What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved?
I have heard many theories about this drop, ranging from the apologogetic (gold bugs) to the triumphant (easy money theorists).
There's a fundamental thing to consider: the demand for physical (coins, bullion, ingots) gold and even silver remains very strong. Small savers and investors have not stopped buying. Sales of US Mint Silver Eagles are at an all time high (first quarter 2013 saw sales raising to an unbelievable 14.2 million ounces), and mints cannot keep up with demand of physical gold coins and bullions.
So what are we to make of this? The problem is, of course, paper gold, meaning ETF's. The amount of positions taken just in the first quarter of 2013 is staggering. It's a mass of future contracts well in excess of any gold that can possibily be mined (especially with a global slowdown in mining in progress) or consumed. A correction was necessary and it will probably continue. At over $1500/oz gold was seriously overpriced (yes, I am not a "$5000/oz in the near future" guy despite owning considerable amounts of gold) and silver even more so, since there's no shortage of silver ore.
One of the chief causes is the volatility presently reigning in the Japanese stock market. Big keiretsu banks and investment funds operating in Japan have always been huge gold ETF buyers and sellers. Not to mention Japanese savers have always been avid hoarders of gold coins and bullion. With panic setting in Tokyo, these banks and funds have started dumping gold ETF's to get liquidity, to be quickly followed by panicked investors worldwide. Their losses, the hoarders' gain (especially those who bought the bulk of their holdings before 2011). Unless this is the first stage in the long-awaited correction in stocks and ETF's, gold will rebound in the near future. Otherwise, price will continue to drop as greedy investors will scramble for liquidity before being bailed out once again.
One may argue "Why, in light of what happened in Cyprus and how real life price inflation is heating up, gold isn't skyrocketing?". The reasons are simple. There aren't many who plan for the future. Those who buy gold as an edge against inflation or simply to have something tangible to leave to their children are such a small minority they can barely affect the price of gold. Asian buyers prefer small, constant purchases. Europeans are actually selling their gold (if they haven't already) either to get desperately needed liquidity or tempted by high prices. The present "in" thing is stock trading. Gold ETF's are just a side bubble to the big bubble waiting to burst. Because it must burst: I have seen firms with the same net worth as in 2007 posting profits six times higher... this is sheer lunacy.
Agreed that gold was overpriced and was due for a serious shakedown. But I keep hearing "it's only the price of paper gold that's effected." If that's so then there should be a large disconnect between the price of physicals and paper.
Many dealers of physical PMs base their price on the spot price and then add a premium. Also, some of the premiums nowadays are ridiculously high.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
What is the libertarian explanation for the drop in gold prices?
Why would a political philosophy be able to explain an economic event?
because we are so fucking good, John.
Before I was in a hurry (when am I not?) so I left out one important consideration.
Since 2004, when the first gold-backed ETF fund debuted in Australia, analysts have kept wondering how these new financial instruments would affect the price of gold. The answer came in 2011 when, in face of declining gold demand, price increased considerably. What had changed? Gold-backed ETF's had boomed. While nobody felt like talking about cause and effect, all agreed there was a "correlation".
Now for a bit of bad news. The largest gold exchange-trade fund, SPDR Gold Trust ETF (GLD), owns over 1200 tons of gold. That makes it the sixth largest gold owner worldwide and by far the largest private owner. If the gold bust continues and investors start fleeing gold ETF's in droves, these funds will have to drop physical holdings. Meaning they'll start to sell physical gold they have in their vaults. GLD alone has enough to literally flood the market, not to mention all its competitors. If GLD decides to sell 200 tons, price will drop by a fair margin, even if it's all scooped up by a large buyer like China or India. Panic alone will force the price down quite a bit before it reaches a "liquidation level". I wouldn't be too surprised, if this correction continues, to see gold reach $1200/oz or even $1000/oz if other ETF bubbles (oil for example) pop in the meanwhile.
Something becoming more affordable is good news.
I don't think it would, but it would be interesting to hear the opinions. I think psychology would better explain the behavior of prices.
Al_Gore the Idiot:Why would a political philosophy be able to explain an economic event? I don't think it would, but it would be interesting to hear the opinions. I think psychology would better explain the behavior of prices.
Then why are you asking for a "libertarian explanation"?
It's like asking for a capitalist explanation for the number of moons orbiting Saturn.
I read that 3bil in holdings at the comex were removed. Not sold, just removed, by JP Morgan and . Then came the Cyprus thing. And of course goldman is talking down gold, predicting new lower-lows.
http://bullmarketthinking.com/comex-gold-inventories-collapse-by-largest-amount-on-record/
And something similar went on with silver. Max Keiser is actually doing a decent job on keeping up with it.
supply and demand you fool!
http://www.youtube.com/watch?v=2Si9AaWVbak&feature=player_embedded
For a little more on the matter.
Al_Gore the Idiot: What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved?
How about: "what goes up must go down"?
Regards, obf.
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
onebornfree: Al_Gore the Idiot: What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved? How about: "what goes up must go down"? Regards, obf.
Not if you're in free space.
Here's what I said recently over at the Daily Bell about the drop in gold prices:
"As I have been saying for years, both here and elsewhere, nobody can know for certain what lies ahead for the economy, investment markets etc., despite what various investment advisors, economists ["Austrians" and "free market" economists included], central banksters, tea-leaf readers etc. might claim. The financial future is inherently unknowable, except perhaps in the most generalized terms.
_Because_ the economic future remains largely unknowable, there are, as far as I can see, two reasons for owning gold:
1] [The most important reason] : As a part of a fully diversified, non-predictive, long term savings plan.
That is, gold [bullion] makes up an always fixed, pre-determined percentage of an individuals long term savings plan. A long term savings plan is for money that an individual cannot afford to lose, [i.e. _not_ for speculations ] - gold bullion is an important part of such a non- speculative, non-future-predicting, plan.
2] As a speculation, or bet.
That is, an individual who has money they _can_ afford to lose, would perhaps buy gold [or whatever] with the money they can afford to lose. Under those circumstances the individual buys within a certain price range [perhaps based on fundamental or technical analysis], and then stays "in" as long as the speculation makes money, and gets out automatically via stop-losses that are automatically triggered when the price drops by a pre-set percentage .
Question: Are You Investing, Or Are You Really Speculating?
As I see it, the biggest problem for most individuals is that they are really speculating [i.e. using money they cannot afford to lose to place bets for expected profits], when they think they are investing, and so are psychologically unprepared for significant market drops and must therefor "chicken out" of whatever they "invested" in.
See: "The Golden "Bubble" - Time to Buy, or Sell?" :
>What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved?
It seems to be "Crimex"-related.
If I had any money I would load up on phys while the "Crimex" patsies are stuck holding the bag (i.e. gold claim checks).
@JJ: +1
@OP: I'm going to answer anyway because this is a topic worthy of discussion.
Of course, we never fully know all the whys and wherefores of anything as large and complex as "the gold market". However, I think there are two fairly big reasons that explain most of the drop:
a) Gold prices have been due for a correction ever since we passed the 1700 mark - not because gold cannot rise higher but because investors inevitably become skittish with untested highs and it turns into a self-fulfilling prophecy. Marc Faber was calling a correction in gold since early 2012, he even recommended some limited move into equities as he expected them to perform better than gold (blasphemy!) Now that we've had this correction, it is a time to buy buy buy. Buy as much physical as you can get your hands on while the getting is good. Take a second mortgage if you have to; you will pay it back with plenty of interest left over within a year.
b) This is partly a corollary to (a)... financial advisors have been telling their clients since 2008, "You should be putting 5-10% of your portfolio into gold" as part of the "high-risk" portion of their portfolio. A lot of these people are retirees or on the down-slope to retirement... they have a very low appetite for risk. When you have instability such as Greece or Cyprus, these fair-weather gold investors run for "safety" in cash or bonds.
@OBF: You're completely off the mark
Even the modern conception of "investment" has been thoroughly corrupted, as evidenced by the idea of mutual funds, particularly index funds. An index fund is nothing more than an inflation tracker (and that only during the good times). You're not investing, you're just discounting the effect of the rise in CPI on your savings. An investment is always the purchase/production of capital goods (producer goods) on the basis of speculating that greater productivity in the chosen market is possible, at a profit*. The extension of credit for this end (venturing) can only be done sanely by the detailed understanding of the creditor of the business he is venturing on. In other words, the venture capitalist is the investor... the capitalist/CEO is merely a manager/visionary.
We have it all backwards, we think the capitalist/CEO is the investor and the venture capitalists (shareholders) don't need to know anything in particular about the business. What rubbish. And then we get into the whole rat's nest of the stock-share scam... common stock sahres are not ownership shares in the business, in my view. They are not even secured in bankruptcy liquidation. If they were, they would entitle the shareholder to certain guaranteed dividends based on the profitability of the company. Of course, this is not possible even for dividend-bearing shares because the vast majority of shareholders are not entitled to inspect the company's books, so they have no way to ensure fair play in the handling of revenues, costs, profit and dividend calculations. In other words, the common stock holder is playing "hot potato" or "the greater fool", while even the dividend stock holder is at the mercy of the board of directors, senior management and the other major shareholders. In other words, the whole modern model of what investing even is, is completely broken.
tl;dr: "Blind" investing is not investing, it's just gambling by another name. It is made possible courtesy of the Fed+NYSE which, taken together, constitute a gigantic counterfeiting and money-laundering syndicate. Sure, your assets will rise with inflation - all boats rise together and the closer you are to the source, the faster your boat will rise vis-a-vis everyone else's. Buying gold is not an investment by any measure. Holding gold is also not speculation unless we mean that holding dollars is also speculation. In this sense, we are talking about the relative propensity of non-monetary goods versus monetary-goods to rise in value more quickly. In general, the fluctuations in the relative value of gold and other non-monetary goods are milder than the fluctuations of fiat currencies. In other words, if you're just trying to "hold onto what is yours", gold is the place to be.
Clayton -
* Speculation is often mis-labeled "investment"... speculation is not investment, it is a kind of asset allocation in time, I call it "peddling over time." A peddlar buys things from people who need them less (at a lower price) and re-sells them to people who need them more (at a higher price) and, by facilitating the reallocation of resources from those who need them less to those who need them more, he makes a profit. The speculator is nothing but a peddlar... in time. He buys things that are needed less at time A (at a lower price) and sells them when they are needed more at time B (at a higher price).
Here's what I said recently over at the Daily Bell
Are you Wile?
You're confused by the financial and the economical meaning of the word investment.
Gold is not investment to the economist because there's no capitalization. Only a commodity and a dude that sells and a dude that buys.
But it is a financial (speculative) investment to the dude that buy if he is expecting its price to rise before he sells it again.
You're right about time peddling but peddling is a form of using private information and willingness to assume risks in order to make profits.
About buying a stock index, it is a financial investment, but it becomes investment in the "economist" sense if you follow the thread of effects.
Yes, it does not necessarily means more capitalization when a chap buys a basket of stocks because another chap sold it to him. Therefore, this type of "investment" is associated with the "disinvestment" or liquidation on the other side of the transaction, and the total capitalization in the economy remains the same, right?
Not quite.
Say you and a bunch of other guys want to enter the stock market. How you're gonna do it? You need to outbid the current ask prices, pushing the stock price levels up.
And by doing that, you just helped these companies because now they can raise more money by issuing new equity, and/or get better credit evaluations on their bonds, which can be used to cancel extant expensive debt (issued when the company market cap was lower).
The net effect so is higher capitalization and more investment, insofar as at least a part of this new money on the hands of the company executives gets transformed in new capital.
And it came from your delayed consumption, not from the thin air :)
Clayton: @OBF: You're completely off the mark Gold is not an investment, it is hard money.
Gold is not an investment, it is hard money.
Thank you for your thoughts. I understand what you are saying, and even agree with you- it _is_ "hard money" [ there was really nothing in my post to suggest otherwise as far as I can see ].
However you and I have to face the fact that in the real world gold is viewed by different individuals in different ways. To some it is indeed an investment, to others a speculation, to others still a "barbarous relic", and to others maybe some kind of divine saviour. Because _you_ [and I ] might believe it is "hard money" does not make it so in the general market at this time, nor at any other.
Fact: The general perception of the market for gold [or for anything else- stocks, bonds, real estate, etc.] is in a constant state of flux.
More people might see gold as "hard money" tomorrow, than do today, or maybe not- it is impossible to know for sure, and there is no way to ensure that in the future our view of what's "right" will be reflected in other peoples scales of value, either as a group, or as individuals.
Regarding the difference between speculation and investment- I'm not sure what your point is, my only point is that if an individual puts all of the money they cannot afford to lose into gold bullion, that _because_ gold only performs really well in a couple of different specific economic environments [ i.e. persistent inflation and political unrest], then they are effectively saying that those two particular economic environments _must_ occur, and that therefore, essentially they are making a massive speculation, [bet, gamble], with all of their savings, no less, on the future "guaranteed" occurrence of very specific economic conditions ; economic conditions which, in the real world, cannot be guaranteed to occur within the individuals lifetime, because the economic future , in my opinion, remains largely unknowable.
Clayton: Here's what I said recently over at the Daily Bell Are you Wile? Clayton - No. This is me singing "Dreams [Anarchist Blues]" [ my own composition], live recently. Why would you even ask that? Why don't you simply look at my profile? [And even if I were, what difference would that make, in your view? How would that affect the truth or falsity of what I have said?] Regards, obf For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"]. Filed under: investment & speculatative philosophy | Post Points: 5
No. This is me singing "Dreams [Anarchist Blues]" [ my own composition], live recently.
Why would you even ask that? Why don't you simply look at my profile?
[And even if I were, what difference would that make, in your view? How would that affect the truth or falsity of what I have said?]
Regards, obf
You're confused by the financial and the economical meaning of the word investment. Gold is not investment to the economist because there's no capitalization. Only a commodity and a dude that sells and a dude that buys. But it is a financial (speculative) investment to the dude that buy if he is expecting its price to rise before he sells it again.
Highlight added. The price of something is measured in the monetary unit. If gold is money, its "price" is always 1.0. Again, we return to what I said before: holding money (gold, paper cash, etc.) is a form of speculation against the class of "non-monetary goods". What you are essentially saying is: "I'm better off holding cash for now because I believe non-money goods will be cheaper in the future as against the cash I am holding than they are today". In an inflationary boom economy, this is a very safe bet.
You're right about time peddling but peddling is a form of using private information and willingness to assume risks in order to make profits. About buying a stock index, it is a financial investment, but it becomes investment in the "economist" sense if you follow the thread of effects.
It is driving blind and it doesn't become any more enlightened once the money leaves your hands.
Yes, it does not necessarily means more capitalization when a chap buys a basket of stocks because another chap sold it to him. Therefore, this type of "investment" is associated with the "disinvestment" or liquidation on the other side of the transaction, and the total capitalization in the economy remains the same, right? Not quite. Say you and a bunch of other guys want to enter the stock market. How you're gonna do it? You need to outbid the current ask prices, pushing the stock price levels up. And by doing that, you just helped these companies because now they can raise more money by issuing new equity, and/or get better credit evaluations on their bonds, which can be used to cancel extant expensive debt (issued when the company market cap was lower). The net effect so is higher capitalization and more investment, insofar as at least a part of this new money on the hands of the company executives gets transformed in new capital. And it came from your delayed consumption, not from the thin air :)
There's a lot more thin air involved than I think you're acknowledging here.
Clayton:a) Gold prices have been due for a correction ever since we passed the 1700 mark - not because gold cannot rise higher but because investors inevitably become skittish with untested highs and it turns into a self-fulfilling prophecy. Marc Faber was calling a correction in gold since early 2012, he even recommended some limited move into equities as he expected them to perform better than gold (blasphemy!)
Corrections are bound to occur, especially when prices begin to go parabolic like they did in April 2011. I actually sold half my stash of silver at $46, but I wonder how many other austro-libertarians sold any of their holdings during that time. I'd guess that most of the investors that are subscribed to newsletters such as those by Casey Research and Agora Financial actually did not because they haven't actually gone through much of the thought process as to why they own PMs. I think this is evident by the fact that these same newsletters always include a section that reminds the subscriber as to why they bought PMs in the first place whenever there is a correction such as the one that is occuring now. I'm sure that Casey Research and Agora Financial are being flooded with calls by subscribers that want to know why the newsletters did not tell them to sell their PMs before the correction.
Now that we've had this correction, it is a time to buy buy buy. Buy as much physical as you can get your hands on while the getting is good. Take a second mortgage if you have to; you will pay it back with plenty of interest left over within a year.
Certainly; however, I wonder how many of us austro-libertarian PM havers actually have the cash the to buy PMs right now. Especially those that never sold gold at $1900 and silver at $49. I bet that they been holding on since then.
Hum.
I don't know about that.
Inflation is the expansion of the supply of money, either in by adding to the monetary base (bank notes currency and bank reserves with the central bank), or through changing the multiplying effect of fractional reserve banking. If they expect an inflationary boom, they expect cash to loose value against commodities and other financial assets (except bonds), so they are worse off holding cash.
That's why gold or real estate or equity can all be used as hedges against inflation.
You can say that gold is money and all the cash in terms of currency and deposits and savings account are something else, but in that case it is important to clarify that the inflation you were talking about was not the inflation of the money supply (of gold), but of this other financial asset (fiat money).
In this case "inflation" is just the issuance of a financial asset. Stocks are "inflated" in IPOs and follow ons. And bonds are "inflated" when new debt is issued making the credit rating of a given company drop.
Of course this is not very helpful, since gold is usually transacted agains fiat money (or maybe bonds, gold futures and gold derivatives), and seldom against anything else, which makes somewhat hard to call it money, as a means of exchange, but hey, whatever floats your boat man, I'm not here to say that money has some precise metaphysical definition.
Actually, I'm arguing precisely the opposite in the bitcoin thread. Moneyness is rather a gradient quality enjoyed by several highly liquid commodities that can be used as an exchange buffer to reduce transactions costs. And the most liquid of them (in every day life) all are the different states of fiat money known as M1, like cash or (electronic access) demand deposit accounts.
Even in terms of fiat money, it is not the same when we talk of a million dollars in cash, or in a checking account or in savings. All of these forms of a million dollars entice different transaction costs in terms of security, portability, and therefore are not equally liquid.
Even three sets of a million dollars in cash are not the same in terms of liquidity and moneyness if one is a briefcase of consecutive numbered high denomination bills, the second is a pair of large gym bags full of blood stained shuffled bills of medium denominations, and the third set is an 18-wheeler Mack truck full of dimes.
So this whole Highlander thing of "there can only be one kind of money" is pure fruitcakeness. There are several with different liquidity properties that make them more or less suitable as an exchange media buffer in transactions of certain volumes or of certain timespans or in certain venues or against certain counter-parts.
These analogies are certainly good to score rhetorical points with civilian audiences generally conditioned to act hostile against all things high finance, but what they actually reveal is a lack of understanding on how financial markets really operate.
An index like S&P 500 is made of certain weighted stocks of major companies.
So if you buy a basket of these stocks you are basically saying that you trust the collectivity of executives in these companies more than any other end you might have for the money you invested. Or maybe you don't necessarily trust them that much, but you feel there is a bull market happening and you want a part in the action before everything falls apart. Generally you're not buying a new batch of stocks in an IPO or follow on, but your buying from some fellow who happened to own these stocks, but wasn't so confident as you, and decided to desinvest. So the money doesn't go to the company, but to somebody else, generally unrelated. But if more people are willing to buy than sell at the current price, it will rise a bit.
And by doing that you pushed the equity value of every company listed in the S&P 500 a little bit higher. With higher equity values, the board and the executives of those companies have access to proportionally cheaper ways of raising more capital. For instance, they can simply issue more equity, since their stock is trading now at higher prices due to the entry of new investors (you).
In any case this is not blind investment, it is informed investment. You could have used the money to do many other things. You could have bought gold futures, you could have bought real estate, you could have put it in trust fund for your children college tuition, you could have seeded the startup of your nephew.
But instead you bought S&P 500. You did that because your assessment of the risk/upkeep costs/return profile of all these alternative uses of your savings turned out favorable to such a decision.
Sure, but not in the process I described. Saving income to buy stock is investing, even when you simply buy S&P 500 tracker funds. Granted it's not the most sophisticated form of investment in the world, but it isn't "driving blindly" either.
@Muff: Well, yes, if you don't have spare cash, then you don't have it. As for not having sold at $1,900, I don't think it's a "mistake" - your coins are not really less valuable today than they were two weeks ago. The dollar has not really suddenly become half again as strong as it was two weeks ago. This is a very temporary dip.
I think that you (generic) have to decide beforehand why you are moving into PMs. If it's because you are just trying to "keep what is yours" and not lose it to inflation, then there is no need to watch the gold price closely... it's going to go up and down and this just reflects the inevitable swings in the market as the dollar wildly moves up and down and demand for monetary goods generally increases and decreases. As long as you have the same number of coins in your safe, you haven't lost a thing. If, however, you're wishing to speculate on the basis of political shenanigans, then you need to watch the fundamentals very closely, not only in gold, but in silver, oil, and other commodities, as well as the general equities trends and not just in US, but internationally. You should also be reading the news closely and find alternative news sources - rt.com, aljazeera.net, antiwar.com, Asia Times, etc. basically everything that LRC links to, plus whatever other solid news you can find. Then you need to read the tea-leaves... what are they up to? Are we going to war against Iran within the year? North Korea? Who are the counter-parties to US-dollar hegemony? Is there defection within the ranks or are they maintaining solidarity? Is the EU doomed or do they have the resources to fight the US-UK-Fed syndicate? Etc. These questions point to the gross outcomes which we may be facing and, thus, are a bellwether of PMs speculative performance. War, for example, is actually bad news for PMs as it will encourage the perception that the economy is finally going to recover, that the dollar will once again be strong, and that PMs are just another industrial metal suitable only for their use in the electronic circuits of the smart bombs and Predator drones we are lobbing over Iran or North Korea. Of course, that doesn't mean you should dump your PMs, either... people who held onto their gold through either of the World Wars came out the other side doing quite well. Once the war is over and you can safely trade your PMs, they will have retained their value just fine. So panic selling is not the answer... you will just have to accept that you are locked into PMs for the duration of the war.
Clayton: @Muff: Well, yes, if you don't have spare cash, then you don't have it. As for not having sold at $1,900, I don't think it's a "mistake" - your coins are not really less valuable today than they were two weeks ago. The dollar has not really suddenly become half again as strong as it was two weeks ago. This is a very temporary dip.