Author Archives: Keith Weiner

     

 

 

Shrinking the Balance Sheet?

The big news last week came from the Fed, which announced two things. One, it hiked the Fed Funds rate another 25 basis points. The target is now 1.00 to 1.25%, and there will be further increases this year. Two, the Fed plans to reduce its balance sheet, its portfolio of bonds.

 

Assets held by Federal Reserve banks and commercial bank reserves maintained with the Fed – note that while asset purchases and bank reserve creation are connected, the connection is loose (there are other factors influencing movements in reserves as well). [PT] – click to enlarge.

 

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The Socialist Politician-Bureaucrat with the Worst Timing Ever

As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold… or does it?

 

Former UK chancellor of the exchequer and later prime minister Gordon Brown, about to make a splash. He had a sense of market timing that is not exactly uncommon in political circles. In the UK market timing with respect to gold is a particularly sore point.  Before Brown sold 400 tons right at the 1999 bear market low, the UK government had already performed a large sale once – it sold 800 tons at $42/oz. shortly before Nixon defaulted on the US gold exchange obligation; over the next decade the dollar price of gold soared by nearly 2,500%. As a result, Brown’s decision to sell was like a giant bell ringing at a distance of about five feet –  even the deaf must have heard it. [PT]

Cartoon by Steve Bell

 

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Driven by Credit

The jobs report was disappointing. The prices of gold, and even more so silver, took off. In three hours, they gained $18 and 39 cents. Before we try to read into the connection, it is worth pausing to consider how another market responded. We don’t often discuss the stock market (and we have not been calling for an imminent stock market collapse as many others have).

 

NYSE margin debt has reached new record highs this year, dwarfing previous peak readings by an impressive margin. At some point this is bound to generate many long faces, gnashing of teeth and loud wailing. And overtime for margin clerks. [PT] – click to enlarge.

 

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Numeraire Extraordinaire

The price of gold went up $12 last week, and that of silver $0.50. That’s not bad for gold and silver owners, and not good for the vast majority who are all-in on the dollar (though they don’t think of it that way).

 

“All in”: A legendary scene from “High Stakes Poker”. This was a straddled hand, with three players pumping up the pot to $14,900 pre-flop (Sammy Farha was in there too, with the ace of hearts and the three of spades as his hole cards). Guy Laliberte (the owner of the Cirque du Soleil) was first to act after the above flop was dealt and checked his top two pair hand. Farha bet $13,000 with his pair of threes, upon which former tennis pro turned poker pro David Benyamine quickly raised his nut-flush draw to $43,000, so as to thin out the field (this is known as a “semi-bluff”). Laliberte responded (also not thinking very long about it) by raising his two pair to $168,000, prompting Farha to insta-muck. As Gabe Kaplan (the most entertaining poker commentator of all time) noted while Benyamine mulled things over: “It’s hard to just call”. It took Benyamine 57 seconds before muttering “I’m all in” and shove $600,000 into the middle – at the time equivalent to approximately 500 ounces of gold. Laliberte thereupon announced “I have to think about it” and called precisely 30 seconds later (yep, he’s a fast thinker).* And so a 1,000 gold ounces poker hand came into being. [PT]

 

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How to Earn Money that Will Soon be Worthless Real Quick

There is a often-promoted plan to grow your wealth. Here’s the background. The dollar is going to be worthless. Soon! The reason is because [their peeps in high places tell them / the Chinese / end of the petrodollar / historical fiat currencies / Rothschild Jekyll Island Master Plan Private Fed / Fed printing] will cause the dollar to collapse and gold will rocket to $50,000.

 


The many ways of getting rich quick… sometimes it a bit takes longer than anticipated, as the panel to the right indicates. Getting rich off inflation is not impossible of course, but pulling it off in practice it is actually a lot more tricky than is generally believed. [PT]

 

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The Problem with Mining

If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).

 

As this book attests to, some people have a very cynical view of mining…  We would say there is a time for everything. For instance, when gold went  from $270 to $320 in 2001-2002, the HUI index went from 35 points to 150 points, in a show of rather noteworthy outperformance (something similar happened in 2016).  The “sweet spot” for gold mining shares is usually early in gold rallies, before input prices catch up (empirically, gold has a habit of leading price moves in the main mining inputs) [PT]

 

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The Wrong Approach

This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question.

Which interest rate will be higher?

 

It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of purchasing power.

 

American economist Irving Fisher, of “permanent plateau” fame. He inter alia came up with the “quantity theory of money” and the infamous “equation of exchange” (as Hayek once remarked, every student of economics should know about these, and then immediately forget about them again; we know exactly what he meant to convey…).  Fisher was quite the busybody. Like so many economists of his time, he became fascinated by the possibility to collate statistics and “measure” things in the economy. We have to thank him for index numbers like CPI as well, and it is probably fair to say that Fisher is the bedrock on which much of US mainstream economics rests (only things he was right about are rejected). In the early 20th century the erroneous idea began to take hold that economics should become more akin to the natural sciences. The data of economic history (i.e., statistics), would so the speak provide the numerical wherewithal to put some flesh on equilibrium equations previously only used as theoretical constructs which were understood not to apply to the real world of constant change. Why did economists so readily fall for this methodological lunacy? It was yet another momentous error – the growing belief that the economy had to be steered, or somehow centrally planned by “wise men”. No doubt tempting for those imagining themselves to be among the planners, and a catastrophe for the rest of us. [PT]

 

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Frexit Threat Macronized

The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK.

The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing… we can’t wait! [PT]

 

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Election Effect Debate

Last week, we talked about the effect of the French election on the gold and silver markets, and noted:

 

Of course, traders want to know how this will affect gold and silver. As we write this, we see that silver went down 30 cents before rallying back up to where it closed on Friday. Gold went down about $20, and then half way back up.

At this point, we are not sure if the metals are supposed to go up because more printing. Or go down because the euro constrains France from printing. Or silver at least should go up because the economy is going to be better with France remaining in the Eurozone. Or go down because the ongoing malaise will only progress as it has been. Or some other logic… and the price gyrations this evening show that traders don’t agree either.

 

French precious metals terrorizers sow discord among traders [PT]

Photo credit: Christian Hartmann / Reuters

 

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The Mathematics of Frexitology

This was also a holiday-shorted week. As we write this, the big news comes from the election in France. The leading candidate is a banker named Emmanuel Macron, with about 24% of the vote in a 4-candidate race. The anti-euro Marine Le Pen came in second with just over 21%. From the sharp rally in the euro, which was up about 2% at one point, we assume that observers believe the odds of France leaving the euro have just gone down.

 

The political program of Emmanuel Macron: ”Hamon is lost – Fillon is burned – It’s either me, or the blonde of the FN” – “Obviously, if you look at it like that…”  A concise summary of how one becomes president in France these days – provided the polls are not in error. It wouldn’t be the first time – don’t forget the “Bradley Effect”, which is probably even stronger in Le Pen’s case than it was in Trump’s. [PT]

 

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A Force Like Gravity

This was a holiday-shorted week, due to Good Friday, and we are posting this Monday evening due to today being a holiday in much of the world. Gold and silver went up the dollar went down, +$33 and +$0.53 -64mg gold and -.05g silver. The prices of the metals in dollar terms are readily available, and the price of the dollar in terms of honest money can be easily calculated.

 

Curved space-time… eventually, it will get you. The image above depicts the binary system PSR J0348+0432 – a neutron star orbited by a white dwarf in the constallation Taurus, discovered in 2007 [PT]

Illustration by John Antoniadis

 

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Input Data Errors

Dear Readers,

I owe you an apology. I made a mistake. I am writing this letter in the first person, because I made the mistake. Let me explain what happened.

 

The wrong stuff went into the funnel in the upper left-hand corner…

 

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