Gold: Past, Present, and Future

rapidranger54 said:I have been following this thread, and I must admit it is quite engaging for someone who isn't an economist by trade, but simply follows these matters out of pure curiosity. However, there are a few points I cannot quite grasp. I will jump in briefly to pose a question, though I will likely end up looking foolish...
The entire situation regarding fiat currency and the inflationary pressures exerted by central banks—which politicians pressure to print unbacked money just to maintain some semblance of "domestic peace" or economic stability—is clear enough to me.
It is also obvious that this results in the erosion of purchasing power. I am certainly not young enough to be unaware of how much one could buy with a hundred dollars decades ago compared to what fifty dollars buys today. It is the same principle.
It stands to reason that people "flee" from paper money in favor of gold. After all, it is a millennia-old alternative that serves as the most efficient way to preserve the value of one's savings...
But I am somewhat perplexed by one fact: the amount of investment gold in circulation increases every single day. In the US alone, perhaps 100 kilos of gold from old family jewelry probably find their way to buyback stations every day to be converted into investment grade. And that is to say nothing of what is being pulled from the mines...
How, then, can we expect the price of something to rise when its market supply grows daily?
Ultimately, both gold and paper money are symbols. Behind the dollar stands America and her economy; behind gold stands a thousand years of reliability. Who stands behind the Euro? The Germans? The Greeks?🙂I shall stop here before I appear too ignorant.

To put it extremely simply:
markets grow because demand grows—driven by things like population increases or rising living standards.

Demand rises
both through actual utility (think traditional gold markets in places like India or China, or people just trying to hedge against inflation caused by money printing and low interest rates)
and through speculation (like, say, reacting to general global uncertainty).

dustyheron5 said:You have to understand that demand for investment gold is drawn from the total pool of liquidity—much like stocks, bonds, real estate, silver, commodities, and so on. For example, someone holding bonds—pension funds, hedge funds, etc.—might find they aren't satisfied with the returns because they aren't beating inflation. They decide to sell those bonds and buy gold—and just like that, you have new demand...

Or perhaps you own real estate and decide to pivot into gold. You could have simply kept that money in a bank account earning, say, three percent interest—while the official inflation rate here is four percent. In that scenario, you are essentially accepting a negative real return just by keeping cash in the bank...

Regarding mining, it only increases the gold supply by about two percent. If investment demand grows faster than production, then logically, it cannot exert downward pressure on the price...

Furthermore, without crises, Zira, NIRPa, or interventions from the CBA, gold wouldn't be nearly as sought after—the price would likely remain stable rather than climbing...

One shouldn't forget that gold is the ultimate form of liquidity—which is absolutely vital during times of crisis...

I shall correct my own previous estimation regarding those 100 kg I claimed were being redeemed daily in America. Upon further calculation, I suspect I may have been somewhat hyperbolic. Let me recalculate—brother to brother—300 branches multiplied by an average of 100 grams per day.🤔—roughly 30 kg at most.

Here is how this looks in practice:

Interestingly, Deutsche Bank recently said their high net worth clients are buying physical gold. Barclays is currently completing one of the largest vaults in the United States—a facility designed specifically to secure physical gold and various other precious metals...

rapidranger54 said:I shall correct my own previous estimation regarding those 100 kg I claimed were being redeemed daily in America. Upon further calculation, I suspect I may have been somewhat hyperbolic. Let me recalculate—brother to brother—300 branches multiplied by an average of 100 grams per day.🤔—roughly 30 kg at most.

It’s all fine; honestly, the volume being bought domestically doesn't even matter. These numbers are purely symbolic when you consider what the Russian and Chinese central banks—along with other massive institutional investors—are actually moving into position...

The attachment above shows exactly who else is driving this new demand for gold...

For instance, major global pension funds don't even hold it at all...

dustyheron5 said:You have to understand that demand for investment gold is drawn from the total pool of liquidity—much like stocks, bonds, real estate, silver, commodities, and so on. For example, someone holding bonds—pension funds, hedge funds, etc.—might find they aren't satisfied with the returns because they aren't beating inflation. They decide to sell those bonds and buy gold—and just like that, you have new demand...

Or perhaps you own real estate and decide to pivot into gold. You could have simply kept that money in a bank account earning, say, three percent interest—while the official inflation rate here is four percent. In that scenario, you are essentially accepting a negative real return just by keeping cash in the bank...

Regarding mining, it only increases the gold supply by about two percent. If investment demand grows faster than production, then logically, it cannot exert downward pressure on the price...

Furthermore, without crises, Zira, NIRPa, or interventions from the CBA, gold wouldn't be nearly as sought after—the price would likely remain stable rather than climbing...

One shouldn't forget that gold is the ultimate form of liquidity—which is absolutely vital during times of crisis...

I don't know about that, honestly. Gold bugs just can't seem to wrap their heads around the actual intrinsic valuation problems inherent to gold.😂

rapidranger54 said:I shall correct my own previous estimation regarding those 100 kg I claimed were being redeemed daily in America. Upon further calculation, I suspect I may have been somewhat hyperbolic. Let me recalculate—brother to brother—300 branches multiplied by an average of 100 grams per day.🤔—roughly 30 kg at most.

Supposedly 50-60 kg of pure gold every single week.

dustyheron5 said:Who actually determines the velocity of money?

Well, nobody can, because if the Federal Reserve can't even explain why velocity is cratering, then we're lost. Alan Greenspan just dropped yet another one of his legendary gems when he muttered, "We don’t know what money is, any more."
Since the Federal Reserve has zero influence over velocity, the whole idea of controlling the economy via the quantity theory of money is basically dead in the water.
That's why, ever since the 80s, the Federal Reserve has been leaning on this thing called the Taylor rule.
But hey, 2008 happened, and it turns out even that rule doesn't guarantee "control" over the economy—you know, the whole low inflation and low unemployment dream—so now the Federal Reserve is just cooking up these new uber-methods of control that will inevitably fail us all over again.

If you're betting on someone deciding to dump massive amounts of US Treasuries in the future to spike velocity and trigger (hyper)inflation, you've got two big problems to deal with.
(1) The US market is just too massive; there isn't a single market out there capable of absorbing that kind of cash injection (that's what M. Armstrong was talking about)
(2) The President could just step in and freeze the sale of Dollar-denominated assets and a whole bunch of other stuff under the International Emergency Economic Powers Act Quote.

Anthony Evans78 said:The answer is pretty straightforward: all that money the Federal Reserve printed just went straight to the banks so they could cover their OTC derivatives, MBS, and whatever other financial magic tricks they’re pulling. Of course we aren't seeing hyperinflation yet—that cash is still just sitting there with the banks while they pretend they're actually solvent.

And honestly, that might be the catch right there. Banks aren't handing out loans because they're terrified of going insolvent again, which could happen the second the Federal Reserve decides to hike interest rates. So, yeah, velocity is just going to keep on falling.

Amy Sanchez2 said:Well, nobody can, because if the Federal Reserve can't even explain why velocity is cratering, then we're lost. Alan Greenspan just dropped yet another one of his legendary gems when he muttered, "We don’t know what money is, any more."
Since the Federal Reserve has zero influence over velocity, the whole idea of controlling the economy via the quantity theory of money is basically dead in the water.
That's why, ever since the 80s, the Federal Reserve has been leaning on this thing called the Taylor rule.
But hey, 2008 happened, and it turns out even that rule doesn't guarantee "control" over the economy—you know, the whole low inflation and low unemployment dream—so now the Federal Reserve is just cooking up these new uber-methods of control that will inevitably fail us all over again.

If you're betting on someone deciding to dump massive amounts of US Treasuries in the future to spike velocity and trigger (hyper)inflation, you've got two big problems to deal with.
(1) The US market is just too massive; there isn't a single market out there capable of absorbing that kind of cash injection (that's what M. Armstrong was talking about)
(2) The President could just step in and freeze the sale of Dollar-denominated assets and a whole bunch of other stuff under the International Emergency Economic Powers Act Quote.

And honestly, that might be the catch right there. Banks aren't handing out loans because they're terrified of going insolvent again, which could happen the second the Federal Reserve decides to hike interest rates. So, yeah, velocity is just going to keep on falling.

If the Federal Reserve has truly given up on quantitative theory as you claim, how then do you interpret the Federal Reserve's targeting of nominal GDP?

( keeping in mind that GDP = money supply x velocity )

Melissa Sanchez17 said:I don't know about that, honestly. Gold bugs just can't seem to wrap their heads around the actual intrinsic valuation problems inherent to gold.😂

You have a point there—we should probably flip the liquidity pyramid back over for the fiat bugs, just so they can finally see which currency is actually the most liquid. 😂

Amy Sanchez2 said:God, I honestly pity these so-called experts and the massive paychecks they pull for being so wrong. It’s like they’re mentally stuck in 1971 and just refuse to accept that the entire American monetary system has fundamentally shifted since then—I mean, the gold standard is dead, and ever since '82, the money supply hasn't even played the role people think it does.

According to the quantity theory of money:
MV = PQ

Greyer focuses way too much on the money supply (M), but he's completely overlooking the fact that back in '82, the Federal Reserve basically gave up on targeting the money supply altogether and pivoted toward targeting interest rates instead. And you know why? Because around 1980, the velocity of money (V) started acting totally bizarre; it stopped growing linearly like the theory predicts it should have from 1958 through 1980. So, the Federal Reserve just walked away from trying to control the money supply because they realized velocity could plummet at any moment, which essentially made that whole theory useless for actually "controlling" the economy.



The Count's chart explains everything perfectly: if the Federal Reserve were pumping out this much cash through things like QE back in, say, 1965, we would be staring down the barrel of hyperinflation right now (because if M and V both rise according to that equation, prices P absolutely have to skyrocket). But since V is falling today, the Federal Reserve can print as much as they want, and yet, look—no miracle hyperinflation in sight.

👍

We're looking at a vicious cycle here—a spiral involving debt, GDP, and money velocity. Usually, velocity drops because of deflation (lower prices), recessions (unemployment plus people hoarding cash out of fear), and debt levels (servicing what we owe). This hits the "C" and "I" parts of GDP, dragging everything down.
The Keynes fans would say the fix is pumping up government spending—the "G" component in the GDP formula. But since the government is broke, they have to borrow. That borrowed cash just slows down velocity even more in the long run, and we're right back where we started. Back in the Keynes era, debt wasn't what it is today, so pumping spending actually helped growth. Now? It’s just delaying the inevitable...
Besides the drop in M1V, look at M2V. It’s sitting at its lowest levels since they started tracking it: http://research.stlouisfed.org/fred2/graph/?id=M2V
If you look at the crashes in 2000 and 2008, an M2V drop is usually followed by a recession... and I think it's pretty obvious a new one is on the horizon.

Melissa Sanchez17 said:Look, I wasn't even talking about this specific piece—I was talking about his track record of missing the mark time and time again. As for what he actually wrote here... honestly, I don't see this happening.

"the Euro vs the US Dollar"

I'm totally with you on that one.

I've been calling for synchronized moves from the central banks for a while now, and even if they didn't pull the trigger all at once, the coordination was obvious.

The Fed and other central banks are going to try their hardest to keep inflation at some level they deem "acceptable"—as if they get to decide what that is. Some people think they can actually pull it off. Personally? Not me. I think things are going to spiral out of their control. Once that happens, they'll pivot to a new monetary system—something they're already laying the groundwork for behind the scenes. It's hard to say exactly how messy that transition will be, but for most regular folks, it could be pretty damn ugly.

Why do you think it's time for the Dollar to face its reckoning? The idea that the Dollar will weaken against other
currencies is baked right into the expectations for gold prices over the coming months and years.

dustyheron5 said:If the Federal Reserve has truly given up on quantitative theory as you claim, how then do you interpret the Federal Reserve's targeting of nominal GDP?

( keeping in mind that GDP = money supply x velocity )

What I was trying to get at is that from 1982 all the way up to today (Quantitative Easing 3), the Federal Reserve hasn't really been following quantitative theory; what you’re talking about now—this whole business of targeting nominal GDP (which I guess is the big goal behind Quantitative Easing III)—is that shiny new "uber method" they're using to try and pump up both the money supply and velocity. It's a bit of a wild goose chase, really, because we still have to see exactly how they plan to kickstart that velocity—maybe through some heavy-handed regulations on the banks, who knows?—and whether they can even pull it off, if you look at Patrick Moore3's post above. If they actually manage to get a handle on velocity, then, and only then, will they be in a position to actually apply quantitative theory to hit those specific GDP targets.

Good luck to them with all that alchemy, I guess.

-briskjackal5

Unfortunately, the Dollar didn't keep sliding on Friday, which killed some of the momentum for gold. We'll have a better idea of where things stand at the start of the week. If the Dollar stays stubborn—and it looks like it will—gold is headed for a correction that could drag on until late November.

quiettrucker12 said:Why do you think it's time for the Dollar to face its reckoning? The idea that the Dollar will weaken against other
currencies is baked right into the expectations for gold prices over the coming months and years.

Look, I'm not talking about some minor dip in value here—I'm talking about a total currency collapse. Honestly, I just can't wrap my head around the idea that the Dollar is going to go belly up before the Euro does.

Velocity could continue its descent; what actually matters is the scale of that drop relative to inflation. Take the US, for instance—if we used the pre-1980 Federal Reserve methodology, inflation would have been sitting around 6% back in early 2012. That discrepancy alone highlights just how much money was printed, considering prices should have plummeted given the falling velocity and the contraction in the money supply.

Melissa Sanchez17 said:Look, I'm not talking about some minor dip in value here—I'm talking about a total currency collapse. Honestly, I just can't wrap my head around the idea that the Dollar is going to go belly up before the Euro does.

Sure, but (haven't read the full piece) that phrase "it is not the Euro that will collapse next but the dollar" sounds to me like the author thinks the Dollar is the next one to hit the floor (which, let's be honest, isn't a shocker), not the Euro. If they actually meant the Dollar would tank before the Euro, they would have phrased it differently.

quiettrucker12 said:Sure, but (haven't read the full piece) that phrase "it is not the Euro that will collapse next but the dollar" sounds to me like the author thinks the Dollar is the next one to hit the floor (which, let's be honest, isn't a shocker), not the Euro. If they actually meant the Dollar would tank before the Euro, they would have phrased it differently.

In that sense, yeah. Though I'm still struggling to wrap my head around how the Euro is even being considered "saved" at this point.🙂

Melissa Sanchez17 said:In that sense, yeah. Though I'm still struggling to wrap my head around how the Euro is even being considered "saved" at this point.🙂

It's saved relative to the very real possibility that it might have already collapsed 😂
Which certainly doesn't mean that risk has vanished...

There’s a pretty interesting angle to this whole Dollar vs Euro debate: it really comes down to who's going to blink first. The US is running this massive trade deficit, whereas the EU is a bit of a mixed bag—you've got Northern Europe exporting everything while Mediterranean countries import most of their stuff. But overall, the EU manages to cover its own demand for goods and materials through domestic production, while the US is basically stuck depending on Chinese people and others to supply them with goods in exchange for those greenbacks.

All the major currencies right now—Dollar, Euro, Pound, Renminbi, you name it—are essentially being "printed." Or, more accurately, we're seeing massive amounts of money being digitally generated without any real backing (well, if you count newly issued government bonds as backing). It feels like we're drifting toward that Nostradamus idea of funding a state budget through primary issuance—except, obviously, there are banks in the middle taking their cut, often state-run ones at that. Unless some miracle happens and the economy just takes off, it's a safe bet that cranking out new money will lead to inflation. I'm not talking about that crazy, hyperinflationary mess you saw in America, but we're looking at maybe 5%, 10%, or even 15% annual inflation—though they'll probably try to hide the true scale using some shady statistical gymnastics early on.

For now, I’m sticking with the Euro since my expenses are in Euros, and honestly, I find it more stable than the Dollar. If the Arabs & CO start selling oil for something other than USD—and hey, the Iranians are already doing it—then the US printing press won't be able to tax the entire world anymore. That would trigger even bigger trade issues because, frankly, the US won't have much left to pay for imports. They'll be forced to bring manufacturing back to the States, which is going to be an expensive, long-term headache. As it stands, the Fed is basically the biggest buyer of T-bills. Once the Chinese stop buying them, pretty much everyone else might follow suit.

The pension fund situation is also worth watching. Traditionally, one of the largest institutional investors stays well away from PM. Lately, though, they've been taking heavy hits on government bonds—which are supposed to be the "safe" bet, assuming you follow the legal mandates on where that capital can go. If they even direct a tiny fraction of their capital toward PM, it could send the price skyrocketing. Right now, they're struggling to find decent places to park money; between playing poker with the Greeks and worrying about the Spanish, they're facing actual negative interest rates from the Germans. At this rate, they'll be handing out starvation pensions.