Wednesday, 1 January 2014

Why don't westerners understand the concept of currency risk ?

I have been having this heated argument with some fellows on a hockey forum about gold, inflation, investing, saving and all of that. What I have come to understand is that westerners are absolutely clueless on anything to do with currency risk. The reason is because generations of them have never experienced a currency crisis. Even the inflation in the 80's was blamed on Iranians taking Americans hostage and oil prices so they didn't learn anything from that. These guys have not been easy on me so I haven't  been easy on them. Its all part of the fun. Basically we have been arguing endlessly for 40 pages. Since none of them will save in gold, I asked them what they would do with $200,000 if it fell on their lap. I'm just posting this because I did some math that I always wanted to post.

My name is LolClarkson on this forum

Here is the exchanges:

Originally Posted by LolClarkson

I've asked this question 3 times now. Nobody has answered it. What would you do with $200,000 right now if it fell on your lap ????????????
Originally Posted by Epsilon

But it all seriousness, with $200,000 I'd pay off my debts, make down payments on a house and a new car, put a chunk in my checking account to make some purchases, and put the rest in a savings account.

I wouldn't spend a cent of it on a bar of gold bullion.
Originally Posted by Roughneck

I'd spend about $10,000 on stuff I don't really need.
A sizable chunk would go towards a home.
$10,000 to a trip
The rest into savings.
Originally Posted by LolClarkson
 Here is another fool who didn't understand the question. What would you do with it as an investment ? I am not interested in what you want to piss the money away on.
You said put it in savings.
Canada Inflation Rate
The inflation rate in Canada was recorded at 0.90 percent in November of 2013. Inflation Rate in Canada is reported by the Statistics Canada. Inflation Rate in Canada averaged 3.21 Percent from 1915 until 2013 but we will use the 0.90%

Toronto Dominion Bank Account Interest Rates

Rates as of January 01, 2014

Accounts $60,000 and over rate 0.35%

.90 (-).35 = minus -0.55. So after inflation, you have a negative .55 return.

So your $200,000 in a savings account costs you $1100 a year. (.55% of 200,000 is $1100)

After year one, you are left with ($200,000- $1100=)$198,900

Is this what you call a sound investment or savings strategy ?

Negative yields.... Plus you pay income taxes on the .35% return even though it is no return at all ! Using the governments own statistics.

Interest Income
Investments such as Canada Savings Bonds, GIC’s,
T-bills or strip bonds, pay interest income which
is taxed at your marginal tax rate
without any
preferential tax treatment.

So the law says that you have to pretend that your $1100 dollar loss on your $200,000 savings doesn't exist. And you have to pay taxes on the imaginary return. Lets do some imagining...

.35% return on $200,000 = $699

Federal tax rates for 2013

15% on the first $43,561 of taxable income.

15% of $699= $104. So you lose $104 to taxes.

So you can add that to your already negative $1100 loss.

$1100+ $104 =$1204 loss.

$200,000-$1204= $198,796  

Originally Posted by Roughneck

LolClarkson: the guy who has all the gold in the world but isn't smart enough to use a TFSA (Tax Free Savings account)properly.
Originally Posted by LolClarkson
^This guy thinks that a Tax Free Savings Account will shield him from loss via inflation !

And we have already been through many currency risk lessons on this thread !


  1. I feel your pain! I had a similar conversation (argument) with some friends last night at supper. The absolute lack of understanding regarding the fragile nature of the $USD is astounding. I decided to just let it be after a bit as our guests (and my wife) started looking at me like I was an alien. Even simple concepts like saving vs investing seemed hard to understand. This will truly be an epic paradigm shift. Good luck with your blog!

  2. Where are you 'M'? are you in Clarkson? I am in East Mississauga.
    Gary (tEON)

    1. Hi Gary

      The Clarkson part is just a hockey reference. I grew up near Vancouver and live in Edmonton now. I like your style on FOFOA. Keep it up.


  3. M,

    Could you please bitch slap Archer. If bullion can't be had then what's the next option? Mining shares. Bullion would be no-offer and so would the shares.

    Anyway if anyone caught Koo's piece about the Chinese' plans for gold then it's apparent that the FOFOA vision is not in the works. They're talking about a transparent futures market fair to real players such as miners, refiners, and consumers, not a playground for bullion banks.

    1. Hmmm

      Gold is not a commodity though. The stock to flow ratio that gold holds makes it a monetary metal. Its a tier one asset. It has a currency code.

  4. STFU you pretentious douchebag.

    1. You must be one of those Seppo dollar bulls that I beat to a pulp on one of the forums.


  5. M,

    Do you realize the implications of this? Gold mining will be a robust and lucrative business. FOFOA has got it all wrong about mining. That color is going to come out of the ground. If anything governments will encourage it. Plus the Chinese have been buying shares in producers across the globe. Very strong hands, very strong creditor hands that can dictate terms behind the scenes. Don't worry, man.

    BTW it looks like Jim Willie has been spot on. It's amazing to see this Eurasian Trade system come online. It won't be Freegold, but closer to Sinclair's Gold Certificate Ratio. I don't think we are going to get a USD HI and with it a 30x revaluation in gold PP. I see only a managed USD devaluation. Gold may only increase 2 or 3 times in PP. If that is the case then holding mining shares will be the windfall. Holding only bullion is taking on too much risk. We don't know what the tax consequences will be. If you have enough bullion that a 30X reval will change your life, then it's wise to put extra funds in other contigencies.

    1. I disagree about your take on bullion. The last time interest rates were close to this low (60's), gold was 35$ an oz. The cycle ended itself with bullion being worth 2300% more.


    At the end of article: "This year, the value of Chinese overseas mining investments would probably increase, but the nature of the mining assets being acquired would shift towards gold and copper, said Carrie Chen, a senior vice-president of mergers and acquisitions at Citic Securities.

    Su said investment would gravitate towards gold mines. "When we talk to Chinese companies in general, they have a positive outlook on gold prices. They think the price is going to go up," he said. "Gold is seen as a safe investment. There is a flight to quality as there are challenges in the global economy."

    "Currently, if a gold deposit has over 50 tonnes, the amount over this limit is considered federal property. The Ministry is looking to increase that threshold to 250 tonnes to stimulate mining project development."

  7. A thought. A bondholder with enough juice can exercise a call on collateral in the case of a payment default. If the currency of the bond is the mechanism of default, then why ask for the cash dump? Why not ask for real world assets? This could blunt a HI and a massive revaluation for gold.

  8. Actually the price of gold is above cash cost and AISC (All-In-Sustaining-Cost). The last couple months I've exhaustively gone through the annual reports of the miners held by my gold mutual funds. Cash costs are typically in the 450-750 range. AISC, usually about 1000 or lower, is a fudge number that isn't written in stone. If in a cash squeeze a company can always postpone expenditures on resource exploration. And what I've noticed is that juniors that ran out of cash didn't just disappear--they got bought out by a healthier outfit. So all this hysteria of the miners being doomed was hogwash. It was only a downcycle in the resource sector.

    And you're right about the the FOFOAtards being atheists regarding manipulation. It was always about paper gold dying. It's sad that they don't see that the Chinese have taken control of the POG. A 24hour futures market has been online over there since last May. Notice how the POG no longer rallies overnite. The Comex will end up being an options market. The East will be the futures market with real inventory and delivery.

    1. But if you look at some of the income statements by gold miners, they are not making anything. They are losing money. Inflation in their input costs is higher then they think it is.

  9. The losses are one-time non-cash writedowns b/c if the 3 year trailing gold price falls then they have to reassess to value of the reserves in the ground. These are writedowns, not writeoffs. The cashflow for the majors and midtiers is fine. Once the 3 year avg POG is higher then you'll see writeups and additions to proven&probable reserves. Agnico even said that if gold were to rise a meager 150 dollars then it could a million ounces to P&P reserves.

    In retrospect if you look at the events of the last year it appears the sly Chinese had an additional goal with the April 2013 takedown. To not only procure as much bullion per dollar as possible but as many mining shares as possible so as to stay on top of the world in terms of gold for a very long time. The Chinese with their 24 hour market have control now. If they have major investments in miners then they won't let the POG collapse below cost of production.

  10. Did you catch all the links in Koos' latest? What's unfolding is nothing like what FOFOA envisioned. There's still going to be gold derivative market but it will be used for legitimate hedging. It also looks like the producers will have a big seat at the table. Sinclair is going to be right. Monetary utilities, baby.

  11. Already "the miners are doomed if gold and silver go lower" articles are hitting the interwebs. If someone hasn't actually dug thru the financials of these companies he could easily be scared. Even from the gold advocates we see this crap. Norcini thinks 1280 is near the cost of production. Wrong. Just shows that you have to do your own research.

  12. Brad said...
    I have a doubt. Anyone remember what Buffett said about gold?

    For all the gold in the world you could buy Exxon Mobil 16 times over, all the farmland in the US. A century later both will have produced trillions in valuable product. Gold will have produced nothing.

    Doesn't he have a point?
    May 27, 2014 at 5:29 PM

    Brad's gotta point. Last night I checked out of long term chart of Berkshire Hathaway.

    12-28-1990 the A shares were 6625.
    5-27-2014 the A shares are 191,300. That's nearly a 2800% gain.

    Mar 17, 1980 the A shares were 290. That makes for a 659 bagger over 34 years. What did gold do? It went from 875 to 1900 for a double. Now what is wealth? What is an inflation hedge?

  13. and why do you think that you will find a buyer for your gold in the future paying a higher price in real purchasing terms from now?

    Because already 170000mt have already been hoarded? This conclusion makes no sense to me. The only conclusion I can draw from it is, gold has value, or like DP calls it its value is arbitrary. PERIOD, nothing more nothing less.
    The only case for gold I see is:
    1.) hedge against goverment.
    2.) if CBs will buy gold to devalue their own currencies, but I guess this will not happen, since they are owned by gov, therefore these govs will instead insist to QE to infinity first.
    Greets, AD

  14. Advocatus ...Advocatus ...Advocatus

    Why do I think I will find a buyer for my gold in the future ? For the same reason that I am a buyer now. I am a saver. I am in the saving phase of my life. I buy gold from people who bought it in the past all the time.

    And you are right. The value of gold is arbitrary which means it could be worth $10,000 to $50,000 an oz. If the amount of saving that has gone on in US treasuries and JGBs over the last 30 years went into gold, gold would be worth more then $10,000. So that means that the value of this debt is the equivalent of 10 k or 20k an oz gold in the future.

  15. @ Grumps

    "Brad's gotta point. Last night I checked out of long term chart of Berkshire Hathaway.12-28-1990 the A shares were 6625.
    5-27-2014 the A shares are 191,300. That's nearly a 2800% gain."

    That is garbage Grumps. Birkshire is a holding company. That gain does not account for the holdings that enter and exit the holding company. This is just as foolish as comparing stock indexes to gold over 30 years. Stock index prices do not account for the stocks that leave the index throughout the 30 years. But with gold, its the same gold all 30 years. You would have to take the value of the stocks that comprised the index on the first day and follow the prices of only those stocks over the 30 years to get an accurate depiction.

    1. Yet it doesn't change the fact that If I had bought a share in 1980 my investment went from 290 to 191K.

  16. M,
    remember "Moneyness"? Remember Mises regression theorem? Those are quite similair, but also different. People associate not only the relative value of things to each other (Moneyness), no they also associate nominal value of currency (Mises).
    Nobody (at least >99%) will asociate relative purchase power of gold. And the dishoarding of gold at Cash4Gold proves to me that people sell regardless of price in terms of purchasing power.

    I just look at it from my personal standpoint. I love gold. Do I go 100% in? Hell no, never. Why? Because I have enough. So why would I assume that other people play from game therory differently?

  17. @ AD

    Have you ever been to Thailand, China or India ? I have. Anytime even medium term savings is in the cards, they use gold. These people have lived through currency crisis. Its not even worth talking about delusioned westerners who've been living in fantasy, currency wise.

  18. @M,

    no I havent been there. Does it matter? Does it matter what these people save in? Those are piss poor (my wife travels those places for business, I refuse in my business and instead send people there), and guess what, they prefer an Ipad over there kittney. Hey what does that tell you?
    Or what does that tell you that the chinese oligarchs grab any kind of real estate in california whatever they can?
    Or that it's the chinese dream to drive a german car?
    Com'on that eastbond&down is a bunch of BS to keep on preaching the same old broken record, there numbers show different.

  19. The last 15min of today's trading action was something else. Nobody wanted to be short miners going into June. Even Barrick closed at its high on big volume and after hours is still moving up. The pig Kinross after making a 52week low this morning also closes at the high on a huge market on the close volume. All this with gold and silver down too.

  20. @ AD

    Bretton Woods 2 has left people in the dollar bloc living in fantasy land. So it matters more what the few billion people in reality think. It does not matter what the few hundred thousand people living in fantasy think. And btw, these people are not as poor as you think.

    1. "So it matters more what the few billion people in reality think."

      I tell you what a few billion people think (in priority order rising):
      How do I get food today.
      How do I get a TV (in my township ghetto).
      How do I get those nice gadgets I see on TV.
      How do I get free gadgets from my government.
      How do I get more gadgets than my neighbour.
      How do I get a better yield than anybody else for more gadgets tomorrow.

      Always been that way and getting worse and worse.


    "The ECB is expected to announce on Thursday that it will apply a 'negative deposit rate' for money placed with the central bank overnight in a bid to convince banks to lend the money out instead."

    So they are going to try and flush out the excess reserves.
    According to this:
    there are only 91Billion euro in excess reserves.

    What if the Fed tries that here?
    We have 2.6 Trillion!!!

  22. @ Grumps

    I like how the ECB is doing all these gimmicky things to try and satisfy the Keynesian Fed. Hopefully they will continue this closet Austrian stance.

    But lending out money is not what causes banana republic or 70's style inflation. A loss of confidence in the bond market will start a bond bear market. From there, money velocity kicks up as the value of the currency starts to fall. The more the velocity kicks up, the more the currency devalues. The more the currency devalues, the higher bond yields have to go to make up the difference. The higher bond yields go, the worse the economy gets. The worse the economy gets, the more the currency devalues and the smaller the tax base gets.

  23. It'll be interesting to see what actually happens if a neg rate is put on xs reserves. In theory banks would loan out to the public and inflation would follow. But what if nobody wants to borrow? What if the banks don't want to lend to debt-saturated parties? What if the banks don't want to lend to themselves? What if the banks decide a neg rate is the lesser of many evils? What if the banks decide to use the money to procure another asset which should go up when rates are negative to compensate and then some for a shrinking euro reserve?

  24. The only thing that these gimmicky central bank ideas accomplish is blow air into asset price bubbles. They do not cause banana republic style inflation or any such price action that will befall the Bretton Woods 2 construct ie the bond bubble. As long as the bond bubble lives, there will be limited money velocity and limited price action that will pose a threat to the dollar. As long as the bond bubble lives, everything will just continue to trade on sentiment and word clouds from the Fed. Sentiment could even change in the gold market and we could get another gold bull market within Bretton Woods 2. But that still won't be the main event or even a sign that the main event is upon us.

    I explained it best in this blog post.

    I invite you are AdvocusDiabloi to read and comment on it. You guys are good sports.

    1. What about that bulge in Belgium's pants? Is that Draghi happy to buy Treasuries or as EuroRaj posits BRICS posting collateral for a gold deal? This could be a big game of chicken to see what really underpins the monetary system, what really is base collateral, US debt or gold.

  25. M

    Everyone is passively aware of the small loss they take when 'savings' returns does not exceed inflation. There is however no simple logical train that concludes ' so buy gold.' Take into account that if you look at gold prices the last few years it seems to be going nowhere. Also take into account that people based future expectations on current experience. They expect continued small losses on such bank savings, not hyperinflation.

    So in a very real sense you do in fact look like a lunatic when speaking to people who have not spent a long time and effort understanding the underlying realities.

    I hope that answers your question.


  26. That site is unmoderated. Its all in good fun.

    But I disagree with your point. Most westerners are not passively aware of the loss via inflation at all. They put the blame squarely on capitalism when they see prices go up and the size of what they are buying go down. How dare those greedy capitalists up the price of my stuff and lower the size at the same time. Just look at what the average person says on a long weekend when the price of gas goes up. Those damn capitalists. They are completely oblivious to the fact that the price gets raised because there will be more demand and they need to raise the price so that they don't run out of fuel in the local area.

    Most westerners think that the numerical value of their currency is set in stone and price changes around them is just either because of greedy capitalists or the weather. The basic concept that the numerical value of the currency could change is not that complicated but it is the last thing on their mind.

    And yeah. The price of gold is going nowhere. It just reinforces the normalcy bias that everyday people have. This is why the banking interests want to control the price of gold. This is why Paul Volcker said that not controlling the gold price in the 70's and 80's was a mistake.

    This lull in the posted price of gold has caused all gold bugs including FOFOA to lose their credibility and look like lunatics with everyday western people. So from this point on, two groups are in a collision course. Its the banking interests , government , Keynesians and the western normalcy bias vs a few Austrians, goldbugs, Asians, Indians and middle easterners. If you know anything about the basic state of affairs in the IMFS it takes a radical mind to be in the normalcy bias camp. Its not the other way around.

    I am not sure if you have been to Canada, Australia or the US but I can tell you that the word inflation means nothing here. People really do believe that the value of their currency is set in stone.

    1. Americans are so trained to treat their 401k and bank deposit balances as the measuring stick. They don't see the 3-5% loss in PP as long as the nominal balance is at least treading water. Though I'm now sensing in the workaday fellow an angst about the general stock market. He knows it's disconnected from the reality of the empty houses on his street, empty strip malls, and the desperate enticements to tap his money ( Direct TV, cable companies, car insurance, unsolicited debit cards with access to 6 figure credit lines). The common guy doesn't know to do. Many have withdrawn to cash and are hoarding it as a bank deposit. Some are deciding to retire having reached a crticial mass number upon the advice a financial advisor, yet their nest egg will be mostly in cash or a bond fund thinking being out of equities is safety. Nobody has an allocation to gold.

      Remember in 2011, gold was at 1500 the beginning of July. In ten weeks it reached 1900. When gold starts moving again it will leave the masses behind. It'll be above 3000 before the public notices and then it will be too expensive for them. This will be the fuel for the shares and silver. A share of Agnico at 300 will seem cheap and attainable to the retail investor and that fact the producers have a dividend and a negative correlation to the S&P will attract the institutional money.

    2. Yep. I remember that time. The Canadian dollar was well above the USD at that time too. It got managed down to 90 last year. I've been hearing lately that physical demand from the public in general is finally starting to wain. Why markets are always out of sync by 6 months or a year I will never know but it would not surprise me to see the market head higher now that the buying is done.

      I get what you are saying about mining stocks. What I am unsure about is if the turnaround in the gold price will still be within Bretton Woods 2 or if BW2 will blow up before any momentum can be gathered. I'd prefer to see a good ol BW2 style bubble in all things mining first. Then yeah, $300 Agnico is in the cards. But if BW2 blows up and we get some strange revaluation of the price of gold, or we get freegold, all bets are off. Nobody knows what will happen.

  27. Ein anderer's article corroborates the neg rate on xs deposits. Boy oh boy we are indeed living in a grand experiment. Draghi's going to release the Kraken.

  28. You gotta hand it to the Jackass. The headlines coming out are stuff he forecasted months to years ago. I think where FG gets it wrong is considering gold a perfect savings capacitor. I see gold functioning more as the most rudimentary collateral. We Westerners are kinda dumb in that we only think of selling to capturing a gain. But that's not what you really do with gold. If you have a big hoard you should use to as collateral for a productive loan. Wealth is a cash-flowing enterprise, not gold. Think about it. What do the Custodians do? The use a portion of their gold to underpin a network of Central Banking franchises, receiving a dividend of 6% tax free over the years. And TSP thinks what the CB's have done is indirectly sell the gold back to their private CB owners via the leasing to BBs.

  29. My spidey sense is telling me Goldcorp is on the prowl. I have a sick feeling Agnico might be on the radar. It would be too big a deal. Too dilutive.

    1. Goldcorp is so cheap right now. Damn. No debt. I am just gun shy because they are out looking to acquire which will hit the stock. They should make a move for Kinross.

  30. I took a look at Kinross and it is interesting. The Redback deal looks stupid now after paying 2000/oz, but the potential for property is still to the upside and when gold is 2500 and above they'll look genius. The market cap for KGC is 4.3B. GG could take it in an all stock deal, 50% premium, dilute by 250m shares. 250m times $23= 6B. But there isn't much overlap, no contigous properties. GG has nothing in Africa or Asia so a merger really wouldn't save much in administration. Maybe that's why nobody's gone after Kinross, the geopolitical profile.

    As for Gustafson's chart. I notice he still considers that we are in Kondratieff Fall b/c the bond market is still in a bull phase with dropping yields. Some K-wavers consider that Winter started in 2000 with the dotcom bust. Gustafson appears to consider Winter doesn't start until bond yields start rising. Rising yields are not always bullish for a currency. You have to consider the state of debt saturation in that currency. When Winter starts, rising rates will be the result of energy leaving an already full debt container. Not until expectations of inflation and default are out of the picture then energy will flow back to bonds. This will probably take place after a currency reboot that delevers the system.

  31. M, sometimes the freegolders come so close to understanding the realtionship of gold to debt and interest rates. So close, but yet the assumption that gold will be a perfect SoV blinds them to a beautiful cycle.

    What lies ahead is not just a revaluation for gold. That's only half of the opportunity. The other half will be the greatest entry point from gold ( either being sold or used as loan collateral) into real yielding assets.

  32. From the "21 Reasons to own Gold, Miners and Explorers":

    "The ‘easy’ gold has already been mined and
    along with falling grades and increasing
    production costs, Thomson Reuters
    estimates global all-in cash costs in
    2013 at US$1,250 per ounce. With recent
    prices remaining perilously close to the
    cash costs of many producing mines gold
    production is likely to fall in the face of
    record demand for the physical metal."

    This is what I'm talking about with this lazy-ass garbage reporting. They quote Reuters, a cabal news organization. AISC are below a thousand per ounce.

  33. Get all the best spirits and wines on Duty Free Depot!

    All the world famous brand name beverages for unbelievable low prices.

  34. eToro is the ultimate forex trading platform for beginning and pro traders.

  35. If you need your ex-girlfriend or ex-boyfriend to come crawling back to you on their knees (even if they're dating somebody else now) you need to watch this video
    right away...

    (VIDEO) Text Your Ex Back?


    Professional trading signals delivered to your cell phone daily.

    Follow our signals NOW and gain up to 270% daily.

  37. Experts and patriots are enraged:

    The crazies secretly maneuvered more wealth into their pockets

    In the last year, than they did in the last 185 years!

    Meaning the top 1% now own as much wealth as half the world

    Just 5 years ago the filthy rich were 388.

    As of January 2016 there’s only 62 people who own

    HALF the world!

    >>Watch shocking video<<

    No living soul can spend that much money in a lifetime…

    And when people sits on money,

    The economy stalls.

    And that’s how it all begins:

    What’s coming in the next 6 months or less

    Will give a new definition to the infamous “economic crisis”

    >>Access U.S. Dollar Exposed!<<

    Are you prepared to be broke…




    Or can you turn the game around:

    >>Profit from the dollar crisis: watch video<<

    [Mr Mark Fidelman]