Thursday, November 24, 2011

Looking ugly

Death of a currency as eurogeddon approaches

"It's time to think what hitherto markets have regarded as unthinkable – that the euro really is on its last legs ... Investors have gone on strike. The Americans are getting their money out as fast as they decently can. British banks have stopped lending to all but their safest eurozone counterparts, and even those have been denied access to dollar funding. The UK hardly has anything to boast of; it's got its own legion of problems, many of them not so dissimilar to those of the eurozone periphery." Trying to predict exactly what will happen next is folly but unless the Eurozone can re-establish credibility soon, things seem unlikely to be good for the UK economy for the next few years at least.

Posted by quiet guy @ 10:19 PM (2623 views)
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62 thoughts on “Looking ugly

  • It’s time for ECB bonds and a huge helping of Euro QE which can be used to buy those bonds. It’s a sad reality when there are no investors left who will buy a countries bonds. One presumes the intelligent investors out there are buying up value-holding assets and now waiting until the Euro currency has imploded.

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  • It’s time for ECB bonds and a huge helping of Euro QE which can be used to buy those bonds

    Devaluation. Nice.

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  • I’ll believe it when I see it, I have become very patient over the last 4 years or so.

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  • The actual problem was government borrowing with no intention to repay. He discusses the mechanics of the point of failure as though they were a cause.

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  • general congreve says:

    @1 – Yes they are. The really intelligent ones bought value assets a lot earlier.

    Stealth default via printing or outright default and Euro collapse, win-win either way, although I think the latter will get us there quicker. Eurobonds are a hiding to nothing, I mean, if Germany can’t sell Bunds then who the hell will want to purchase Euro bonds? Stealth default of outright default, them’s the choices, IMO.

    Anyway, this, coupled with 9 straight days down in the FTSE, is all most heartening for my 2011 predictions if the article is truthful (in the sig):

    2011 Prdeictions made Dec. 2010

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  • Another prediction, people to get bored of egotistical one trick ponies constantly talking their book.

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  • Fair play to General Congreve is what I say! Consistently on the money (pun intended) and postings that have made always seemed logical (well, they made sense to me at least.) I wish I’d had his cohones back in ’07.

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  • Clockslinger, the problem isn’t the PM bet, the problem is having to hear about it every single fckin day.

    The other problem, from my perspective, is the group think, and the lack of individual slant. I can get all the same stuff from Zero Hedge or the Talking Bears that told us JPM was going to collpase in the spring because they were short silver.

    It’s actually the lack of invovation rather than the endless repetition that apalls me, perhaps fitting for people who see only see value in something concrete.

    Meanwhile gold and silver bull market WILL continue , but the irony is that it will play out in the paper market (that goldbugs despise) and on the margin (being the other thing goldbugs despise) meaning the collapse when it comes will happen over night. There will be no stop loss for anyone holding physical, and believe me they will accumulate all the way to the top.

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  • Yesterday Steph Flanders, today Jeremy Warner..

    Big name financial hacks who value their reputation calling the end game on the euro..

    .. I always said it would end in tears, and have never wavered; but at times it has been a lonely stance..

    As recently as September I was discussing a complex business deal in Portugal, and threw into the ring of possible variables the fact that Portugal might not be in the euro for much longer. There was real surprise and disbelief from the Portuguese contingent, and I was amazed that successful and intelligent businessmen could be so blinkered to the reality of what was happening.

    The question today is whether the eurozone politicians will step up to the mark and try to bring some semblance of order to the dismantling of ithe eurozone – or will they pathetically run away and hide as it falls apart around them..

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  • Bellwether
    Can you clarify that last paragraph of yours forme please, I’m not quite clear on what you’re saying.

    GC
    It’s on the 144 day MA, but This has been punctured so may not hold so maybe the 252 day MA will be the next stop. Having said that, not sure ehich is galling quicker Gold or Stirling 😉

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  • GC
    If your fundamentals are intact then you’re in a buying zone, I’m just not sure (based on technical analysis) that the fundamentals are intact. Which is why I was interested in Bellwethers last paragraph.

    If it’s any consolation I’m nursing a (hopefully temporary) loss with MF Global going belly up.

    My safety thoughts then move to the likes of Bullion Vault etc. And I’m not convinced selling physical (in your hand) Gold will be very easy when you need to.

    My point if a big bank goes belly up the government have to step in quickly. If BV go, who really gives a stuff !

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  • I’m told HSBC have passed internal directives not to lend to the risky Euro countries.

    Can’t validate this, sorry.

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  • STR 2007 the standard wisdom is that the physical market will eventually crush the paper market, I suspect it may well be the other way round. This would not be a popular notion with metal heads but then faith does not broker much in the way of enquiry.

    For all the bluster from those with a stash, the PM bull is now being played out via Comex etc and on the margin. This is not therefore ultimately about people sheltering from a Fiat Currency collapse but rather a momentum trade where traders don’t take delivery because most of the money they have used to take a position is borrowered. Specualtive games of this sort always end in the same way with a cascade of margin calls and liquidations.

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  • general congreve says:

    @7 – Thanks Clockslinger. Although I should clarify it was the end of ’08/start of ’09 I went balls deep! If only I’d have been in the position to go all in at the start of ’07, I’d have quadrupled my money now, rather than merely just nearly doubling it. 🙁

    @8 – So, first I didn’t know what I was talking about. Now it’s that I might have been right so far, but I’ll mess up in the end. There’s nothing to be ashamed about in changing tactics, if things aren’t going your way, any decent military commander would do the same in a losing position, so don’t be too hard on yourself.

    @10 – Sorry to hear about your MF losses, even happened to Gerald Celente, he lost a packet apparently by failing to take his own advice. I’ve always said go physical only, ultimately you can’t trust any financial institution, there is always counterparty risk, especially in this environment.

    I don’t agree with your notion that if BV go then who really gives a stuff. I wouldn’t give a stuff, that much is true, but I think everyone who thought they owned gold in BV might be slightly p1ssed off! I’ve heard similar attitudes elsewhere, “Well, if the whole economy and currency goes down, then everything fecked anyway, so why bother to do anything?” My reply is that if shortly after the Titanic had slipped beneath the waves, you did an interview with a bloke rapidly freezing to death in the icy Atlantic and another fellow sitting nice and dry in a life boat, you’d get very similar views on just how bloody priceless a life boat is in the midst of such a massive disaster.

    As for the current price of gold, that seems to be reacting counter intuitively to most market news these days, I am happy to say I think we are witnessing outright manipulation of the gold market via Bellwether’s beloved paper gold market (which is leverage 99-1 to the real thing – fractional reserve gold!). To be honest I love it to, because it is still leaving a window of opportunity to get real gold at below real market value, a bit like those who are first in the queue at the bank run get some actual cash instead of nothing.

    I am sure that Bellwether could well be right, and that we could see a collapse in official gold prices, led by some underhand tactic, such as aggressive margin hikes in the paper market (this means anyone long gold on the futures market has to find extra cash to fund their open position – if they don’t have it, they have to sell, driving down the price of gold), which we have seen plenty of already, as TPTB get even more panicky. Of course, in that situation I wish everyone the best of luck in actually buying some of this newly cheap gold for real.

    Best of luck with MF btw, I hope they find the loot and you get your money back from the crooks.

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  • Actually i – this morning liquidated all of my Short Euro / Long USD position. I also liquidated the majority of my short positions in S&P. Why? Because it looks (short term) a bit oversold. When you add the armageddon type headlines its normally time to expect a bounce, add to that the septics having yesterday off and a gap down (for them) at the opening would be no surprise to me.

    Next? Santa rally? Hmmm I will be selling the rallies, although as usual depends on how big they are and when. As for Gold…..

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  • Bellwether
    Thanks, I see where you’re coming from.
    GC
    Cheers.

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  • General Congreve good to see you have emerged from your sulk. I might even get some answers to the questions I posed over the course of the week.

    My point today isn’t that the paper market is manipulating the gold bull, but that the paper market is increasingly becoming the gold bull a phenomenon likely only increase as the price spirals upwards – if you like destroying the purity of the bull market from the inside.

    Also I don’t think I’ve ever disagreed wholeheartedly with what you have to say, much of it is more sensible than many on here. You just seem to get locked into the kind of group think, which you accuse those you see as blinded by the fiat illusion.

    This is disapointing where rather than engage in points you tend to adopt a defensive position that is not predicated on thought but on the notion that you must be right and that you must not lose face by being wrong. Think of the outrage that would occur were I to post some of these ideas on Zero Hedge. These are the same people that buy into the freeman v debtslave meme. Actually I think there is some truth in all that stuff but I fear it quickly goes too far and becomes parody.

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  • general congreve says:

    @15 – Well…

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  • @ 18 or even hmmmm…. Good luck!

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  • general congreve says:

    @17 – Sulk? Very amusing. I think you might find that I have a life outside HPC that requires some of my time occasionally.

    I completely get the mechanics of the paper gold market. My point is that the price for gold you see is predicated by that paper market in the first place. It is well known that there are multitudes more contracts for delivery (paper gold) for gold than the actual stuff to satisfy those deliveries. The system works because, just like a bank using fractional reserve banking, they know that only a handful of customers will ever want delivery at any one time. But what happens come a panic. When nations are pulling up the drawbridge and demanding their leased gold back? When rich investors start getting nervous about the dollar and decide it would be better to take delivery of their gold? What will that do to the price of gold? Governments can’t print more of it to bailout the gold market like they did with the banks. Bottom line is I say it will happen and I’m guessing you say it won’t. As before, we’ll let time be the arbiter.

    This is disapointing where rather than engage in points you tend to adopt a defensive position that is not predicated on thought but on the notion that you must be right and that you must not lose face by being wrong.

    Sorry, who’s being defensive? I’ve stated my case, with plenty of analysis. Been right so far. If I prove to be wrong, I’ll admit it, said it before, that’s the deal, I’m man enough to admit my errors,So if and when. So, any you’d care to pull me up on, aside from those imaginary future ones you are predicting I’ll make, that haven’t happened yet.

    On the matter of the debt slave meme, you don’t think over-extended mortgage holders are debt slaves then?

    As for dodging your questions, I have replied, here’s one on your debt jubilee for Europe suggestion that you missed (I went back and checked many times to see if you answered, as I put a lot of effort in):

    @14 – OK, I’ll make it clear as day with a simple model.

    We have a world with only two countries, England and France. England uses the pound, France uses the Euro. The exchange rate is 1 to 1, always has been. Goods in both countries cost the same in Francs or Pounds. One such good is a pint of beer, which is 1 pound or 1 franc (no stupid taxes in our model), depending on which country you are in. Suddenly France goes on a debt binge and realises it cannot pay the debts back without devaluing the currency, so it devalues the Franc by 50%. Now the exchange rate is 1 pound to 2 Francs and it now takes the equivalent 1 pound to buy a beer, but 2 Francs to buy a beer, whether in France or the UK (this may take a little time to balance out through the system – but it will in the end). Later on we find that the UK has got itself in a similar mess and they take the same route out by devaluing the pound by 50%. The exchange rate is now back to 1:1 between the pound and Franc. Only now it costs 2 pounds or 2 Francs for a pint, depending on which country you are in. Now, if wages double, we’re back where we started, all square, as you say. But tell me, have wages increased since the 30% devaluation of the pound in 2008 and subsequent inflation that have further devalued the pound?

    As for the plan to write off the debt, look at the big arrows coming out of the PIIGS on this chart and then think how much have Greek, Irish, Portuguese and Spanish Banks lent the UK, France and Germany? Looks a bit like one way traffic to me.

    Image and video hosting by TinyPic

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  • Whoops – sorry @ 15 “the septics having yesterday off and a gap down (for them) at the opening would be no surprise to me”

    should have said “the septics having yesterday off and a gap down (for them) at the opening FOLLOWED BY A SHORT SQUEEZE would be no surprise to me.”

    Obviously we could go lower but the impulsive (S&P) fall from 1270 to 1150 in ten days looks to be nearing a completion. I for one would rather be sidelined and be happy with whats been taken off the table then risk a hundred or so S&P points for the lowish probability of another 50 to 100.

    As for buying it here…thanks but no thanks……. a surprise COULD still be to the downside.

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  • general congreve says:

    @20 – Actually that was a reply to your debt jubilee idea AND your assertion that if everyone devalues, it makes no difference to the purchasing power of all the respective currencies.

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  • general congreve says:

    @21 – I am not suggesting here is the very best place to buy gold in the short term. I’m sure there’s a 50/50 chance a better entry price may be available in the near future, I am not debating that. My view has always been over the longer term and has essentially been that gold will be last man standing, not only protecting the wealth of investors who hold it, but actually making them a very healthy return too. My view is to forget short term volatility, make your decision on how you ultimately think this will play out and then stick to your guns. Only the other day someone said to me on here how they regret waiting and waiting, only to see the price edge higher and higher to the point where they’ve let 40% gains pass them by. Still, just like on the Titanic, even if the ship is listing violently, it’s still not too late to grab that lifeboat and row for safety.

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  • Actually GC you are often defensive. Its a kind of admiral quality in a way because it shows you have so much faith in your analysis that you cant accept that any one with a different view COULD conceivably be right.

    Ahhh takes me back actually i think we are all like that to a degree, but you do tend to make it an art form. Some of your analysis is very interesting and thought provoking, so thanks for that, is it right? Well speaking for myself i do often agree with what you say, although as B/wether says when someone disagrees you do tend to post about 10 responses to “prove” you are right… If thats not being defensive i dont know what is.

    Lets just chill, remember it takes all sorts and being wrong isnt a bad thing, staking a reputation on it is probably (depending on the sums involved) more upsetting than losing “money” ;).

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  • GC my 24 crossed with your 23…. but your 23 kind of lets the prosecution rest. I actually didnt say anything about Gold, so im not sure why you want to assign a view to me. The “hmmmm” and the “……….” are basically because i have no strong feeling either way. I think it probably goes lower but it may bounce back after the $ rebounds, but i really dont have enough confidence either way to implement a trade

    I actually did think about shorting it the other day but decided that selling the Euro @ 1.3510 with a stop @ 68 to add to 13600 and 13850 shorts looked to be a much better idea. Of course too generally markets are correlated so had that been the wrong thing to do then selling gold would also have been incorrect. Hedging my bets? Yep , as always, i dont really see thats a bad thing though. Last time i looked that was called Money Management.

    S&P up around 5 points from the lows – if i was going to trade it (punt it really) it would be a long around here with a stop @1144 and looking for a short squeeze up to around 1186. If it goes t1ts up? I think Peter Brandt explains that best, im not going to repeat myself.

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  • general congreve says:

    @24 – I think you’ll find ’10 responses’ or however many, are just that, responses, to points, critiques or arguments put to me. I am happy to fully respond on all points in a thorough manner with my take on those points. That is the nature of a site like this after all, is it not, for debate and to explore the issues. If I didn’t respond, I expect I’d be accused of dodging the issue and not having the answers (in fact see @17).

    Now, I have my point of view, one I am very glad I have stuck to and not been swayed from as time has progressed. There is nothing wrong in that. My analysis has proved correct so far, has it not?

    Perhaps you’d like to level the same criticism at Bellwether, because if memory serves me correctly, I fail to remember a time when he has been open to my point of view. We have opposing views and that is that. He is welcome to his, as I am to mine and anyone else to their’s. Naturally we will disagree and nothing either of us has said has changed the others point of view.

    As for staking my reputation, I am happy to, as my predictions on the forum made in Dec 2010 (link @5) show. My detractors should be very happy I am prepared to stake my reputation, as they are no doubt looking forward to the time they are certain they will be able to publicly humiliate me on here.

    Perhaps, I am defensive with Bellwether, but when he resorts to shallow personal attacks like this, it’s hardly surprising I do my utmost to make it clear where I stand on his point of view:

    Another prediction, people to get bored of egotistical one trick ponies constantly talking their book.

    As for you Techie, I may be defensive, but you are guilty of often being massively patronising, see your last post for details.

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  • general congreve says:

    @25 – FFS, I thought it was obvious you were taking about it, I mean, what does hmmm… and this ….. mean anyway, if not being deliberately misleading. And as for this:

    As for buying it here…thanks but no thanks……. a surprise COULD still be to the downside.

    But as you say as usual, it could go down or up. Covered all ways then.

    @20 – Still waiting for a response Bellwether.

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  • General Congreve thanks for the response. “TPTB” are currently insisting that I push some paper for the Man, but will come back on your thought experiment later.

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  • general congreve says:

    @28 – Another pathetic and snide cop out.

    You criticise me for not responding, when it turns out I have, at length, you suddenly have nothing to say. You’re a complete joke.

    @26 – Techieman. I apologise, I take it all back. I had a moment of clarity a few minutes ago. I suddenly regretted all the times I have become embroiled in circle jerk arguments with certain people on this side. I mean, how many hours of my life have I wasted, pointlessly counterpointing some jackass who is probably only in it for the wind up, see @28 in response to @20 for a splendid example. What a fool.

    You are absolutely right, I am guilty of being too defensive and sporting, as a result I have been my worst own enemy, pointlessly wasting valuable time on idiots. I always thought HPW was a bit blunt and crude when dealing with his detractors, but I am suddenly realising he knows that the hell he is doing!

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  • “As for buying it here…thanks but no thanks……. a surprise COULD still be to the downside.” – re read it…. the “it” i was talking about was the S&P. “its pretty obvious to anyone who wasnt “FIX”ated with the yellow stuff :). Any need for “FFS” ? YOU thought it was obvious… I turn to Granville’s comment “when its obvious… its obviously wrong”.

    As for the rest…. its really not worth commenting much further. The funny thing is i was actually applauding you for being “blinkered” but if you want to take that as a criticism that’s your call.

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  • general congreve says:

    @30 – Applauding me? Back handed compliment more like! 😉

    Anyway, please see @29 for my apology, I take it the rest of it back.

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  • infact just to labour the point “As for buying it here…thanks but no thanks……. a surprise COULD still be to the downside.” was in contrast to liquidating the shorts. i.e. rather than liquidating shorts and reversing to go long i only want to liquidate shorts to be flat and then wait to try to take another short position. I could be wrong of course and the market continue to go lower – like your gold example but in terms of movement in reverse.

    Even there I am agreeing with you that money is to be made on the short (rather than the long) side. That is agreeing with you until the market tells me I shouldn’t.

    GC you should learn who you do and dont need to pick fights with. Have a good weekend!!!

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  • general congreve says:

    @32 – I’m going to be brutally honest Techie, all your analysis and figures that you post on the short term directions of the market, I largely skip over them, as they are of little interest to me as I am not a day trader. I always hope you are right and wish you luck in what you are saying if you have open positions, but very little, if any of it, gets read by me, because it is of little use to me to analyse it and agree or disagree. Just in case you thought I did read it. I’m sure others are interested though, so don’t stop on my account!

    As for picking fights, you are correct, you can’t win a fight against hot air, so why bother?!

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  • general congreve says:

    @32 – Almost forgot, have a good weekend too!!!

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  • GC fair enough. But do try not to swear at me when what i have said is (at best) ambiguous, please just check it out first.

    Having worked in the pits at LIFFE wearing a red jacket, i am a sensitive soul ……

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  • S&P 1150 this morning ….now 1171 trades… just another lucky guess i suppose. Euro off its lows – which was the point of this thread, i.e. that the Euro collapse would happen in the next nano second.

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  • General Congreve, you are behaving like a complete [email protected] now, and would have seriously earned yourself a slap if this were the real world.

    I patiently waited days for an answer from you, and then when I tell you I’ll come back (in part bcos I want to actually think about your point, in part cos I’m busy), you pretty much burst into tears.

    As I said I will come back to you!

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  • I just want to say, genuinely, thanks to the posters, particularly Bellweather, General Congreave and Techieman on this thread. I can’t quite keep up with all of this (I’m at work FFS) and not familiar with some terminology, but even on a quick read it is claerly a refreshingly well informed and pertinent discussion. Credit to HPC where it is due. (That’s t’power o’t tinternet for you!)
    Sorry for the occasional (okay,regular rant)…you lot really do deserve better. Sorry (til next time), C.
    Now, can anyone elaborate on their reservations about BV…is it a feeling that there may only be painted lead in the vaults, or the physical gold would disappear when TSHTF? Also, can one of you explain why the paper market may have such a negative amplifying impact on real metal, please. (I’m sure it is simply understood once the obvious is pointed out)
    Seems a quick exit possibility is worth something if needs must

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  • CS – I really dont know too much about Bullion Vault but whats happened to MF Global (or more accurately what the folks there did] is a salutary tale (apologies to STR 2007 I echo GC sentiments and really hope that works out for you). [see http://peterlbrandt.com for some stuff about MF].

    My advice – FWIW – is not to bother with ETFs but to trade the spot. You can do that as a spread bet on IG and you wont lose much on the bid offer. Of course IG could go under but since most punters are crap its unlikely…. Not only that but they are protected, and probably hedge the positions. Of course GC might say that the physical is best but the spot is the price.

    See : http://www.igindex.co.uk/spread-betting/strength-security.html [and no i dont earn commission from them]. The fact is their spreads will enable them to hedge in the “real” market, as i said its doubtful there will be problems but it is conceivable. However thats the same for any broker. see : http://www.iggroup.com/corporate/results.html

    Of course you are still trading against a currency so i’m not sure what GC will make of that, but realistically money isnt going to disappear (although thats opening a can of worms for GC to have input). :).

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  • sorry GC – of course the price is actually expressed in dollars so although you can bet on the price movement in £, to bet against the price in £ you would need to do some conversions and also trade £/$ and then keep on trading that. So no not idealsituation i agree.

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  • Skeptical First Time Buyer says:

    @ 38
    The paper market keeps the price artificially suppressed because one can buy as much gold as one likes without the practicallities of whether it actually exists. Much more paper gold has been sold than exists in the world. It makes a nonsense of supply and demand, because the paper supply is effectively infinite. However if this becomes widely accepted knowledge through inability to make physical delivery, then the games up.

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  • GC??!?! CS even! God I need a weekend! :).

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  • Cheers techieman, I guess it’ll come good in the end, but I could have been using that little pot for some good trading opportunities.

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  • general congreve says:

    @37 – Having re-read your post, I can see that I misread it. It looked like a brush off to me. I was in a rush at the time. Please accept my sincere apologies, I admit I f3cked up. I can reassure you that if you’ve put a question to me, I always take the opportunity to reply, if I’ve seen the question (as @20 hopefully demonstrates). If anything goes unanswered, it’s not because I’m ignoring it, it simply means I’ve taken time out from my hectic HPC schedule and missed it. By the way, [email protected]? Don’t think I’ve heard that since I was about 9, not powerful enough really. I’d have opted for massive [email protected] [email protected]! 😉

    @38 – I personally think it is more likely BV have the gold than don’t have it. My main reservation is that you are at the mercy of sudden government emergency legislation, if you store your gold somewhere like BV. For example, if the Euro collapses and our banks are hit, we could see all sorts of overnight emergency legislation to put in capital controls to try to sure up the economy and the currency. One such action could be a radical rise in the the capital gains tax on gold, to put people off selling sterling for gold. No problem if you own physical, if you sell to someone else on the black market, that is your business, the tax can be dodged easily, no record of the transaction exists. But just try dodging such taxation when you withdraw your money from somewhere like BV. Add these sort of factors to doubts about whether they have the gold, whether they can be trusted not to raid client accounts (e.g. MF Global) and pretty soon you realise that owning physical is the sensible thing. The only gain with BV is slightly lower margins on buying and selling gold, but is saving 10 or 20 quid an ounce worth the additional risks? Your call.

    As for Techie’s suggestion. IG Index is spread betting. A while back I set up an account and played around with £100 to test the water, betting a couple of quid here and there on a few things, including the gold price, on a daily basis, just to get the feel. I cashed out having lost £75. That is me done with spread betting. IG Index exist because the business model ensures 90% of their clients lose on each trade, that is why they are in business.

    I take it you have neither the time or inclination to be trying to second guess every move in the gold market. Sure, you can take a long term bet on IG Index and you can limit losses with stops, the only problem is that while you are waiting for your long term target to be hit, you can lose money because short term volatility has stopped you out at a losing position, if you set stops too tight. If you set them too far apart though, then you could lose a packet if the market seriously moves against you, especially due to the leveraged nature of spread betting – stupendous rewards can be had, but stupendous losses too, not great when 90% lose. At the end of the day, the odds are in the dealers favour. Plus there’s the whole $/£ conversion issue too, as Techie points out.

    Therefore, if simple wealth preservation (with a large hint of very decent investment returns into the bargain further down the road) is your game, I suggest, as Techie rightly assumes, bullion. Log on, make your order, pay, take delivery, make your own personal secure arrangements for storage and then sit tight and do nothing, until the dust has settled. Buy sovereigns, as these are CGT free and the most liquid coin in the UK and one of the most liquid in the world. That is my advice, works for me.

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  • general congreve says:

    And just to clarify Clockslinger 😉

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  • GC- I obviously take the point re $/£ but if you were to use IG then its just the same as buying bullion… i.e. with no stop.

    For example a £1 a point move will cost you £1700 if gold were to fall to nothing. And since the spot isnt an ETF and by definition IS the price then i dont really understand the problem….. Care to enlighten me? If you BUY gold then its the same, to be perfectly honest if you (i.e. one – not you personally) havent got £1700 then really there would be not much point in investing or worrying about it!

    As you said if you have real bullion then you have to store it somewhere…. so im not sure what the problem is.

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  • general congreve says:

    @45 – OK, fair point when you put it that way. I suppose my opinion was more a general critique of using IG to spread bet in general. But you are absolutely right that 1 pound a point with no stop would be a near bullion purchase equivalent. Whether that is cheaper than bullion vault, because obviously IG set their spread to make a few quid, I don’t know. But I now agree, it is another way to invest.

    Personally I am all for bullion, no counter party risk full stop, unlike IG or BV.

    Yes, storage could be an issue, but for the ordinary bloke who is going to maybe buy a few ounces, it is not difficult to store securely. You can even bury it in the garden if you want to be cheap (I believe the term is Midnight Gardening!). Fair enough if Clockslinger wants to invest the equivalent of a pallet of the stuff, then maybe BV or IG might be more convenient. But if he did have that much to invest, I doubt he’d be frequenting a site who’s primary remit is to complain about house prices! 😉

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  • General C, your response at 43 is really generous, I was actually quite touched. Anyway down to business, I’ve put together an initial response to the question you posed. Look forward to hearing about the holes in it!

    We have a world with only two countries, England and France. England uses the pound, France uses the Euro. The exchange rate is 1 to 1, always has been. Goods in both countries cost the same in Francs or Pounds. One such good is a pint of beer, which is 1 pound or 1 franc (no stupid taxes in our model), depending on which country you are in. Suddenly France goes on a debt binge and realises it cannot pay the debts back without devaluing the currency, so it devalues the Franc by 50%. Now the exchange rate is 1 pound to 2 Francs and it now takes the equivalent 1 pound to buy a beer, but 2 Francs to buy a beer, whether in France or the UK (this may take a little time to balance out through the system – but it will in the end). Later on we find that the UK has got itself in a similar mess and they take the same route out by devaluing the pound by 50%. The exchange rate is now back to 1:1 between the pound and Franc. Only now it costs 2 pounds or 2 Francs for a pint, depending on which country you are in.

    Devaluing the currencies by half involves either doubling the volume of currencies chasing goods, or a halving the countries productivity most likely due to an emigration of capital .

    As both countries are devaluing an emigration of capital is not meaningfully going to happen. There is nowhere for it to advantageously emigrate to.

    It’s not enough however to double the reserves of currency, the additional currency needs to get into the economy and start chasing goods and labour to take effect. This can only really occur if the currency gets into the hands of the population generally (remember no route for an emigration of capital – which incidentally was in part what happened in post WW1 Germany.

    Getting the currency into the population can happen through a variety of exchange mechanisms eg loose credit, debt jubilee, tax cuts without corresponding cuts to the public purse, increased benefits, and wage increases.

    All of these mechanisms tend to spread the increased volume of monies relatively evenly – although may benefit some groups more than others eg depending on the transmission mechanism it may more benefit public servants etc.
    But even at that the spread of monies is likely to be fairly similar to that prior to devaluation (the existing power and political structures will see to that) and also that patterning will increase over time as money is spent and recycled.

    As for importing goods the exchange rate has remained the same so there is no real difference there either. Coal produced in the UK and imported into France will cost the same in real terms (although of course not in nominal terms) post devaluation as pre devaluation.

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  • general congreve says:

    @47 – Happy we’re friends again, well friends that have difficulty agreeing on anything at least! 😉

    So, essentially you are saying that in the instance of devaluation taking place via currency volumes increasing (which is what we are looking at). So, unless the money given to the banks via QE can actually make it’s way into the economy, then there should be no real effects of that devaluation on citizens purchasing power (all things being equal) if every country is at it to more or less the same degree. Correct?

    I would actually say that the money is seeping into the economy though. The money has been conjured up and given to banks, the banks have then used that money to speculate in commodities and the markets, that money ultimately ends up in someone else’s pocket and also drives up the prices of commodities which in turn drives up the price of finished goods for the ordinary man, wherever he may live. It also allows banks to carry on lending to consumers, who go out and spend, and the government, so the government can carry on deficit spending, it also allows banks to pay their staff lucrative salaries and bonuses (that would not exist were if not for QE). All these things create cash flow into the economy that would not have existed otherwise. In fact I think enabling this deficit spending is one of the biggest culprits. Without bank funding for deficits, wages would be cut, people laid off etc. So, while there may be no wage rises (typically associated with inflation), QE is actually allowing more people to stay in work and therefore there is more money being paid in wages in aggregate, than there would have been without QE, thereby creating a conduit for that new currency into the economy.

    So, I take your point that if everyone devalues and just puts the money in a vault, then there would be little pressure on prices and exchange rates would be stable. However, why is the money created in the first place? To cover unfunded expenditure and to service debts that would otherwise go unpaid (with the original amount of currency in circulation), add to that some of the money being used for speculation and what have you got? Money leaking into the economy as far as I can see.

    Your view on this?

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  • general congreve says:

    @49 – Apologies for the bad grammar in the first paragraph!

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  • So, essentially you are saying that in the instance of devaluation taking place via currency volumes increasing (which is what we are looking at). So, unless the money given to the banks via QE can actually make it’s way into the economy, then there should be no real effects of that devaluation on citizens purchasing power (all things being equal) if every country is at it to more or less the same degree. Correct?

    BEAR IN MIND I MADE NO MENTION OF QE AT ALL. I’D ADD THAT IF BOTH COUNTRIES ARE QE’ING (OR INDEED PRINTING a l’OUTRANCE) AND THE MONEY REACHES THE ECONOMY IN SIMILAR VOLUMES THIS HAS NO IMPACT ON INTER STATE RELATIVE PURCHASING POWER.

    I would actually say that the money is seeping into the economy though. The money has been conjured up and given to banks, the banks have then used that money to speculate in commodities and the markets, that money ultimately ends up in someone else’s pocket and also drives up the prices of commodities which in turn drives up the price of finished goods for the ordinary man, wherever he may live.

    I THINK THIS AND THE REST OF THE COMMENT PRETTY MUCH DEPARTS FROM THE THOUGHT EXPERIMENT! WHAT IF YOU LOOK TO MAKE THE UNDERNOTED POINT WITH REFERENCE TO OUR IMAGINARY 2 COUNTRIES?

    It also allows banks to carry on lending to consumers, who go out and spend, and the government, so the government can carry on deficit spending, it also allows banks to pay their staff lucrative salaries and bonuses (that would not exist were if not for QE). All these things create cash flow into the economy that would not have existed otherwise. In fact I think enabling this deficit spending is one of the biggest culprits. Without bank funding for deficits, wages would be cut, people laid off etc. So, while there may be no wage rises (typically associated with inflation), QE is actually allowing more people to stay in work and therefore there is more money being paid in wages in aggregate, than there would have been without QE, thereby creating a conduit for that new currency into the economy.

    So, I take your point that if everyone devalues and just puts the money in a vault, then there would be little pressure on prices and exchange rates would be stable. However, why is the money created in the first place? To cover unfunded expenditure and to service debts that would otherwise go unpaid (with the original amount of currency in circulation), add to that some of the money being used for speculation and what have you got? Money leaking into the economy as far as I can see

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  • general congreve says:

    @50 – True, you made no mention of QE. But QE and ZIRP are essentially the core mechanisms by which devaluation is taking place, hence why I brought them into my expanded argument.

    The thought experiment was just a simple model, I was expanding on that in order to answer you question, because in my model there was no details about how devaluation actually takes place.

    With regards to the same amount of new money, hitting both economies in similar volumes, having no impact on ‘interstate’ purchasing power, I would agree. But it is the purchasing power of the individual in the two countries, where twice the money is chasing the same amount of beer, but the individuals wages haven’t doubled to compensate, that we are talking about. On which topic, the next part of the model:

    In both the UK and France, they use QE to keep deficit spending, to keep non-productive non-job state workers as wage earners, rather than sending them to the dole queue. So while there is twice the money floating around thanks to QE (and the exchange rate is still 1:1), the productive individual’s share of the new money does not double, because the extra money is spread between the non-productive and productive too. So, because devaluation has caused a beer to double in price, the productive members of society, the real wage earners and wealth producers, actually experience a higher real price of beer when the dust has settled, because the new money is not all ultimately being redistributed through the economy to them, a chunk is going to pay people who do nothing (essentially they are being taxed to pay for the non-productive through devaluation/inflation).

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  • So we are agreed that such steps would make no difference to the relative exchange rate within our world, which for present purposes consists of France and the UK. There would therefore be no inflation expressed in trade between these states. This is the point I’ve been making when saying that if everyone devalues it has not net effect to the RELATIVE strength of the various currencies. Everyone cannot inflate at once because the efforts to do so, simply cancel each other out. This seems to be an important concept, which is generally overlooked. There would be no interstate flight of capital.

    Also in such a scenario we can expect that as the monetary base in both countries doubles so the price of hard assets will double but no more than that. This isn’t really a problem for those who have benefitted from the increased monetary base, although if this has been distributed unevenly amongst citizens then those who have benefitted less will tend to be priced out. This isn’t really inflation but actually a simple redistribution of wealth.

    I say that the price of hard assets should double, but of course people who have been shafted by the devaluation might look to move their reduced assets into something that can’t so easily be debased, and this would tend to drive the price of the asset up.

    The outcome of this will depend on the size of this move and on whether the move into hard assets is a trading move, or a permanent state.

    If this hoarding is temporary and the hard assets are ultimately liquidated as prices rise, say in order to live, then the rise a rise in prices would be temporary only.

    If however the assets are hoarded then this brings into being a sort of quasi state (in addition to France and UK), made up of a collective of people who don’t trust what’s going on and would prefer to deal in hard assets. Given the distrust with currency it is unlikely that these people will work – although there would be exceptions for people working for hard assets eg farmers feeding. Trade will also presumably happen in hard assets. These people refuse to liquidate and there is a permanent flight of capital out of the mainstream – including a flight of productive effort.

    If this happens on the fringes, then it will be a fringe activity that doesn’t ultimately matter. It could however spread more widely and as it does so the economy would deteriorate further, with more and more people hoarding and trading less. France and the UK would stop trading and might start warring. If the situation became extreme at very least a full blown depression would arise, and everyone would be poorer. Even people in gold would be poorer by the end than when they begun.

    Possible then, but likely?

    In Weimar Germany the faith in currency hung on until the very end. There was inflation of an order that we cannot contemplate and yet people kept believing that a change was just around the corner. This was even although there was a world where people could emigrate to and exchange currencies into. But people tended to stay and continued to work if they could get work. Incredibly when the currency was finally abandoned and replaced by the Rentenmark, the Rentenmark was not backed by gold but by a mere promise of fiscal discipline. That it seems was enough.

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  • general congreve says:

    Well it seems as I must have misunderstood your original point, as it seems you agree a doubling of the money supply in both countries will result, more or less, in a doubling of general prices in both countries, in addition to keeping relative exchange rates stable.

    You also agree that some people, will seek safety from the devaluation of their currency savings by purchasing hard assets, thereby, not only would the value of these hard assets appreciate by an amount consummate with increased currency supply, but also above and beyond levels consummate with devaluation, through the result of increased demand for those hard assets.

    Obviously in this situation I believe gold to be the primary hard asset people would flock to, seeing as historically it has been money for thousands of years and because unlike paper currencies, no one can print any more of it.

    It seems you point, highlighted by the Weimar example, is that people will have faith in paper until the bitter end, even in the face of outrageous inflation, and therefore gold will not appreciate to the degree I believe it will, because people will not flock to it insufficient volume to generate an appreciable return on investment.

    In response, I would say that even if additional demand does not appear, in real terms at least gold will protect your wealth as it increases in value in line with devaluation of paper currency, so you have lost nothing. Secondly I would say that relative to the inflation we have experienced in the last 10 years (gold’s latest bull run) that the price of gold has outpaced inflation (thus far), so sufficient investor demand for this has obviously materialised and, in my opinion, will only increase at the global economic situation worsens.

    Also, in reference to the Weimar Republic, at the height of the hyperinflation I understand that a whole row of desirable town houses could be had for a handful of gold coins. How accurate that is, I do not know, but as paper currency lost all credibility I would think that the market value of something like gold could achieve such dizzy heights as a result of increased demand generated simply by the lack of a viable monetary alternative. Even if this doesn’t become the case, as this graph shows, those who held gold in the Weimar hyperinflation coped signifcantly better (to several powers) vis-a-vis maintaining purchasing power, than those holdings Marks:

    Image and video hosting by TinyPic

    I think that much is beyond dispute.

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  • Well it seems as I must have misunderstood your original point, as it seems you agree a doubling of the money supply in both countries will result, more or less, in a doubling of general prices in both countries, in addition to keeping relative exchange rates stable.

    [YES BUT REAL PRICES FOR ANYONE BENEFITING FROM THE INCREASE IN MONEY SUPPLY REMAIN THE SAME. ALSO AS THERE IS NO COUNTRY WHICH IS DOING RELATIVELY BETTER THAN THE OTHER THERE IS NO READY MADE PLACE FOR A FLIGHT OF CAPITAL. IF EVERYONE DEVALUES EQUALLY NO-ONE DOES. BUT SEE NEXT POINT]

    You also agree that some people, will seek safety from the devaluation of their currency savings by purchasing hard assets, thereby, not only would the value of these hard assets appreciate by an amount consummate with increased currency supply, but also above and beyond levels consummate with devaluation, through the result of increased demand for those hard assets.

    [WHERE THE INCREASE IS SYMETRICAL BENEFITING EVERYONE EQUALLY REAL PRICES REMAIN CONSTANT. HOWEVER IF THE INCREASE IS ASYMETRICAL BENEFITING SOME MORE THAN OTHERS, THEN THOSE WHO ARE DISADVANTAGED MIGHT SEEK PROTECTION IS HARD ASSETS. ALTHOUGH A CASE COULD ALSO BE MADE THAT THOSE WHO HAVE SEEN THERE WEALTH INCREASE MIGHT TAKE AN OPPOSITE COURSE AND CONSUME MORE. ]

    Obviously in this situation I believe gold to be the primary hard asset people would flock to, seeing as historically it has been money for thousands of years and because unlike paper currencies, no one can print any more of it.
    [ I’D AGREE IT WOULD BE A PRIMARY TARGET FOR SUCH PEOPLE. THE QUESTION IS WHETHER IN RELATIVE TERMS PEOPLE ARE FLOCKING OR ARE GOING TO FLOCK. TO DETERMINE THIS IT IS NOT ENOUGH IN MY OPINION TO RESORT TO HOME TRUTHS, CLICHES, RULES OF THUMB OR ANY OF THAT. I DO HOWEVER THINK IT IS A QUESTION WORTHY OF SERIOUS THOUGHT AND ENQUIRY. FOR ALL THE STIR ABOUT GOLD OUT THERE, I SEE VERY LITTLE OF THIS OUT THERE. THERE IS A LACK OF CALM RATIONAL SCIENCTIFIC ENQUIRY, AND FAR TOO MUCH EMOTINAL AXE GRINDING AND WISHFUL THINKING. ZERO HEDGE IS AWARE OF THIS AND I SUSPECT PLAYS TO ITS HOMOGENISED AUDIENCE, IN A MANNER NO LESS PATRONISING THAT CNBC.

    It seems you point, highlighted by the Weimar example, is that people will have faith in paper until the bitter end, even in the face of outrageous inflation, and therefore gold will not appreciate to the degree I believe it will, because people will not flock to it insufficient volume to generate an appreciable return on investment.

    I THINK WE HAVE TO REMEMBER THAT WEIMAR WAS AN ASTONISHING SET OF CIRCUMSTANCES.THE COUNTRY HAD SUFFERED HUGE LOSSES IN CAPACITY AND MANPOWER VIA A WAR WITHOUT PRECEDENT, THEY WERE BEING FORCED TO MAKE HUGE REPERATIONS AND THEIR LEADERSHIP WAS INCOMPETENT IN A WAY THAT IS DIFFICULT TO COMPREHEND. HORRENDOUS FISCAL DECISIONS WERE MADE AGAIN AND AGAIN AND AGAIN. FROM WHERE WE STAND AT PRESENT THERE IS SIMPLY NO PARALLEL, I MEAN ITS NOT EVEN REMOTELY SIMILAR. THIS IS NOT TO SAY THAT OUR LEADERSHIP HAVE BEEN INEPT BUT ONLY I SUSPECT IN A VERY AVERAGE WAY, AND NOT EGRIGEOUSLY SO.

    In response, I would say that even if additional demand does not appear, in real terms at least gold will protect your wealth as it increases in value in line with devaluation of paper currency, so you have lost nothing.

    IT ALL DEPENDS ON PRICE I SUPPOSE, THE MORE GOLD RISES IN PRICE, THE MORE ITS CAPACITY TO PROTECT AGAINST IS BEING USED UP. GOLD WILL HAVE A PRICE THAT REPRESENTS VALUE BUT I’D HAVE NO IDEA WHERE THAT IS, AND I’VE SEEN VERY LITTLE THAT SEEMS ESPECIALLY CONVINCING ON THIS. AS I HUNCH I WONDER IF 10 YEARS INTO A BULL RUN AND 4 YEARS OF HUGE FISCAL DISLOCATION MIGHT HAVE BROUGHT US TO A POINT WHERE A HUGE AMOUNT IS PRICED IN. I ALSO AS A SIDE ISSUE BELIEVE THAT THAT THE PRICE ACTION OF COMMODITIES IS VERY UNSTABLE AND ALREADY IN BUBBLE TERROITORY DRIVEN BY ARTIFICIAL GROWTH IN CHINA.

    THAT’S NOT TO SAY THAT GOLD WILL NOT INCREASE IN PRICE FROM HERE. I SUSPECT IT WILL BUT IT MIGHT WELL BE IN A BUBBLE ALREADY AND IF NOT IT MIGHT BE IN ONE SOON. I COULDN’T PROVE THIS WITHOUT DOING MORE WORK, AND I DON’T REALLY HAVE THE TIME TO EVEN BEGIN THAT. I WOULD BE CONCERNED ABOUT PHYSICAL BECAUSE OF THE INFLUENCE OF THE PAPER MARKET, AND NOT THE PAPER MARKET SUPPRESSING THE PRICE BUT RAMPING IT TO PRICES THAT WILL EVENTUALLY COLLAPSE VERY SUDDENLY. OF COURSE IF YOU BOUGHT VERY LOW THERE IS PLENTY OF HEADROOM TO BAIL IF THAT HAPPENS.

    Secondly I would say that relative to the inflation we have experienced in the last 10 years (gold’s latest bull run) that the price of gold has outpaced inflation (thus far), so sufficient investor demand for this has obviously materialized and, in my opinion, will only increase at the global economic situation worsens.

    THIS IS JUST GUESS WORK BUT THERE IS SCOPE TO TRULY TEST THE CONCLUSION, IF THERE IS ALSO A WILLINGNESS TO DEPART FROM IT IF THE EVIDENCE BEARS SUCH A CONCLUSION OUT. I ALSO THINK AT A PERSONAL LEVEL YOUR POSITION IS SOMEWHAT DIFFERENT FROM OTHERS ON HPC. YOU OWN YOUR HOUSE OUTRIGHT WHEREAS OTHER ARE SITTING ON THE SIDELINES AND WAITING. THE CONSERVATIVE APPROACH FOR THOSE WAITING TO BUY IS TO STAY IN CASH AS LONG AS HOUSE PRICES ARE DROPPING – AS THEY ARE, ALBEIT SLOWLY. YES INFLATION IS HIGH IN SOME AREAS BUT IT TENDS TO BE IN THE AREAS THAT ONLY TAKE UP A SMALL PROPORTION OF MIDDLE EARNERS INCOMES.

    Also, in reference to the Weimar Republic, at the height of the hyperinflation I understand that a whole row of desirable town houses could be had for a handful of gold coins. How accurate that is, I do not know, but as paper currency lost all credibility I would think that the market value of something like gold could achieve such dizzy heights as a result of increased demand generated simply by the lack of a viable monetary alternative. Even if this doesn’t become the case, as this graph shows, those who held gold in the Weimar hyperinflation coped significantly better (to several powers) vis-a-vis maintaining purchasing power, than those holdings Marks:

    IN WEIMAR THE REAL WINNER WAS PRODUCTIVE LAND. PEOPLE WOULD TRADE GOLD FOR FOOD. IF I RECALL HOUSES DIDN’T DO WELL BECAUSE GERMAN TENANCY RULES MEANT RENTS DIDN’T KEEP PACE

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  • general congreve says:

    Yes, I agree, for those near the money spigot, the early beneficiaries of the new money, such as politicians and bankers, the relative cost of living in the economy may stay more or less constant. But because of this asymmetry in the distribution of the money supply, the majority find themselves losing purchasing power. Unless they start directly crediting new money directly to peoples bank accounts, this is a given.

    In the example, you are right, there is no COUNTRY, that is doing any better, so there is no opportunity for capital flight after devaluation has taken place. However, those with there ears to the ground, even in my limited example, could have used the information of the coming devaluation to stock up on barrels of beer (a real asset) at the pre-devaluation price of £1 or 1 Euro a pint. Come devaluation there purchasing power is intact, as they can sell the beer back to the market at the rate of £2/2 euros a pint. They may even find there is a rush on to buy beer, driving up price through demand, as people offload cash for the real asset, in fear of further rounds of devaluation, thereby driving up the price of beer further and making the beer holders a real profit if they sell.

    Would these individuals who have seen their wealth increase then spend more (as you state could happen)? Certainly some of them might, some of them might go crazy and spend the lot, selling all the beer. Would this drive down the price of beer? Only if there wasn’t someone who wanted to pay £2 a pint for it, if not then the price would need to be lowered until a buyer was found. Would it sink all the way to pre-devaluation price? Can you still get a pint in the UK, stripping out taxes of course, for the same price as in the 1970’s, 80’s, 90’s? There is your answer.

    Yes, there is precious little about gold in the MSM, aside from the rare TV advert or leaflet drop trying to get people to part with it fro below market rates, there is nothing. Therefore we can certainly agree it is off the radar to most of the public and not in a bubble, as some claim. Does Zerohedge play to it’s audience? For what end? there are no ads, the commentators all post as Tyler Durden and therefore are not in it for commercial gain. I would say it is just a meeting place for like-minded commentators, a club of sorts. And to say it is patronising like CNBC is gross misrepresentation. Anyway, regardless of Zerohedge’s intentions (it is a minority website like HPC anyway) and the lack of public awareness, gold has still made about a 23% gain this year. Demand is coming from somewhere, that cannot be denied.

    Yes, Weimar was exceptional circumstances. However, the situation the world as a whole, led by the west, finds itself in now is also exceptional. World debt outstrips global GDP by a huge margin, the debts are unpayable. the growth needed just won’t materialise. It isn’t just Germany in the sh1tter this time, it’s the whole of the West and a great deal of the rest of the world via proxy. I’d say we are in exceptional times.

    Gold’s upside is only limited by fiat’s downside, which can be devalued ad infinitum. We already have the BoE saying they are ready to launch more QE in March. I for one am not concerned we have hit the limits of gold’s rise have all been priced in, the limits are set by the extent of devaluation of fiat currency, which is infinite (see the Mark graph above) not an inherent limited capacity of gold itself.

    I agree on commodities, falls in global demand, and therefore output, are generally bad for commodities and these effects can outweigh, at least temporarily, the opposite effects of currency devaluation. You will however notice that gold has been behaving more like currency than commodity recently (I see it as 90% currency), may commodities have taken a knock this year, no such move happened for gold.

    As regards to personal circumstances, yes, I have a house. But for the remainder of my wealth I choose gold. I think it makes no difference if someone owns a house or not, the threat of inflation/devaluation on savings is the same. It cannot be argued against, that in the time we have been having these conversations, anyone who invested savings in gold, if they changed back into sterling now, has 40% more money to put towards anything, be it a house or whatever. Some may say that it does not matter because my savings are for a house and houses will come down in price so I have lost nothing. But this narrow view point doesn’t take account of:

    1) The fact that in the last few years house prices have hardly budged.

    2) The real purchasing power of those savings with regards to everything else they could buy has fallen significantly in the same time frame. What if you suddenly needed the money to pay for private cancer treatment instead, you’d have less money than before potentially not enough. Also remember that just 4% inflation for 9 years equals a halving of the real value of savings. We are nearly 3 years in already, at understated official inflation rates that easily average 4%, from when I started posting

    3) What if the bank you keep your savings in does an Icesave or an MF Global?

    4) Inflation may be high in some areas, but you say it only takes up a small portion of middle-income earners earnings. Petrol at 30% dearer? How does that affect the commuter? I’d say a significant impact and we all need to eat, sure a middle income earner can drop to own label brands and save money that way, but that is not living like for like, that’s a cut in living standards.

    I agree that at the moment we are still near the top of the cliff and only slipping gradually towards the edge, by adjusting our footing perhaps it seems unlikely we’ll plummet over the edge, but that unexpected gust of wind from across the channel could suddenly make a relatively benign situation a tragic one. People must be wary of being over confident when they are not on a firm footing.

    This sort of takes us full circle back to the original example, are you better off holding cash or a real asset when everyone is devaluing their currencies? Maybe the trend will change and cash will be king, but all I see in the news is the same old problems getting worse every day, I see no change in the trend.

    Land may well have done well in Weimar. Currently land, like housing is overpriced in the UK.

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  • Wow this response is about 1300 words long. The thing is I’m a little dismayed because I was keen to see us continue looking to observe the law of parsimony. There are just so many assumptions in the response, that it’s almost bewildering. Not to mention that you misquote me (a lot), eg:

    “I agree that at the moment we are still near the top of the cliff and only slipping gradually towards the edge, by adjusting our footing perhaps it seems unlikely we’ll plummet over the edge,” Where did I say we were on any sort of cliff, never mind slipping towards the edge it. I don’t!

    “Yes, there is precious little about gold in the MSM”, reads as if you are agreeing with a point I made, but didn’t! The point I made was there is a lot of chatter about gold but a lack of calm rational scientific enquiry, but that it seems got lost in the chatter of the response.

    Speaking of which the core of the response seems to be

    “Yes, Weimar was exceptional circumstances. However, the situation the world as a whole, led by the west, finds itself in now is also exceptional.” [ REALLY, IN HISTORIC TERMS THE US DEBT LOAD IS RELATIVELY LOW.] “World debt outstrips global GDP by a huge margin” ,[ AGAIN IS THAT ESPECIALLY UNUSUAL – CAN YOU PUT SPECIFIC FIGURES ON THIS WITH HISTORIC REFERENCE POINT. “the debts are unpayable” I THINK GERMANY ONLY RECENTLY PAID OFF WAR REPARATIONS. HISTORICALLY DEBT CAN STAND FOR A LONG PERIOD OF TIME, AND ANYWAY IF IT CAN’T BE PAID OFF IT CAN JUST BE WRITTEN DOWN. NO-ONE WOULD BE HURT BY THIS. NOT REALLY. ” the growth needed just won’t materialise. It isn’t just Germany in the sh1tter this time, it’s the whole of the West and a great deal of the rest of the world via proxy.” [THE SHITTER, RIGHT I UNDERSTAND NOW! THAT YOU COMPARE POST WAR GERMANY WHICH HAD ALREADY DURING THE WAR YEARS EXPERIENCED INFLATION + 100% TO EG THE US WHERE INFLATION IS 3% AND BROAD MONEY IS CONTRACTING (NOT GROWING) IS JUST BAFFLING TO ME. I’M NOT SAYING YOU MIGHT NOT BE RIGHT, THAT YOU MIGHT BE ONTO SOMETHING VERY EARLY, BUT ( AS YOU KNOW) THERE WOULD NEED TO BE SO MUCH MORE ANALYSIS OR SUBSTANCE BEYOND A BARE ASSERTION. ”

    If this reads as a little off, it’s not the intention and hopefully not the effect. I’m genuinely interested in this topic and discussing it in the spirit of scientific enquiry , in so far as possible. I’m also not that wedded to my view of things and more interested in evolving it than anything else. The polarisation and unsubstantiated claims on the main forum is a bit of fun at times, but tends to get boring after a while.

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  • general congreve says:

    Try again:

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  • general congreve says:

    Just kidding, a little light relief for us there. No offense taken from your post BTW.

    OK, quicker (hopefully) response:

    The point I made was there is a lot of chatter about gold but a lack of calm rational scientific enquiry, but that it seems got lost in the chatter of the response.

    Please give an example of what you mean? Where are you hearing this ‘chatter’ specifically (HPC doesn’t count)? What sort of scientific reasoning are you looking in particular that you have not as yet seen (this includes sources on HPC this time)?

    REALLY, IN HISTORIC TERMS THE US DEBT LOAD IS RELATIVELY LOW

    Really? Unfunded liabilities, off-balance sheet vehicles, record corporate (including banks) and private debt to boot and a shrinking economy at the end of a credit cycle. All have to be factored in. The figure for all this is believed to be around $113 Trillion for the US.

    “World debt outstrips global GDP by a huge margin”. AGAIN IS THAT ESPECIALLY UNUSUAL – CAN YOU PUT SPECIFIC FIGURES ON THIS WITH HISTORIC REFERENCE POINT.

    It might not be especially unusual, but we are on the verge of major credit contraction, it means the debts will continue to outpace growth, ultimately leading to default. Obviously markets see this before it gets to default, hence bond markets selling off, rates climbing and the problems coming to a head quicker than they otherwise would.

    I THINK GERMANY ONLY RECENTLY PAID OFF WAR REPARATIONS. HISTORICALLY DEBT CAN STAND FOR A LONG PERIOD OF TIME, AND ANYWAY IF IT CAN’T BE PAID OFF IT CAN JUST BE WRITTEN DOWN. NO-ONE WOULD BE HURT BY THIS. NOT REALLY.

    I don’t disagree that a debt can stand for a long time. As long as the lender sees light at the end of the tunnel, they’ll lend, that’s why it’s possible to get a 30 year mortgage etc. (well was!). And I AM IN TOTAL AGREEMENT that if it can’t be paid, it can just be written down. Obviously, such an approach can lead to insolvency for the lender and its counter parties (bank and it’s shareholders and account holders for example). Solves the problem nicely though, I’m all in favour of it 😉

    [THE SHITTER, RIGHT I UNDERSTAND NOW! THAT YOU COMPARE POST WAR GERMANY WHICH HAD ALREADY DURING THE WAR YEARS EXPERIENCED INFLATION + 100% TO EG THE US WHERE INFLATION IS 3% AND BROAD MONEY IS CONTRACTING (NOT GROWING) IS JUST BAFFLING TO ME. I’M NOT SAYING YOU MIGHT NOT BE RIGHT, THAT YOU MIGHT BE ONTO SOMETHING VERY EARLY, BUT ( AS YOU KNOW) THERE WOULD NEED TO BE SO MUCH MORE ANALYSIS OR SUBSTANCE BEYOND A BARE ASSERTION. ”

    I would say today’s inflation, relative to higher inflation at some other point in history, is not a valid comparison on its own. The government could zero inflation tomorrow, if it wrote down debts and introduced stable currency for example. My point is that as the system is set up, I do not see the debt accumulated ever being paid down in a real sense. Sure, inflationary policies of ZIRP and QE can help pay it down through stealth default, or we can write it down and default outright. Both are solutions. It is the ramifications of those solutions I am getting at and what they mean for the paper-stored wealth of the ordinary man and woman. Effectively the system of credit and debt has to be balanced in a right down (inflationary or outright), which means winners and losers. Safeguarding myself against such effects is my goal. Working quite nicely so far!

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  • Ok let’s agree from here to cut references to what markets may or may not confirm. For everything you cite that might be predictive of inflation I’m pretty sure I could cite examples of things suggesting the opposite eg stocks, bonds and certain commodities.

    On other points:

    You don’t confirm whether now is in any sense worse than before from either a debt load position, but that we are on the verge of a major credit contraction. By credit contraction do you mean a reduction in the rate of credit contraction, and if so isn’t that what we need to ensure in the longer term a money supply more proportionate to reduced circumstances?

    Then you sort of suggest that the debt load for the US at $113 Trillion. I’m not clear if this is especially unusual for the US. Is it? If it is, it’s worthy of discussion but we would need to begin by breaking the figure down into component parts. Is there info on that?

    You then focus on the set up of today’s system suggesting that it’s set up for inflation that outpaces growth – inflation isn’t itself an issue, the fact that beer costs many times what it did in the 1930’s isn’t relevant if standards of living and productivity have kept pace with the reduction in value of a unit of currency. The popular graph (using a torn dollar as the graphic) showing the loss of purchasing power of the $ over the past century misses this point completely, although I suppose the point is valid for someone who did not involve themselves in society.

    But assuming you mean inflation that outpaces growth, I can agree this would be good for gold. Not only is money supply increasing but growth is not keeping up with it. The extent this is good for gold depends on degree. Modest and we can expect modest compensatory rises at one end of the spectrum, and we have at the other end Germany, or Yugoslavia or Zimbabwe. Incidentally I don’t think you believe we are in a situation as far towards that end of the spectrum as your comments often suggest.

    Anyway by focusing on the system, you seem to be saying it doesn’t especially matter what is happening now, what matters are what is going to happen and how our set up predicates that. We could discuss that, although my initial thoughts are that this overplayed. As opposed to being in shock and awe over monetary policy, I’ve found it tame as compared to say Bernanke’s rhetoric from 2001 or whenever. Printing presses and helicopters were impressed in people minds, but instead we got QE asset swaps that have served in the main to recapitalise banks, ready for loans that are not and will not be made. Even ZIRP isn’t ZIRP but at best near ZIRP. Then we had no QE3, and lots of hand wringing over debt ceilings in the US and Euro bonds or whatever in Europe, Germany haunted by the spectre of 1930’s.

    The net effect is that broad money in the system has reduced – something you argued was impossible in your “it’s only deflation, no currency has been harmed” which I don’t get. Money disappears all the time. Think of all the money that went into residential property.

    If prices drop 20% it’s not going to come out again, in default it quite literally disappears. Agreed that the bank in question then need recapitalised by a proportionate amount (this may be out of earning – banks make a huge amount of money in all sorts of ways – unjustifiably but that’s another point) or it may be in extremis via money creation, but critically this money creation simply sits as sterilised as reserves unless lent out.

    Final point and I’ve no time to reread this so excuse the typos etc, but I think the ultimate set up of the system is for a country to survive. I think there is no possibility of the US lightly letting go of it’s grip as the major super power. It would go to war over it, and I don’t see it losing that grip and by lazily allowing it’s currency to become completely debauched. Policies that see gold at say $10,000 also see oil that $800 and in real terms increasingly unaffordable to the US. Is that seriously going to happen?

    So what to focus on?

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  • general congreve says:

    I’m going to deal with the two main points, debt levels compared to the past and ability to defend the value of the currency in light of the debt burden:

    Here is a chart of global historical public debt, it says this in small writing on the Y-axis.

    Image and video hosting by TinyPic

    As you can see debt levels are lower than post WW2, albeit rising rapidly, however, the difference now is that we are not just dealing with public debt, but also corporate debt (much of which is financial corporate debt, e.g. banks for many countries, most notably the UK) and private debt.

    The society we live in is different to post WW2, credit/debt is now ubiquitous across all strata of society, we live in a credit/debt-based system. In totality, all that debt-amassed in this system must ultimately be paid back by society from earned-income. So not only do taxes have to be paid, to service public debt, but earnings must be spent on company products (goods, services etc.) to ensure corporate debt (owned by these companies) can be serviced and yet more money must be found to pay the individual’s debts such as credit cards, loans, mortgages etc.. So cumulative debt and the onus on wage earners and taxpayers to ultimately service that debt is far higher today than any time in the past, as you can see (this graph is from 2008 – the levels will be higher now):

    Image and video hosting by TinyPic

    Most of the debt can ultimately be traced back to the banks, private debt in the form of mortgages, credit cards, loans is ultimately the banks liability. Corporate debt in the form of money lent to companies is ultimately the banks liability. Public debt in the form of money lent to governments by banks is ultimately the banks liability. Now, if consumers, companies and governments start to default on debt the banks need bailouts (this has happened) and those bailouts have to be serviced by the tax payer. But it is the self-same taxpayer who wasn’t able to spend enough to service those debts paid in the first place, which is why the bank needed a bailout!

    So, how do bailouts ultimately help? It is just a stalling measure, one that may work is rapid economic growth rides in to save the day, but seeing as much of the previous few decades growth was built on a growing debt bubble, I fail to see how even greater growth will materialise now the debt bubble has hit the fall, i.e. no new lending to keep inflating it.

    So, failing growth, the debts will ultimately have to be defaulted on, and much of that debt is now the liability of the government/taxpayer. What will be the outcome? I say the fallout is currency collapse, either through money printing or outright default, the only two ways to deal with the debt. So far they have been printing, and while inflation has crept up, we are hardly in hyperinflationary territory, yet. However, hyperinflation tends to occur when enough printing has taken place for people to lose confidence in a currency, then they start dumping it, this feeds off itself and creates the hyperinflation, i.e. why do I want to hold a currency that loses 20% a year, so I dump it, as does everyone else, devaluing the currency further and faster in a feedback loop. It will take a little time to get to the tipping point, but we are on the way. Whether hyperinflation of Zimbabwe proportions occurs is not a concern for me, high-inflation is sufficient enough reason to protect one-self with hard assets.

    If we do discover fiscal rectitude and implement the budgetary cuts needed to stop this happening and let banks fail etc., them the economy will suffer a collapse (a necessary one – it’s on the cards either way) and the currency will devalue anyway. That is my opinion and why I maintain the position I do.

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