What Happened to Gold as Global Stock Markets Sold Off?
March 3rd, 2007WARNING: This is not a recommendation to buy sell or hold any financial asset or investment.
Again, the assumptions for gold proved to be wrong. As stock markets sold off around the world last week, gold declined sharply. How can this be?
Gold has been turned into a funny money bet, just like stocks, bonds and index futures. The people trying to sell us precious metals say the stuff is, “real money.” If that’s true, how can you use fiat script to acquire it? Furthermore, how can leveraged fiat script be used to control large amounts of “real money”???
I’d believe in precious metals if they couldn’t be bought with fiat currencies or, even more insane, traded with leveraged fiat currencies (margin). How would anyone be able to acquire precious metals then? Real, tangible goods and services, only, would be exchangeable for gold or silver. Sure, in such a non existent, theoretical environment, precious metals make sense. Increasingly, though, with big fiat money psychopaths throwing their leveraged numbers around in the computer systems, the “real money” is looking more like fools gold. Don’t take my word for it, look at the numbers, blinking and updating in real time…
Obviously, these metals have some underlying, intrinsic value, but what is it? What is the actual value when the prices quoted are based on the leveraged scams of the global fiat money casino?
Precious metals strategy? This sounds more like a roll of the dice to me.
Lots of people, including me (I was a goldbug for years), have been sold a fallacy as a strategic hedge against financial uncertainty. But when the best thing you can say about your strategy—based on the actual observation of events—is, “It might work, or it might not,” you’ve got a serious problem.
Take a serious, objective look at your plans. Are you eliminating your reliance on luck and minimizing the impact of factors that are completely beyond your control, or are your rolling the dice?
If you found the analysis above useful, you might also like:
Gold Gapping Down Along with Global Stock Markets? Sure, Why Not?
Waiting for Clarity On the Brink of Oblivion
Via: Marketwatch:
Gold futures dropped more than 3% Friday, suffering from a fourth-straight losing session and a weekly loss of more $42 an ounce with investors still rattled by this week’s volatility in global stock markets as they eye demand for the precious metal in Asia.
“We have now witnessed a rout in bullion of a magnitude not seen since last fall,” said Jon Nadler, an analyst at Kitco Bullion Dealers, in e-mailed commentary.
Gold for April delivery lost $21 to close at $644.10 an ounce on the New York Mercantile Exchange. Prices have been falling from Monday’s $689.80 level in the wake of Tuesday’s global sell-off in stocks that triggered volatility across financial markets.
The contract ended the session down $42.60, or 6.2%, below last Friday’s closing level.
Silver futures led the decline in the precious metals, with the May contract dropping 5.1%, or 69 cents, to end at $12.96 an ounce. The contract touched a six-week low of $12.80 and ended the week with a 12% loss.
1. Stocks and investments will keep soaring forever.
2. Stocks and investments will crash in value.
BOTH ARE CORRECT!
Central Banks around the world are all massively expanding fiat money supply. (10% USD per year, 16% Yuan, etc)
This will cause economic growth and asset price increases.
However, since the central banks control the money supply with printing presses and credit expansion, they need only increase interest rates and POOF! all the money supply will contract, and the artificial economic and asset growth will vanish.
So Yes Virginia, everything will keep growing, but the end of that growth in is the hands of a few.
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The interesting thing about this to me is that it FORCES you to put your hard earned wealth into those assets that are being expanded by massive fiat money inflation. If you do not, and try to store your wealth in ‘Money’, it will continually decrease in value.
Creating more ‘Money’ is similar to a company with 10 million shares at $5 each issuing another 10 million shares. The market cap was $50 million before and after. But after the reissue, your 1 million shares worth $5 million (10% of the company) is now really only worth $2.5 million (5% of outstanding shares).
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The only alternative stores for wealth, such as gold and silver, are heavily controlled by central banks. (That is why Fort Knox has never been audited; central banks have transfered ownership to themselves).
So when the stock market goes down, it makes sense for central banks to sell paper gold and silver (fiat gold and silver certificates that will never be honored in a real emergency) to crash the price of those assets down and scare people back into their preferred assets.
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Summary
1. ALL WORLD MAJOR CURRENCIES CONTROLLED BY CENTRAL BANKS (which are corporate organizations, not state run)
2. ALL WORLD MAJOR CURRENCIES ARE FIAT MONEY BEING MASSIVELY INFLATED BY CREDIT EXPANSION.
3. MASSIVE WORLD WIDE CREDIT EXPANSION CREATES MASSIVE ECONOMIC STIMULATION AND ASSET PRICE GROWTH.
4. CENTRAL BANKS CAN REDUCE MONEY SUPPLY AT ANY TIME BY INCREASING INTEREST RATES (just one fed meeting away) OPEN MARKET ACTIONS (sell t-bills) OR REDUCING CREDIT (stop making loans due to ‘surprise’ sub-prime market risks).
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We have absolutely no control over this process (except by revoking the Federal Reserve Act of 1913 and returning control of USD creation to US Treasury) so you are on your own at the mercy of a few large global central banking corporations. Good Luck.
In the summer of 2005 I bought a good amount of gold in the $400s and silver around $9. I’m happy and not terribly concerned that gold went down 3% with the equity markets. Leveraged traders are getting margin calls, and they’re liquidating their holdings to pay up – gold and energy have been profitable (credit Jim Puplava).
Gold isn’t to protect you when the equity markets have a hiccup, it’s there for serious events and as a long-term inflation hedge.
Also, remember that the gold price is affected by the price of energy and labor needed to mine and process it. Gold will not stay at $600 when oil goes up to $200/barrel and the minimum wage is $20/hr. When serious inflation happens gold will preserve buying power. It will probably even do better than that, as everyone tries to buy some all at once, like in the late 70’s.
Even if you believe that the bad guys are manipulating the price of gold, you know they can’t keep it up forever or do it all the time.
That said, I’d still rather have land that produces food. I haven’t yet found the land I want to buy. Even when I do, it wouldnt’ be bad to have a decent supply of silver to be sure I can always pay the taxes.
I would also clarify that I have 15% of my money in gold and silver, and I never plan to sell it unless there is a very, very serious emergency. I don’t think of it as a typical investment. Also, there are many other assets that will retain value during inflation.
I’m not surprised in the downdraft in gold. I think that the size of the population that really ‘gets it,’ that understands the precariousness of the current situation with regard to energy, finance, and climate is still very small. So long as the great majority of people think that the usual rules apply you’re going to see gold bobble around, evem drop occasionally. At some point, though, I think that there will be a true panic when a significant fraction of the investing public starts doubting the future. When that happens, watch out. Anything could happen. Gold could become a shiny doorstop, or it could go to the moon. I tend to think that human nature will prevail, and denial will keep folks from really looking reality in the face; In that situation gold will go up significantly, as people will still be used to thinking that there is some way, any way, to preserve accumulated wealth. They won’t want to let go of the endless growth illusion, they won’t want to turn to the idea of community and sustainability – it is too foreign. We’ve been raised on a series of myths, and I think we’re going to gap our way down very reluctantly.
How about this for a paradigm shift? Most investors’ investments exist only on paper, or, even worse, on a computer database. In a severe economic crisis, such as a war, these economic assets have a way of “disappearing.” Thus, if you thought you owned gold because you bought some certificates, you might find out that your certificates aren’t worth a “Continental.” That’s the really point. Sure, you can maybe get ahead by placing bets on everything, like some oligarchs did when all markets hit an all-time low post-Depression, but you have to make sure your timing is right, which is very difficult to do unless you’re an insider, or you have an intuitive knack for how markets work outside of the school-based brain-washing.
Thus, a real hedge against the future, is to invest in everything, including real property, means of production, intellectual property, means of feeding one-self. This is what the uber-wealthy do, which is why they are considered the “owners.” They buy up everything and “own” it.
What’s even more problematic, is that such folk can easily take your property away by buying up politicians and having them engage in legislative and chicanery combined with banks engaging in financial chicanery. That’s how they really get you. If they want your land, they force you to pay taxes from selling stuff you grown. Therefore, you can’t just grow to support yourself, you have to sell-stuff so you can get the government off your back.
That’s why the whole “run from the Empire” strategy doesn’t really work that well. The Empire can always hunt you down and reintegrate you back into it at will.
I mean, if you look at this country’s history, the “government,” whatever that means, incentivized the settlers to go West with the lure of free land provided it was home-steaded, as in, all the heavy labor was done, plus the risks inherent to running into the Native Americans were placed on the settlers, who, along with the military, acted as a buffer of expansion. However, once the U.S. was more or less “conquered,” it was relatively easy to get the population back into cities through the creation of “incentives,” namely, making rural life financially risky, and offering the lure of wealth and glamor in the city.
This is why rich folks, after they’ve “made their bones” (Don’t you just love the image that shop-worn phrase evokes?) in the city, buy houses in the country. They are hedging their bets. What would really be interesting to know is how many do it consciously, and how many do it just to keep up with the Jones’s?
So, in conclusion, the best strategy is diversification; just make sure you go as broad as possible and are aware of all the strategies for losing your property.
IMHO, as continuing shifts in currency exchanges advance further into electrodollars, cash loses it’s ability to be used pervasively in the complete economy. the more rigid a society, the more likely an undergound market will develop for ‘specialty wares’ from essentials no longer generally available to more exotic products. a medium of exchange will still need to be available that cannot be traced and has intrinsic value.
when the fabric of society begins to unravel at it’s own tauntness, then your gold watch will be more likely to buy you the medication your child needs right now. especially if it’s a wind up.
the point being, trade will always look to the best intrinsic value. as you’ve pointed out, fiat currency will not hold it’s value under the circumstances likely to be concerned about. from there it becomes a matter of greed and need, and peoples eyes always shine when they see gold. smaller rural markets may see less of this, however if there still exists any kind of urban landscape, eventually your produce may end up in an exchange for gold/silver several middlemen out.
Yeah, lots of different commodities will do good against over inflated fiat currency.
And it’s fairly certain that the gold markets are at least somewhat rigged:
June 2005
From the Daily Reckoning newsletter:
*** Daily Reckoning correspondent, Lila Rajiva, finds a scoop…in India:
“After years of being called crackpots in tin – or gold – foil hats, GATA
(the U.S.-based Gold Anti-Trust Action Committee) seems to look saner by the day, next to the thorough-going loopiness of the financial establishment. The latest evidence is an IMF report that shows how IMF rules wink – if they do not actually blow kisses – at central banks that double-count the gold reserves they’ve lent out for sale in the open market. Apparently, being a central bank means never having to say you’re short.
“Aha, says GATA, which has charged all along that the IMF along with the U.S. Federal Reserve and other central banks have tried to hold down gold prices. The shady rules suggest that when they lent gold out for cash, the banks actually got to double their reserves by counting the leased gold as an asset on their books, as well as the cash. That was pretty sweet both for the lenders – the central banks, who got a small return for their gold – and for the borrowers, the bullion banks who got to sell and reinvest the proceeds for a higher return in what’s called a ‘carry trade.’
“Even the IMF report admits, delicately, that IMF rules have encouraged ‘overstating reserve assets because both the funds received from the gold swap and the gold are included in reserve assets.’ But except for a lone article yesterday in The Financial Express in India, (Sangita Shah, Double counting of gold may have aided the price suppression, June 7, 2006), the mainstream media has ignored the story.”
I’d believe in precious metals if they couldn’t be bought with fiat currencies or, even more insane, traded with leveraged fiat currencies (margin).
By this point, you wouldn’t be able to buy the gold under any circumstance.
Don’t take my word for it, look at the numbers, blinking and updating in real time…
Gold has been in uptread for several years. I am EXPECTING it to fall to to 620-630 based simple technical analysis.
Kevin, we all rely on luck. The same system that says gold is worth something is the same system that says the deed to your farm is worth something.
Really, holding the right assets is a temporary fix in a system in decline..something to buy time. What we need to do it learn to stand on our own (an dour immediate community)…and teach our children to do the same with the time we have.
@chuck:
Interesting note- gold is also very good during deflationary times. It takes the place of money as bank credit it destroyed.
The gut-wrenching market events that began on Tuesday, in my opinion, were a shock test undertaken by Them to determine how markets will react when they instigate a major value-shifting event, such as the U.S. attacking Iran, and said instigation causes the world’s financial architecture to begin its inevitable permanent crumble; consequently, I expect the markets to fully recover until a major event is catalyzed.
Having said that, here’s my take on the gold situation:
even in the midst of a gargantuan CREDIT inflation, such as is occurring in the U.S., currency (AND, paradoxically, credit [I’ll explain below]) is always in short supply, as you don’t need the actual printed dollars/yen/swiss franc/renminbi/etceteras to conduct transactions;
to conduct these credit transactions in the most economically efficient manner, electronic digits in the form of zeros and ones that signify credit amounts simply need be passed from bank a to consumer a to merchant a to bank b to bank c to merchant b back to bank a….
it follows that an economy, such as the U.S. economy, can simultaneously be in the midst of a massive inflation (ponzi credit via dollar-as-world-reserve-currency recycling momentary free lunch, derivatives, etc.) and deflation (credit and paper currency amounts relative to massively increasing amounts of credit PLUS THE COST OF CARRYING THAT CREDIT), with the costs of carry (interest rates) of the expanding credit amounts determining the exact moment of collapse of the financial system, as those costs increase exponentially and eventually consume the consumers of the credit who eventually fail to pay the creditors because:
a. A dearth of credit appears after a systemic event, such as the beginning of the subprime mortgage collapse, i.e. creditors begin to turn off the ponzi credit liquidity pump.
b. The credit and currency to pay the carry costs does not exist, AS NEITHER CREDIT NOR CURRENCY IS EVER CREATED TO PAY THE EXPONENTIALLY GROWING COSTS OF CARRYING THE CREDIT;
(only the credit and currency forming the prinicipal itself is created by the banks; to pay the costs of carry, you must go to war with your fellow man or woman to convince him or her to give you a portion of his or her credit or currency, which was in turn given to him or her by a bank, either directly or indirectly; it’s a zero sum game, which is why a massive credit inflation regressively redistributes true economic wealth [insiders, i.e. bankers and producers, retain possession of the currency and credit in existence, and the consumers of credit, i.e. regular people aka non-insiders, give the credit and currency they earn or were loaned to insiders to purchase economic products, such as overpriced homes, or to pay for previous credit extensions, such as arbitrarily priced loans; additionally, insiders, if they find themselves in a financial bind, have easy access to marginal amounts of credit/currency to keep themselves afloat, whereas non-insiders don’t have such access; consequently, in a financial meltdown, non-insiders find themselves lacking the credit and currency access neccessary to meet financial obligations, while insiders laugh as the system collapses, and with the currency and credit they possess, rush in to buy undervalued economic goods from the bankrupt non-insiders])
thus, when those carry costs equal and begin to exceed the amount of currency and credit in existence, the system begins collapsing unless more credit is extended. In our present case, we are quickly approaching zero hour, as debt levels are so high in every sector of the economy that no more credit can be extended to perpetuate the Ponzi scheme.
At the exact moment when the psychology of market participants determine a mega value-shifting event is about to occur or when such an event does occur, they will dump all overvalued assets, asset prices will plummet, fiat currency will be strongly desired in exchange for those overvalued assets, but will not be immediately available due to the electronic credit dry-up and the deficit of readily available paper currencies; consequently, the fed will monetize all assets being dumped, i.e. give holders of those assets digital dollars, which they will exchange for fiat currencies with value, such as the yen, euro, and swiss franc.
I believe gold will be avoided in such a deflationary collapse scenario because it can’t legally be used for economic exchange; however, if, as I suspect, Bernanke attempts to hyperinflate his way out of collapse, gold will skyrocket in the long run.
I believe Their dry-run, which began on Tuesday, to some extent, confirms this viewpoint.
Here is a great article on the Gold Sting; the theft of gold from everyone in exchange for fiat currency.
http://www.lewrockwell.com/north/north512.html
“There were gold coins in circulation in my parents’ youth. There were silver coins circulating in my youth. These coins used to be money, all over the industrial West. No longer. What happened?
The sting happened.
In June, 1914, you could have walked into a bank anywhere in the West and handed over the national paper money in exchange for either gold coins or silver coins. You could have purchased these coins at a fixed price: a specific quantity of paper money per coin. You would have paid nothing for the transaction, other than standing in line.”
This comment is an effort to clarify a part my previous comment (#9), as I wrote it in haste, and it is somewhat unintelligible; when reading comment #9, please replace the larger bracketed portion with these bracketed comments.
[insiders, i.e. bankers and producers, inevitably gain possession of the currency and credit in existence because the consumers of credit, i.e. regular people aka non-insiders, give the credit and currency they earn or were loaned back to the insiders via their purchases of economic products, such as overpriced homes, or their payments for previous credit extensions, such as arbitrarily priced loans; additionally, insiders, if they find themselves in a financial bind, have easy access to marginal amounts of credit/currency to keep themselves afloat, whereas non-insiders don’t have such access; consequently, in a financial meltdown, non-insiders find themselves lacking both the credit and currency possession and access neccessary to meet financial obligations, while insiders laugh as the system collapses, and with the currency and credit they possess, which, again, was given back to them by currency and credit consumers via product purchases and payments for previous credit extensions, rush in to buy undervalued economic goods from the bankrupt non-insiders]
p.s. I’m also changing my viewpoint that the markets will FULLY recover; I now believe they will recover, but only partially, before the final meltdown begins.
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