patrick.net

Randy,

just consider the bad loans in China as a matter of massive internal debt in Japan, they are essentially the same thing. These bad loans are typically tied up in inefficient state-owned enterprises, investment in infrastructure and real estate. Most of the parties involved are all Chinese.

In 1999, there was a bank run in the rural area that was never reported in western press. I happened to be in China witnessing this whole event. What happened was, the government decided to get rid of some rural banks (co-ops, thrifts) so as to ensure a better monetary control because there was a big underground banking system going on. The way to do it was to "forgive" all oustanding loans in the shut-down process. You can imagine what kind of reaction it stirred up among the depositors. Well, let's say they dealt with it the Chinese way, lots of persuasion, one-on-one talks, and lots of lined up troops ready to be deployed. Somehow these depositors were resigned to the fact that they would be losing their lifetime savings. It may sound very strange to anyone growing up here, but I can tell you I am not surprised to see such a reaction.

Tracing back, the current Chinese government confiscated all land ownership in China, so what can a bit of loan obligation to its own citizen bother them? The only problem going forward is, if they don't loosen up their exchange rate, they won't be able to afford importing raw materials any longer. Only loan obligations involving Non-Chinese will matter.

One of my best friends is the head in Hong Kong managing a top international private bank outift serving HNIs. The average account size is north of $5M, although the minimum requirement for entry is only $1M. Most of their clients are based in mainland China. These accounts have been aggressively buying gold since late 2005, not trading, but hoarding, buying without selling. Whether this is indicative of a general sentiment or not, there is no conclusive answer at this point. He also says it is very likely that the Chinese government could acquire gold itself through private operations so as not to attract unncessary attention.

If I was to invest in metals, I would have gone with Copper which at least has some use.

Copper, zinc, molybdenum and such are easier to deal with because they are driven much more by micro economic factors, which means you can take industry forecasts and such into account. Gold suffers from being a speculative carry for all kinds of shenanigans.

That said, hedge funds are doing a pretty good job of mucking up copper and zinc these days.

SQT,

Oh and I do hear you. Yes I have been at "social functions" where gold was mentioned more than once. I, like you (and your husband I'm sure) have gotten a little threadbare about trading one bubble for the next. Let's do this instead, gold traders, you go play nice amongst yourselfs, brick kickers go do your real estate thing and get back to some semblance of sanity vice huge waves of people chasing the next big thing already!

Just put it simply, people who are hoarding gold are treating it as if it were the true USD as our founding fathers would have liked it.

It is just a store of value of keeping scores. How do I know that after years of work, I am eventually richer than my neighbor? THe original way would be measuring my wealth by counting Hahas. Now that the Fed is polluting my Hahas by manufacturing too much Hahas, making mine less valuable, I need to find a better way to store the fruit of my hard work.

If the Fed at any time is showing me with their action that they are restoring the credibility of USD, I am very happy to store my fruit in USD. Until then, I am relying on gold to keep the purchasing power of my already-earned money.

Mr. Vincent,

Phelps Dodge is a great way to work the "copper play". Someone once told me that a one cent uptick in the price of copper translates to 18 cents in earnings for PD.

NIA

Conor,

I wasn't directly implicating you. I'm reflecting a lot of what gets discussed on this blog vis-a-vis gold. I've heard it all: fiat money causing doomsday due to M3 manipulation and the evil Fed cabal of global central bankers seeking to enslave the masses with electronic currency and the mark of the beast.

I don't mind people speculating. I just like to call out the fact they're speculating.

Holding things denominated in dollars is not speculating, except in some philosophical sense. Holding dollars in the bank (in excess of consumption needs) is simply part of a portfolio decision. You'll probably want some there in case you're wrong about the future; for example deflation (as unlikely as it is).

By the way, a few months ago there were at least a half dozen people in here arguing quite passionately that we were on the edge of global deflation and depression. They used the exact same gold arguments to support that conclusion. I find this interesting given that these two lines of argument are contradictory yet always result in "buy gold".

And, just for clarity, gold is not a currency. It is a vehicle by which you can carry speculation on currencies. Even during most of the "gold standard" era, gold was not a currency, it was just an exchange-rate base mechanism. They regularly revalued exchange rates to correct for gold price movements. It was mostly the same as the system we have today, just a whole lot less efficient and prone to massive manipulations by central bankers.

Stock market bubble, housing bubble, or the commodity bubble, are all product of ONE reason, there is too DAMN MANY US dollars floating around!

If someone doesn't turn off that tap, there will be endless bubbles to come, because if you happen to have lots of US dollars falling on your lap, what will you do after you have bought everything you want to buy and there is still plenty left?

If you leave your USD in the bank, you know it is getting inflated away. So the only choice is for you to find something to own, so hopefully as USD devalues, that thing you own will keep its value. That is the game that we have been playing for the last 10 years. It will keep going on if there are more M1, M2 M3....being dropped from the helicopter as we speak.

Grammatical Note:

If you're from the "southside" (yourselfs) is actually correct english.

"You's guys" is also acceptable.

As in accepting a gift.

Awww, you's guys should'n have!

OO,

Couldn't agree more. Stephen Roach used to talk about getting the "cost of money" right but was labeled a kill joy. Now that he's turned to the darkside I'm not so sure?

Can we get some nominations in for the most paranoid, fear mongering and exploitive "gold" web sites. I've been on a few that were so motivational I was ready to start digging a bunker in the backyard. Children and dogs living together!

Conor,

I hope you don't take my arguments as an attack directly on your position. I can come across heavy handed at times. I just worry that a lot of people read stuff in the blogosphere and make very risky decisions based upon what they read. I happen to think that gold is not for most people. Having said that, I have a commodity portfolio which holds a position in gold, and other metals, energy, and agriculture.

But I have a command on what my "discount rate" is. It's easy for someone to read your quite compelling, logical arguments and determine they need some gold. I just want them to be sure they've put their financial house in order first before they make such portfolio decisions. Since *most* people have nasty credit card debt, unflattering home equity loans, and other forms of high-interest, variable rate obligations, they shouldn't put a single penny (or it's true copper+zinc value) into anything other than bringing down their personal discount rate. When they get that close enough to be affected by inflation, then go ahead and figure out how much gold to put in safe keeping.

Mr. Vincent,

why is it lagging the general commodity performance so much?

By the way, we discussed the "Penny Arb" a while ago on my blog. It is currently *theoretically* possible because the value of copper + zinc in a penny is worth more than a penny. We came up with 3 problems, and 1 solution:

1) It's technically illegal to destroy official currency in the US. Perhaps you could melt the pennies in Canada or Mexico and get away with it though.

2) Production costs (as said earlier) exceed potential revenue. Again, with enough scale you could probably achieve an efficiency in excess of fixed and variable costs.

3) The US Gov't: they would almost surely use penny-arb as a reason to finally put the penny out of its misery. They' probably take all the small change out at once.

Here's the solution, as unseemly as it is:

Scrappers/salvage operations are wonderful vehicles of money laundering in the US. Copper salvage operations in places like South Chicago already "lose" money, but they do a booming business. So much so that pipe-hounds run around cutting copper pipe out of apartment building basements to sell to them. Turns out most of these operations are scrubbing money for organized crime, most likely drug trafficking related.

So, you could ostensibly run a penny-arb at a scale small enough to escape Congressional review of the penny but still making money for your arb. You'd just have to be ok with the types of guys you'd be doing business with, and the ever present risk you'll probably go to jail for a very long time eventually; and that's if you're lucky.

Btw, I am not getting the stock market any more. How can TOL trims sales forecast and then their stock shoots up 2%? Then, we have a job growth slowdown and DOW is up almost 1%.

Now I understand why I have to invest in commodities. I am too old for this new-age stock market.

Btw, I am not getting the stock market any more. How can TOL trims sales forecast and then their stock shoots up 2%? Then, we have a job growth slowdown and DOW is up almost 1%.

Because everybody looks at the Fed now? I remember strange things towards the end of the last bubble.

Now I understand why I have to invest in commodities. I am too old for this new-age stock market.

Stocks prices are too anticipatory. It is too difficult to anticipate the anticipation of the market.

1) It’s technically illegal to destroy official currency in the US. Perhaps you could melt the pennies in Canada or Mexico and get away with it though.

Are pennies exempted? Remember those machines in tourist spots that crush pennies into souvenir?

Are pennies exempted? Remember those machines in tourist spots that crush pennies into souvenir?

I don't think so. I just think it's not enforced because it doesn't hurt anything. If you were to start destroying thousands of tons of pennies a week, they might well decide to enforce those laws upon you.

I bought a few physical gold coins (

(sorry - last post had a less-than-sign which got link-interpreted)

I bought a few physical gold coins ( less than 10) back in 2000 as the NASDAQ was tanking. I had always wanted to own some gold coins and I had dot-com cash so WTF.

I bought 100 silver coins 2 years ago on a vague paranoia that they'd be useful in a pinch.

I sold half of my gold coins two weeks ago at $640. Sure, they've gone up since then, but for those of you wanting to get into gold, I strongly recommend going into a gold store, taking out $680 in twenties and looking at a single 1oz Eagle coin. Then think about all the things you can buy with that $680 (a new dell laptop perhaps? a new bike for this glorious weather? Maybe 1000lbs of rice for those of you with bunker ambitions. How about a nice set of Craftmen power tools? Or a 100 burritos?)

Set against these hard assets (or necessary consumables), doesn't gold strike you as a bubble?

Conor, Peter P,

It appears you guys are technically correct about destruction of currency. Reference.

There are different laws for paper currency and coinage. It appears that, with coinage, there may be some intellectual property arguments which could be brought to bear against someone destroying coinage. These wouldn't be criminal, though.

Criminal statues require an intent to defraud. Melting for salvage would not be intent to defraud.

Arb Away!

I strongly recommend going into a gold store, taking out $680 in twenties and looking at a single 1oz Eagle coin.

Personally, I prefer Maple. Eagle is only 0.917 fine.

Peter P:Personally, I prefer Maple. Eagle is only 0.917 fine.

Really? Now I'll definitely sell the rest. ;-)

Really? Now I’ll definitely sell the rest.

http://www.taxfreegold.co.uk/comparisons.html

Conor,

I love like ya like a brother but if I was down $100 in a week I'd be ill for the rest of the month, seriously. That's like what a 15-20% hit in a week. If you're not worried you should be.

Yeah, I had a buddy that almost burned his garage down melting lead wheel weights into fishing lures. He now has nick name. "Shake and Bake". I swear everytime we get together to watch a game or play cards some tacky drunk brings it up. Me? I'll go to G.I Joe's Sporting Goods if I need fishing weights thank you. Playing with white gas is da bomb baby! It's da bomb!

Burbed.com has a nice piece on Bay Area intangibles. Here is an excerpt:

New York has the Statue of Liberty and the Empire State Museum - we have the Winchester Mystery Mansion.
Washington DC has the Smithsonian - we have the San Jose Museum of Art
Egypt has the pyramids - we have the Fry’s in Campbell
Boston has the birth of America - we have Great America.
The Mediterranean has villages - we have Santana Row.
London has the Tube - we have Light Rail.
Alaska has glaciers - we have Valco.
China has the Great Wall - we have the Great Mall of Milpitas.
Everywhere else has an airport - we have Terminal C at SJC.
Paris has Champs Elysées - we have El Camino Real.
Asia has Shanghai, Hong Kong, Taipei - we have Cupertino Village.

See, no bubble. ;)

"Set against these hard assets (or necessary consumables), doesn’t gold strike you as a bubble?"

I'm putting my money in forged knives and tomato seeds...

Randy and Owneroccupier, check your gmail

I'm putting all my money in cushie toys and chick lit.

Peter P,

Too funny! Burbed? Now I've got to check it out.

George,

I agree. We can't compete with the efficiency of big operations. However, I think the dumb money will follow us. Gold is still quite cheap by historical standards. Furthermore, gold hasn't edged up much against the Euro. We're just hedging for the hidden depreciation of the almighty dollar.

SFWoman,

I am concerned about bird flu. We've dodged a replay of 1918 for a while now, maybe we're due for something.

Keep in mind that Tulipmania was happening in the shadow of Black Death.

Randy,

I suggest buying up worthless old coins of EU nations and melting those down if you want to - think Czech Korunnas, Swedish pennies, one franc coins etc.

If you can find some around and you want to melt them down, check this out:

http://tinyurl.com/nju9p

Also, if you want to melt down Canadian pennies, they need to be the old ones:

http://tinyurl.com/l5nu3

SFWoman,

Welcome back btw! Globetrotting? Anyway are sure that article wasn't writtem by Kim CARNES? Ma'am, there isn't a lot any of us can do about bird flu, landslides or gas prices but the one thing we can do is our checkbooks snug, safe and secure at home when it comes to fluffy RE prices!

Keep in mind that Tulipmania was happening in the shadow of Black Death.

Planetary influences.

Peter P,

When will the planets be aligned for a run on high carbon steel knives? :P

Conor,

I guess that's O.K. I sure don't want to get on a soapbox on a Friday. I have a 2:00pm appt. in the city and this will keep my "low beer warning indicator" illuminating intemittently a little longer. So forgive me if I seem a little "edgy". Anyway, that's the difference between representing yourself and representing a client. SQT (help me out here a little). When an individual miscalulates the entry point, it's no big deal b/c either he/she was going to hold it long term or; the were going to dollar cost average. Traders and brokers get flamed by their boss and fund managers are given a quarter to get it "cleaned up" or they are gone. I guess the question here is that if you were managing some kind of gold account for me what would be my index be to track your performance against? Anytime we invest, we have options so if you put me into gold and it's flat or only slightly up when the S+P 500 is taking off or REIT's are going through the roof you have my speculative capital in the wrong asset class. The relationship and your credibility are strained. TTIYF.

If a lemming wants to buy a house, he gets an absurd neg-amo interest-only ARM which he never intends to pay back. If a lemming wants to buy gold he pays for it with 100% cash.

With gold futures ont can control 100oz with as little as $2500 on eCBOT.

This amounts to a leverage greater than 1:25.

NOT INVESTMENT ADVICE

Conor,

I do get your meaning and your words have not fallen on deaf ears! Btw, the eCBOT players in Peter's scenario have more skin in the game than the avg. homebuyer today.

At least the commodities exchanges RAISE margin requirements during volatile markets, which sadly isn’t the case with equities or housing, as we’ve seen over the past several years.

Exchanges are more concerned over daily fluctuations when setting margin requirements. They do not care if speculators will lose money or not.

If anyone has to ask about whether or not a futures account is appropriate for them, the answer is no.

Unless that someone has some colored jackets in his closet. :)

Conor,

True. I try not to get roped into the "benchmark game" if at all possible. It leads to golden statements like; The R2K is down 28% YTD and your account is only down 26.5% so Mr. Client, you are actually outperforming the market. Ahem.