Money Supply, Commodities, and Numismatics

[DemonD]

So, I decided to try to really get a hold on what M1, M2, and M3 are.

It's still a whirlwind. What I found fascinating though was that on wikipedia, the money supply entry (based on the US dollar) is part of a larger Numismatic project. Just to make things even more confusing, I went over and read the numismatic page, and certain things began to make more sense, especially in terms of gold and silver.

Has platinum ever been used as a steady currency?

In any case, while I get the general concept of "money supply," it's still pretty hard to discern how the differences in M1, M2, and M3 affect the economy. It's somewhat intuitive to say "Money supply goes up, we have inflation, and the buying power of any unit of that currency goes down." But beyond that, I'm pretty damn lost. (Fortunately there seems to be a whole heaping of people out there who get it to help steer me in the right direction - thanks guys ;) ).

The one thing reading about M1 2 and 3 did though was make me realize what a bastard move the Fed made when it stopped publishing M3 material, and it's no wonder why Bart's M3 charts would be so popular.

The numismatic part to the currency equation has given me a bit more understanding of what EJ had posted a while back, in terms of putting coins in peoples hands and actually physically holding gold coins and getting the feel of it. Archeology meets psychology meets economics?

Personally I'm a functionalist. I don't like buying or collecting anything unless it has some utility. Money and wealth is never an end, but a means towards an end, and I could care less about what we use as money, what it looks like, feels like, etc. etc. I find myself ice cold when it comes to any type of money matter. Fundamentally, it would seem to me that oil would be a safer bet than any precious metal, as PM's have far less functional usage than oil, and in an stagflationary environment, PM's functional level goes down even worse. If manufacturing goes down, PM uses in manufacturing goes down with it. Found this little tidbit from http://www.halexandria.org/dward480.htm

In one typical year gold consumption and its use was apportioned in the following manner: Jewelry 62.5%, electronics 5%, Dentistry 5%, other industrial 5%, coins (official, medals, medallions, etceteras) 15%, and increase in investments/holdings 7.5%.

So if Jewelry makes up 63% of gold demand, and we hit a big recession, wouldn't that put some downward pressure on gold?

Meanwhile, oil still moves all around us, in our cars, our water bottles, keeping the lights on in our big cities, etc.

I'm not sure I have a real solid point with this post, more just musings on some complex things I'm trying to make heads and tails of.

I think the biggest thing I wonder about gold bugs in specific is how much of the bullishness in gold is due to the dollar falling, how much is due to history, and how much is due to a closeness with the actual physical currency?

[jk]

Re: Money Supply, Commodities, and Numismatics

So if Jewelry makes up 63% of gold demand, and we hit a big recession, wouldn't that put some downward pressure on gold?

if everyone thinks the fed is pushing the money supply/inflation, gold will go up while the dollar goes down, and likely go up faster than currencies. the issue with demand is that investment demand has been growing, and is likely to grow more. investment is the swing in demand.

[bart]

Re: Money Supply, Commodities, and Numismatics

So, I decided to try to really get a hold on what M1, M2, and M3 are.

...

In any case, while I get the general concept of "money supply," it's still pretty hard to discern how the differences in M1, M2, and M3 affect the economy. It's somewhat intuitive to say "Money supply goes up, we have inflation, and the buying power of any unit of that currency goes down." But beyond that, I'm pretty damn lost. (Fortunately there seems to be a whole heaping of people out there who get it to help steer me in the right direction - thanks guys ;) ).

More power to self education.

One simple way to view the differences between the M's is just based on what they are. M1 is pretty much currency and checking accounts and therefore measures how liquid the average household or individual is. M3 is the largest measure so it, together with a broad credit measure, tells you how much the Fed has their foot on the go pedal. The only potential gotcha is the M3 & credit lag (the time between when the money is created and when it actually hits most of the economy), since it not only varies from 6-24 months but it also has an almost immediate effect since investors & traders watch them both. And M2 can be ignored except as a possible confirmation.

Note that liquidity is not only a euphemism (and a touch 1984-ish) for money creation and therefore inflation, but also covers the relative international dollar value.

The one thing reading about M1 2 and 3 did though was make me realize what a bastard move the Fed made when it stopped publishing M3 material, and it's no wonder why Bart's M3 charts would be so popular.

For what its worth, the top three reasons that I attempted it were:
1. I use it in my own forecasting
2. It ticked me off that they discontinued it
3. Pure curiosity

So if Jewelry makes up 63% of gold demand, and we hit a big recession, wouldn't that put some downward pressure on gold?

Some, of course - but the question that will help a fuller answer is what kind of recession are you expecting?

In the '70s stagflationary recession, it went up. In the 2002 recession, it also went up since liquidity was high. In most other recessions since 1971, it either was stable or went down depending on how much real liquidity was being subtracted and/or how tight credit was (and how high "real" interest rates were).

I think the biggest thing I wonder about gold bugs in specific is how much of the bullishness in gold is due to the dollar falling, how much is due to history, and how much is due to a closeness with the actual physical currency?

If its bart, there must be at least one chart(TM). ;)

I'm not sure what you mean about the "closeness" portion, but here's a longer term picture of the dollar vs. gold.




And an even longer term picture of the dollar that's not terribly unlike Finster's FDI:




Here's a long term liquidity picture showing its relationship to gold:





On the history angle, here's the longest term picture I have of gold - over 700 years worth:

[DemonD]

Re: Money Supply, Commodities, and Numismatics

I'm not sure what you mean about the "closeness" portion, but here's a longer term picture of the dollar vs. gold.

Closeness to the currency meaning the actual spiritual or emotional value that gold holds both with individuals and with large populations.

See, I'm not a technical guy. Your charts are great, and they make a lot of sense in terms of helping to invest. But I'm a functionalist/realist. The reasons that gold are sought after by individuals do not resonate with me at all. I think I'm sort of asking on a more grander philosophical scale, "Why gold?"

Gold has some specific industrial and technological uses, and has some limited applications in health care. But as a medium with which to provide monetary value?

I guess here is where my fundamental analysis of gold goes wayward. Every municipality that creates a currency has some sort of reserve bank that controls the money supply. While the leaders of these banks are beholden to the politicians that put them there, we can generally say that the people that lead these banks are highly educated and have a difficult job, and in the case of the US Fed, there is a large amount of transparency there (even without them publishing the M3 numbers). Yes, the BLS has lies in it, but the transparency in the north american banking system is such that you, as an independent researcher, can fairly accurately gauge your own M3.

In other words, the fundamental money supply in the US is supervised by a group of very smart well-educated people who are not perfect, but we can have some reasonable confidence that they are not out to destroy the greater public.

Meanwhile, what entities are backing up and supervising the value of gold? Paper dollars, in and of themselves, don't mean much, but when you are able to redeem them with the backing of a strong government, that gives them their weight in terms of purchasing power. What gives gold it's purchasing weight?

Looking at other commodities, it makes much more sense to me how things move. Copper, oil, iron, titanium, uranium - these all are highly utilized in industrial or functional uses, and their price depends not on your ability to trade them hand-to-hand for food, but for their utilitarian value. If we hit a recession, and we use less steel for cars and buildings, the price of iron would go down as demand would go down (leaving aside inflation for a second). While I would agree that gold certainly would maintain it's value to a certain extent because of it's rarity and physical properties (versus, say, copper), I just do not see the allure of gold as a medium of exchange on a basic level. I guess maybe I'm just fighting against a social meme that has been around for about 2500 years? (Coming from a bio-evolutionary standpoint, i would argue that gold has absolutely no hold who we are as human beings, and therefore would not be something that is inherent to our survival and intrinsically worth something.)

The question I pose is what makes gold so special? Why does it have value outside it's utilitarian purposes? And here is the most functional (maybe pessimistic or cynical) question I have: who profits the most from gold rising, and are these profiteers any more or less dishonest or incompetent than the reserve banks?

[WDCRob]

Re: Money Supply, Commodities, and Numismatics

The question I pose is what makes gold so special? Why does it have value outside it's utilitarian purposes?

I tried to answer this for myself recently and the best answer I could come up with is: because it's had that non-utilitarian value for 3000 years.

I also think that something about the combination of density, richness of color and 'purity' (trying to describe what I feel when I see gold) creates a hard-wired reaction in Humans -- i.e. the reaction isn't likely to change anytime soon.

EJ referenced this 'reptilian brain' reaction in one of his posts, and I think that's right. I think it'd be an interesting question to put to E.O. Wilson and some of his sort.

[SeanO]

Re: Money Supply, Commodities, and Numismatics

The question I pose is what makes gold so special? Why does it have value outside it's utilitarian purposes?

I believe it's primarily the constrained supply. Like oil, increasing gold production increases extraction cost, thus requiring an increase in price.

You talk about oil as possibly better than gold, but imagine if we used dollar bills to heat our homes, things like cold or warm spells would greatly complicate the money supply. I don't think consumables are a good "store of value" - thus your hunt for utilitarian purpose is probably at odds with the goal.

[Spartacus]

Re: Money Supply, Commodities, and Numismatics

There is the possibility that as the gold price rises, the jewelry demand might rise.

Same for Silver.

If you're thinking that jewelry might be melted, that's another story- to make the melting and refining of RETAIL jewelry pay off, gold's bullion price may need to double or triple.

So if Jewelry makes up 63% of gold demand, and we hit a big recession, wouldn't that put some downward pressure on gold?

[WDCRob]

Re: Money Supply, Commodities, and Numismatics

I believe it's primarily the constrained supply.

But there's a constrained supply of many items on the planet. Why have we assigned that value to gold? The fact that gold is jewelry is because we already assigned that value to it. Otherwise we'd all wear cockle shells and wouldn't bother going to the trouble of extracting it in the first place.

[bart]

Re: Money Supply, Commodities, and Numismatics

Closeness to the currency meaning the actual spiritual or emotional value that gold holds both with individuals and with large populations.

See, I'm not a technical guy. Your charts are great, and they make a lot of sense in terms of helping to invest. But I'm a functionalist/realist. The reasons that gold are sought after by individuals do not resonate with me at all. I think I'm sort of asking on a more grander philosophical scale, "Why gold?"

Gold has some specific industrial and technological uses, and has some limited applications in health care. But as a medium with which to provide monetary value?

...

The question I pose is what makes gold so special? Why does it have value outside it's utilitarian purposes? And here is the most functional (maybe pessimistic or cynical) question I have: who profits the most from gold rising, and are these profiteers any more or less dishonest or incompetent than the reserve banks?

Once we get off into the philosophical area and to a large degree into the "barbarous relic" area of gold, all I can do is point out things like the historical and "gut" value of gold and other hard assets, as well as the general effect of bankers and similar being to virtually always destroy fiat currencies.
As EJ and others have pointed out, that "gut" value isn't shared by everyone - you're obviously one that doesn't "feel" it for whatever reason or reasons. My guess is that you feel similarly about diamonds for example - "they're just a sparkley mineral that has been well marketed", etc.

Perhaps asking "why not gold?" would help, since unlike fiat currencies that have nothing substantial behind them other than the "full faith and credit of a country/gov't" and can be manufactured from nothing, gold and other hard assets can't be created in any volume wanted.

Another approach could be looking at the purpose of money - my favorite basic & broad definitions are an "accepted medium of exchange" and "an idea backed by confidence". To say I have trouble having confidence in the dollar maintaining its value is a major understatement. The Fed and *every* other central bank throughout history have always devalued the existing money - gold and other hard assets are the only available assets that addresses those issues. In other words, its well beyond a social meme and I submit that your framework for judging it is the main fallacy and why you don't see the value in gold, etc.


As far as me being able to put M3 back together and John Williams being able to derive a "real" CPI, that's of course true. But the real questions to me are why should either of us have had to do that, and also what does that say about certain areas of the government & the Fed and their ethics?

This gets back to the conspiracy/cabal/cartel area or even EJ's view of "jocks vs. geeks" too - the Fed and others may not have the direct purpose of destroying the currency or the "greater public", but the actual results and effects of their actions are difficult at best to distinguish.
They sure aren't unintelligent or uneducated... but I don't buy that they're smart. Stated another way, the "very best people" simply aren't and the primary evidence is that in less than 100 years, the dollar has lost between 95% and 98% of its value. That's far less than smart - the consequences on the country and culture have not exactly been positive.

What gives gold, the dollar and every asset their value is a complex combination of factors that boil down to future confidence that their value will maintain or increase.

In theory, the free market is what determines the value of gold or most anything - and I could ask you a similar question about any other asset like copper or housing or the dollar - "Who supports their value?". I submit that your view of "backing up and supervising the value of ______" implies that you believe somewhat in "controlled" markets as opposed to freer markets, and of course that manipulation exists in every market. I also submit that markets are not always logical and do not consistently submit to a bio-evolutionary analysis.

But the real bottom line here is that you feel the way you do, and pretty much nothing I say or posit or show will change that view... and investing in certain hard assets other than gold have out-performed gold significantly too.

I do think though that on the longer term it's not "different this time" (barring some super controlled fascistic or 1984-ish outcome) and that gold will get well above $1000 and silver above $50, and other hard assets will also go up significantly.
They are continuing to make lots of inflation, to paraphrase Will Rogers.

[jk]

the irrationality of gold

the long history of emotional attachment to gold is based on fundamental irrationality. i think it's arbitrary and foolish, but since i think most people are foolish in the same way in this regard, i have 25% of my assets in precious metal etf's and mining stocks.

i think the population's foolish attachment to gold will outperform the population's belief in the u.s. dollar.

[aweber]

Re: Money Supply, Commodities, and Numismatics

Does anybody care to enlighten me on the velocity of money, with best gauge it M1, M2 or M3?:confused:

[Spartacus]

Re: Money Supply, Commodities, and Numismatics

M1, M2 and M3 are volumes of money.

For velocity of money you want something that measures how quickly dollars change hands.

say M3 divided by GDP.

I don't know if you can ever come up with a good good global measure, though, since various classes of money move differently.

forex - market money supposedly changes hands dozens of times per day, NASDAQ money changes hands a lot, pink sheet money a lot less, mortgages (non-securitized) rarely move.

Does anybody care to enlighten me on the velocity of money, with best gauge it M1, M2 or M3?:confused:

[spunky]

Re: Money Supply, Commodities, and Numismatics

But there's a constrained supply of many items on the planet. Why have we assigned that value to gold? The fact that gold is jewelry is because we already assigned that value to it. Otherwise we'd all wear cockle shells and wouldn't bother going to the trouble of extracting it in the first place.

You cannot counterfeit Gold. It is easily weighed, malable and transported, and is reconginzed through the ages as real money. By being mined it supply is not only limited , but cannot be inflated irrationally .

For the years we ( US ) were on the gold standard. What was the rate of inflation while on the gold standard as compared since we left it ????


Look on barts chart for gold and the bonar. Notice at the end of it ( appx 2Q 2005 ) the dollar gets a little bump yet gold doesnt falter. The relationship to the USD and Gold has fundamentally changed.


I can wallpaper my bathroom with bonars so what ? Making jewelry out of gold, so what ???? . Why are some oil paintings worth milions and some nothing ?????

Can anyone on here refine their own petro products , extrude their own plastic.:confused: No


Why should anyone have confidence in the Bonar ??????

[lobodelmar]

Re: Money Supply, Commodities, and Numismatics

You cannot counterfeit Gold. It is easily weighed, malable and transported, and is reconginzed through the ages as real money. By being mined it supply is not only limited , but cannot be inflated irrationally .

I'd add that gold is also used in other ways in addition to being a unit of currency and wealth storage (jewelry, electronics, dentistry)...so because of those uses, fungibility between use and wealth, and its limited supply, it is universally recognized as currency. You could say the same thing about water...many uses, easily transported, weighed...but since it is so common on this planet, it won't be a currency, at least not until Mad Max rides on the Aussie desert...

[renewable]

Re: Money Supply, Commodities, and Numismatics

Doesn't the central banks' large gold reserves prove that gold is money - why else would they hold a non-yielding asset that costs money to store? Additionally, the first point in the 2004 ECB joint statement on gold was "Gold will remain an important element of global monetary reserves". Is 'an important element of global monetary reserves' = money?