Worrying Gold

We just had the spectacle of one of the better Gold Traders on the planet getting “smoked” on a market call. Gartman had a ‘buy gold’ call on Fast Money a couple of days back. The next day the market headed down, hard. Looking at the Up / Down volume ranges lately, it’s pretty clear that was a BIG down day

GLD vs FXF Swiss Franc vs SLV Silver 1 year with volume+

GLD vs FXF Swiss Franc vs SLV Silver 1 year with volume+

We have a pretty big volume spike on the down day, weak volume on the up days.

The down hard came just a tiny bit below the ‘last high’ so we have “failure to advance to the upside” and even if only slightly lower, a “lower high”. All very not good.

The moving averages are weaving ( they do that at tops and bottoms, so a ‘topping weave’, but it can happen in a ‘pause’ for things like ‘waiting for The Fed to announce’…) and price has pulled away from the upper Bollinger Band. A worry.

ROC Rate Of Change has gone negative (below the center line).

Williams%R is below the midline indicating “be out” and amount of time “below the midline” has been picking up with the ‘above the line’ has been lessening (trend weakening).

All in all, Gold is looking rather weak and likely to “roll down”. Add that both The Bernake and the EU Central Bank have said they are going to keep stocks rising (via easy money) and The Fed claimed inflation is low (near 2%) and The Bernake said he would take action if it did get out of hand (no, it doesn’t matter if YOU believe that, it matters if all the OTHER market participants believe it…) All those things argue for a “Risk On” world, and that is a ‘be out of gold’ trade.

Silver looks even worse in that it tried to get through that prior high and failed. “Failure to advance” to the upside. Indicators similar to GLD.

(Silver chart here: at BigChart.com )

Also we have the infrastructure charts here:

https://chiefio.wordpress.com/2011/12/13/gld-gold-vs-silver-and-currencies/

However, those Swiss Francs are looking nice. It looks like the Swiss Central Bank intervention is over and it’s back to a nice rise vs other currencies.

Also worth noting, FXC the Canadian Dollar is looking like it’s started up too

There is a herd of Central Bank meetings next week that will likely cause all sorts of things to move.

Tueday has Australia then on Wednesday we have Brazil followed on Thursday with the EU, UK, New Zealand, Canada and Indonesia.

This means currency trades will be volatile then. The Euro looks like it is having a ‘bottoming weave’, but that is likely just a pause while we wait for the ECB to tell us what their money will be worth next Thursday.

Also I heard on the news that Spain continues to have very high unemployment with the EU overall at about 10.7% (Germany doing well, though, with the lowest in a few decades, though why is unclear). Ireland having the greatest emigration since the 19th century and still high unemployment, despite Very Large Austerity measures. Folks will not be happy with that.

This is looking in some ways a lot like it was about the time of the last large Irish Emigrations. I hope it doesn’t get that bad or that cold…

So, for now, it’s looking to me like the “Safe Haven” trade will be into $US, $Canadian, Swiss Francs. I’d watch the $Australian for a pullback just a bit (maybe $1.05-1.06 ) so would not ‘run to it’ before that point. If it hits $1.10 I’d bail out of it on too much rise too fast. As the $Australian tends to trade with stocks, a stock sell off would likely have the $Aus falling a bit too. But it also looks like the Precious Metals are not going to be a safe haven for a while. (Yes, this is paradoxical as the metal weakness is attributed to ‘risk on’ news from The Fed, and I’m seeing a weak “risk off” pattern in the US smaller caps… It’s not always a clean world ;-)

At any rate, be aware of what currency you are in, what your Central Banker is doing (and others) , and plan what your “safe haven” is, be it a currency or a metal.

For me, for now, it’s USD, Swiss Francs, and maybe some Canadian. Aussie on an appropriate move. As oil is looking toppy (but it’s a bit volatile to say for sure) the “oil currencies” of Mexican Peso, Russian Ruble, and Brazilian Real may have some pressure on them.

Sigh. Will we ever be out of the ‘duck and cover mode’? (Or, “when will governments stop stampeding markets for ‘stability’…”)

Sidebar on Greece: Moodies just down rated Greek Debt to “C” – High Likelihood of default.

So Spain is in rough trouble with crushing unemployment especially among the youth, Ireland is emigrating (again), Greece is “high likelihood of default”, and Italy is planning their strategy…

So tell me again how well this “Central Planning of the EU Unelected Commissars” is working?

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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33 Responses to Worrying Gold

  1. Pascvaks says:

    Life’s a beach! Surf’s Up! Most fold their towels and head for home. Some brave the waves, mostly young wild-ones. A few old foggies walk the beach, hand in hand. No one’s listening to the radio, folks don’t do that anymore. Time passes slowly and the wind and waves grow. And that’s the way it is, 3 March 1929, and you are there.

  2. Richard Ilfeld says:

    This means it’s time for the uninformed to listen to the radio ads and start buying. Right? Imagine the cycles of boom and bust if the late-to-the party public was a significant fragment of money in the market any more. My argument for mainstream, pedestrian dividend paying stocks, even if the froth in the market has taken everything out of Ben Graham territory, is that the labor left and academic left have their pension money invested there too. Yes, I know ideologues have been known to eat their young, but examine what a leftie like Chuckie Shumer does (as opposed to his public babbling) and you see the broader market pretty well protected. So 95% there, but 5% for survivalist stuff cause you never know…..

  3. DirkH says:

    Germany is doing well because? Well, because everyone including the ECB is printing money like crazy, props up his failing wellfare state and consumes… German goods.

    ChiefIO, google Target2; that’s the European inter-central-banking accounting mechanism. When the Greek central bank prints Euros, they accumulate debt in their account towards the ECB. Each Central bank must provide balancing collateral, so countries NOT printing Euros accumulate demands against the ECB in the Target2 account. Germany has in this way accumulated 600 bn or so Euros of outstanding credit.

    So basically, Germany and other creditor nations constantly send money to Greece and some other debtor nations, keeping their bloated public sectors standing, and the debtors keep on importing German goods, esp. cars.

    When you hear the Greek complain about the harsh austerity measures: Their public sector is as large as ever. It’s only their private sector that gets massacred.

  4. Paul Hanlon says:

    Yep, Ireland is emigrating again. I was one of them in 1983. I moved to London and stayed until 1998. I came back mainly to catch my daughters formative years and to help my mother raise my nephew. Other than for those moments, I am sorry I ever returned. I was better treated and given more respect in Britain than here, despite the IRA running their most effective campaign in London during that time.
    Us Irish have always placed great store in education, and our young people today are probably the best educated ever, and they’re not going to wait around until the gombeens pull their finger out, and I don’t blame them. My own daughter moved to Paris two years ago with my encouragement. The sad part is that unlike my generation, this generation will likely never come back.
    At one point during the boom, the population rose to 4.1 million. It’s probably down to around 3.8 million now and will go to 3.2 to 3.5 million, depending on how deep this recession bites, and what action the gombeens take.
    I don’t know when it all started going wrong. In 1988, when Dublin became one thousand years old, the government was taking about 32% out of the economy, which was one of the lowest in Europe, and arguably services were at least as good as they are now. It’s now at 55% and will be 60% by the time all the austerity measures are brought in.
    About a quarter of our working population works for the government, about 420,000 by the time you count the civil servants (or should that be “rude masters”), the people in the semi-states (mostly utilities), and the 800 Quangos (something like the EPA). Of these, only about 140-150,000 actually “do” work, the rest are bureaucrats.
    These are among the highest paid people in the country with an average wage of about €46,000 (against the industrial wage of €33000), but by the time you include the pensions, training, sick and holidays, special days off, and offices to house them, their cost is closer to €100,000 each. They also have guaranteed lifetime employment and most of their pensions are defined benefit, so God only knows what it is eventually going to cost the rest of us, because both our pensions and social welfare are fully unfunded i.e. a Ponzi scheme.
    Another quarter are unemployed, with probably another quarter under or misemployed i.e. their skills are higher than their job. Despite this, even on a GNP basis, our exports exceed our imports, which means we are not a total basket case.
    It will be interesting to see how we vote in the forthcoming referendum on the ESM (European Stability Mechanism, which is anything but). I will most definitely be voting No, but I expect most of the Irish to take the coward’s way out and vote Yes. Whatever problems we have brought down upon ourselves have been hugely exacerbated by our membership of that club.
    When we needed to have high interest rates, they were low because Germany and France were sclerotic. Now that we need interest rates to stay low for a long time, we will most likely get higher interest rates as Germany gets its knickers in a twist over the inevitable inflation that will result from all this quantitative easing. Once that happens Europe will either implode or there will be a “European Spring”. Interesting times.

  5. E.M.Smith says:

    @Paul Hanlon:

    My Irish great grandmother and great grandfather came over here in the potato famine and never went back. My wife picked up an Irish passport thanks to HER Irish grandparents… There’s a lot of Irish on this side of the pond…

    I was going to get my Irish Passport based on marriage to my spouse, but then things went sour “over there”. (As my grandparent was born in America, just after the Grands got off the boat, I can’t reach back to them for a passport…)

    About 36 Millions American self identify as having Irish ancestors… I make that between 6 and 9 times the Irish population in Ireland… (depending on how much of the island you count). Add in the Irish is Canada and Australia and, well… ;-)

    But in reality, I’m an American Mutt. Mom is English (a Celtic / Viking cross). Dad mixed Amish-German / Irish with a fraction of French somewhere along the line. Then again, the Germans and Celts were both wandering around the same areas where my Amish fraction started… and for a long time the various Viking source areas were sort of German (as they didn’t draw lines so often then) so I figure we’ve likely been a Germanic / Celt mix for most of the last several thousand years… just changing what languages we speak and where we live…

    Maybe when you are down to 3.2 M or so I’ll head over ;-)

  6. Paul Hanlon says:

    @E.M.

    LOL. If you and your good lady ever decide to come to Ireland for a holiday, you have a place to stay here if you need one. And you can take that to the bank.
    Interestingly, it turns out that if you go back just three generations, there are more Irish people who identify as Irish people living in England than there are Irish people in Ireland. I remember an old joke at the time that if we gave them back Liverpool, they’d get out of Norn Iron. We still have Liverpool :-)).

    Like the new layout btw.

  7. hpx83 says:

    Beeh, Gartman is just holding up his reputation as a contrary indicator :)

  8. Pascvaks says:

    Putin “re-elected”, Ireland hurting, Europe crazy, US sliding, FarEast flexing, the People’s Republic of Oz is Oz, Kiwi’s kiwi, Africa’s a mess, SAmerica 50:50, Canada trying. Anarchists, fanatics, suicidebombers, and zealots jump on the gravy train and band wagons when ever and where ever they can. History says something very unpleasent is brewing in the pipes, the toilets are beginning to bubble. If nothing else people are consistant in the way they approach BIG problems (and in how they acted when the BIG problems were growing). All indicators are saying the global system needs a major overhall and this does not happen easily, and usually not willingly. Those who think they are in a position to gain are positioning themselves to gain (as best they can by trying to read their tea leaves). Those at most risk usually have no idea what is going on, nor what I’m talking about. But, true is true as they say, nothing is impossible. Nothing is too Big to fail. Stupid people elect stupid people and entrust them with ALL they have. Usually it’s not harmful, like eating dirt or swimming in a creek cows use for everything under the sun. Sometimes it really pays to be lucky, and for your fool to not be as stupid as everyone else’s fool. Human history repeats itself repeatedly, only the names and costumes change. Gold is a guage of pressure. Ahhh.. the pipes! The pipes are calling.. and the pressure is continuing to build.. and the fools are giving speeches.. and..

    (Too too?;-)

  9. E.M.Smith says:

    @Paul Hanlon:

    There’s an odd artifact of inherited traits that says that eventually everyone will be able to claim some Irish ancestry…. even if a bit dilute. At the St. Pattys Day parade in Sacramento one year, there was a fellow as black as coal… toasting HIS Irish ancestors (a few generations back).

    America can be a strange place some times… Black Fellows in Kilts playing pipes? Yeah, we got ‘em… and fair good ones!

    @Hpx83:

    I’d complain that he has been right fairly often… but for the fact that I’m now wondering just how much of the memory is thanks to the ‘fast reversal’ behaviour he showed when the market spanked him mid-morning…

    @Pascvaks:

    It’s not the pressure in the pipes that moves the price, it’s how recently that pressure was noticed… That’s what the indicators help with. They tell you what is already “old news” so “priced in”.

    Longer term, I agree that “pressure in the pipes” will likely drive gold to over $2000 / ounce. But right NOW the indicators are saying “taking a break, most folks already bought, some looking to sell”.

  10. Andrew says:

    @ E.M.

    A gold question for you. Something I began thinking about yesterday…

    When people calculate the price of gold do they truly factor in all the proper supply and demand nuances?

    Let me explain where I am coming from. I know a little bit about money and investing. (Series 6,63,65,7, 24, only the 24 is current, btw) I have managed a fair amount of other peoples money over the years. Gold has always bugged me. People act very irrationally…especially regarding gold.

    Here is my expanded question/comments: Gold does not behave like most ‘investments’. As the price climbs, and if it looks as if it might stay high, companies mine more. Known gold deposits are left undisturbed due to the high cost of extraction, however, if gold stays over $1,000 an oz, it may become profitable to dig it up, thus increasing supply…correct? Today we have people in third world Africa burning piles of old computers to recover the gold. You cannot do that with most investments. Most people can go out and pan some gold if they want. The higher the price, the more people…some other Smith wrote something about that years ago…

    I think gold can be a great hedge, but it can be so unpredictable. A better inflation hedge, IMHO…fine wine! As I see it, if it goes up, you can sell it…if it goes down, you can get drunk…Win Win, lol.

  11. Pascvaks says:

    @Andrew
    $.02 = Gold has different markets, not just one or two. Each does their thing based on different costs, values, wants, needs. There’s the ‘Possess It Market’ (Brides, India Indians, etc.), there’s the ‘Commodities Market’, and there’s the ‘Individual Feel Good Private Insurance Market’ (there’s at least two of these, one is ‘RatherShortTerm’ –they use it to mentally balance and hedge their bets now and then, the other is ‘VeryLongTerm’ –they buy it and keep it in order to have it when “Civilization Collapses and that brown stuff hits the fan”;-). I know there’s others too, but I think these are the 3 BIG ones. Hope I’m sorta close, no harm intended; remember free feedback is really only worth about as much as you have to pay for it.

  12. adolfogiurfa says:

    What is much more important: 50% of the Gold total market it is simply imaginary, there is no metallic gold behind.

  13. Andrew says:

    @adolfogiurfa

    You are not implying that the ‘market’ could be manipulated are you? (Silver anyone?)

    Does anyone know how gold will actually respond during a real protracted global panic or war? Gold prices didn’t float prior to the 1970′s.

  14. adolfogiurfa says:

    @Andrew: If all buyers would ask for metallic gold there would not be enough. That´s all that I know. Perhaps @E.M. could enlighten us with the details of how is this possible.

  15. Andrew says:

    Its typically done with futures or derivative contracts. The system evolved from agriculture. They original concept allowed farmers some price stability. A farmer to establish a price for his crop, to be delivered at a future date. The buyer, say a bread company, could also minimize future cost fluctuations. Think of it as ‘insurance’, but like insurance it comes with a PREMIUM…and somebody…the BROKER…will/and should, receive $ for facilitating the transaction.

    The farmer can guarantee himself a price for something that he does not actually own…and the buyer controls the rights to some grain, at a set price in the future. The buyer can sell the contract to somebody else if so desired.

    Commodity’s for well for these types of transactions as they are fungible.

    A subject many Chiefio readers know well, CARBON CREDIT’s are/were an attempt to create a free and open trading market. As ‘carbon credits’ are not fungible this will not work. (it’s a no brainer to me, but others are free to disagree)

    Gold is an interesting commodity because it hold true value at some level. How much money are consumers (consumers…NOT investors) willing to spend for gold. As I mentioned before, gold is use in computers, in addition to millions of other products. Additionally, people buy it for jewelry, thus making it a collectible. This can complicate any calculation of golds intrinsic value…make sense?

    Look at the numismatic price of certain coins compared with the melt price of the coin. I have heard that the current melt price of a 2012 US Nickle is worth around $0.067. In theory, one could take delivery from the US Mint, and immediately resell the metal for a decent profit. However, it is against the law.

    Anyway…

    Fast forward to the conclusion…your point “: If all buyers would ask for metallic gold there would not be enough. That´s all that I know.” You are both right and wrong, in my opinion. You are absolutely correct regarding the gold, but I am pretty sure you are being modest about your knowledge, lol. You might not know a lot about the Chicago Merc, http://www.cmegroup.com/ , but you seem to know a lot!

    Disclaimer…I DON”T know much about futures and options…as someone that has spent 3 decades in the financial industry…as in I have never been a trader/broker in that particular market place. So don’t take my comments to the bank…but if we used the proper techniques, we could sell short against the box and possibly mimic some type of guarantee… (bad attempt at a pun, sorry)

  16. E.M.Smith says:

    @Andrew & Pascvaks:

    You left out the LARGEST players in the gold market: Governments.

    When gold went down to about $270 / OZ it was partly because European central banks were selling (especially Spain). Now that other central banks are buying (as the Euro is ‘suspect’ and they want to ‘diversify’) prices are going up.

    Most of the gold ever mined is sitting in central bank vaults.

    So it’s fine to wonder what John Q. Public is doing with his $2000 or couple of ounces, but the Big Daddy is the $Trillion sized players…

    Per mining:

    Mines are managed to stabilize profits. you have some ore that makes a profit at $200 / ounce and some that works at $400 / ounce and some that costs you $1500 / ounce to mine. When prices are $275, you mine the $200 body of ore. When prices are $1600 you mine the $1500 body of ore… This is a common and widely practiced technique for assuring your company survives longer than that one puddle of $200 ore…

    Per “What is gold worth”:

    Best metric I’ve seen is that through all of history it has bought “One man’s suit of fine clothes”. Yes, it bounces up and down as governments and the public panic. But the central tendency remains. So go to Macys or Saks and price up a really nice suit. If gold is much below that, accumulate. If it is much over that, slowly sell some ;-) I haven’t done it in a while, but I suspect a really nice suit is less than $2000

    Oh, and a metric I’ve found convenient: During recessions, platinum drops below gold. During “good times” it runs much higher as industrial demand ramps up. Compare platinum to gold. Buy the cheaper one, sell the higher one (with due allowance for the several years a cycle can take to mature… so don’t just sell month one ;-)

    As to “not enough gold”:

    That depends on The Velocity Of Money. If you have $1,000,000,000 of transactions in a year, and they ‘clear’ 10 times a year, you need $100,000,000 of ‘money’. If they clear 100 times a year, you need $10,000,000 of ‘money’. That simple, really.

    One of the reasons we went to paper money was that during a recession / depression folks hang onto their money. The velocity drops. That is the equivalent effect of a reduction in money supply. “Exactly wrong” and contractionary. But we couldn’t just suddenly double the amount of gold to stabilize things. You can double the number of bank notes.

    The flip side is that we’re supposed to cut the money back as velocity picks up. Easy with paper currency and / or computer bits. Now try taking half of everybody’s gold away…. (Though FDR did it… and they wonder why the depression continued…)

    So to answer “how much gold is needed?” you also have to answer “at what velocity?”. (Also ‘at what conversion rate?’ as one could easily say the new Gold Dollar was worth $10,000 paper dollars…) So it isn’t really a problem, but does bring back the old annoyances of limits on quantity change and velocity compensation…

    The other ‘issue’ is the very old and long discussion of “Bi-Metalism”: Using both silver and gold is convenient (smaller coins …) but has the problem that the ratio of cost to produce shifts over time with ore bodies and techniques (we are waaaayyyy far away from the ancient 16:1 now with heap leach mining and electrorefining of copper with silver byproduct). So it was always a PITA to have silver and gold coins at the same time and try to keep them in sync. With current industrial swings on silver added, it’s even harder. In many countries folks also added Copper to the coinage. So, in exchange for the problems of bimetalism (or trimetalism or if using Platinum too quadrametalism) you can have ever more money supply as metals.

    Personally, I’d also add Palladium, Nickel, and Tin to the mix and have a straight barter price ratio market set between them. Somehow we can handle beef wandering between $3 and $8 a pound but think we can’t handle Palladium at 4:1 gold to 8:1 gold? I think folks would sort it out pretty quickly… Heck, why not have Iridium and Osmium coinage too… Any of the rare metals could be added to the mix (as long as reasonably durable and non-toxic… skip the beryllium coins ;-)

    You could extend this even further, if desired, and make a paper currency based on a ‘basket of commodities’. So you could define a basket of, say “One ounce each gold, platinum, 50 ounces silver and palladium; and one ton each of wheat, rice, beans, with 10 barrels of oil” Every day the central market issues a ‘current total price’ of the basket. Call it 10 CBs in this case (made up from guessing about $10,000 for present costs). Now you would allocate the ratios of each constituent of the basket. Gold would be selling at about, say, 1 CB, maybe a ton of rice is 1/3 CB, etc. At that point, you can use any of the commodities in a barter, and you can use certificates of deposit for that commodity as currency. Now you have a reality anchored currency, but you may choose to use the whole basket, or certificates redeemable in any part of it, as your particular currency. Money “supply” becomes the aggregate of stuff in inventory or under contract. The 10 Gold C note shifts relative to the 10 Platinum C note and relative to the 100 Rice C note, but you can have a 10 CB note to dampen them if you wish…

    I think most folks would rapidly use the CB note (to avoid market swings) but some folks would choose otherwise. For example, paying for gasoline with an Oil Note would be more stable… So I could see trucking companies holding more Oil Notes while a jewelery shop might want more Gold and Silver notes…

    Just to make it more fun, you could even have something like 100 Minimum Wage Hours as part of the CB note calculation. Now when paid in CBs for your work, you also know exactly what it will buy…. (which is why it will never be done…)

    You know, I need some small Latin American Country that’s having IMF issues and is isolationist and just wants to be left alone that would like to be adventuresome with the currency. I’d love to design a national currency based on the “Net National Wealth” as a basket. Everybody gets their share of the basket in WealthNotes. From that point on, you want labor, you have to pay it in WealthNotes. You want rice, or gold? Fork over a known part of NationalWealth for it. Only way to make more currency is increase National Wealth.

    Folks want to take a vacation there? They turn in their foreign exchange for notes that will buy a known chunk of what the nation produces (coffee, hotel days, etc. it all goes into the national wealth creation number). That then is used to buy the ‘foreign goods’ needed. Can’t spend NationalWealth for that as it’s not an international currency… fundamental wealth transfers out tied to foreign exchange currencies in.

    Oh Well… not enough desperate little countries for them to be willing to accept me as adviser ;-)

  17. Pascvaks says:

    EM -
    Is there something ‘new’ or ‘unique’ about today’s ‘credit’ system (vice ‘old’ paper and metal money)? Have we transcended ‘money’ (Currency), so to speak, and moved on/in to a new paradigm so to speak? Somehow, it seems, the rules (or whatever) that Governments and Super-Banks/Corporations/Markets play with are different now than they were 20-30 years ago. That the old gold deposits in the basement of the NY Federal Reserve don’t move around much anymore, that they’re pretty much collecting dust. Maybe nothing’s ‘new’ and it’s taken me this long to ask about something that’s actually quite ‘old’. Maybe it’s my age. I’m just wondering if anything has happened while I’ve been Rip Van Winkling under my tree. If so, any ‘problems’ that you can see looming before us? (One thing governments know how to do well is create problems.) Maybe the changes, if such exist, weren’t too smart given the pickle juice we’re in now, etc.? This might be something too involved for a response here, or anytime soon. But sure would be interested in any thoughts if my rather open ended question piques your interest/fancy and you have the time to spare from real work and HoneyDo‘s. (If you’ve already answered this kind of thing –and you probably have– would appreciate help finding it, don’t have a clue what keywords to use in a search;-)

  18. Andrew says:

    @ E.M.

    You said
    “@Andrew & Pascvaks:

    You left out the LARGEST players in the gold market: Governments.”

    Left out, correct, unaware of the impact…ummm…remember August of 1998. Russia dumped about 25% of their gold reserves.

    http://en.wikipedia.org/wiki/1998_Russian_financial_crisis

    One little anecdote you might find amusing…(see attempt at sarcasm below) anyway, I was in the process of transitioning 300 employee $4,000,000 401(k) plan. A member of their board, sat on the board of another newly acquired client. I guess I had impressed him. Needless to say…I wanted it to transition over seamlessly. These days…its usually a piece of cake…back then…daily valuations on individually funds…coming from a pooled account, 1980′s accounting software…to a top level platform…pain in the ass! Due to some mistakes, made entirely by the other guys…(they admitted it…it was an old legacy platform of Fidelity’s, and they were willing to eat the trading loss, not happy, but willing)…the clients money was out of the market beyond the time frame we had set, 3-10 days. Thankfully, due to ERISA laws, Fidelity’s neck was on the line for any market loss. BUT my new clients would receive any upside gain! Talk about a nice collar. All of this happened during August and September of 1998. They missed most of the Russia meltdown and Long Term Capital. The problems got fixed, and they got back in within a day or two of the bottom. As I recall, it worked out to about a $400,000 upside for my clients. HOWEVER, I made sure to make it clear during a series of group meetings that I had nothing to do with the AMAZING returns they just experienced, and it was a once in a lifetime windfall. (live by the sword, die by the sword…I wanted to manage their future expectation)

    So when Russia was selling Gold to avoid another revolution…I was aware, lol.

    (Like I said above, not sure if you find it amusing, but…you admitted you went from Asiatic bivalves to something about slavery…which I hesitate to even begin to read…out of fear of getting wrapped up in it. Particularly because a Storm approaches… http://www.accuweather.com/en/us/lakewood-wa/98499/weather-warnings/341300)

    Now to read the rest of your comment, lol.

  19. Andrew says:

    @E.M.

    You said “You could extend this even further, if desired, and make a paper currency based on a ‘basket of commodities’.”

    I betcha a ‘Buck’ I could could come up with a few more examples…and probably be able to link back to your thread on Chinook Jargon and research the value the Coastal tribes place on copper. But I can’t even finish reading your comment…

    I am beginning to realize I have a Love/Hate relationship with this blog….

    ….ok finished…

    You said “Oh Well… not enough desperate little countries for them to be willing to accept me as adviser ;-)”

    How did that one dude get the gig in Chile? The bald economist, Uncle Miltie or something like that. Argentina or Venezuela might have opening soon.

  20. Andrew says:

    @Pascvaks

    My quick 2 cents.

    “Have we transcended ‘money’ (Currency), so to speak?”

    Yes and no. In the days of actual coinage, when you would literally cut the coin in half to make change, the ‘money’ was tied to a perceived value of the precious metal. Water is worth more than gold if you are dying of thirst, it all depends on ones perspective.

    Today people circumvent traditional methods of ‘money’ via barter and trade, like they always have. However, today it can be done internationally via the internet on E-bay and Craigslist. Not to mention the massive underground economy that exists for both legal and illegal ‘products’.

    The more things change, the more they stay the same, or something like that.

  21. Pascvaks says:

    @Andrew:
    Thanks. What I was curious if EM could comment on was his views on the ‘new’ in it all. I have a feeling the big boys have moved away from things and now use numbers only, that any ‘thing’ –if such exists– is like an e-stock e-certificate or e-promissary e-note that is e-mailed in rare cases and that it’s all e-ether, nothing real about it; that it’s got no substance whatsoever. In the back of my mind I keep thinking, what’s going to happen when we have another Carrington Event a’la 1859? Are the e-back-up systems protected to the extent that a real life Solar Super Storm is going to be like a splash of water running off a duck’s back? Or, maybe we don’t even need a Carrington Event, maybe what we have now is a heck of a lot more fragile in other ways? I’m like a happy Irish drunk who just wants to ‘touch’ something to check which way my head and ass are pointed vis-a-vis the center of the universe and the floor;-)

    http://en.wikipedia.org/wiki/Solar_storm_of_1859

  22. adolfogiurfa says:

    @Pascvaks: Is there any obligation whatsoever to register all those “E-nothing”? Or…is it that currency counterfeit is OK when THEY do it?

  23. E.M.Smith says:

    @Adolfo:

    It doesn’t matter if you have a ‘e-stamp’ or a paper stamp; and e-dollar or a paper dollar. Both can be counterfeit and both can be created in effectively unlimited numbers by the “official agency”. So what prevents the post office from printing $10 Trillion of stamps? Just issue them in exchange for cash or gold and “voilà” no budget shortage… What limits it is the requirement that they deliver a product of real value upon presentation of that stamp…

    Similarly, paper money. The government can print all it wants. If it does so to excess, then the paper it tries to spend becomes ‘worth less’… But with a twist… the government also provides services to the ‘client citizens’… but typically not via a payment. Via extracted taxes that typically go up apace with inflation… (So I’d suggest that all taxes be in REAL terms and NOT indexed for inflation… we’d find stable money ‘right quick’ was a government priority ;-) So for the government, and it alone, income is independent of inflation while expenses are prone to a long lag time. They make gain on the hysteresis…)

    At any rate, the ‘advantage’ of physical material as money is that it anchors into a non-fiat form so removes that “just print it” temptation…

    But paper vs e-whatevers is just no real difference at all… (both can have encryption / serial numbering / tracking features to help prevent counterfeits but both are essentially fictions and can be produced without limit by any issuing agency.)

    @Pascvaks:

    Per a major EMP bringing it all down: Not going to happen.

    First off, it’s going to fry boundary UPS boxes, not the computers themselves. Second, even if it DID fry the computers, it would be their power supplies and CPUs and memory chips, not the disk surfaces. (I’ve recovered disks by just putting new electronics boards on them). Even if all of THAT happened, the backup tapes are on racks in other rooms with now power supply connections (tape being an unpowered object). It takes a rather surprisingly high mag field strength to erase a back up tape. We’d have cars flying into space from that strong a mag field impressed on us from outerspace… And even THEN you can go back to printed statements to recreate ‘who owned what’ (which is why you are supposed to print out your monthly or year end statement and keep it every so often…)

    How do I know this?

    Because at one time or another I’ve been involved with a recovery from each of those levels…

    At Disney, some years back, the “impossible to go down” data center with two independent power feeds into two distinct UPS boxes on opposite ends of a block long building; went down…

    How is amusing. A flag pole was in front of the lobby near the middle of the building, About 50 meters from the ends with the UPS feeds. Not near anything ‘electric’. It was hit with lighting. (A very common thing in Orlando). The post event review found that it was about a meter from the main water line. Met code. Besides, it’s a water line…. talk about “grounded”…

    But the soil is very sandy. Lightning “flashed” over to the water pipe. This was far more conductive than the sand. It also raised the whole ‘ground plane’ of the giant building by some huge voltage. THAT reverse volted the UPSs that promptly blew their brains out and died. No Power.

    We’re talking thousands to potentially tens of thousands of volts, at amps that melt pipes. Makes an EMP look like nothing.

    After about 3 hours down time, they figured out that both UPSs were fried and spares were a couple of days away. Violating SOP, but at $4 Million / day for downtime justifying it, they simply bypassed the power conditioning UPS boxes and powered the building strait off of “line power” (taking the risk of a lightning hit on the powerline entering computers…) and ran that way until the UPSs were fixed.

    Actual ‘lost computers’ were nearly none (a couple always fail to recover from a power outage as some part that was marginal doesn’t take the power off / on and live – the number that time was only a couple of more). They were all easily fixed with spares on site or at the vendor inside a few days. Backups were sound. Etc.

    Realize that THAT kind of data center, while quite well designed, is not nearly as “robust” as the ones that run financial systems. ( I’ve worked on them, too). SOP is to take backups that once a week at least are places in STEEL lockboxes and couriered to an off site archive. Many in underground vaults…

    Heck, I even have a UPS drive that backs up my laptop that sits powered off 99% of the time and I’m not even serious about it… (If I were, I’d put it in a steel “tin” box that’s sitting all of 20 feet away from it…) But disk housings are generally all metal. They have quite strong magnets in them anyway. A magnetic pulse is just not going to be as strong as the magnets already inside the case…

    So a major EMP would be a PITA, would require a lot of work to recover, would likely knock many services off line for a few days (maybe even a week), and would have some low priority services off line for up to a month; but it’s not going to erase the e-stuff of money, stocks, etc.

    IMHO, it will mostly fry a lot of consumer electronics. The military gear is all EMP certified and the major commercial stuff is darned robust (vis the lighting strikes nationally), and even many consumer goods are not going to notice. So expect to replace a lot of “curly bulbs” as their electronic ballasts get blown, but those with magnetic ballast and the incandescent bulbs will keep on working (as will any ‘on the shelf’ and not installed / turned on at the time). Expect your TV will likely be fried, but the laptop in your backpack will be fine. The “DSL” router will get fried, but you backup ‘dial-in account’ will likely work (for some percentage of us ;-) and rapidly some ‘hot spots’ will be brought up in major cities as folks repair things. ( I have a spare DSL router in a box that “works but not as well as I’d like” that would be plugged in at my end in an emergency…)

    So “no worries” ok?

    And the e-stuff can be made more ‘counterfeit proof’ via encryption techniques….

  24. E.M.Smith says:

    @Pascvaks:

    Per “what’s new?” in money and currency:

    2 things, really. One is just that there are many kinds of currency these days. (reminder: ‘currency’ is a medium of exchange while ‘money’ is that, plus a store of value. Paper money is not a store of value, just a medium of exchange, so is properly called ‘currency’ not ‘money’; though I did notice that even Ben Bernanke is fuzzing the line lately… hmm….) Included is our currency is ‘created on demand’ currency. Credit Cards.

    40 years ago this was a source of some concern. What would happen if you had 10% of your transactions in ‘credit’ that the bank created at the moment of sale and not in ‘currency’ that the government could modulate? Over time they figured out it didn’t matter much and they could lean on the banks to ‘raise margin’ and it didn’t matter if they cut YOUR credit line or just raised the amount of paper sitting in the vault. IMHO it IS still a bit of a theoretical concern. On the flip side, it tends to act counter cyclically to stabilize the ‘velocity of currency’… When I lose my job, I load up the credit cards, when I get a new one, I pay them down… steadies out the natural swings. So it’s a thing to ponder, but not worry about, really. The Fed can still tell member banks “cut back the credit lines” and control total “money supply”.

    The other is the ease of electronic funds transfer. 40 years ago, to buy a chunk of Swiss assets or put some money in Swiss Francs took a physical trip to the bank (and sometimes waiting a week as they ordered some Swiss Francs or AMEX Travelers Checks in them…) Now it’s a few seconds and a couple of mouse clicks. “News Driven Events” happen and reflect in markets much faster. Not really an issue for anyone other than traders and Government Planners trying to keep investments from fleeing when they do something stupid. So the majority of my “cash” wanders between $US, Japanese Yen, Swiss Francs, and UK Pounds depending on who is being less stupid. Occasionally wanders into gold, platinum, silver, palladium, copper, nickel, etc. and the odd Aussie and Looney (even N.Z. $ and Brazilian Reals some times) depending on charts, motivation, and needs. Sometimes a dozen times a year. “click click”.

    Governments hate that (as they want ‘control’) and many folks will rail against “speculators” driving prices (when the reality is that price expectations drive speculators who just accelerate the process to it’s natural end) but in the end I think it mostly just stabilizes things (as any “excess stupid” rapidly reflects in money flows and price movements…)

    Basically, everything moves faster and easier, but with a generalized “more stable”.

    One Exception:

    The ability to place Naked Bets In Size.

    I don’t care if it is ‘credit default swaps’ that are a kind of life insurance on a financial asset or the ‘naked short’ of that asset that can then start a panic to kill it, and the issuing agency, or any of a half dozen other things that take little collateral to do. We’ve returned to a ‘Fattest Wallet Wins’ world where classical Bear Raids are again allowed and where you did not have to meet insurance regulatory requirements to issue some kinds of ‘financial insurance’. Just Dumb. Then excess government intervention in housing promoted the need to use such things to excess. The result was what we saw in the ‘housing bubble and bust’.

    Were it up to me, the “derivatives markets” would have somewhat higher margin rates and anyone issuing any kind of ‘insurance’ or ‘swap’ would need to meet insurance company standards for liquidity.

    In short: Not worried about the money, currency, or bonds. Am worried about naked shorts and naked swap writing…

    @Andrews:

    Well, I’ve discovered that lately I can only barely keep up with all the threads… I’ve had to forgo reading and responding to every interesting comment… Sigh….

    But then I’ll stumble on something interesting…. and a pondering ponders… and I feel I ought to at least share it ;-)

    Per Barter:

    That is the foundation of ALL transactions. Even paper currency ones. We agree to accept the pretty piece of paper as a claim on some future barter / goods. If inflation stays below about 2% (a ‘tax’ on the convenience) all is OK. Over about 5% it becomes an issue that folks don’t ignore. Over 10% the currency is pretty much doomed to failure.

    So by having a metal currency, there is a fixed limit to the inflation (but the complexity of market driven value to the currency – the ‘barter’ of an ounce of silver vs a bag of wheat… changes day to day). My idea just selects more things to put in the ‘barter basket’ to hedge one against the other and lead to more natural stabilizing of the currency. (One could make a case for putting in a mixture of stocks and bonds too, as a generalized claim on net national production… but that’s a different theoretical currency ;-)

    So back in the days of the silver Spanish Dollar, they were scored for breaking into 1/8 pieces, or ‘bits’, and that is why a 25 cent piece is “two bits”… Held value nicely (good ‘store of value’) but with some volatility as a currency. (Spain learned this the hard way when the hauled tons of South American gold and silver back to Spain and had inflation like crazy…. )

    So even a ‘metal money’ has issues as a currency. New mines or technologies, large Russian sales, or the relative demand of silver as the economy picks up and more folks want new things with silver in them…. all can move the value of the currency.

    My solution would be to have a broadly hedged basket for most things, and direct commodity barter certificates for others. (So a guy who needs to buy gold to make things could preferentially deal in Gold Certificates…) With modern electronics, the ‘settling prices’ would rapidly happen and all be automated, so you could pay for stuff with any of the barter receipts (as that is what my currency really is) without much effort. (When I was a kid, I remember some folks listening for the daily settlement prices on some goods in gold, to know what the money was doing and what the ‘stuff’ was doing… and some discussions of silver vs gold movements. It becomes natural pretty quick.)

    So has barter ever left? Nope.

    India is buying Iranian oil in grains. Why? Banking sanctions. And the water flows around the boulder…

    FWIW, US Paper currency started as exactly that kind of barter certificate. They were ‘depository receipts’ for the gold in the vault. Every bank issued their own. Later the central government decided to get in on the act too… So we had gold certificates and silver certificates. Realize that my buying a unit of an ETF in ‘physical palladium’ is substantially identical (other than that it must happen on an exchange and not just person to person).

    IMHO, there is an opportunity to make that kind of ‘Barter Certificate of Deposit’, but it would require a cooperating country. The USA would just toss you in jail and figure out what for later…

    At any rate, nothing has really changed. Barter is still the basis. Money is a specialized kind of barter via an intermediary convenient good. Currencies originated as money deposit receipts and has now become just a Gentleman’s Agreement to not screw each other over too much (only the inflation rate) and with the government getting the goodies from the creation / float of it. IMHO a new “deposit receipt” based currency where the deposit was a hedged basket of ‘goods and services’ has interesting potentials. And, lots of us can just step out of any national currency into any “deposit receipt ETF” in many kinds of funds any time we want… so I do ;-)

  25. adolfogiurfa says:

    @E.M.: It happens that the US dollar is bought, also, by third countries, where the “elite” must have some relations as to make those purchases; when that happens, we from the third countries, are IMPORTING THE US INFLATION. Thus, you US taxpayers and we, citizens of the world, are exchanging the product of our real goods production by virtual e-”almost nothing”. This can continue not endlessly but until reaching a point of inflection in your country, as we, foreigners soon realize that it is much better to save in our stronger currencies, as it is happening right now, when the majority of accounts in US$ are cancelled and the US$ and the Euro, of course, are not longer the “refugee currency” that they used to be. The consequence: A very big tsunami of US$ and Euros is coming back its birth place….so, only you as an economist can tell us when it will happen the economic armageddon.
    The problem is that all the people living on food stamps, unemployed being paid, do not feel it yet, and they really hallucinate this situation can last forever. It is really a multi-megaton-bomb ticking…

  26. adolfogiurfa says:

    There are two cures: One slow the other quick. The sooner the better, the faster the painless, but to keep it as you are doing it now will blow the whole world up in pieces.

  27. Andrew says:

    @E.M.

    You said:
    “The problem is that all the people living on food stamps, unemployed being paid, do not feel it yet, and they really hallucinate this situation can last forever. It is really a multi-megaton-bomb ticking…”

    You mentioned food stamps. Any thoughts on the impact Food stamps are having on real inflation? Specifically, right now, we have lots of people on the dole. Most people that are on food stamps are not as careful with their purchases as they would be if they had to earn it. So they buy expensive pre packaged TV dinners, and because their basic survival needs are being handed to them, what little discretionary $ they have often goes to consumer electronics or vehicles.

    Create an artificial imbalance in the economy…increased demand…prices go up. My concern is that when 40-50% of the population is out of touch as a consumer, bad things happen. A similar situation exists in the health insurance system as well. People believe it only costs a $10 co-pay to see the Doc and the drugs are free…no problem right?

    Guess what happens when you take the needle away from the junkie…

  28. I think we are getting closer to that 1980s mega spike in gold when the Iran/Iraq war was about to start. Did we have Carter in power then too? Since Obama is pretty similar. When the Israel/USA – Iran war starts we could have a massive spike

  29. R. de Haan says:

    We have this governments on both sides of the Atlantic lying about almost everything.
    They lie about the inflation rates, they lie about the unemployment rates
    http://www.washingtonpost.com/blogs/election-2012/post/ron-paul-unemployment-rate-is-probably-closer-to-20-percent/2012/03/09/gIQAUkOd1R_blog.html

    And

    http://www.zerohedge.com/news/europes-scariest-chart-just-got-scarier

    Now greece, despite the bailout has defaulted.
    Despite this we have Van Rumpay tell us we have the deepest part of the crises behind us.

    At the same time Zero Hedge tells us Greece still has to deal fit 107 billion in claims that were not in the EU books.
    http://www.zerohedge.com/news/greek-€107-billion-contingent-liability-gorilla-exposed

    And while the over confident but plain stupid EU apparatchiks thought they would buy time to write a “new constitution” the house is coming down

    This weekend millions have woken up to find out that their jobs and their pension funds have vaporized.

    Now Portugal, Spain and Italy are lining up to go the same track as Greece with global consequences.
    http://www.zerohedge.com/news/china-posts-biggest-trade-deficit-1989-crude-imports-surge-china-recycling-export-dollars-solel

    It’s time to accumulate gold and silver
    http://www.zerohedge.com/news/guest-post-time-accumulate-gold-and-silver

  30. And europe has no oil now really as Iran can’t supply it. Syria could blow up soon, Iran is about to be attacked by Israel and Obama wants to have a war in Uganda even though Kony left in 2006 and is not even there LOL

  31. R. de Haan says:

    Scarlet Pumpernickel says:
    11 March 2012 at 9:28 am
    “And europe has no oil now really as Iran can’t supply it. Syria could blow up soon, Iran is about to be attacked by Israel and Obama wants to have a war in Uganda even though Kony left in 2006 and is not even there LOL”

    All Europe lacks. just as the USA is refining capacity.
    Even with all nuclear plants closed down in Germany peak electricity demand during the most extreme winter period last month was met without any black outs.

    The EU is dying, no worries.

  32. Scarlet Pumpernickel says:

    If there is a melt down anywhere in France, it’s game over. UK also depends on France since it has been wasting it’s money on windmills. And the increasing cold which is coming over the next decade will cause huge problems.

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