, "what if everyone in the world wanted to buy a Sassanian drachm, they price would skyrocket!". BUT, you have absolutely no proof that they do. In fact, most americans could give a rip about owning PM. Yes, they would like to have the money that an ounce of gold is worth, the whole world would, but they are not willing to BUY it, and have no interest buying it.

IF a third of the people in the world wanted to buy an ounce of gold, and could afford to, they WOULD HAVE. Nothing is stopping most people from doing so, and the fact that 98%+ of the world DOESN'T proves that they do not wish to buy.

>>IF a third of the people in the world wanted to buy an ounce of gold, and could afford to, they WOULD HAVE.>>

Only if they have the disposable income. Up until recently they haven't.

As China, India and Emerging Market countries become more affluent they will start buying gold. That is the reason India's & China's gold consumption is growing now.

Gold demand is growing and will continue to grow.

Originally Posted by medoraman

EVEN IF the USD FRN's were backed by gold, that would have no affect on the ability of Washington to go into debt. "Printing money" is not printing notes, it is selling debt. How would a gold standard stop Washington from selling debt? The real currency of international business is government bonds, not currency. Changing currency is nothing, and if you cannot prevent the issuance of debt then you have accomplished nothing.

You might say they would be limited by having to pay off debt with gold backed notes, but they don't, they would pay it off with more debt.

Without money printing over 60% of the debt would not have a buyer (the Fed). So it does impact their ability to go into debt, because that debt requires someone to service it. If they don't have buyers then they can't issue it, and they can't go into debt. Since they print money and use it to buy these treasury notes (QE by definition) there will never be a shortage of demand, but if there was a gold standard they would not be able to do this, and would instead have to have enough creditworthiness to incite buying by the free market. Creditworthiness being the key here. Debt issuance would only continue for as long as the market is confident it will be paid back. This is why countries like Spain and Italy have such high bond yields right now, and ours are artificially low, because they can't print their own currency. Not only does this create a bond/debt bubble in the US, but it also prevents the market from using bonds for their intended function which is risk identification based on interest rates. Ratings agencies should not even be necessary.

India, China, etc. populations are a long ways from having the disposable income to buy much of anything expendable, as food, fuel, housing consumes all, or more of the average total income. The article below was written in India early this year

The per capita income of Indians for the first time crossed the Rs 50,000-mark in 2010-11, although using current prices as the barometer. According to the revised GDP data for the last financial year, per capita income is estimated to have risen 16.9% to Rs 53,331 compared to Rs 46,117 in the previous year.

The $1,000-average income of Indians is seen to be illusionary in economic circles as economists prefer to use factor cost to weed out the impact of inflation. Based on 2004-05 prices, per capita income saw a modest 6.4% increase and reached Rs 35,993 in 2010-11, compared to Rs 33,843 in the previous year.

http://timesofindia.indiatimes.com/b...w/11707030.cms

At this time the Indian Rupee was about .02 US, and now is about 0.018. With real life India inflation, current income per capita ( without considering inflation) is $890 USD/year and after inflation , $623 USD/ year and these are Total income ~~disposable income most likely = 0.00 USD.

Current conditions of the developing countries such as BRIC and other lesser countries, face the same crises or are currently in them as the US, they along with the Eurounion nations are where the US was in 2008, and I expect their financial problems to continue well beyond any US recovery. Gold is pretty and valuable, but most of the world would rather eat and live sheltered ( or even have satellite and TV, ipod, internet, etc ) than PM. IMO.
Jim

I don't know where the line is between the PBOC and the Chinese population, but together they have been buying gold at an exponential rate since at least 2010. This year has been no exception thus far.

Originally Posted by InfleXion

Without money printing over 60% of the debt would not have a buyer (the Fed). So it does impact their ability to go into debt, because that debt requires someone to service it. If they don't have buyers then they can't issue it, and they can't go into debt. Since they print money and use it to buy these treasury notes (QE by definition) there will never be a shortage of demand, but if there was a gold standard they would not be able to do this, and would instead have to have enough creditworthiness to incite buying by the free market. Creditworthiness being the key here. Debt issuance would only continue for as long as the market is confident it will be paid back. This is why countries like Spain and Italy have such high bond yields right now, and ours are artificially low, because they can't print their own currency. Not only does this create a bond/debt bubble in the US, but it also prevents the market from using bonds for their intended function which is risk identification based on interest rates. Ratings agencies should not even be necessary.

So, are you asserting that the Fed physically prints a FRN in order to purchase Treasuries?

Originally Posted by JimOfOakCreek

You would need over 97,000 tons of the yellow metal to meet demand.

There are ~165,000 tons of above ground gold. Your analysis is using faulty data.

Gold denominated in federal reserve notes is meaningless in terms of a gold standard. Officially Gold = $42.22/ounce in lawful money.

Originally Posted by medoraman

EVEN IF the USD FRN's were backed by gold, that would have no affect on the ability of Washington to go into debt. "Printing money" is not printing notes, it is selling debt. How would a gold standard stop Washington from selling debt? The real currency of international business is government bonds, not currency. Changing currency is nothing, and if you cannot prevent the issuance of debt then you have accomplished nothing.

Because if the world is using gold currency then the bonds have to be redeemable in gold when they are due. If government is spending willy nilly then 1 of two things happen. The country runs out of gold, or the country defaults on it's gold debt.

This happened in the USA in 1971. So much gold left the country that Nixon closed the gold window and refused to do any further gold redemptions. So they took option 2: Default on the Debt.

Now they can create debt unabated. This is why 97% of all of the outstanding debt has been created since 1971. The system breaks when the debtors can no longer pay the interest on this debt. This is essentially what is happening in the Eurozone now. It's coming to the rest of us eventually.

Originally Posted by medoraman

So, are you asserting that the Fed physically prints a FRN in order to purchase Treasuries?

No, sorry. Every instance when I said print money what I meant to say was create new money. The method is irrelevant. What is important is that without the creation of new money to buy treasuries the debt would not be able to expand beyond the capacity in which the market deems appropriate. Currently it can expand equivalently to the amount of new money created. With a gold standard, and thus the inability to create new money from nothing, it would only be able to expand to the point that either the market deems is appropriate, or to the extent that new gold is acquired/discovered.

Originally Posted by InfleXion

No, sorry. Every instance when I said print money what I meant to say was create new money. The method is irrelevant. What is important is that without the creation of new money to buy treasuries the debt would not be able to expand beyond the capacity in which the market deems appropriate. Currently it can expand equivalently to the amount of new money created. With a gold standard, and thus the inability to create new money from nothing, it would only be able to expand to the point that either the market deems is appropriate, or to the extent that new gold is acquired/discovered.

But the majority of money isn't created through government printing - it is created through fractional reserve banking.

Originally Posted by justafarmer

But the majority of money isn't created through government printing - it is created through fractional reserve banking.

You miss the important element that Fractional Reserve Banking has an artificial limit placed on it by the Federal Reserve else it will lose control over its banks. That limit is that a bank can't create more money than a multiple of it's reserves (usually 9X) on deposit at the Federal Reserve. So where does a bank get new reserves?

Here you go:

So the government borrows the money and then uses it to issue checks to make payments. So Mr. Federal Recipient takes this check down to his local bank and deposits it. (or maybe he cashes it a his local liquor store and the store deposits it) Now the bank all of a sudden has a new amount that it can add to its reserves. Hence it can now, should it choose, to increase it's FRB activities.

Originally Posted by fatima

You miss the important element that Fractional Reserve Banking has an artificial limit placed on it by the Federal Reserve else it will lose control over its banks. That limit is that a bank can't create more money than a multiple of it's reserves (usually 9X) on deposit at the Federal Reserve. So where does a bank get new reserves?

Here you go:

So the government borrows the money and then uses it to issue checks to make payments. So Mr. Federal Recipient takes this check down to his local bank and deposits it. (or maybe he cashes it a his local liquor store and the store deposits it) Now the bank all of a sudden has a new amount that it can add to its reserves. Hence it can now, should it choose, to increase it's FRB activities.

But you are playing single entree accounting here. Someone bought this debt and in so doing decreased their bank's reserve accordingly.