Supply/Demand dynamics

[escobar]

I wanted to start a thread about the supply / demand dynamics as they relate to Gold and Silver prices going fwd. I am trying to link my understanding of more abstract ways to look at prices (money supply, debts, fx reserves etc) with real world supply demand dynamics.

How will rising prices effect current demand equations as they relate to industrial usage, scrap and mining supply etc. also as prices rise dollar amt need to be invested rise to buy the same amount of oz's.

I never seem to read much discussion about this when listening or reading to the big picture people targets for gold and silver as they relate to: national debts, money supply, fx reserves etc.

For example Rickards mentions a target of like $6k for gold which is probably one of the lower end projections for the reasonable big picture thinkers out there. Turk quotes 11k, heard some head scratching 55k numbers from the freegold thinkers. But what will be the non investment demand at these levels? also the dollar amounts to buy the same ozs as today will be huge so it will take ever larger dollar amount to take away the same amt of supply.

Looking for an open discussion on how you guys think about this. Thanks

 

[pmbug]

In order for prices to reach those levels without having severe inflation - such that it's not the metals appreciating, but the dollar depreciating in terms of real goods/commodities in general, investment demand will have to far outstrip industrial demand.

So, IMO, either the price is achieved by severe inflation, in which case there isn't any real impact on industrial demand (costs passed on to consumers), or it's a moot point because the metals are essentially/defacto re-monetized and no one is worrying about industrial products in the face of collapsing currencies (economies in the toilets).

 

[DCFusor]

Right. Investment demand has to be the main and least predictable driver particularly as prices get really high - it's well known that investors, seeing something going up, will buy at almost any price due to fear of missing out. At that point prices interestingly swamp things like cost of mining as a driver. All that stuff, and a lot of industrial use, is just in the noise at that point.

Remember, we don't make much silver based film anymore. That was a major way of making it go poof down the drain in development (and even then, big houses found ways to recover it at much lower relative-effective prices than it has now).

The stuff I (and some other tech outfits) use precious metals for only needs micro-grams at a time, and the cost of that at almost any price per ounce is still going to be less than the other costs of fabrication or deposition or materials prep.

In my case, if anything, I already have a lifetime supply for that sort of work, for most things (could use some more sheet Pt around the place if anyone wants to barter or sell me some). So I and many others wouldn't place a ceiling price on demand anyway. The integrated circuit business and PCB business uses a fair amount of gold from one standpoint - but it's avoided where possible and they've become real good at using it in mono-molecular layers over something cheaper -so while an IC fab might use an amount of gold one of us couldn't afford to buy in a month, in the grand scheme it's still diddly. A $200 CPU might have a hundred uG of gold in it...that's not a lot in the scheme of things, and of course, as we get smarter, we use less - engineers are like that.

You'd have to guess that a super high price would dampen demand for new gold jewelry at some point - or trigger a reversion to plating or low gold alloys.

But that's a monkey-psychology thing - if it ramped at the right rate, it might make new gold jewelery more in demand as a way to get two birds with one stone so to speak. She gets happy, and you both get a store of value that appears to be increasing.

Solar panels use some silver in the internal interconnects, because of the conductivity, but more for the ductility - it doesn't work-harden and break as quickly as the electrically equal amount of copper would. I have no idea what those numbers are, but they sure do make a lotta panels, and the ones I own seem to have some grams each in them. That's quite a lot, actually.

On the production side, if I can go by the Rare Metals Handbook (somewhat out of date I suspect) quite a lot of all the PM's aren't mined and refined as the principal output of a particular mine - they are byproducts of things like copper, lead, zinc, nickel, and so on that fall off as anode slimes or flue dust from some other process.

Thus, at least one major component of the supply would be driven by other metal production. It would then seem that if the world economy stalls, so no one is producing those other metals full speed ahead, that the PM byproducts supply would drop, and perhaps that would be without a loss in demand - might be something to research further.

Of course if the price rises high enough (and it's not merely fiat inflation), then it might pay large producers to go ahead and keep producing base metals and stockpile them if they could make enough out of the PM byproducts, but in many cases if I understand correctly, it would take pretty high prices to make that reasonable to do at all - tiny fractions of the PMs in a whole lot of Cu for example. Since your main business might be the copper - and you have this interesting concentrate from making that, no reason not to go ahead and smelt and refine that too. But if the PM was the only thing coming out of that, the costs of getting a tiny fraction of a percent of it out of the ore alone would be prohibitive.

That would lead to a really interesting pair type trade - as the base metal demand and production go down, if the demand for PM's doesn't also go down to match, you could short base metals and go long PM's for example, and do real well.

I really agree with PMBug's apparent premises here though. If PM's skyrocket due to inflation - then you really don't make money (value) off them as they just buy the same amount of other stuff later. If they go up due to investment/jewelry/industrial types of demands, then you have true relative appreciation. It's obvious most hardcore bugs are talking their book because they "get this" idea - I think that's where some of the nuttier price projections are coming from, because the more they can increase demand, well just like fiat, the first holders of it are the winners.

This is something even honest scientists fall prey to - you have a premise you're pretty sure of (or have a vested interest in) and then look for ways to justify it - there's a heck of a risk of confirmation bias there. I see all sorts of silly reasons gold should be 50k an ounce - but if you examine the logic closely, it falls apart and doesn't take into account what else would have to be true for that to be true at such extreme levels. Plays well to the choir but maybe needs more critical examination.


I would look to energy prices generally as a main cause of fiat-devaluing myself, it's really going to be the driver if things keep on their present course - and it's a tough course to change - I promise that science will NOT come up with a cheap box you can clip to the antenna on your toyota (or tractor trailer) that will let it run on freely available hydrogen in our lifetimes - multiple problems there with all the sub-premises.

Current energy production causes very strange mis-allocation of resources (where have I heard that one and what it results in?) because some guys just get it outa the ground (eg they don't create lasting value, just supply a wasting asset and make big holes), producing little else but a mess, and get a lot of money in exchange to mis-allocate for it - think of the middle east buying off their populations to keep in power, for one. Or big oil buying off our government for another larger one. Does that create lasting value?

Then the consumers don't use it efficiently to create new value much - it's mostly used for things that make us feel good for a little while (air conditioning, joyriding, TV), but produce no lasting value if the supply is cut off, which it will be at any given price of it.

Unlike gold, you burn oil or coal and it's truly gone after that. Even uranium has that one going for it - there's a finite amount; though if we didn't have our head up our nether regions we'd get a lot more use out of it than we do (about 100:1 is possible) - we call fuel spent when only a little bit is burned off because of the buildup of other nasty junk, and our current refusal to reprocess it to get the unused fuel back. They cite proliferation as the reason, but it's a truly nasty job to do it without killing people in the process as well.

So, I'm trying to build at least a mental model of how these major themes tie together, and certainly don't think of myself as an expert in any of the subfields. I'm here to learn like anybody, but willing to share what I think I know as well - knowing I'm about as fallible as the next guy - often better informed than most, because I love learning, but that doesn't mean I know it all, either.

 

[DSAbug]

well.. 1600 was thought to be unheard of a few years ago. We are just going to have to see when the public gets involved. That's when we'll know it's over.

 

[DoChenRollingBearing]

Good thread!

It all depends on how it all shakes out...

My guess, no better than anyone else's, is that FOFOA will be shown right:

Gold: "$55,000" / oz
Silver: $5.00 - $200 / oz

Silver in his view will not ride along the big reset. Once you have bought your gold "You have already been paid." <--- I don't think that is really so for silver.

The central banks have already chosen their store of wealth. There are 100 x the amount of paper claims on gold as there are physical oz (at least in the USA).

If gold "only" goes to $3000, hey, I am pretty big winner! Gold goes to $55,000, we should go to Vegas, and the first round of drinks is on me!

 

[DCFusor]

I'll hold you to that one DoChen, that is, if drinks aren't an eagle each by then. If they are, drinks on me, here - but they might be corn-based.:loco: Because you'd want to be out of a city if gold goes to 50k, I'm pretty sure. Most of the arguments for that I've seen assume that total gold ownership will stay the same as the paper game collapses - eg the demand for physical in ounces will match the current paper holdings no matter what the price then goes to when it's discovered that the paper is multiply re-hypothecated. I don't think that's a good assumption - some people will just take their whipping when paper goes down and that's that - there isn't that money to re-buy the real thing if they've lost it in the paper game. Hence no ability to drive the price up that high unless it's just inflation.

Derriks right too - this last big correction was preceded immediately by a ton of bugs boasting on how gold had blown off almost all other investments for the previous year ('11). Always a bad sign when that happens.

 

[DSAbug]

If gold "only" goes to $3000, hey, I am pretty big winner! Gold goes to $55,000, we should go to Vegas, and the first round of drinks is on me!

If gold goes to $55,000 Vegas probably wont be a place you'd want to visit. The US would probably look substantially different.

 

[ancona]

At 55,000 an ounce, who the hell would be able to "make change" for something purchased with gold? I agree with the general concensus here, that gold at 55,000 means the end of the republic as we know it, and the start of a new dark ages.

 

[escobar]

I have read a few of the FOFOA recent post. I enjoy his writing. The thing I find odd though is he seems to gloat that he is not a gold bug and doesn't believe the gold standard will come back etc. But then seems to lay out this grand unified theory of freegold which will eventually help bring global trade balances in order and as a result bring sanity to the global financial mkts.

Perhaps he touches on this in older posts which I have not read but I dont see how that is possible without some very formulized gold standard. He talk about creditor nations transferring debt back gold right to debtor nations and then the tend will reverse when the debtor nations decide that want to spend the gold they have accumulated. Curious how this would work without very strict gold standard in place.

Also again he does not address the supply issue as I see it. If gold were 55k lets say and all other commodities were much lower or did not appreciate as much, we would see every miner in the world switch to 100% gold mining. So just like Fiat fx gold supply would grow rapidly.

curious your thoughts here.

 

[DCFusor]

escobar - as you say, "the cure for high prices, is high prices". The real question is "high compared to what" here, I think.

No way gold goes to 50k without some major societal disruption in which all bets are off. If it does, and it's "only" fiat hyperinflation, that's one thing. If it goes up that much compared to say, loaves of bread or oil - that's something else entirely, and I think, a heck of a lot less likely.

 

[DoChenRollingBearing]

I started reading FOFOA in late 2009. I was immediately captivated by his predictions (I have always had a soft place in my heart for certain kinds of radicals, and that's what I had him pegged as at first). I then read his pieces from then on.

I can see it happen: $55,000. As all the paper gets destroyed, as the gold derivatives become seen as a chimera. If the COMEX is very low on physical (see Jim Willie thread elsewhere today here at pmbug), then what happens when people want their gold? Not cash, but gold? And who gets those ALLOCATED bars (you "own" that serial numbered bar) once HSBC hypothecates it away a la MF Global? And what happens when gold leasing becomes broken, who owns the gold? (Answer: whoever HAS it).

FOFOA makes a long and complicated case (for me anyway), but I think he is right. In the end, gold will rule supreme. FOFOA also predicts hyperinflation, which is why he predicted $55,000 in NON-HYPERINFLATED 2009 dollars. But, he does not predict the destruction of the USA...

It is hard to summarize FOFOA in one (even very long) post, and I do not buy all of his ideas (the euro being so much better than the dollar). So, if anyone wants to study the case FOFOA makes, you have to put your time and mental energy into reading... And reading...

But, yeah, if Vegas is still Vegas AND we hit 55K, the drinks are still on me!


@ ancona

You would use your gold, after the reset, only to buy capital goods like farmland, apartment buildings, the gas station(s) in town, the toll bridge. Or perhaps in my case, most of our competition down there in Peru. You would certainly want to look at buying monopolies...


EDIT:

At my blog I wrote up a "Thought Experiment" on the value of gold. One of FOFOA's readers asked the question (to people he knew, but who had not bought gold) "Do you think the Chinese would take their $2 trillion in Treasuries and trade that for our $419 billion worth of gold? Most people responded yes or probably." That kind of implies a gold price of $7600 right there (2 tn / 419 bn). The other question would be: would the US Government pay off the $2 tn debt with our gold worth only $419 bn? NO WAY!

To pay off our 15 tn + national debt with our gold, we would have to have gold priced at $78,000 / oz:

$15,000,000,000,000 / 192,000,000 oz = $78,000 / oz

(8000 tons) * (2000 lbs/ton) * (12 toz / lb) = 192,000,000 oz

The above arithmetic, of course, proves nothing. But, it may help clarify thinking as to how much gold is really worth...

 

[escobar]

Thx for the responses. I find this discussion helpful. I do enjoy reading the FOFOA posts, mentally stimulating. But to your pt its always hard to give an easy explanation of his thought process. In my experience great ideas are usually fairly easily conveyed. They dont take pages to understand and help the other person understand.

I used to work in the financial industry and met a guy that was one of Carl Icahn analysts. He said Carl wouldn't look at an idea if you could not convey the thesis in one page.

Yeah I hear you on the US gold reserves relative to debt, money supply etc. But the problem is if one unit of measure, say gold becomes so divorced from other units(silver, other pm, commodities etc) then the logic starts breaking down.

The us govt could just turn around and buy whatever commodity is relativley much cheaper and offer that in sufficient quantities to the other party. I find it odd that he think that the gold standard wont come back etc but then his whole theory relies on complete and absolute observance of the gold gods. somewhat contradictory to me.

I mean if gold becomes so overvalued relative to what I can buy with it and someone offers to pay in my choice. I will take what I perceive as more valuable. His views seemed to be divorced of any human mktplace dynamics which seems to make him the biggest gold bug of them all, which he claims he isnt.

In terms of the derivatives. If there is ever some great scandel like that they will just settle in cash and say tough luck. Its written into the comex contracts, force mejeure.

 

[KMS]

I hate to think that Tptb might do something like that, but I agree with you that we cannot 100% be sure they will play by any rules we have heard of before. Considering how things are going with Greek debt and MF Global/JPM, etc...

 

[DoChenRollingBearing]

@ escobar

You have a good point re good ideas usually being easy to understand.

So, for the record, I feel like FOFOA is right, I think so, but it may be faulty logic. Or whatever.

That's my story, and I'm sticking to it!

***

Question for the board:

If it does NOT go to $55,000, is it safer to take my gold out on boating trips?

 

[pmbug]

...
In terms of the derivatives. If there is ever some great scandel like that they will just settle in cash and say tough luck. Its written into the comex contracts, force mejeure.

If it becomes widely known (ie. proven/documented and reported) that the derivative markets are broken, it would, I think, cause a surge of demand in the physical market. If the physical market is really as tight as some folks say it is, a supply shock would become evident and prices would jump dramatically without having a sea change of interest from the public (ie. folks [institutions] who are already investing via the derivative markets investing directly in the physical market could drive a huge spike without a large influx of new investors).

...
If it does NOT go to $55,000, is it safer to take my gold out on boating trips?

All goldbugs are sailors are heart. It's a primal imprint in the ethos! No point in owning gold if you can't take it out on the lake to enjoy.

 

[bushi]

...that gold at 55,000 means the end of the republic as we know it, and the start of a new dark ages.

....or the opposite - creation of a (hypothetical) sound monetary system, backed with gold, at whatever ratio of fiat to gold would be required, to provide adequate supply of money to the global economy, and saving us all from the down-spiraling economic turmoil?

in any way, industrial and not investment demand for especially gold, is really small, I believe. It doesn't have too many practical applications. Gold's main purpose is and always been a money. Gold IS money.

Genghis Khan, as pragmatic a man as it gets, was laughing at gold and silver offered to him by the powers of his times, that he and his "tribesmen" rode to death, as a things with no value/meaning. Iron, horses, wood, slaves - that was of value to him. Being in power to kill a man, and see his wifes crying, was his greatest pleasure. And he needed no gold nor silver for that.

My point is, that gold and silver derive their value nearly ONLY from the fact, that they are widely accepted AS money ITSELF (or near as good as, in today's biased markets), and not because they are so "precious" for any other practical reason (AFAIK, silver has much more industrial applications than Gold, both by numbers and by volume). Almost ANYTHING could be used as money, if agreed upon, and secured from counterfeiting - and it would immediately gain in the perceived value immensely. Just like fiat paper money - one tiny sheet of it with couple of printed numbers, can buy you roles of otherwise very similar paper .

I suggest watch "The secret of OZ" by Bill Still on Youtube, well worth it, to understand that small important thing (although he is against the gold money, for the reasons he explains in the documentary - but it is valuable doc, and I am agnostic )

Actually, the fact that gold is NOT really usable for anything significantly different apart storing the wealth, is precisely WHY it has been used as a money. It is one of the necessary qualities of the money - that it has no other practical use, other than serving a purpose of widely accepted medium of exchange. So you can only "spend it" by exchanging it for other, (in)tangible goods, but not "spend it" by, let's say, eating it away, or building it into the walls of the new houses (so, bricks wouldn't work well as money, even if agreed upon, nor would candy do. "My dog ate my homework, sir" would turn into "my kids ate my rents by mistake, sir")


Remember, such a devaluation fiat to gold does not necessarily mean "inflation". If the gold's price is settled at such high levels because that is a price that market commanded - it cannot cause inflation, because it doesn't change the supply of money. Remember, that gold has to be purchased first, for ever-increasing price (so someone somewhere is getting it's today's paper/electronic fiat equivalent). Probably, with the defaults happening along the way, and rightly so (eg. "we will settle X of our debt with you, by paying Y in Gold" - where Y is WAY lower than today's valuation of X in ounces). I think that would work for many. I bet that China would happily accepted settlement with USA, if you agreed to pay 20% of their US treasuries holdings in gold, and cancel the rest. Only nobody wants to part with their gold, somehow, somewhat, for whatever reason

 

[ancona]

Very well articulated Bushi, and your scenario is just as plausible as any other out there. Your position is also presented well. ;-)

 

[DCFusor]

Bushi - your last paragraph. Gold doesn't (can't) cause inflation, it measures it.
A whole lot of other things about markets make far more sense when plotted against gold instead of dollars. It ought to be a default choice in all market plotting software.

I bet the big traders have this and are just snickering at how we get fooled by what we see. - They can just play the temporary dislocations while we play catchup.

 

[rblong2us]

All goldbugs are sailors are heart. It's a primal imprint in the ethos! No point in owning gold if you can't take it out on the lake to enjoy.

:rotflmbo:


Would you sell any of your gold if it reached $55k an oz ?

2 questions -

What would $55k actually buy on that day and would it cost double by the end of the week ? ( i might buy a diving barge though, regardless of price )

Just who would be buying your gold ?


I see gold 'going into hiding' at this time and bic lighters becoming the new currency.

Golds true role can only begin once fiats are truly burnt, so any $number is irrelevant once we get to the crazy numbers being discussed.

Until the feds really loose control of things, gold will generally do no more than 'keep up' with markets because thats all the feds will allow.

Always happy to be wrong though

 

[ancona]

Rblong,
Bic lightersw would be worth their weight in gols......so to speak. As would .22 cartridges, canned food, tobacco, medicines, and clothing.

 

[bushi]

To pay off our 15 tn + national debt with our gold, we would have to have gold priced at $78,000 / oz:

good question: TO WHOM you owe that 15TN? Last fiver, AFAIK, has been more or less printed by FED since roughly 2008 shock.

And it is important to understand, that when we say "FED is printing", what it really means, is "FED is creating money out of thin air, and then they lend these freshly formated harddrives (it is just too much of a hassle to print all these banknotes anymore) to US people via their government, on interest

This is the devil. Creating money, required for every nation to function, as a interest-bearing debt. This circle has to be stopped.

And you know what money is created differently? Everything that is minted. Coins, and of course PMs.


So, going back to my original question: why you should EVER pay back ANYTHING that you owe to the FEDs? IT is a nonsense, and this part of the debt should be simply abolished. I would try to get the already paid interest back, because it is just a very sophisticated scam.

Of course, it would take very brave or very stupid president to try to do this.

 

[bushi]

Hi guys,

It will be probably PM's 101 to many folks here, but I think this is a great series of rationale behind PM's current (under)valuation. Bear in mind they are making their living from selling that stuff , so make your own mind, but I find that reasoning very appropriate:

http://gold.bullionvault.com/How/GoldValue

And another very good one, specific about the silver (explaining well why you could put the "volatility" of the PMs market deep into the closet, and keep laughing at the swings):
http://www.tfmetalsreport.com/blog/3313/coming-paradigm-shift-silver


These two tie nicely with other stuff that I've read/heard from few people who do NOT have any interest in promoting PMs, and in general, it resonates well with my strongly formed "no nonsense, bullshit-detecting spider sense"


cheers,

 

[pmbug]

This is another Silver 101 type overview:

http://seekingalpha.com/article/322807-the-silver-singularity-is-near

 

[DCFusor]

I don' get the argument that our debt has anything whatsoever to do with the value or price of gold, except that as we monetize it, gold's going up. Sorry DoChen, I think that one is specious. Pun intended.

If Zimbabwe had to pay off theirs with their gold...I mean, where does that line of thinking lead you, and why is the US particular financial situation a price setter for gold? I don't think it is.

 

[bushi]

1)(...)that our debt has anything whatsoever to do with the value or price of gold, except that as we monetize it, gold's going up

2) (...) why is the US particular financial situation a price setter for gold? I don't think it is.

My take on this:
ad 1). Indeed, as you monetize your debt, the gold goes up. And because monetizing it changes investors' sentiments, and is increasing risks regarding paper assets (or wipes their value, or creates negative effective rates), that is shifting the gold price upwards.

Secondly, "gold is money". So it is a natural alternative to paper assets, which become more and more risky and worthless. Other commodities cannot perform the function of money, i.e. wealth preservation (oil, food, etc., even silver, with it's big industrial consumption (irreversible economically - for now) - we don't want our wealth preservation medium, whatever it would be, to be consumed. So while we could TEMPORARILY hedge our cash into oil, food, etc - which is happening, that is why commodities are skyrocketing after any round of "easy money", if it is available in tough economic climate - re QE - but eventually, that is just impractical to store one's wealth in these other commodities)

ad 2) size matters, and the status of dollar being (still) world reserve currency, makes all the difference, if someone wants to switch from dollars (China? Europe? Middle East?) into something else, gold comes into play inevitably, and naturally. There may (and will be) temporary swings into other currencies, commodities, but ultimately, it will gravitate towards gold, because ALL fiat currencies are in a deep shit, our global economy is simply too much in debt, and pumping more money in it, only derives that money into risky investments (commodities again), but does not filter down to SMEs (ask anyone at the bottom of the pyramid how easy it is to get credit, and how THEIR interest rates looks like, comparing to ZIRPs of the leviathans)

Although I agree with you completely that simplistic calculations, i.e. "we owe $X trillions, we have Y OZ of gold, so price of gold will be X/Y, and everything is rosy, reset the counters" will definitely not work. Markets will eventually dictate the real value (the price discovery WILL happened in the future, it is already happening despite all the BS going around. This price discovery will also include massive defaults and liquidity, happening in the "monopoly money" economy, inevitably, affecting greatly and disturbing also the real economy. This is inevitable, all these abstract economic instruments floating around, that do not PRODUCE anything, that do not add any REAL value - apart from transferring the wealth from the real economy into the hands of the few - it will HAVE to come down tumbling. At some stage soon, nobody will be willing to pay for them, and people smart enough to notice, will probably make the killing on it.

Just imagine even a fraction of all that Monopoly Money being pumped into PMs, if the derivative market alone is estimated an order of magnitude bigger than the WHOLE real, tangible, wealth-producing economy. And it will happened at some intermediate stage - while suckers will be still buying these paper assets, and the clever sellers of them will be putting them into the ONLY remaining safe heaven - the gold (and possibly silver, but I believe silver mechanics will be largely driven by different mechanics (vanishing supply).

So, Zimbabwe could not make a dent, but US of A, oh "yes we can" . Also, in case of any previous high/hyperinflations, there were OTHER STRONG FIAT CURRENCIES ready available, that people naturally switched to -> ergo, gold haven't came into a play in a big way. Not so much in our current end game...

regards,

 

[DCFusor]

Right, bushi - I think we're seeing things about the same here. The amount of gold the US claims to own (maybe not equal to the amount actually owned) seems a pretty arbitrary number - an accident of history. Though discovering we own a lot less than claimed would surely cause gold to spike, it's not a 1::1 kind of thing..

What I would find interesting I think is to compare gold to other things that are money, or at least extremely necessary in this world as we've built it.

What's the ratio of gold to:
Oil
Food
Copper
Stock indexes
Land (hmm, a bunch of possible categories here)
Other PM's

Or some combination of these things to smooth out the fact that weather can affect the price of food, a big find can cut the price of oil, Land and stocks are affected by the economy at large, and so forth.

Maybe I should get off my butt and make that plot...As far as I can tell, gold merely prices currencies plus or minus some noise - there's nothing really to see there - the grocery store also prices the currency I use..effectively, as does the price of gasoline for most people (heh, charging my Volt off solar regularly now - sun finally getting over the trees).

Well, perhaps I should retract a little bit - that noise (Forex) is also data that can be turned into information.

 

[DCFusor]

Ok, real crummy compared to what I envisioned, but still somewhat enlightening I think. To do what I want here, I'd have to write some code to use the downloadable data I can get and plot it in Gnuplot all pretty. But using some stand ins - another source of not-goodness, here's what I see.

What happened at the end of July? Look at all that divergence!
But on a longer scale, not so dramatic.

 

[pmbug]

What happened at the end of July? ...

Off the top of my head, QE2 ended in June and QE3 was expected and didn't come.

 

[DCFusor]

Interesting that BTE, a stand in for oil, which I got real lucky and bought in 1q 09, has done better than gold - and has been paying a real nice dividend the whole time that doesn't show up there (google doesn't do dividends as return) - speaking of supply/demand dynamics. I'm not sure I'd buy it now, but...

Guess that's why they call it black gold. A lot higher risk than gold - but with higher return, as things should be in a sane world. Sanity is getting harder and harder to find out there.

 

[bushi]

I still think (and that's my belief only), that for every practical reason, gold (and quite possibly silver as well) will end up as the money of choice, when everything paper starts to fail all over the place (hint: Iran/India recent deal)

Other commodities you mention are not intrinsically money, or do not have that broad tradition (like other PMs, platinium etc.).

Can't really imagine transactions being carried out in oil, that's just highly unlikely to happened. 1OZ Krugs would be still waaaay more practical than whatever amounts of crude equivalent. Oil's usability lies in BURNING it (well, this and chemistry, of course), why should we use as money something that you by default want to extract the value from by BURNING it . It is much more NEEDED in economy as the fuel/component, rather than wealth preservation/medium of exchange, it is also it's main PRACTICAL purpose. Gold on the other hand is and always was used nearly only for wealth preservation/jewelry (=to a large degree, wealth preservation as well). IT is not really used for anything else.
For obvious reasons, you CANNOT use land for any transactions, it is physically impossible (good for storing the wealth, though - but only in big chunks, and only where/when available, and as you know best yourself - an acre is not equal to another acre at all).

 

[DCFusor]

I agree that oil would stink as money (and those other things too) - but I think you'd have to agree that with the world set up as it is - it's just as important. If all money (by the standard definitions of it as medium of exchange) disappeared overnight by some magic - we'd still barter - it'd be inconvenient, but we'd live. But without oil to move things around, there'd not be much to barter for. We'd lose that whole Adam Smith thing of allowing specialization on the scale we now have it just as surely as if there was no money - we'd be back to village scale things totally.

What I was going for there was some way to look at some sort of absolute value of gold. Obviously comparing against fiat is pointless except to value the fiat - which can come, or go, on the whim of a government. So, what else is there to compare, something that's at least nearly as important as money to everyone's daily life?

Some of these things, yes, their only value happens as they are consumed. Which of course brings in supply/demand/scarcity dynamics - particularly for "those they ain't makin' anymore". But humans consume these things not so much by choice, but because you die without them - or can't have a society anything like what we have - and support as many people on the planet without them (copper). I'd say that rates their importance way up there, and makes possible at least some kind of comparison of gold to something other than paper currency.

I'm not dissing gold! I'm trying to accurately value it, since there is so much utter baloney out there as theories of its value (as agreed on by we silly human beings, my cats really don't care - and the trees don't notice at all). I believe the value of any "thing" there is or will be is just what you can trade for it (neglecting deeper philosophical considerations, such as "what is wealth" because hey, I'm wealthy - and I also have money).

Gold really IS used for "anything else", though not a huge fraction of the total gold there is. I have a house full of electronics all of which have gold in them. Much tech would not be practical without it as a contact media - nothing else is even close to being as reliable. I use it in my physics lab for its properties - one of the things I do is transmute it into other things (not much, though!). RF gear plates gold over silver for best long lasting conductivity in corrosive atmospheres. NASA used it all over the moon lander as the best reflector of IR radiation - and it's in every satellite. There is any amount of gold plated jewelry that you really can't call a store of wealth, but gives the appearance, and then gets thrown away. All these uses do put some gold in landfills (and in orbit!), maybe not much, but like with anything finite - a drip can fill an ocean eventually, a rate is definitely a different thing than an amount - and the latter is what we have with gold unless someone gets to practical transmutation.

This might be another important idea about what can constitute money - the fact that it's finite. If you go with Chris Martensen's view of you can't grow forever on a finite planet - it makes sense that whatever makes good money should also be finite, and perhaps the potential infiniteness of fiat (particularly digital) is the problem with it as money.

Sure you can use land in transactions, real estate professionals have an entire sector devoted to doing just that. It's slow, painful, and only happens in large pieces - like 1 oz gold coins are pretty useless for buying a loaf of bread - or you'd better hope, a weeks worth of groceries (when 1 oz only feeds you a week, we've got real issues!). That's simply a matter of scale.

 

[bushi]

OK, I generally agree with you, these commodities you mention have practical more importance for us to function as a society, as materials (and unlike them, we could function WITHOUT gold, no doubts about that - re century of fiat money) but... money is something that enables all that other stuff to circulate (practically). So this is a one and only practical use for money, to make other things go around.

And suppose, that you are a hedge fund manager, and you have some burning stash of fiat, being more and more risky to hold on to. What would you buy? Depends... maybe oil. But then, at some stage... you will need to exchange it, to trade it for something else... maybe grain? Uuups, you need to go through something intermediary, ie money in between, most likely. So, back to that risky fiat stuff, or maybe we can trade directly in something tangible and intrinsically valuable???

Switzerland's new exchange, devalued in gold as "new currency", India/Iran deal (and China on board maybe as well)... the writing seems to be on the wall, really.

But again, I value your input on this just as much as mine, it is but a mind exercise, and trying to predict the future... As such, rooted in personal beliefs etc.

 

[DCFusor]

Well, I trade stocks for a living (and other things, including land). For me, so far, gold isn't working as a currency for that. It's not as good a "money' as digital fiat for things that have to happen fast (and I'm a cowboy trader, I do a lot of quick moves - at least one trade a day, sometimes more). I'm sure it was less trouble (if also less fun) to whip out a check to buy that Volt than some number of large gold coins.

To put my money where my mouth is - I keep as little in fiat as I can, all costs considered. I know it's devaluing at some rate - but it's a manageable rate - say a little faster than 30yr T bonds do - or whatever you decide is a "risk free rate" these days, which as Kyle points out, ain't risk free anymore. Gold goes down too on some days and weeks - sometimes faster than bucks, and there's transaction costs going back and forth. It's a balancing act. It's why I trade rather than buy and hold - most things. Gold (PM's in general) and land are the only two things I hold always.

Which brings up another interesting philosophical issue - if I never sell either, what were they worth, and how would I know? I know their value to me, but it's phrased in far more esoteric terms than price.

For a longer term store of "return of my capital" I use gold, silver, and other like things - I don't buy and hold oil - I trade it. But what I was trying to look into here was "return ON my capital" as many gold bugs seem to get all excited with these predictions of extra digits in the price of gold - my own take is that if that happens, you're probably not going to gain much if any actual buying power - gold might do better than almost anything else does, but..."How long can this coin keep me alive" or something similar is the issue - does that go up, or down? That 10k+ scenario means things are going seriously wrong with society at that point, which isn't going to make most things more efficient for the price they cost in whatever you're using for money. Maybe you make some seriously good scores during the initial dislocations - when people dump things just to run away - but over a longer term, going going into the 10k+ range (assuming it happens fast enough for me to collect before I die) - means real big trouble with everything else, and is not something to wish for, I think.

Thus if gold goes to 10k in a year - you probably won't want to go to Vegas and buy drinks with it. If Vegas is still there, they're going to cost about the same - or even more - milligrams of gold they do now. There might be a scarcity of booze or open places to buy it - you never know what will happen if things get rough. According to that guy from Serbia I think it was - booze and bic lighters held up real well in value in those kind of situations. Along with ammo. No one was admitting to having gold then, too dangerous.

And this leads me full circle. We can (and do) make the argument that at least the attempt is being made to keep gold undervalued, and that to make this case, we have to agree that it has an absolute value of some sort which you currently aren't getting for it. Obviously, comparing it to some currency is silly - they move in relation to each other and everything else - with the temporary dislocations providing arbitrage opportunities - it's why we have markets! So, how do we figure that one out? I'm struggling to figure out a fairly unbiased way - and the basket of "necessary" commodities isn't my idea, it's out there already. Since gold is for now, priced in bucks - and might be suppressed, even that fails, to tell the truth, since so are all those other things.

Not to put on a tinfoil hat, but could this be a reason that trying to value oil directly in gold is so unpopular to TPTB - even to the point of making war on those who try? Because it would indeed show a truer price for gold in the bucks both are measured in and might upset some applecarts? You'd think the .001% would be fine with gold going up - they have most of it, after all, or so I'd bet.

I really do hope that Swiss experiment works out, as I said on that thread. That would be really cool - but the devil is in the details. "Digital gold" doesn't impress me a lot more than paper gold does, for the same reasons. What if they, in effect, "break the buck"? As many say, if you can't hold it, it isn't yours at some level; and truthfully, maybe not then - someone can always take it from you by force.

It's trying to fix the part of the system that isn't the most broken. If you don't trust the party on the other side of the internet - you are hosed trying to do business with them no matter the medium of exchange - money, in any form, can be stolen. So it addresses the "I don't trust fiat" part, but not the "I don't trust this guy on the line, who is certainly even less trustworthy than the fed or whoever controls value of fiat".

 

[rblong2us]

the concept of storing wealth in the form of 'stuff' is arguably a sign of insecurity.

When we have all we need what more do we need ?

I see the stored gold as no more than a throw of the dice, while our real wealth is all around us and our health the most valuable of all.


oops ... wrong forum (-;

 

[ancona]

Rblong, while fundamentally correct, you are also wrong. Wealth is an individual idea, constructed from the beliefs of the person being posed the question.

While having a Hummer and a 55" flat-screen could be seen as a sign of wealth by some, it is not by me. I see a person with two handguns, three battle rifles and a couple of riot guns, with a thousand rounds for each, a rich man. I further see someone with a food supply, some solar panels and wind turbine as wealthy. I see the person home-schooling their teenage kids as wealthy. I see the person looking at converting an old pick-up truck to a wood gas burner as rich. I see those with a solid faith in out Lord Jesus Christ as their lord and savior as rich.

However, I also see those with ten thousand ounces of silver as rich, but only in the material sense.