Secret ... insider ... question about gold

[Angela Shelley]

This is a new topic for me, please be patient.

After reading the post recently about the Wall Street Journal ad "Anybody seen our gold?", I visited the GATA website, watched the video, and have some questions.

I also watched "The Money Changers" video.

1) I understand "gold leasing", but what´s a "gold swap?"

2) The GATA asks about gold reserves, and in the Money Changers video it is explained that the gold reserves from the Treasury are in the Fed vaults as "collateral". What do you think, is the actual gold still somewhere where it can be inventoried?

3) Would you advise another innocent human being to buy gold at the current price?

Looking forward to your thoughts. Have a nice day!

[Celebration]

1. good questions

Apparently there are different types of swaps. They can have to do with location of the gold, or the quality of the gold, or are just repurchase agreements of various types. I am not sure what GATA is getting at other than there is just not enough transparency about these trades. It's part of the smoke and mirrors thing. That includes me, because I sit here rather clueless about all this. I believe that there is probably all sorts of nefarious actions going on with gold. Wasn't there a bunch of gold at the WTC that was whisked away?

Gold doesn't have that many industrial purposes--jewelry, and, maybe a few other things. I don't think I would advise anyone to put any more than 5% or 10% of their assets into gold. Naturally I wish I had had all my money in gold over the past four or five years, but that is hindsight. Gold is a hedge against monetary uncertainty, so it probably belongs in every portfolio in small amounts.

I am not a financial adviser or anything so take all of the above with a grain of salt.

[A HERETIC I AM]

3. Gold actually has many industrial uses

http://www.utilisegold.com/

As an "Investment"....well...It's a commodity. Commodities are notoriously volatile.

[Dover]

6. How do ETFs (exchange traded funds) figure into this as a substitute for

either real bullion or gold stocks?

I understand that the trades are expensive so it wouldn't make sense unless someone had enough to make it worth their while. But can anyone explain the pros and cons of these different forms of gold ownership/protections?

Excerpt from one article:

When the dollar fails due to extreme defaults, the government will be pressured to offer a solution to the mayhem. It might offer reinflation fiats, but these will all fail (as they did in Weimer Germany). Since eventually there will be no confidence in fiats, government will need to offer something new, and probably something with a gold backing. The gold ETFs may or may not be a solution as extreme defaults may wipe out most brokerage accounts, and the ETFs may fail also due their derivative gold reserve (paper gold, not physical gold, see the prospectus for proof). The long-planned Amero may be offered with gold (that the US gave the IMF) backed SDRs from the IMF backing the Amero.

http://www.gold-eagle.com/editorials_05/moore031107.html

[DavidMS]

2. I've never been a fan of gold

If I want protection against US dollar inflation, I would first look to the Swiss Franc and other hard currencies. Most gold pushers that I have run into have gotten lots wrong with their description of fractional reserve banking. Another option is to buy a mutual fund that invests in gold mining companies.

[Extend a Hand]

4. well it kind of depends on where you thing the economy is going..

If you think we're heading in to an inflationary cycle
then buying gold now is the way to go.

If you think we're at the very beginning of a deflationary cycle
then you might want to wait for a price correction before jumping in

Economists are hotly arguing this topic now. I'm buying the arguments from Mish Shedlock in the deflationist camp.

Here's a link to Mish's friendly rebuttle of Eric Janszen's analysis of the situation. These guys are in an on going debate.
http://globaleconomicanalysis.blogspot.com/2008/02/bubble-economy-endgame.html

Here's a paper that explains gold leases and gold swaps.
http://64.233.169.104/search?q=cache:9JHCN1o-5t8J:www.imf.org/External/NP/sta/bop/pdf/bopteg21a.pdf+gold+swap&hl=en&ct=clnk&cd=19&gl=us

The bottom line is that even the experts can't agree on how the economy is going to go. All I know to do is to read the arguments, pick a side and hope I'm right. (I personally am holding but not buying right now')

[Dover]

5. Inflation/Deflation and Gold

Gold Value Increases During Extreme Deflation (or Inflation)

Shelby Moore

I will explain why it does not matter whether the central banks lead us to inflation or deflation, because it is too late to maintain any balance in the business cycle, and defaults are now an unavoidable event in the not so distant future, which will cause gold to skyrocket in value.

I explained in my previous two articles, "How Derivatives Compete With Gold" and "Derivatives Are Competing With Gold!", that "interest rates" are set by the free market (of individual decisions) if on a 100% gold legal tender standard, because no one can control the supply of gold money.

Fiat paper/electronic money empowers a central bank to create/destroy (and thus control the supply of) legal tender money and thus the "interest rates". When "interest rates" are set higher than the free market (of individual decisions) would, then supply of legal tender money is in deflation. When "interest rates" are set lower than the free market would, then supply of legal tender money is in inflation.

Again, I reiterate that "interest rate" is the "opportunity cost" on investment, so don't confuse this with Fed Funds or even bond rates. Perhaps a reasonable proxy for "interest rate" is long-term bond rates minus money supply inflation, but money supply inflation is not accurately reported and bond rates are being manipulated by CPI lies, direct central bank intervention (buying/selling) via Repo contracts, and other factors. Thus we have no accurate measure of "interest rate" when on a fiat money standard, which is precisely the reason that (the deception of) derivates can compete with gold.

My previous two articles implied the fact that gold can gain no value when it is the legal tender money (100% gold standard), because the free market of "interest rates" is inherently in competitive balance, as thus the legal tender gold money supply is nearly constant (no centralized manipulative force able to create/destroy money) with the free market of individuals deciding the necessary return for investing their money.

When on fiat money standard and perceived "interest rates" are set higher than free market, either by deflation of fiat money supply or by deceptive reporting of CPI, real GDP, and M3, then the value of gold decreases. As explained by Dr. Fekete (see my previous articles), this is because a (deceptive) higher return can be obtained in fiat derivatives from the higher than free market "interest rates". The deception is that the risks of defaults, or the swing of the business cycle, may not be properly factored, especially if the underlying data on CPI (and thus real GDP) and money supply inflation are deceptively reported or not reported:

http://ShadowStats.com

Thus many fear that gold will decrease in value when deflation comes in our current economy. Not true! When derivates have been allowed to grow to such as an extreme (see my prior article "Derivatives Are Competing With Gold!" for discussion of how extreme), then any significant deflationary period will result in catastrophic defaults. This means most banks, most brokerage accounts, most futures accounts, most businesses, etc.. will all fail and lose all value. When every method of fiat storage is failing, then the desire to store fiat fails, then gold skyrockets.

..cont'd

http://www.gold-eagle.com/editorials_05/moore031107.html

------------------------------------------------------------


And another article: Currency Crisis

http://www.usagold.com/asianflurose.html

[Extend a Hand]

7. I agree that gold will do well in deflation...

But Mish's article that I linked above:

There are many deflationistas bullish on gold. There is one prominent one who is not. It is a mistake to lump all deflationistas with one lighting rod. That person has been wrong about gold for seven years and may be wrong for another 15. But inflationistas have been wrong about treasuries for the same period.

Two Viewpoints

* Gold is money.
* Money is going to do well in deflation.

That is my simple Austrian economist based belief. Having said that, I do expect a significant correction in the price of gold as deflation forces a reduction in leverage of all kinds (including leverage in gold and leverage in the carry trade). I simply do not know if that starts now or at a much higher level.

I do agree with Mish's assertion that as deflation forces a reduction in leverage, gold will (temporarily) drop. Partly because I already have a significant percentage of my assets in gold, I think it's better to hold right now and see if the across the board selling continues rather than to continue buying at the current price.

So I think we (mostly?) agree.

:hi:

[Dover]

8. Yes I think we agree.

Some questions:

How much do you think it would drop during a correction?

And do you feel that ETF's would fare as well as the real deal in this scenario to purchase during this correction (whenever that is)?

[Extend a Hand]

11. oh gosh, I wish I knew

My husband and I are trying to figure it out when/if/how much more gold we should buy.
We're not trying to time the market to make a buck off the ups and downs. My husband needs to make it at his job until December to be eligible for retiree medical benefits but we've been told our jobs are going to India sometime within the next three years so we're just wanting to find somewhere SAFE for our retirement savings. There just don't seem to be very many safe places to put money right now.

We don't have ETF's. We have physical gold and stock in the Central Fund of Canada(CEF). CEF is a gold and silver bullion holding company. CEF bullion is held in allocated storage at a Canadian bank, it is audited by a third party and the company charter does not permit them to lend or lease the gold. The stock is selling at more of a premium now than it was when we bought it. That seemed safer to me than an index fund. If/when we buy any more we'll probably use a pooled gold account at Everbank. ETF's just didn't seem quite as safe to me-- it does seem like ETF's might be better if you're buying for shorter term speculation though.

[gravity]

9. Don't worry about gold swaps

Messing in derivatives like swaps, forwards, and options is for suckers and pros. You are playing a zero sum game and will lose money using them. They aren't for the common investor so don't worry about them.

I don't know how investing in gold will do in the future, so I can't give advice on that. One thing to remember is that gold is a risky asset and can lose significant value. It will never go to 0, but you could lose 50% of the money you put into it. I would think of gold as a hedge against economic tourmoil instead of an investment, so just put a fraction of your portfolio into gold.

The easiest way to invest in gold is to buy an ETF. The ticker GLD on the NYSE mimicks the price of gold, and it is a fairly simple way to buy and sell gold. I wouldn't make investing in gold any more complicated than that.

[Art_from_Ark]

14. I think of gold as an investment

After all, the purpose of an investment is to make money for the investor. No one buys gold with the expectation that they're going to lose money when they cash in.

[ursi]

10. Angela, we are going to try answer your questions

(1) An example of a gold swap ...hypothetical:

There was gold in Fort Knox that is owned by the United States. A monetary deal is made with say German Central Bank, the US makes a swap for some of their currency and the German Bank now has claim to that portion of gold it represents in Fort Knox. So it the gold has gone from the US gold reserve to be swapped for "custodial gold" because the title of it is owned by the German Central Bank. So physically is still in Ft. Knox but the claim to it is owned by Germany by title.

See this link for further explanation: http://www.gata.org/node/4223

(2) That is the million dollar question. No one really knows. That is the point of GATA's ad.

(3) Yes, the dollar has gone down 30% in the past seven years. Look at the performance of the stock market in January and compare it to gold performance. The Weimar Republic is an example of a currency debasement. Teh world is becoming unsteadier and gold is the only asset that is not someone else's liability if you have it physically. As in buy it and have it in hand. Remember, all paper can burn but a tangible asset in hand will hold its value.

Do we have gold? Yes, for quite some time.

Good luck!

[Angela Shelley]

12. Thank you, Ursi and Co., for the explanation

:toast:

[ursi]

13. Angela, sorry for all the mistakes/typos! I was typing that while watching

Larry King last night with Michael Moore and tryin to keep up with my husband's dictation! I should have checked it out before posting. Hope you got the drift though!

Best!