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Is Gold A Giffen Good?

Tyler Durden's picture




 

Via Paul Mylchreest of Seymour Pierce,

Is Gold a Giffen good?

We are at a critical point for gold and the gold equities.

With regard to the latter, the long running underperformance versus bullion may be over for the time being with the recent double bottom in the chart of the HUH Index of large cap. gold stocks versus the gold price:

 

During the Summer, a portfolio manager from a large UK fund in a CNBC interview commented that "I wish I'd never met a gold miner." That kind of abandonment of hope can obviously be typical of market bottoms.

Time will tell, but the investment case for gold equities has received a boost from recent M&A transactions. This week saw the announcement of Minera Frisco's US$750m acquisition of the Mexican Ocampo mine from Au Rico Gold. Minera Frisco is majority owned by Carlos Slim, touted in the media as the world's richest man. Other recent announcements should have raised eyebrows due to the (very) obvious theme:

  • 7 August 2012 - Zijin Mining, the largest Chinese gold miner, acquired a majority stake in the Australian gold miner, Norton Gold Fields, for US$180m;
  • 16 August 2012 - China National Gold announced that it was in preliminary discussion regarding an offer for Barrick's 73.9 percent stake in African Barrick Gold;
  • 4 September 2012 - China's SEFCO Group announced the acquisition of the Zara gold project in Eritrea for US$80m;
  • 19 September 2012 - China's Shandong Gold announced the acquisition of a 51% stake in the Australian gold miner, Focus Minerals, for US$238m; and
  • 27 September 2012 - Zhongrun Resources announced the acquisition of a 42% stake in the Australian gold miner, Noble Mineral Resources, for US$88 million.

Gold itself has had a strong move up since mid-August as the expectation of further QE became baked into expectations. We have moved into a new era of open-ended money printing across the developed world. Surprisingly, many people are prepared to believe that this will not be inflationary - but all in good time.

The failure of the gold price to breech US$1,800/oz so far can be attributed to aggressive short selling of various forms of "paper gold" by bullion banks. If we take the more transparent COMEX futures market, the CFTC's Bank Participation Report shows that between 7 August and 2 October 2012, almost the entire increase in open interest has been accommodated by an 86,486 contract increase in the net short position of the reporting banks. The total net short position is now 184,748 contracts, i.e. 18.47m oz of gold or 574.6 tonnes. The latter is the paper equivalent of 20.4% of world gold mine production and more than 50% of China's reported gold reserves...just on COMEX!

The London gold market (LBMA) is much bigger, but far more opaque. What most commentators fail to appreciate is that the convention for gold trading on the LBMA is in "unallocated" gold. This is an unsecured claim against a pool of gold held in the vaults of clearing members of the LBMA. In keeping with banking practice, it is a fractional reserve system. Smart money has been buying gold on the LBMA and specifying delivery of "allocated" bullion, i.e. where specific gold bars are segregated in the vault in the name of the purchaser, or (increasingly) removed by the purchaser from the banking system altogether.

In August 2011, S&P downgraded the US sovereign credit rating from AAA to AA+ which was the catalyst for the gold price to rise US$270/oz to hit an all-time high of US$1,920/oz on the morning of 6 September 2011. Beginning the following month, reports of heightened demand for physical gold in the London market began to filter through which have continued in 2012. For example:

21 October 2011 - King World News' "London Trader"
"We had a major, major physical buy order today. The Chinese bought a massive amount of physical today at the lows."

17 January 2012 - King World News' "London Trader"
"They (the Chinese) have recently taken another roughly 150 tons away from the Western central banks."

18 March 2012 - Jim Willie of the Hat Trick Letter
"My best gold trader source..The Chinese are the principal buyers, but he swears that China is not alone.. The battle is being won in the vaults, where the gold cartel is being depleted"

19 June 2012 - TF Metals Report
"London Good Delivery bars are being delivered to Eastern buyers. Instead of being vaulted inside the LBMA system, these bars are being sent directly to refiners. The bars are then being melted and recast in 1 kilogram sizes."

8 October 2012 - Egon Von Greyerz of Zurich-based Matterhorn Asset Management on King World News
"I would also note, Eric, that some of the refiners we are talking to, they are seeing business strongly increasing now, and in this environment they are actually increasing their margins and prices. So there is clearly an increase in short-term demand."

Whether the reported Chinese buying is "official" or not is unclear. However, it is worth remembering the surprise Chinese announcement in April 2009. This was from a China Daily news article at the time:

"China, owner of the world's biggest forex reserves, said Friday its gold reserves had risen to 1,054 tonnes by the end of 2008. China is now the fifth biggest holder of gold reserves in the world, with only six countries having a holding of more than 1,000 tonnes, Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua in an interview. The new figure represents an increase of 454 tonnes from 600 tonnes in 2003, the last time China announced an adjustment of its gold holdings."

What's happening in the gold market reminds me of something I speculated could happen back in 2007 i.e. whether gold would some day exhibit the characteristics of a "Giffen good"?

Economists (I am not one) define a Giffen good as one which violates the normal laws of supply and demand, i.e. instead of falling, demand rises as the price increases. Wikipedia explains the paradox as follows:

"In normal situations, as the price of a good rises, the substitution effect causes consumers to purchase less of it and more of substitute goods. In the Giffen good situation, the income effect dominates, leading people to buy more of the good, even as its price rises."

 

 

According to Wikipedia, the evidence for the existence of Giffen good is:

"limited, but microeconomic mathematical models explain how such a thing could exist."

Please note that Giffen goods should not be confused with "Veblen goods". This is Wikipedia on the latter:

"people's preference for buying them increases as their price increases (as greater price confers greater status)... decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products."

Super cars and high-end luxury goods are examples of Veblen goods

 

In searching for examples of Giffen goods, the focus has normally been on low quality staple foods, i.e. as the price rises, people can't afford to buy better quality foods and are forced to purchase more of the staple.

For many years, the oft-cited example of a Giffen good was the potato during the Irish Potato Famine of 1845-52. When the famine broke out, approximately one third of the Irish population was believed to have been dependent on the potato as their major source of food. Subsequently, this example was discredited when it was realized that more potatoes could not have been consumed even by the poorest one third of the population since there was such a severe shortage of potatoes - at its nadir the potato blight caused an 80% reduction in the potato crop.

More recently, it has been suggested that rice and wheat in parts of China show the characteristics of Giffen goods. In "Giffen Behaviour and Subsistence Consumption", a 2008 paper by Robert Jensen and Nolan Miller of Brown and Harvard universities, the authors claim:

"This paper provides the first real-world evidence of Giffen behavior, i.e. upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu."

The amusing thing is that I saw a real time example of "Giffen behaviour" on Bloomberg News last week without needing to analyse consumption surveys from the Chinese hinterland. Before I get to that, when Alfred Marshall first publicized the idea of a Giffen good in 1895 he noted that:

"As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it."

In light of those remarks, let's turn our attention to the current hyper-inflation in Iran and a section from a Bloomberg News' article "Iranians Abandon Meat for Bread as Protests Flare" on 4 October 2012:

"Iran's free-falling currency is turning meat into a luxury, sparking overnight price surges and spurring shoppers to stockpile goods.

 

'Most of my customers just look at products behind the window and pass,' said Behrouz Madani, 42, who owns a butcher shop in northwest Tehran. 'I see them going to the next store, which is a bakery, to feed their families with bread."

This is a perfect example of Giffen behaviour, but what about gold?

The lows in the gold price - there was a double bottom in 1999 and 2001 - were in the range US$250-300/oz:

 

We are currently in the eleventh year of rising prices. What about demand for gold?

When it comes to the supply and demand for gold, many people don't understand that it is IMPOSSIBLE to measure accurately, as almost all of the physical gold ever mined is still available as theoretical supply in the form of bars, coins or (scrap) jewellery. This is reflected in gold's stock-to-flow ratio, i.e. the ratio of above ground stocks to annual mine production. The ratio for gold is between 60-70 and is FAR higher than any other metal or commodity. Silver is the only one other one which even troubles the scorers. While the high stock to flow ratio is one reason for gold's suitability as money, it also makes estimating supply and demand problematic:

The flows between the buyers and sellers of the existing above ground stock of gold held for investment purposes CANNOT be measured;

 

The supply and demand models created by the World Gold Council, industry consultants and banks are only estimates of the end demand for INCREMENTAL ANNUAL PRODUCTION; and

 

In some of these models, the demand for gold for "Investment" purposes is just a balancing figure.

The difficulties don't end there. It is well known that India's demand for gold is a significant factor impacting supply and demand for gold. This is Sandeep Jaitly in his October 2012 "Gold Basis Service" newsletter:

"India remains the largest market for gold and silver by many magnitudes. What is not commonly appreciated is that whilst the recorded numbers for gold imports are big, the unrecorded are far larger. The 'black economy' of India is larger than that of any other country. Reported gold transactions courtesy of the well-known bullion organisations should always be taken with a pinch of salt."

However, there are some objective measures of key components of overall gold demand. Firstly, the aggregate amount of gold held in all known gold Exchange Traded Funds (ETFs). Bloomberg data goes back to October 2003 and is summarized in the following chart:

 

The current level is an all-time high at 82.958m oz (2,580.3 tonnes) - which is consistent with Giffen behaviour - demand for gold rising as the bull market in gold plays out.

Another source of measurable demand is from central banks, at least in terms of their reported activity. These venerable institutions have had an almost Damascene conversion as they have changed from sizeable net sellers to sizeable net buyers. We probably shouldn't be surprised that a) they were late joining the party and b) the inflection point was in 2008 - when the Great Financial Crisis hit - 7 years into the bull market.

 

Once again, this is evidence of Giffen behaviour with respect to gold. The data above obviously doesn't take account of likely additional purchases by China's central bank as per the discussion above. I use the term "Giffen behaviour" deliberately. Some economists argue that there are three necessary pre-conditions for a Giffen good:

  • Firstly, there should be a lack of close substitutes. This is certainly true for gold as there are only two monetary metals - the other being silver - and the latter is both a monetary AND industrial metal. In contrast, other types of money, like paper currency and electronic credit, have no intrinsic value;
  • Secondly, it should be an "inferior good" - a good that people buy more of when their income goes down. Once again, gold scores well here as gold's attraction increases in response to a rise in inflation/inflation expectations which have a negative impact on real incomes; and
  • Thirdly, the good should constitute a substantial percentage of the consumer's income. This is much harder to argue in gold's favour. There is no doubt that growing numbers of people are allocating a larger slice of their savings (past income/future consumption) to gold, but that's about as far as the argument can be taken.

While two out of three "ain't bad", we'll stop short of attaching the term Giffen good to gold and instead focus on clear evidence of gold's Giffen behaviour.

Another point which shouldn't go unnoticed is the growing roll call of portfolio and hedge fund managers who, like the central banks, have been high profile gold advocates since the Lehman collapse in 2008. Here are a few relevant quotes:

Kyle Bass on CNBC on 12 March 2012:
You can call it what you want to call it..I call it money creation out of thin air and, therefore, gold has a lot further to go."

 

From WSJ's Market Watch on 15 August 2012:
"Hedge-fund managers John Paulson and George Soros boosted their gold holdings during the second quarter"

 

The "paper king" Bill Gross of Pimco, the world's largest bond fund, on Bloomberg TV on 5 September 2012:
"I just think it (the gold price) would be higher than it is today and certainly a better investment than a bond or a stock which will probably only return 3-4% over the next 5-10 years."

 

Ray Dalio when asked by whether he owns gold on CNBC on 21 September 2012:
"Oh yeah. I do. ..There's no sensible reason not to have some. If you're going to own a currency, it's not sensible not to own gold."

 

David Einhorn in the Huffington Post on 3 May 2012:
"I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote (his characterisation of Bernanke's QE strategy) for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls."

Besides avoiding the quarterly conference calls, two other factors spring to mind:

We are in the midst of the biggest debt crisis in history and there is only one financial asset which doesn't have COUNTER-PARTY RISK; and

 

From Philip Barton's "The Dawn of Gold":

"A stock of anything has to be started at a moment in time. A stock of 170,000 tonnes does not just suddenly appear. At some point, long ago, the decision was made to begin to hoard gold. No one hoards something that will not hold its value over time. No one would put a dozen eggs or an iron bar in the back shed and expect it to have value fifty years later. The crucial point to understand is that when the original decision was made to begin to acquire and hoard gold, it must have already been regarded as a store of stable value over time, otherwise the decision to store it would not have been made."

Imagine if in 2007, Ben Bernanke, Mervyn King, Jean Claude Trichet et al, had actually possessed the analytical foresight to see what was coming, organised a meeting with the world's media and explained how, using their collective wisdom, they would solve the problem.

"There's going to be a massive global crisis, but there's no need to worry. We're just going to print money."

 

"Is that it?"

How would most people have reacted then? I think they would have laughed out loud. Why are so many of us reacting differently now?

For some reason, what's happening reminds me of a skiing holiday years ago when one of my friends, after putting on skis for the first time, was persuaded to take the chairlift to the top of the mountain with the immortal words "Don't worry, you'll be fine." He wasn't.

The nature of markets is that they periodically forget the lessons of history. One of them is that low interest rates (how about ZIRP?) and extreme monetary stimulus cause financial bubbles. Confidence in the status quo seems as entrenched now as it was in 2007. In 2009, I remember talking to a former colleague and, having been bullish on gold, he had turned bearish, arguing that everybody was bullish and that it was a crowded trade. My response was that if that was the case, then "everybody" wasn't bullish enough. Needless to say, he wasn't convinced.

 

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Sat, 10/13/2012 - 11:52 | 2884762 valkir
valkir's picture

All i know,gold is good as gift.Have to gift myself and my family again.Window for that is closing very soon.Have a nice weekend bitchez.

Sat, 10/13/2012 - 12:08 | 2885045 DoChenRollingBearing
DoChenRollingBearing's picture

Gold is a gift, what a great observation, + 1

Yes, give yourself and your family that gift early and often!

In my own case, I have been buying gold for deacdes.  But it was not until about 2001/2002 that I stepped up my purchases.  As gold went from $900 - $1200 I bought even more.  And I have been buying in the recent $1550 - $1800 ranges as well.

Physical gold is way underpriced now.  Practically a gift, again, a great observation.

Sat, 10/13/2012 - 12:29 | 2885091 max2205
max2205's picture

I can't wait to short gold.

Sat, 10/13/2012 - 12:35 | 2885099 hawk nation
hawk nation's picture

You should probably wait about 3 years

Sat, 10/13/2012 - 12:45 | 2885122 max2205
max2205's picture

It'll be classic because the TPTB could give a shit about propping up gold

Sat, 10/13/2012 - 13:15 | 2885189 max2205
max2205's picture

Always prepare for the next turn

Fri, 11/09/2012 - 23:21 | 2967033 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

What a dumb comment:

The PTB don't care about the price of gold

Gold is the underpinning of the financial system.  Gold is held as an asset and reserve of every CB out there.  The way they are running their liabilities they need every asset they can find, if it is gold or Milky Way candy wrappers.

Look at the Bundesbank!  They won't even rock the boat when it is possible their gold has been leased away to other banks!

So boy genius, what price would you short gold?  Why not now?  Go ahead punk, put your cash where your mouth is.

Fri, 11/09/2012 - 23:33 | 2967064 Seer
Seer's picture

Kinda jumping in the middle of this (w/o really reading everything), but... NO, TPTB don't give a shit about anything other than SOME apparatus that allows them to assert their roles as, well, as TPTB!  Religious throne-sitters have their schemes, these folks have theirs.

Because most who go along with this game do so by way of showing their allegiance by subscribing to the "ownership" thing (don't get me wrong, I'm not saying I'm against this).  And most "ownership" stuff comes from various fabricated papers.  TPTB control the paper, thereby asserting themselves as the biggest "owners."  Pecking order... BUT, this pecking order could easily be crushed if people stopped believing in all this (just as the religious powers would lose their power if people stopped believing in that religion).  We're more physical than mental, so the ownership PTB sit in higher thrones...

And no, I wouldn't short gold.  Someday, however, it'll have little significance: I just hope that such time comes when I'm long dead and gone.

Fri, 11/09/2012 - 23:48 | 2967086 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Religious throne-sitters have their schemes, these folks have theirs.

They are one and the same.  They are the old priest class.  Today they have different means of swaying power.

The old class would watch the Warrior class conquer the kingdom and they would name them King, on behalf of God.  Now the new scheme is they run the money supply and they knight the politicians with the silver toungues PMs and Presidents.

What does the gold have to do with any of it?  If people were allowed to trade the gold freely, without Central Banks dictating the terms of use, then the power structure would fade.  It is the power system they wish to keep, and they must maintain control of the gold to do so.

Sat, 11/10/2012 - 01:34 | 2967243 Seer
Seer's picture

Good catch!  I was hoping that someone would see that.

I'm kind of torn as to whether having gold reign freely would cure our ills.  Once upon a time gold was THE exchange medium.  I think that as long as people look to "leaders" and allow themselves to buy into stories nothing will keep them from being enslaved by the contriving class...

I do figure that things will tend to revert back to the mean.  On this path there will be, however, lots of smoke generated by TPTB.  And the best advice for ducking the worst is to concentrate on Food, Shelter and Water.  When you have these covered then their "spells" are pretty much ineffectual.

Fri, 11/09/2012 - 23:48 | 2967089 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Religious throne-sitters have their schemes, these folks have theirs.

They are one and the same.  They are the old priest class.  Today they have different means of swaying power.

The old class would watch the Warrior class conquer the kingdom and they would name them King, on behalf of God.  Now the new scheme is they run the money supply and they knight the politicians with the silver toungues PMs and Presidents.

What does the gold have to do with any of it?  If people were allowed to trade the gold freely, without Central Banks dictating the terms of use, then the power structure would fade.  It is the power system they wish to keep, and they must maintain control of the gold to do so.

Sat, 10/13/2012 - 16:24 | 2885506 ultraticum
ultraticum's picture

Perfect observation in gold's favor:  counter the criminal TPTB.

Sat, 10/13/2012 - 13:03 | 2885164 SilverDOG
SilverDOG's picture

max2205,

 

Go physical silver.

It will reach 1/1 ratio. 

As shorting is done in paper, bring extra shorts.

"Keep stacking my friends"

Sat, 10/13/2012 - 13:17 | 2885195 max2205
max2205's picture

Bonds and gold will be devestated equally

Sat, 10/13/2012 - 15:44 | 2885452 LongBalls
LongBalls's picture

You clearly do not understand the new banking rules set by Basel III.

Sun, 10/14/2012 - 19:59 | 2888839 Larry Dallas
Larry Dallas's picture

All I know is that someone let Frasier Crane out and now I have to read another gold article on ZH that sounds pretentious.

But that's my opinion. How many ways do you need to say "own gold"?

Fuck you "Guest Post".

Sat, 10/13/2012 - 12:07 | 2885051 evolutionx
evolutionx's picture

24 Reasons For Gold

There are many reasons for Gold. First and foremost: Preservation of Wealth. The illusionary paper wealth will implode in the next few years. The initial trigger will be the collapse of the world’s reserve currency – the US dollar. The financial system is unlikely to survive in its present form. Gold has been money for 5,000 years and will continue to be the only currency with integrity.

 

http://www.mmnews.de/index.php/english-news/11038-24-reasons-for-gold

Sat, 10/13/2012 - 12:14 | 2885066 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1  

Egon von Greyerz is a true expert on gold and on the world financial system.  Yes, yes, yes, for 5000 years humanity has valued gold for wealth preservation.  That is not likely to change anytime soon, particularly in our dangerous times.

Sat, 10/13/2012 - 12:48 | 2885130 Ignatius
Ignatius's picture

Also, the higher the price the more efficiently gold does its job:  wealth preservation and savings.

Sat, 10/13/2012 - 13:09 | 2885178 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1  Yes.  A lot of good observations early on a Saturday.

Sat, 10/13/2012 - 13:43 | 2885251 OutLookingIn
OutLookingIn's picture

Too much of a good/bad thing.

Is still bad for you.

As the loss of confidence in paper currency reaches a peak, physical gold or silver will NOT be available at ANY price. Bad currency drives good money into hiding, until such time as the bad currency is discarded as garbage, good only for wiping your ass, or starting a fire!

At that point in time, both physical gold and silver, will show their true valuations.  

Sat, 10/13/2012 - 12:41 | 2885110 Silver Bug
Silver Bug's picture

Gold becomes more in demand as people panic. This is the way it has always been.

 

http://jimrickards.blogspot.ca/

Sat, 10/13/2012 - 20:24 | 2885858 Newager23
Newager23's picture

I find it amazing that most of my family and friends know that I invest most of my money in gold and silver, but they do not join me. Instead, they say things, like "How is your silver investment doing?" I never get questions about how to invest in gold and silver. And I have even written a book on the subject: How to Invest in Gold & Silver: A complete guide from an investor's viewpoint (available on Amazon). If my friends don't care, then who does? Practically no one. This why only 1% have a significant amout of their assets in gold or silver.

Gold and silver continue to rise and continue to reveal their value, still people shy away? Why? It mystifies me. I think it comes down to the herd mentality. No one wants to be perceived as "different", and prefer to follow the crowd. There is a fear out there that if you invest in gold, not only are you perceived as different, but anti-American or even a nutcase.

This is why I don't get any questions from friends. They don't want to go down that road. Instead they want to go the mainstream route. This is also why Warren Buffet's remarks about gold hold so much power over people.

This fear of being seen as an outcast if you buy gold or silver is currently pervasive. But I think it is going to eventually breakdown. At some point the stronger fear of taking care of yourself and your family is going to kick in, and when it does you will see a psychological shift. I call this the flip, and I think it’s coming. When this flip happens gold will no longer be a risk-on trade, but the ultimate risk-off trade.

Remember when EVERYONE was talking about real estate in 2004 and 2005? Well that same thing is going to occur with gold and silver, although not to that extent. Get ready for the flip, because it's coming.

www.goldsilverdata.com (for mining stocks)

Sat, 11/10/2012 - 01:51 | 2967259 Seer
Seer's picture

"Remember when EVERYONE was talking about real estate in 2004 and 2005? Well that same thing is going to occur with gold and silver, although not to that extent."

I'm thinking not.  Reason being is that I don't see loose credit for gold (unless you're one of the big banksters).  People are BROKE, and the assets that they might have of value will become less and less valued (flooded market as everyone is dumping their HDTVs, Hummers and horses [I live in horse country and man oh man are people bailing fast!]).

Sat, 10/13/2012 - 11:55 | 2884870 hawk nation
hawk nation's picture

The banksters are trying to keep a lid on the boiling pot of gold and when it finally blows it should be an epic move up with no sellers of note participating

Sat, 10/13/2012 - 12:46 | 2885126 SilverDOG
SilverDOG's picture

hawk nation,

SIlver is contained in a pressure cooker, and the pressure is rising.

Kaboom! as there is only 1/3 as much available compared to gold.

"Stay thirsty my friends"

Sat, 10/13/2012 - 22:11 | 2885998 Tapeworm
Tapeworm's picture

Sure, and there is 1/100,000 Rhodium as to silver, so what?

 Your comment proves that you do not understand why Au/Ag were money.

Sat, 11/10/2012 - 01:55 | 2967268 Seer
Seer's picture

I hear that rare earth metals are also rare.

At some point rarity becomes a lead weight.   When people realize that there's really no hope of themselves actually own/possessing something then they're not likely going to be all fired up about it...

Sat, 10/13/2012 - 12:52 | 2885140 eddiebe
eddiebe's picture

Sorry to disagree at least with the second part of your statement.

 The lid will not blow off, and even if it did, I would bet the banksters are the ones that will profit the most. The rules will be changed long before there is a chance of a true parabolic event and if it does happen a:The banksters and their political lackeys will be front runnning and b: The vast majority of people will beg their central banks to make it stop because they will have no gold and won't be able to buy food let alone toys with their worthles fiat.

Sat, 10/13/2012 - 13:12 | 2885183 SilverDOG
SilverDOG's picture

Your theory is not incorrect, only laden with immense variables. 

Historical references beg to differ when viewing individual countries.

USGS 1998-2000 global study declared silver's extinction(mine extractability) in 20 years.

Ore content is verifying. 

So even industrial supply/demand will force monumental rise in value.

The banks have cursed themselves; in the western world.

Sun, 10/14/2012 - 10:27 | 2887121 ATM
ATM's picture

How does an industrial commodity such as silver then retain it's use as a monetary store? 

This dual use never made sense to me. If it is consumed, as silver is, it is not a good store of wealth. It is nothing more than any other depleting commodity such as oil. You can make money on it as supply shrinks but the problem is the market will figure out a replacement for it.

It looks more like whale oil to me than gold whose real use is as nothing but money.

Sat, 11/10/2012 - 02:11 | 2967289 Seer
Seer's picture

"So even industrial supply/demand will force monumental rise in value."

What is going to prop up the demand for the products pushed out the butt-end of the industries that will be so busy buying up all that silver?

Careful about overlooking the fact that you cannot force people to buy stuff.

And what passes for "industry" today is not what we'll be seeing in the future.

Sat, 10/13/2012 - 11:55 | 2884875 Abitdodgie
Abitdodgie's picture

All I know is that the price will NOT move untill they say it can , forget charts and graphs they mean nothing.

Sat, 10/13/2012 - 16:19 | 2885500 Dr. Sandi
Dr. Sandi's picture

When the wheel on the financial donkey cart breaks, even the big boys won't be able to coax it into town with their pretty words or their threats to the poor donkey.

Sat, 10/13/2012 - 11:57 | 2884937 No Euros please...
No Euros please we're British's picture

Seem to think a few weeks back everyone was getting excited about the golden triangle. Seems to me all we got was a golden shower from the bullion banks. BTFD.

Sat, 10/13/2012 - 11:57 | 2884949 VonManstein
VonManstein's picture

JPM asset management advertising on local london radio. time to go short then

Sat, 10/13/2012 - 11:58 | 2885004 VonManstein
VonManstein's picture

and long XAG

Sat, 10/13/2012 - 12:00 | 2885039 Conax
Conax's picture

Silver, bitchez.

I finally got one in there..

Sat, 10/13/2012 - 12:02 | 2885041 Dre4dwolf
Dre4dwolf's picture

They are just trying to keep gold prices down, because if gold and silver shoot to the moon people are going to start taking notice and dumping paper dollars all over the freaking world.

 

Sat, 10/13/2012 - 12:02 | 2885042 Dr. Gonzo
Dr. Gonzo's picture

Can Jon Corzine rehypothicate gold mining shares like he can bullion? I'll probably just stick to coins since I'm not sure.

Sat, 10/13/2012 - 12:50 | 2885135 SilverDOG
SilverDOG's picture

Dr. Gonzo,

Possession is 9/10ths of the law.

"Keep stacking my friends"

Sat, 10/13/2012 - 13:08 | 2885177 topspinslicer
topspinslicer's picture

Since we appear to have become a land of just men rather than just laws coins are just great 

Sat, 10/13/2012 - 12:13 | 2885047 JustObserving
JustObserving's picture

Gold does not have to be a Giffen good for its price to rise.  The total gold bullion in the world is about $4 trillion and world debts are on the order of $100 trillion and unfunded liabilities are on the order of $500 trillion. The world is awash in paper fiat.  Hence the constant attacks on gold to keep the fiat ponzi going a little longer before the inevitable collapse.

If you think that gold is overpriced, please note that US debt and unfunded liabilities rise $8.3715 trillion a year and just the value of land in Beijing is $20 trillion.

As incomes and wealth rise in China and India, demand for gold will continue to rise since gold has traditionally been money in those cultures.

Gold is far from being a Giffen good.  A vast and growing amount of paper fiat is available to purchase a finite amount of real money.

Sat, 10/13/2012 - 12:25 | 2885083 cynicalskeptic
cynicalskeptic's picture

Thinking pretty much the same.....  it's not that the price of gold is going up all that much, it's that the VALUE of the paper money used to purchase it has been going DOWN.     

I could make the same argument about food being a Giffen good.... the price keeps going up but I've got to buy more of it - though in this case the demand is also spurred by growing kids.  Nonetheless, the price is going up at a far faster rate than my increased consumption.

Sat, 10/13/2012 - 13:05 | 2885169 CrockettAlmanac.com
CrockettAlmanac.com's picture

 

I could make the same argument about food being a Giffen good.... the price keeps going up but I've got to buy more of it

 

Just that was discussed in the article. Did you read it?

Sat, 10/13/2012 - 13:52 | 2885275 OutLookingIn
OutLookingIn's picture

Probably not!

Try buying ANYTHING with worthless currency!

Modern case in point - Try buying some rice in Zimbabwe with ZIM dollars?

Bad currency drives good money into hiding. Try buying gold with ZIM dollars?

Same thing is staring the US dollar in the face - it is it's fate as the printing speeds up.

Sat, 10/13/2012 - 12:07 | 2885053 BeetleBailey
BeetleBailey's picture
Is Gold A Giffen Good?

All I know is that it's been fricking, frackening, fecking, fuckin GOOD to me....

Sat, 10/13/2012 - 12:08 | 2885057 Marco
Marco's picture

Were MBS's pre-crisis a Giffen good?

Sat, 10/13/2012 - 12:26 | 2885084 cynicalskeptic
cynicalskeptic's picture

Tulips in the Netherlands?

Sat, 10/13/2012 - 12:52 | 2885141 SilverDOG
SilverDOG's picture

Derivatives.

Quadrillions of 'em.

Sat, 10/13/2012 - 12:46 | 2885127 blunderdog
blunderdog's picture

How about McMansions?

Sat, 10/13/2012 - 12:10 | 2885060 caimen garou
caimen garou's picture

don't really care what anybody else thinks in the land of paper pushers,I like my hard assets, gold and silver is at the top of my list!

Sat, 10/13/2012 - 12:19 | 2885068 Temporalist
Temporalist's picture

"everybody was bullish and that it was a crowded trade"

I've heard that before too on the financial "news" outlets by "analysts" and that was around $600 and $800 and $1000 and then $1100 and $1200 and then it was way overcrowded at $1300 which it would certainly crash back to from $1400 and $1500 was way too high but $1600 was ridiculous so $1700 was unobtainable...

Sat, 10/13/2012 - 12:21 | 2885073 PUD
PUD's picture

IMHO I think it's an equal sickness that men would lust for a yellow mineral that fouls the planet with toxins from its extraction, makes working slaves of people digging for it, has limited industrial use and is devoid of all nutritional elements.

If you really cared about a "currency" that had merit you would be advocating for one backed by real assets in a broad basket of actual needed goods and services.

One unit of money could represent a given quantity of corn, wheat, fuel, labor, timber, cotton etc

If you knew how much environmental damage is done in pursuit of this cosmetic thing, you might not sing its praises so highly

Sat, 10/13/2012 - 12:42 | 2885098 Temporalist
Temporalist's picture

Well your opinion sucks; honestly.  Every commodity you mention is consumed or is perishable.  One of the most important reasons gold is money is because it is not perishable, hence the majority of it still being in existence and continuing to represent money.  Do you still have the corn your grandma had?  Or maybe you kept a jerry can of your grandpa's favorite gasoline?  Maybe you still have a 30 ft high pile of timber that you'd like to exchange for a car?  And labor, is all labor equally divisible and infinitely so?  Is being a "secret shopper" as valuable as a dentist or car mechanic?

 

I suppose you don't ever drive a car or have a barbecue because certainly extracting that horrendous stuff that makes labor productive and heats homes or cooks food is wrong and you'd never abide by it.  Or you definitely don't use electricity because coal is the devil's feces and you wouldn't dream of using an electric light or god forbid the internets.

 

You are a fraud and you've poisoned your own mind with the idea that people "lust" after gold and that it is "cosmetic".  As if people don't lust after paper money or anything that represents wealth and power.  You think if a commodity based fiat were in effect people wouldn't "lust" after it?   People lust after becoming YouTube sensations by breaking flourescent lights over their own heads.  And you think gold is the problem?

Sat, 10/13/2012 - 12:53 | 2885143 PUD
PUD's picture

Food is a requirement. Gold is not a requirement. Clothing is a requirement. Gold is not a requirement. It is attitudes like yours that foster the selfish destruction of things. It is one thing to want the basic elements of life it's another to seek your fortune on the mis-fortune of others.

Sat, 10/13/2012 - 13:07 | 2885174 DoChenRollingBearing
DoChenRollingBearing's picture

Gold has relatively few uses, that is one of the reasons why it CAN be a store of value.  And besides, humanity (central banks, jewelry owners, stackers, etc.) has ALREADY CHOSEN gold as their store of wealth.

Grandma's clothes?  Grandpa's beans?  Your uncle's diesel fuel for his truck?  Not so much.

Sat, 10/13/2012 - 19:01 | 2885206 SilverDOG
SilverDOG's picture

The assumed value today of gold is in $$$.

Whereas in reality gold stores TIME.

As one does not purchase lettuce for lettuce value. One purchases the time which

was expended in order to produce.

Sat, 10/13/2012 - 13:08 | 2885176 Bay of Pigs
Bay of Pigs's picture

Not a 'requirement'? LOL.

Maybe go read a book on golds 5000 year history as money and get back to us Einstein.

Fri, 11/09/2012 - 23:30 | 2967055 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The best book to read so to learn about money is the dictionary.

Go read the definition of money:  it must store value/wealth. 

Then take your beloved dollars and throw them in a furnace and see how well fiat maintains its intrinsic value.

Wife Cooks Money That Husband Hid In Oven:

http://www.huffingtonpost.com/2012/07/26/family-destroys-15k-hidden-oven_n_1706896.html

Sat, 10/13/2012 - 13:20 | 2885196 CrockettAlmanac.com
CrockettAlmanac.com's picture

 

Food is a requirement. Gold is not a requirement.

 

Division of labor is not possible without money. Gold functions as money better than any other substance in part because it is not widely consumed on a day to day basis. If you abandon sound money you make it impossible to provide billions of people with food, energy and other goods. So if you live on a packed planet where food is a requirement then division of labor is required to feed those people and money is required to regulate the voluntary exchanges which make the market work. The best money is gold. But if you want to deal in chits representing baskets of corn and kerosene I won't try to stop you.

Sat, 10/13/2012 - 23:44 | 2886105 RockyRacoon
RockyRacoon's picture

I think Johnny Bravo is back!  Or is it just that these people crawl out from under rocks periodically?

Sat, 10/13/2012 - 13:40 | 2885246 Temporalist
Temporalist's picture

You are so full of shit you probably wear diapers and a bib because you never know which end it will spurt from.  I wouldn't wear your hats too tight or it may come out your ears too.

 

Gold is a requirement as MONEY is a requirement of exchanging goods.  Gold exists as money because people exist in a complex society.  Perhaps you should move back into a cave.

 

Incidentally clothing is not a requirement in many places it is just a social norm. 

 

And what misfortunes of others are you talking about?  Gold is not responsible for the foibles of man.  You sound like a misanthrope who would prefer the planet be left all to yourself so that it can't be exploited by those mean other people that want to leave the jungle and walk on two feet. 

Sat, 10/13/2012 - 20:42 | 2885892 Toronto Kid
Toronto Kid's picture

Even the Bible - the Old Testaments now, not the newer ones - had no issues with gold as it helped facilitate the trade of goods that could not normally be traded. If you had sheep and wool to trade, you could sell your sheep and wool in the market once a year and be given gold or silver in return for them. As you needed, or as things became available, you could exchange that portable form of your sheep and wool for things you needed, like new sandals, or salt, or dried apples, or perhaps replace your knife.

"Selfish destruction of things" is a foolish comment. Things are meant to be used. Gold is merely a portable form - an exchange - of these things we all require. It does not rot, it stores well, and can be transported easily. Gold, in my case, is the excess product of my labour that I have saved so I may enjoy the products of my labour when I am too old or sick to work.

It's interest that the Bible and the three religions based off the Bible object to. And it's interest that I think you should object to, not gold.

Sat, 10/13/2012 - 13:47 | 2885262 Lore
Lore's picture

"Well your opinion sucks..."

I think PUD was kidding.

You were kidding, right PUD?

Sun, 10/14/2012 - 07:02 | 2886648 millennia
millennia's picture

Couldn't agree more.

 

 

 

 

 

Sat, 10/13/2012 - 12:45 | 2885123 blunderdog
blunderdog's picture

Wanting to carry a sidearm in a demilitarized zone wouldn't be called "lusting after a handgun."

Sat, 10/13/2012 - 12:59 | 2885155 SilverDOG
SilverDOG's picture

8 lbs pesticide for every 1 lb cotton.

Corn #1 consumer of fertilizer(mostly petroleum based) in the world.

Petroleum reaching 1 to 1 ratio of extraction.

All listed consume vast amounts of fuel.

Microcosm is the solution, intended or resulting in.

 

Sat, 10/13/2012 - 13:10 | 2885179 PUD
PUD's picture

"need" vs "want" and there does exist organic foodstuffs...you cannot rationalize a desire by faulting the flaws in "needs"

Sat, 10/13/2012 - 13:18 | 2885199 SilverDOG
SilverDOG's picture

Have an big OG garden and OG blueberry field acreage. 

Both are need, as purchasing OG is creeping beyond income bracket.

Sat, 10/13/2012 - 23:54 | 2886123 Diogenes
Diogenes's picture

You are right. The cure for the sickness? An honest government that regards inflation as a despicable cheat not a clever way to "stimulate" the economy. If one government made it their policy to have a stable currency they would rule the financial world the way England did from 1815 to 1915.

Sat, 10/13/2012 - 12:31 | 2885095 the 300000000th...
the 300000000th percent's picture

I don't really care what they say its worth in dollars, i refuse to value it based on their manipulation, buy it if you can afford it. Hold it don't let them shake you loose with their manipulation. Their game will end soon enuf. 

Sat, 10/13/2012 - 12:44 | 2885121 Urban Redneck
Urban Redneck's picture

post hoc ergo propter hoc

 

 

Sat, 10/13/2012 - 12:51 | 2885138 blunderdog
blunderdog's picture

This guy is really reaching.  I'm at a loss as to what purpose is served by shoehorning gold into this model.  It seems like rationalization for gold bullishness, but there are so many superior arguments.

Urban Redneck nailed it.

Sat, 10/13/2012 - 13:28 | 2885213 CrockettAlmanac.com
CrockettAlmanac.com's picture

Nothing wrong with discussing the same old thing from a new perspective. I found the article to be interesting and thought provoking and I learned a few new words, too.

Sun, 10/14/2012 - 14:22 | 2887918 blunderdog
blunderdog's picture

The problem is it's WRONG.  Gold certainly is NOT a Giffen Good.  I don't really care, but if anyone is taking the premise seriously, they're being misled.

Sat, 10/13/2012 - 12:57 | 2885153 My Days Are Get...
My Days Are Getting Fewer's picture

I have had 90% of my investment money in gold and silver and a couple of gold miners for more than 5 years.  With zero interest being paid on money market funds, I do not know where else to turn.  I reviewed my tax returns from the late 1990s and early 21st Century.  I taxed a lot of money market interest back then. The interest I get on my Government IOUs is "rent" for the use of my money.  The rent is now zero.  That fact alone should suffice as proof that fiat money is a crap investment.

Sat, 10/13/2012 - 13:01 | 2885159 topspinslicer
topspinslicer's picture

Thankfully for those of us with many bills to pay there is also the very nice alternative called silver

Sat, 10/13/2012 - 13:13 | 2885184 resurger
resurger's picture

Excellent read, 

Am pleased to hear that GOLD & Silver is a Griffen Good!

 

Sat, 10/13/2012 - 13:46 | 2885260 Temporalist
Temporalist's picture

Freakin' sweet!

Griffin btw http://familyguy.wikia.com/wiki/Peter_Griffin

Sat, 10/13/2012 - 13:14 | 2885187 Peter Pan
Peter Pan's picture

This may sound odd but US government bonds portray some of the characteristics of Giffen goods. More and more of them bought as their price increased due to a drop in the interest rate. In fact this is insane and only goes to show how twisted this world is.

Sat, 10/13/2012 - 13:21 | 2885203 Peter Pan
Peter Pan's picture

The best investment in gold is the one you can pass onto your children as the ultimate form of wealth protection when you die. I would rather rely on gold and history as the true fonts of wealth. Government printing presses and computers will never be the source or storage of true wealth.

Sat, 10/13/2012 - 13:37 | 2885233 FreeMktFisherMN
FreeMktFisherMN's picture

On a true gold/free money standard, prices would usually go down. Think about that for a second. One holds an ounce of gold, and as more things get built/food gets grown + more services, it takes less gold (the scarce item) to have to give up to get those services. 

Gold and silver do not just preserve value. They gain value. Obviously there are other supply and demand factors that fluctuate, but it is remarkable to think how awesome that'd be to have prices going down. The interest would just get baked into the gold as it sits there. No need to actually figure out and add some amount for interest. The market as a whole would assess/account for the increased value over time.

Sat, 10/13/2012 - 20:14 | 2885852 Papasmurf
Papasmurf's picture

Well, we can't have prices going down.  That would cause living standards to rise.

Sat, 10/13/2012 - 13:39 | 2885244 icanhasbailout
icanhasbailout's picture

It's Giffen this time

Sat, 10/13/2012 - 13:40 | 2885248 orangegeek
orangegeek's picture

17 January 2012 - King World News' "London Trader"

"They (the Chinese) have recently taken another roughly 150 tons away from the Western central banks."

 

I love this line the most.  Between building cities that are empty, the Chinese, wait for it, have outsmarted the "Western Central Banks".  Yes, the communists have outwitted the capitalists once again, just like the USSR did in the 1980's.

Recent spot gold - daily.

http://bullandbearmash.com/chart/gold-today/

Gold priced in US Dollars will have a hard time staying up if the US Dollar rises.  And the US Dollar will rise (57% weighted against the Euro) if the Euro falls - but we know that Europe has recovered and the socialists are back on track to prosperity - they just won the Nobel Prize so they must be all better now.

 

 

Sat, 10/13/2012 - 14:27 | 2885325 OutLookingIn
OutLookingIn's picture

At least the Chinese cities are NEW!

The fast emptying US cities are decrepid, decaying, cesspits of poverty and crime, that are bankrupt!

Detroit, Camden, etc. Yup, those Chinese sure have the nerve buying up all that gold!

Have you checked out how much gold the Russian's have now? More each year. How about all that gold in Ft. Knox? Last time the door was open to the public, just a crack mind you! Was in 1954! Almost 60 years ago! WTFIUWT?

Sat, 10/13/2012 - 17:32 | 2885622 DosZap
DosZap's picture

IF GOLD/PM's in General, were a worthless investment/INSURANCE, then NO Central Banks would have, and are still loading up on.

China,Russia, India,Asia,M E, etc,etc, would be accumualting as fast, and as much as they can get their hands on.AND they are.

The CB's hoarding Au  ALONE, should answer ANY questions about WHY one should hold, and accumulate.

End of story.

Sat, 10/13/2012 - 17:56 | 2885662 jimmyjames
jimmyjames's picture

Gold priced in US Dollars will have a hard time staying up if the US Dollar rises. 

***********

If that were true-considering the USD is exactly where it was in 2005-then shouldn't the price of gold be exactly where it was in 2005?

Sat, 10/13/2012 - 13:53 | 2885273 kill switch
kill switch's picture

The symbol for silver is "A" and "G"
Silver as a very interesting subject for me
Silver is a little harder than the element gold
You should go buy some if you know where its sold
Silvers atomic number is 47
and its density is close to eleven
in todays world silver is worth alot of money
I bet you could use it to buy alot of honey
Silver is hard to find in its pure state
Its not something you would want to use as fishing bait
Silver is also used to make some of our mirrors
Thats all the information that your going to hear

Sun, 10/14/2012 - 17:25 | 2888638 kill switch
kill switch's picture

 

I propel silver and I get fucking down arrows,,, No need to explain my post as the three are clueless. In some cases ZH has now been infiltrated by armatures....

Sat, 10/13/2012 - 14:12 | 2885302 monopoly
monopoly's picture

Well done post. Thank you Tyler.

I sit here, watch the usual correction in gold, silver and quality miners and I just smile. I realize charts, overbought, oversold and all the other matrices about investing and as many here know have been doing this for at least a week or two. But I find it beyond comprehension that anyone with 1/2 a brain, (politicians excluded as 1/2 is required), does not realize or does not look around them as to what is coming down. How can people not understand the ramifications of what the "inmates" are doing. So, I sit through the corrections, again and again, knowing we will prevail. 

Why is it so hard to find a Jefferson, Truman, or Eisenhower? Why is power and money all that matters to the twits that run our banks and our country? Actually the Same Twits run our banks and country. If we had term limits for the incompetent ones, say two 6 year terms, at least during the second term there is a modicum of hope that something true would be accomplished. Ahhh, why am I wasting words. We all know how this will end. And those that believe our govt., watch Diane Sawyer or Brian Jennings will be the first to look for a life vest that is no longer available. 

Long live Zero Hedge.... where Truth reigns.

Sat, 10/13/2012 - 14:27 | 2885326 ziggy59
ziggy59's picture

Giffen Good is almost better than Effen Good

Sat, 10/13/2012 - 16:30 | 2885516 Dr. Sandi
Dr. Sandi's picture

Effen Eh!

Sat, 10/13/2012 - 14:33 | 2885335 DowTheorist
DowTheorist's picture

There is technical tailwind for gold and the the gold miners.

On October 4, something important happened in gold and silver that may be easily overlooked, and that accounts for gold's strength:

On that day, gold and silver displayed a very bullish signal long and short term, since both broke out the previous highs. We are “in the clear," in spite of the current timid pullback. Such breakout confirmed the primary bull market.

Furthermore, if we look at closing prices (not intra-day highs), SLV is also quite strong.

Here you can find additional information as to gold's strength:

http://bit.ly/QK5T0C

Under Dow theory such primary bull markets have long legs. We are not talking of a "tradable" rally but of a power move that may last 1-2 years and witness a price gain exceeding 40%. Here you have the details:

http://bit.ly/Ooer8T

 

The miners have a bull market on their own under Dow theory:


http://bit.ly/RMIbg4


 


Sat, 10/13/2012 - 14:53 | 2885364 oddjob
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