Au

A quick question for my readers.  Given global turmoil and chaos, what is better:

1.     A billion “dollars” (or whatever value metric you wish to impose) which would weigh approximately 25 tons?

2.     U.S. Dollars denominated in thousands weighing in at 2000 lbs?

3.     Several pieces of rare impressionistic art weighing 120 lbs?

4.     An international currency bank account weighing zero pounds?

Lets also just assume the Billion dollars experiences no security cost “decay” (does anyone think that insuring 25 tons of gold is the same as insuring a bank account?) that effectively inflates the discount rate of its future value. (for the option guys out there, lets assume zero theta)

Of course, all of these have their strengths and weaknesses, and I realize the decreasing utility of weight given its portability costs, but who really thinks that gold is “the” safe haven in times of instability?

It is fascinating to see the gymnastics put on the gold bug crowd.  We have heard the doom knell of "inflation is coming because of QE and such!" for years now...and yet the statistics do not bear this out (I have said repeated times here that without the wage pressure that appears to be a pipe dream, it ain't gonna happen).

So Au is now just a "safety" play.  

Why?

AFRICOM...

...cannot come fast enough. What a Travesty. Mugabe, hero...I am at a loss for adjectives or superlatives that accurately contain how much this hurts Africa in the short term.

Robert Mugabe hailed a hero at African Union summitY
Sonia Verma in Sharm el-Sheikh, and Philippe Naughton
Robert Mugabe was hailed a "hero" by Africa's longest-serving head of
state as he joined his fellow leaders at an African Union summit.

The 84-year-old flew to the summit in the Egyptian resort of Sharm
el-Sheikh only hours after being sworn in for his sixth presidential
term following a one-candidate election run-off widely decried as at
best a sham, at worst a travesty of democracy.

He entered the conference hall accompanied by the leaders of Egypt,
Tanzania - the AU chairman - and Uganda, and his enemies' hopes that
he would be disowned by his peers were quickly dashed.

"He was elected, he took an oath, and he is here with us, so he is
President and we cannot ask him more," said Omar Bongo, President of
Gabon since 1967. "He conducted elections and I think he won.

Au...

...continued.

The problems of "holding" and "exchanging" the metal are actually being considered.

Felix Salmon

How to get $12 billion of gold to Venezuela

AUG 22, 2011 21:59 EDT

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

Stampede mode initiated...

...when Au is sub 700 within a year, yet more ephemeral causal inferences will be dusted off and plied for explanatory traction.

There will also be attendant outrage at what will be the obvious difference between owning physical gold and owning a financial claim to a trust or security deriving its value from traded gold prices.

Gold climbed to a record in New York as the dollar extended its decline, boosting demand for precious metals as alternative assets. Silver advanced to a 30-year high.

Gold reached $1,333.80 an ounce as the dollar dropped as much as 0.7 percent against a basket of six currencies. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. central bank may buy more debt to help the economy. The Bank of Japan today pledged to keep its benchmark interest rate at “virtually zero.” Since Sept. 14, gold has risen to a record 12 times.

“When governments are in the business of printing money, gold is going to do well,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “More quantitative easing is inevitable at this point for the U.S. The dollar is going to suffer, and gold is going to take out records along the way.”

Gold futures for December delivery rose $16.10, or 1.2 percent, to $1,332.90 at 9:29 a.m. on the Comex in New York. Before today, gold had gained 20 percent this year.

In London, gold for immediate delivery is up 21 percent this year and headed for a 10th consecutive annual gain, the longest winning streak since at least 1920. Bullion has outperformed global equities, Treasuries and many industrial metals, prompting record investment in gold-backed exchange- traded products.

Galbraith's Bezel

So I recently saw the film "Prometheus".  Its interesting, no doubt, (R. Scott does not make uninteresting anything) but the suspension of disbelief was unfortunately punctured by several instances that would only make sense if humans were not humans.  But I will not spoil things for the uninitiated.  Keeping an open mind with respect to multiple interpretations is a healthy thing.

And so that wonderful spacecraft known as "Galbraiths Bezel" is about the land squarely upon the AU platform.  There will be much braying about the definition of a "safe" asset from people who put a significant portion of their savings (and it appears to me that the retail investor, as always, is left holding the bag) into gold and securities and financial instruments with a claim on the returns derived from gold holdings (yes, it is laughable that anyone would simply trust gilded financial institutions to buy and hold anything when prices drop substantially).

So here come the lawsuits.  Oh, I could name some of the culprits most likely to receive indictments/wells notices/congressional summons/etc.  But who wants to provide spoilers to a rapidly unfolding plot?  Just sit back and enjoy.

Au

One of my more spectacularly bad calls over the past year has been my insistence of Gold as a terrible investment idea. Gold has obliged me by increasing by 30%.

But let me be more specific. I "get" the insistence to hold PHYSICAL GOLD as some sort of inflation hedge. I may even understand the "gotterdamerung" notion that gold will hold its value given a massive and sudden decline in Western Civilization. (my objections still hold in these cases...I would rather hold ammunition than gold, as the former will be far more important and valuable given bellum omnium contra omnes, to say nothing about its heavy weight and uselessness for anything but an obvious signal that you hold a wealthy object)

However, what I have trouble understanding is the misguided trust in various financial vehicles (be they futures, ETF's or the bouque of instruments invented by clever non-fiduciaries that tie their "value" to gold prices, and hold some "promise" of delivery of physical gold given certain conditions)

This bubble is going to end in tears for many folks who thought they had some claim to deliverable physical gold. It will only take one large player to squeeze the supply if he/she demands delivery. A delay or failure will occur. Then, dear readers, and it will be a mad scramble for the exits of these financial vehicles.

But then again, I have been wrong about this before...

About that Au Standard...

...Bernanke recently spoke about the shortcomings of the Gold Standard, with points captured by Joe Weisenthal of Bloomberg. Note the first point he makes is the truly preposterous notion that the U.S. should out-source foreign policy (and economic policy) to gold producing countries. Note also the #1 producing country at the moment is China. It is ironic that some of the most virulent supporters of the gold standard share similar ideologies as Mr. Paul of Texas, as any gold producing country in the world would immediately become a key U.S. interest.

To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It's nonsensical.

The gold standard ends up linking everyone's currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they've fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.

It creates deflation, as William Jennings Bryan noted. The meaning of the "cross of gold" speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.

The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.

The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).

The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there's a hint of another priority (like falling unemployment) it all falls apart.

Gold standards leave central banks open to speculative runs, since they usually don't hold all the gold.

Read more: http://www.businessinsider.com/ben-bernanke-murders-the-gold-standard-2012-3#ixzz1plrQW6Vq

Au

Summer has arrived and there is no shortage of gold bugs to usher in the hot season.

They seem to be everywhere. In popular media, in strip malls, on the street corners holding placards, and everywhere in between.

The arguments proffered by the gold bugs are simple:

1. It will protect you from inflation. It won't. Witness the Price Revolution of 1600 in response an influx of precious metals from the New World. Owning gold does not mean one is immune to inflationary pressures.

2. It serves as a store of value. True, however, there are storage costs for physical gold that dilute value over time and provide an EXPROPRIATION/THEFT risk.

3. Governments cannot be trusted. True. but this is not a reason to own gold. Refer again to the "Price Revolution" of 1600 as well as the panics of 1820, 1890, and 1910. If the End Of Timer scenarios do play out, does anyone want to hold a large supply of a relatively heavy metal that requires considerable energy to store and transport?

4. It is a safe asset. It is not, by a long shot. Gold prices are volatile, and the current FAD will subside soon enough. Milton Friedman once quipped "Nothing cures high prices like high prices". In other words, supply is popping up everywhere and the purveyors of the supply wish to keep the illusion of massive scarcity and governmental collapse at the forefront of the popular Zeitgeist for as long as it takes to clear their inventory. Is a "safe" asset one that is highly dependant on extraction activities in sub-Saharan Africa???

5. It has historical, preternatural value. True. So what? So did Salt and cow teeth at one time or another in history. Tying a sovereign currency to a commodity that is not WHOLLY dependant on production factors WITHIN its own borders completely obliterates the point of having a sovereign currency in the first place. So let us go back to a gold standard that is highly sensitive to gold production in countries thousands of miles away.

As an aside, the number one producer of gold is...China. If the United States outsources its currency advantage, I will look at emigration options, because the greatest non violent foreign policy victory in the history of mankind occurred when the U.S. went off the gold standard in 1971, and the second the U.S. relinquishes this precious advantage will harbor great danger for coming generations. That is the real danger as opposed to the hogwash regarding balanced budgets and deficit terrorists who wish to whip the country into a frenzy based on economic analysis wholly inapplicable to non-convertible sovereign issuers currency regimes.

Au...

...a continuing series.

Yes, the last death throws of this particularly troublesome critter are (finally) being recorded, as the absurdity now appears obvious to all. We have passed the "greater fool" stage and are now entering the final run and eventual decline.

Breaking news yesterday was centered around the gold market (GLD) which continued its meteoric, some say, parabolic rise, to more than $1900/oz. and the predominant gold exchange traded fund, (GLD) passed the S&P 500 ETF (SPY) to become the largest ETF by market cap; truly a milestone and most reflective of our current environment.