How far will gold and silver fall?

Look again. I said that total worth was limited by the available currency. I didn't say worth had to absolutely equal the available currency. If all the corn is now worth $0, then this is less than $1000, the total amount of currency in the system, which is consistent with what I said.

 

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Fatima, I think you need to revisit this idea. Your scenario, Fields A and B, both priced at $1000. If there is buyer C, he pays farmer A $1000. You say Field B is now worth zero. Well farmer A will pay supplier D and E, who maybe pays banker F. Banker F now has $1000, and he can buy field B for $1000. So on and so on. Also, what about bartering? Who even NEEDS money except to establish relative values? For eons humans traded, I will trade you a cow for 6 goats and some wheat. Does that mean cows, goats, and wheat are valueless because no currency changed hands?

A supposition that total worth of anything is limited to currency available is making your arguments here look silly. Currency has ALWAYS been simply a medium of exchange, not in sum total the total value of all assets in an economy. In the past the currency was gold and silver, and yoru argument means that the only value net to a country is it gold and silver assets. That is simply not true. Again, currency is only needed to facilitate trading activuty, it has not correlation to total values of assets in any way.

You like to say how others here, "make common mistakes", or "just cannot understand" ideas you lay out. I am telling you, point blank, with no wiggle room, that a supposition that the amount of currency in any economic system having to equal the total asset value in that system, is totally, utterly incorrect. Every single book on the subject will back up that statement. Even having to dispute that fact on this board is making me feel silly.

Not trying to seem mean, but that is how strongly I believe that premise is wrong, and simply do not want any reader here for one second to start believing such ideas. If you wish to dispute me, please start out with how in a barter system your idea would equate into all products having zero economic worth.

Chris

 

Okay, I think you've made your point crystal-clear: you're using a definition of "worth" that is -- how can I put this charitably? -- unique.

 

Just to reinforce what your are stating Chris - If all currency was back by gold then it would take all the currency available to buy all the gold which would mean the accumilated value of all other assets would have to equal zero.

 

Try looking at what I said in the context in which it was given. There was a claim made there were $50T worth of assets in the USA, but only $2T in currency. This was in response to that in that it is an impossible situation. Of course there are other ways to look at worth but are no longer talking about worth in terms of $.

On the comment about gold, try thinking about it outside of fiat terms. The currency IS the gold. Worth is then established in amounts of gold, not $ denomination. $ denomination and coinage is simply a convenient assay the gold is not counterfeit and in the amount specified. In the days when deals were settled in gold coin, it was just as valid to bring an equivalent amount of non-coined gold to settle the deal. (or foriegn coin)

 

You are 100% correct, of course, and it is a shame that people value their own opinions more than the facts supplied by others.

 

Not only is is not impossible, but it's been the norm since the dawn of money. I'm not sure why you hold on to your error so stubbornly when it is a simple matter for you to add up the value of assets in the US, add up the currency in circulation, and compare the two. It would probably take less than a half hour on Google. More importantly, you need to rethink your entire belief system regarding economics to avoid the compounding of errors that occur from using invalid assumptions. A lot of people here are tyring to help you, but you have to have an open mind. Sometimes it is more difficult to unlearn something that you know and believe that happens to be untrue than it is to learn something entirely new.

Anyway, good luck.

 

You are incorrect. Inflation is a function of both the money supply and the goods available in the economy.

Let's look at a situation where we have soil depletion (ala the late Roman Empire). The same amount of money is in circulation, but the amount of work involved in producing food has gone up. So, we see a decline in food supplies paired with a steady amount of money in circulation. What is the result? Inflation. Everything costs more (at least, everything dependent on the price of food).

 

Ok, lets just talk about this. Three men, label them A, B, and C, each have an asset. There is only $1 worth of gold in the whole world, and that is the only currency. Man A trades the gold to man B for a goat. Man B trades the gold to man C for some chickens. Man C trades the gold to man A for some wheat. What is the cumulative value of all three items? You say its $1, I say its $3, since each was fairly traded at a $1 value. The $1 can be passed around forever, valuing the transaction each time.

That is about as clear as I am capable of explaining it. EVEN IF gold is the only money in the world, the world's assets are multiple times the value of all of the gold in the world. Money, (even if only gold), just allows an ease of the exchange, it NEVER limits cumulative wealth.

The exact same situation happens even WITHOUT money, if they all agreed that each item was worth a $1 of gold, and bartered them. Same exact result, and same exact wealth, even without money. the money simply made the bartering easier.

Chris

 

You seem to understand the concept of a zero sum equation, but fail to grasp that there are other situations (and they occur all the time in economics).

In practice, most people who take out a loan expect to make more than the amount of money they pay in interest from the loan. For example, let's look at a hypothetical cattle drive in the Old West. A cattle herd is a big investment - way more than someone could probably pay out of pocket. So, the people running the cattle likely had to borrow money to purchase them (say, $10,000 for a large herd). They would pay short term interest to do that (say, $500 for 1 month - or, a 6% annual rate).

The only reason someone would do this again and again is if they made a healthy net profit after paying off the cowboys and any other costs. Let's say an organizer for a cattle drive had a net profit of $100 after paying all his bills (pretty good money for a month or two of work back in the 1880's).

Beyond that, we're not just talking about shuffling commodities around. Driving the cattle from point A to point B created add-on value - in a place like New York (where land was scarce) the existence of cattle driven in from out of state meant that cow products were much less expensive (steaks, beef tallow, leather, etc). Cow products that were better than their substitute goods (ie; leather gloves vs. cotton gloves) made people more productive (fewer instances of frostbite or injuries when laying bricks, for instance).

So, the $100 paid to the cattle drive organizer was a manifestation of that increased productivity. The cities were economic engines that turned out cheaper horse tackle / clothing / rope / etc for the cattle drivers, in a positive feedback loop.

 

My viewpoint on the disrepancy in conclusions is that one side of the argument is using examples that were true at the inception of banking, where as the other side is pointing out how things are today which is much different than 500 or so years ago, or even 100 years ago.

As far as not letting a $100 bill sit around I would say that due to inflation it is better to use that bill to buy an asset that will appreciate at least as much as inflation, since dollars sitting around don't appreciate at all, and thus depreciate in relative value due to inflation. Sure you could keep it in a savings account, but even at 3% interest in a CD for example you are still losing against inflation in today's financial situation.

I personally choose to forfeit that tiny bit of savings account interest so that I can have my cash on hand to avoid the negative impact of a potential banking holiday. So it's not bad to have cash on hand as compared to in the bank in my opinion in case you need it, but if you want to preserve your wealth gold and silver are better alternative so long as you still have enough cash to buy what you really need.

 

Don't worry - plenty of the participants in this thread are writing with confused fascination. And, it's common for people to have brilliant lines of reasoning that arrive at totally different destinations. That likely just means we're all wrong to varying degrees.

I agree with your summary though - having a $100 bill sit under your mattress (or otherwise out of circulation / not invested in anything) is generally a bad idea in an inflationary situation. In a deflationary situation, it can be wonderful though.

Having cash in hand can be useful even in an inflationary situation if no one else has any. It allows you to make fire-sale purchases (ie; when a company goes out of business and you can buy their assets cheaply, or when a storage unit is auctioned off due to the renters failure to pay).

One way of looking at interest rates is that interest is the value of money. When more people have money that they want to invest than there are people who want to borrow money, interest rates fall. When there's a shortage of lenders, interest rates climb.

Currently, we are in a strange situation because the US government is trying to depress interest rates to stimulate economic growth (this is being done through several different mechanisms, from the Federal Funds Rate set by the Federal Reserve to TARP and various other Federal Loan Programs). The impact on interest rates has been pretty severe, but we haven't seen the results in the form of economic growth yet. When that does come, you can expect a pretty big slinky effect.

 

I am unaware of any bank(s) paying any decent interest on cds, not even jumbo, unless of course you tie up for years! Bank holidays..yes, a great concern..

Gold and silver are comforting, but there's that niggling worry of not recognizing a change of trend..

I"ll continue to ponder all of these views, and try to make comfortable moves.

Carry on!

 

Lucy, there are so many variables moving in Economics even those with Nobel Prizes, who have the same school of thought, rarely agree. Its simply readin others thoughts, and taking away what you believe to be true. If any economist ever stated he is absolutely right, you are absolutely looking at a liar.

Concerning cash, yes you need to remember it costs you money to have cash in your hand and not earning interest. I am not saying its a horrible thing, and it may be worth the money you are losing for peace of mind and security, but the point is absolute you are losing money by not generating interest. That's all it means, and like I said if you prefer it that way its fine, simply recognize it costs you a little bit for that security.

This is why people who make comparisons using nominal dollars, (like you put them under your mattress), from 1930 to today are making false assumptions. Dollars are expected to be invested and earning interest, so $1 from 1930 may be equal to $40 today, and that is the comparison that should be made. Saying how much purchasing power a dollar has lost from 1930 to today are simply erroneous comparisions designed to scare you, (usually into buying something the author is selling).

Hope that helped.

Chris

 

I will stick my neck out and say that by this time next year you will see gold drop by 20% and silver in the $25 an ounce. If the government does not get the problems under control with our financial situation our paper money will be made by Charmin and only good as toilet paper. :yes:

 

I can't reconcile $25 silver with toilet paper money.

 

You're correct, no decent rates now. A few months ago I locked in 3% on jumbos for 5 years. My reasoning was even if I took a 6 month early withdrawl penalty on them, it would be a wash after one year vis a vis the then current 2 year rate. I was prepared to take the penalty, if rates rose. Some banks may just have 3 month penalty on a 5 year, while others are a year penalty. If you deal with a small bank ask them to waive the penalty after one year.

 

Well, either they ignored it or nobody disagreed. The easy way to look at it is what would you have rather had a relative do in 1976? Should they have stuck their $100 bill in an envelope to save for you to use today? Or would you rather have had them by an ounce of gold then and stash it? Because a $100 bill back then could still be used today. They're physically the same. An ounce of gold is the same as it was back then too.

The 1976 $100 bill may or may not fill the gas tank of a large SUV today. While an ounce of gold purchased back then with that $100,could fill the tank 18 times now. It could have been invested in the stock market too but it's not immune from long term problems.

The same people who will argue that gold was flat for years, won't acknowledge that the DOW has now been flat for over a decade (a lost decade) with no relief in sight. The dow was over 11k in Oct. 1999. And there's been a lot of shady business just to keep the number up to where it's at now. (Stocks crashing to nothing get pulled, and then are replaced with new companies with value to prop the number back up.) Not to mention all the baby boomers who made real money over their lives are now cashing out and I'm doubting there's an equal number of people available to buy up what they're cashing out these days. Considering 20% of the population is unemployed wondering where their next meal is coming from. They're not buying shares. Many are probably living off old money.

Don't feel bad about having some cash stored for an emergency fund though. It's still the medium of exchange for now. You don't want to have to cash things out and have to convert every time you need some extra. It's just a matter of how much you want sitting there and what's happening to it over a period of years compared to what it could be doing.

It might be very risky to buy in at these new found highs at the top of a new, vertical peak. I would think many people would wait to see some pull back before trusting the new highs. Gold is up about $190 in one week. It's hard even for me to believe that there could be this much demand.

You also have to realize though, that as the years go by, more and more is being mined and more and more people are hoarding and stock piling. As someone else said, if ANYTHING else could present itself as a ground level buy opportunity with realistic looking gains, there could be a whole lot of PMs that get dumped back on to the market all at once and in a hurry. It will probably happen eventually. Then everybody will be wondering where the bottom is and it could be ugly. Nothing is certain.

I do listen to the goldline podcast and there were many independent (of the program) analysts predicting in January that $2000 to $2500 gold would be likely by the end of the year. It's looking like they were spot on. Seems like it was just yesterday people were laughing at the $1000 level as being a bubble. Things are not well when you see gold behaving like it is.

 

One thing about CDs - most of the time, the penalty for early withdrawal is expressed in terms of "months of interest". So, if rates go up significantly, it's well worth it to take the hit and reinvest.

For instance, an average CD rate right now is around 0.75% (annualized rate), and an average penalty is "3 months of interest". So, let's say you have a 24 month CD... and 6 months from now the interest rate goes from 0.75% to 4%. Would you be better off leaving it at 0.75% and not paying the penalty, or would you be better of switching the rate and swallowing 6 months of only earning 0.37% interest (or whatever the annualized rate would be depending on the compounding)?

On a thousand dollar CD, you'd only be paying less than $6 to switch from 0.75% to 4%.

 

This is incorrect. If the currency stays and prices on food rise, then there is less currency to spend on something else. Total inflation is 0. This is a difficult concept for many people to accept given that we have had several generations to only experience an economy where money supply is increased almost every day,.but that fact remains. Inflation only happens due to currency increases.