Posts tagged 'Gold'

QE: quantitatively shrinking collateral reuse

Adding to the QE scarcity concerns already highlighted by David earlier on Monday, here’s a couple of charts from Citi’s Hans Lorenzen reflecting the fundamental “too much of a good thing” problem with QE.

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The intended (and unintended) consequences of India’s crackdown on black money

Before we begin, how about a very, very quick quiz?

Question: What percentage of Indians paid income tax in the 2013 fiscal year? Read more

Venezuela’s reserve liquidation in one chart

Venezuela is in dire straits. Once one of the richest countries in the western hemisphere, the average wage is now estimated to be less than half what it is in Cuba using market exchange rates.

There are many ways to measure how much money is currently fleeing the clutches of Bolivarian socialism, either to repay debts contracted when the oil price was far higher, or simply to shield the wealth of apparatchiks worried by the prospect of state collapse. (Miami condo developers send their regards.) Read more

On the absurdity of today’s safe haven flows

From the FT’s Jamie Chisholm on Thursday:

Gold and the yen are surging to multimonth highs while stocks and the dollar are in sharp retreat after Federal Reserve chair Janet Yellen warned that global financial market turbulence could hurt US growth.

Yes indeed. But it’s also an entirely absurd and inefficient market reaction.

If you tell people you’re going to tax them just for the privilege of having them lend you their spare capital, those people are in turn supposed to treat you like an ungrateful entity and walk away to find more grateful recipients elsewhere or — at the very least — spend the tax differential on people or causes who might in the end benefit from the spending and show you some non-monetary gratitude even if they’re unlikely to ever pay the sum back directly. Read more

Reversion to commodity mean: The force awakens

There’s a funny fact (touted by gold enthusiasts) about the purchasing power of gold. For most of history — with few exceptions — an ounce of gold has been able to buy you pretty much the same sort of thing: a good quality pair of shoes, a belt and a suit.

Somewhere in our psyche, the suggestion is, that’s how much we’d ever really forgo to obtain a little lump of gold: the combined value of what it costs to clothe ourselves properly (since clothes wear and tear over time and always need replacing).

What it also suggests is that any time the gold price trades at more than the collective value of a good pair of shoes, a belt and a suit, chances are it’s massively overvalued. Eventually — bar some major technical innovation which finds a more pressing use for gold — the historical trend will reassert itself. Read more

No, very kind offer, but we think we’ll keep our gold for now. Yours, India

Compare, contrast and then draw your own conclusions about India’s newly born Gold Deposit scheme, its plan to lure gold out of temples, vaults and jewellery boxes with the promise of (hopefully but not apparently yet) lovely enough interest rates.

First… from Reuters last last week on its rather stuttering start:

A gold deposit scheme launched amid fanfare by Indian Prime Minister Narendra Modi two weeks ago has so far attracted only 400 grammes, an industry official said on Thursday, out of a national hoard estimated at 20,000 tonnes…

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Gold, gold everywhere, not any drop to drink

UBS looks at the fundamentals of India’s new gold monetisation schemes on Thursday and in the process comes up with one of the best summations we’ve ever seen on why gold investing in and of itself is stoopid — especially when done en masse by a relatively poor economy.

Indians directly or indirectly hold an estimated 22,000 tonnes of gold worth USD 800bn or 39% of Indian GDP (banking system credit is c50% of GDP). Gold thus held is problematic to some because unlike most capital goods it derives its expected value not from its ability to produce (directly or indirectly) goods or services that will meet the material demands of consumers. Instead it derives its value from investors’ collective perception of what it is worth.

Indeed. Read more

Self-driving cars, the NHS and John Law

To conclude FT Alphaville’s contribution to the self-driving car debate, here’s a bullet-point summary of why we don’t think it would ever be economically efficient or publicly useful for a private enterprise to fund the roll-out of a driverless taxi fleet.

  • Cars in garages are like gold — naturally depreciating and don’t yield anything.
  • Unlike gold, cars do provide the hoarder with optional utility — the option to use the car whenever they want.
  • Most personal car options expire un-utilised.
  • If you rehypothecate the car (rent it out) you can compensate for the depreciation by substituting unused optionality for more useful optionality in the wider system.
  • The more passive and automated the rental — the self-driving element — the less it eats into your general time value, thus the more profitable the option trade.

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Self-driving cars, opportunity costs and idle gold

We argued earlier that the economics of self-driving taxis don’t necessarily make sense.

Which is to say, we’re not entirely convinced (at this stage) that self-driving taxis will be any more or less affordable than those driven by humans. At least if deployed by a private enterprise.

But there’s a bigger point to be made about the economics of the self-driving car market. It’s about society’s general treatment of so-called idle assets. But also, how the rhetoric from Silicon Valley regarding the need to diminish the number of idle assets in society and up capacity utilisation everywhere contradicts the standing mantra that distributed, decentralised systems are stronger and more resilient. Or for that matter that gold or bitcoin are a better form of money than evil centralised rehypothecated fiat.

So here’s a post about why private cars have a lot in common with gold, and more specifically how Uber is to cars what fractional-reserve bankers were to gold. Read more

Aapka gold chahiye

Yes, as you can probably tell this is the news that India’s government wants to get the masses of idle gold lying dormant in vaults and households throughout the country out into the open.

To put that in Zerohedge-ese it’s the The Start Of India’s Gold Confiscation.

Or, to put it more simply… it’s a reasonable (if poorly executed) attempt to cut India’s crazy large (CA hurting) gold import bill by tapping into the estimated 22,000 MT of gold knocking around its temples etc. Read more

How much gold should you have in your portfolio?

Since the peak in early September, 2011, the dollar price of gold has plunged more than 40 per cent. Given the human tendency to expect the future to look like the recent past, sentiment seems to have become relentlessly bearish.

Hedge funds have gone net short gold for the first time since data began being collected in 2006.

For the sake of argument, suppose you agree with this “smart money”. (Maybe you were persuaded by this or this.) What should you do?

Knowing the strength of your conviction and your risk tolerance is necessary for determining whether you should simply stop buying more gold than you already hold, go to the other extreme of dumping everything and loading up on ETFs like this, or something in the middle — but it’s not sufficient.

To articulate your view into an actual position you also need a sense of what constitutes “neutral”. In other words, how much gold, if any, would you own in a purely passive savings portfolio? Read more

A not very golden crisis

Here’s a puzzle. Neither the Chinese stock slide or the Greek ‘no’ vote are having much of an effect on the gold price — odd given that the goldbug narrative that gold always performs well in a crisis:

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Amara, BCM, and unpaid debts in Burkina Faso

We finally got a copy of the recent appeal judgement in Côte d’Ivoire, a failed attempt by London-listed Amara Mining to have a “conservatory seizure” of its gold mine in the country lifted.

The legal action over the UK-listed miner’s main asset is a result of a dispute with mining contractor BCM over unpaid bills in Burkina Faso, and more litigation awaits, on which more from both sides below the fold.

On the February judgement, click the document for the written French. Broadly, it was an appeal on technical grounds related to the ownership of the company which owns the mining rights, and the nature of the seizure. Read more

Chicago, the last refuge of light touch regulation?

Friday, November 28th. It’s the day after Thanksgiving in the US – possibly the lightest trading session of the year. And here, buried under the turkey leftovers, we find two statements (click to read) …

That’s the CME handing out disciplinary action against Mr Igor Oystacher, one of the biggest individual fish in the deep Chicago derivatives pond. He’s been landed with a $150,000 fine and a one month trading ban. Happy Holidays Igor! Read more

An Indian precedent for Switzerland

Switzerland’s “anyone can initiate a referendum if they’ve got enough signatures” society gets to vote on the “Save our Swiss gold” proposal this Sunday, which aims to make it compulsory for the Swiss Central Bank to hold at least 20 per cent of its assets in gold bullion and repatriate all Swiss gold that’s held abroad.

The proposal also plans to make it illegal for the SNB to sell any of the gold it accumulates. Ever.

What’s worth noting ahead of the poll, though, is how the naturally occurring phenomenon of “too many non-productive gold assets in our economy” has struck economies in the past. Read more

Buiter on gold, Bitcoin and subjective value

Someone once wisely said, “if you love something, let it go. If it returns, it’s yours; if it doesn’t, it never was.”

But as Willem Buiter, chief economist at Citi, points out on Thursday, that’s not the message those with a tendency for passion investments seem to have ever received. They want to imprison the thing they love most and keep them in a dark dingy basement.

In a note on the non-virtues of gold and bitcoin investing (and the upcoming Swiss gold referendum), Buiter notes:

  • Gold is a fiat commodity currency (with insignificant intrinsic value).
  • Bitcoin is a fiat virtual peer-to-peer currency (without intrinsic value).
  • Gold and Bitcoin are costly to produce and store.
  • Gold as an asset is equivalent to shiny Bitcoin.
  • Central bank fiat paper currency and fiat electronic currency are socially superior to gold and Bitcoin as currencies and assets. There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value.
  • Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.

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ECB QE and the prospect of gold purchases

One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don’t.

It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target.

There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. Read more

Building the SNB a cross of gold (or an SWF?)

Tbh, we thought this one would just go away.

But no, on November 30 there’s to be a vote in Switzerland which, if won, would shackle the Swiss National Bank by forcing it, amongst other things, to hold at least 20 per cent of its assets in gold; to repatriate any gold stored abroad; and to refrain from selling any gold in future.

From SocGen’s Sebastian Galy:

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Beware the Chinese FX reserve fall

The latest from SocGen’s Albert Edwards features this eye-catching chart:

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The collapse in “physical demand” for precious metals in the USA

Some precious metal bulls like to dismiss price declines in gold and silver by pointing to the strength of “physical demand.” (Savers who put their wealth into precious metals never seem to get paid for this “physical demand”, but whatever…)

For example, here is Jim Rickards: Read more

On the art of creating value from nothing

Bitcoin does it. Dogecoin does it. Gold miners do it. And now Kinder Morgan does it too.

What we’re talking about is the amazing ability to create value out of nothing.

The Kinder Morgan self-acquisition deal, which effectively found $12bn of shareholder value from a paperwork reshuffle, is probably the most high-profile example of mining shareholder value from good old fashioned financial ingenuity, even when it involves some finance reverse-engineering. Read more

China in gold collateral financing shock

This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.

But it’s hardly a revelation.

We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.

Goldman even blessed us with a more recent update about the shenanigans in March: Read more

Putin’s gold level: $1300/oz

Not much market reaction yet to reports of an “anti-terrorist operation” in Ukraine apart from gold, which had broken through a key resistance level before Russia said that its neighbour is close to civil warRead more

Who saw that coming?

So, havens were what worked in the first quarter, led by a niche precious metal.

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The FRRP is not enough

Gold has been rising steadily since the start of the year.

Given the US taper, this might seem counterintuitive, especially if you believe that “money printing” should always justify higher gold prices.

But, as usual, everything is relative. Read more

The real reason the Chinese are mad for gold

It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner.

Prosperous countries, after all, don’t need gold (or huge amounts of foreign reserves for that matter either) to back their fiat currency. They don’t need them because they are so mighty, productive, knowledgable, powerful and desirable to live in that they have seigniorage power all of their own accord. You know. Like Bitcoin. But not because they are artificially scarce, but because they are managed well.

Also, even if you go with the goldbug logic that fiat ‘money printing’ equals debasement, it must then also imply that mass gold importation equals the opposite: purposeful rebasement. Someone is trying to bolster what would otherwise be a naturally weak currency. Read more

Why it’s tough being in an altcoin cartel

Cartels come in many shapes and sizes.

There are Colombian drug cartels. Mafia protection cartels. Oil producer cartels. Diamond cartels. Commodity cartels. Central banks. Altcoin cartels. All sorts.

All of them, however, extract value from potentially low-value things by means of organised collusion and discipline.

Columbian drug cartels organise to ensure drug markets are not oversupplied by wiping out the competition. The mafia organises to extract rents from those who would otherwise not be inclined to pay them, mostly by imposing an artificial market for protection. Oil producers organise to ensure oil markets are not oversupplied for the best possible return from oil prices. Diamond cartels do the same , but since diamonds are not an essential commodity they also create fanciful myths about diamonds being a girl’s best friend to create continuos demand. Central banks control the money supply, and thanks to that can corner and support any market they wish for as long as their underlying currency is demand. Read more

Investors should abandon long-term commodity bets

This guest post is from Mark Haefele, Global Head of Investment at UBS Wealth Management, and his colleague Chris Wright, Cross-Asset Strategist.

A key rule in financial markets is that rational investors should not take unnecessary risks. It is strange, then, that some savvy investors still allocate to commodities over a long-term, five-year-plus horizon. The assumption is that commodities diversify portfolios, hedge against inflation, and, in the case of gold, offer a safe store of value. But our research suggests these justifications for long-term bets on commodities are illusory. Read more

The golden subprime swan

Cardiff made a nice point on Tuesday that financial innovation, much like evolution, always finds a way. We have stressed before that that’s because risky lending — i.e. lending to the most distressed who are prepared to pay for it the most — also always finds a way.

So, in what form did the most recent spell of risky lending take place in? Read more

China, Bitcoin and the EM transfer problem

A common criticism of the secular stagnation and post-scarcity theory is that it is contradicted by the fact that unacceptable levels of poverty exist in many places around the world, and in particular the developing world.

If there’s so much growth potential out there, how is it possible that the economy is in secular stagnation? Or so, at least, the argument goes.

But perhaps the question we should be asking is what continues to frighten investment capital away? Read more