On silver mania

Apologies in advance for this post, which began as a comment to Kid Dynamite (KD) in Warren's fine post below, but grew too long and suggested a few charts. I believe the length is justified, however, as the extent of actual manipulation in the PM markets needs to be discussed: is it minor (as I'm sure even KD agrees), or is it pervasive? One's position here undeniably impacts one's investment decisions going forward, especially in the silver market.

Background: I commented: "the silver chart appears to have been painted to make it look like we were hitting a manic blow-off top phase in April. "


To which KD fairly noted: "I'm surprised to see GM Jenkins use the term "painted" to describe the April action - the April action was a result of mania. There's no doubt about that."


Ok, by "painted" I mean "not actively suppressed." In other words, my provisional view is that the status quo is interference in these markets, such that without interference the natural state of the PM markets right now would resemble a nuclear reactor with a busted heat exchanger: any given trigger would easily shoot prices literally to the moon (as in you'd have to literally visit the moon to retrieve them). Of course, I by no means feign certainty in these matters, and am willing to defer to argument or even trustworthy authority.


But, my reasoning is as follows: the same way that a government has to have measures in place to preserve the status quo, such as, say, proactive and reactive protocols to prevent cyber-attacks or electrical-grid failures, so (the intrinsic value of paper being zero), it needs to have in place active measures to prevent a loss of faith (rational or irrational) in its currency. Obviously, this is especially true when a loss of faith is indeed eminently rational, since the future sure ain't what it used to be (21st century America, and really the Western world as a whole, is the 19th century Ottoman Empire: the sick man of the globe).


My next premise: I believe (cf. Marty Armstrong) that the fiat price of gold in a fiat world is a straight function of faith in the competence and integrity of the ruling class, and by extension of future stability and positive quality of life. So, connecting the dots, I think it's far more likely than not that the ruling class cares more that a mania in gold not occur than even that a city isn't destroyed by terrorist attack. Sure, they'd rather not see any commodity -- corn or cattle -- go up in price, but they're scared unto death that the price of gold will skyrocket like LinkedIn stock. (To a lesser extent, they're similarly worried about oil, but for different reasons.)


So we have a motive, and all that's left is means. I don't know what to believe about the various theories of price suppression that I've read, e.g. via GATA, and I enjoy reading debunkings (including KD's) of various claims thereof. However, can KD or anyone really argue that, beyond any reasonable doubt, government has neither motive nor means here? How does one explain that the number of times gold, the best asset class of the decade, has gone up by more than 1% in a day has been a 3 standard deviation event?


I extend the above reasoning to silver, since it's been money for longer than gold has, except that it's much easier to manipulate because the market is so small. Whereas the gold:silver ratio obviously fluctuates, it's historically never gone up by more than an order of magnitude, so keeping silver cheap, combined with some mechanism in place also to control gold, ipso facto reins in gold and preserves the status quo. I certainly can't be the only one who realizes this.


Then there's a preponderance of little points of evidence, too. For example, there's Andrew Maguire's testimony and the many consequent lawsuits that have not been summarily dismissed (including some, I believe, against even SLV), and the lame foot-dragging of the CFTC. There's the simple fact that the spokespeople of TPTB were wildly bullish in their economic forecasts through the 2000's and thus lost all credibility, while team GATA and their Austrian satellites have been consistently right in their predictions, so I give them the benefit of the doubt more now than I would have if I had heard of them in say, 1999. GATA certainly presents ample points of evidence, such as those marshaled in a recent speech by Chris Powell, which I strongly encourage everyone to read.


Then, since we're talking about silver 2011, there are the curious circumstances immediately preceding the so-called bursting of the bubble. I noted here (posted while silver was still > $40) that, coinciding with the conspicuous absence in April 2011 of the typical waterfall drops in silver, there was also an absolute, unprecedented disconnect between the silver price and the mining shares. I'm not talking about mere "underperformance" here. Here's my chart in that post.


Luckily, stockcharts.com now has a "correlation coefficient" feature, so I took a look at it for the duration of silver's ascent through May 2. My suspicions were correct:



A negative correlation! Some mania! It's as if internet sales exploded in January 2000 while the internet companies' stocks fell.


To be sure, not every explanation for this April 2011 phenomenon supports my position, but I think the best ones do. As I wrote in the above post: "Someone knows something. Caveat emptor." Note that if silver stocks had exploded along with silver itself, the general public might have joined the small circle of silverbugs in their mania, so were they capped? Or were certain parties with inside information of future events heavily selling them short for profit? Why were the bullion banks covering shorts during the bursting of the bubble and not selling into it? Moreover, Occam's razor says that the curious timing of the first raid on silver was no coincidence: zero economic news, access markets on a Sunday night, Asian holiday, right before a chain of several margin hikes (why not one or two big ones? then, why not raise margins once silver settled down?), a few hours before the Osama bin Laden announcement, etc. It should also be noted that on that otherwise quiet evening, gold had just made an all-time high when markets opened.



37 comments:

Louis Cypher said...

Not to veer to far off topic but Bill spotted an inverted Head and Shoulder on the HUI. In English this is a good thing and of course once that starts to circulate around the inter tubes we can expect some positive movement on those damn shares.

Warren James said...

Real anecdote from a friend last week, quote: "Its too late for me to go gold. Sad."

That comment was from 9th August, at $1700/oz.

It's true that any dollarbug will be afraid of buying the top in gold, which is why a steadily-rising gold price is one of the best ways to prevent a mania, whilst still letting the pressure out. I would prefer to view it as an emergent effect of policy and the banking structure (as GM suggests above), rather than being an evil perpetration (as GATA suggests).

I have often wondered what Freegold would look like, with everyone taking their cut, extracting value along the way - basically a muted stable ascent in gold (or rather, a muted stable descent of fiat value). Looks about right to me and it's why I'm happy to keep investing bits in gold, even at current prices, unlike my friend above.

Jeanne d'Arc said...

KD/GM/Warren

I'm really enjoying this debate. It's so nice to read both sides put so calmly and rationally, without the insults and accusations seen elsewhere on the net, and with a genuine desire to work out what's been going on.

For what it's worth, I'm pretty convinced that the March/April event in silver was a bubble. KD's assertion that the number of players is so small that bubbles can form easily (even if no-one else you know socially is buying silver) is spot on, and is a point I've tried to make several times before. It's also typical of silver's behaviour during the whole ten-year gold bull run: staganate - rapid rise - crash - repeat.

This time it was a bubble fuelled by rather mad speculation all over the internet that promised huge riches for those who believed they could crash JPM et al. Momentum traders then saw an opportunity to make a quick buck on the back of this naivity (they knew that they would get out in time...)

People buying a commodity/stock/whatever after a rapid doubling of price, and using credit cards, 401ks, etc., to do so is virtually the very definition of a bubble in my view.

That said, I spend most of last week converting my quick gold gains (I stocked up huge on gold last weekend) into poorly moving silver. Why? Two reasons:

1. I think the bubble will start again in the next six months, and silver at $36 - 37.50 is going to look like a magic place to have bought.

2. The gold-silver ratio (as mentioned by GM). It got to around 46 this week. I reckon it's a no-brainer to say this will fall (in fact, it's already fallen to 44.5). Hence converting (some of) my gold to silver, rather than buying silver with cash. I plan to swap it all back into gold when the GSR gets to 30 or so (an event I'm sure we'll see during the next 12 months).

Oh, and for what it's worth, I think inflationary effects alone will support silver above $35. Add in the fact that gold will continue to rise (over the long term) and support the silver price (again, above $35 I'd say), and I'm feeling like the risk-reward for buying silver at the moment is looking pretty attractive.

This could, of course, all go horribly wrong. I'm ready to sell quickly and take a small loss if necessary. But the general view seems to be that if (IF) silver can break, say, $42, then there will be another big move up towards (and perhaps through) $50. Bubble or not, I want to have some skin in the game in case that's what plays out.

Kid Dynamite said...

GM - I don't get it - you offered a post of silver's complete detachment to the underlying stocks as evidence of a NON-bubble in April? I'd put that in the APRIL BUBBLE CAMP evidence!

remember: the Silver Mafia wasn't saying "you have to get exposure to paper silver instruments like miners at all costs" - they were saying "BUY THE FUCKIN' DIP - BORROW ON YOUR CREDIT CARD TO BUY MORE PHYZZZZZZZZZZZZ THANKS BLYTHE!" "EVERY DOWNTICK IS A GIFT FROM THE ICE QUEEN - AN OPPORTUNITY TO BUY MORE, CHEAPER"... "YES, YOU SHOULD CASH OUT YOUR 401K, PAY A PENALTY, MORTGAGE YOUR HOUSE, AND BUY SILVER" - it was the saddest crap I ever read in my life.

that's why there was a detachment between the metal and the miners: the mania was in the metal - not the miners!

again - I really want to focus on my comment in the previous thread, which Bron echoed, and which JdA repeated above about how silver can be a mania and not seen its top yet at the same time. IN essence, perhaps that chart of bubble sentiment in the prior thread is quite likely NOT to hold for silver - as a result of market size (lack thereof).

Brian O'Flanagan said...

I'd agree with KD. On April 29, silver was trading 70% above its 40-week moving average. People want to focus on what caused the drop thereafter without considering why it was rational for it to move so high in the first place. Silver didn't need manipulation or margin increases to bring it down - it was going to fall eventually anyway as its rise exhibited all the characteristics of a bubble.

Now that gold is starting to act now as silver did in April is a great concern to me. It reached about 23% above its 40week, which is highly unusual. Sure, the fundamentals are strong for gold, but the price action had a "buying panic" feel to it before it started correcting late week.

For things with little intrinsic value, such as gold and silver, the actual price is less important than how it got there, in my view. When prices shoot up exponentially, the long-term holders either sell or step away and those buying are weak hands (either panic short covering or emotional longs thinking that big move to the moon is coming). Inevitably, the weak hands will be tested with a correction and most of the time they will panic and sell just as they panic and bought. The price then mean reverts and the strong hands step up and buy from the weak hands.

Also keep in mind that despite the claims of many of the bugs, there are alternatives to gold, namely oil, copper, equities and others. If gold or silver rise to high relative to other assets, many investors will rotate capital out of gold and silver and into those other assets. So, absent armageddon, there is a limit to how high gold and silver can go relative to other assets.

Yukon Cornelius said...

Hey LC, if you like the HUI you'll love the XAU.

So I was going to comment, but then I got to typing and it got way too long. I made a post on my blog related to this with some stuff you guys might find interesting.

GM Jenkins said...

KD: GM - I don't get it - you offered a post of silver's complete detachment to the underlying stocks as evidence of a NON-bubble in April? I'd put that in the APRIL BUBBLE CAMP evidence!


You could be right: maybe the stock market is a lot smarter than the commodities market, and gained that wisdom over the weekend of the 8th of April (because on the 8th of April, silver had shot up to like $42 and mining stocks had finally blasted off). At this point, more information is needed. I stand by my view though. By analogy, if a cult starts in Africa, whereby a few billion people decide they need oil to ward off magic spirits even if it means selling everything they have, and so the price of oil spikes, I would imagine Exxon's and Chevron;s stock to spike too, even if everyone knew that such an irrational cult would have to come to an end sometime soon.

GM Jenkins said...

KD: it was the saddest crap I ever read in my life.

Lol. Maybe so, but I think you're slandering silver investors by taking the fringe to represent the whole. Sure, there were dubious claims proliferating, but were these claims the drivers of silver's price spike or merely expected and all-too-human epiphenomena of a larger event? I don't think you really know.

I think you're letting your disgust at glassy-eyed conspiracy theorists cloud your perception of the real drivers of silver's recent spike, namely silver bullion starting to regain its historical and deserved status as an investment vehicle (not only here but around the world); namely people realizing the rampant criminality in these markets (e.g. cf. Maguire) and realizing it can't possibly go on forever; namely more and more people finally shaking off the superstition that the dollar is a magic talisman that will remain the world's reserve currency forever, and with that the understanding that if gold explodes, silver probably has a lot more to climb than gold; namely that silver is industrially irreplaceable and being depleted at an unprecedented rate, mined only as a byproduct, etc. ; namely people realizing that inflatable paper currency is designed to empower the base and nihilistic banker and war-mongering class (and the unproductive underclass) at the expense of the hard-working people and rebe;ling against that; namely a growing education of silver's history as the "people's money," etc. There's nothing "sad" about any of these observations, in my mind.

GM Jenkins said...

Brian: For things with little intrinsic value, such as gold and silver

Understood statistically (i.e. integrating a large enough sample of years and points in space) and defined operationally (this is economics not philosophy, after all), gold and silver do indeed have "intrinsic" value. More than just about any other material item, because their value (exchangeability for other items) remains context-independent and relatively unchanged throughout time and space. The man's suit example is no less true for being a cliche: I saw somewhere (Consumer Reports issue from the late 80's?) that a high-end suit was worth ~$600, or 1.5 ounces of gold. The better Armani suits are now over $2000. Etc.

The use of falsely-premised models leads inevitably to bad predictions. So, if we must treat gold and silver conceptually as we treat other goods susceptible to bubbles, we should at least make a mental note of the differences.

Someone can sit out a typical bubble with no material loss. Thus, a typical bubble is fueled upwards by greed, not fear. There eventually comes a point when tulip or internet stock prices get so ridiculous that an "emperor has no clothes" moment arrives, a critical mass of awareness is provoked, and fear finally comes into play, instigating the bubble's descent. On the other hand, gold and silver are driven upwards by fear (as well as greed). Your risk of "sitting this one out" may not be limited to the annoyance of watching your friends get rich. You could lose all your hard-earned purchasing power.

Look, you either believe fiat currencies will collapse or you don't. Anyone who's going to persuade me that gold and silver are merely commodities susceptible to bubbles has to explain to me why history no long matters, i.e. why we're in a "new paradigm" now, why "this time it's different."

When currencies start to collapse, gold and silver will start to go to the moon. When gold and silver start to go to the moon, currencies will start to collapse even faster. In other words, the arrow points both ways. Importantly, unlike other bubbles, when gold and silver reach ridiculous levels, the "emperor has no clothes" will not pertain to them, but the source of their valuation: namely the chucky cheese tokens we call FRNs.

In my opinion, the "crash" of gold and silver in 1980 was a bear trap. Yeah, it lasted 20 years, but what's 20 years in the course of history. It wouldn't have lasted even that long if it weren't for the incredible power of our central planners. But all the tricks have been used up (e.g. interest can't be raised to 2% much less 20%) and as GATA says, what's occurring now looks very much like a managed retreat to me.

GM Jenkins said...

It's true that any dollarbug will be afraid of buying the top in gold, which is why a steadily-rising gold price is one of the best ways to prevent a mania

I thought something similar the other day, perhaps in a more sinister light. Not saying this is the case, but if the goal were to keep the professional classes and the tax-paying middle class out of gold, the best way to do it would be to make fun of "dumb money" in all media outlets while steadily raising the price as you say, like boiling a frog by slow degrees, intermixed with periodic "blow-off top"-like takedowns that relax intermittent bouts of fear. If you already have a tall stack of gold coins, buying three or four more at very high prices is not psycholoigcally hard. If you have none, spending $1900 (with premium etc) for a shitty little coin is difficult as all hell. I mean that's a vacation in Europe. So a real polarization is occurring, where those who have no gold will not even permit the possibility in their minds that gold may not be in a bubble.

GM Jenkins said...

JdA, I'm not at all confident that silver will emphatically break $40 in the near term. I suspect a test of the $36 level first, as I think you suggest. The gold-silver ratio just moved above it's 200 day MA, and appears to have broken an important trend line http://stockcharts.com/h-sc/ui?s=$GOLD:$SILVER&p=D&yr=9&mn=0&dy=0&id=p66810532899&a=241625043 , and given that gold appears technically overextended, if the ratio continues to rise, that doesn't bode well for silver.

Louis and Yukon, thanks for pointing out the inverted head and shoulders. I suppose if we see a rally in the S&P and gold can hold above $1700, we finally might break $580, but then the mining stocks have been so erratic that while I won't reduce my positions, I'm not about to let Lucy lift the football again.

Louis Cypher said...

I was going to do a post based on what KD said the other day and then Bron backed up his on site experience. I was going to compare the interest in say buy Silver and Lady Gaga. Gold and Silver forum participation to say Miata and Porsche forums just to get a gauge of the public interest in Gold and Silver.
But I don't think there is any need. A quick look at any of the forums and a quick head count will tell the story. Chances are the same people participate in several forums.
(Kitco.com Web traffic is skewed from the price feed that everyone uses. So any meaningful stats wold have to be drawn from their sub domains.)

I think even the bulls and the bears here can agree what we saw going to $48 was Silver maniacs not Silver mania.
Maybe change the title of this post to "On Silver Mania(cs)"

Swampfox said...

I love this site. Most rational insight on the net. What a breath of fresh air!

Jenkins - I think you are right. At the heart of the debate is what we define as money. You either accept that FRN's have a certain instrinsic value or you do not. That does not mean that the system will not perpetuate itself - the TPTB are a hell of a lot more powerful than you andr I. And unfortunately - in the grand scheme of global populations - folks who think like you and I are scarce.

However - the laws of economics (really an extension of the laws of physics/reality in a sense) may be ignored but not without consequence.

Money that has no value - and I define value as a representation of human labour or effort - and is based on debt is doomed to fail. Waking up to the relaization that FRN's represent essentially nothing is akin to Neo's awakening in the Matrix (sorry for the over-done analogy).

In our business we hold no savings and little to no debt. What we do hold is inventory - bought and paid for because it represents value - my labour - better than cash in the bank can. My divedends are converted largely into other tangible assets for the same reason. I keep cash for operating expenses only.

The destruction of the dollar (whether it is in part or in whole) will accellerate relative to the world's realization that the intrinsic value of cash is zero. This will also be the point at which we see the price of metals go "parabolic". Cash reserves will be liquidated in exchange for hard assets as fast as you can hit the sell button on your browser. I think we are moving closer to this point. Events in Europe this last week make me wonder... on the other hand there seems to be a million and one ways to kick the can down the road....

Aalas I am but a simple shop keeper... so what the hell do I know? :-)

Thanks again for a great site guys.

Cheers,
Swampfox

Brian O'Flanagan said...

ok - let's say that FRN's become worthless and gold and silver go parabolic. But that also means oil will go parabolic, so will natural gas, equities, corn, wheat and even housing and AAPL stock. One shouldn't assume that gold and silver is the only way to protect purchasing power. In fact, other assets may be poised to greatly outperform the metals - namely housing in my view.

Kid Dynamite said...

Louis wrote "Silver maniacs not Silver mania. "... but is there a difference, Louis? Don't silver maniacs create silver mania?

@GM - you asked me if these maniacs were the drivers of silver's price. That's the million dollar question - one that I pondered for many hours/days, aloud to many people (I'm sure you can find it online, somewhere), when trying to decide if I had to sell into the gross nonsense i was seeing (I ended up doing so)... You're right: i still do not know for sure, but I think that they have much much more of an affect on the silver market than they might in other markets - due to the small size of silver, as noted previously multiple times.

just so I'm clear, GM: do you envision paying for your good/services with gold/silver coins in the near future? I do not. (and note: I do not mean at stores that will accept your gold coin as "worth" $1700 when gold is trading at $1800.

and just so you're clear: fiat currency has value for a very specific reason: the government demands it as payment for taxes.

Kid Dynamite said...

@GM - also, the "man's suit" example is a terrible red herring that I almost never see corrected. The proper comparison isn't that 1 ounce of gold which bought a man's suit 100 years ago still buys a man's suit today - the proper question is: if you'd instead invested the dollars (the horror! FRNs!) used to buy that man's suit in bonds, or stocks, or Honus Wagner cards, how many suits would you be able to buy today?

in other words, the red herring is comparing the purchasing power of the dollar to the purchasing power of gold - no one is really advising holding dollars in your mattress in physical form earning "nothing", or disputing that dollars lose purchasing power over any long horizon... I think that's what Brian meant in his comment, which I generally agree with, although I'm wicked bearish on housing.

Yukon Cornelius said...

@Swampfox - Agreed sir. I sometimes browse through some other blogs I won't name and I sit there reading and thinking no one here has any idea what they're talking about. Not that it's something I disagree with. I'm talking they literally are just throwing together random financial terms and shit and pretending they said something profound when all that came out is, "Darmok and Jalad at Tenagra"

http://www.youtube.com/watch?v=3-wzr74d7TI

I've thought about gold and silver's rise for a long time and I've had some conversations with some of you about it. I have a very cynical (I know you're shocked) opinion of what I believe is going on which I'm not sure I've ever shared and I'm a little loath to, but I'll go ahead and share knowing it's going to piss some people off.

I think the pushing of gold and silver is simply one prong of an offensive orchestrated by socialists against the banking cartel led western capitalist status quo. I could go into details and shit but it would veer way off topic so I'll just say this. You're seeing a concerted effort to have everyone question their currency, their governments, and their beliefs. You're seeing battle lines purposefully being drawn and pushed based on age, race, religion, ethnicity, sexual orientation, philosophy - you name it.

Gold, but especially silver are being purposefully used as a wedge. It's for these reasons and some more that I say that it is far more likely that silver is being manipulated more up than down.

The truth is most of us even with the currency debasement have kept up with salary increases, or higher returns on our investments and our style of living has not been very impacted if at all by anything that's happened up unto this point. There are exceptions of course mostly around people who lost their job, but western civilization seems to me to still be alive and well regardless of all the doom and gloom hype we hear and are bombarded with everyday.

p.s. This is getting too heavy for a Sunday... I'm going to go drink some beer.

Kid Dynamite said...

hey GM - one more point as to your crude oil analogy: check the price action in 2008, and that of the stocks you mentioned...

GM Jenkins said...

KD - the "man's suit" would indeed be a red herring if someone used it to argue that gold is the best investment out there. Obviously, the best investments do more than maintain their original purchasing power. But i've never heard the "man's suit" argument used that way; rather it's just evidence for gold's intrinsic value, nothing more. Even pre-WWI when money was gold, you could lend your gold for interest or buy a few hundred honus wagner baseball cards or whatever.

I too agree with Brian's point that if gold and silver increase in price faster than other hard assets with more short-term utilitarian value, that's a sign that they're overbought. But, that's only true if gold and silver are being traded like commodities. If the increase in gold and silver prices signals a loss of faith in fiat (and by extension the integrity of those who enforce the fiat system), then you would expect those to be leading indicators. Actually, more than just indicators, they'd be actual drivers of further loss of faith in fiat, which eventually would impact all assets. Check out this chart of the CRB vs gold … it can be interpreted that gold is overpriced or that it's pricing in the future death of fiat before the commodities. Don't have time to think about this now, but I will, because it's a striking chart since the 2008 crisis. Comments welcomed.

GM Jenkins said...

hey GM - one more point as to your crude oil analogy: check the price action in 2008, and that of the stocks you mentioned…

Thanks. It appears that the correlation between oil and oil stocks isn't as tight as I expected. Chevron tracked the price of oil better than Exxon in 2008, but both peaked well before oil did.

However, there are two fundamental differences here with the silver/mining stock situation in April. The 15-day correlations between mining stocks and silver are generally close to 1.0, but fell of a cliff on April 11. On the other hand, the 15-day correlations between oil and oil stocks are consistently sinuous, going from negative to positive, and thus non-informative. Moreover, the silver/mining stock correlations do not track the silver/S&P500 correlations at all (see my chart above) whereas the oil/oilstock correlations do: see here

As far as whether gold coins will be used in stores, i wouldn't rule it out. I mean I can imagine a future world where our artificial reserve-currency-driven standard of living plummets, and things become more expensive, and if we move to some kind of gold standard, as e.g. Jim Rickards says will happen either by planning (unlikely) or by necessity, i could see gold and silver coins start to be minted instead of $100 bills and such, at which time gold bullion would be revalued and exchanged for them. Or, I could see some kind of digital gold system in place with the dollar devalued to gold and/or silver. Or, a complete collapse and splintering of the United States. Or, frankly, I could imagine 10 years from now gold is valued at $30 an ounce because some technology allows us to harvest it out of oceans, easily paying off our debts - and who knows, maybe silver is $1000 an ounce because it's necessary for that technology. But it's all about playing probabilities.

Speaking of which - Brian, why do you think housing has upside now? Faber recently said he also thinks real estate may have bottomed in nominal terms. I'm going in for a condo soon, but certainly not at all confident in it as an investment.

GM Jenkins said...

Yukon, I don't think your hypothesis is right, though I'd liek to hear it fleshed out... I think the elimination of sound money was the tool of the socialists far more than the opposite, which you argue. If money couldn't be printed, WWI and WWII could not have been fought, the welfare state and the dysfunction it has engendered could not be paid for, etc.

GM Jenkins said...

Thanks, swampfox... At least someone here agrees with me!

Warren James said...

Viewing money/wealth merely as claims on other's value/productivity - whether it be FRN's, Digital ledger entries, Gold, Silver or Cows or Buttons, helps the picture somewhat (did for me at least). So, yep, it can be anything - but directly related to the social contract.

It then becomes a question of what people prefer to hold at a particular point in time, almost like a contest between each wealth asset. FOFOA argues that gold has all the best qualities. Given the option, I prefer FRN's over cows to store my wealth, but then I prefer gold over FRN's. If I want to swap my wealth to buy food, I prefer FRN's over buttons simply because the shop keeper doesn't accept buttons for payment.

Even if the shop keeper accepted silver I would probably still hesitate before running down my stash.

But gold treated as money has one really immportant distinction over fiat as money - it is like a monopole magnet ... payment in full, not representing a counter party liability. I like that. Saves a lot of hassle.

Swampfox said...

Hi Brian,

You could be right. Mind you I was talking about physical assets of varying types in general. Metals are easy to talk about and reference in the discussion because they are easy for those in the middle class (people like myself) to hold. An ounce of Gold can store a lot of value for the average wage earner. Conversely you could value your labour in a barrel of oil, a chord of wood or a side of beef. I'm not sure I agree with your assessment of housing as a good store of value in general but it is very possible that in the right time and the right place that you could make a good amount of money on housing. Although this may be more speculating than saving (which is what I am refering to) it has worked for many. As in most "investments" timing is everything. I think my arguement as well as Jenkins (although he should probably speak for himself) is that as a store of value silver and gold are good choices as they represent scarcity, labour and capital in and of themselves. Moreover, throughout history they have been generally viewed as money because of durability and portability. They are not only a good store of value but a convenient medium of exchange. FRN's may be convenient but they represent nothing of value. In this sense they are essentially theft of the most valuable things I own - my labour and my time. As human beings our time here is finite. When you steal my time you steal chunks of my life. I hate thieves and have little love for modern bankers and the politico's that shelter them.

Yukon,

Sometimes you lose me but that's ok. I'm a libertarian philosophically (not radically - mostly I am just human and enjoy the company of many other types of humans) so my thinking is naturally slanted towards the idea that people should be essentially free to choose how they want to interact and live.

Economically I am closer to an anarcho-capitalist as I do not believe government has a place at all in the regulation or creation of money. Money should come from the markets and ultimately - regardless of what government decides - that is where it will come from. This is a natural law that can be ignored for a time but we all know what happens when you ignore reality for too long...

Swampfox said...

Fiat price of gold and silver is of little concern to me these days because sound money is that which best stores value and thus represents my labour. Irregardless of 'price' the world is hoarding these physical metals. I suspect it is because outside of how much it trades for on the Comex the true and free markets (the ones governed by our wallets and our choices) are currently moving towards metals as a mdeium of exchange. Our definition of money is being questioned and people are "democratically" voting for metals with their time and labour. Silver and gold are slowly losing their status as investments and are moving back to what they once were - money.

This does not mean of course that paper money is finished (although it could) but rather that no matter what regulations you pass and what we think is currency the end choice is still up to the consumer.

For what it's worth I think the western world is screwed. We continue to choose paper money over tangible assets as a store of wealth but fail to realize that the rest of the world is rapidly begining to choose otherwise. We allow our governments to run massive deficits and to pay them with more debt which leads to more money printing which leads to... yadda yadda yadda as we worship at the alter of consumerism. We are like the residents of Sodom and Gamora (spelling?) and I fear we will suffer a similar fate.

As for this being some sort of socialist conspiracy - well - there is nothing more unsocialist than individual choice. And right now there are millions of Asians and other nationalities chosing hard assets over paper. If anything is socialist it is the banking cartel. Capitalism by its very definition is a free market system devoid of interference by governments and their ilk. It is creative destruction - birth and death and rebirth. Ironically it is this process of discovery in the free market that creates stability economically, politically and socially on a larger scale than any centally planned economy could hope for. Socialism is central planning... that's what we've had to one degree or another for about 100 years or so. It's not working out so well.

Of course - as I've said before - the only way to know for sure how this will all end is time.

We ought to get a wager going. A pool. How far will the dollar sink by a certain date and how long until currencies backed by hard assets such as gold and silver start to emerge?

Maybe this is why why we are really in Lybia... didn't MG want an african currency backed by Gold? Man. That must have seriously pissed some bankers right off... I digress.

Maybe we could send a big yellow hat to the winner? I wonder if Turd would mind???

Swampfox said...

KD said:

"and just so you're clear: fiat currency has value for a very specific reason: the government demands it as payment for taxes."

ROTFLMFUCKINGAO!!!!!!!!!!

I guess we peasants should know our place eh?

Seriously - are you pulling my chain? :-)

This is akin to saying "Paying tribute to Rome is valubale because if you don't we will feed you to the lions".

I guess this relevant to the arguement in the sense that it all depends on how we define "value". LOL.


Cheers.

Warren James said...

Great discussion.

@Swamp Fox, Kid Dynamite is right about tax payment creating demand for fiat ... dwell on it for a while and you will see that your reaction above is spot-on, but at the same time KD is also largely correct.

If Govt demanded payment in sea shells then it would likewise create a roaring sea shell industry, sea shell exchanges and all the rest. But demanding fiat is essential because they control the supply (of fiat). It is the most convenient method the government can use to siphon your value/productivity plus whatever extra they wish to extract - by making you run on the hamster wheel just a little longer.

Because of this aspect instilled in our culture for so many years, people have forgotten that wealth = assets/value/productivity, and started measuring their net worth in FRN's (and hoarding those same FRN's for wealth preservation) - not realising at the same time that the governments had rigged the game with their seemingly innocent set of rules. Without the extra tax demand, people would probably just use FRN's as ... well currency units for exchange.

At least that's my take. A really good test of this cultural brainwashing we've all had, is to ask yourself if you would be happy for the government's men to come to your house every year and take away 30% of your furniture - it's the same effect really (and a disturbing mental exercise to do).

Swampfox said...

Actually - he is absolutely right - within the context of "demand". I would simply say that just because something is in demand does not mean that it has "value" in relation to my life... only that it is demanded from me in exchange for the absense of greater force.

It is pennance for liviing in the bankers world.

It's the kind of demand I could do without.

Swampfox said...

Actually the mob has been running this raquet for a long time. I think we call it EXTORTION...

It's getting late and I'm ranting... time to go nighty night.

Louis Cypher said...

Brian,
I'd like to hear your views on why you think housing will recover any time soon if you have time.

Brian O'Flanagan said...

Louis, two main reasons. First,relative to gold housing is the cheapest it has ever been. Currently it takes only 100oz of gold to buy a median priced home, compared to 267oz in 1913 and matching the 100oz low set in 1980. Second, housing prices have fallen to the point where the median income can afford the median house price and the rent vs buy calculatuion favors buying in most markets in the US. I am doing more research on this and will publish some charts here in a few weeks.

Kid Dynamite said...

Swampfox wrote: "It's the kind of demand I could do without"

ahhhh. but you can't do without it! that's the point - it's not really your choice. So although you WANT to do without it, well...

i don't really get this comment: "I would simply say that just because something is in demand does not mean that it has "value" in relation to my life"

that's what "value" is - either you value it intrinsically (ie: I can eat the eggs that my hens lay), or you value it because others (the the government) demand it (to pay taxes).

Isn't that why you value gold? because you think that others will demand it? Certainly it's not because it's pretty.. or shiny... or feels good when you rub it on your chest.

if the government demanded payment of taxes in eggs instead of dollars, I'd have 1200 chickens instead of 12...

Louis Cypher said...

Hey Brian, You got to be careful on that comparison. Housing inventory is way up from 1913. Building materials are cheaper and flimsier etc etc
It's kind of like the suit comparison. It might be better to compare Gold to hand made Persian rugs because the process is the same now as it was 1000 years ago.

Swampfox said...

KD,

You make me chuckle. I've never rubbed it on my chest but maybe I should give it a try. :-) And yes I see your point. I think the arguement we are dancing around is the difference between punishmnet and positive reinforcement. The government punishes you for not complying thus FRN's have utility but value? Gold has instirinsic value (value in relation to my labour and time) thus exchange is based more upon positive reinforcement between individuals. The latter - imho - has value in terms of someone elses time and labour the former has no value and carry's with it only an obligation. It is debt and nothing more. As for eggs it is unlikely the governemtn would require you to use them because ... wait for it.... they cannot be created out of thin air and are more difficult to inflate!! They also taste good, are a great source of protien and thus have intrinsic value as they represent your labour and your time (I've cleaned chicken barns/coups and butchered the damn birds so my heart goes out to you). We could call it the egg standard :-). I would gladly take it over FRN's although in terms of portability/durability I'm not too sure they fit the bill...

As for choice - it always exists. Paying my taxes is a choice. Failing to pay them may bring about uncomfortable consequences but it is a choice non the less.

Cheers!

Yukon Cornelius said...

@Brian,
Bullish on housing. Bold sir. Very bold. I'm with LC on this. You know I'm all about comparing the value of things relative to gold. I'm at my core a fundamentals guy first and the fundamentals are saying housing is borked until at least 2020 when the U.S. should see another population bulge. I do think that housing can be a good investment right now with historically low rates and going in with the plan to turn your purchases into rental property. Hell, the government is talking about doing just that. I also think there are some regional exceptions where the housing market looks quite strong.

@Swampfox
Yeah I lose myself sometimes to. There's no way I can relay my thoughts on the socialists/capitalists struggle and how it might include gold and silver in that in a comment anyway. Suffice it to say, the western financial powers are under attack and there appears to be collusion (especially around pushing precious metals) from various different groups some with radically different ideologies from each other. I'm not making any judgements. I'm just the guy pointing out what I think is happening.

Kid Dynamite said...

Swampfox, I really truly honestly have NO interest at all in debating you on this: "Gold has intrinsic value" but that's kinda my point. Unless you enjoy rubbing it on your chest, it doesn't....

I do agree that eggs DO have intrinsic value.

Dollars also have no intrinsic value, of course, which is why the Government CREATES intrinsic value for them by demanding payment of taxes!

hasta la pasta

Swampfox said...

KD get's the last word... that's ok. I learned along time ago that arguing over things you cannot change is a waste of good energy. Besides you are right - for now FRN's are the soup de jour. And not you nor I are gonna change it. On the other hand - nature being what it is I would hate like hell to be on the wrong side of this once it all comes down... intrinsic value or not.

Cheers!