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Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong
Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". In a recent commentary entitled "Ten Things for 2010" he was at it again bashing Gold. Here is what he had to say:
We're not looking at hyperinflation folks, in my view - we're looking at a deflationary collapse…If you fear hyperinflation do not look to Gold, instead buy a small (5% of your total portfolio) position in far out of the money LEAP CALLS on the major indices, spread across them. Why? Because (1) the tax structure on gold is unfavorable, (2) gold has never performed well on a contemporary basis .vs. inflation and (3) you can't eat it. If you try to get around the tax man structure you're going to get creamed; governments can and WILL prevent that from working. My recommendation thus is to buy insurance against a hyperinflationary event using instruments that do not try to evade the formal financial structure, are levered (to get around the tax hit) and are defined risk (so as to avoid losing your ass if you're wrong.)
Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?
And the tax structure is FAR more favorable for Gold than ANYTHING else, if only you are not in the habit of bending over. Buy cash and keep your mouth shut – it’s very simple – or just move to another country where the government is not as intent on raping its citizens. I know privacy is a foreign concept in America these days, but still. All your other assets, including stock market profits, are fully open to the government and there is nothing stopping them from taxing them to the hilt. Trust me, when it all hits the fan Gold in your personal possession will be your best friend.
Which brings me to my favorite part:
gold has never performed well on a contemporary basis .vs. inflation
Poor Gold. The thing gave an instant 75% profit when Roosevelt confiscated it in 1933 and rose 24x (yes, that’s 24 TIMES) from $35 to about $850 in a space of 10 years from 1970 to 1980. And even during the past decade from 2000-2010 it has risen 5x outperforming ALL asset classes. Overall, from 1933 till date it has risen about 60x. That is, if you simply held Gold since 1933 you would be now 60 times richer, at least in nominal terms. Yet nobody remembers all that. All they remember is the lousy 20 years from 1980-2000 when the full force of the derivatives market was brought to bear upon it to suppress it’s price (well, that’s a topic for another post), as is being done even now absent which it would have easily crossed 10x (from the 2000 low) by now – which it will at some point in the future as the market cannot be suppressed forever. Indeed, the longer the suppression, the more forceful the eventual price rise as happened when the London Gold Pool collapsed during the late sixties soon after which Gold shot up 24x during the next decade. If you’re not that devoted a disciple of Karl I suggest you hang on to your Gold for a little while longer. In my humble opinion, it will outpace all gains in all other asset classes since the creation of the dollar – in not only nominal, but real purchasing power terms.
And then there was this again:
The last time I checked they didn't take 100oz bars at WalMart, but they sure do take $100 bills
And the last time I checked Karl, they weren’t taking stock certificates and bonds either. Also, there was a funny thing I noticed: there was NOTHING stopping me from getting dollar bills, euros, yen – you name it – for my Gold. In fact, everytime I sold some Gold I got even more paper tickets than the last time – which meant that I could buy even more stuff with the same amount of Gold. How surprising, no?
Well, Karl was definitely surprised:
Precious metals will not be a safe haven: Clean miss. Gold and silver have both performed well.
And talk about reaching wrong conclusions:
Discovery that the metals market has been "polluted" to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren't gold had tendered good money for nothing. This would be a monstrous deflationary event - after all, the definition of deflation is the destruction of money, and that's exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard.
No Karl, the bills still exist – in the bank account of whoever was paid to obtain the said Gold. It is the Gold which is discovered to be no longer existing, thus causing the apparent supply to be further reduced and spiking the price.
Karl thinks he’ll be safe watching these “fireworks” from the sidelines. Not so Karl. By not buying Gold (and holding dollars), you are smack in the middle of them. You are not simply “missing out” on some investment gain but stand to lose everything as the purchasing power of the dollar is decimated. This is why those advocating holding only paper cash as a “safe alternative” are in fact harming those who listen to them.
Now don’t get me wrong - I agree with a lot of what he says in general – he’s a good reporter (which is why I keep him on my “must read” list) - but when it comes to Gold, Karl simply doesn’t “get it”. First of all, when you talk about deflation you have to ask the question, “In terms of what?”. Most people ala Mish, Prechter, Karl et. al. when they talk about deflation are referring to deflation in terms of the dollar, i.e. they are, in fact, “dollar-deflationists”*. One can’t really blame them since the dollar is considered by most people as “money” today and is therefore their frame of reference. But this is a critical error of perception that will prove fatal to those who hold their life’s savings in dollars when it all finally implodes. The dollar today is just another fiat currency created at will out of thin air by bankrupt and corrupt governments and their Central Banks. It is an illusion of money, not money; which brings us to the question of:
What is money?
This is a topic which can fill an entire book, but I’ll just quote the best one I found (Mises):
In the marketability of the various commodities and services there prevail considerable differences. There are goods for which it is not difficult to find applicants ready to disburse the highest recompense which, under the given state of affairs, can possibly be obtained, or a recompense only slightly smaller. There are other goods for which it is very hard to find a customer quickly, even if the vendor is ready to be content with a compensation much smaller than he could reap if he could find another aspirant whose demand is more intense. It is these differences in the marketability of the various commodities and services which created indirect exchange. A man who at the instant cannot acquire what he wants to get for the conduct of his own household or business, or who does not yet know what kind of goods he will need in the uncertain future, comes nearer to his ultimate goal if he exchanges a less marketable good he wants to trade against a more marketable one. It may also happen that the physical properties of the merchandise he wants to give away (as, for instance, its perishability or the costs incurred by its storage or similar circumstances) impel him not to wait longer. Sometimes he may be prompted to hurry in giving away the good concerned because he is afraid of a deterioration of its market value. In all such cases he improves his own situation in acquiring a more marketable good, even if this good is not suitable to satisfy directly any of his own needs.
A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.
Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange...
(All emphasis mine)
Money was created by the markets; by humans trading goods and services amongst themselves; by the need for indirect exchange. This is one of the major misconceptions of the dollar-deflationists - that money is what the government says it is. Although Governments do their best to convince people otherwise, including putting a gun to their collective heads via legal tender laws, they cannot dictate what money is – not for long periods of time anyways – which is why whereas Gold has been money for thousands of years, you’d be hard pressed to find a fiat currency that has existed past a few decades. The present period is one such short period of mass delusion where the majority has been convinced – including, apparently, Mr. Denninger - that the colored pieces of paper being printed by various men behind the curtains is, in fact, money.
Gold is the commodity that humans chose to be “money”- the most marketable good. It didn’t happen overnight, but over thousands of years of evolution. Billions of trading decisions over centuries made by free men of their own volition – the collective wisdom – installed Gold as money. It needs no government violence to enforce as money because the force of nature that is the market chose it to be money. Indeed, it was the governments who hijacked the free-market commodity money of Gold into “backing” their various fraudulent paper money scams using fractional reserve systems. Why? Because the power to create money is the ultimate power. It is not for no reason that Mayer Amschel Rothschild said:
“Give me control of a nation's money and I care not who makes her laws.”
And why do we know Gold is still money today? It’s simple – Gold has the highest stocks to flow ratio of any commodity i.e. its total above ground stockpile is very large compared to its annual production which is NOT the case for other commodities. The reason for this is that while other commodities are primarily mined for consumption, Gold is not consumed but hoarded. Its primary function is that of a store of value – a wealth reserve. Why do you think the Central Banks keep Gold on their balance sheet even today? Right. Even the Gold jewellery demand in countries like India is, in fact, investment demand in disguise – hidden firmly behind veils of religion and culture to protect their real wealth from the depredations of various rulers and governments that have pillaged her over the many thousands of years of her existence.
Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.
Gold IS Money – not the dollar, not ANY fiat currency. Period.
As the king of banksters J.P. Morgan himself testified before the Pujo Committee in 1913:
“Gold is money and nothing else”.
The Fiat Money Scam
Throughout history no fiat currency has survived – ever. There is a reason for it. Paper money is inherently a scam – a scheme to loot the people who actually produce the goods and services in the economy. Just because it is legalized and its perpetrators hold fancy government titles does not mean it is not a fraud. The issuer can create unlimited pieces of paper – or computer bits today – at essentially no cost and use them to appropriate real goods and services in the economy. So whereas you and I have to actually do real work to procure it, the printers of the currency can basically print whatever they need. This is why there is a constant inflation of money supply under a fiat money regime as has been the case since the Federal Reserve was established in the US in 1913, as constant theft requires constant creation of new money. The evidence of this inflation is the annihilation of the dollar’s purchasing power since then:
The Dollar's Purchasing Power Since the Creation of the Federal Reserve in 1913
This is why we have legal tender laws making the unconstitutional Federal Reserve Notes legal tender with the monopoly of the private banking cartel (i.e. the Federal Reserve) enforced by the courts enabling the banks and the government to essentially enslave the populace. This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price. Indeed, America today is the very antithesis of what its founders intended.
The fraudulent money system today is the source of all the rottenness. The various scams in progress today - the entrenched corruption - can be all be traced back to it. The rot is at the very top of the pyramid from which the fountain of fiat money emanates. It is indeed telling that the two World Wars occurred right after creation of the Federal Reserve. Further, no amount of prosecution will fix the system because the prosecutors themselves have been corrupted. As Ayn Rand said:
"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.”
It is too lucrative a scam to be given up voluntarily by those owning the printing press while the going is still good. It is like expecting a thief to stop stealing while not only being immune from any sort of legal prosecution, but actually having the power to create laws. The system cannot be fixed - the only way this will stop is a collapse of the existing system so that a new one can be built – and we are in the middle of it right now.
Deflation in Terms of Gold, Hyperinflation in Terms of the Dollar
By its very nature, due to economic control being concentrated in a few hands and fraudulent creation of money out of thin air, the fiat money system creates massive misallocations of capital and resources throughout the economy. The economy under a fiat money system is no different than a centrally planned one, such as the Soviet Union. Moreover, since the entire world is on a fiat money standard today – with the various fiat currencies themselves being “backed” by the fiat dollar - misallocations of capital have occurred throughout the world resulting in malinvestments. These misallocations are both material and human, as exemplified by the skyrocketing unemployment rate. The malinvestments now need to be liquidated i.e. converted to the most liquid form – “the most marketable good” or money - so that the capital can be reallocated to more productive uses. Loans are called in as they can no longer be serviced. This results in deflation, i.e. rising demand for money in relation to everything else, and consequently falling prices and increasing purchasing power of money. Moreover, economic uncertainty means that more and more people want to hold “the most marketable good” i.e. money thus further increasing the demand for money.
Now normally – since a lot of debt-money is destroyed in the process and there is a rising demand for money - this would lead to a rising dollar (in terms of purchasing power, not the meaningless DXY), but that would mean that the whole “theft-via-inflation” scam would fall apart. The government can’t tax a rising purchasing power! They simply CANNOT allow deflation in a fiat money regime as it would defeat its very purpose – that of allowing them to appropriate resources from the rest of the economy. This would threaten their very existence. This is why holes created on the banks’ balance sheets by defaulting loans – which would normally create deflation - are being eagerly filled by the Central Banks. This is why the Fed is now simply printing money out of thin air – both overtly and covertly, with the derivatives market being cleverly used to absorb the excess money creation (so you were wondering why the derivatives monster is increasing exponentially in size?) - to fund the government’s operations as there is not enough money in the market to lend to the government. Hiding under esoteric nonsense terms like “quantitative easing” does not change the fact that it is simply creating money via ledger entries and outright STEALING.
Whether they “allow” it or not deflation WILL take place – not in terms of dollars, but in terms of Gold. It’s simply forces of nature – the market – at work. The dollar deflationists expect the dollar to suddenly reverse its 100 year long drop in purchasing power. Ain’t gonna happen. What the government is doing now – i.e. spending raw printed money into a contracting economy - assures us that we will end up with the hyperinflation of the dollar. The only thing they can do is prolong its demise with intermittent bouts of induced apparent “deflation” to keep the inflationary scam going a little bit longer - remember 2008? (h/t Gary). Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise. But ultimately, as more and more people realize that the government will not – indeed, cannot – stop inflating the currency into oblivion, will choose to hold the ultimate “marketable good”, i.e. Gold. This is the reason why Gold is the only asset class at new all time highs. Rest assured, even the big boys are holding Gold in their private vaults, not dollars. Is there any sense in holding something you can create at will?
Ultimately, there can only be deflation in terms of commodity based money such as Gold since it cannot be created out of thin air. Indeed, we have already been deflating in terms of Gold for the past decade. Just look at the various commodities, the stock market, real estate – pretty much anything - priced in Gold – it’s all going down.
SPX priced in Gold (2000-2010)
As capital goes down the liquidity pyramid in search of the most marketable good, all the money derivatives – including the dollar – will collapse returning all capital to where it came from: Gold; a global reset, if you will, with only holders of Gold left standing when the dust settles:
Exter's Liquidity Pyramid
You Cannot Eat Gold, But You Can’t Eat Dollars Either
That has to be one of the lamest arguments against Gold – ever. It is the sign of a closed mind. It shows that you don't know ANYTHING about human history, which is not surprising considering the sorry state of our government controlled "education system". You cannot eat FRN’s either – why not just burn them? The function of money is not to be eaten but to be used as a medium of exchange and store of wealth i.e. to get what you want to eat at an indefinite time in the future. And while with Gold you are assured of getting at least something in return in the future, whether it is an edible product or not, it is not so with dollars. Fiat money has a problem in that it lasts only as long as the government enforcing its use does. In times of economic uncertainty, such as today, when the very survival of various governments is at stake (yes, that includes the US Government) do you want to hold Gold or their worthless colored paper tickets? Gold is the only money that has outlasted empires and governments - no fiat currency has. Think about it - what will your dollars be worth when there is no government to enforce it as legal tender? Yup – zip, zilch, ZERO. And to those who say that we will not need Gold (but something else like food or guns) in such extreme circumstances, I say that empires and governments have constantly collapsed throughout history but it did not mean the end of the world. As long as you believe that human society will exist and there will be division of labor, you need money (i.e. Gold) – because:
a) You cannot store indefinitely all your needs especially perishable items such as food.
b) You do not know with 100% certainty what you will need in the future.
c) You cannot produce/manufacture everything that you will need today or in the future by yourself.
Even if the government does not collapse there is nothing stopping it from devaluing the currency at will in a step function thereby instantly appropriating a vast amount of your savings, as has already happened not once but twice with the dollar since the creation of the Federal Reserve. I mean really, the facts are so obvious that you have to be either be in total and complete denial (perhaps due to having already put all your eggs in the dollar basket) or in collusion with the people promoting the paper money scam.
Gold is the currency beyond Governments. It is the most liquid form of money accepted throughout the world – the true reserve currency of the world - whereas Dollars, Yuans and Euros etc. are only guaranteed to be accepted within their own respective countries, and as long as their respective governments last. Why would you want to tie yourself down to the paper currency of a particular nation, especially in times of such turbulence? It points to a very limited sphere of thinking when you advocate that holding only dollars is the best strategy. It is a fallacy to believe that there is no refuge outside the system; that you have to be trading paper tickets all the time to “keep up” with the dilution of your purchasing power or just stand by idly holding dollars while the government rapes you. Gold is your refuge outside the system.
Got Gold, Mr. Denninger?
*In general we can state that they are “fiat-money deflationists” since the process of money creation is same in all the countries i.e. money is created as debt and the collapse will follow a similar route. The only caveat in my opinion is that since the dollar backs all the other fiat currencies, it *might* collapse last. Also, to keep things simple, for the rest of the discussion, we’ll simply use the term “dollars” with the understanding that it can be used interchangeably with the general terms “fiat currency” or “fiat money” since it is one itself.
For an excellent discussion refuting the dollar-deflation theory and why the dollar WILL eventually hyperinflate, please refer to "No Free Lunch".
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When was the last time you were able to purchase anything with equities or Treasury debt, you disingenuous asshole?
And once again, for you all you lying pseudo-deflationary propagandists for the finacial and political establishment, gold is NOT a commodity, it is MONEY!
+100
Thanks GG, great read!
However, I fear you are in grave danger... our friend Karl recently banned me from his site during the health-care debate. I "respectfully" disagreed with his less than caring position on health care for the poor... and I sent what I thought was a very polite email to him, rather than call him out in public. His reply was pompous and somewhat insulting (don't I know how wrong my views are), but I thanked him for his prompt reply (seems he gets right to work on anyone who disagrees with him) and concluded we would just have to "agree to disagree." He answered with the devastating news that I had been banned from a site that I was not (and never would be) even a member of.
One can only imagine the evil he has in store for you GG... taking him down in public no less. Perhaps he has the power to will you to read every word of his posts for the next year, or some other unthinkable atrocity... please be careful!
ROTFLMFAO!
Hell hath no furry like a paper bug scorned!!!!
You'se in twubble now buster.
Perhaps it should also be pointed out that gold should NOT be considered a "money-making" (as in more dollars) tool. That it is to be held LONG-TERM.
It is a savings method, not an "investment".
Forget the guns, groceries, gasoline stocks and isolated fortified ranch "compounds". Gold will preserve purchasing power better than any other alternative for the simple reason it is in shorter supply and is NOT leveraged or encumbered in any way.
The economy will muddle through as always. Mad Max is NOT coming. But inflation will continue. They have no choice, as the article says.
But inflation will continue??? what the hell world do you live in? Please show me the inflation. Don't point out government services and tolls.. those prices are set and not determined by a market. Market determined prices are the true measure of inflation and deflation. Tolss and governement services are increasing to cover their own debts and have nothing to do witht the strength of an economy. Inflation is created when an economy is strong ans getting stronger. When that takes place, governments collect taxes.....and they can in turn keep government services in check. SHOW ME THE INFLATION..............Every commodity is in a bubble. so pricings despite recent price hikesisa not sustainable as the demand is not there. Without demand a true market with fall......Just like we saw in the fall of 2008...we will see it again. The government is try its hardest to continue the bubbles for the purpose of generating inflation. IT AIN'T GONNA HAPPEN.
Then the ultimate guarantor of the FRN, the US Gov't, will collapse.
It's as simple as that, dude. Really. The FRN is a DEBT which CANNOT be repaid, ok?
Deflation is a SYMPTOM of a contractionary aggregate economic climate! It is NOT the cause, it is an effect!
huh? Inflation is created when the money supply increases relative to the economy. In a solid currency, money supply is relatively constant, so a strong economy will give you deflation. In a fiat currency, the money supply is variable. You get inflation whenever the money printers create it...and also when they're too slow to react when the economy contracts.
"Every commodity is in a bubble. so pricings despite recent price hikesisa not sustainable as the demand is not there." - ?
What if they are NOT in bubbles? Lots of characters have been saying GOLD is "in a bubble". What if these are just the new pricing levels? What if people have suddenly just decided, either one-by-one & slowly or en masse, that they'd better hold REAL assets?
Prices are supported by both speculation and demand. This is a "credit event"; a "debt deflation": the only thing that's going to deflate is the value of paper assets ~ not the real goods.
Kreditanstalt
But then you have to convert it to whatever medium of exchange exists at that time.
Mad Max isn't coming, but a lot of people seem to have discovered their testosterone while fondling their weapons.
What happens when someone some big player decides it is time to turn his Gold in. The next big player not willing to lose a fortune does the same. Chain reaction.
Those who are not fast enough lose.
china is ready in the wings to buy it all,
where you been india just took a boo-ko of gold off the market
russia lining up nations are buying the stuff ,, and they will pick up the buying as gold crosses 1500,
all gold in all currencies world wide is braking out to the up side .. sprott just bought millions ..
debt is going up fiat is becoming dog dung ,,trade a little for the common exchange medium.
some folks will trade (barter ) the system .
folks with eye sockets blinding by the car lights freeze .
and spout pablum in the face of fiat destruction
I don't want paper money. If I could make half an ounce of silver an hour I would in a heart beat.
You need to get that message out to the countries of the world with dollar reserves.
Karl has yet to show anyone a debtor nations currency that appreciated during an economic downturn.
Ah yes, 2008. Thats what happens when you underestimate the intelligence of other market participants.
Bitch slap!
http://market-ticker.org/archives/2361-Listen-To-The-Hucksters,-Lose-You...
Listen To The Hucksters, Lose Your Ass
Especially those who don't sign their real names:
Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold.
Bah. One cannot hate an inanimate object.
It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums".
"From what I hear" is what someone says when they're incapable of actually bothering to read the simple topic headers on a forum. Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum.
That's right, I have a specific place for all such discussions where they're perfectly welcome - even if I believe the people running their particular beliefs are wrong (or worse.)
Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?
Worthless currency eh? Hmmm... all I have to do is be able to obtain a return that exceeds the devaluation of the currency in question, assuming it does in fact devaluate.
How's that thesis worked out for the last year or so? Remember, these were the same people who told us that the dollar was imminently going to collapse in 2007, 2008 and 2009. Heh, things looked pretty dire in 2008, didn't they? But then we had radical appreciation in 2008 (nearly 25%!) followed by a second dip which put in a higher low.
Call chart-reading silly if you wish, but higher highs and higher lows are a pattern one ignores only through willful blindness.
Now there will be many who claim "well the dollar is relative since all currencies are fiat - that means you can't use this."
Ok, I'll give you that. You're still wrong - the dollar's purchasing power in the context of purchasing power of actual hard productive assets such as land, houses, commercial buildings, industrial equipment and various other means of production has appreciated dramatically since the start of the financial crisis in 2007.
After all, I don't care what you claim something is worth in the end - what I care about is what I can exchange that "something" for in the marketplace. Durable, productive assets are by far the most important indicator of a currency's value since they are the means by which one can sustain themself.
And the tax structure is FAR more favorable for Gold than ANYTHING else, if only you are not in the habit of bending over. Buy cash and keep your mouth shut – it’s very simple – or just move to another country where the government is not as intent on raping its citizens.
Oh, so now "Gordon" advocates lawbreaking as a means of "safeguarding wealth"? Uh huh. You're going to do well with all your "stored wealth" when you're getting boffed in a prison cell. And as for "moving to another country", which one would that be, exactly? It would certainly appear that the United States for all it's faults is better-situated than the alternatives reasonably available to most of us. Certainly you cannot believe that any of the so-called "Western Nations" in the EU, for example, are a better choice, yes?
I know privacy is a foreign concept in America these days, but still. All your other assets, including stock market profits, are fully open to the government and there is nothing stopping them from taxing them to the hilt. Trust me, when it all hits the fan Gold in your personal possession will be your best friend.
You're awfully presumptive there "Mr. Gekko", ye who dispenses advocacy of lawbreaking and cowers behind an assumed name.
Poor Gold. The thing gave an instant 75% profit when Roosevelt confiscated it in 1933 and rose 24x (yes, that’s 24 TIMES) from $35 to about $850 in a space of 10 years from 1970 to 1980. And even during the past decade from 2000-2010 it has risen 5x outperforming ALL asset classes. Overall, from 1933 till date it has risen about 60x. That is, if you simply held Gold since 1933 you would be now 60 times richer, at least in nominal terms. Yet nobody remembers all that. All they remember is the lousy 20 years from 1980-2000 when the full force of the derivatives market was brought to bear upon it to suppress it’s price (well, that’s a topic for another post), as is being done even now absent which it would have easily crossed 10x (from the 2000 low) by now – which it will at some point in the future as the market cannot be suppressed forever.
Yes, I know, it's all manipulation. Remember all those who have for the last three decades been running television advertisements along with writing articles claiming "price suppression" and "imminent breakout of prices to the mooooon!" along with imminent death of the dollar. How's their record of prognostication?
You may not remember the mania in 1980, but I sure as hell do. I also remember the people who were bankrupted by believing that gold was "money" and nothing else was, and that due to the hyperinflation that was certain to smash the dollar and result in it being nothing more than a firestarter one had to buy all the gold they could at $800/oz.
Of course what really happened was that gold's price collapsed and the promised hyperinflation didn't occur. The hucksters took all the money that the proletariat paid for their gold with (in "worthless" fiat paper, no less!) and laughed all the way to the bank - and their new yachts. The proletariat suffered through 20 years of inflation while their "protection" went down in nominal value - they got buttfucked twice by listening to these clowns!
In the same time period this is what happened to stocks:
The S&P 500 went from about 125 to 1576 (if you got out at the top) or 1089 (today), a gain of 871%. Of course there was plenty of inflation, but the point remains.
Gekko also flatly ignores the fact that gold's 1970 price was not a market price, it was a fixed-by-fiat price. Therefore one must ask - what was the actual market price when the gold window was closed? Let's look:
Pick a place from anywhere beyond 1974, and you still have a problem, as this is the stock market (SPX) price from that date:
In 1974 the SPX was trading at about 75 - substantially lower than gold's price.
So in point of fact fiat-currency denominated stocks outperformed gold as an inflation hedge from the point that the gold window was closed - that is, when it was able to trade freely - onward.
This, incidentally, is exactly why I said what I had to say. The historical precedent is what it is; it doesn't matter what I want it to be. Since I sell neither stocks or gold I have no gain to be made by promoting one over the other. I simply look at the mathematical facts, and those facts say that gold is not a particularly good hedge against inflation and in fact during a period of serious inflation - from 1982 to 2002, a 20 year period during which there was lots and lots of inflation - gold's price was flat to down. It is thus a massive fail at it's claimed purpose.
Gold is, however, a damn good geopolitical instability hedge. The 1979/80 price spike was due to the Iranian hostage situation and the possibility of wide-scale war. Look at the charts of the time and correlate with the election cycle - and what was going on in the world. The correlation is obvious.
The move since 2007 in gold is mostly a matter of fear, but it is not fear of collapse of the dollar. Indeed if you look at the correlation chart of gold and the dollar you'll see that the inverse-correlation (that would support this thesis) basically disappeared at the end of last year.
The fear being hedged is geopolitical risk - again. If that risk is realized then the rise in price will be justified and in fact prices may go significantly higher. If it turns out not to be realized I fully expect gold prices to collapse - just as they did last time.
No Karl, the bills still exist – in the bank account of whoever was paid to obtain the said Gold. It is the Gold which is discovered to be no longer existing, thus causing the apparent supply to be further reduced and spiking the price.
Prove it. You conspiracy theorists on this topic have been ranting for three decades about the same tired song - that it's all "price suppression", that "the gold doesn't really exist", and on and on and on.
Well, when is it going to happen? Investment forecasts, to be actionable, must include both a price and a time or they are worthless - indeed, often worse than worthless.
Money was created by the markets; by humans trading goods and services amongst themselves; by the need for indirect exchange. This is one of the major misconceptions of the dollar-deflationists - that money is what the government says it is.
No.
Let's define our terms. "Money" is a convenient catch-all but it's also a bullshit term because it lacks precision. As such I'm going to be more precise and use the terms that should be applied.
Wealth is created through production - that is, mining, manufacturing or growing something. The wealth so created is the intrinsic, not speculative, portion of the value so-created. A home with three bedrooms and one bath can thus comfortably house a family of four persons consisting of two married adults and two children, and more persons with decreasing levels of comfort. The wealth inherent in the free-and-clear ownership of such a home is in its shelter value. That can be reduced to a monetary number in any unit you care to use, along with a premium (or discount) predicated on speculative conditions.
Anything lacking intrinsic value is credit. They spend the same (they're fungible in some cases and convertible in all) but they're not the same.
That is, I can say that this house is worth $200,000, but the house is not in fact $200,000 worth of credit on it's own. I can, however, convert it into $200,000 worth of credit dollars or I can secure borrowing of those credit dollars with it. At least today. The inherent shelter value of the home, however, might only be $50,000 - the rest is speculative premium.
The point is that all items of wealth have some subjective component to their value.
In order to trade you need credit. Wealth comes from production. When you produce something and get what you call "money" in exchange for it in fact you got a form of credit as the person accepting it at the other end of your transaction has to believe it is good.
By definition anything you must trust in the value of is credit in some form or fashion - that which you exchange for and has intrinsic value (e.g. a bushel of corn, a gallon of gasoline, a house, etc) is fungible or convertible with that credit but is in fact wealth.
This is the error that most so-called "economists" and nearly all gold bugs make - they define money as a medium of exchange "and" a store of value.
That's pure nonsense and a conflation of convenience - or outright fraud upon the public when attached to something with little or no intrinsic value.
A store of value must have intrinsic worth. If it does not, it is an instrument of credit as its value is subjective. As such gold, being mined, is a form of wealth when mined, but as its intrinsic value is tiny in relationship to its price it is mostly an instrument of credit (that is, belief in value .vs. intrinsic value.)
If you dig up gold, you have mined something - you created wealth. But if you dig up copper, silver, iron ore or similar, or if you grow and process lumber, or build a car, you have also created wealth.
All wealth is in fact ultimately traceable to the only free lunch - the Sun. (Even that is not really a free lunch, but geologic and astronomical time frames are, for all intents and purposes, a "free lunch" from a human point of reference.)
The point is that nearly all that we spend as "money" is in fact credit in one form or another - that is, it is a call option on future production, or wealth, and most if not all of its so-called "value" is speculative - including gold!
Because the power to create money is the ultimate power.
The hell it is. Every man has the ability to create wealth and most can create credit, which is the essence of money. When Wimpy promises to pay for that hamburger next Tuesday he has created, in point of fact, both credit and (by common definition) money. But only government has the authority to use force to extract both from you - that is, to force you not only to turn over current production but to compel you to produce in the future as well. You have your balance of powers exactly backwards sir.
Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.
Absolute and abject nonsense. The convertibility by law was disposed of by Richard Nixon. The dollar did not "instantly collapse" (although many said it would.) In addition there was no right of exchange during the period after FDR's confiscation through the repeal of those regulations and laws, and again, the dollar did not "instantly collapse." This claim is utter and pure horsecrap as the dollar was maintained through forty years of being non-convertible.
This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price.
The founders based our monetary system on silver, not gold. The reason for this is quite simple - silver is both consumed and thus has industrial purpose - that is, it has significant intrinsic value.
Indeed the banking cartel in London tried after the Revolutionary War to change this, going so far as to bribe Congress. Why? Because with gold-backed money and the control of said cartel, along with the lack of utility (intrinsic) value, gold supplies and the speculative premium in its value (its "moneyness") could be easily manipulated. With silver being an industrial metal this was dramatically more difficult to accomplish; ergo, silver was seen as undesirable by the banking cartel - and no wonder.
Even today the banksters would love a gold standard, as it would play directly into their hands. With the vast majority of production being tied to a handful of suppliers absolute control would vest in just a few easily-bribed persons and corporations. By being able to control gold supply through such a corrupt system they could easily cause deflationary collapses any time they wished, thus escheating all property carrying debt to themselves literally on demand. Such was common practice prior to the abandonment of gold-backed currencies.
Gold-backed currency is a banking cartel member's wet dream.
Gecko then presents the following outright fraudulent chart:
Why is it fraudulent? Look at his starting point - the end of Kondratieff Autumn in 2000!
Now look at the long-term SPX chart up above - it was at 70 in the early part of 1975. Gold, on the the other hand, was closer to $200/oz - that is, the ratio was under 0.5, yet gold was trading at a market price.
This is what is expected during Kondratieff Autumn. Inflation - and lots of it - in the monetary and price sense. That is, prices for assets rise dramatically, often exceeding 1,000% of their realistic and intrinsic value. Gold is a asset class as are houses, stocks and other items. It too gets inflated in price as it has a speculative premium associated with it - indeed its price is MOSTLY speculative premium!
But Kondratieff Winter follows autumn, and during winter you have deflation - and again, lots of it. Values over that period return to historically reasonable ratios and wealth returns to near or at intrinsic value. This is insanely disruptive to the economy as a whole, and to those who hold assets they believe can "never go down" - including Gold.
During the last incidence of this we lived in a world where FDR had just made the public ownership of gold illegal. As such we have no point of reference for gold's relative performance during that period that matters, and prior to that it's valuation was tied to everything else since it was (foolishly) tied to the monetary base. But during those depressions purchasing power of currencies increased - not the other way around.
The inflationists should be excused from their foolishness, when one looks at historical precedent. After all, none of them were alive and sentient during the last major deflationary event. As such it is unreasonable for them to talk from experience - we have all lived in a seriously-inflationary time.
Those who are looking for hyperinflation are about 20 years too late. We already had it. First in stock prices, and then in houses. Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head.
They are also trying to deny the history of long-wave cycles.
Not that their beliefs matter. Nor does the attempt of Greenspan and others to prevent the inevitable winter from arriving. They are no more able to stop it than you can stop the secular winter from following fall. It will come, whether you want it to or not, and it is wise to be prepared other than to try baying at the moon to keep it from arriving.
The goldbugs are after a laudable goal - the ability to simply save money (production) over time, take zero risk and wind up with the sum of the purchasing power saved.
That's the goal that the bugs have, but the goal is unachievable through hard-backed money. The bugs often point to the period before the 1930s as one where over time purchasing power didn't change much, but they ignore the outrageous swings that took place in the interim, often resulting in 30-50% price changes in the space of just a year or two's time - in both directions! Catch that wrong and you're bankrupted.
The Federal Reserve Act says:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
This, if followed defacto, results in zero inflation (stable prices) across the intermediate term. It prevents the abuse of metallic supply via cartel behavior to cause wild swings in prices and at the same time results in an economic system where simple saving of surplus production by the average person is sufficient to fund retirement.
The failure is not in the structure of the system, but rather is found in the corruption thereof and the utter refusal of the people to hold those elected and appointed officials to account under their black letter legal responsibilities.
Metallic-backed "money" not only would not fix the problem, it would make it worse. The solution is in fact right under our noses and in the statute books - we simply refuse to demand that the law be enforced.
The blame is ours and has nothing to do with the fact that our currency is fiat-backed.
Gordon and those who believe as he do are simply wrong.
Well, I guess Mr. Denninger won't be quoting or referring to Zerohedge ever again (which he does frequently, I might add), because that is the very core of ZH.
And yet Denninger seems to almost obsessively feel the need to respond to articles and arguments raised here on ZH.
I guess the truth hurts, huh Karl? What's the matter, getting a little lonely over in your intolerant and rigidly-controlled stalag of a forum after banning almost everyone who dared ever enter it, or who committed the heresy of even meekly questioning your iron-fisted and misguidedly Keynesian orthodoxy? Deflation sure is a bitch, especially when it pertains to the steadily decreasing number of your slavishly gold-hating devotees.
TF has ZH penis envy. Clearly
ZH is the REAL free market in ideas. Who cares what names each of us use, if any? Caveat emptor, but let all schools of thought contend...
Kreditanstalt
Depends. I rather enjoy the hypocrisy of quoting John Galt while being of the class that doesn't create nor manufacture anything.
I chortle merrily at the yuppies with their new big balls waving their guns in the air.
On the other hand some are realists and understand that Superman was a comic book character and John McClain was a movie hero who had stunt men do the heavy lifting.
You post 60,000 words above and 2 of them are yours:
You really should get a dialogue together. Something like, "You can't eat gold!".
Now that would give you some street cred with Karl.
And don't forget, it earns no interest or dividends!
And it can't be used at Wal-Mart to buy diapers!
And it's heavy! So, SO heavy!
(The "heavy" argument is the clincher in my mind.)
Bubble top! Bubble top alert!
Sears, Kmart to offer cash-for-gold service"But you can't EAT it!"
BAAAA-AAAA-AAAAH!
"But you can't EAT it!"
BAAAA-AAAA-AAAAH!
"But you can't EAT it!"
BAAAA-AAAA-AAAAH!
"But you can't EAT it!"
BAAAA-AAAA-AAAAH!
BAAAA-AAAA-AAAAH!
Karl just responded on his blog
All I can say is that no one knows the answer for sure, and I thank both of you guys for giving a detailed account of both sides of the issue.
I'm buying airline size bottles of whiskey, .22& 12 ga.ammo, and installing an extra large boobie trapped gastank in the trunk of my Falcon
I read Karl and he is not dumb.
Where are you getting those little things (the airline booze)?
I've often thought they would be a great barter item.
Most liquor stores sell them! Just ask for nips. Or by the thousand for about 20 cents each:
http://www.bottlesetc.com/plastic_containers_bottles_jars/%28airline%29_...
where do you get the labels, Rocky?
Outstanding. Was not aware of that. Thanks a bunch.
No, Karl Denninger is most certainly NOT dumb --- just willfully and selectively ignorant.
Thanks GG. Great read as always. Fiat currency and the Fed will be history sooner than later. The only problem we currently face is the manipulation of every market, but that issue, as you mention, is being taken care of as we speak. When it all implodes gold will rule for a time, but following the destructive force of this cycle I believe seeds, ammo and water may be worth far more than gold. I think we're really going deep in the shitter this time.
Again, WTF GOOD is ammo!??!
It's EVERYWHERE. There's no place on EARTH where ammo is in short supply.
Water? LOL..how about antibiotics?
A SIMPLE infection used to KILL PEOPLE pretty frequently. WTF are you worrying about ammo for? If it comes to a shooting match, you will NOT survive ONE bullet wound.
babe settle down
i am aware of your antibotics awareness plan.
babe. your hyperbolic.
take a look at me one more time, now s l i d e.
Totally.
Yup
Reading Denninger's rebuttal http://market-ticker.denninger.net/archives/2361-Listen-To-The-Hucksters,-Lose-Your-Ass.html
...it seems he does not believe money should have any intrinsic value at all! Gold is simply - another commodity!
In other words, to him, "money" is simply credit: a stand-in claim on future goods that contracting parties hold until they wish to redeem it!
Just like THE DOLLAR, Karl?
Excellent article!
KD, like so many others, deliberately mixes up the investment and the insurance aspects of gold.
Karl is a POPULIST, in the Lou Dobbs vein. Someone who will bend any principle, turn over every stone in the name of "the little people".
He also HATES China. Irrationally, venally. He believes China is a "currency manipulator" while claiming that his beloved U.S. government has only good intentions...
It's no good to shout "We little guys are the VICTIMS!!!" , cry for "fairness" to governments and decry the bankers as villains.
Karl Denninger, what role did the U.S. middle classes have in choosing to indebt themselves, in choosing to take up the "free" "money" on offer via ZIRP? Were they FORCED to gorge themselves on overpriced real estate with borrowed money forced down their throats? Or were they just the silly turnips they resemble?
Answer THAT one.
OTOH, gold is liberty. Gold stands for financial privacy and against manipulation, against governments. But if one looks to governments as arbiters and saviours, that won't go down well...
http://www.gata.org/node/8688
the dennenger is one of the many who will find that history will not be kind to his views ,
that is the last laugh ,, the final arbiter of things economic ,
gold is money where is the gain ,,a coin is an oz. always an oz. no more no less,
and why would denninger give a rats . gold will be going down in value.. so no capitol gains ,, and a write off ,,,
what is his views on 9-11 this is also a blind guy in search of those to praise him .. maybe his objective is his smiling face on tout TV . smiling at his grasp of a financial statment , and his mug with tie and lincolnist form,,, plastered on some rock in south dakota ,, dennenger the almighty one .
Don't bring 9/11 into it. Most gold bugs including me have respect for Karl, like Gekko said, the only thing he seems to get wrong is gold.
If you think 9/11 was a con job then you are a hopeless bastard
If you believe the investigation is complete you are a hopeless bastard.
tell that to a growing skeptical group of very informed and professional people ..
and the list grows daily,,
your a folly of mind set , a hopeless sponge of government misinformation .... and would make pavlov proud as you eat the bowl of gruel and bask in the glory of 1984
Note that the biggest immigration boom in history occurred between 1880 and 1930 as 24 million came to the US, mainly from Europe. The European and UK based oilgarchies could not stand that these people would have a chance at "freedom" and "liberty", and coincidentally the Federal Reserve counterfeiting machine was created in 1913 during a largely absent legislative session. And so it began. You want to leave the continent where we rule for a chance at a better life? Not so says the banksters.
Gold is not just money, it is liberty.
Funny one. In many human societies, holding a large share of the currency can be compared to liberty.
Dont tell that people holding large amounts of USD dont not feel a sense of liberty today.
+1m
Denninger is a Goldman and federal shill. Make that GoldmanGovernment shill.
I find his "send all the criminals to jail" folly in the highest. Whom does he think will be the police, lawyers, judges, and jailors?
I think KD is wrong about gold-- but comments that he believes "his beloved U.S. government has only good intentions" or that he is "a Goldman and federal shill," are patently absurd.
No one short of Matt Taibbi has been more consistently critical of US government, politicians, banksters and GS systematic fraud and looting than Denninger. I've had private spats w him and he is rather intractable when his pov is challenged, but imo, he's a moralist more than a populist. He rightfully demands indictments and prosecutions for the massive frauds that have taken control of the system, because he believes that without corrective action, the results are inevitable and will be calamitous, for a time, decimating all asset values, PM's included.
http://calltoaccount.wordpress.com/