Chart Update

     

 

 

How We Got Used to Fiat Money

Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market valued silver a bit lower than that.

 

The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio. It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit. [PT]

 

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Fundamental Developments

Last week he price of gold was up nine bucks, and that of silver 6 cents. These small changes mask the relatively big drop on Tuesday—$13 in gold and $0.48 in silver — and recovery the rest of the week. The gains above previous week occurred on Thursday.

 

Speculators have lately warmed up to precious metals – this is also evident in a large increase in net speculative long positions in the futures markets [PT]

 

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Milestones in the Pursuit of Insolvency

A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.

 

US consumer debt is making new all time highs – while this post GFC surge is actually relatively tame, corporate and government debt have in the meantime exploded into the blue yonder. Nevertheless, this means consumers are also highly vulnerable to the coming crisis (which will look different from the last one, but will be perceived as just as, if not more devastating). [PT] – click to enlarge.

 

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Bitcoin and Credit Transactions

Last week, we said:

 

It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt.

Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by Satoshi’s design.

 

The mad-cap rally in bitcoin has continued – as we recently pointed out, the chart pattern is highly reminiscent of the pattern in gold in the 1970s. The current phase is mimicking the 1979 blow-off move. [PT] – click to enlarge.

 

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A Fork in the Cryptographic Road

So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.

 

Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we write this. So far the chart of BTC in USD terms since 2010 happens to be a spitting image of the chart of gold in USD terms from 1973-1979 (the pattern similarity is eerie). A brief explanation of the “hard fork”. [PT] – click to enlarge.

 

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Precious Metals Supply and Demand Report

That’s it. It’s the final straw. One of the alternative investing newsletters had a headline that screamed, “Bitcoin Is About to Soar, But You Must Act by August 1 to Get In”. It was missing only the call to action “call 1-800-BIT-COIN now! That number again is 800 B.I.T..C.O.I.N.”

 

Bitcoin, daily. In terms of the gains recorded between the lows of 2009 and the recent highs (from less eight hundredths of a US cent per bitcoin, or $1 = 1,309.2 BTC, the first officially recorded value of BTC, to $3,000 per bitcoin, or $1 = 0.000333333 BTC), the bubble in bitcoin by now exceeds every historical precedent by several orders of magnitude, including the infamous Tulipomania and Kuwait’s Souk-al-Manakh bubble. In percentage terms BTC has increased by about 392,760,000% in dollar terms (more than 392 million percent) since its launch eight years ago. Comparable price increases have otherwise only occurred in hyperinflation scenarios in which the underlying currency was repudiated as a viable medium of exchange. Our view regarding its prior non-monetary use value and hence its potential to become money differs slightly from that presented by Keith below. We will post more details on this soon, for now we only want to point out that we believe there is room for further debate on this point. [PT] – click to enlarge.

 

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Hostages of Irredeemable Scrip

Stockholm Syndrome is defined as “…a condition that causes hostages to develop a psychological alliance with their captors as a survival strategy during captivity.” While observers would expect kidnapping victims to fear and loathe the gang who imprison and threaten them, the reality is that some don’t.

 

Images from the Kreditbanken robbery at Norrmalmstorg in central Stockholm in 1973. The two bank robbers took four hostages, who afterward complained that they were far more scared of the what the police might do than of the robbers. One of the hostages even struck up a personal friendship with one of the hostage takers a few years later (despite the fact that he remained a career criminal).  Psychologists became interested in this odd behavior and criminologist Nils Bejerot eventually coined the term “Stockholm syndrome” to describe it. [PT]

 

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Bent and Distorted

POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.

 

They’re not the best map readers, that much is known for certain. [PT]

 

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Fundamental Drivers of Gold Prices

[Ed. note by PT: we believe there is a lot less disagreement with Steve Saville’s approach than Keith assumes – we are adding comments in the chart captions below as well as an addendum and footnotes to illustrate what we mean – all our comments are marked with [PT] below – we have essentially made a discussion out of this week’s supply-demand report, as we believe these issues are of interest to all gold aficionados]

Steve Saville wrote a post this week, in which he proposed a model that indicates the fundamentals of gold. According to him, these are: (1) the real interest rate, (2) the yield curve, (3) credit spreads, (4) the relative strength of the banking sector, (5) the US dollar’s exchange rate, (6) commodity prices, and (7) the bond/dollar ratio.

 

Steve Saville’s fundamental gold price model (details see here) – this looks actually quite good to us. We follow the macroeconomic indicators it is based on as well – see e.g. “An Overview of Macroeconomic Gold Price Drivers” from mid April. As we understand it, the model is not trying to determine a specific gold price. It merely tries to show in if macroeconomic pressures are pointing toward a rising or falling gold price, and it seems to be doing that quite well. As Steve Saville mentions, the model is slightly leading the gold price (or at least has done so in recent years and on numerous previous occasions – that is not always the case as we have discussed in the past, see also our comment on the yield curve). Keith’s methodology of bringing the trading on gold futures into context with the spot market does the same most of the time (i.e., the fundamental price he derives is usually leading the market gold price). Both models are largely based on market-derived data, so this should be no surprise – we would assume they ultimately show the same forces at work. [PT]

 

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Frisky Fed Hike-o-Matic

We haven’t commented on central bank policy for a while, mainly because it threatened to become repetitive; there just didn’t seem anything new to say. Things have recently changed a bit though. A little over a week ago we received an email from Brian Dowd of Focus Economics, who asked if we would care to comment on the efforts by the Fed and the ECB to exit unconventional monetary policy and whether they could do so without triggering upheaval in the markets and the economy**, so we are taking this opportunity to do just that.

 

Outside view of a famous crime scene: the building where the central planners of the fiat money regime gather to “steer” the economy.

 

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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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Returns One Can Only Dream Of

When I heard about Bitcoin for the very first time in May of 2011, it traded at eight US dollars.

As I write this, almost exactly six years later on May 20 2017, it has broken through the USD 2,000 barrier for the first time [ed. note: since then it has streaked even higher].

 

Bitcoin, daily: just four trading days after breaking through the USD 2,000 level, Bitcoin reached a peak of USD 2,760 – click to enlarge.

 

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

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