Another Gold Bearish Factor- Keith Weiner (27/08/2018)

August 27,2018
Last week , we said that the consensus is that gold must go down (as measured in terms of the unstable dollar) and then will rocket higher. We suggested that if everyone expects an outcome in the market, the outcome is likely not to turn out that way. We also said that this time, there is likely less leverage employed to buy gold and that gold is less leveraged as well. And this, combined with a contrarian perspective on the consensus view, means that this time gold won’t go down before going up.
Dan Oliver of Myrmikan Capital emailed Keith to say that
people in the third world use gold as collateral on their loans. When they
can’t repay, the gold collateral is sold by the creditors. This time around,
there is likely to be a larger crisis in the so-called emerging markets and
their currencies, and hence this selling of gold will be a bigger factor. With
greater selling pressure on gold, we’re back to the bearish case.
Million Ton Rock, Meet Million Ton Force
The bottom line is that we have several
forces pushing gold
up, and several
pushing it
down. On the up side (not
upside, sorry we couldn’t resist) these include creditors rightly fearing
dreadful losses when debtors default, speculators wrongly thinking that an
increase in the quantity of dollars causes gold to
go up, and even the possible path to remonetizing gold if we are
successful in help
Nevada to
issue a gold bond
. On the downside, we have speculators who front-run the
consensus that gold must
go down
first in a crisis, and we have forced selling by leveraged gold holders in the
first and third worlds.
Think of the plight of those poor
third-world people. No one in his right mind would keep his wealth in rupees,
lira, bolivars, or whatevars. So they buy gold for savings. Also because these
currencies fall so much, they like to borrow them, and count on the currency
going down, so they can repay in cheaper units. Except in a credit crunch. Even
if their local whatevar is falling, that does not necessarily help a borrower
earn some whatevars to repay his loan. It is possible for the whatevar to fall
against the dollar, but at the same time rise against the internal markets for real
estate and food.
In the first world, the currency has been
made irredeemable. That is, to own what’s called
money, you are actually a creditor. The currency is targeted for 2%
losses per year, so people are forced to seek whatever asset is going up. They
engage in a process of conversion of one’s wealth to another’s income.
Deprived of interest, they each seek to
increase their own purchasing power. That is, they seek to get something for
nothing. But there is a problem. This is only possible, if someone else gets
nothing for something (it will not remain the first world if the perverse
incentives that cause this perverse outcome remains in force).
Gold in the Third World
In the third world, the currency does not
fall at a mere 2% per year. It falls faster, and there can be utter collapses, like
the Zimbabwe or Venezuelan toilet paper currencies. Or it can have sudden
crashes like the Turkish lira, On July 23, the lira was over $0.21. By August
13—just three weeks later—it had dropped to under $0.14. It lost more than one
third.
So the locals buy gold, which is a lossy
transaction. They buy at the offer price, and when they sell, they must take
the bid price. For this reason, and because the lira is unstable, they use
their gold as collateral. Borrowing against gold avoids that loss due to the
bid-ask spread. However, it puts their gold at risk. If they cannot sell their
products and make
money whatevars, then they lose their gold.
Most people believe that we have free
markets. We don’t. We have a monetary system gone mad, under the abuse of
pervasive government interference.
However people accept the idea of so-called
floating currency exchange rates as the very foundation of capitalism. It is
true that people can buy and sell the major currencies freely (except for the
ones with capital controls, e.g. yuan). However, these currencies and this
so-called floating regime, are artificial and unnecessary. A free market is not
when people are forced to use government debt paper—but hey, at least they can
find a bid for that paper 24 hours a day.
A Dirty Picture
We are painting a picture of a sewer,
endlessly churning up cloudy water with floating brown pieces, disturbed by
unpredictable but frequent deluges of fresh credit-effluent. And each country
has its own sewer. Some are less muddy, others are more putrid. All have their
own rates of churn and effluent flows.
Anyone can exchange credit claims on one
sewer for credit claims on another.
This
is deemed to be a free market!
Worse, people who were born and lived their
whole lives in these polluted ponds take it as right as rain. They feel that this
is normal. They accept
monetary
relativity
, measuring each failing currency only in terms of other failing
currencies or in consumer prices. Never do they dare measure paper credit by
using the objective standard, gold.
Of course, if a currency is irredeemable
then there is no way to extinguish any debt and total debt rises exponentially.
Of course, if a currency is falling then everyone must seek to speculate for
gains, to seek something for nothing. Which means others get nothing for
something. Rising debt combined with conversion of one party’s wealth to
another’s income, to be consumed—that is capital consumption.
Exponentially rising debt plus falling real
capital is a formula for booms and busts. Everyone loves the euphoria of the
boom. But of course then the bust comes.
Traders know that the bust comes, but no
one (not even the PhD economists who run the credit-effluent pumping stations)
knows when. So traders sometimes go long, and other times go short. They are
always looking to bet on a price move, that is, to increase their purchasing
power, that is, to get something for nothing. The good ones achieve their goal.
Others get nothing for something.
And then the bust comes. As Keynes knew
well, “while the process impoverishes many, it actually enriches some.”
Magical Thinking Market Hypothesis
Some economists still assert the so called efficient markets hypothesis. They
believe that asset prices fully reflect all available information. It should be
called
magical thinking about markets!
The monetary system creates a contradiction between the perverse incentive to
borrow falling currencies to buy assets, and the suddenly collapses of asset
prices when the borrowing gravy train crashes.
In other words, which group is correct? One
group buys gold thinking it’s better to own money than to be a creditor at the
peak of the biggest borrowing binge in human history. The other sells gold,
thinking that central bank credit slips will go up in the debtor’s crunch.
There is nothing efficient about this. And
although
information is available, there is no convergence
process by which people arrive at the right price. A quick glance at the price
of anything shows this to be true.
Meanwhile, we have endless debates about
how capitalism caused the crisis of 2008, and how additional government controls
will somehow prevent the next crisis. And we debate if the current president is
somehow creating prosperity, ignoring that a debt-fueled boom is not prosperity
and the president has little effect on the boom-bust cycle.
Anyways, this is not capitalism. It is not
a free market. It is an unstable mix, and it will either be resolved by
transitioning to a free market or to dictatorship. Sadly, most places during
most periods of history have chosen dictatorship.
Is it better to own gold than paper in an
incipient dictatorship? Maybe. If it avails you.
We would rather transition to a free
market. In fact, we are working on that transition. We have been working with
the state of Nevada, and now they have pending legislation to issue a gold
bond. The gold bond is the key to a working gold standard. Interest is the one
force that can pull gold out of hoarding and into the market. And now, for the
first time in 85 years, America could have gold bonds. This is a giant step
toward the gold standard.
Keith has put up a petition, and is asking
for everyone who cares about honest money to show Nevada that you support their
move to gold bonds. Please click
here for the
petition at Monetary Metals, especially if you would consider
buying a gold bond. If you’d like to sign, but prefer not to give us your
email address, please click here for the
petition at Change.org.
Supply and Demand Fundamentals
While the price of gold was up $19 this
week, the price of silver was unchanged.
Of course, we are not going to bias our discussions of the fundamentals, based on bearish or bullish theory. Let’s take a look at the supply and demand fundamentals of both metals. But first, here is the chart of the prices of gold and silver.
Next, this is a graph of the gold price
measured in silver, otherwise known as the gold to silver ratio (see
here for an
explanation of bid and offer prices for the ratio). It rose again this week.
Here is the gold graph showing gold basis, cobasis and the price of
the dollar in terms of gold price.
It is notable that even with the dollar
moving down (which most people miscall gold moving up) gold becomes scarcer.
The cobasis (our measure of scarcity) is up about 20bps. It is odd that the
father-out contracts did not move, with the
gold
cobasis continuous
unchanged.
This week, the Monetary
Metals Gold Fundamental Price
rose $71, from $1,295 to $1,366. A big move!
Now let’s look at silver.
The picture in silver was a bit different.
With the price not moving, we see the scarcity falling. The same occurs in the
farther contracts, and the
silver
cobasis continuous
.
The Monetary
Metals Silver Fundamental Price
fell 41 more cents, from $16.19 to $15.78.
Silver not only has a more volatile price, it has more volatile fundamentals.
Remember, the fundamental price is just a calculation of what price would clear
metal if the impact of the futures speculators were backed out of the market.
It fell quite a bit, but it’s still a buck
over market.
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