Why are gold and silver tanking so rapidly?

[GRG55]

Re: Why are gold and silver tanking so rapidly?

Don't jump the gun, they are not done with us yet. "D" day is yet to come.

Sure. But it could be 5 or 10 years away... ;)

[metalman]

Re: Why are gold and silver tanking so rapidly?

Don't jump the gun, they are not done with us yet. "D" day is yet to come.

sure but many reading whacko gary north sold because IT'S ALL OVER, FOLKS! he said.

a ******* nut job and a shitty forecaster, too.

[Sapiens]

Re: Why are gold and silver tanking so rapidly?

Sure. But it could be 5 or 10 years away... ;)

GRG,

I doubt it, but you will know it's near once the EU cries out in pain, the same for the English. Also, China needs to get over the Olympics, to show the world their glorious “transformation.”

Don't worry, we will get there soon enough.

[krakknisse]

Re: Why are gold and silver tanking so rapidly?

GRG, I doubt it, but you will know it's near once the EU cries out in pain, the same for the English. Also, China needs to get over the Olympics, to show the world their glorious “transformation.” Don't worry, we will get there soon enough.

Uh... why do you think the run-up in gold will stop when the ECB starts to ease monetary policy? (Am I misunderstanding you?) Wouldn't that leave very few safe havens? It's what I'm betting on...

[Sapiens]

Re: Why are gold and silver tanking so rapidly?

Uh... why do you think the run-up in gold will stop when the ECB starts to ease monetary policy? (Am I misunderstanding you?) Wouldn't that leave very few safe havens? It's what I'm betting on...

krakknisse, I would tell you, but then you would be my competitor; and I believe competition is a sin, I rather own everything [insert evil laughter here].

[WDCRob]

Re: Why are gold and silver tanking so rapidly?

Something EJ posted 12/7/2006:

The idea that the U.S. Federal Reserve Bank and later global central banks were destined to reflate the economy by printing press was so deeply lodged in my skull since 1999, before the event, that I never considered the possibility that the Fed might not print away and that the world's central banks would sit by idle and watch the dollar collapse in a heap. In 1999, the deflation versus inflation was the hot topic among Internet economics and finance obsessives—the worried well—as it is today.

As I considered matters then, deflation did not compute. Clearly the Fed has the ability to create money. And the rest of the world needed to support the U.S. economy and the dollar as a matter of central bank policy—a collapse of the U.S. economy and its currency could only mean certain pain for their economies in turn. The question was not a matter of what the central banks wanted to do. It was this: What limits are there to what they can do to accomplish reflation?

In 1999, that was not a difficult question to answer. My take was that the central banks were going to take all necessary steps within the framework of the international monetary system to prevent a major liquidation of financial assets.

This is also true today, but we are in a different place than in 1999. Oil is three times more expensive. We are engaged in a war that has cost $346 billion to date (versus $640 billion total on Vietnam) and we’re still in Afghanistan and Iraq. The United States and several other nations including the United Kingdom, Australia and Spain have gone through housing bubbles that started collapsing in mid-2005. Housing bubbles deflate slowly, making the data on the resulting effects on the economy more difficult for the Fed to read and react to versus after a rapidly collapsing stock market. The negative wealth impact on the economy is more gradual but more profound, because three times as much household net worth is invested in homes than in stocks. Economic and financial system fallout from the collapse of the private equity and USIP bubbles is more difficult to gauge. The impact could be sudden or gradual. This is a very complex stew.

That the world's central banks will eventually fail to maintain the system is as good as fact, for reasons that are not hard to understand. The transition costs to a new international monetary system are too high for the world's central banks to allow them to enter into a process of major change willfully. The change will come by crisis. But financial crises of a international monetary nature, due to geopolitical influences, are famously unpredictable; how and when an international monetary system will fail is unknowable.

Thankfully, an accurate prediction down to the year or quarter is not necessary. In 1999 as now, PMs seem to me as close to a can't-lose long term bet as any I know. If the world's central banks are willing and able to act as I expect, PMs are due to rise again in price relative to all major currencies. If they fail, PMs are due to rise in dollars. Thus the most prudent approach now as then is to diversity into both PMs and euro- and yen- based stocks and bonds.

On the question of inflation versus deflation in the event of the end of the cycle of asset bubbles, as I argue in "No Deflation! First Disinflation, then Lots of Inflation," the Fed cannot possibly be more clear as to its intentions. The Fed will print money and use it to buy mortgage debt if necessary to prevent a collapse in the debt markets that support housing; not to support housing prices directly but to prevent the collapse of the U.S. banking system and economy. The question is, if the Fed does this, what will other central banks around the world do at the same time? What is likely to happen to the price of PMs and other currencies? I believe the question is answered by Gresham's Law as explained by John Kenneth Galbraith in chapter two of his 1975 book “Money: Whence It Came, Where It Went”:

"In the ancient and medieval world the coins of different jurisdictions converted at the major trading cities. If there were any disposition to accept coin on faith, it was inevitably the bad coins that were proffered, the good ones that were retained. Out of this precaution came, in 1558, the enduring observation of Sir Thomas Gresham, previously made by Oresme and Copernicus and reflected in the hoarding of the good Roman coin, that bad money always drives out good. It is perhaps the only economic law that has never been challenged, and for the reason that there has never been a serious exception. Human nature may be an infinitely variant thing. But it has constants. One is that, given a choice, people keep what is best for themselves, i.e., for those whom they love the most."

On the question of inflation and deflation, Gresham’s Law tells us that it is important to understand that the value of an asset is not determined only by the quantity of money that is available to purchase it, but also by the value of the money used to purchase the asset relative to other kinds of money available at the time.

There is no magic to this. Anything can be money. In a prison or a city that is cut off from outside supplies, such as during war, cigarettes are money, functioning admirably as a store of value and means of exchange. All that is needed to monetize nearly anything is a limit of supply versus demand for that item relative to other forms of money. In the extreme case of hyperinflation, government money is in vast oversupply and thus shunned by everyone–and that goes for gold and silver, too, to a more limited extent. For example, when the Spanish government imported vast amounts by ship from mining operations in the New World in the 1600s, it created inflation in Spain and other parts of Europe.

In the case of fiat money, the monetization of common items can become sadly absurd. As there are always limits in the rate of mining versus printing, especially money created and stored as bits on hard drives, fiat money is always at greater risk of extremes of over-supply and under-value. At the height of the German hyperinflation in the 1930s, long after all of the gold coin and other rare items had been hoarded, and all of the brass doorknobs had been stolen from buildings and the copper pipes in them kept under armed guard, items that you might find at a yard sale, such molded glass figures, were used as a store of value and means of exchange, much like cigarettes in a prison. Note that neither gold nor fiat have much use as money in a prison or a city under siege.

A government can always print money to buy assets that the markets do not want. If in the future the Fed prints money to buy mortgage debt, it is doing so because that debt, as an asset on the balance sheets of lenders, has a negative net present value in the market. The money printed by the Fed to pay for it will also have less value in the market than money used to purchase items that the market values: "...people keep what is best for themselves, i.e., for those whom they love the most." The dollars thus printed to buy debt that the markets do not want will increase the quantity of dollars already in circulation, lowering the value of the currency on global markets, as happened between 2001 when I was sitting in my friend's home on Martha's Vineyard and the time of my visit with the investment bank money manager in 2003.

Global central banks are motivated to print their own currencies to purchase dollars and dollar-denominated assets. If they do not, the United States will experience a major increase in both inflation and interest rates, certainly sending the U.S. economy and possibly the world into economic depression. The world's central banks can be expected to print their own currency to purchase dollars, thus increasing the quantity of all money globally and causing PMs to rise in all currencies, as occurred between the time of the investment banker’s visit and now.

As we approach the moment of truth in 2007, the world of money is not unlike 1999. We stand at the precipice of a monetary deflation followed be a decline in the price of financial assets. The Fed will then print money to prevent the U.S. economy from falling into a depression and keep the U.S. banking system from seizing up. Global central banks will be compelled to follow suit both to support their own economies and keep the U.S. dollar and economy from falling into depression. It may collapse anyway in this cycle as described in Ka-Poom Theory. Currency markets further re-monetize gold and de-monetize dollars as gold develops more of the characteristics of cigarettes in a prison, which is what the out-of-date U.S. dollar centric, floating exchange rate international monetary system has become for global financial markets.

[Guest]

Re: Why are gold and silver tanking so rapidly?

This is probably a little counter-trend rally for gold and silver, they still have another stiff leg down. I would guess people loading up on more bullion this week are early.

When prices start trending down again after this little rally watch Mish be eagerly posting how he "forecast this decline all along". Another year to 18 months down the road gold will be more expensive to get into - but for Mish thankfully our attention will be on the other news so few will remember just how wretchedly short term his "sell gold" call really was.

[Finster]

Re: Why are gold and silver tanking so rapidly?

This is probably a little counter-trend rally for gold and silver, they still have another stiff leg down. I would guess people loading up on more bullion this week are early.

When prices start trending down again after this little rally watch Mish be eagerly posting how he "forecast this decline all along". Another year to 18 months down the road gold will be more expensive to get into - but for Mish thankfully our attention will be on the other news so few will remember just how wretchedly short term his "sell gold" call really was.

That would be my best guess, too. Corrections often come in two waves. Gold prices tend to make sharp peaks and trace broad bottoms, so it may not necessarily be immediately off to the races again, but for anyone finding themselves with perhaps a few too many bonars and too little gold, it should be an excellent opportunity to remedy that deficiency...

[krakknisse]

Re: Why are gold and silver tanking so rapidly?

krakknisse, I would tell you, but then you would be my competitor; and I believe competition is a sin, I rather own everything [insert evil laughter here].

Aww, come on - at least give me a sneak peak at your thoughts. This is getting more fun by the day!

[Guest]

Re: Why are gold and silver tanking so rapidly?

Finster -

I think in your discreet way you are turning into a goldbug. Of course you'll flatly deny it all day long in the interests of agnosticism.

[Guest]

Re: Why are gold and silver tanking so rapidly?

Krakknisse -

You don't know Sapiens yet. This is his trademark. He always wants to leave people hanging wondering what he really meant. The bottom line is left shrouded in mystery - Always always always.

[Jim Nickerson]

Re: Why are gold and silver tanking so rapidly?

Uh... why do you think the run-up in gold will stop when the ECB starts to ease monetary policy? (Am I misunderstanding you?) Wouldn't that leave very few safe havens? It's what I'm betting on...

There may be better answers, but here's mine. If whatever is ahead of us forces the ECB to lower rates, I take it that would weaken the Euro against the dollar or vice versa the dollar would strengthen. If the dollar strengthens then it will take less of them to buy gold, which I asume would show up as a decrease of the price of gold (and commodities) when measured in dollars.

[Nervous Drake]

Re: Why are gold and silver tanking so rapidly?

.

[FRED]

Re: Why are gold and silver tanking so rapidly?

There may be better answers, but here's mine. If whatever is ahead of us forces the ECB to lower rates, I take it that would weaken the Euro against the dollar or vice versa the dollar would strengthen. If the dollar strengthens then it will buy take less of them to buy gold, which I asume would show up as a decrease of the price of gold (and commodities) when measured in dollars.

EJ writes in:

The chart above is from my keynote presentation at the Hard Assets Conference in Las Vegas Aug. 2007.

The new gold bull market began when the US depreciated the dollar unilaterally from 2001 to 2004; gold prices increased against gold but not much against other currencies. When other central banks depreciated as well from 2004 to 2006, gold increased in other currencies as well. In fact, all commodities increased in unison. The one-way bet nature of this competitive depreciation was amplified by speculators.

Since the US-centric credit crisis began in 2007 the US dollar began to fall due to economic and financial risks. Gold increased in dollar terms but less in euro terms as the dollar depreciated against the euro. Again, speculators betting on the Fed's response doubled down using leverage.

When European governments again weaken the euro to reduce the impact of a weak dollar on their exports and to fight debt deflation, gold will rise in terms of other currencies as well. There is no evidence based on the 2001 - 2006 period to suggest that this will reduce the dollar price of gold.

That said, I am still expecting a correction in gold prices driven both by a demand scare and government intervention via changes in margin requirements. This is what the government could have done to reduce speculation in the stock market before it got out of hand in 2000 and again now (margin debt is back up to $328B near its peak of $381B before the credit crisis began). However, as a policy the US government approves of stock market speculation but not commodities speculation.

[The Outback Oracle]

Re: Why are gold and silver tanking so rapidly?

You're probably right but there is a serious disconnect in the markets right now. Ebay is selling silver coins at 21+ when spot is showing 17-18. Apmex selling eagles for one day only at 2+ spot. I wonder what will happen if we get a leg down to 15ish.

I don't get iot...a KG of Silver going for A$800 on Ebay at the moment. Correct me if I'm wrong...that's about USD$22.65 per ounce! This is a KG...not even a coin!
The world's gone crazy Cotillion!