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XMFSinchiruna (27.87)

The Gold Price is Ultimately a Function of Debt

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May 23, 2011 – Comments (18) | RELATED TICKERS: CEF

18 Comments – Post Your Own

#1) On May 23, 2011 at 11:53 AM, Jbay76 (< 20) wrote:

Hi Sinch,

 

I've been out for a while shoppig for townhomes and have been quiet, but now that I am back I was wondering if the microcap miner evaluations were going to resume soon?

Thanks

J

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#2) On May 23, 2011 at 11:58 AM, XMFSinchiruna (27.87) wrote:

Jbay76

As time allows, I hope to resume soon. But I too have been allocating time to some alternate endeavours of late.

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#3) On May 23, 2011 at 12:10 PM, catoismymotor (30.47) wrote:

*like*

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#4) On May 23, 2011 at 12:31 PM, rfaramir (29.40) wrote:

The government has no money of its own. How could it? It produces nothing of value that anyone would exchange for it.

It can only take from the citizens and then spend. By taxation directly or by printing the money which steals purchasing power surreptitiously. Borrowing just steals from future taxpayers, since it will have to be printed or taxed eventually (plus the interest). And our children cannot even vote yet! Someday they will wake up and repudiate the debt which they had no say in incurring.

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#5) On May 23, 2011 at 1:48 PM, Jbay76 (< 20) wrote:

TMFSinchiruna

I totally understand! Good luck on those endeavors and I look forward to the resuming series!

J

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#6) On May 23, 2011 at 6:05 PM, leohaas (33.32) wrote:

Very funny.

And only one nutjob responding!

But like any other commodity, the gold price is a function of demand and supply. The US debt ceiling is definitely not the only parameter influencing the gold price.

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#7) On May 24, 2011 at 8:35 AM, XMFSinchiruna (27.87) wrote:

leohaas

Gold is not a commodity; it is money. As such, its relationship to debt -- not just in the U.S. -- is inextricable. Supply and demand provide the direct pricing mechanism, but there is a principle root cause for this powerful upward trend in demand; and it is debt. Supply and demand are the proximal price determinants; while debt and currency distress are the movers at the core. 

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#8) On May 24, 2011 at 8:38 AM, XMFSinchiruna (27.87) wrote:

leohaas

Also, I saw no "nutjob" response above, and I detest the pejorative term.

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#9) On May 24, 2011 at 9:20 AM, catoismymotor (30.47) wrote:

leohaas,

Nutjob? Why do you resort to personally attacking Chris instead of offering a well constructed arguement against gold? Maybe in the past you have done so, but I can't recall it. To resort to name calling does not reflect well upon you.

Cato

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#10) On May 24, 2011 at 11:09 AM, XMFSinchiruna (27.87) wrote:

catoismymotor

I don't think he was attacking me. I've had mostly very constructive dialogues with leohaas over the years, so let's forgive him this one transgression. :)

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#11) On May 24, 2011 at 11:22 AM, catoismymotor (30.47) wrote:

Leohaas, I'm sorry for the misunderstanding.

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#12) On May 24, 2011 at 11:31 AM, mhy729 (32.53) wrote:

leohaas, are you referring to rfaramir?  What about his comment is it that you feel merits such a response as yours?

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#13) On May 24, 2011 at 5:26 PM, rfaramir (29.40) wrote:

TMFSinchiruna,

Rather than "Gold is not a commodity; it is money" I'd say "Gold is not an ordinary commodity, it is one chosen to be a money, a medium of exchange."

It's definitely a commodity, but definitely a special one. Since it can be used as a medium of exchange, it has more than just "use value" it has "exchange value". I.e., I don't just value it for what it can do for me directly, but I know that others will value it later (both for what they can do with it and knowing that others value it).

But still, its value is ruled by supply and demand like any other commodity, it's just that it has more demand than just industrial use. As a competing currency, you also have to compare its supply with the supply of the currency you care more about (for now), your local fiat currency, the dollar for us, imposed on us by force by legal tender laws. The supply of gold changes very little year by year. Since it is so durable (one reason our ancestors chose it as a money), most of it ever mined is still above ground and usable. Compared to that total amount, the amount mined each year is nearly microscopic. Its near-constancy of supply is also a reason our ancestors chose it as a money, as that keeps its value fairly stable, which makes for easier economic calculation. Dollars on the other hand, are a very inferior money, in particular because of its supply being so changeable. While occasionally increasing reserve ratios makes money (credit actually) less available, its most enduring trend is it increases in supply. Worse, this increase is effortless, now that it is done with computer entries and not physical printing presses.

So, compare the supply (near-constant) and demand (high) of gold with the supply (ever-increasing) and demand (low) of dollars, and watch the price of gold go up and up.

Interesting thing about the comic and this valuation, though: if a debt ceiling is ever honored, the money supply would very likely remain fairly constant for a while, and the gold price would no longer keep rising (once the banks' reserves are all done being fractionally lent out, the secondary and larger method of increasing the money supply). While the first half of the comic looks comic, the second half demonstrates that the first half (Uncle Sam stuck with no new spending money) is a state that will not last long, and sky is truly the limit for the price of gold.

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#14) On May 24, 2011 at 8:23 PM, XMFSinchiruna (27.87) wrote:

rfaramir

Thanks for sharing your thoughts. I have spelled out on countless occasions my more precise definition of gold as a dual-nature asset that is at once money and also shares characteristics in common with commodities. I can see how my terse comment could be misinterpreted, so your point is wel taken there.

You're preaching to the choir regarding supply and demand dynamics for gold vs. fiat, which again is a topic I have discussed at length over the years. Of course supply and demand are the proximate price determinants, as I stated, but gold's monetary pedigree makes it unique along with silver in the degree to which demand is tied ultimately to debt. I believe that no topic can be fully understood until it is traced back in a progression of causality as far as can be reasonably determined, and in that respect the story surely does not end with supply and demand. Supply and demand are the pricing mechanism, and the proximal determinants, but for gold investors it is arguably far more crucial to comprehend the fundamental drivers fomenting gold demand than it is to create a snapshot of those dynamics at any given point in time. Obviously, those snapshots are likewise extremely important, which is why you see that my very next article/blog post is dedicated to that very endeavor, but still those dynamics do not represent the nucleus of gold's story. 

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#15) On May 24, 2011 at 10:36 PM, Lordrobot (90.90) wrote:

"Look," Buffett says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

"Equities," Buffett answers without a moment's hesitation.

Buffett is a superior investor to you.... case closed.  

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#16) On May 25, 2011 at 9:19 AM, XMFSinchiruna (27.87) wrote:

Lordrobot

Oh wow. That argument is completely unassailable from any angle, and that does close the case entirely. Remarkably, you achieved that resounding cognitive victory without addressing a single one of my specific arguments laid out over the years in support of higher gold prices. I never thought it would be possible to construct the perfect argument against gold without any mention of macroeconomic trends, but lo and behold, you have succeeded where thousands before you have failed. I'm selling all my gold today, and and putting all of my money into Berkshire Hathaway stock for amped-up derivative exposure. What a load off! All my tiresome concerns about the dollar, budget deficits, pension shortfalls, state and municipal defaults, bank closings, sovereign default, leveraged derivatives, and quantitative easing all just melted away and left me in a paradise of blissful ambrosia.

Not!

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#17) On May 25, 2011 at 2:34 PM, rfaramir (29.40) wrote:

"Buffett is a superior investor to you.... case closed"

Actually, he admits he is not. We can invest in small caps, he has so much to invest, he cannot, therefore he knows we can make larger (percentage) gains than he can.

Also, he himself invested in PMs (silver bullion, wasn't it?) and only sold when powers leaned on him. He made money, but he'd've made more had he kept it until now.

I'd stick with what Buffett *wishes* he could be investing in: small caps (esp. miners) and PMs.

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#18) On May 29, 2011 at 4:09 AM, brizzlekizzle (39.73) wrote:

The german people were forced to pay 100,000 tonnes of gold after some war they lost to the winners of that war. The goldmark and the papermark were created where before they had simply not had the need to seperate them, and the war debt was to be paid in goldmarks obviously, as inflation would tear the papermark apart. What I get out of this is that as long as we have war, gold will be valuable. We have war, gold is valuable. So, is the dollar going to be inflated over and over? Yes. Is death by deflation certain? Yes. Is debt in dollars going to matter after that? No. Will gold matter? 

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