Three-Card Monte Central Bankers

"After all the massive bailouts, the federal debt is exploding. ... The US now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname 'the PIIGS.' ... Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. ... And banks and other financial institutions owe $1.4 trillion less than they did in late 2008. Those debts haven't disappeared. They have merely been shifted onto the books of the federal government--in what may be the highest-stakes shell game ever. ... There's no sign of a slowdown in debt growth. 'These processes are not linear,' warns [Carmen] Reinhart. 'You can increase debt for a while and nothing happens. Then you hit the wall, and--bang!--what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.' ... 'If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise.' ... In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: Those who spend too much will eventually be owned by those who are thrify.' ... But in my view, the obvious tools--gold and other commodities, emerging-markets stocks, inflation-protected bonds--are already so popular that they are likely overpriced", my emphasis, Jason Zweig at the WSJ, 8 May 2010, link: http://online.wsj.com/article/SB10001424052748704292004575230601932486166.html.

I disagree with Templeton, remembering something Brazil's finance minster said about 25 years ago, "If I owe the bank a million dollars and I can't pay, I'm in trouble. If I owe the bank a billion dollars and I can't pay, the bank is in trouble". Who is in trouble if Uncle Sam owes trillions? I think $1,225 gold is cheap.

That Four-Letter Word Again

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. ... But there is an alternative. The US could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons. ... The value of a gold standard was proven in the 19th century. ... Countries that adopted to international gold standard prospered. This remarkably successful monetary system only blew apart with the outbreak of World War I in 1914. The reason it came apart then--and not at other times when countries abandoned the gold standard to finance wars with deficit spending--was that World War I was the first conflict to affect every major economically advanced country in the world. ... This might not have mattered, and the major economic powers might have re-established a monetary system similar to what existed before the war if not for the central reason why political elites dislike the gold standard: It leaves them little room to run the economy and claim credit for its successes. ... But their deeper reason is that they prefer to retain power over the economy that they would not have under a gold standard. ... But foreign central banks don't stack their greenbacks in vaults. They maintain monetary reserves mainly as interest-bearing US government-backed debt securities--in effect, as unsolicited loans to the US government. ... That increase in borrowing capacity creates liquidity that is unrelated to any need of Americans involved in economic transactions. ... The government of Charles DeGaulle, president of France from 1958 to 1969 and a supporter of returning to the gold standard, once assailed this American liquidity advantage as as 'exorbitant privilege.' ... Now Ben Bernanke's Fed is repeating recent patterns of keeping interest rates too low for too long, creating new bubbles and risking a whack-a-mole encore: 1970s-style stagflation. ... The first step in cutting off the addictive flow of foreign central-bank capital to Washington is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace their dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard. ... Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the [US]", my emphasis, Sean Fieler and Jeffrey Bell (F&B) at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052702303695604575181693906532202.html.

Absent repealing the Federal Reserve Act any US gold remonitization will be another scam to be reversed at Uncle Sam's whim. F&B work at the American Principles Project. See my 8 January 2009 post:

http://skepticaltexascpa.blogspot.com/2009/01/galbraiths-dialectic.html.

Gold and Conservatives

"Within the American conservative movement, opponents of the gold standard--any form of gold standard--have always dominated the leadership. Newcomers may be unaware of this. ... Debates are usually limited to whether the FED is wise in holding to, or changing, the federal funds rate. Few readers of the '[WSJ]' or viewers of CNBC could tell you exactly what the federal funds rate is, why it is important, or how the [Fed] controls it. ... No one raises the fundamental issue of why and how it posses the legal authority to set the federal funds rate, enforce banking rules, and control the money supply--sort of. No one argues that the [Fed] is the most powerful private agency that is covered by a veneeer of public accountability. ... Ron Paul for the first time in American history made the [Fed] an issue in a Presidential campaign. He called for the re-establishment of the gold standard. ... The early years of the Great Depression were a time of monetary deflation. ... One economist who predicted this was Ludwig von Mises. he warned in the late 1920's about the coming contraction. He was opposed by an American economist, Irving Fisher of Yale, who announced a plateau for the American stock market in September 1929. ... Mises argued that the gold standard has arisen as a market phenomenon becasue gold is the most marketable commodity. ... In sharp contrast, Fisher in Chapter XII dismissed the gold standard as an historical accident. he said the gold standard would be difficult to dislodge, but someday people would abandon it. Why? Because gold 'is a substance, of which the supply is excessive.' The most famous advocate of Fisher's monetary theory was Milton Friedman. Through Friedman, the academic free market economics community became committed to fiat money after 1950. Friedman was the dominant free market spokesman after 1960. He held a position at the University of Chicago There was not a single gold standard proponent in the economics department in 1950 or later. ... Critics of the FED have long been segregated out of the movement by the leadership. ... Only in the last decade have pro-gold standard economists appeared on the scene through http://www.mises.org/. ... Friedman viewed gold as just another commodity. ... in 1986 ... [Freidman] admitted that his advocacy of a fixed rules for the expansion of central bank-created money had been a waste of time. Such restraint was not in the self-interest of central-banking officals. ... The [Fed] has been the problem ever since 1914", Gary North at Lew Rockwell, 25 February 2010, link:

http://www.lewrockwell.com/north/north817.html.

Chicago had no gold standard advocates when I was there in the early 1970s. If I recollect correctly, Uncle Miltie's gestalt was when he realized the Fed must lie to the public to influence the economy.

Bulls and Bears

"John Tammy, the editor of RealClearMarkets.com, a Forbes.com columnist and a monetarist in the fashion of Milton Friedman, thinks GDP is a flawed number. It's expressed in an unreliable measure--the US dollar. Expressed in gold, GDP has been contracting for eight years. Richard Koo, chief economist for Nomura Research Institute, says the US is in a balance sheet recession, marked by deflation and deleveraging that will crimp investing and spending for a decade or more. ... Harvard financial historian and author Niall Ferguson says debt-laden America is past its glory but will try to mask its decline by inflating away its debt. ... However, maybe what this is telling us is that the biggest economic and market surprises of this decade could be on the upside", Rick Karlgaard (RK) at Forbes, 12 April 2010:

http://www.forbes.com/forbes/2010/0412/opinions-rich-karlgaard-economy-recovery-digital-rules_print.html.

RK gives a "seven-band spectrum of bears to bulls". I am in his most bearish group, which includes "bloggers too numerous to mention here". However, as inflation panic engulfs the US I expect a Misean "crack-up boom" and apparent prosperity. Before the collapse. I agree with Koo, the US dollar is a unreliable measure.

What's Gold in the Ground Worth?

"This March two of the world's biggest investors became believers in a company with next to no revenues and $352 million in losses over three years. ... Both Soros and [John] Paulson are seriously bullish on gold, but why did they bet on a Vancouver mining company with an unimpressive history? ... An Oxford-trained historian, [Thomas] Kaplan believes that the last 40 years, when gold was not the world's reserve currency, were an aberration and that gold will revert to the top of the store of value as it was for 5,000 years. He means it: Kaplan's family office, Tigris Financial Group, manages close to $2 billion in gold assets. ... Billionaires, big money managers and Wall Streeters are jumping in, even as few ways remain to play this game. ... But then, if you believe that government spending run amok and easy money will result in the decline of Western civilization, you don't need any multiples to look at. ... Kaplan's NovaGold deal started in January 2009, when his New York investment outfit, Electrum Strategic Resources, made a $70 million investment for a 28% stake and warrants for more. ... One, called Donlin Creek, is in Alaska. NovaGold says it has 29.3 million ounces of gold. The other is British Columbia's Galore Creek, with 7.3 million ounces of gold and 8.9 billion pounds of copper. But investors may be getting ahead of themselves. Both properties are remote and tough to develop. ... NovaGold's annual-return estimate on [Donlin] at $1,000 gold is 12.3%, which is marginal for a big mining project", Nathan Vardi at Forbes, 12 April 2010, link:

http://www.forbes.com/forbes/2010/0412/outfront-gold-kaplan-novagold-soros-paulson-golden-boy.html.

I think and have thought for about 30 years, gold bullion coins are the world's most conservative investment. What about gold stocks? For more leverage, why not? See my 1 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/gold-mines-and-operating-leverage.html. Look at NovaGold (NG-AMEX). Now at $7.79, NG has a $1.47 billion market cap (MC). What's NG worth? With 36.6 million ounces of gold and 8.9 billion pounds of copper "in situ" I get gross revenues of $74.8 billion for NG (36.6 million x $1,161 = $42.5 billion; 8.9 billion x $3.63 = $32.3 billion; $42.5 + $32.3 = $74.8). So NG will have $74.8 billion in gross revenues over the next say, 20 years. Assuming 50% operating costs, we have net cash inflows of $37.4 billion ($74.8 x 50%). Now, assume a 35% tax rate, we get $24.3 billion in net after tax cash flows ($37.4 billion x 65%). If coming in evenly over 20 years that's $101 million per month ($24.3 billion / 240 = $101 million). Discounting this at a 7% real rate, per Kenneth Arrow, I get a $13.03 billion value for NG. With NG's $1.47 billion MC. that means the market assumes NG has an 11.3% chance of developing these projects ($1.47 / $13.03 = .113). NG appears to be fairly priced to me. Eugene Fama, take a bow.

China Buys Dollars?

"China's chief foreign-exchange regulator suggested the country's appetite for further gold purchases may be limited and offered soothing words about China's role as an investor in US Treasurys. 'Gold is not a bad asset, but currently a few factors limit out ability to increase foreign-exchange investment in gold,' said Yi Gang, director of China's State Administration of Foreign Exchange. ... China rarely revels its thinking on investment of its foreign-exchange reserves, which at $2.4 trillion are the world's largest. ... Mr. Yi said the past 30 years have shown that the return on gold hasn't been that great and that given China's heft as a gold buyer, any move it makes to purchase the precious metal would 'certainly' increase gold prices. ... China is the world's largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council", Aaron Back at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704869304575110621920790934.html.

Suppose Yi is buying gold? Would he tell us? Got gold? Get more. Got bonds? Sell 'em to Yi. If he'll take them.

Cheap Gold?

"It took John Paulson months to convince investors that housing would crumble. Now it's taking him awhile to get them excited about gold, his latest passion. ... Some gold traders expected Mr. Paulson's new fund, launched Jan. 1, to raise billions of dollars and even help push gold higher when it started buying this year. That hasn't happened. Despite months of investor meetings, Mr. Paulson has raised $90 million or so for his new gold fund, according to people close to the matter. Even the $250 million that Mr. Paulson himself placed in the fund hasn't persuaded many investors to get on board", Gregory Zuckerman at the WSJ, 10 February 2010, link:

http://online.wsj.com/article/SB10001424052748703615904575053793439062452.html.

This is great news. Gold is cheap. Hold on Paulson.

Debt Bomb

"Kyle Bass has bet the house against Japan--his own house, that it. ... 'Japan is the most asymmetric opportunity I have ever seen,' he says, 'way better than subprime.' ... If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke. ... National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceeding five years. ... Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. ... America is a nation of spendthrifts, addicted to easy credit and dependent on the kindnesss of savers overseas to keep us comfortable. ... The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that it still a pathetic figure for a nation whose government is un-saving all that and more with its budget deficit. ... If the GDP doesn't expand at 'normal' rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher taxes of many fronts. ... US corporate tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. ... If Congress and the Obama Administration don't trim spending [Benn Steil] says, 'we will get to the point where credit is much more expensive in the US than it has been in the past.' ... 'US states are like emerging markets,' says Reinhart. 'They spent a lot during the boom years and then were forced to retrench during the down years.' ... But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the US and UK could join shakier nations like Japan and Ireland in losing their AAA ratings if they don't get their bad habits under control. ... Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that 'countries don't go bust.' The opposite is true. ... Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation", Daniel Fisher at Forbes, 8 February 2010, link:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html.

"In 2009 investors were warned about bubbles: a bubble in Treasuries, a gold bubble, and, finally, warnings of a rapidly expanding bond mutual fund bubble forming. It's brought to us by the [Fed's] 0% interest rate policy. Whether the flood into bond funds of all types was an intended consequence or not, it's now a flood that could go just as quickly the other way. ... There is a lot of unsophisticated money in bonds now, and I'm not sure investors understand how miserable things can get when the low interest rate party ends", Marilyn Cohen at Forbes, 8 February 2010: http://www.forbes.com/forbes/2010/0208/finances-junk-bonds-yield-interest-capital-markets.html.

If you have any type of bonds, no matter in what currency, sell! As for Walter Wriston, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.

I agree, the bond market is a disaster waiting to happen.

Fisher's Folly

"The behavior of Congress this week, however, has added another obstacle to our economic recovery: The risk that elected officials will now politicize the [Fed] and compromise its independence. ... The impulse to use Mr. Bernanke as a political punching bag raises the specter that, instead of doing the right thing, Congress may seek to pressure the Fed to print its way out of this crisis. We know from history that when fiscal authorities attempt to monetize their debts, the result in inevitably inflation. ... Other congressional initiatives put forward would make the presidents of the country's 12 Federal Reserve banks--and even the chairman of their boards--subject to presidential appointment and Senate confirmation. ... We are hired and fired by nine-member boards of directors that represent the financial institutions and stakeholders of our respective districts. ... In my capacity as president of the Dallas Fed, I represent Main Street--not Wall Street", my emphasis, Richard Fisher (RF) at the WSJ, 26 January 2010, link: http://online.wsj.com/article/SB10001424052748703808904575025042648895592.html.

"[RF] raises important issues regarding efforts by some to influence [Fed] policy ... . But he must understand the political backlash against the central bank is partly of its own making. ... Ben Bernanke ... has given the appearance of making the Fed a division of the Treasury. That has politicized the Fed more than anything its critics could do. The only protection from political interference is a monetary rule. The gold standard was one such rule", Gerald O'Driscoll letter to the WSJ, 30 January 2010. Mr. Fisher indicates that he doesn't know that the Fed is already politicized", Don Crook letter to the WSJ, 30 January 2010, link: http://online.wsj.com/article/SB10001424052748704094304575029452385284206.html.

RF is Dallas Fed president. This is nonsense. Congress created the Fed and can kill it. RF talks of "independence". From who? For what? "Nine-member boards of directors" hire and fire Fed heads. Do the Fed heads "represent the financial institutions ... of their respective districts"? Who represents the public? Kill the Fed.

Yes O'Driscoll and Crook.

Martin Feldstein-Maniac

"Many gold buyers want a hedge against the risk of inflation or possible declines in the value of the dollar or other currencies. Both are serious potential risks that are worthy of precautionary hedges. ... But is gold a good hedge against these two risks? Will gold maintain its purchasing power value if inflation erodes the purchasing power of the dollar or the euro? And will gold hold its value in euros or yen if the dollar continues to decline? The short answer is no on all counts. ... Consider first the potential of gold as an inflation hedge. The price of an ounce of gold in 1980 was $400. Ten years later, the US consumer price index (CPI) was up more than 60%, but the price of gold was still $400, having risen to $700 and then fallen back during the intervening years. ... So gold is a poor inflation hedge. Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS). .... Gold is also a poor hedge against currency fluctuations. ... Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be", my emphasis, Martin Feldstein (MF) at Project Syndicate, 26 December 2009, link: http://www.project-syndicate.org/commentary/feldstein18.

MF, did you lose your mind? Gold is the inflation hedge, see my 2 and 19 December 2009 posts:

http://skepticaltexascpa.blogspot.com/2009/12/dollar-drops-98.html; http://skepticaltexascpa.blogspot.com/2009/12/pound-drops-99.html. TIPS are a good investment? For who? Uncle Sam; not the TIPS holder. Buy TIPS? No bye TIPS, see my 5 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/tip-on-tips.html. Gold has no underlying earnings, it's MONEY! What is a dollar's underlying earnings? MF, go back to school and study economic history. Try ECON 2239 at Harvard. I found the course number for you! Poor MF. He's so confused he should join Princeton's economics department and consult with luminaries like Paul Krugman and Alan (well-named) Blinder!

Central Banks and Game Theory

The insightful Mencius Moldbug (MM) has a 3 December 2009 post at his Unqualified Reservations about game theory and central banks, link: http://unqualified-reservations.blogspot.com/2009/12/gold-and-central-banks-game-theory.html. MM asked a question I have asked many times over the last 30 years, "I've never really understood why gold miners sell gold, beyond recouping the cost of mining". They mine gold, but would rather "invest" in paper. Crazy. Why? To appease Wall Street "analysts"? To hell with Wall Street analysts!

Sliding Back to Gold

"So the world has bench-tested the Keynesian theory that gold is a barabrous relic, and found it wanting. ... There are three ways in which the world could move towards a gold standard without actually getting there. ... Second, the world's monetary authorities could start targeting the gold price as part of their monetary management, aiming to keep it within a certain range, thereby preventing excessive monetary expansion and dampening excessive exchange rate fluctuations. A 'hard money [Fed] chairman, for example, worried about the value of the dollar, could seek to keep the gold price between $900 and $1,000", Martin Hutchison (MH) at Prudent Bear, 7 December 2009, link:

http://www.prudentbear.com/index.php/thebearslairview?art_id=10318.

I first used MH's phrase "sliding back towards a Gold Standard" almost 30 years ago, suggesting MH's second alternative. However, $1,000 an ounce isn't high enough. See Mike Rozefff's comments about the ZDV of gold.

Barrick Rings the Bell

"Barrick Gold Corp. accelerated plans to eliminate hedges against declines in gold prices, jumping to capitalize on months of gains for the precious metal and freeing up the company to develop even more. ... Tuesday's move by the Toronto-based moner, the world's biggest gold producer, helped boost the metal's price briefly to a record intraday high of $1,200 an ounce. Gold settled at a record close of $1,199.10, up 1.5%. ... Barrick and other miners for years protected against the risk of declining gold prices by selling part of future production in advance at fixed prices. ... Higher gold prices present some challenges for Barrick and other big miners. And moves to escape the hedges can have a bearish element in gold market. ... Barrick said it expects that it will provide an instant boost to its reserves--the amount of gold it can say it posses underground--which now is 138.5 million ounces. ... Barrick is investing $100 million more in a mine in Montana that it had initially planned to close last year. ... Barrick instead is focusing on developing its own sizeable pipeline of mines and is considering whether gold prices will be strong enough to let it accelerate its plans, Mr. [Aaron] Regent said. ... Barrick in September said it would spend $5.1 billion to eliminate its hedges within a year, by buying gold on the open market and by paying off previous contracts", my emphasis, Phred Dvorak at the WSJ, 2 December 2009, link: http://online.wsj.com/article/SB10001424052748703735004574570232904103054.html.

I don't see why Barrick and other miners sell any more gold than necessary to pay the bills. Gold stock investors buy miners as leveraged gold proxies. Why sell gold for paper, instead of storing it? As for "hedging", see Tom Selling 21 July 2009 comment: http://skepticaltexascpa.blogspot.com/2009/07/tom-selling-on-derviatives.html. ABX should drive its investment bankers (IBs) out and stick to mining. ABX has 983 million shares outstanding. Therefore, every $100 increase in gold's price yields ABX $9.00 billion in net revenues (138.5 million X $100 X 65%). Assuming it is paid over 20 years and no extramarginal ore become intramarginal, this is $450 million in annual net revenue for ABX, discounted at 7% real or, $4.837 billion, or $4.92 per share. ABX, you idiots, stop this hedging nonsense no matter what your IBs say. Hedges are not just against gold price declines, but increases.

Jim Grant on the Dollar

Jim Grant writes about the dying dollar at the WSJ, 5 December 2009: http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html. Read Grant.

Pound Drops 99%

The US double eagle coin had .9675 ounces of gold, thus the dollar was .048375 ounces of gold. The British sovereign coin had .2354 ounces, the pound's dollar value. .2354 / .048375 = $4.866. The current dollar price of pounds is $1.6487. The pound fell 66.12% against the dollar since 1792. On 5 December 2009 the pound "price" price of gold was 704.45, or .00142 ounces per pound, therefore today's gold pound is .00603 1792's pound, down (1 - .00603) or 99.4%. That's a bear market. Pounds, dollars, gold, it all "arbitrages" out.

Spengler on Gold

"Even a rather wobbly reserve currency is a better asset than gold, whose price again crossed the US$1,000 mark last week. Gold is far less liquid than US Treasury securities, costly to store and insurance, and above all far more volatile in price. ... In a functioning world financial system, in which investors trust governments to control extreme instability, even an indifferently managed reserve currency with a broad capital market behind it is better than gold. ... Strictly speaking, gold isn't an investment but an insurance policy against a breakdown of the functioning of the world financial system. ... Divided by the US Consumer Price Index (CPI), the price of gold trades at half its 1979 peak, when the world had cause to believe that America would lose the Cold War. ... America's position in the world today is far less subject to challenge than it was in those dark days at the end of the Carter administration. ... The scurrilous fringe of financial journalism likes to speculate as to when China will dump the dollar, without asking the obvious question: what would China do in the absence of the dollar? ... Gold will have no official role unless America's international role really does collapse, and the world is reduced from a system of trsut (or imperial dictates, which amounts to the same thing) to a kind of barter at the international level. ... Everyone owns too many dollars; by definition, a problem in the resrve currency means that the whole world is long as asset they no longer want. But the dollar is so large that nothing can substitute for it", my emphasis, Spengler at Asia Times, 14 September 2009, link: http://www.atimes.com/atimes/Global_Economy/KI15Dj08.html.

I am a 30-year card carrying member of the "scurrilous fringe of financial journalism". I assert China will dump the dollar and buy gold. I disagree, gold is better than any (paper) currency. Gold has fallen in real terms since January 1980, true. But the dollar has fallen 98% relative to gold since 1933. Is gold rising or the dollar falling? Gold is as "volatile in price" as the dollar. Who cares what gold's "official role" is? Nothing can substitute for the dollar. Interesting. Think about that.

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:

http://www.economist.com/businessfinance/PrinterFriendly.cfm?story_id=14853132.

"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: http://www.economist.com/businessfinance/PrinterFriendly.cfm?story_id=14842922.

"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: http://online.wsj.com/article/SB10001424052748704533904574546163308851186.html.

"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: http://www.lewrockwell.com/rozeff/rozeff322.html.

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: http://skepticaltexascpa.blogspot.com/2007/09/even-child-can-understand-economics.html. 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:

http://skepticaltexascpa.blogspot.com/2007/12/fed-and-four-letter-word-gold.html.

Dollar Drops 98%

On 1 December 2009 gold hit $1,200 in the Far East. In 1933 a $20 "double eagle" had .9675 ounces of gold, therefore the dollar's gold content was .9675 / 20 = .048375. At $1,200 it's now .000833, .000833 / .048375 = .0172. The gold value of the dollar has fallen 98.28% (1 - .0172) since 1933. That's a bear market where I come from. And it ain't over.

How Dumb Can You Get?

"Buried in the Treasury's International Reserve Position report is an interesting bit of math. The document details the total amount, by weight, of the Treasury's gold reserves, plus a dollar value for said metal. But some fast division reveals something interesting: The Treasury marks the value of it gold at $42 an ounces, the price settled on in 1973, two years after the [US] scrapped the Bretton Woods System, which held gold at $35 an ounce for decades. ... If the Treasury's bling were valued at the spot price, we'd be sitting on a literal gold mine of nearly $288 billion. Why doesn't the Treasury account for the huge run-up in gold prices? ... And if the [US] were to dump its gold on the open market, there's no way we'd get today's spot rate. ... Raising the value of the Treasury's gold stockpile would have an inflationary effect, too, which is the last thing the [Fed] wants right now", my emphasis, Martha White (MW) at The Big Money, 4 November 2009, link: http://www.thebigmoney.com/print/4171.

Read MW's piece in its entirety. It's one of the worst pieces of analysis I've ever seen. The Treasury owns 261.5 million ounces of gold, no matter what price it puts on them! MW is so stupid, she could be a CPA! She must believe if you bought Exxon (XOM) decades ago at say $10 a share, it's "worth" $10 until you pick up the WSJ and see it's worth $75. Hmm, 261.5 million x $1,140 = $298.1 billion. MW, beg China to take all 261.5 milion ounces. How can revaluing gold be inflationary? It exists before and after revaluation. It's just accounting. It's Zimbabwe Ben (ZB) who prints dollars. How does MW know what ZB wants? Did she consult Ed McMahon's hermetically sealed mayonaisse jar?

What Gold Frenzy?

"'It could be your grandmother's gold or the gift of an ex-boyfriend,' said Erhard Oberli, the chief executive of Argor-Heraeus, a major refiner [in Mendriso, Switzerland] that processes roughly 400 tons of gold a year. 'Gold doesn't disappear.' ... Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the [US] and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop. ... Jim Rogers, an investor who has made his name investing overseas and in commodities, predicted to Bloomberg Television last week that gold might reach $2,000 an ounce--prompting a rebuke from Nouriel Roubini, an economist who gained attention for his early warnings about the global economic crisis. At a conference in New York on Wednesday, Mr. Roubini described Mr. Roger's forecasts as 'utter nonsense,' saying that there aren't any inflationary or economic pressures that would drive the price of gold to $2,000 an ounce. Even the most bullish of gold lovers were surprised last week when the Reserve Bank of India stepped in and bought 220 tones of gold from the [IMF] for $6.7 billion, a sign that other central banks might move away from dollar-denominated assets like Treasury bonds in favor of the precious metal. ... 'We have money to buy gold,' said Pranab Mukherjee, India's finance minister. 'We have enough foreign exchange reserves.' ... 'Gold has been around as an investment for 6,000 years,' Mr. Oberli said. 'When there is no alternative, it's there'," my emphasis, Nelson Schwartz at the NYT, 8 November 2009, link: http://www.nytimes.com/2009/11/08/business/global/08gold.html.

Disagreeing with Roubini, inflation is everywhere. Look. The inflationary pressures I see could drive gold to multiples of $2,000 an ounce. Unlike paper currencies, "gold doesn't disappear". Trillions of dollars? What is Zimbabwe Ben's marginal cost of producing a dollar? Or a trillion? How overvalued is it? When mankind sees "there is no alternative" it will return to gold. When? When the price is high enough. India's buying $6.7 billion of gold did not surprise me. It's peanuts in the world market.