Gold Discussion

Well, I still haven't read the whole article yet, but I got the clue from the first paragraph....

Yes, it is so true that it is hard to believe....Believe me or not, I have ZERO faith in ALL the currencies we are talking about over here...When currencies were backed up with Gold, we were holding gold in our pockets actually, but now, whatever currency you are holding is just a piece of paper, nothing more and nothing less....

Earlier before, your piece of paper was worth a certain amount of Gold, so nobody could ever deny taking it from you in exchange for a product or a service because it was backed up by a real physical commodity....Now, suppose that a certain country runs into deep economic troubles, and let's say that your networth is in this currency, in a matter of few weeks, you can find yourself bankrupt and holding worthless paper...

I am not attacking currencies in their own, I am just saying that the strength of the currency is determined by the strength of the economy, but you can't buy milk or food or gasoline for your car in exchange for some strength in the economy, but you can buy some of them in exchange with Gold or silver....

The issue is that Central Banks are double checked sometimes, or in other words, they have 2 choices to support their economy in which both choices are losers, but they have to move a piece, they can't hold or stand still, action must be taken....So, if the action to be taken is to print more money, it's easier now than ever before, and this will hurt the purchasing power of the currency and after successive periods like this, devaluation finally comes out with its' ugly head and people get hurt in their savings...

Unless you own real assets, you are at risk my friend...


Thanks,

Nader

come on nader! have some faith!

LOL

Quoting bensonchan

Disliked

Is this article true? I just want to know how everybody think. I am not trying to advertise anything.

Ignored

The short answer is that this article is complete and utter horse****.



Milton Freidman was an idiot. It was proven categorically in both the US and UK in the early 1980's that his theories (monetarism) were invalid. The money supply is not in any way the cause of inflation.



Inflation is a "demand" phenomenon. For a very simple explanation, let us examine pocket lint. There is a certain quantity of pocket lint in the world. As you probably know pocket lint has a market value of zero. If it were determined that pocket lint could be used to cure cancer, I can guarantee you that irrespective of the money supply, the price for pocket lint would rise. How much it would rise would be a matter of how much pocket lint was required for the cure, how many people had cancer, and how much pocket lint was available.



In our pocket lint example, a doubling of the money supply is not going to change how many people have cancer, how much lint is needed to cure them, or how much is available in the world. But if the population of cancer patients doubled or the supply of lint was depleted, you can be sure that price "inflation" for pocket lint will occur.



In a world of constantly expanding population, the demand for ALL products, including labor, energy, food, cell phones, tvs, cars, etc, is going to continue increasing. It is population growth that causes inflation, so unless you would like to advocate the elimination of some excess population, inflation is a fact of existence.



An ancillary cause of inflation is the expectation of inflation. The inflation of the 1970's was not money supply related, it was caused by people raising prices in anticipation of inflation. Employers increased prices on goods in anticipation of higher wages and workers demanded higher wages in anticipation of higher prices. This created a vicious cycle that was only ended by cutting off the flow of capital circulation through punitive interest rates.



Money is NOT a commodity; it is a medium of exchange. It is the fundamental demand and supply of products and services that determines prices. We use money to compare unrelated products to a base figure. We can't answer the question of how many chairs is a car worth, but we can easily say that a chair is worth $20 and a car is worth $20k.



This stupid gold standard debate comes up again and again because only a tiny fraction of the population understands what money really is. If everyone did, they could figure out how it functions and they would be thanking whatever God they subscribe to that we have a central bank and a paper currency. The undeniable fact is that we have jobs, homes, food, and enough excess resources to trade forex only because we have a Federal Reserve stabilizing growth with a liquid exchange system.



The Fed is not out to get you and Bernanke is not stupid or the devil incarnate. The real answers are out there for you to find. You just need to ask the right questions...

Note that when you do have more money because the central bank printed more of them, you will eventually have more demand for everything, this is a "psychological" phenomenon...Gold can't be printed at near zero cost...You can print a $100 note at virtually the same cost of printing a $1 note, but the difference in cost relative to your economy & currency purchasing parity is really huge....

Printing more money means more money with the government which means more contracts to companies, higher salaries, higher production, larger revenues & profits, and thus larger amounts of money in the pocket of consumers and eventually, inflation...

If you recall how the Feds dealt with the crazy inflation of the 80s, it was by risking all or nothing through hiking rates up to 18% to force people to save and to buy their dollars once again in exchange for 10 years due notes....That was the only way to stop this crazy inflation...If this strategy failed, you would have seen the Dollar value tumbling since then, or a deep recession like the one Japan went through in the past decade...


Thanks,

Nader

Merlin, I do have faith, it's just that I am diversefying


Thanks,

Nader

To really understand the grave problems that go hand in hand with fiat currencies you need to understand the history of money. To this end I would recommend that you read The Creature from Jekyll Island.

If nothing else it will open your eyes and give you a new perspective on many of the events that go on in the world today.

The Federal reserve and the US treasury are explicitly prohibited in their governing documents from creating money. If you don't believe me, feel free to look it up.

The treasury can print bills, but it can't spend them. On anything. Period. End paragraph.

For the bills that the treasury prints to move into to the money supply, non-government financial institutions are required to exchange assets from their balance sheets. If they have no assets to trade for the cash, they can't get it. The Fed just facilitates the transaction.

The Fed can't even print money. It actually has no money of it's own. It uses the money that the banks deposit with it as reserves to conduct open market operations. It doesn't create anything becasue it can't.

Betcha your jeckyl island book or the rest of the gold bug literature failed to mention any of that important info...
PS- Trying to learn international banking and finance from a screenplay writer is probably not the best idea.

No-one needs to be able to print money. The way fiat currencies work based off of fractional reserves allows for money to be created out of thin air. That's the whole point and reason for having a fiat currency.

Let's look at how it is done in simple terms. The Treasury prints a bill, let's say with a face value of $100. The treasury can't actually use this bill to buy anything. So it deposits the bill at the Federal Reservce. With the bill deposited the treasury can withdraw $100 of money with which it can buy things.

The treasury duly spends the $100 which ends up in the hands of other people who in turn deposit the money into their regular banks. The banks in turn want to loan out that money, but they need to keep a fractional reserve of 10% with the Fed. So out of the $100 they received they deposit $10 with the Fed, and loan out the remaining $90.

The $90 loaned out makes its way to customers who in turn deposit the money into their banks. The banks can now loan out 90% of the $90, i.e. $81, and deposit the remaining $9 with the Fed.

As so it goes on and on, the $81 loaned out gets deposited which means another $72 can be loaned out, etc etc.

The initial deposit of the $100 bill by the treasury will result in more than $2800 new dollars entering the economy.

The initial $100 bill created by the treasury is just a piece of paper with the government's promise that they will give the bearer $100. It is not a real physical commodity, and the treasury can print as many of them as they want, and the Fed will honor them as faithful deposits, resulting in new money entering the economy each time one is deposited and the treasury makes a withdrawal of money based on that deposit.

If you read the book you might learn something, as I don't think you're seeing the whole picture.

If you have trouble learning it from a screenplay writer, try learning it from an economics scholar, Murray Rothbard. Available as an ebook: The Mystery of Banking

I never said money wasn't created. It is most certainly created in a fractional reserve system, but not by the government.

As you probably already know, the fractional reserve system was applied for thousands of years to the gold exchange system. Gold can very much be created from nothing just as easily as paper bills. Their both backed by faith. No more, no less.



Mr. Rothbards book is ok as a primer on supply and demand, but his theories about inflation are predicated on the misguided assumption that the purchase of government debt is the mysterious secret by which the government screws everyone. He plainly admits that his understanding (and explanation) of the process differs from that described in the "boring" textbooks on the subject. The only acknowledgement he can give to the concept of velocity is to label it arbitrary, when in fact it is critical to understanding how the money supply functions. It was velocity that proved Freidman’s theory wrong in practice. That’s why the monetarists such as Rothbard keep it so hush hush...



The debt purchase argument fails to account for the fact that all the debt purchased by the Fed in a falling interest rate environment eventually gets liquidated in a rising rate environment. It also assumes that there is an infinite amount of reserve currency to effect these purchases, which is plainly irrational if one just takes the time to think about how reserve banking actually works.



Anyone, I mean anyone, who genuinely believes that we should return to the gold standard, has absolutely no idea what they are talking about. Locking the money supply to an arbitrary commodity would guarantee an immediate world wide depression event. Maybe your money would stabilize in value (although it’s highly unlikely), but to do so price deflation of ALL the remaining asset classes would have to occur. If you think a 3% annual decline in the purchasing power of cash is terrible, imagine what your life would be like if your home, your car, your stocks, your bonds, and any other asset you kept your store of wealth in suddenly dropped 50% or more in value. You would be bankrupt, along with every other individual in the world.



Then again, I could be a total idiot. If I am then you should convert everything you have into gold because as you know, the inflation adjusted value of gold is $3000/oz. The whole world is just stupid and doesn't know it. And look! The dollar is falling off a cliff so gold should be going to infinity very soon. Hurry hurry buy buy!!



The monetarist argument seems rational today because the price of gold has gone up rather dramatically. It's too difficult to assume that the bid is coming from the geopolitical risks associated with Iran and Chinas insatiable apatite for commodities because the gold bugs are fanning the flames of inflation. Their running their tired old game hoping that this time it will be different, that this time they will actually be proven right. Go ahead and buy into it... I'll be waiting for the short opportunity to extract some of your worthless fiat currency.

You changed your post after I read it...



This is where you’re mistaken. The treasury doesn't deposit the bill with the fed. The bill gets sold at auction to the investment public. This is what the big Treasury market is that you hear so much about. The fed has absolutely nothing to do with treasury raising money. It's not that kind of bank.



Aside form that, for the US government, a t-bill is a liability, not an asset. They could in theory trade assets for cash at the discount window, but they can't do so using a liability as collateral. If this doesn't make sense, try taking your car loan to use as collateral for a mortgage. The bank will find it very amusing.



The misconception comes from how open market operations are conducted. You assume that the bill goes strait to the fed because you hear that they buy and sell treasury bills to facilitate monetary policy. Were that the case you would be correct in your conclusion. But they are not sold to the fed; they are sold to investors, banks, china, etc. The Fed gets involved in the t-bill market only after the bills have been issued at auction. The Fed buys AND SELLS 3 month t-bills to manipulate the yield curve. They buy bills to lower rates; they sell them to increase rates. But this only temporarily alters the existing money supply, it doesn't add to it...



So for the last 18 months the fed has actually been liquidating its treasury holding to drive up rates. This removes the cash that it had provided (from the reserves) when it was lowering rates.



PS- 3 month treasury debt is referred to as treasury bills. Do not confuse these bills with USD.

Sorry for any confusion. It's been a while since I read either of the books, and I just gave the example from memory.

Since you're such a strong supporter of fiat currencies, I was wondering what your stance on whether it is a good thing that the Federal Reserve is at its heart a banking cartel?

Also, if fiat money is such a good thing then why was it such a dismal failure in the early years of the US, with the Federal Reserve being America's fourth central bank?

Quoting HornedGod

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Since you're such a strong supporter of fiat currencies, I was wondering what your stance on whether it is a good thing that the Federal Reserve is at its heart a banking cartel?

Ignored

You can't honestly expect me to answer that...

Quoting HornedGod

Disliked

Also, if fiat money is such a good thing then why was it such a dismal failure in the early years of the US, with the Federal Reserve being America's fourth central bank?

Ignored

Why were any of us such dismal failures when we first started trading forex? Monetary policy, like trading, is a difficult business. The concept of what your trying to do is easy to grasp, but the application takes time and learning from mistakes to develop proficiency in execution.



Gold bugs are fond of talking about the great depression. They see it as the utopian example of the world as it should be. The world economy collapsed and gold retained its value. They blame the collapse on central banking, and conclude that it should be eliminated.



The truth is, they are right in that the central bank was at fault for the great depression; it never had to be as bad as it was. The fed was only a handful of years old at the time and had no idea how to handle that crisis. It is known now that had they done more to stimulate the economy through the manipulation of interest rates, it never would have happened.



But the Fed, like us, learns from its mistakes. It learned that it needs to maintain an active monetary policy agenda to prevent those type of events. You may want to notice that we haven’t had another one since. The only time we came close was in 1981-83 when the monetarist influence on the Fed caused them to hike interest rates to 20%. If you do some hard research on the subject you'll find that even at 20% interest rates the money supply couldn't be controlled. It grows regardless what the Fed does because of that "arbitrary" concept of velocity.



Freidman’s disciples kept pushing for tighter and tighter control of the money supply so the fed kept raising rates. The punitive interest rates eventually caused the emerging market debt crisis and would have done far worse if Volcker hadn't abandoned the theory. The money supply has been left to do as it pleases since that time and we have had the longest period of economic expansion in history. There were some setbacks in '89 when tax changes tanked the housing market and in 2001 which we all know about, but I haven't heard of anyone starving to death because they couldn't find work.



We live in a good time, and a majority of the prosperity can be attributed to sound monetary policy. Don't be so quick to throw it away for a failed ideal or misconceptions about a piece of worthless metal.

Don't worry I'm not. I don't even own or hold any gold. It's taken us a long time to go from pure barter to gold to fractional gold to money backed by gold to pure fiat money. Who knows what the next wrinkle might be.

At the same time, there have been plenty of financial collapses in the past with their roots in fractional reserve systems. Since people do so rarely learn any lessons from past history I think it's not a question of if but when the next debacle will happen.

interesting read gentlemen!

if i buy 1 ounce gold , how much is the fee for 1 night ?

What's everyone's thoughts on gold right now? Still a good buy?

Look at www.kitco.com for the opinions. I have a lot of gold (bankpapers that rise 3% when gold rises 1% ) and I keep them. But gold has the property to spike, so if you buy it on the wrong moment, you can lose a lot of money. On the long term I think it is still a good investment.

Starting monday (5/8/06) the London Metals Exchange will be increasing their margin requirements for all products by 100% or more.

It may not have much effect, but the elimination of over half the buying power of a markets participants should be regarded with a measure of caution...

According to the LME.com website they do not trade gold or silver so why should this have an impact?