Gold as an investment

http://www.paulvaneeden.com/the.gold.model.updated

How does he get $775? Can someone help me, because I am having blurred vision today and can't read very well. That essay is too dense.

As I see it, he AMS money supply calculation is $8 trillion ($8000 billion on his chart for it). And the world gold supply is at most 5 billion oz, so thus $8000 / $5 = $1600 gold price.

Why does he complicate his model?

Also why is he only using dollar supply mixed with the whole world's supply of gold?

Seems to me Van Eden's own math is way off. I think the world money supply is at least double the dollar supply, so I think that projects a $3200 gold price. Can someone help me analyze?

Seems Van Eden is trying to find what the ratio of the AMS / gold price should be, by looking at history of when gold was the dollar. I am not sure that is an applicable methodology. He provides that logic that the correct ratio would have been when the gold coming into US Treasury was net 0, as that would mean the dollar value was neutral (no arbitrage). However, why would that ratio necessarily remain the same, even if he could pinpoint the exact time of past neutrality (did he pinpoint it? What was his data)? I mean comparing money supply ratio when gold was the dollar to when gold and dollar are opposites, are sure that is valid methodology? When gold is the money, then the ratio should be much in favor of a higher theoretical gold price, than when gold is not money, because by definition the amount of money in gold is less when gold is not the money. So if we actually have a higher ratio now (when it should be lower), then it seems to blow big holes in the concept of any consistent ratio between money supply and gold price. Also I think he was assuming that the gold coming in as arbitrage in early 1900s before and aftter neutrality (e.g. 1918) was coming not from gold as money in other countries. If that same gold was European money, then it was also committed to some money supply ratio abroad. So I just think the whole notion of comparing money supply to gold price is flawed.

Instead I think we need to look at confidence and trust:

http://www.paulvaneeden.com/Confidence.and.trust

What I realized is that if tomorrow everyone demanded to pull their money out of the banks, then the money in circulation would skyrocket, because money on deposit is not circulating (not being spent). Ditto money in investments and bonds which are not counted in the money supply. If these were liquidated and spent, the ACTUAL (not M3) money supply and velocity of money would skyrocket. Additionally I agree we must ignore M3, the removal of it was a red-herring possibly planted by the central bankers to excite us to over-invest at the wrong time. I now realize projecting $10,000 silver price based on M3 ratio, is not a very thorough view of the situation in reality. Read over Mish Shedlock's point that money supply = M1 + Market value of credit

I am going back and double-checking all our silver/gold bug assumptions about the silver and gold story. I am looking at the various mathematical models of inflation (and thus the precious metal prices):

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-75.htm#1106

Do not feel obligated/pressured on analysis. I am wondering:

1) Is Mish Shedlock correct that M3 can not be an indicator of the gold price because money supply = M1 + market value of credit, which is deflating.

2) Is Van Eden correct that AMS (similar to M1, an exact computation of money already created, not credit or investments) can predict the gold price throughout history (except for exceptions of 1979 - 82, and 1996 - 2007), and that a historic ratio of gold price to AMS (when gold was the dollar) is valid today?

3) Is the gold price really dictated by availability of credit, as well as money in circulation? If credit is deflating, does that mean gold is peaking recently with the double-top at $1000?

4) Can the M1/AMS suddenly skyrocket, if people liquidate their investments (Tbonds, etc), to spend because they don't trust the solvency of the US govt. That could rapidly switch the situation from deflation of credit, to hyperinflation of actual money in circulation, as well skyrocket the velocity of money (hyperinflation)?

http://financialsense.com/fsu/editorials/2009/0303.html

I responded to praise about potential coming gold price drop:

Shelby wrote:Mea culpa, I was quoting from a comment in the article I was rebutting.

I am not actually convinced that gold will fall that deeply, but I just wanted to point out both sides of the argument-- long term is up, but short-term there is a possibility of correction if interest rates are allowed to rise coincident with a bear market rally due to all this TARP money on the sidelines.

Have you checked out what we are trying to do drive geometric demand to silver and blow the top off of it:

http://VaultOz.com

Help us spread the word (and get rich doing that). Pedal to metal!

I can not see China and Russia making a clean break from the dollar/Euro system, because they don't have well developed alternative markets to sell to. It will be either a gradual process, or it will be overshoots and retreats.

My current prediction is that the Fed will choose to buy Tbonds to keep interest rates low rather, and the rest of the world will competively devalue their currencies and we head back into another massive round of inflation. I think gold and silver will lead in anticipation of this monetary inflation, just as they did in 2003 - 2006, then the other commodities may follow (they did in 2007) but the world simply can not sustain any growth without a monetary fix. We have a coincident effect of systemic financial system failure, which the inflation will not fix, so the precious metals may continue to outrun the other commodities.

Gold & silver didn't peak until 2006 (and actually March 2008) after the interest rates had started to rise from 1% in 2001. Point being that gold (& monetary silver) outperform in negative real interest rates, and they don't peak until interest rates rise significantly. I think the peak in March 2008 was prematurely predicting the massive TARPs debasement, but got reeled back in due to the temporary fraud of keeping all that debasement in the reserves stored by the banks at the Fed. That fraud is not sustainable, because if they banks never spend (or loan out) that money, then they could end up with a worthless asset that no one wants (the pricking of a fiat/fractional reserve/ponzi scheme bubble ends up at it's intrinsic value = 0). So I think the bankers will dump their reserves, because they profit on the cycling of the wave energy between booms and busts.

Silver has been in backwardation for 38 days!

http://goldmoney.com/en/commentary/2009-03-15.html

Silver market can blowup at any time. It could happen this year, next year, ... no one knows for sure. What I mean is the price of silver could in a very short period of time (maybe even overnight) go up 10 - 50 fold. Figure it happens at about the same time as the PTB no longer need to maintain the dollar lie, as they have already all the suckers corralled and/or blead dry. The alternative scenario is the price is allowed to rise so as to bring more supply to market (e.g. scrap recovery from 5 billion oz of heirlooms). In this case the price needs to start rising soon and fast, because it needs to get up to about $80+ in short order. So either way you slice it, the price has to go ballastic soon. But will you be able to trade it in a free market or hang on to it?? The govt can simply decide to raise taxes in order to confiscate, and regulate the dealers. What can you trade it for? Land? The govt can decide to make the payment for land a reportable transaction. Etc. This is why I say, get your metal out of the USA, so you will have more options forward. The PTB still need to develop the developing world, in order to bring all the "natives" down from the mountain into the cities, so they can complete the 666. They are done with the USA, already corralled and willing to take the 666. The coming revolution will kill off those who won't comply.

Think about the following. Who will be consuming silver? Developing world has all the factories. The West has a huge supply of heirloom silver (5+ billion oz). So don't you see. The plan is to essentially confiscate the west's silver via capital controls and taxation. Get your silver out to the East, where it will be in the market for silver. The bullion market is just a game to placate the west gold bugs. The PTB have a plan how to deal with you. Get out of that classification and put yourself at par with the Taipans of the East.

Also one sign of failure is when someone keeps trying different futile business models to hang on to something that isn't working. Evidence seekbullion.com. The bullion is not moving at the premiums Hommel wants. He has now (desperately imho) decided to buy a retail dealer. More and more desperation to come in USA. The fat lady has sung, the party is over, there will be nothing but a worsening situation where people turn on each other. Get out of a failing system! Go where the future is. Ultimately the USA will be a place where people are selling silver (at high prices, but taxed at very high rates). There will be very little buying, the buyers will be in the developing world. So your selling will be completely controlled by the govt with export capital controls.

http://www.kitco.com/ind/willie/mar272009.html

...A quid-pro-quo agreement was struck, continued USTBond purchases in return for Eminent Domain option to exercise by China for property seizure, “to physically take, inside the USA, land, buildings, factories, perhaps even entire cities.” ...

Jim wrote:http://stockcharts.com/charts/gallery.html?$GOLD:$WTIC

Jim what is your interpretation of that? Looks like gold is ready to explode upwards in price relative to oil? So this means the monetary end game is accelerating?

If the implication of my questions is correct, then my comment is that it sure feels like we are in eye of the hurricane and that all this monetary crap lately has to really begin to devolve into reality soon. For my part, I am trying to move forward on diversifying my precious metals outside the USA. If anyone needs help with this and is serious, they can contact me via email.

Yes, Shelby, in my opinion the chart is saying that gold is the better investment at this time.

As for oil, some persons think that when, not if, Pakistan blows up, it will mean a $100 move in the price of oil.

And, of course, we've been living on hot air since the gold window was shut in 1971. And we're running out of hot air.

Excellent work Jason!

http://silverstockreport.com/2009/gold-gather.html

Hommel wrote:...This is a dispersion of gold, or gifting of gold, towards the poorest people in the world.

If the poorest people of the world are buying 1/5th of the world's gold, it implies that gold is cheap. It is also being dispersed surprisingly equitably, or evenly. India has over 1 billion people, about 1/6th of the world population!...

Suggestion, add a note that this was 70% instant hyper-inflation (for the people who turned in their gold). Most people have bad math and don't realize that $35 is 70% larger than $20.67:

Hommel wrote:...Paper money failed in the USA in the 1930's when...paper money was devalued against gold, which rose from the official price of $20.67/oz. to $35/oz...

Hi Shelby,

If you can spare the time please read this piece at http://fofoa.blogspot.com/ from Friday, August 14, 2009. It is headed "The Waterfall Effect".

I think the author makes an excellent point in focusing on the use of the USD as the unit of account in the Inflation/Deflation debate. If I understand what he is saying then his central thesis is that Gold is the relevant unit of account not the USD. Accordingly the cross rates between the USD and other currencies are tangentally tied to the base unit of account, Gold.

I agree with your proposition that the Marginal Productivity of Debt (MPD) is currently negative and I believe that I understand Professor Fekete's explanation of the implications of this in contracting the economy with the continued attempts to expand debt. Again if I understand your reasoning on negative MPD it guarrantees deflation not inflation.

Under the Von Mises definition of both currency and fiduciary media as "money" in a fiat money/fractional reserve/central banking system I think you are correct. However, I think that this debate may be a distraction from the main game.

If the game is to collapse the US$ why can't we have the predictable effects of both, ultimately in sequence, as 1. Deflation and 2. Hyperinflation? As the "energy" accumulates for hyperinflation and "inflationists" rail about signals of inflation (such as money printing) how easy to distract the public from the coming tsunami by pointing out the real deflation in progress today that they can "see in prices" all around them?

Cheers!

angophera wrote:...If the game is to collapse the US$ why can't we have the predictable effects of both, ultimately in sequence, as 1. Deflation and 2. Hyperinflation? As the "energy" accumulates for hyperinflation and "inflationists" rail about signals of inflation (such as money printing) how easy to distract the public from the coming tsunami by pointing out the real deflation in progress today that they can "see in prices" all around them?

Cheers!

I am already saying that is what may happen, please read my paper again (I improved it):

http://www.coolpage.com/commentary/economic/shelby/Bell%20Curve%20Economics.html

The only other endgame alternative to hyper-inflation is rationing, e.g. another WW2 that forced massive rationing.

If that is the Martin Armstrong paper, then I already read it. Will look later.

So short-term is deflation, gold could drop short-term, but will rise against every thing except cash and Tbonds. Look at Exter's Pyramid, we at the cash stage, not yet at the Gold stage. I mentioned all this in my linked paper above.

Hi Shelby,

The math in your paper is way beyond me but I think I grasp the key concepts. Thanks again for your thoughts and taking the time to communicate them.

The FOFOA link is not to the Armstrong paper itself but the author does make reference to it in building his case.

On the subject of Exeter's pyramid a piece I saw recently argued that near zero yield on Government bonds/treasuries would be the catalyst for a cascade into physical currency due to zero opportunity cost. If the PTB want to trap the herd for the coup de grace it seems to me that currency is the logical next step after other debt instruments have extracted all the value they can. Once the rug is pulled from under the currency then the herd divests any remaining saleable assets at whatever price they can get with short term survival as their only priority.

I have also heard the same theory advanced for the flight from fiat currency to gold, that is, zero opportunity cost. If the transfer, to the PTB, of the last remaining assets is to be accomplished through gold wouldn't this fit with Professor Fekete's proposition that gold is the only money that can settle debt.

If you see this as the ultimate game plan how does the widening distribution of gold and silver among large segments of the world's population (as reported by Jason Hommel) fit into the picture? I considered the possiblities that a) it would make people more receptive to this "solution" to the "crisis" and b) it could be a stock to flow issue in ultimately remonetizing PMs. What do you think?

Cheers!