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The Big Myth

February 27, 2017

The Big Myth 

Debunking a Lie

Don Watkins of the Ayn Rand Institute wrote an article, The Myth of Banking Deregulation, to debunk a lie. The lie is that bank regulation is good. That it helped stabilize the economy in the 1930’s. And that deregulation at the end of the century destabilized the economy and caused the crisis of 2008.
As of early 2015, Dodd-Frank had imposed altogether 27,670 new restrictions, more than all other laws passed under Obama combined (that is really saying something, considering the regulatory frenzy let loose by his administration. Note: the law may have “only” 2,300 pages, but more than 10 different regulatory agencies have been producing administrative laws for six years in a row to put it into practice – and they are not finished yet. Don’t you feel safer already?

If deregulation is the problem, then re-regulation is the solution. So, in the wake of the crisis, Congress enacted a 2,300-page monstrosity of regulation known as Dodd-Frank.

 

Watkins does a good job describing government regulation of finance, in particular addressing the savings and loan industry. He gives an example where people commonly assume that Congress reduced regulation, the Graham-Leach-Bliley Act of 1999.

The headline is that this law reduced regulation, and allowed banks to be in the securities business. However, the truth is that it mixed in a dollop of increased regulation.

 

The economic cost of Dodd-Frank (one guess as to who is going to end up paying for this…). Note: this is not cumulative – the cumulative tally so far is a cost of $36 billion (about $310 per household!); it has so far taken 74.8 million paperwork man hours to create this monster. You will be happy to learn that the law not only makes us perfectly safe, but introduces racial and gender quotas as well. The number of final rules exceeds those generated by Sarbanes-Oxley by a factor of 30 – so far.

…click on the above link to read the rest of the article…

The Precious Metals Conspiracy

April 11, 2016

The Precious Metals Conspiracy 

Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

Goild conspiracyA metallic conspirator and his flying factotum…     Image via sceptic.com

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

…click on the above link to read the rest of the article…

Interest on Gold Is the New Tempest in a Teapot

March 3, 2016

Interest on Gold Is the New Tempest in a Teapot 

Accustomed to Speculation

Zero Hedge published an article on Canadian Bullion Services (CBS) last week. Other sites ran similar articles. The common thread through these articles, and in the user comments section, is that CBS is committing criminal fraud. Or, if not, then it’s a conspiracy by the Canadian government to confiscate gold. Terms like fractional reserve and re-hypothecation were dusted off for the occasion.

t-bill3-month t-bill rates: all the way to nada – click to enlarge.

I don’t know anything about this company other than what I read that day. I am writing today to make a different point, not to address or defend CBS. My point is: a company offers interest on gold, and the gold community goes ballistic. Why so visceral a response? To answer that, we need to look at the backdrop of today’s bizarre financial world.

Interest rates have been falling for well over three decades. This has caused endless asset bubbles in which to speculate to make a fortune (or lose one). And now, in the terminal stage of our monetary disease, there is scant yield to be had even in the US. Negative yields already prevail in several other countries.

We have become accustomed to it. We’re trained to not expect to earn interest, to not even think about it. Instead, we’re like Pavlov’s dogs who know to salivate at the sound of a bell. Only we’re not after food, but opportunities to speculate. All we want to know is, what’s going up next.

PavlovPavlov looks at one of his dogs. The dog is probably not happy, but it is certainly well-trained…Photo credit: Corbis

…click on the above link to read the rest of the article…

Janet Yellen Fights the Tide of Falling Interest

January 4, 2016

JANET YELLEN FIGHTS THE TIDE OF FALLING INTEREST

On Wednesday Dec 16, Federal Reserve Chair Janet Yellen announced that the Fed was raising the federal funds rate by 25 basis points.

Let’s get one thing out of the way. This is not a move towards free markets. Whether the Fed sets interest lower, or whether it sets interest higher, we still have central planning. We still have price fixing of interest rates.

Interest rates may be set too low. However, forcing interest up is no cure. We need to eliminate central planning, and move to a free market in interest. This is impossible in our present monetary regime.

Anyway, given the system as it is, the Fed is going to have to take back this interest rate hike. Here is Exhibit A of our case: a graph of the 10-year US Treasury bond yield.

Keith-1
Source: Yahoo Finance

At least the US dollar still has interest. Switzerland, and several countries in the European Union, don’t. Their currencies are drowning under the zero line. For example, the Swiss government 10-year bond takes 0.16% per year from lenders. That’s right, if you fork over your francs to buy that bond, you get back less at the end. Germany is little better, with their five-year bond charging investors 0.1%.

The global trend for over three decades has been falling interest. The yield on the 10-year Treasury even fell after the Fed’s announcement. Yellen thinks to fight this megatrend, but that’s absurd. Let’s look at why.

The process that sets the interest rate is complex. I have written many words on its terminal decline. However, there are two simple reasons why the trend remains downward.

One, banks today have a business model called maturity transformation. They borrow short term to lend long term.

…click on the above link to read the rest of the article…

A Prediction: Gold and Gold-Silver Ratio Up, Stocks Down

September 28, 2015

A Prediction: Gold and Gold-Silver Ratio Up, Stocks Down

A Trend Change may be in the Works

The price of gold moved up moderately, and the price of silver moved down a few cents last week. However, there were some interesting fireworks in the middle of the week. Tuesday, the prices dropped and Thursday the prices of the metals popped $23 and $0.34 respectively.

Everyone can judge the sentiment prevailing in gold and silver articles for themselves, but we think there is a growing feeling of optimism (that is a renewed fall in the dollar, which most think is a rise in gold). This goes along with a sense that the long bull run in the stock market is rolling over.

gravity-2Gravity… ever since Einstein invented it, stocks occasionally go down

We are inclined to agree that the stock market may be overdue for its appointment with gravity. This is not a good business climate, and we sure don’t see where earnings growth could come from. At the same time, we see lots of forces that could cause margin compression, not to mention rising default risk in many disparate places (e.g. shale oil bonds). We are not stock market prognosticators, so treat this as nothing more than a feeling.

Gold market participants may be expecting the price of gold to move up if the stock market moves down. This would be a continuation of the pattern of the last several years, with the prices moving opposite to each other. We are inclined to agree with this. That said, to shamelessly borrow a phrase from the London Underground (we’re currently visiting London), please mind the gap between the theory and the data.

For an updated picture of the only true supply and demand data read on…

Last Week’s Market Data

First, here is the graph of the metals’ prices.

chart-1-pricesThe prices of gold and silver – click to enlarge.

…click on the above link to read the rest of the article…

 

Jackson Hole: Cherry Flavored Cyanide, or Strawberry

September 9, 2015

Jackson Hole: Cherry Flavored Cyanide, or Strawberry

The Federal Reserve puts on a conference in the idyllic location of Jackson Hole, Wyoming. Of course it’s all about how best to centrally plan our little lives for us, and who is to be sacrificed to whom.

The American Principles Project and the Atlas Network Sound Money Project, provided a much needed alternative in the Jackson Hole Summit. By choosing the same time and place as the Fed, Steve Lonegan capitalized on the publicity. In fact, the #jacksonholesummit hashtag was trending on Twitter the first day of the conference, so it was a big success.

There were many great talks. Larry White observed that the government used to weaken the banks with restrictions, but now does it with privileges (think about that for a moment). MP Kwasi Kwarteng talked about fiscal discipline as a prerequisite for the gold standard. Judy Shelton asked the question that should be on top of everyone’s mind: what if central banks are wrong?

Forget the blah blah of the Fed, this is what the world needs to hear. From the turnout and energy, I believe next year will be even bigger and better.

One idea always comes up in a discussion of sound money. The Fed manages the dollar based on (in theory) unemployment and consumer prices (CPI). Instead, couldn’t it just use the gold price?

In my talk, I explained why not.

A few months ago, the Supreme Court struck down an unjust New Deal era raisin planning board. This committee takes grapes from farmers, to drive up the price. If it later sells the grapes, the farmers may get paid. It’s looting, plain and simple, and the Court rightly tossed it into the dustbin of history.

– See more at: http://www.cobdencentre.org/2015/09/jackson-hole-cherry-flavored-cyanide-or-strawberry/#sthash.0YnAIgIg.dpuf

 

Why Is Gold Becoming Scarcer

August 17, 2015

Why Is Gold Becoming Scarcer

A Tight Market

For quite a while, we have been talking about scarcity in gold. The cobasis for both October and December is positive. These contracts are backwardated. The cobasis for the February 2016 contract is not far from backwardation. The gold market is tight. Why? Let’s explore.

Part of the matter is that the price has fallen. The more the price drops, the more buyers tend to come out, and sellers go away.

We do not refer necessarily to the mines. Once the capital is sunk, a mining company is a price-taker. Management has little choice but to extract what it can, and hope the quantity produced times the profit available at a given gold price is enough to pay the fixed expenses such as debt service (well, if they don’t have a proper hedging program, which I wrote about here and here). Gold is often produced as a byproduct when mining for other metals, and this production depends on the profitability of the main metal in the ore.

TUC2004-252sunnygoldNative gold in quartz – from the Dixie Mine in Idaho Springs
Photo via silvertongold.org

For thousands of years, the market has absorbed all the output from every mine. If the quantity theory of money were true, gold would be a worthless commodity. Unlike everything else (except silver), the stocks of gold held by the people are a large multiple of annual production. There is no such thing as a glut in gold.

The lower price is not the only factor. The price of silver has fallen more than the price of gold. However, while there is backwardation in the September silver contract, there’s nothing even close in December much less 2016.

 

…click on the above link to read the rest of the article…

 

 

 

Monetary Metals Supply and Demand Report 9 August, 2015

August 10, 2015

Monetary Metals Supply and Demand Report 9 August, 2015

Withdrawing the Gold Bid

Last week, we left off with this:

“Something is happening with gold…”

It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit, which currently has nontrivial value. A dollar is worth 28.4mg gold. To understand the second, let’s look at how markets work at the mechanical level.

 

gold-coins-and-bullionAn assortment of well-known bullion coins and bars from all over the world

Photo via reisebank.de

 

Regular readers of this Report know that we emphasize the bid and ask prices as separate values. The people and forces involved in the bid price are different from those involved in the ask price. This is critical in our definition and calculation of the basis and cobasis. You cannot just assume that there is a real price, somewhere between the bid and ask. That may be a working approximation during normal market conditions. But it could be badly misleading.

Suppose there is stress in the market, a crisis impending or active. The bid recedes, and can even withdraw entirely. For example, what if the US Geological Survey were to say that there will be an earthquake in Los Angeles, 15 on the Richter scale, and nothing taller than a dollhouse will be left standing? You would not find any lack of offers to sell real estate. But what is the price of a house in LA? There wouldn’t be a bid in LA, and maybe not as far south as Chile, as far north as British Columbia, and as far east as the Mississippi River. The bid would come back into the market when the threat was over (perhaps at a much lower level).

…click on the above link to read the rest of the article…

 

 

 

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