Two Years Of Zero Interest! Oh Yeah, She's Going Up!

Well, I'm willing to entertain any potential reason why fiat currency should be considered money, even though it is in contradiction to what the US Constituion says money is as well as the Wikipedia entries for Unit of Account and Store of Value. Electronic currency suffices for unit of account, but not store of value. Paper currency suffices neither. Which is preferable to have is certainly a matter of opinion. In any case, we may agree to disagree, but this is my reasoning.

http://en.wikipedia.org/wiki/Money

 

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From a fundamental standpoint you are 100% correct. However, gold and silver alike are both driven by paper traded contracts. Until the physical market takes precedence on price action and we see real market value, whatever that may be, or until the physical market is no longer willing to adhere to the paper dictated price then they are both speculative markets just as susceptible to high frequency trading and computer algorithms. Gold is much more difficult to sway by the paper traded markets due to it's size, which is in large part due to the fact that it is not only much more expensive than silver but there is a lot more of it available, but it is not immune. Silver being as rare as it is and as cheap as it is can be moved 5% with only $300 million, as Eric Sprott did last week, which to put into perspective is only 19% of one 10,000th (or 0.0001875) of the US national debt @ ~$16 trillion.

 

Gold has another distinction from silver that isn't well understood, because the mechanics of fiat money are not understood. It's probably the most important distinction. Gold is the only monetary metal held by central banks including the Federal Reserve as a reserve for the base money supply. (MB). It is a hard asset on the Fed's balance sheet used to balance out the liability of fiat MB. MB also includes other assets including US Treasury paper,, and demand deposits that member banks deposit at the Fed to cover their own reserve requirements. The law requires the Fed to to keep the MB sheet balanced. i.e. solvent.

The importance of gold's role in this doesn't make sense until one understands that money which you and I use in the real economy is not part of MB. Instead this is known as the circulating money supply and that is reported as M0, M1, M2 and until the mid 2000s, M3. (MN) Now MN is a function of MB. That is the total amount of MN can't exceed a multiplier of MB. MN is created by fractional reserve banking including all the extremely complicated financial vehicles created in the last decade when they broke down Glass Stegal.

I hope you are still with me. To summarize MB is created or destroyed by the Fed and the law requires the Fed to hold hard assets in balance including gold. MN, the circulating money is created by FRB and is a function of MB. The Fed traditionally controls MN by changing the interest rates and adjusting the size of MB. The problem the Fed has now is that due to past actions, and the fact that interest rates are 0%, this tool is now gone. So they are left with expanding MB. The insidious tool created to do this is called QE.

Basically the way QE works, is the Fed creates a "bank" for itself, loads it down with MN, then takes this money and uses it to buy financial assets from the banks. The Fed then uses this paper and deposits it as a "bank" demand deposit back to itself and MB is now increased. Furthermore, now that MB is increased, they can increase MN by 10X that amount. The Fed buys all kinds of assets via it's dealers and things such as toxic loans are considered "assets" for the purposes for what the law requires in terms of assets backing up the base money.

If you got this far, then good because it's easy to get lost since the rational mind refuses to believe it. In the minds of these banksters, it's perfectly OK to take these kinds of gambles. However, this where gold comes in. If the real world this paper is very sensitive to interest rates and other issues and could become worthless. If that were to happen it could push the Fed into insolvency which would invite all kinds of political interference. Hence, Gold, becomes hugely important, more more than they will admit, in holding onto their reserve requirements. Because MN is a multiple of MB, gold has a huge role in the amount of circulating money available to the economy.

This is why Gold is different than Silver. This is why Gold's role against currency is completely different than that of all other metals. That is, the Central Banks need it to protect their reserves and that need is going to continue to increase.

 

Howdy,

I think I might not have been clear or you read more into my posties than was intended.

Momentum investing is hardly active trading. Far from it. It's slow and methodical and not rocket science. I've been doing to successfully since the 90's and thru the various and sundry meltdowns. I still have a basic portfolio with a consevative asset allocation. I just use a portion of it to overweight a trending sector as long as it trends. I'm not looking for something that moves up and down for a week or month, but years.

As for learning about gold and silver, excuse me. I've collected coins for over 50 years. I finished my degree in Economics with by GI Bill augmented by proceeds from selling silver taken out of circulation in the mid 70's and sold in 78 and 79. This is why I favor silver over gold - leverage. During this earlier bull run, gold peaked at 850 and silver at 50. That represented a tripling of gold but a tenbagger in silver. It was also a 17 to 1 g/s ratio. Do you ever follow the gold/silver ratio? I've been following it closely for 10 years. The other metric you need to follow is the gold/XAU ratio. If you're going to invest in gold and silver, you really need to know what it is and what it shows.

Because I've been studying gold and silver most of my life I noted when gold and silver first started to move back in 2001. I started to slowly invest starting in 2002. I kept scaling in until I got to about 3 paper units. While this was happening, I was also buying physical bullion. I bought gold at 335, 785, and 1200. I just bought a roll of silver eagles at 718 but remember buying a roll for under 90.

I never said the gold was pure speculation. What I said was that folks should have a portion of their wealth in gold as an investment - 5% and that more than that was speculation. Nothing wrong with speculation. I've been doing in in gold and silver since the 70s. I've been doing it with stocks for 25 years. However, what is important that folks realize that it's speculation and with all speculation there is an element of risk.

Oh, and I'm actually pretty risk averse. I prefer real bullion over paper. I don't care for the bullion ETF's. My stock exposure in my portfolios is about 30-35% (I'm 63) with the rest in bonds and cash equivalents. Wifey is even more conservatively invested. That said, if you don't take risks you'll never be rewarded. You just need to understand and temper that risk in various ways. Apparently you missed my statement that no one should ever invest in anything without an exit strategy in place first.

Do you have an exit strategy for your gold and silver bullion?

peace,

rono

 

Howdy,

Nice summation. Part of the problem is that they're facing over $100 T in Unfunded Liabilities (social security, medicare/aid, trust funds, debt service, etc.) at the Federal level and their is no politically viable way to cut benefits (default, as it were) AND increase taxes sufficiently to pay this tab. They are left with no option other than to try to monetize as much as possible without imploding the dollar and financial system. Er, that's means printing lots of new dollars to pay the bills. I've read estimates that it will so many new dollars that they will halve the value of the dollar over the next decade. Oh, and this is by the same FRB that since their creation in 1913 have seen the dollar lose 96% of its value.

Here's an interesting read by the goldenjackass


http://news.goldseek.com/GoldenJackass/1327611600.php

peace,

rono

 

NO, pseudo unfunded liabilities issues have absolutely nothing to do with what I was talking about. These are political issues that belong to the Federal Government and which are drummed up to support one side of a meaningless political dogma. The government has many tools too fix the issue that won't affect the price of PMs.

My summation, what I wrote above, is 100% related to actions being taken by the central banking system that IMO, is killing everything else. It's being done to protect the Western, mostly anglo controlled, global central banking and in the process a relatively small number of institutions and people are making huge amounts of money. It's the reason for the mad rush to gold and why gold has been rising for the last 12 years. As long as the Federal Reserve can continue to produce a balance sheet that is well.. balanced, neither of the political parties is willing to deal with it, and in fact, continue to enable it.

(Stop reading those silly gold & silver blogs)

 

That statement right there is what's wrong with this country!! You can't do anything without putting yourself at risk. It's not about raising revenues, anymore...it's about wealth redistribution. The three best laws in my lifetime have been...

1. The repeal of the Federal 55 MPH law,
2. The "right turn on red after stop" law, and
3. The National "Do Not Call" registry.

We need to add "Repeal of the 16th Amendment" to the list!! :hail:

 

I agree completely. Many say they can time markets, very few succeed. This is why I advocate simply choosing where they wish to be positioned in a few years and work to achieve that. Its like the casino, you hear a lot of bragging where they won, but don't hear a peep where they didn't. I just wouldn't want to have others think this is so easy.

Bottom line, most small investors are "sucker money" buying high, selling low. If something is high they want to buy, if it has been going down they want to sell. Basically the exact opposite actions they should take.