Alasdair further sees the flagship monetary metals will be unstoppable in the face of the inescapable financial corner the Fed has backed into.
- Source, Liberty & Finance
Monday, September 14, 2020
Gold & Silver Unstoppable: China Dumping USD For Real Stuff Right Now
Sunday, September 6, 2020
Wednesday, September 2, 2020
James Turk: The Existing Monetary Order is Not Going to Survive
Paul Buitink talks to James Turk, founder of GoldMoney, about the current economic crisis.
James thinks it will inevitably lead to a collapse of confidence in fiat money and hence hyperinflation.
James also believes companies should just be able to go bankrupt.
He criticizes fiat currencies and calls upon people to return to sound money since corrupt money has corrupted the system.
The existing monetary order is not going to survive. He believes in buying gold and silver to protect your purchasing power. Gold needs to be in the hands of the people, not the central banks he says. He also likes Bitcoin better than fiat.
- Source, Reinvent Money
Friday, August 28, 2020
Where is All That Gold Being Stored?
WE'RE in the midst of a modern-day gold rush.
The precious metal has reached record high prices in recent days. A survey of 1,000 people by Magnify Money found that one out of six have invested in gold or other precious metals since May, and about half of Americans are seriously thinking about buying gold.
(This after Gallup reported in April that Americans had cooled somewhat on stocks as a long-term investment.)
Whether these people are stocking up on gold because they're worried about a pending apocalypse or simply convinced that it's a fabulous investment, they do have one major issue: storage. Bars and coins are bulky (and let's not get started on jewellery, which can be complicated emotionally).
With anxiety about the economy increasing - which tends to rise any time there's political or world turmoil - the need for storage is growing, too, and options are expanding to meet it.
"Gold and silver bullion storage options have simply grown more in location diversity, pricing - with even some offering short-term collateral loan options," said James Anderson, a research executive at SD Bullion in Toledo, Ohio.
"When I began in this industry pre-2008 financial crisis, there were perhaps 10 to 20 domestic bullion storage depositories. Now, there are hundreds in the US and abroad."
People tend to buy gold when they fear a sustained loss in stocks, bonds, real estate or other traditionally profitable investments, said Adrian Ash, the director of research for BullionVault in West London.
Increasing capacity
So private vault operators have been increasing their capacity as well - but specifically within presumed politically safe locations like Switzerland and Singapore, said James Turk, the founder and director of Goldmoney Inc in Toronto.
Switzerland's banks have always been deemed a safe haven for assets and precious metals, but in recent years many people started to lose faith in banks.
As a result, there has been an increased demand there for safe deposit boxes there that aren't run by banks.
"In late 2019, we even had to build additional boxes, as we had reached 100 per cent of our capacity," said Michael Hardmeier, the CEO of Sincona Trading AG, whose headquarters are in a former bank building in central Zurich.
Swiss vaults tend to be more expensive than those in England, where a new spot opened that was designed for those accustomed to a lavish lifestyle.
The vault is inside a former mansion run by International Bank Vaults (IBV).
A chauffeur driving a Rolls-Royce picks up clients and delivers them to the London mansion, where white-gloved custodians transfer them to their boxes (after a quick fingerprint and iris scan, of course).
Those boxes are stored within a steel-lined vault supposedly impenetrable to anyone attempting to illegally gain access from any angle.
You may have to spend a few of those gold bars to store them: It's advertised as the most expensive safe deposit box in the world, and the company claims it's available only to billionaires, with the smallest box starting at £600 (S$1,017) to rent (this would fit just a few gold bars).
IBV London managing director Sean Hoey said that, unlike a bank, IBV allows clients to buy gold and to store it - and it will buy back the gold.
Also, many gold owners believe that vaults, unlike banks, are somewhat resilient to an economic meltdown.
"You can use a safe deposit box, but folks worry that if there was an economic meltdown, the banks might close, and your metals would be trapped inside that bank," said Gary Cubeta, a gold dealer in Arizona and the president and founder of Insurance for Final Expense.
Even without an economic meltdown, there's less faith in bank safe deposit boxes, because there aren't federal laws governing these boxes, so if anything is stolen or destroyed, the customer is typically out of luck.
Old-fashioned route
That may be why some are choosing to go the old-fashioned route and are storing their gold at home.
Numerous YouTube videos and bloggers explain how to bury gold bars in everything from mincemeat to the backyard.
But it's wise to consider your home options before simply stuffing your gold under a tree.
Mr Cubeta, who advises gold owners to store their gold within 15 to 20 minutes of their home so they have easy access to it in case of a financial meltdown, said the best thing you can do is to keep half in a home safe while putting the other half in a safe deposit box.
"You need a safe especially designed for precious metals," he said, explaining that most gun safes can't withstand the heat of a fire, while precious metal safes will keep your gold protected for two hours.
Before moving your gold home, you need to contact the insurer that issues your homeowner's policy, because most don't cover large amounts of gold stored at home.
"On average, the standard homeowner's insurance policy covers around US$1,000 for jewellery or valuables, and the average home insurance policy is set up to protect the average household, so the limits will not be sufficient to cover expensive or valuable items," said Lev Barinskiy, the CEO of SmartFinancial, an insurance comparison site.
There are also storage options where you never even see the gold you own. Customers buy a digital token backed by physical gold held in a vault, said Joonas Karppinen, head of trading at InfiniGold.
"A token provides customers with actual ownership of the gold in question - which is essential, especially if your content insurance does not cover your bullion portfolio stored in the house," he said.
That's all good, unless you want to feel its weight in gold. Literally.
The precious metal has reached record high prices in recent days. A survey of 1,000 people by Magnify Money found that one out of six have invested in gold or other precious metals since May, and about half of Americans are seriously thinking about buying gold.
(This after Gallup reported in April that Americans had cooled somewhat on stocks as a long-term investment.)
Whether these people are stocking up on gold because they're worried about a pending apocalypse or simply convinced that it's a fabulous investment, they do have one major issue: storage. Bars and coins are bulky (and let's not get started on jewellery, which can be complicated emotionally).
With anxiety about the economy increasing - which tends to rise any time there's political or world turmoil - the need for storage is growing, too, and options are expanding to meet it.
"Gold and silver bullion storage options have simply grown more in location diversity, pricing - with even some offering short-term collateral loan options," said James Anderson, a research executive at SD Bullion in Toledo, Ohio.
"When I began in this industry pre-2008 financial crisis, there were perhaps 10 to 20 domestic bullion storage depositories. Now, there are hundreds in the US and abroad."
People tend to buy gold when they fear a sustained loss in stocks, bonds, real estate or other traditionally profitable investments, said Adrian Ash, the director of research for BullionVault in West London.
Increasing capacity
So private vault operators have been increasing their capacity as well - but specifically within presumed politically safe locations like Switzerland and Singapore, said James Turk, the founder and director of Goldmoney Inc in Toronto.
Switzerland's banks have always been deemed a safe haven for assets and precious metals, but in recent years many people started to lose faith in banks.
As a result, there has been an increased demand there for safe deposit boxes there that aren't run by banks.
"In late 2019, we even had to build additional boxes, as we had reached 100 per cent of our capacity," said Michael Hardmeier, the CEO of Sincona Trading AG, whose headquarters are in a former bank building in central Zurich.
Swiss vaults tend to be more expensive than those in England, where a new spot opened that was designed for those accustomed to a lavish lifestyle.
The vault is inside a former mansion run by International Bank Vaults (IBV).
A chauffeur driving a Rolls-Royce picks up clients and delivers them to the London mansion, where white-gloved custodians transfer them to their boxes (after a quick fingerprint and iris scan, of course).
Those boxes are stored within a steel-lined vault supposedly impenetrable to anyone attempting to illegally gain access from any angle.
You may have to spend a few of those gold bars to store them: It's advertised as the most expensive safe deposit box in the world, and the company claims it's available only to billionaires, with the smallest box starting at £600 (S$1,017) to rent (this would fit just a few gold bars).
IBV London managing director Sean Hoey said that, unlike a bank, IBV allows clients to buy gold and to store it - and it will buy back the gold.
Also, many gold owners believe that vaults, unlike banks, are somewhat resilient to an economic meltdown.
"You can use a safe deposit box, but folks worry that if there was an economic meltdown, the banks might close, and your metals would be trapped inside that bank," said Gary Cubeta, a gold dealer in Arizona and the president and founder of Insurance for Final Expense.
Even without an economic meltdown, there's less faith in bank safe deposit boxes, because there aren't federal laws governing these boxes, so if anything is stolen or destroyed, the customer is typically out of luck.
Old-fashioned route
That may be why some are choosing to go the old-fashioned route and are storing their gold at home.
Numerous YouTube videos and bloggers explain how to bury gold bars in everything from mincemeat to the backyard.
But it's wise to consider your home options before simply stuffing your gold under a tree.
Mr Cubeta, who advises gold owners to store their gold within 15 to 20 minutes of their home so they have easy access to it in case of a financial meltdown, said the best thing you can do is to keep half in a home safe while putting the other half in a safe deposit box.
"You need a safe especially designed for precious metals," he said, explaining that most gun safes can't withstand the heat of a fire, while precious metal safes will keep your gold protected for two hours.
Before moving your gold home, you need to contact the insurer that issues your homeowner's policy, because most don't cover large amounts of gold stored at home.
"On average, the standard homeowner's insurance policy covers around US$1,000 for jewellery or valuables, and the average home insurance policy is set up to protect the average household, so the limits will not be sufficient to cover expensive or valuable items," said Lev Barinskiy, the CEO of SmartFinancial, an insurance comparison site.
There are also storage options where you never even see the gold you own. Customers buy a digital token backed by physical gold held in a vault, said Joonas Karppinen, head of trading at InfiniGold.
"A token provides customers with actual ownership of the gold in question - which is essential, especially if your content insurance does not cover your bullion portfolio stored in the house," he said.
That's all good, unless you want to feel its weight in gold. Literally.
- Source, Business Times
Tuesday, August 4, 2020
The Next Phase of the Great Silver Squeeze
His recent analysis foresaw a banking crisis as soon as the end of July 2020, and a currency crisis yet this year. What is the latest from this engaging and respected analyst, so we can be ready for what comes next?
- Source, Liberty & Finance
Sunday, July 26, 2020
The Price of Gold andSilver is Infinity
I think the problems of the COMEX are going to happen considerably before that. I think they are going to be tied into a wider banking crisis. A banking crisis is certain. I cannot see how it can be avoided.
If our end point is the purchasing power of the dollar goes to zero, then you can see $1,800 for the price of gold and $19 for the price of silver is chicken crap compared to where it’s going to go.
So, this is a major, major move that is happening, not because they are buying gold and silver so much, but because people are beginning to realize what is happening to the purchasing power of the dollar, pound, euro and so on and so forth.
That is the thing to keep in mind.I think the dollar will be destroyed by year end, and the price of gold and silver is infinity.
I think the banking crisis could start in a month. Look what’s happening to their balance sheets.
I think the collapse is likely to be so rapid that in the absence of any other information, the best thing to do is to hold on to gold and silver as an insurance policy just in case I am right.”
- Source, USA Watchdog
Wednesday, July 22, 2020
The New Deal is a Bad Old Deal
Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.
It would not be unusual, even for a libertarian politician. FDR is immensely popular with the inflationists who overwhelmingly wrote the economic history of the depression era. In fact, FDR was not the first “something must be done” American president, a policy which started with his predecessor, Herbert Hoover. But the story told is that FDR took over from heartless Hoover who had failed to step in and rescue the economy from a free-market catastrophe, by standing back and letting events take their course instead. Nothing is further from the truth: Hoover was an interventionist to his fingertips. The last of the laissez-faire presidents was Calvin Coolidge, Hoover’s predecessor.
A few years ago, the BBC broadcast a programme extolling the virtues of FDR and his new deal. Stephanie Flanders, at that time the BBC’s economics correspondent, reiterated the myth about Hoover being a non-interventionist and FDR having all the correct reflationary policies. In a piece to camera at the Hoover Dam, no less, she recounted how it was an example of FDR’s new deal stimulus. While it wasn’t completed until 1936, building started in 1931 as a project by the eponymous Hoover, pursuing the same interventionist policies as FDR before FDR’s landslide election. It was never FDR’s project, the clue being in the dam’s name. Research by Flanders and the BBC was either biased, deficient, blind or all three.
The myth that has even drawn in Boris is so powerful it has intelligent people swearing the earth is flat. The FDR fairy-story is fundamental to the modern state’s interventionist stance; the very reason for its existence and its welfare commitments to the electorate. Wishful thinking about FDR’s pioneering role is now the pervasive theology. But the way the world is viewed cannot change the facts, and to quote FDR and his new deal as the template for economic policy is to repeat the errors that led to the longest and deepest depression in American history.
If in a few words one was to sum up why the state fails in its interventionist quest, it would be its inability to understand change. Free markets change all the time. Businesses and whole industries evolve and disappear in a natural process of selection driven by the consumer. The state’s response to a crisis is always aimed at a return to normality; normality being an unchanged state from before the crisis. The state protects yesterday’s jobs and yesterday’s businesses. Worse, by preventing evolutionary change at the heart of a dynamic economy it deprives it of the resources required to evolve. And that’s why the depression lasted into the Second World War.
The back-story to the depression
Before Hoover, US presidents understood a hands-off policy would let the economy rapidly fix itself. The post-war 1920—1921 depression in America was allowed to run its course. It lasted just eighteen months and was the prelude to a period of technological revolution that gave enormous benefits in the quality of life for all Americans. Following President Harding’s death in 1923, Coolidge was elected the new president. While Coolidge enforced a strict laissez-faire policy, he was either unaware of or ignored the monetary policies of Benjamin Strong at the Fed, which, to be fair to Coolidge, was only a decade old. The Fed’s monetary policy was the cause of an inflationary boom which ended in a stockmarket bubble in 1929.
In 1927, Coolidge announced he would not be standing for a second term, and Herbert Hoover was elected President in 1928 nearly a year before the stock market crisis occurred.
Fuelled by a free market approach and the stimulus of unbacked credit, when Hoover took office in March 1929 the economy was, in the epithet of historians, roaring. We can now begin our comparison with the present day. Boris Johnson became Prime Minister after a similar inflation-fuelled period; but the more important correlation is with Republican Donald Trump, whose interventionist policies imitate Hoover’s from his time as Secretary of Commerce in Harding’s administration onwards. Hoover deported immigrants and Trump builds a wall, both reasoning they take American jobs. And like Hoover, Trump uses tariffs to protect farmers and businesses from foreign competition deemed unfair.
The combination of a massive credit expansion in the 1920s and the Smoot-Hawley Tariff Act passed by congress in October 1929 — the month of the Wall Street Crash — serves as a template for the condition of America’s economy today. Apart from some differences in timing, the most significant difference is in the money. Before April 1933 the dollar was freely exchangeable by the public for gold at $20.67 to the ounce; today the dollar is unbacked. Prices were stable, today they rise.
By passing the Smoot-Hawley Act at the top of the credit cycle, Congress ensured a sharp downturn in the economic outlook, persuading bankers to call in their loans. The economy began to contract, and interventionist Hoover went to work. To quote from his memoires;
“…the primary question at once arose as to whether the President and the Federal government should undertake to investigate and remedy the evils… No President before had ever believed that there was a governmental responsibility in such cases. No matter what the urging on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions . . . therefore, we had to pioneer a new field.”[i]
Hoover called a series of White House conferences with industry leaders and bankers to persuade them to invest and maintain wages in order to keep consumer spending going. Like the neo-Keynesians of today, Hoover believed consumer spending was vital for the economy, but failed to make the connection with production, which is always first in temporal order, and provides the product for consumption without which it cannot happen. Hoover’s view on maintaining wages is reflected today in minimum wage rates, which innocuous though they may seem render certain activities uneconomic.
As is the case today, the Fed was ready to inflate. According to Murray Rothbard, the Fed
“…was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks.” [ii]
Monetary policy was a doppelganger for the Fed’s policies today. In today’s money, $300 million is about $26bn, using gold as the conversion factor. Today’s stimulus is a thousand times greater in real terms — so far.
In 1932 Roosevelt won a landslide against Hoover, and as was the custom at the time he took office the following March. Only a week before, an assassination attempt on Roosevelt struck the wrong man who died shortly afterwards. Banks were failing. Farmers were in revolt. The numbers of unemployed were increasing alarmingly. Hoover’s reflationary policies had failed, and he was said to be the least popular man in America on inauguration day. Fast-forward eighty-eight years and we see President Trump following in Hoover’s footsteps in this election year; and we can be pretty sure Joe Biden — if he is not asleep at the wheel — will cast himself as the new FDR with his version of the new deal.
Roosevelt then delivered his inaugural address, which included the famous line, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” His speech was followed by the Hundred Days, the first time a president had set such a schedule.
In Britain, Rishi Sunak, the new Chancellor, is now pursuing his version of a Hundred Days announcing subsidies and new support as the occasion demands, financed by monetary inflation. Admittedly Sunak remains a free marketeer but has yet to prove his measures are temporary. Meanwhile, President Trump is destroying his administration’s finances in an attempt to contain the economic fallout from the coronavirus in his election year.
They say that repeating a failed action in search of a different outcome is a sign of madness. Hoover and Roosevelt were pioneers of today’s failed economic policies and it is their post-war successors who are arguably certifiable. But the problem is deeper than that, with the public voting for the same failed policies, so even an economically literate politician has to deliver solutions in that context. It is what makes history repetitious. Instead of economics, psychological factors drive politics, including the public desire for the state to provide easy solutions to economic and personal difficulties. But the lesson from the Hoover era is that we stand on the precipice of an economic collapse as a result of a combination of excessive credit creation in the years before and the introduction of trade tariffs. And that was before the coronavirus was added to this lethal mix.
The psychology suggests that this time the politicians and the monetary authorities will pursue much the same course as before, even more aggressively. So far, the evidence supports this thesis, and it allows us to anticipate mistakes yet to be made.
It would not be unusual, even for a libertarian politician. FDR is immensely popular with the inflationists who overwhelmingly wrote the economic history of the depression era. In fact, FDR was not the first “something must be done” American president, a policy which started with his predecessor, Herbert Hoover. But the story told is that FDR took over from heartless Hoover who had failed to step in and rescue the economy from a free-market catastrophe, by standing back and letting events take their course instead. Nothing is further from the truth: Hoover was an interventionist to his fingertips. The last of the laissez-faire presidents was Calvin Coolidge, Hoover’s predecessor.
A few years ago, the BBC broadcast a programme extolling the virtues of FDR and his new deal. Stephanie Flanders, at that time the BBC’s economics correspondent, reiterated the myth about Hoover being a non-interventionist and FDR having all the correct reflationary policies. In a piece to camera at the Hoover Dam, no less, she recounted how it was an example of FDR’s new deal stimulus. While it wasn’t completed until 1936, building started in 1931 as a project by the eponymous Hoover, pursuing the same interventionist policies as FDR before FDR’s landslide election. It was never FDR’s project, the clue being in the dam’s name. Research by Flanders and the BBC was either biased, deficient, blind or all three.
The myth that has even drawn in Boris is so powerful it has intelligent people swearing the earth is flat. The FDR fairy-story is fundamental to the modern state’s interventionist stance; the very reason for its existence and its welfare commitments to the electorate. Wishful thinking about FDR’s pioneering role is now the pervasive theology. But the way the world is viewed cannot change the facts, and to quote FDR and his new deal as the template for economic policy is to repeat the errors that led to the longest and deepest depression in American history.
If in a few words one was to sum up why the state fails in its interventionist quest, it would be its inability to understand change. Free markets change all the time. Businesses and whole industries evolve and disappear in a natural process of selection driven by the consumer. The state’s response to a crisis is always aimed at a return to normality; normality being an unchanged state from before the crisis. The state protects yesterday’s jobs and yesterday’s businesses. Worse, by preventing evolutionary change at the heart of a dynamic economy it deprives it of the resources required to evolve. And that’s why the depression lasted into the Second World War.
The back-story to the depression
Before Hoover, US presidents understood a hands-off policy would let the economy rapidly fix itself. The post-war 1920—1921 depression in America was allowed to run its course. It lasted just eighteen months and was the prelude to a period of technological revolution that gave enormous benefits in the quality of life for all Americans. Following President Harding’s death in 1923, Coolidge was elected the new president. While Coolidge enforced a strict laissez-faire policy, he was either unaware of or ignored the monetary policies of Benjamin Strong at the Fed, which, to be fair to Coolidge, was only a decade old. The Fed’s monetary policy was the cause of an inflationary boom which ended in a stockmarket bubble in 1929.
In 1927, Coolidge announced he would not be standing for a second term, and Herbert Hoover was elected President in 1928 nearly a year before the stock market crisis occurred.
Fuelled by a free market approach and the stimulus of unbacked credit, when Hoover took office in March 1929 the economy was, in the epithet of historians, roaring. We can now begin our comparison with the present day. Boris Johnson became Prime Minister after a similar inflation-fuelled period; but the more important correlation is with Republican Donald Trump, whose interventionist policies imitate Hoover’s from his time as Secretary of Commerce in Harding’s administration onwards. Hoover deported immigrants and Trump builds a wall, both reasoning they take American jobs. And like Hoover, Trump uses tariffs to protect farmers and businesses from foreign competition deemed unfair.
The combination of a massive credit expansion in the 1920s and the Smoot-Hawley Tariff Act passed by congress in October 1929 — the month of the Wall Street Crash — serves as a template for the condition of America’s economy today. Apart from some differences in timing, the most significant difference is in the money. Before April 1933 the dollar was freely exchangeable by the public for gold at $20.67 to the ounce; today the dollar is unbacked. Prices were stable, today they rise.
By passing the Smoot-Hawley Act at the top of the credit cycle, Congress ensured a sharp downturn in the economic outlook, persuading bankers to call in their loans. The economy began to contract, and interventionist Hoover went to work. To quote from his memoires;
“…the primary question at once arose as to whether the President and the Federal government should undertake to investigate and remedy the evils… No President before had ever believed that there was a governmental responsibility in such cases. No matter what the urging on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions . . . therefore, we had to pioneer a new field.”[i]
Hoover called a series of White House conferences with industry leaders and bankers to persuade them to invest and maintain wages in order to keep consumer spending going. Like the neo-Keynesians of today, Hoover believed consumer spending was vital for the economy, but failed to make the connection with production, which is always first in temporal order, and provides the product for consumption without which it cannot happen. Hoover’s view on maintaining wages is reflected today in minimum wage rates, which innocuous though they may seem render certain activities uneconomic.
As is the case today, the Fed was ready to inflate. According to Murray Rothbard, the Fed
“…was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks.” [ii]
Monetary policy was a doppelganger for the Fed’s policies today. In today’s money, $300 million is about $26bn, using gold as the conversion factor. Today’s stimulus is a thousand times greater in real terms — so far.
In 1932 Roosevelt won a landslide against Hoover, and as was the custom at the time he took office the following March. Only a week before, an assassination attempt on Roosevelt struck the wrong man who died shortly afterwards. Banks were failing. Farmers were in revolt. The numbers of unemployed were increasing alarmingly. Hoover’s reflationary policies had failed, and he was said to be the least popular man in America on inauguration day. Fast-forward eighty-eight years and we see President Trump following in Hoover’s footsteps in this election year; and we can be pretty sure Joe Biden — if he is not asleep at the wheel — will cast himself as the new FDR with his version of the new deal.
Roosevelt then delivered his inaugural address, which included the famous line, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” His speech was followed by the Hundred Days, the first time a president had set such a schedule.
In Britain, Rishi Sunak, the new Chancellor, is now pursuing his version of a Hundred Days announcing subsidies and new support as the occasion demands, financed by monetary inflation. Admittedly Sunak remains a free marketeer but has yet to prove his measures are temporary. Meanwhile, President Trump is destroying his administration’s finances in an attempt to contain the economic fallout from the coronavirus in his election year.
They say that repeating a failed action in search of a different outcome is a sign of madness. Hoover and Roosevelt were pioneers of today’s failed economic policies and it is their post-war successors who are arguably certifiable. But the problem is deeper than that, with the public voting for the same failed policies, so even an economically literate politician has to deliver solutions in that context. It is what makes history repetitious. Instead of economics, psychological factors drive politics, including the public desire for the state to provide easy solutions to economic and personal difficulties. But the lesson from the Hoover era is that we stand on the precipice of an economic collapse as a result of a combination of excessive credit creation in the years before and the introduction of trade tariffs. And that was before the coronavirus was added to this lethal mix.
The psychology suggests that this time the politicians and the monetary authorities will pursue much the same course as before, even more aggressively. So far, the evidence supports this thesis, and it allows us to anticipate mistakes yet to be made.
- Source, James Turk's Goldmoney
Saturday, July 18, 2020
Gold Money: Economic Prospects for the Next Few Months
Before we proceed in our analysis of the price effects of inflation, we must assess the economic outlook,as the backdrop to the likely consequences for the scale of monetary inflation, and then we can have a stab at evaluating the effect on prices.
At this stage of the credit cycle, which began expanding following the aftermath of the Lehman crisis over a decade ago, a sharp contraction of bank credit to non-financials is normal. It is what drives periodic recessions slumps and depressions, and monetary stimulus by central banks is intended to help commercial bankers recover their mojo and resume lending.
The relevant history of central bankers’ attitudes to bank credit goes back to Irving Fisher’s description of how contracting bank credit intensified the 1930s depression by the liquidation of debt, forcing collateral values down and leading to bank runs and the bankruptcy of thousands of banks. Ever since, monetary policy is guided by the fear of a repeat performance. But the Keynesian stimulus at the start of the credit cycle only increases the destabilising nature of bankers’ behaviour, consisting of long periods of growing greed for profitable loan business, interspersed by sudden reversions to fear of loan risk. It results in a cycle of credit expansion and contraction, which in recent cycles have been resolved temporarily by increasingly aggressive expansions of base money along with government actions to support ailing industries.
It is a sticking-plaster approach which allows the wound to fester out of sight.
Following Lehman’s failure, a similar pattern to the one unfolding today of a rapid increase in bank assets through the newly invented QE was followed by a contraction of bank credit which lasted about fifteen months. But that crisis was about financial assets in the mortgage market, which had knock-on effects in the non-financials. Difficult though it was, its resolution was relatively predictable.
This crisis started in the non-financials and is therefore more damaging to the economy; its severity is likely to lead to a banking crisis far larger than the Lehman failure and possibly greater than anything seen since the 1930s depression.
Commercial bankers are now waking up to this possibility. For them, the immediate danger is associated with this quarter-end just passed, when demand for credit to pay quarterly charges increases significantly. Already, businesses are in arrears as never before, with many shopping malls, office blocks and factories unused and rents unpaid. It is this problem, shared by banks around the world, which due to the severity of current business conditions is likely to tip the banking system over the edge and into an immediate crisis. The extent of the problem is likely to be revealed any time in this month of July.
Excluding the subsequent effects, the Lehman crisis cost the US Government and its agencies over $10 trillion in support and rescue operations. This time, being in the non-financial sector with knock-on effects for the financial economy, this crisis is much deeper than Lehman and will require a far larger bailout cheque for collapsing industries. Part of the problem are the broken supply chains needing bridging finance. And none of this can be done without the Fed funding it all directly or indirectly through quantitative easing. Despite the massive monetary inflation already underway there can be no doubt that aggregate consumer demand and the production of goods to satisfy it will take an enormous hit this year and beyond, and there is little doubt about the state’s will be on the hook for even more monetary financing.
Unemployment of previously productive labour is already rising dramatically, and as bankruptcies increase the rise in the unemployment numbers will continue to do so. Let us therefore assume that compared with last year the production of goods and services and consumer demand for them will decline by at least 25%. Note that we avoid using money-totals, since they are meaningless; it is the exchange of labour being converted into physical products and services that matters.
Into this situation is injected enormous quantities of money, none of which defeats the constraints on true supply of goods, nor for overall demand in a high unemployment economy. Put in a more familiar way, we will have too much money chasing not enough goods. There is only one outcome, other things being equal; the purchasing power of the dollar in terms of consumer goods will be driven significantly lower. But central bank analysis rules this out, associating too much money chasing too few goods with only an expanding, over-stimulated economy.
This explains stagflation, the situation where an economy stagnating in overall demand is accompanied by rising prices. Nor are other things ever equal, the condition for the paragraph above. The early receivers of inflated money will spend it, driving up the prices of the goods and services they acquire before the prices of other goods and services are affected. These early receivers include the Federal Government, which in an election year is doubly unlikely to hold back. Distribution of state money will increasingly be in the form of welfare to the unemployed, skewing spending towards life’s essentials. Inevitably, in an economy with subdued activity not responding quickly enough to produce the volumes of products desired, prices, mainly of essential items, will increase sharply.
Almost certainly, a broad index of prices will not capture this secular effect until too late. The CPI includes a majority of items which are only occasionally bought by individuals. Poor demand for non-essentials where there is now an oversupply puts downward pressure on their prices even in an inflationary environment. It is therefore possible for the CPI to record little or no price inflation as an average when food and energy prices are rising strongly, particularly when statistical methods designed to show little or no increase in price inflation are additionally taken into account.
Consequently, central banks are already being badly misled by the CPI’s statistical method. And when prices for essentials are soaring, they will continue to increase the quantity of money in circulation, distracted by that 2% increase in the CPI target. By the time it creeps up above that rate it will be too late, much monetary water having already flowed under the bridge.
The politicians will likely dismiss rising prices for food and fuel as the result of profiteering — they always do and then contemplate introducing price controls, making this outcome even worse.
At this stage of the credit cycle, which began expanding following the aftermath of the Lehman crisis over a decade ago, a sharp contraction of bank credit to non-financials is normal. It is what drives periodic recessions slumps and depressions, and monetary stimulus by central banks is intended to help commercial bankers recover their mojo and resume lending.
The relevant history of central bankers’ attitudes to bank credit goes back to Irving Fisher’s description of how contracting bank credit intensified the 1930s depression by the liquidation of debt, forcing collateral values down and leading to bank runs and the bankruptcy of thousands of banks. Ever since, monetary policy is guided by the fear of a repeat performance. But the Keynesian stimulus at the start of the credit cycle only increases the destabilising nature of bankers’ behaviour, consisting of long periods of growing greed for profitable loan business, interspersed by sudden reversions to fear of loan risk. It results in a cycle of credit expansion and contraction, which in recent cycles have been resolved temporarily by increasingly aggressive expansions of base money along with government actions to support ailing industries.
It is a sticking-plaster approach which allows the wound to fester out of sight.
Following Lehman’s failure, a similar pattern to the one unfolding today of a rapid increase in bank assets through the newly invented QE was followed by a contraction of bank credit which lasted about fifteen months. But that crisis was about financial assets in the mortgage market, which had knock-on effects in the non-financials. Difficult though it was, its resolution was relatively predictable.
This crisis started in the non-financials and is therefore more damaging to the economy; its severity is likely to lead to a banking crisis far larger than the Lehman failure and possibly greater than anything seen since the 1930s depression.
Commercial bankers are now waking up to this possibility. For them, the immediate danger is associated with this quarter-end just passed, when demand for credit to pay quarterly charges increases significantly. Already, businesses are in arrears as never before, with many shopping malls, office blocks and factories unused and rents unpaid. It is this problem, shared by banks around the world, which due to the severity of current business conditions is likely to tip the banking system over the edge and into an immediate crisis. The extent of the problem is likely to be revealed any time in this month of July.
Excluding the subsequent effects, the Lehman crisis cost the US Government and its agencies over $10 trillion in support and rescue operations. This time, being in the non-financial sector with knock-on effects for the financial economy, this crisis is much deeper than Lehman and will require a far larger bailout cheque for collapsing industries. Part of the problem are the broken supply chains needing bridging finance. And none of this can be done without the Fed funding it all directly or indirectly through quantitative easing. Despite the massive monetary inflation already underway there can be no doubt that aggregate consumer demand and the production of goods to satisfy it will take an enormous hit this year and beyond, and there is little doubt about the state’s will be on the hook for even more monetary financing.
Unemployment of previously productive labour is already rising dramatically, and as bankruptcies increase the rise in the unemployment numbers will continue to do so. Let us therefore assume that compared with last year the production of goods and services and consumer demand for them will decline by at least 25%. Note that we avoid using money-totals, since they are meaningless; it is the exchange of labour being converted into physical products and services that matters.
Into this situation is injected enormous quantities of money, none of which defeats the constraints on true supply of goods, nor for overall demand in a high unemployment economy. Put in a more familiar way, we will have too much money chasing not enough goods. There is only one outcome, other things being equal; the purchasing power of the dollar in terms of consumer goods will be driven significantly lower. But central bank analysis rules this out, associating too much money chasing too few goods with only an expanding, over-stimulated economy.
This explains stagflation, the situation where an economy stagnating in overall demand is accompanied by rising prices. Nor are other things ever equal, the condition for the paragraph above. The early receivers of inflated money will spend it, driving up the prices of the goods and services they acquire before the prices of other goods and services are affected. These early receivers include the Federal Government, which in an election year is doubly unlikely to hold back. Distribution of state money will increasingly be in the form of welfare to the unemployed, skewing spending towards life’s essentials. Inevitably, in an economy with subdued activity not responding quickly enough to produce the volumes of products desired, prices, mainly of essential items, will increase sharply.
Almost certainly, a broad index of prices will not capture this secular effect until too late. The CPI includes a majority of items which are only occasionally bought by individuals. Poor demand for non-essentials where there is now an oversupply puts downward pressure on their prices even in an inflationary environment. It is therefore possible for the CPI to record little or no price inflation as an average when food and energy prices are rising strongly, particularly when statistical methods designed to show little or no increase in price inflation are additionally taken into account.
Consequently, central banks are already being badly misled by the CPI’s statistical method. And when prices for essentials are soaring, they will continue to increase the quantity of money in circulation, distracted by that 2% increase in the CPI target. By the time it creeps up above that rate it will be too late, much monetary water having already flowed under the bridge.
The politicians will likely dismiss rising prices for food and fuel as the result of profiteering — they always do and then contemplate introducing price controls, making this outcome even worse.
- Source, James Turk Goldmoney
Tuesday, July 14, 2020
Bullion Prices Are Going to Rise And Fast
Between different schools of economics there is much confusion over the link between changes in the quantity of money and prices, exposed afresh by the collapse in GDP due to COVID-19 and the aggressive monetary response from the authorities to contain the economic consequences.
Neo-Keynesians appear to understand the link exists, but for them inflation is always of prices which can be managed by adjusting monetary policy subsequently.
Monetarists follow a mechanical quantity theory leading to a relatively straightforward relationship between changes in the quantity of money and of prices after a time lag of a year or so. The principal difference with the neo-Keynesians is in the timing: monetarists see monetary inflation occurring long before the price effect, and neo-Keynesians in charge of central bank monetary policy assume rising prices can be controlled subsequently by varying interest rates.
The Austrian school, which is banished from these proceedings, explains that inflation is of money and nothing else, and the effect on the general price level is determined by a combination of changes in the money quantity and of consumers’ relative preferences for holding money relative to goods.
But central banks operate exclusively on neo-Keynesian lines. They feel free to expand the money quantity so long as the general level of prices does not exceed a targeted 2%; except when it does there is usually an excuse not to restrict money supply growth immediately. Keynesian Inflationism offers problems on so many levels, not least being it is rather like driving a vehicle using a rear-view mirror for guidance. But importantly for our analysis, central banks do not seem to realise current monetary policies guarantee the death of their currencies.
Central bankers act as if money supply increases after prices, which is what monetary policy amounts to. They have other nonsensical beliefs, such as through an inflation tax despite robbing consumers of their wealth, it stimulates them to buy. Whoever thought that one up as a lasting policy beyond short-term distortions deserves an Ignoble prize for idiocy.
Ah! That was Lord Keynes. And perversely, his disciples are today’s main recipients of the Nobel prize for economics. We are now seeing central banks, like some latter-day Aztec priests, trying to appease their gods with human sacrifices. We are the sacrifices, lesser mortals trying to do the best for our families and ourselves, being slaughtered by monetary means.
Figure 1 indicates the alarming debasement of our savings, earnings, and pensions so far through monetary expansion and explains why the dollar’s purchasing power has been declining faster than the CPI suggests.
The fiat money quantity reflects not only money in circulation, that is to say true money as defined by Austrian economists, but additionally the banks’ deposit reserves held at the Fed, the last data being for 1 May. It captures fiat money both in circulation and theoretically available for circulation.
From 2009 it shows the excess monetary inflation that followed the Lehman crisis in 2008, which until 1 February this year grew at an annualised monthly compound rate of 9.5%, compared with the pre-Lehman average long-run rate of about 5.9%.
No wonder independent analysts calculating the rate of price inflation tell us that it is running at 8%—10% (Shadowstats.com and Chapwood Index), instead of the CPI’s 1.5—2.0%. And if that was not bad enough, the recent sharp increase at an annualised rate of 98% since March comes on top of it, putting FMQ at more than double where it would be if Lehman had not happened. FMQ now also exceeds GDP, telling us there is more fiat money than US output, and yet more liquidity is demanded through the banks by failing businesses.
The Fed has increased base money at an unprecedented rate to provide liquidity, allegedly for the non-financial sector. For this to get to businesses banks must be prepared to increase their lending to non-financials and bank credit must not contract. But as Figure 2 shows, bank balance sheets have stopped growing and even contracted since the end of April.
Between 26 February and 29 April bank balance sheets increased by $2,489bn. These figures include the uplift in total reserves held at the Fed and not in public circulation, which over the same period increased by $1,083bn. Therefore, banks increased their other assets by $1,406bn between these dates. Those other assets are split between financials and non-financials, the evidence of rising financial asset prices relative to commercial business’s decline strongly suggesting Wall Street has been favoured over Main Street
Subsequently, up to 17 June bank balance sheets contracted by $169bn. The extent to which banks are increasing financial activities will be balanced by an even sharper contraction in bank credit for non-financials than indicated by the overall balance sheet.
Central banks with their reliance on inflation now have a problem: the banks are failing to pass on extra money to the non-financial sector by expanding their balance sheets. Yet, the disruptions to supply chains, the onshore component totalling some $38 trillion and an unquantifiable offshore component feeding into it, are still there and their problems are growing by the day. In short, we face a continuing liquidity crisis with limited means of relieving it.
Neo-Keynesians appear to understand the link exists, but for them inflation is always of prices which can be managed by adjusting monetary policy subsequently.
Monetarists follow a mechanical quantity theory leading to a relatively straightforward relationship between changes in the quantity of money and of prices after a time lag of a year or so. The principal difference with the neo-Keynesians is in the timing: monetarists see monetary inflation occurring long before the price effect, and neo-Keynesians in charge of central bank monetary policy assume rising prices can be controlled subsequently by varying interest rates.
The Austrian school, which is banished from these proceedings, explains that inflation is of money and nothing else, and the effect on the general price level is determined by a combination of changes in the money quantity and of consumers’ relative preferences for holding money relative to goods.
But central banks operate exclusively on neo-Keynesian lines. They feel free to expand the money quantity so long as the general level of prices does not exceed a targeted 2%; except when it does there is usually an excuse not to restrict money supply growth immediately. Keynesian Inflationism offers problems on so many levels, not least being it is rather like driving a vehicle using a rear-view mirror for guidance. But importantly for our analysis, central banks do not seem to realise current monetary policies guarantee the death of their currencies.
Central bankers act as if money supply increases after prices, which is what monetary policy amounts to. They have other nonsensical beliefs, such as through an inflation tax despite robbing consumers of their wealth, it stimulates them to buy. Whoever thought that one up as a lasting policy beyond short-term distortions deserves an Ignoble prize for idiocy.
Ah! That was Lord Keynes. And perversely, his disciples are today’s main recipients of the Nobel prize for economics. We are now seeing central banks, like some latter-day Aztec priests, trying to appease their gods with human sacrifices. We are the sacrifices, lesser mortals trying to do the best for our families and ourselves, being slaughtered by monetary means.
Figure 1 indicates the alarming debasement of our savings, earnings, and pensions so far through monetary expansion and explains why the dollar’s purchasing power has been declining faster than the CPI suggests.
The fiat money quantity reflects not only money in circulation, that is to say true money as defined by Austrian economists, but additionally the banks’ deposit reserves held at the Fed, the last data being for 1 May. It captures fiat money both in circulation and theoretically available for circulation.
From 2009 it shows the excess monetary inflation that followed the Lehman crisis in 2008, which until 1 February this year grew at an annualised monthly compound rate of 9.5%, compared with the pre-Lehman average long-run rate of about 5.9%.
No wonder independent analysts calculating the rate of price inflation tell us that it is running at 8%—10% (Shadowstats.com and Chapwood Index), instead of the CPI’s 1.5—2.0%. And if that was not bad enough, the recent sharp increase at an annualised rate of 98% since March comes on top of it, putting FMQ at more than double where it would be if Lehman had not happened. FMQ now also exceeds GDP, telling us there is more fiat money than US output, and yet more liquidity is demanded through the banks by failing businesses.
The Fed has increased base money at an unprecedented rate to provide liquidity, allegedly for the non-financial sector. For this to get to businesses banks must be prepared to increase their lending to non-financials and bank credit must not contract. But as Figure 2 shows, bank balance sheets have stopped growing and even contracted since the end of April.
Between 26 February and 29 April bank balance sheets increased by $2,489bn. These figures include the uplift in total reserves held at the Fed and not in public circulation, which over the same period increased by $1,083bn. Therefore, banks increased their other assets by $1,406bn between these dates. Those other assets are split between financials and non-financials, the evidence of rising financial asset prices relative to commercial business’s decline strongly suggesting Wall Street has been favoured over Main Street
Subsequently, up to 17 June bank balance sheets contracted by $169bn. The extent to which banks are increasing financial activities will be balanced by an even sharper contraction in bank credit for non-financials than indicated by the overall balance sheet.
Central banks with their reliance on inflation now have a problem: the banks are failing to pass on extra money to the non-financial sector by expanding their balance sheets. Yet, the disruptions to supply chains, the onshore component totalling some $38 trillion and an unquantifiable offshore component feeding into it, are still there and their problems are growing by the day. In short, we face a continuing liquidity crisis with limited means of relieving it.
- Source, James Turk Goldmoney
Friday, July 10, 2020
A Potential Crisis in Comex Gold
We are all used to the bullion banks covering their shorts on Comex by waiting until the speculators are over-bullish and vulnerable to mark-downs that trigger their stops. Algorithmic traders go from long to short in a heartbeat as well, and they dump contracts into a falling market, speeding up the decline. We should say at this juncture that the Managed Money speculators are short-term, attracted by futures leverage, and their gold position is often part of a wider risk strategy deployed by hedge funds. They do not intend to stand for delivery. The wider investment world taking strategic portfolio decisions does not often get involved with gold, so the Comex gold contract has been a secular play.
The table below shows a typical set-up, in this case July 2016. The Managed Money category (296,106 — net 259,129 contracts) is close to record long. Open interest was 633,000 contracts and the gold price was at $1360, having run up from $1040 the previous December.
In the non-speculative category, the bullion banks (Swaps) had 56% of the shorts and the Producer/Merchants 44%. Mark-to-market value of the Swaps net short position was $25bn. Of the speculative longs, the managed money category (hedge funds) held 69%, and at 296,106 long contracts it was almost a record. There was a high level of bullishness; easy pickings for the bullion banks, who by the following December drove the price down to $1120, reducing their net shorts to under 50,000 contracts.
It was a game that evolved out of Comex futures being used simply to offset long bullion positions at the LBMA. Over time, bullion bank traders increased their trading position limits, as opposed to their pure hedging activity, making easy money jobbing the other side of Managed Money trades.
Now look at the current situation, with the gold price at decade highs ($1775) and open interest at 561,628 (30 June).
In the non-speculator category, the Swaps are more short than they were in July 2016 despite open interest being 71,372 contracts lower. The mark-to-market value is record net short at $36.6 billion. What has happened is the Producer/Merchants have cut their positions, presumably deciding that hedging mine output is less important in the current inflationary environment. Consequently, the bullion banks are bearing 71% of the short exposure.
The speculator category makes this more interesting still. At 138,555 net long, hedge funds are only 25,000 contracts longer than average, and compared with their bullishness in July 2016 have hardly got going. It is the other categories, Other Reported and Non-reported have taken 56% of the long side, and they are not behaving like skittish hedge funds at all. These include family offices, the ultra-wealthy and foreigners through Globex who are standing for delivery as a means of getting their hands on physical bullion —171 tonnes from the June contract alone.
The table below shows a typical set-up, in this case July 2016. The Managed Money category (296,106 — net 259,129 contracts) is close to record long. Open interest was 633,000 contracts and the gold price was at $1360, having run up from $1040 the previous December.
In the non-speculative category, the bullion banks (Swaps) had 56% of the shorts and the Producer/Merchants 44%. Mark-to-market value of the Swaps net short position was $25bn. Of the speculative longs, the managed money category (hedge funds) held 69%, and at 296,106 long contracts it was almost a record. There was a high level of bullishness; easy pickings for the bullion banks, who by the following December drove the price down to $1120, reducing their net shorts to under 50,000 contracts.
It was a game that evolved out of Comex futures being used simply to offset long bullion positions at the LBMA. Over time, bullion bank traders increased their trading position limits, as opposed to their pure hedging activity, making easy money jobbing the other side of Managed Money trades.
Now look at the current situation, with the gold price at decade highs ($1775) and open interest at 561,628 (30 June).
In the non-speculator category, the Swaps are more short than they were in July 2016 despite open interest being 71,372 contracts lower. The mark-to-market value is record net short at $36.6 billion. What has happened is the Producer/Merchants have cut their positions, presumably deciding that hedging mine output is less important in the current inflationary environment. Consequently, the bullion banks are bearing 71% of the short exposure.
The speculator category makes this more interesting still. At 138,555 net long, hedge funds are only 25,000 contracts longer than average, and compared with their bullishness in July 2016 have hardly got going. It is the other categories, Other Reported and Non-reported have taken 56% of the long side, and they are not behaving like skittish hedge funds at all. These include family offices, the ultra-wealthy and foreigners through Globex who are standing for delivery as a means of getting their hands on physical bullion —171 tonnes from the June contract alone.
- Source, James Turk's Goldmoney
Saturday, June 20, 2020
Keynesian Macroeconomics Out of Control
Macroeconomics has become so far removed from reality that its practitioners cannot understand what is happening in the real economy. Never has this been more obvious than today. While they claim to be economically literate, macroeconomists are in thrall to their paymasters; a combination of government, quasi-government and financial institutions with a vested interest in not looking too closely at the full consequences of government economic and monetary policies.
From this neo-Keynesian macro world, the latest spinoff is modern monetary theory, which is little more than a logical extension of Keynesianism —justifying intervention by the state and the use of fiat currency being expanded limitlessly. MMT is the end of the line for arguments based on macroeconomic fallacies that have their origin in Keynes.
Stephanie Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy was released on Tuesday (9 June):
“Stephanie Kelton’s brilliant exploration of MMT dramatically changes our understanding of how we can deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure.”
That is the first sentence of Amazon’s sales pitch. If these claims are true, the world’s economic problems are easily solved. But we must put aside the marketing hyperbole and look at MMT seriously...
Stephanie Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy was released on Tuesday (9 June):
“Stephanie Kelton’s brilliant exploration of MMT dramatically changes our understanding of how we can deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure.”
That is the first sentence of Amazon’s sales pitch. If these claims are true, the world’s economic problems are easily solved. But we must put aside the marketing hyperbole and look at MMT seriously...
- Source, James Turk's Goldmoney
Tuesday, June 16, 2020
A Brief History of Monetary Silver
Silver has a similar history to gold of being money. Following the ending of barter, communities worldwide adopted durable metals – gold, silver or copper, depending on local availability — as the principal medium of exchange. And until the 1960s this heritage, with respect to copper and silver, was still reflected in the coinage used in most nations. The British currency is still known as sterling because since the reign of Henry II (1154–1189) money was silver coinage of sterling alloy, comprised of 92.5% silver, the balance being mainly copper.
Silver was the sole monetary standard, sometimes with gold on a bimetallic standard, for most regions from medieval times until the nineteenth century. Sir Isaac Newton reset the silver standard against gold in 1717, and it was because the British government overpriced gold and failed to adjust to the consequences of changing mine supplies, principally the subsequent expansion of gold supply from Brazil, that British commerce moved towards a gold standard during the eighteenth century.
We look in greater detail at these events later in this article.
As international trade developed, gold for trading nations assumed greater significance, leading eventually to the adoption of the British sovereign coin as the gold standard in the early nineteenth century.
In colonial America, silver was the principal circulating currency in common with that of Britain at the time, but following Newton’s introduction of a silver standard for the pricing of gold, similar practical relationships between the two metals existed for trade in nearly all Britain’s colonies; in America’s case at least until independence was formally gained by the Treaty of Paris in 1783.[i]
When Alexander Hamilton was Treasury Secretary, the US introduced a bimetallic standard with the first coinage act in 1792 when the dollar was fixed at 371.25 grains of pure silver, minted with alloy into coins of 416 grains. Gold coins were also authorised in denominations of $10 (eagles) and $2.50 (quarter eagles). The ratio of silver to gold was set at fifteen to one. All these coins were declared legal tender, along with some foreign coins, notably the Spanish milled silver dollar, which had 373 grains of pure silver making them a reasonable approximation for the US silver dollar.
However, not long after Hamilton’s coinage act was passed, the international market rate for the gold/silver ratio rose to 15.5:1, which led to gold being drained from domestic circulation, leaving silver as the common coinage. Effectively, the dollar was on a silver standard until 1834, when Congress approved a change in the ratio to 16:1 by reducing the gold in the eagle from 246.5 to 232 grains, or 258 grains at about nine-tenths fine. An additional adjustment to 232.2 grains was made in 1834. After a few years, gold coins then dominated in circulation over silver, the circulation of which declined as it became more valuable relative to gold. Gold discoveries in California and Australia then increased the quantity of gold mined relative to silver, making silver even more valuable relative to gold coinage thereby driving it almost totally out of circulation. This was remedied by an act of 1853 authorising subsidiary silver coins of less than $1 to be debased with less silver than called for by the official mint ratio and less than indicated by the world market price.
Under financial pressure from the civil war, in 1862 the government issued notes that were not convertible either on demand or at a specific future date. These greenbacks were legal tender for everything but customs duties, which still had to be paid in gold or silver. The government had abandoned the metallic standards. Greenbacks were issued in large quantities and the United States experienced a substantial inflation.
After the war was over Congress determined to return to the metallic standard at the same parity that existed before the war. It was accomplished by slowly removing greenbacks from circulation. The bimetallic standard, measuring the dollar primarily in silver, was finally replaced with a gold standard in 1879, reaffirmed in 1900 when silver was officially relegated to small denomination money.
In Europe, most countries on a silver standard moved to gold after the Franco-Prussian war (1870–1), when Germany imposed substantial reparations from France which were paid in gold, and Germany was then able to migrate from a silver to a gold standard. Other European nations followed suit.
More recently, silver circulated as money in Arab lands in the form of Maria Theresa dollars, which had circulated widely in the Middle East and East Africa from the mid-nineteenth century and were still being used in Muscat and Oman in the 1970s.
These are just some examples of silver’s use as money in the past. It lives on in base metal coins today, made to look like silver. Now imagine a world where fiat currencies are discredited: gold or gold substitutes will almost certainly return as the money for larger transactions, and silver will equally certainly return as money for everyday transactions. Bimetallism might not return as official policy due to the frequent adjustments required, but history has shown that a relatively stable market rate between gold and silver is likely to ensue, and silver more than gold will ensure widespread distribution of circulating metallic money.
Supply and demand factors
Analysts are currently grappling with the effects of the coronavirus on supply and demand in their forecasts for the rest of this year. Silver mines have been affected by changes in grades and production shutdowns. According to the Silver Institute, in 2019 less than 30% of mine supply was from mines classified as primarily silver, the rest coming from lead/zinc, copper, gold mines and “others” in that order of importance. Miners of lead/zinc, copper and others made up about 56% of global silver mine supply, so that a decline in global economic activity automatically leads to a decline in silver output from base metal miners.
At the same time, falling industrial demand for silver throws a greater emphasis on investment to sustain demand overall. Last year, non-investment demand was 806 million ounces, while investment was estimated at 186 million, a relationship which in a deep recession will require a significant increase in investment demand to absorb the combination of mine, scrap and available above-ground stocks. Identifiable above-ground stocks are estimated at 1,651 million, a multiple of 1.67 times 2019 demand, and 8.9 times 2019 investment demand.
For 2020 and beyond, I am very bearish for the global economy for reasons stated elsewhere. If I am right, current estimates for mine supply, of which over half is dependent on base metal mines, will prove optimistic. But silver demand for non-investment usage is likely to decline even more, in which case investment demand will probably need to at least double if silver prices are to rise in real terms.
An interesting point is found in the comparison with gold, where above-ground stocks are many multiples of mine and scrap supply. Stock-to-flow comparisons have been popularised recently by the cryptocurrency community as a measure of future monetary stability, compared with that of infinitely expandable fiat currencies. A high stock-to-flow signals a low rate of inflationary supply. Silver has a very low stock to flow ratio due to the low level of above-ground stocks. But it is a mistake is to rely on this measure of monetary stability for a metallic money when the lack of physical liquidity should be the main consideration.
At current prices, silver’s above-ground stock is worth only $31bn, compared with gold’s at over $10 trillion. With this relationship of 323 times of gold to silver’s above-ground stock values and an annual mine supply ratio of only 8 times as many silver ounces to that of gold, it appears that if gold returns to its traditional monetary role, silver will turn out to be substantially undervalued. “If” is a little word for a very big assumption; but given the unprecedented and coordinated acceleration of monetary expansion currently proposed, an ending of the current fiat currency regime and a return to gold and silver as monies is becoming increasingly likely.
The relationship with gold in the numbers above suggest that a bimetallic standard today on mine supply considerations alone would be at almost half Isaac Newton’s 1717 exchange rate. Obviously, the issue is not so simple and will be settled by markets. But looking at some other facts suggest the gold/silver relationship is due for a radical rethink. Table 1 below lists some of the relevant ones.
The clear outlier is the gold/silver ratio.
Silver was the sole monetary standard, sometimes with gold on a bimetallic standard, for most regions from medieval times until the nineteenth century. Sir Isaac Newton reset the silver standard against gold in 1717, and it was because the British government overpriced gold and failed to adjust to the consequences of changing mine supplies, principally the subsequent expansion of gold supply from Brazil, that British commerce moved towards a gold standard during the eighteenth century.
We look in greater detail at these events later in this article.
As international trade developed, gold for trading nations assumed greater significance, leading eventually to the adoption of the British sovereign coin as the gold standard in the early nineteenth century.
In colonial America, silver was the principal circulating currency in common with that of Britain at the time, but following Newton’s introduction of a silver standard for the pricing of gold, similar practical relationships between the two metals existed for trade in nearly all Britain’s colonies; in America’s case at least until independence was formally gained by the Treaty of Paris in 1783.[i]
When Alexander Hamilton was Treasury Secretary, the US introduced a bimetallic standard with the first coinage act in 1792 when the dollar was fixed at 371.25 grains of pure silver, minted with alloy into coins of 416 grains. Gold coins were also authorised in denominations of $10 (eagles) and $2.50 (quarter eagles). The ratio of silver to gold was set at fifteen to one. All these coins were declared legal tender, along with some foreign coins, notably the Spanish milled silver dollar, which had 373 grains of pure silver making them a reasonable approximation for the US silver dollar.
However, not long after Hamilton’s coinage act was passed, the international market rate for the gold/silver ratio rose to 15.5:1, which led to gold being drained from domestic circulation, leaving silver as the common coinage. Effectively, the dollar was on a silver standard until 1834, when Congress approved a change in the ratio to 16:1 by reducing the gold in the eagle from 246.5 to 232 grains, or 258 grains at about nine-tenths fine. An additional adjustment to 232.2 grains was made in 1834. After a few years, gold coins then dominated in circulation over silver, the circulation of which declined as it became more valuable relative to gold. Gold discoveries in California and Australia then increased the quantity of gold mined relative to silver, making silver even more valuable relative to gold coinage thereby driving it almost totally out of circulation. This was remedied by an act of 1853 authorising subsidiary silver coins of less than $1 to be debased with less silver than called for by the official mint ratio and less than indicated by the world market price.
Under financial pressure from the civil war, in 1862 the government issued notes that were not convertible either on demand or at a specific future date. These greenbacks were legal tender for everything but customs duties, which still had to be paid in gold or silver. The government had abandoned the metallic standards. Greenbacks were issued in large quantities and the United States experienced a substantial inflation.
After the war was over Congress determined to return to the metallic standard at the same parity that existed before the war. It was accomplished by slowly removing greenbacks from circulation. The bimetallic standard, measuring the dollar primarily in silver, was finally replaced with a gold standard in 1879, reaffirmed in 1900 when silver was officially relegated to small denomination money.
In Europe, most countries on a silver standard moved to gold after the Franco-Prussian war (1870–1), when Germany imposed substantial reparations from France which were paid in gold, and Germany was then able to migrate from a silver to a gold standard. Other European nations followed suit.
More recently, silver circulated as money in Arab lands in the form of Maria Theresa dollars, which had circulated widely in the Middle East and East Africa from the mid-nineteenth century and were still being used in Muscat and Oman in the 1970s.
These are just some examples of silver’s use as money in the past. It lives on in base metal coins today, made to look like silver. Now imagine a world where fiat currencies are discredited: gold or gold substitutes will almost certainly return as the money for larger transactions, and silver will equally certainly return as money for everyday transactions. Bimetallism might not return as official policy due to the frequent adjustments required, but history has shown that a relatively stable market rate between gold and silver is likely to ensue, and silver more than gold will ensure widespread distribution of circulating metallic money.
Supply and demand factors
Analysts are currently grappling with the effects of the coronavirus on supply and demand in their forecasts for the rest of this year. Silver mines have been affected by changes in grades and production shutdowns. According to the Silver Institute, in 2019 less than 30% of mine supply was from mines classified as primarily silver, the rest coming from lead/zinc, copper, gold mines and “others” in that order of importance. Miners of lead/zinc, copper and others made up about 56% of global silver mine supply, so that a decline in global economic activity automatically leads to a decline in silver output from base metal miners.
At the same time, falling industrial demand for silver throws a greater emphasis on investment to sustain demand overall. Last year, non-investment demand was 806 million ounces, while investment was estimated at 186 million, a relationship which in a deep recession will require a significant increase in investment demand to absorb the combination of mine, scrap and available above-ground stocks. Identifiable above-ground stocks are estimated at 1,651 million, a multiple of 1.67 times 2019 demand, and 8.9 times 2019 investment demand.
For 2020 and beyond, I am very bearish for the global economy for reasons stated elsewhere. If I am right, current estimates for mine supply, of which over half is dependent on base metal mines, will prove optimistic. But silver demand for non-investment usage is likely to decline even more, in which case investment demand will probably need to at least double if silver prices are to rise in real terms.
An interesting point is found in the comparison with gold, where above-ground stocks are many multiples of mine and scrap supply. Stock-to-flow comparisons have been popularised recently by the cryptocurrency community as a measure of future monetary stability, compared with that of infinitely expandable fiat currencies. A high stock-to-flow signals a low rate of inflationary supply. Silver has a very low stock to flow ratio due to the low level of above-ground stocks. But it is a mistake is to rely on this measure of monetary stability for a metallic money when the lack of physical liquidity should be the main consideration.
At current prices, silver’s above-ground stock is worth only $31bn, compared with gold’s at over $10 trillion. With this relationship of 323 times of gold to silver’s above-ground stock values and an annual mine supply ratio of only 8 times as many silver ounces to that of gold, it appears that if gold returns to its traditional monetary role, silver will turn out to be substantially undervalued. “If” is a little word for a very big assumption; but given the unprecedented and coordinated acceleration of monetary expansion currently proposed, an ending of the current fiat currency regime and a return to gold and silver as monies is becoming increasingly likely.
The relationship with gold in the numbers above suggest that a bimetallic standard today on mine supply considerations alone would be at almost half Isaac Newton’s 1717 exchange rate. Obviously, the issue is not so simple and will be settled by markets. But looking at some other facts suggest the gold/silver relationship is due for a radical rethink. Table 1 below lists some of the relevant ones.
The clear outlier is the gold/silver ratio.
- Source, James Turk's Goldmoney
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