fascinating article on zerohedge

[croc]

Erste Group's Ronald Stoeferle has released another must read report on gold, recapping all the recent developments in the space, and more importantly putting the recent price moves in context. While there are numerous key observations which we leave to readers to uncover on their own, arguably the key fact is the following: "The possession of gold is tantamount to pure ownership without liabilities. This also explains why it does not pay any ongoing interest: it does not contain any counterpart risk. Along with the International Exchange and the Chicago Mercantile Exchange, JPMorgan now also accepts gold as collateral. The European Commission for Economic and Monetary Affairs has also decided to accept the gold reserves of its member states as additionally lodged collateral. We also regard the most recent initiatives in Utah and in numerous other States as well as in Malaysia, and the planned remonaterisation of silver in Mexico as a clear sign of the times. The foundation of a return to “sound money” seems to have been laid." And as the currency basket vs gold since 1999 chart below demonstrates, the key feature of fiat money is that is most certainly has liabilities, paradoxically in the form of central bank assets which collateralize it. The more worthless "assets" that are taken up by central banks to match the balance sheet expansion, the more worthless the actual currency in the form of actual circulating paper and reserves. As such it is not so much the actual dilution of fiat paper that devalues it: it is the increasingly less valuable available collateral that supports it. As for the future: one of Erste's scarier hypotheticals is that should the US lose control of its monetary base, leading to a 1000% jump in said monetary metric, the shadow price of gold assuming 40% backing of gold, would be $99,419. Frankly we have yet to hear even some of the most undaunted gold bulls throw this number around.

Probably the most important chart which each and every report on modern monetary analysis should include is the following: the one showing the relative value of gold versus a basket of currencies. While it is true that within the closed system of fiat currencies, where the devaluation of one leads explicitly to the revaluation of another (or others), the ceaseless dilution of all ultimately leads to an absolute loss in credibility and value relative to hard assets. Per Erste:

The following chart also shows the clearly intact downward trend of most currencies vis-à-vis gold. The equally weighted currency basket consists of US dollar, euro, Swiss franc, yuan, Indian rupee, British pound, and Australian dollar. The downward trend is intact and is at the moment only marginally above the trend line. We have little reason to believe that the downward trend should subside in the foreseeable future, which is why we stick to our positive assessment of the future gold price development.

http://www.zerohedge.com/article/gold-special-report-erste-group-says-foundation-return-sound-money-has-been-laid-expects-gol

[gunDriller]

The possession of gold is tantamount to pure ownership without liabilities."

same for silver & copper & palladium & platinum & maybe even aluminum.

good quote though.


i wonder how industrial demand for palladium would hold up in the face of a worldwide economic crash. it really is a magical metal if you want to refine hydrogen.

[shakinginmyshoes]

As for the future: one of Erste's scarier hypotheticals is that should the US lose control of its monetary base, leading to a 1000% jump in said monetary metric, the shadow price of gold assuming 40% backing of gold, would be $99,419. Frankly we have yet to hear even some of the most undaunted gold bulls throw this number around.



Shrug. It's of no import to me WHAT the $ number of gold is. I care about how much STUFF my gold will get me.

When you can buy a 3-bed, 2 bath, 2 car garage house in a good neighborhood for 1 to 10 gold coins, then it's time to trade gold for real estate.
(Gold and land are the only true things of tangible wealth.)

10 gold coins is preposterous for a house, you say? Nonsense. At the height of the real estate bubble at gold at its nadir, a CA house was 300K and a gold coin was $300. That means it took 1000 gold coins to buy a house. Very extreme. But pendulums swing, and the more extreme, the more extreme the counter reaction.

Houses in my state are now $180 K. Gold is now 1400, so 148 coins to buy a house. That's a 10X improvement in the buying power of gold, and this bull is faaaarrrrr from over. And since the bulk of the gain of a bull happens at the end, assuming a 100 -1000 X improvement in the purchasing power of gold for houses is reasonable. , (Either the price of houses comes down or the price of gold goes up or both. I'm betting on both. Both is the established trend, and I'm betting on the trend of both continuing.)