Where Gold is Going

Many will argue that — more or less — this reflects the U.S. government’s attempts to deal with broad and deep social and financial problems through monetary policy. The higher the price of gold goes, the more the market believes that monetary policy just isn’t working, and that the big problems in American and Western society — oil dependency, deindustrialisation, unemployment, regulatory capture and debt saturation — are just not being effectively addressed.

As I wrote last month:

Getting out of a depression requires debt erasure, and new organic activity, and there is absolutely no guarantee that monetary easing will do the trick on either count. Most often, depressions and liquidity traps are a reflection of underlying structural and sociological problems, and broken economic and trade systems. Easing kicks the can down the road a little, and gives some time and breathing room for those problems to be fixed, but very often that just doesn’t happen. Ultimately, societies only take the steps necessary (e.g. a debt jubilee) when their very existence seems threatened.

The simple expansionary recipe for getting out of depressions is a sad smile, a false promise of an easy route out of complex and multi-dimensional problems.

If these problems are fixed, then the correlation between the debt ceiling and the price of gold will go away. Gold is not necessarily going to the moon, and the gold speculators will be forced to give up the ghost as real broad-based economic growth returns. The trouble is, I don’t see any evidence that these problems are going away. Japan is still — more or less — in the same place it was twenty years ago. Now the whole world may be moving to the Japanese model. Readers are welcome to try and convince me otherwise.

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19 thoughts on “Where Gold is Going

  1. Aziz,

    Mitt Romney will run, but the economy in the USA is turning for the better, so Obama will be re-elected. The USA will open its borders to high net worth immigrants who will underpin housing demand (new starts, and purchase of rental properties).

    Chinese are buying gold because, the Yuan will collapse, when the elites flee with smuggled physical.

    Obama has told his multinationals to return home with the technology and “factory managers”

    Watch this space. The USA have fallen into Putin’s “Afghanistan Trap” and now they have woken up and are fleeing.

    The boost to the domestic economy from “introversion” will be massive.

    Go long USD and Gold.

    • Problem: being long the dollar is being long an asset smeared with massive counter-party risk. This is what the PBOC have grasped. Their trade with America has left them holding a sackful of dollar-shaped risk. They tell us Westerners this explicitly and we still ignore it.

      Whoops is the word.

    • If I had a choice I’d much rather own AUD than USD. My thinking is that I’ll own a high-yielding currency of a democratic country, rich in resources and sparsely populated – which means that in the long term it shouldn’t be a losing proposition. If I were to describe the USD, things get much murkier and I’d rather not do it (or speculate on it becoming stronger).

  2. Pingback: Where Gold is Going « azizonomics | My Gold Fix

    • Anyone who told you gold buying was “speculation” had no clue.

      Gold is a hedge against counter-party risk. It’s not speculation.

      Counter-party risk is real. Just ask Hank Paulson.

  3. I’d say USD:CNY parity optimistic for the dollar.

    This is a generational change. Empires die slowly, then very quickly.

  4. America does not have to die. It can be prevented. Broadly two agents exist… the elites and the mass. The elites in America appear to have all the power, the masses are not powerless they think they are. This can be turned around the ruling elites need help, we do not occupy a ruthless world of dog eat dog where human beings simply act like packs of dogs fighting over a bone. Darwins theory can be shown to be ‘a projection’, yes being powerful and strong helps a people to survive, but they also need to cultivate compassion for the lame and the weak, the elderly and the very young. The Compassion and the life supporting Atmosphere which envelopes the Earth need to be emphasised at this time. Do we really want to live in a world where we dis-trust each other and are hostile because we want to own more than the next person? Yes material wealth is useful, but there is more than enough to go around those who want to take it and control it need to be enlightened, otherwise the world will be turned into a hell for everyone. We live in a globalized inter-connected world, the only ones who may benefit from an economic implosion are the people who have nothing now because they have nothing to lose. Own some Gold and or Silver and give in charity a proportion only this will activate the Compassion.

    • I am reading a book on Talmudic thought in Economics, and it appears that from the Jewish perspective, wealth equals knowledge/respect/power, whereas the Christian or Buddhist perspective is the opposite.

      Perhaps it is a philosophy thing. Perhaps we are to be ruled by elites who do possess great power, wealth and intelligence. If we did go down the Buddhist/Christian path, we would be back to nature, without societies material achievements.

  5. Interesting ideas. Invoking is Darwin is interesting, because it has been shown quite exhaustively that Darwinism can account for things like compassion and charity. “Fittest” doesn’t necessarily mean strongest, or cruellest, or nastiest. It just means the best fit for the situation at hand. Simply, these traits are useful for survival in individuals The “social Darwinists” aren’t really Darwinist at all. They just took the theories of Darwin and twisted them to their pre-existing political agenda.

    Your most interesting point:

    We live in a globalized inter-connected world, the only ones who may benefit from an economic implosion are the people who have nothing now because they have nothing to lose.

    Yeah. I wish more of us could understand this.

  6. The most pessimistic scenario for gold in the long term is a resolution of the debt crisis and of the world trade imbalances in a way that does not involve gold (gold-standard, revalued fofoa-style freegold etc.). Of course, gold may still have a long way to go before you could sell at the top and analysts that I respect (like Ray Dalio) are still long gold for the long term.

    But even in the “pessimistic” scenario described above, some say that gold will continue to be sought after because the multipolar world that we’ll find ourselves in will be fraught with risks and uncertainties. In a way, a multipolar world is orders of magnitude more perilous than a bipolar world (as was the one during the Cold War). In a way (metaphorically) a bipolar world is like a unipolar world (I’m on the good side, the others are on the bad side). This multipolar vs. unipolar argument is anyway simplistic and does not tackle the specifics of the massive secular shifts we’re experiencing (the shift of global power to the east, the peak of cheap oil, the testing of the limits of the compounding growth-based economic model etc. etc.)

  7. Aziz,

    Like most people, you have a misunderstanding about debt in our country.

    ALL MONEY, except coins, comes from debt.

    Everything most people know about money and deficits was 100% true until 1971 — when Nixon ended the dollar’s convertibility into gold. Up until then, the nation had to “borrow” when it ran out of gold reserves.

    After 1971, the dollar became fiat and there was no longer any risk of insolvency. However, the laws (and economics textbooks) on spending and “borrowing” were never changed — even though fiat money operates very differently from money that has a fixed convertibility into gold, wheat, or another currency.

    Here is an overly-simplified 4-minute explanation of where our base money supply (M0) now comes from…

    We were all taught in school that banks create all our money supply — by loaning money into existence. However, in a fractional-reserve banking system, such as ours, banks can’t create any loans (M1) without backing from their own (M0) reserves — which can only come from our government spending it into existence.

    The M0 reserves to back all bank loans are held in reserve accounts at the Fed. When you pay your taxes or buy Treasury securities, the Treasury deducts money directly from these reserve accounts. When the Treasury spends money — according to Congress’s budget — it simply credits those reserve accounts. In other words, you can’t pay your taxes or buy Treasury securities with bank loans (M1), since bank loans are never held in these reserve accounts at the Fed.

    Therefore, the funds to pay taxes and buy government securities come from government spending.

    It doesn’t make sense to “pay off” the debt because our money supply IS DEBT. I suppose you could argue that we need a smaller money supply, but less money in the private sector wouldn’t be very helpful when the private sector is deleveraging.

    Before you continue advocating for debt erasure, I encourage you to learn how debt is crucial to our money supply and what its risks actually entail:

    http://pragcap.com/resources/understanding-modern-monetary-system

    • Thank you for the link. Heavy going as warned, but I agree with the conclusion: Real realth increases = real productivity increases.

      If you have a large inefficient Government sector (A glorified work for welfare programme) you’ll collapse the economy by driving out productive businesses through excessive taxation.

      This is what has happened to Greece. The Treasury is broke, private businesses has fled or is operating in the black economy, and external creditors won’t lend to the sovereign, because there is no chance of getting paid back.

      If you treat an economy like you would treat a survival game on an island, if the Chief taxes too much and grows fat, the Island starves, because the workers swim for the nearest life raft.

      • Not exactly. Greece is not a currency issuer. Greece is a currency user (like a state or local government). Currency users can go bankrupt. States or towns can run out of money. Greece can run out of money. But, currency issuers — such as the Federal government — can never go bankrupt. It’s impossible.

        Therefore, a large Government sector does not starve the private sector, in a fiat country (where the government is the sole issuer of that currency). In fact, a large government sector adds base money to the private sector — for better or for worse. Taxation destroys base money in the private sector (to prevent inflation, if needed).

        The Chief on your island can certainly starve the island by taxing too much, but the Chief can never go bankrupt if he is the sole issuer of the currency of that island. His ability to tax gives the currency value, but the taxation itself is not necessary for the chief to issue additional currency.

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