Author Archives: Keith Weiner

 

The Post Gold Default World

After President Nixon’s gold default in 1971, many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.

There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.

Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.

 

Dollar IndexUS dollar – still alive, for now – click to enlarge.

 

Read the rest of this entry »

The Wrong Idea About Inflation

Here is a post I made to Facebook yesterday.

 

chart-1-crude oil

 

I was making two points. One, virtually all commodities are in falling trends now (except certain foods affected by the government-create drought conditions in California). Two, it has nothing to do with the money supply.

Some comments on the thread reminded me most people accept the idea that changes in the money supply lead to changes in prices (though not necessarily evenly or instantaneously). This idea is tempting, convenient, and it seems only “common sense”. However, it is facile.

I decided to write this post to add some context. Since 2008, there has been a massive increase in the money supply. M0 has increased from about $875B to $4T. It is now 3.5X what it was. M1 went from $1.4T to $2.8T, or 2X. M2 went from $7.8T to $11.4, or about 1.5X.

Prices haven’t done any such thing. The Bloomberg Commodity Index fell from about 175 to 118 today. In other words, the commodity index is 0.67X what it was.

How do we explain this? I have offered my theory of interest and prices. To condense 12,000 words into a sentence: rising interest rates and rising prices go together.

 

Read the rest of this entry »

 

Monetary Metals Supply and Demand Report: 5 Oct, 2014

How much higher can the dollar go? Betting on the Fed’s paper has been one helluva speculation. No doubt the Fed’s credit quality has been falling, but powerful forces are driving it up, such as desperate debtors clutching for cash to calm their creditors (sorry, couldn’t resist).

The dollar was up this week, from 25.5 to 26.1mg gold, or alternatively from 1.76 to 1.86g of silver. Since this move began, the dollar has risen from around 16mg gold, or about 63%.

If one prefers to measure value in terms of other currencies, the dollar was up from €0.788 to €0.80. It went up from £0.615 to £0.626. It went up from CAD$1.115 to CAD$1.124, or AUD$1.14 to AUD$1.15. It went up from ₽39.14 (Russian rubles) to ₽39.98. It went up in Japanese yen, Brazilian reals, Indian rupees, Indonesian rupiahs. You get the picture. In the past year and three quarters, the dollar has gone up about 33% in rubles. Exciting times for Russian speculators, many of whom probably feel they’re getting rich. Are they really? Not in our opinion.

Looked at the other way—in terms of most readers’ favorite paper currency—the prices of the metals fell this week. As usual, this means the price of silver fell in terms of gold as well. The gold to silver ratio made a new high on Thursday of 71.1. Last week, we said the following:

“We have long predicted the ratio will hit 70 and maybe 80. So we will call our target ‘hit’. Is this it? Will the ratio reverse direction, and will silver begin to rise in gold terms (and dollar terms) again?”

This wasn’t quite a premature calling of the top (particularly in light of our silver analysis). But it was not necessary to reach for 70 last week, when this week the market has solidly hit it.

What about 80? Read on …

First, here is the graph of the metals’ prices.

  chart-1, gold and silverThe Prices of Gold and Silver – click to enlarge.

Read the rest of this entry »

 

An Absurd Claim

Last week, a story broke about Fed whistleblower Carmen Segarra. I wrote an article on Forbes about it, Disgruntled Fed Lawyer Blows Whistle on Regulatory Capture. Segarra is a former Fed regulator assigned to supervise Goldman Sachs. She secretly recorded 46 hours of audio from her meetings, during her short stint on site at Goldman as a Fed employee.

This story does not come in a vacuum. There is an ongoing narrative, which is simple, even facile. We had a crisis in 2008, and therefore banks caused it. Because, greed. This is the backdrop for her story, and the story presented by This American Life and ProPublica. It is how every article I have read about that story, except this one by David Stockman, spins it.

Banks suffocate under a full-time, on-site team of government minders. In Sagerra’s words, “The Fed has both the power to get the information [i.e. whatever it demands] and the ability to punish the bank if it chooses to withhold it. And some of these powers involve criminal action.” The banks are monitored, controlled, regulated, and supervised. So how is it possible that they got away with crime on such a scale as to nearly collapse the monetary system?

 

segarra_630x420_20131115

Ex-Federal Reserve lawyer Carmen Segarra

(Photo credit: Nabil Rahman for ProPublica)

 

Read the rest of this entry »

 

Central Planners and Untenable Theories

The European Central Bank again cut the interest rates it controls. Notably, the deposit rate was moved deeper into negative territory. It is now -0.2% (minus 20 basis points, that is not a typo). The ECB says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest.

The linked article above, like most, is focused on the quantity of euros and the presumed direct relationship to price. The following bit of editorializing from that article is uncontroversial in Frankfurt, London, New York, Mumbai, or Shanghai.

“Inflation weakened to a five-year low in August, just 0.3% in annual terms. That is far below the ECB’s target of a little under 2% over the medium term, raising fears that the region could face a debilitating stretch of weak or falling prices that hampers debt-financing and investment. Those fears intensified as market-based measures of inflation expectations weakened, too.”

 

Mario DraghiThe chart shows the 5yr./5yr. swap rate, a.k.a. the 5 year forward inflation breakeven rate. This is the “inflation rate”, or rather the annual rate of change in harmonized euro area CPI, which market participants expect to reign 5 years hence over the following 5 years. This inherently imprecise datum is employed by the ECB as a measure of whether long term inflation expectations are “well anchored” (chart caption by PT).

 

Read the rest of this entry »

 

The Credit Gradient

The United States, and every country, is subject to a monetary authority and legal tender laws. Here in the U.S. we have the Federal Reserve, a central bank that plans money and credit. The Fed thought they had perfected their planning (but of course it cannot be perfected). They thought they had ended the boom and bust cycle, and brought us into a brave new era, their so-called great moderation that ended in 2008. All they really did was manage the banking system to the brink of insolvency.

Let’s try a thought experiment. Suppose the monetary central planner attempts to fix the problem of insolvency by massive injections of liquidity. The central bank buys bonds. It dictates rates near zero on the short end of the yield curve, and promises not to raise rates for years to come. What perverse outcome would we expect?

Arbitrageurs see a green light, telling them that they can safely borrow short to buy long bonds. As the price of a bond goes up, the rate of interest goes down—it’s a rigid mathematical inverse. This is how suppression of short-term rates causes suppression of long-term rates.

 

Read the rest of this entry »

 

The Death of Goodwill

 

This is the first piece in what I intend to be a series, on the theme I think of as the Death of Goodwill. There was (and still is) a huge difference between the attitudes of people in America and the attitudes of those in third-world countries. I use the word goodwill for this difference. For centuries, Americans have been helping one another raise barns, live through hard times, and get up when they fall in the street. Unfortunately, goodwill is being strangled. There are numerous mechanisms for this, though all have bad governance at the core.

With the death of goodwill will come the collapse of civil society, and its twin sister law and order.

 

Read the rest of this entry »

 

Immigration For Republicans

 

This essay is not intended to address a crisis that may be occurring on the border at this time. I make no comment on that. Nor does it discuss the issues around war, such as how to deal with citizens of enemy nations. This essay is not a policy proposal, it does not set out, for example, when an immigrant can become a citizen and attain the vote or what to do to immigrants who commit crimes. It has but one purpose: to enumerate and respond to the common arguments used in favor of an impenetrable and guarded border fence to shut down immigration.

 

Read the rest of this entry »

 

How Can the State Bank of India Pay Interest in Gold?

An article caught my eye this week. The Tirumala Tirupati Temple in India has deposited gold at the State Bank of India, and is getting paid interest on their deposit. There is something unique about this.The interest is paid in gold.

To understand why no one else is paying interest in gold, let’s first look at how one can use any asset class to make a dollar income: speculation. Buy something. Wait. Sell it at a higher price. You can use bonds, stocks, real estate, artwork, or classic Ferraris. By the way, no matter what you use, you are converting what had been someone else’s capital into your own income. This is capital destruction on a massive scale.

Using gold to produce a dollar income is simple. Just sell a covered call with a strike price a little higher than the current market price. You get paid a premium immediately. If the gold price does not rise, then you can repeat the trick and sell another call. If it does rise, you must sell the gold at the strike price. This earns you a profit, as it is above what you paid. Then just buy more gold and do it again.

If you keep your books in dollars, and trade for dollar gains, you don’t really care how much gold you have. You only care about how many dollars. If the gold price doubles, you may end up with about half the gold. But who cares, at least you’re making a steady stream of dollarst hat you can consume.

Making a gold income is something else.

You can’t just sell calls, or sell the gold itself. If you do, and the gold price rises, you will have to buy the gold back. However, the same dollars you have will get you less gold at the higher price. For example, you start with 100oz gold. Today the price is about $1,300 per ounce, and you sell a December call option. It has a strike price of $1,325 and you get paid immediately $25 per ounce or $2,500 for the contract.

Unfortunately — yes this is unfortunate as we shall see in a moment — the gold price jumps in September. It goes to $1,500 and holds steady there. In December, you deliver the gold and per your contract you are paid $1,325 per ounce. Now you have $1,325 × 100oz = $132,500 + the option premium of $2,500 = $135,000.

When you go to buy your gold back, you discover the catch. At the new price, you can only get $135,000 ÷ $1,500 = 90oz. Even after picking up almost two ounces worth of pennies in front of the steamroller, it still squeezed 10 ounces out of you. Your 100oz shrunk to 90oz.

 

TirumalatempleThe Golden Tirumala Tirupati Temple, which is reportedly the richest temple in the world.

(Photo credit: Raj Srikanth)

 

Read the rest of this entry »

 

The Machines Are Coming!

Recently, I have seen a lot of discussion about the future of employment. Many people, from futurists to Leftists, are saying that machines will replace people and most people will be unemployed. This is hogwash, though it has been popular for at least 200 years, when the Luddites were smashing machinery.

Perhaps they didn’t know better, in the early days of Industrial Revolution. Maybe they really didn’t think of machines as providing an escape from drudgery.

They might not have thought that people were freed from long days of backbreaking labor. They may not have considered that increasing productivity benefits the worker, the investor, and the customer—pretty much everyone.

Today, we don’t have their excuse. Economics teaches these points clearly, and this is not my point in writing this essay.

 

700364-real-world-robotsMotoman caught in flagrante delicto, stealing the job of a short order cook. Somebody's got to do something!

(Photo credit: AP)

 

Read the rest of this entry »

 

Like Dripping Silver Icicles

I don’t typically emphasize price charts in analyzing the market, however something unusual has been happening in the spot (physical) silver market. It did not happen in the silver futures market, nor in the gold market. I have been bearish on silver because of its supply and demand fundamentals, and the price action shown below adds a new dimension.

Let’s take a look at a candlestick chart. Candlestick charts show the open, close, and price range during a particular period. The region between the open and close prices is shaded. Green means that the price rose during the period and red indicates it fell.

In this chart, each candlestick corresponds to one hour. The numbers at the bottom are dates. The chart shows from July 17 to July 25, 2014. As with all charts in this article, times and dates are Arizona USA time (PDT).

 

Chart-1, silver hourlySilver Hourly Candlestick Chart - click to enlarge.

 

Read the rest of this entry »

 

Legal Tender Renders Planning Impossible

There is much confusion over what the legal tender law does. I have read articles, written by people who are otherwise knowledgeable about economics, claiming that legal tender forces merchants to accept dollars under threat of imprisonment. Recently, I wrote a short article for Forbes clarifying how legal tender law works in the US.

Legal tender law has nothing to do with merchants. If you want to sell steak dinners in your restaurant for silver, you may legally have at it. Unfortunately, the tax code discourages your would-be customers as I wrote in another article.

The legal tender law targets the lender. It grants to debtors a right to repay a debt in dollars. In practice, this means that if you lend gold, the debtor gets a free put option at your expense. If the gold price rises, he can repay in dollars. If it falls, of course he will be happy to repay in gold. It’s a rotten deal for the lender.

The relationship between lender and borrower is mutually beneficial, or else it would not exist. The parties are exchanging wealth and income, creating new wealth and new income in the process. The government is displeased by this happy marriage, and busts it up by sticking a gun in the lender’s face. His right to expect his partner to honor a signed agreement is violated.

Because no lender will lend gold under such circumstances, gold is relegated to hoarding and speculation only. This strikes a blow to savers, because the best way to save is to lend and earn interest. Savers are forced to choose betweenhoarding gold, getting no yield, or holding dollars and getting whatever yield crumbs are dropped by the Fed.

If there’s no lending in gold, what takes its place? The Fed force-feeds credit in ever-larger amounts, and at ever-falling interest rates.

The Fed is supposed to make its credit decisions in order to optimize two variables. First, employment shouldn’t be too high or too low. Second, consumer prices shouldn’t rise too quickly or too slowly. The Fed has little ability to predict employment and prices, and even less control over them.

 

Read the rest of this entry »

 

The Price of Shipping Is Collapsing

A recurring theme of mine is that one cannot understand the world in terms of the linear Quantity Theory of Money. Let’s look at the cost of shipping.

The money supply has certainly been expanding since 2008. And yet the price of shipping has almost completely collapsed. From a high over 11,000 it’s now down to 755. This is a drop of almost 94%.

The Baltic Dry Index is a dollar price of moving the major materials by sea. The chart shows from just before the acute phase of the crisis to today, July 16, 2014.

 

chart-1-Baltic DryI like to look at the Baltic Dry because, unlike commodities, there is no way to speculate on it and hence drive up the price. (If readers are aware of some sort of futures market or other way for speculators to use credit to bid up prices, then I encourage them to please contact me.) – via Monetary Metals, click to enlarge.

 

Read the rest of this entry »

 

Monetary Metals Silver Headfake Report: 22 June, 2014

Something extraordinary occurred this week. On Wednesday, the Fed made a routine announcement. That day, the price of silver was rising, but not out of the normal. Fireworks began on Thursday, and in 6 hours, the price of silver skyrocketed by 5%.

We have never before changed the headline or format of the Supply and Demand Report. However, it is warranted under the present circumstances.

The Fed’s announcement was mundane. It will continue tapering its bond purchases, from $45B monthly to $35B. It will continue its low interest rate policy. It cut its growth forecast. This was all expected except, arguably, the cut in the forecast.

Some pinned this move on the unwinding of the Chinese commodity finance scheme. That unwind will involve selling metal and buying futures. The impact of this is a rising basis, but probably not a rising price.

Many said that that the Fed was to blame (or credit). One commentator even said that gold had now become an inflation hedge. Apparently it wasn’t last week, but now it is. We respectfully suggest that he step back and take a deep breath.

Looking at a price chart, the action is pretty obvious. This candlestick chart is not the standard chart format we normally use in this Report.

 

chart-1-silverSilver Chart – the blue line shows support around $19, going back 7 months. In the last few days of May, the silver price broke below that line. But by June 10, the price broke out through the line sharply. The breakdown at the end of May was a false breakdown – click to enlarge.

 

Read the rest of this entry »

 

Europe Stricken With Negative Deposit Rate

On Thursday, the European Central bank announced cuts to three of its benchmark interest rates. This is nothing unusual since the global financial crisis began. We are now accustomed to desperate central bank responses. Interest rates have been falling for decades, and the trend continues. What is unusual—unprecedented for a major central bank—is to lower the deposit rate below zero.

A negative deposit rate means that when a bank keeps extra cash on account at the central bank, it pays the central bank a percentage. It’s like telling the banks that having cash is a privilege, for which they must pay. If it sounds pretty crazy, that’s because it is.  First, let’s look at what the ECB says it will do. Then we can dive in and see the likely outcome.

Mario Draghi, President of the ECB, said, “the measures will contribute to a return of inflation rates to levels closer to 2%.” The central bank has been talking a lot about the problem of deflation, by which it means falling prices. The ECB hopes to avoid this fate worse than death, by pushing more euros into circulation. It actually wants prices to relentlessly rise, for salaries to relentlessly lose purchasing power, and for savings to relentlessly erode.

With fiat money, prices rise. This is especially hurtful to people who are struggling to afford food and shelter. Pushing up the cost of living does no good to anyone, but harms the poor most of all. Only a central banker could truly love inflation.

 

Read the rest of this entry »

Support Acting Man

Archive

Realtime Charts

[Most Recent Quotes from www.kitco.com]

[Most Recent Quotes from www.kitco.com]

[Most Recent Quotes from www.kitco.com]

[Most Recent USD from www.kitco.com]

Own physical gold and silver outside a bank

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Oilprice.com