Monday, December 7, 2009

Gold or Dollar Bubble?

"Two hundred metric tonnes of gold would occupy a cube of little more than two metres on a side; it would fit into a small bedroom. But India's purchase of that volume of gold from the IMF last month has had an outsize impact on the markets, helping push the price well above $1,100 a troy ounce. ... Gluskin, Sheff, a Canadian asset-management fiorm, suggests that if China followed India's lead, bullion could hit $1,400 an ounce. ... In any case a headlong retreat from the dollar would be counterproductive, since it would damage the value of Asian central banks' existing holdings of Treasury bonds and bills. And those countries, like China, which peg their currencies against the dollar, are forced to buy large amounts of Treasuries as part of that strategy. ... The nature of reserves is that they insure against emergencies. And in an emergency gold is more likely to hold its value than paper money. ... Some of the more pessmistic commentators see the recent credit excesses as the inevitable consequence of a system based on paper money and call for the return of the gold standard to prevent future crises. ... A gold standard clearly protects the interest of creditors since it ties the value of money to a scarce resource. A govenment cannot create new gold. If you fix one part of the economic system, trouble has to show up elsewhere. When countries on the gold standard suffered a shock they had to let the real economy, rather than their currencies take the strain", my emphasis, Economist, 12 November 2009, link:

"Worries about the dollar's dominance of the global monetary system are not new. But debate about replacing the beleagured dollar, whose trade-weighted value has dropped by 11.5% since its peak in March 2009, has resurfaced in the wake of a global financial and econo0mic crisis that began in America. ... Some say that America's role as the principal issuer of the global reserve currency gives it an unfair advantage. America has a unique ability to borrow from foreigners in its own currency, and wins when the dollar depreciates, since its assets are mainly in foreign currency and its liabilities in dollars. ... But what are the alternatives to relying on the dollar? One possibility is a system with several competing reserve currencies. Over time, the euro and China's yuan (it if became convertible) could emerge as competitors. This would require a great deal of policy co-ordination among issuing countries. ... Another alternative is a greater reliance on SDRs. the IMF's quasi-currency, which operates as a claim on a basket of currencies: the dollar, euro, sterling and yen. ... The most radical solution of all is a new global currency that could be used in international transactions and would float alongside domestic currencies. ... Radical as this may sound, it is not a new idea. John Maynard Keynes had something similar in mind when he proposed an International Clearing Union,. This global bank would issue its own currency, called the bancor", my emphasis, Economist, 20 November 2009, link:

"As frothy as gold has been lately, by some measures it has only just begun to bubble. ... Up 62% since last November, gold is enjoying a moment that is either the start of an amazing bull run or one of those magazine-cover episodes that precedes a fall. ... If the US dollar were back on the gold standard, notes Societe Generale analyst Dylan Grice, then gold would have be priced at $7,648 an ounce in order to fully back all of the dollars in circulation. That calculation is based on the US monetary base of nearly $2 trillion and US government gold holdings of 261.5 million ounces. ... 'You are basically short trust in government when you buy gold,' says Mr. Grice, who suggests gold may be in the early stages of a long-lasting speculative mania", my emphasis, Mark Gogloff at the WSJ, 20 November 2009, link:

"Gold remains undervalued, even at its current price of $1,150 an ounce. ... The market can substantially remove the undervaluation of gold and the overvaluation of the dollar. it has done so before and it can do it again. ... Dollars can be converted into gold at a rate of $1,150 an ounce in the open market, but the implicit rate of conversion derived from the FED's gold holdings compared with the dollars it has issued is at least $7,725 an ounce in order to equate its asset and liability values. ... The monetary base is now 2.02 trillion dollars. I use 261.5 million ounces in calculating the Zero Discount Value (ZDV) of gold, which is the same concept as the fully gold-backed price of Societe Generale, and that price is now $7,725 per ounce. ... It means that gold is undervalued. It means that the downside risk of gold is less than that of the dollar and that the upside potential is large. ... The FED is like an open-end mutual fund whose shares have a fixed nominal price of $1 a share. The shares it issues are the notes (dollar bills) in the monetary base. ... If the FED were an open-end mutual fund, we'd calculate its net asset value by dividing the worth (in dollars) of its assets by the number of sares. Instead let us calculate a real net asset ratio by dividing the FED's gold holdings in ounces by the number of notes outstanding. We get .000129455 ounce of gold per Federal Reserve note (dollar). This measures the amount of real assets per share of the FED, viewed as a fund. ... At present it is as if we are paying $7,725 an ounce when gold is actually available for 85 percent less in the market. This is a remarkable discrepancy. . ... There are no riskless assets in the world. ... The risk of non-acceptance is not well-understood", my emphasis, Michael Rozeff (MR) at Lew Rockwell, 23 November 2009:

What idiocy. Why didn't the IMF's 200 tonne gold sale push the price down? No mattter what monetary chicanery you engage in, the trouble shows up in the real economy. The fool who wrote this fails to see that printing money lets the government shift those effects to money holders from those who made Misean "malinvestments". Literally, printing money is a "wealth tax". If say China can never exchange its dollar holdings for real goods, what "asset" does it own? It should study Japan's 1973 soybean experience, my 5 September 2007 post: Gold always holds its value better over the long-run than paper money.

The fool who wrote this does not mention this radical solution: closing all world central banks and remonitizing gold, that four-letter word again, at a large multiple of its current $1,160 "price".

I first made Grice's calculation in 1980. Disagreeing with Grice, it is the dollar that has been in "a long-lasting speculative mania". Grice is the first "respectable" analyst I've encountered who made this calculation. $1,160 gold is cheap.

Deflation? How about other monies.? Like Bill Gates Units (BGU), also called Microsoft. Consider the deflation with respect to BGU's since 1986. MR, in effect the Fed is a closed-end mutual fund. That's permits a discount from NAV. Good job, MR. Thanks. While MR is correct as to the Fed's liabilities, I prefer to relate gold's value to the various Ms. If the Fed wants to keep the banks open and gold convertible, $7,725 an ounce won't likely cut it. Americans who went to Europe in the 1960s found non-acceptability risk. There are no "riskless assets"; Eugene Fama, take note. What MR calls ZDV is a 100% "gold cover ratio". In 1918 newspapers reported this. I refer to a 1918 NYT report in my 24 December 2007 post:


Anonymous said...

Well I hope you don't expect Zimbabwe Ben to lead a review of idea of remonetizing...

Like President Obama and Bill Clinton I'm sure he is mesmerized by his poll numbers now...

"Just 21% Favor Bernanke’s Reappointment As Fed Chairman"

Wonder how those numbers would look if he got behind gold?

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