Gold progressively matters less and less the closer we get to the biggest currency crisis in modern times.

https://www.conservativereview.com/commentary/2016/09/is-the-treasurys-proposed-ban-of-gold-jewelry-a-sign-of-things-to-come
“The U.S. Treasury is proposing a new regulation banning national banks and federal credit unions from investing in gold, copper, and other metals that are in “commercial or industrial” forms. This includes gold jewelry, copper cathodes, aluminum T-bars, ”

This is just more evidence IMO that the world is just going on its merry way, on the assumption that gold really is just fancy copper. A commodity. They see the hoarding of gold as no different than the hording of copper. Just some jackasses trying to corner the market to make a quick buck. They will ask, how is the jewelry market supposed to function if there is a bunch of idiots hoarding all the gold ? We cant get houses wired without copper and we can’t get our wedding rings made without gold.
This has no nefarious underpinnings behind it and they would laugh at you for even thinking it.
Go watch some of those Ben Bernanke vs Ron Paul videos. Of the few times that Paul mentioned gold in front of Bernanke, Bernanke could barely contain his laughter.

That’s what they think.
When I first learned about Austrian econ and gold and then freegold, I was excited to invest in gold. But before I made my first purchase, I thought, this all makes sense to me but nobody else is going to get it. So nothing is going to happen and gold isn’t going to matter. But then I thought, the fact that nobody gets it is the reason why gold is cheap in the first place and the doubt is the catalyst for why gold is going to matter. Which made me even more excited about gold. And lots of other bull markets in other assets are built on this premise. This was before QE 2, Euro QE, you name it. As time has gone on, more and more evidence is piling up to prove the theory.

But here we are 8 years later. My first thought was right. Gold hasn’t mattered because nobody gets it. And nobody wants to get it. And industries rely on the fact that nobody gets it. The western world is financed by the fact that nobody gets it.

I thought this would happen in stages where some people would be forced to get it. And the world would slowly come to grips with the dead end path that its on and how gold could play a role in correcting it. But nope. Its exactly the opposite. Gold progressively matters less and less the closer we get to the biggest currency crisis in modern times.

Somebody accurately called the oil bear market...

I'm not trying to brag or anything here, but I called it. And it just goes to show for the fundamentalists among us, that we might have to wait a little longer then we want to, but nothing trumps the fundamentals. How many chart technicians like Dan Norcini called the oil bear market ? I didn't hear a word out of them.

This was a comment I made on the FOFOA blog on June 6 2014 when oil was $102 a barrel:

I cant help but notice that everyone from Brazil to Russia to Canada to the US thinks that the oil market is immune to over supply. If you watch "The Prize", you will see that there was always an obvious business cycle in the oil market. When prices were up, oil companies would bring more supply to market and new oil companies would sprout up. Then, the market would become over-supplied and prices would would fall.
Everywhere you look, there is countries and companies discovering new oil and using capital intensive means to get at it. Everyone is becoming oil rich. Russia turned itself back into an empire overnight because of oil.
Everyone seems oblivious to the fact that oil is a commodity market like anything else and if it gets over-supplied, the price will have to come down. It always does. But ever since 2000, there hasn't been a state of over-supply in the market. I think we are way overdue for one. Who knows what form this oil bear market will take, with all the inflation in the world....Who knows how badly the inflation is screwing up the oil market.

June 6, 2014 at 10:16 AM 

 

 

The biggest and most widespread myth in economics today.

The myth ?  That a devalued currency is good for exports. It is all the rage these days. It is  a Keynesian tenet so that should tell you something. Everything about mainstream Keynesianism is complete and total nonsense.

Here are a few reasons why it is a fallacy.

- A low value currency makes raw commodity imports more expensive
- A low value currency makes the acquisition of capital goods like plants and machinery more expensive
- A low value currency makes it more expensive to maintain modern plants and machinery.
- A low value currency makes it more expensive to hire and retain technically savvy employees to manage and maintain plants and machinery. (brain drain)

Can a Keynesian please explain to me what is happening in this chart ?

 Shouldn't German exports be collapsing as the Euro rockets from .85 to 1.50 in less then 10 years ?

What about the USD ?

And what was happening to the USD as the trade deficit got bigger and bigger ? Dollar must have been rising according to the Keynesians.

Fail

No banana republic price inflation yet follow up.

Since the first No banana republic price inflation post got a few thousand more views then the rest even though it was short and rather simple, I decided to follow it up with some simple pictures to illustrate it.  This will just explain the specific conundrum regarding price inflation. Not the Fed buying its own debt and all of that. Just price inflation compared to a place like Jamaica.

The first thing to understand is that purchasing power is something separate in itself. Money is not purchasing power. It is the representation of it.

Since we have established that the money isn't the purchasing power, then we have to understand what it is. It is the end result of the productivity of capital and savings where ever it is being conjured. See the next pic.

The little chart in the above pic, is the real inflation chart of Jamaica. The first few saw teeth you see in chart are bouts of price inflation of 25 to 35%.

Anyway that's price inflation narrowed down to its simplest form. I will also tie this into freegold in a future simple post.

World monetary orders. How long do they typically last ?

We had the classical gold standard from 1873 until World War I (43 years), the gold exchange standard between the two world wars (21 years), the Bretton Woods 1 system from 1944 until 1971 (27 years), and since 1971, the entire world has been on the Bretton Woods 2 system. Which started with  the Nixon wing job.

 How we got here

A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued.^[35] The drain on US gold reserves culminated with the London Gold Pool collapse in March 1968.^[36] By 1970, the U.S. had seen its gold coverage deteriorate from 55% to 22%. In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970, unilaterally imposing 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department.

That  is the very definition of winging it. Little did Nixon know, his wing job would last just as long as the classical gold standard. As of this year, it has been 43 years since Nixon closed the gold window. It remains to be seen , how many years longer this system will last. Historically, it is already older then most. But until now, it was never the same age or older then the gold standard.

How Bretton Woods 1 ended

Robert Triffin accurately predicted the collapse of Bretton Woods and the end of an era of U.S. trade surpluses. Triffin told Congress that, at some point, foreign central banks would become saturated with Treasury securities and seek to redeem them for gold. European countries began to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward. By abandoning Bretton Woods, they could reduce their domestic inflation by reasserting control over their domestic money supply.

 Bretton Woods 2 is the sequel. We are back to square one minus gold. Instead of European countries , Asian countries will begin to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward.

The takeway

 Unmanageable price inflation outside the US's borders will be what brings an end to Bretton Woods 2.

Now that I am on the topic of monetary orders, lets have a quick look at the age of the USD as a reserve currency.

This chart shows the lifespan of the six reserve currencies that preceded the U.S. dollar; the average is 94 years. 2014  marks the 94th year of the U.S. dollar’s lifespan. 

And last but not least, the gold fixing schemes. 

 The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.The London Gold Pool collapsed in March 1968.
 That lasted a rather short 7 years. 

 And the sequel to this

The London bullion market is a wholesale over-the-counter market for the trading of gold and silver. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners. It was founded in 1987
 

This racket is now 27 years old. Which happens to be how long Bretton Woods 1 lasted.

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 !

ZeroHedge compares the Asian Financial crisis to the US dollar bloc.

My second post on this blog went over the Asian Financial crisis in detail and how it compared to the US dollar bloc over the last few decades. I still think this particular crisis does not get nearly enough coverage in these times.  But props to Tyler and ZeroHedge for mentioning it in a recent post.

Although I don't agree with the premise that Thailand is imploding now (its a creditor now and political crisis has been priced in for 30 years), they have it right about the 1997 crisis and the comparison. Here is the post.

http://www.zerohedge.com/news/2013-12-27/1997-asian-crisis-redux-thailand-imploding

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Thailand with the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg to the US$, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Indonesia, South Korea and Thailand were the countries most affected by the crisis.

...

The causes of the debacle are many and disputed. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power.

At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

In the mid-1990s, a series of external shocks began to change the economic environment – the devaluation of the Chinese renminbi and the Japanese yen, raising of US interest rates which led to a strong U.S. dollar, the sharp decline in semiconductor prices; adversely affected their growth.

...

Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level

 Just like the US dollar bloc. And it bares repeating that the AFC currencies lost 50% of their value with no QE and no money printing at all. 


This was my post on the subject: http://freegoldobserver.blogspot.ca/2011/10/forgotten-crisis-and-what-every.html