Sell Everything

[Tet]

Re: Sell Everything

Grantham has a minimum $5 million investment, now if you can get some of these $5 million accounts to put some stock in play and create some volume the next news letter will advise you to get back in. Somebodies got to sell in order to create a higher floor, getting the small investor to do so just won't get you anywhere near the volume you need to get this party started.

[raja]

Re: Sell Everything

Study the early 1930s, the late 1970s, and Argentina earlier this decade as just three possible scenarios.

Bart,

Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Thanks

[bart]

Re: Sell Everything

Bart,

Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Thanks

Yes, and at other times and countries too.

[grapejelly]

Re: Sell Everything

you don't have to visualize the world blowing up to understand the value of physical gold.

Futures markets have defaulted in deliveries in the past. The settlement is in cash rather than in delivery of the contract.

The bond futures market faced default not long ago and was resolved through cash exchange rather than delivery.

If things get crazy, there will be no deliveries on precious metals futures exchanges. This is all to probable and it doesn't take an end-of-world scenario.

[DemonD]

Re: Sell Everything

I am going to relate one third-hand story on how gold was useful in a real-world scenario.

Czech Republic Circa 1939-1945. Read a story on another blog about how their grandfather stockpiled gold, and used it to get through that time, with enough left over at the end to send their father to university in Vienna after the War.

Was there anyone in the US using physical gold for currency for purchasing goods and services in the 1940's?

I wish I knew people that owned Mobil stock from the 1920's. Because I also read another story where a guy sold XOM and some of the original purchase dates were in the 1920's (and I'm going to take a wild stab and say those stock certificates were FAR more valuable in dollars than gold).

[raja]

Re: Sell Everything

Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Bart,

I have just spent a lot of time searching for an example of paper gold defaulting during the Argentina crisis . . . and I can't come up with anything.

Perhaps I wasn't clear on what I meant by "paper gold", and you thought I was referring to the Argentinian paper currency.

What I'm referring to by "paper gold" is something like a gold ETF.

Are there any examples of this type of paper gold defaulting or being seized that you know of?


Thanks

[raja]

Re: Sell Everything

you don't have to visualize the world blowing up to understand the value of physical gold.
Futures markets have defaulted in deliveries in the past. The settlement is in cash rather than in delivery of the contract.
The bond futures market faced default not long ago and was resolved through cash exchange rather than delivery.
If things get crazy, there will be no deliveries on precious metals futures exchanges. This is all to probable and it doesn't take an end-of-world scenario.

Grapejelly,

When I was talking about "paper gold", I was thinking of gold ETFs. But as you point out, there are other forms of "paper gold" with apparently various levels of risk, and it was a mistake on my part to lump them all into one category. So permit me to clean up my terminology, and perhaps we can continue this discussion more fruitfully by narrowing the topic . . . .

Here's what worries me about physical gold . . . .

In the event of a gold bubble, I fear the price of gold could rise and fall so rapidly that the physical-gold-trading infrastructure could not handle the load. Physical gold traders could not possibly service the number of trades desired if the world suddenly decided that fiat currencies, or even just the dollar, were headed for the dumps. jk referred to an article which pointed out that even though gold soared to over 800 two decades ago, it plummeted back to the 600s in only a couple of days. I wouldn't want to be holding physical gold in that type of situation . . . .

In a bubble scenario such as the above, I'm assuming that a gold ETF could be traded very easily, and thus would be preferable to physical gold.
Trading is all electronic . . . and there's no phone calling for quotes or shipping required.

The only point of owning gold is to make a profit on it, right? This means it must go up in value, then be sold. If it can't be sold at a high price, then there's no advantage of having it, and even the risk of a great loss . . . and that's why I think a gold ETF is "safer" than physical gold.

However . . . there is one scenario in which is would be desirable to hold gold rather than sell it, and that's a situation of total societal collapse . . . and I give that a very small probability. Still, it might be good to have some physical gold for that unlikely eventuality. But in all other scenarios, I think it's necessary to be quite nimble to catch the moment, and a gold ETF is the only way I know to do that.

So, if we re-frame this discussion from talking about "paper gold" to talking only about a gold ETF, what would you think?
What are the dangers or downsides of a gold ETF. Under what types of scenarios would a gold ETF be subject to default.
During the bubble scenario I painted above, tons of money would be flowing into the gold ETF. Under this circumstance, there would be no fear of default. Of course, when the bubble starts to deflate rapidly, default could happen toward the end. . . but one has to get out "in time" anyway to make a profit . . . .

[bart]

Re: Sell Everything

Bart,

I have just spent a lot of time searching for an example of paper gold defaulting during the Argentina crisis . . . and I can't come up with anything.

Perhaps I wasn't clear on what I meant by "paper gold", and you thought I was referring to the Argentinian paper currency.

What I'm referring to by "paper gold" is something like a gold ETF.

Are there any examples of this type of paper gold defaulting or being seized that you know of?


Thanks

Yes, keep doing your research and do broaden your concept of paper gold.

The period starting with the corralito in Argentina and going on for many months (at a minimum) does fit your general parameters... and you're welcome to disagree or see something different, as I suspect you will.

[grapejelly]

Re: Sell Everything

Grapejelly,


Here's what worries me about physical gold . . . .

In the event of a gold bubble, I fear the price of gold could rise and fall so rapidly that the physical-gold-trading infrastructure could not handle the load. Physical gold traders could not possibly service the number of trades desired if the world suddenly decided that fiat currencies, or even just the dollar, were headed for the dumps. jk referred to an article which pointed out that even though gold soared to over 800 two decades ago, it plummeted back to the 600s in only a couple of days. I wouldn't want to be holding physical gold in that type of situation . . . .

Physical gold is precisely what I would want to be holding.

If you study the bubble more carefully you will note that the "over 800" time was extremely temporary. But the period when gold rose to $600 and $700 lasted quite a lot longer a time. If you were a gold investor you hopefully would have already taken a position and would be riding the thing up and if you felt things had changed you would have had a good deal of time to sell. Not at the precise top of course. But you would have done extremely well. As many people did.

In a bubble scenario such as the above, I'm assuming that a gold ETF could be traded very easily, and thus would be preferable to physical gold.
Trading is all electronic . . . and there's no phone calling for quotes or shipping required.

There won't be trading in these vehicles when things go crazy. The whole system will seize up.

You see, from your point of view it's paper. But read the prospectus. You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone.

The only point of owning gold is to make a profit on it, right? This means it must go up in value, then be sold. If it can't be sold at a high price, then there's no advantage of having it, and even the risk of a great loss . . . and that's why I think a gold ETF is "safer" than physical gold.

Wrong. The only point of owning physical is to preserve capital. It may or may not be profitable but it will at least keep up with real inflation and then some. And it is not as I call it "on the grid" so there is no counter party risk. It is isolated from the rest of the financial system that will at some point become highly contagious.

However . . . there is one scenario in which is would be desirable to hold gold rather than sell it, and that's a situation of total societal collapse . . . and I give that a very small probability.

I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow.

I anticipate this happening in the next x years. What is x? Can't say. The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper.

So, if we re-frame this discussion from talking about "paper gold" to talking only about a gold ETF, what would you think?
What are the dangers or downsides of a gold ETF. Under what types of scenarios would a gold ETF be subject to default.
During the bubble scenario I painted above, tons of money would be flowing into the gold ETF. Under this circumstance, there would be no fear of default. Of course, when the bubble starts to deflate rapidly, default could happen toward the end. . . but one has to get out "in time" anyway to make a profit . . . .

Wishful thinking. You cannot have both physical and paper. It's one or the other. There will be no money flowing to gold ETFs at some point because of massive "failure to deliver". To me the question is when, not if.

[raja]

Re: Sell Everything

Grapejelly,

Thanks for your response . . . .

I now see the root problem of our conflicting ideas about physical gold -- we are operating from different future scenarios, so naturally we come to different conclusions.

Let me see if I understand your scenario . . . .

You believe the whole financial system will seize up. You say, "I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow."

If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.
This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

But here's where we differ . . . .

My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")

You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone. . . . There will be no money flowing to gold ETFs at some point because of massive "failure to deliver".

This is an interesting point . . . but in thinking it through, here's what I came up with . . . .

For the trading system to work, it assumes that when there is someone who wants buy gold, there is also someone at the same time who wants to sell gold. If this were not the case, then a bubble couldn't form, because as you say, liquidity will be gone. Are you saying there will be no gold bubble?
Also, if trading stops, there is still gold in the ETFs vaults. Shareholders own that, and when things got going again, they would have that wealth.

Of course, someone could steal the ETF gold, or there could be fraudulent activity . . . that is a risk.
There is also a risk that if your scenario came about, and you started using your physical gold for purchases, you might get a visit in the night from some bad people who happened to observe or hear about your transaction.

The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper.

Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

[grapejelly]

Re: Sell Everything

If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.

I don't see the stock market as ending, but otherwise yes, this is what I see as the end game.

This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

Well maybe. But this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.

What it does is really put a crimp on imports. It makes domestic production much more important. Ultimately it is very healthy because it could be the rebirth of American manufacturing and making things. But it is quite painful.

My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")

Well, I don't agree with this. ETFs are good in fair weather but unproven in really stormy weather.

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes?

Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.

There are deliveries in real futures markets.

[raja]

Re: Sell Everything

this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.

Had the gold ETFs existed at that time, would they have run into the problems you are suggesting?
I don't think so . . . but I'm not knowledgable on this subject . . . .

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes?

Well, if there was a gold bubble, and I wanted to cash out at near the top, then they would be paying me in dollars . . . but it would be multiples of what I had originially invested, because gold would have kept up with inflation.
Also, I don't care if the vaults are empty, as long as I get out near the top. They are only going to be looking in the vaults when things start to crash, and I hope to be long gone by then . . . .

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.

It doesn't matter if it's a phony market, as long as I get out before it blows up.

Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.

Or, do you think gold will always retain it's value in relation to the fiat currency? Historically, that hasn't always been the case.

Another thing to worry about: In the last chapter of America's Bubble Economy, the authors postulate that when the new economy arises from the old, gold will be forgotten, and will return to it's commodity value.
Just another possible future . . . .

[bart]

Re: Sell Everything

Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.

And in the "Just another possible future . . . ." department, it wasn't a bubble in Argentina... and other many countries too.

[grapejelly]

Re: Sell Everything

I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks.

[raja]

Re: Sell Everything

I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks.

You expect the Dow to go as low as $250 ??? ;)