Guest Post: Macro Commentary - The Cost of Fiat Money and Gold

Tyler Durden's picture

Submitted by Brian Rogers of Fator Securities

Macro Commentary:  The Cost of Fiat Money and Gold

Markets are trading sharply lower this morning after yesterday’s late afternoon rally on the change in language in the Fed statement that will keep short interest rates essentially at zero until 2013.  As I have stated before, I believe they will ultimately be forced to keep rates low forever, or at least until the bond market vigilantes eventually rise up and shock the world by demonstrating that indeed you can fight the fed.  Which begs the question, who will be the George Soros that breaks the US Fed?  We’ll see.  In any case, by 2013, it’s highly likely that the US will have over $16tr in debt.  If the average rate across the curve in 2013 is only 4%, which is low by any historical standard, then our annual interest payment will be over $600bn, or almost 30% of annual tax revenues.  So the Fed faces problems on a number of fronts.  They have to be seen as actively trying to do something so they continue to manipulate the price of money to artificial levels which only serves to send misleading signals throughout the economy.  QE1 and QE2 have come and gone and yet unemployment remains sticky above 9%.  Their balance sheet remains abnormally large and their policy tools to manipulate the market is dwindling.  Now add to that the reality of the math of our huge fiscal debt and deficits.  No matter which way you spin it, we have some tough times ahead that will involve some asset prices falling (commercial/residential real estate and other levered assets), other asset prices rising (agricultural land, commodities, gold/silver) and the façade that the Fed is all-powerful to come crashing to the ground. 

Gold bubble?

Much ink (and binary 1s and 0s) has been committed to the topic of whether or not gold is in a bubble.  For the record, my view is a clear and unequivocal no.  There are a number of factors that help form my opinion, everything from the estimate of the ratio of paper gold to physical gold (45:1) to the amount of outstanding USD vs the total value of all gold currently above ground (hundreds of trillions vs. approximately $6tr).  In my opinion, gold isn’t in a bubble, but rather is reflecting the largest bubble on the planet, US Treasuries.  Over time, foreign central banks will hold fewer and fewer US Treasuries as Chairman Bernanke and company consistently devalue the dollar.  As this process unfolds, many central banks will opt to own precious metals, commodities and commodity based currencies.  However, with most foreign central banks holding over 60% of their reserves in USD, the flight out of dollars and in to other alternatives will cause bottlenecks and price spikes which could cause some assets to see their prices rise exponentially.  Of course, this isn’t to suggest that gold won’t fall in price from time to time, it certainly will.  In fact, given the recent price rise over the last few days, a correction in gold could be forthcoming soon.  But given the strong demand for alternatives to the USD, gold will always be bought on dips.  In my view, investors should not view gold as a commodity but as a currency.  True, you can’t buy much with gold these days given our legal tender laws, but it will generally protect your wealth better than other fiat currencies and certainly better than the soon-to-be devalued US Treasuries once rates eventually start to rise.  Further, as the world searches for an alternative to the USD as reserve currency, gold is almost certain to find some kind of role in that new economic reality.

Gold price sell target?

Given my views on gold, I’m often asked what price I’m using as my sell target.  I actually don’t have an upside price target for gold.  As I mentioned above, with the ratio of paper gold to physical gold somewhere in the neighborhood of 45:1, it doesn’t take much to realize that even a slight increase in the demand for physical settlement could bring the whole paper gold market to its knees and send gold’s physical price skyward.  However, my view is that when this is happening, it’s very likely that real estate will also be tanking.  Why?  A rush to physical gold which could ignite a parabolic move will very likely be happening due to an extremely fearful economic environment.  This means it’s likely that bank lending will be at low levels if not completely stalled.  At the same time, the government is talking up the idea of defunding FNMA/FHLMC and removing the mortgage interest deductibility benefit.  Some reports have shown that the US government is currently making somewhere between 90% and 95% of all new mortgage loans at relatively low equity levels (<10%).  In other words, when we finally get the TBTF banking crisis that was delayed in late 2008/early 2009, the government won’t have the ability to safeguard the entire system as their own balance sheet will be called into question.  Therefore, I can envision a not-so-unlikely scenario where gold will be rallying, interest rates rising, bank lending drying up and the government’s ability to backstop housing via FNMA/FHLMC severely limited.  End result: most real estate tanks to cash levels.  Americans will still buy and sell property, but they will only be able to afford to pay what they have in cash, which is already the case in many countries, as financing for a large swathe of the market will dry up.  With real estate finally tanking, the endgame of the TBTF banks will be written.  However, this will be the level where I sell my gold, regardless of its current price, and buy real estate with both hands.  At that point, where we finally trade for cash in the majority of the market, real estate will represent an excellent value play as the price paid will be at multi-decades low and yet with the ability to receive rental income, you will be better off over the long run than if you simply held the non-interest bearing, non-dividend paying yellow metal.  So holding gold isn’t the ends, it’s the means.  But when you swap your gold for another asset, you must make sure you aren’t over paying.  As long as mortgage financing remains abundant in the US, mortgage prices will remain artificially high.  Once cash prices return to the US, however, real estate will represent the best way to create multi-generational wealth.  However, for anyone buying now, caveat emptor.  –Brian


* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.

This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

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Long-John-Silver's picture

$56,000 Gold

GATA’s Douglas Makes a Case for $56,000 Gold and $936 Silver

dlmaniac's picture

Sell target? When 3 OZ gold is equal to 4 times DowJones30 I take profit.

Boston's picture

Too bad you can't go back far enough (only 12 years) to determine the low end of the long-term range for IYR/gold, like you can with Dow/gold.

It would be nice to get a hard target for the near-cash valuations in RE (vs. gold).

mayhem_korner's picture

Implies the current 44:1 Au-to-Ag ratio expands to 60:1.  I think silver has proportionately more upside once the paper market and physical shorts are cleared.  Gold is not as supressed now because so many CBs are holding and hoarding.  Ag on the other hand is being held down in desperation by the big shorts at the Morgue and Crimex.

Also, if Au rises to $56K, the dollar-denominated price will no longer be relevant.  I like to think in terms of how many acres of land, barrels oil, etc. an oz buys.

My two cents.

TheGoodDoctor's picture

There will be parity with silver and gold at some point. And a 60 to 1 ratio is ridiculous. More like 10 to 1 then parity.

pops's picture

What will prevent "them" from simply taxing it away from you?

Long-John-Silver's picture

You have hit on one of many reasons Real Estate values are plunging.

Chief KnocAHoma's picture

Tax rates in GA and rural counties are low. Very few dependants to support, and land will be the next to last thing to go. First will be dollars on Wall Street or in 401k. Next will be bank deposits. Property taxes are collected at state and local levels, so they also have to overcome exiisting laws.

It ain't fool proof, but taxing land in GA by the Feds will not be easy. Did this answer your question?

I am The Chief

Pegasus Muse's picture

What will prevent "them" from simply taxing it away from you?

If Au gets to $56K/oz there might not be any of "them" left to levy taxes.

Scisco's picture

If the US begins to heavily tax gold then it will likely go underground and paper will burn. Furthermore, the price of gold will likely adjust to accommodate the tax. Either way, it will likely reek of desperation and may undermine the full faith and credit backing of fiat.

laomei's picture

i live in a country where capital gains taxes are for businesses only?

kumquatsunite's picture

Aren't they already? With a 35% capital gain tax you first have to Gain 35% before you can even call it "break even"? And don't forget the "risk factor" that tells us you may not (tee hee) always be if you've bet the wrong way...bye bye money...

Sgt.Sausage's picture


Just no.

I can't even believe someone with the brains to follow ZH just made such an ignorant and stupid comment.

Let me help you out: if you make one dollar in gain, at 35%, you keep 65 cents, UncleSugar gets 35. You're 65 cents ahead, even thou you made less than a single percent gain.

Here's your clue: It's a tax on your GAIN, Not on your cost.

Moron, bitches.

laomei's picture

yea, but over here if i scalp gold and make one dollar, i keep 100% of it.  no taxes, no questions asked.  and fuck me if im going to "self-report" any of this to the us.

KeyserSoze's picture

An Ode to Gold.

#Thank you for coming home
I'm sorry that the chairs are all worn
I left them here I could have sworn
These are my salad days
Slowly being eaten away
Just another play for today
Oh but I'm proud of you, but I'm proud of you
There's nothing left to make me feel small
Luck has left me standing so tall
Always believe in your soul
You've got the power to know
You're indestructible
Always believe in, because you are
Glad that you're bound to return
There's something I could have learned
You're indestructible, always believe in#

JollyRoger's picture

Inflation should kick up a notch once the Treasury begins to drastically increase the proportion 20y and 30y long dong bonds it sells.  Then we'll see some serious moveement in PM's IMHO

Taku's picture

Mexico offering 100 year bonds.

JollyRoger's picture

I'll sell anyone who wants one, a 1000 year bond.  My great great great great great great great great grandkids are good for it.....I promise :)

cynicalskeptic's picture

I've got GOLD BACKED Imperial Russian bonds bought a hundred years back by great great grandparents......   how much safer could you get?

slackrabbit's picture

Tis a pity his dad's student loan will bankrupt him before he can pay it off

lookma's picture

who will be the George Soros that breaks the US Fed?

The ECB, China, Russia, India, etc.. Its not about breaking the FED per se, the game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage.  

I wonder what these other nations are gonna use in lieu of the dollar as a reserve/reference point?

That would be Gold.


SilverRhino's picture

3 ounces of gold for a house ... That's a monetary colllapse ... timing is a bitch.

Sudden Debt's picture





never mind....



narnia's picture

Gold is not a bubble against quickly depreciating fiat currency, but it is a bubble vs. other assets with future value you can currently get for $1,800.  if you think you are going to be able to acquire those same assets for an ounce of gold when the system implodes, you are kidding yourself.

the gold & siver hysteria is starting to get out of control.  inflation hedgers need some new opportunities.

Snidley Whipsnae's picture

"if you think you are going to be able to acquire those same assets for an ounce of gold when the system implodes, you are kidding yourself."

Yes, I think exactly that. If you don't believe it can happen then you are a poor student of history.

What do you think will happen to the fiat dollar price of gold when all the billions of FRNs that Benny has printed come rushing out of bank vaults into circulation?

If you want to know read what happened during the Weimar Germany hyperinflation?

narnia's picture

I'm certain you are not going to be able to purchase 75 cases of good beer (which would be 175 cases without the taxation effect which will be eliminated) for an ounce of gold after reset.

Snidley Whipsnae's picture

Don't get out much, do you? I have known the owner of a local liquor store for over 30 years and if I walk in there and plunk down a monetary metal for a beer/liquor purchase there will be only one question asked... How much is gold/silver going for today?

If you think gold/silver are'nt money already then you are traveling in the wrong circles.

narnia's picture

so, because i don't agree with your valuation of gold & silver, then i don't believe gold & silver are money?  you must have pulled that out of the comeback edition of barak obama's community organizing manual.

one ounce of a barely useful symbolic substance traded as money is not as valuable as a farmer's time, intellectual capital, land & maintenance cost in growing the inputs, the transportation of those imputs, the energy, intellectual capital & materials going into making great beer, the transfer of those materials into 75-175 cases of bottles and packaging, and the delivery of all that to you fresh.  if you think it does, you're caught into a hysterical version of reality.

Reptil's picture

Gold is behaving like money at this moment. If you didn't see that you've not been paying attention.

narnia's picture

of course it is.  that's exactly why i've called it money in my posts.  

ATM's picture

So let me get this straight narnia. Your thesis is that gold valuation is far too high currently when measured in terms of real goods?

If that's right then the uestion I have is how can you determine the proper valuation if not by common usage? The old roman guide that an ounce of gold would buy a good mans suit still seems to apply right now. $1800 will buy a nice suit, not Saville Row nice but good enough that it's tough to tell the difference.

narnia's picture

my thesis is that in the great reset, assets that maintain or improve the quality of life for people will have value.  those assets that are neutral (like finance, especially) to quality of life or those constructed simply of or to support the state will have no value.  

gold and silver will be used as a medium of exchange.  what an ounce of gold will get you is largely determined by how scarce the assets with value are, how much demand will exist for them, how successful cheap labor credit becomes, and how successful barter and other alternative means of currency (like my great example of beer) become.  a quality suit will be as valuable to you as it is to someone in africa right now.  

monkeys.pick.bottoms's picture

Gold price in fiat is irrelevant. Speculation only betrays our addiction to seeing the world in dollars or euro (me guilty as well...too often). The purchasing power of real money (Ag, Au) may very well be greater than the purchasing power of 56K of today's dollars.

MoneyWise's picture

Gold price right now is in PANIC BUY mode
Later action in Gold has to be viewed
same as VIX * Value
Those who piled up at the end here, will
be burned as usual, Long investors going to be just fine, but those housewife's jumping around screen
on daily bases, going to get hurt..

Reptil's picture

Yeah... well what'd you expect. Picture you yourself Tim Geithner and Olli Rehn in a menage a trois.

Snidley Whipsnae's picture

Brian, excellent comments and article.

You and I think along the same lines. My plan is to purchase more commercial RE with current long term renters and treat them right. I like small shops that actually perform services, ie; industrial motor rewinding, honest auto repair shops, air cond companies, bakers, etc. I have some businesses that have been with me a long time. However, I will never sell all gold, even if a new currency is issued and seems to have sound commodity or PM backing. I don't trust bankers or pols and we are witness what they can do to a formerly sound economy. It's a tragedy in the making. 

I found this comment especially good: " So the Fed faces problems on a number of fronts. They have to be seen as actively trying to do something so they continue to manipulate the price of money to artificial levels which only serves to send misleading signals throughout the economy."

Now the Fed has another potential problem; ie, ANOTHER US downgrade. So, with that in mind along with all the other 'painting ourselves into a tiny corner' past actions, they have more than they can possibly handle on their plates.

vocational tainee's picture

we have experienced this kind of thing here in europe about 65 years ago. It may happen soon in western countrys all over...

cpnscarlet's picture

Narnia is highly ignorant or deluded.

Until there is mass participation in the gold trrade, there is no bubble or hysteria. Those of us financially aware during 1978-1980 know this all too well.

narnia's picture

imagine how would have IPO'd had central banks throughout the world embraced its stock as currency.  it might have even done better than it did.


LetThemEatCake's picture

Excellent commentary.

inkarri9's picture

I am familiar with GLD and IAU but does anyone know of any other ETF that may not be subject to counter-party risk or might be a safer way to play gold aside from GLD, IAU and holding actual bullion?  Thank you.

Pegasus Muse's picture

Not an ETF, but the best way to hold physical bullion outside the US, is James Turk's . 

Good physical bullion trusts are: PHYS, PSLV, GTU, CEF (all Canadian). 

Avoid GLD & SLV like the plague. 

The only way to avoid counter-party risk is to buy the physical and hold it yourself.

Ratscam's picture

switzerland SWX traded JBGOCA or for silver JBSICA
it is physical and it is USD/CHF hedged, henca double whammy!
lots of my assets there except from the physical in hand in the vault of a building guarded by dogs in a country on mars.

bbq on whitehouse lawn's picture

Cash on the barral head economy? Its been that way for most of the pass; but today?

The chaos this auther so casually writes is shocking, if not horrific.  Its not like you can walk or talk so casualy about people begging and starving in the street. Huddled outside of every big box food store with gaunt eyed children begging for food.

Thats the also the reality in many countries. So what, you want to bring that here?

Being the fattest man in the company of the starving is not my idea of a good thing.

Moving from gold into other assets is ideal if the world wasn't the stupid it is. It may become that any movement from gold into other assets is an instant loser..what then?

Humans need things gold needs nothing. It is without input. That is a powerful asset. No, input for an appreciating asset. For your entire life....What will you do. The less you spend the more you make economy.

I dont even want to think of that now. ill just be happen in the warm sun, cool wind and beautiful day. Rocks in a safe. Pointless... to the tree and the little gekco on my porch.

I was danceing in the street with a big stupid grin when gold passed 10% on yoy return. Now at 40%+ that grin is gone. Replaced with dispndance.



slackrabbit's picture

If history is a lession, when the us / german banks crashed, real estate tanked big time. Eg in deppression, cash sales were executed at 60 to in some cases 90% discounts as those desparate to sell wether either for food or to save their businesses. When no one has money to litterally 'do trade' cash prices are set by those who had liquidity. 

in any case, i'll keep hoarding, it either that or put it in the bank. And that sums it up. Even sitting on the sidelines can be dangerous unless you have physical. 

bbq on whitehouse lawn's picture

"When no one has money(accepted currency) to trade.

When its the "reserve currency" that is no longer the "accepted currency". 

I will not, turn away hungry children. Scam or not. I just cant do that.

It's harder to do if you've been there your self.

If things get so bad you are fearful of traveling, or markets need security to bypass the hungery children begging at the door..

Dont lose what makes you human. Do for your own first, but dont be the one who seeks out security for the sake of seeing or being bothered by the hungery. They have a right to ask, as we will have the right to refuse.

India... Here.

Broken, starving children. Broken by adults, to beg for change in the street or to sweep up rice in the markets.

NEVER. We must never allow that here.


Pegasus Muse's picture

Humanity may be as precious a commodity as PMs, food, water & ammo when TSHTF.


The Pianist (2002)

A brilliant pianist, a Polish Jew, witnesses the restrictions Nazis place on Jews in the Polish capital, from restricted access to the building of the Warsaw ghetto. As his family is rounded up to be shipped off to the Nazi labor camps, he escapes deportation and eludes capture by living in the ruins of Warsaw. Written by Anonymous

The true story of Wladyslaw Szpilman who, in the 1930s, was known as the most accomplished piano player in all of Poland, if not Europe. At the outbreak of the Second World War, however, Szpilman becomes subject to the anti-Jewish laws imposed by the conquering Germans. By the start of the 1940s, Szpilman has seen his world go from piano concert halls to the Jewish Ghetto of Warsaw and then must suffer the tragedy of his family deported to a German concentration camps, while Szpilman is conscripted into a forced German Labor Compound. At last deciding to escape, Szpilman goes into hiding as a Jewish refugee where he is witness to the Warsaw Ghetto Uprising (April 19, 1943 - May 16, 1943) and the Warsaw Uprising (1 August to 2 October 1944)


Look here:  'Jews living outside of the prescribed area will have to move to the Jewish district by 1st of October'
They won't get all of us, we'll...   it's too small... there's four hundred thousand of us in Warsaw!
No. Three hundred and sixty thousand, so it'll be easy.
Mama! Mama, what is it?

Twenty zlotys.
That's all we have left! Twenty zlotys!!

What can I buy with twenty zlotys?
I'm sick of cooking potatoes, potatoes, potatoes.


Dealer: That's the price. And my advice is to accept. You won't get more from anyone else.
Pianist:  But ..... but it's a Bechstein, Mr. Lipa. Two thousand.
D:  My advice is to take it.  What are you going to do when you're hungry? Eat the piano?

P: You're a thieving bastard, get out! We'd rather give it away!

D: Hey! Hey! What's the matter with you? You people are crazy!  I'm doing you a favor, two thousand, and I'm paying for the removal, I'm not even charging for the removal. 

You haven't eaten today, you're crazy .... you're crazy.


bbq on whitehouse lawn's picture

Every culture and "race" has their brutes, kings and servents.

All we can do is.. do what humanity we can during the time we have lent to us.

Its not about what is right, its about what gifts you have that you can lend to other who chose not your path but another.

Am i better then a minimum wage floor cleaner...No im worse at cleaning floors. Takes me longer and i do a worse job.

Does that mean im not a good person because im not as fast or strong or experienced as another?

The piano?

Unless you have been without food for 4 weeks, if not longer; you have no idea what that story says.

So end your stupid. The only one here who has any experience in understanding this me.

And i dont want to hear you spouting off stupid you dont even understand. Untill you experience what this means.