Thursday, December 10, 2009

Contrary Thoughts on Gold

A couple of comments and questions left at my Gold Down Over 8% in Last Four Days post have caught my eye. They are of enough general interest that I am reproducing them here, with my replies:

Taylor Conant writes:

Gold is in a long-term bullish trend against most paper currencies. Is that because they're all printing or because gold performs well in a paper-currency crisis?

Will gold perform in the event of a default? Can we take QE measures in a given country to be a form of default?

My reply:

I don't see much of a difference between countries printing money and a paper currency crisis. Without them printing, the odds of a paper currency crisis would be extremely slim.

As far as a default, it depends upon the nature of default. If Greece or Duybai default, a knee jerk reaction up in gold is possible, but keep in mind the default is caused by a shortage of dollars, which means there are also fewer dollars around to buy gold.

The current situation with Dubai and Greece is that they do not have their own currencies to inflate out of their debt!

Anonymous writes:

Actually Gold rises when there is a negative real interest rate, as Bernanke does not seem intent on raising rates in the near future, I expect Gold to correct then reassert itself within it's secular trend.

I reply:

Who says we have a negative real interest rate now? I actually think real rates are below 1/4%. (See: The Visible Hand for more thoughts on this)

When I think of a secular trend I think of a new long lasting demand for a product, gold is only in greater demand when central banks print money. The Fed is not now printing. Gold trends are cyclical not secular.


  1. Robert, I apologize for being dense on this, but I haven't been able to figure it out. You have repeatedly said the Fed is not now printing money. As best described by Chris Martenson, the Fed appears to be monetizing the debt; that is, the Treasury is issuing bonds, which the primary dealers are buying from the Treasury, and then days/weeks later the Fed buys them from the PD. Doesn't this debt, which can't be issued (at least not at these paltry interest rates) if not for these Fed shenanigans, enter in to the money supply (and the real economy?) It gets paid to 20 million govt employees, govt contractors, straight redistribution and ends up in bank accounts where it is used to drive up or at least sustain prices for goods, services and assets.

    I know I am not understanding something here, and would be grateful for your help.

  2. Robert,
    enjoy your blog and appreciate you work.

    when it comes to gold/$ i believe that your thoughts are too narrow, especially the view that gold won't go up until the fed starts printing money.

    as greenspan said him self (paraphrase), the USD is all a CON-fidence game. so even if the fed never prints any further, BUT peoples confidence in them and their product (USD) wanes ...... they will liquidate and follow their emotions to where their confidence lies (hence the age old hatred of gold by the fed, it is their "krytonite").

    many are watching the fed's balance sheet fill with toxins ....... and are speculating on where it will lead ....

    also the fed has engendered a few enemies (De Gaulle @) within its CB fraternity ..... we all know where that lead .....

  3. @Steve

    Good question.

    When the Fed buys the Treasury bonds and other assets--and they have bouight a trillion dollars worth- banks have been putting it on deposit with the Fed, this is the trillion dollar excess reserve number.

    Money on deposit with the Fed is not in the system bidding up goods.


    Creditors of Dubai, Greece and holders of many CDS's would be more than happy to exchange their paper at face for dollars.

  4. @Robert

    How do the purchases of agency MBS that is now up to 1.07 Trillion via the plan to purchase 1.25T fit into all this. I don't understand the mechanics. Same way?

    Is this included in your trilion dollar number?

    Fed buys MBS from Fannie, Fannie puts money in bank? Bank puts deposits with Fed? Is this right? Is this different?

  5. @ Matt M.

    You got it. It's pretty much a shell game. (With a bit leaking out for the individual bankers)

  6. @Robert

    What I don't understand is how you say that Bernanke is NOT increasing the money supply if they are still doing all these agency MBS purchases to the tune of 16B a week. So far they are almost at their 1.25T target? Plus, the 870B stimulus, and all the other quantitative easing stuff. It seems like the true Fed purchases number is north of 2T.

    What number consolidates ALL Fed purchases if the excess bank reserves number has only increased by a trillion??

  7. I'm not just saying it. Until the last couple of weeks, the money supply hasn't increased. That's a fact. Look at the Fed's own numbers H.6

    The Fed is drainning Treasury securities to sterilize the difference.

    Look at their Treasury position in 2007 and now.