The price of gold has taken a hit in the last few weeks dipping down to the $1,500’s. If you own gold and silver as ‘a put option on the financial system’ this temporary dip is of little concern, what you own is real money. And this week Patrick Barron explained why it is the dollar and not gold that is overvalued.

“The problem with comparing the price of gold in dollar terms today and its price in the past is that it ignores dollar inflation.  The price of gold today is around $1,600 per ounce.”

“In December 1980 the CPI stood at 86.3.  In January 2013 it was 230.3. (This is hardly believable; i.e., that prices have gone up only 2.7 times since 1980.)  Nevertheless, adjusting for the CPI increase since 1980, the price of gold today should be $1,633…about where it is right now.”

“But now let’s look at inflation of the money supply.  In 1980 M1 was $.420 trillion and M2 was $1.605 trillion.  As of January 2013, M1 is $2.470 trillion and M2 is $10.445 trillion.  So, taking into account the great inflation in M1 and M2, the price of gold should be either $3,600 per ounce (M1 equivalence) or $3,983 per ounce (M2 equivalence) for the price of gold, IN DOLLAR TERMS, to match its price at year end 1980.”

“Another way to look at the relationship between the dollar price of gold and dollar inflation is to calculate gold’s dollar coverage price; i.e., for the Fed, which owns 262 million ounces of gold, to back the dollar in gold and make it truly redeemable, it would be forced to set the price at either $9,427 per ounce (M1) or $39,866 per ounce (M2).  In other words, at any lower price the Fed would not be able to redeem all of its dollars.”

]]> http://www.dgcmagazine.com/the-price-of-gold/feed/ 0 http://www.dgcmagazine.com/goldmoney-why-price-inflation-will-take-off/ http://www.dgcmagazine.com/goldmoney-why-price-inflation-will-take-off/#comments Tue, 05 Feb 2013 00:21:33 +0000 Julia Dixon http://www.dgcmagazine.com/?p=1159 Continue reading →]]> Alasdair Macleod explains how “preference for money” impacts price levels and what role a shift in preferences will play in a ‘virtually certain’ new banking crisis.

“We are all aware, through application of logic if nothing else, that if you increase the quantity of money, prices will increase as that extra money is spent. What is less appreciated is that prices can change dramatically due to shifts in preference for money over goods.”

“An illustration of this was the fall in prices during the financial crisis five years ago, when over-extended consumers responded to the global banking crisis. Government interventions in capital goods markets, such as for residential property and automobiles, were urgently implemented to stop prices collapsing. Shifts in money-preference can be very dramatic, as that episode showed.”

“Despite the massive expansion of money-quantities in the major economies, prices for goods have been generally stable, though government CPI statistics tend to be self-serving rather than reliable price inflation indicators. Instead of fuelling price increases, money has instead been applied to reducing indebtedness, or to speculation in the capital markets.”

“What is important to understand is five years ago there was a large one-off shift in favour of money, which suggests that the next large shift will be away from money;“

“So where will a reduced preference for money come from? … When the bullish factors for government bonds and other financial assets are replaced by the prospect of rising interest rates and falling prices, there will be a rush for the exit across a wide range of markets.”

“It is a virtual certainty that collapsing bond and other asset prices will set off a new crisis by undermining the collateral backing the entire banking system. Central banks will see no alternative to keeping interest rates as low as possible, accelerating the expansion of the money-quantity to prevent a new systemic crisis.“

“Cash will therefore be an unattractive alternative to owning financial assets, which leaves vital commodities and monetary hedges, such as precious metals, as the only refuge for monetary capital.”

The post can be read in its entirety here.

Bloomberg’s Business Week spoke to a few Iranians who have found a solution in Bitcoin. “Iranians are resorting to virtual currency to move money into and out of the country in a way that Western authorities find hard to detect.”

“Under sanctions imposed by the U.S. and its allies, dollars are hard to come by in Iran. The rial fell from 20,160 against the greenback on the street market in August to 36,500 rials to the dollar in October. It’s settled, for now, around 27,000. The central bank’s fixed official rate is 12,260. Yet there’s one currency in Iran that has kept its value and can be used to purchase goods from abroad: bitcoins, the online-only currency.”

“The advantage for Iranians is that bitcoins can be swapped for dollars that can then be kept outside the country. Another plus: Regulators can’t easily track the transactions, since bitcoins aren’t issued from a central server. Bitcoin users can conduct business on virtual private networks, which hide customers’ identities.”

“At online store coinDL.com, shoppers can use bitcoins to buy Beyond Matter, the latest album from Iranian artist Mohammad Rafigh. Anyone in the U.S. downloading songs, which fetch .039 bitcoins or 45¢ each, risks violating U.S. sanctions. That doesn’t bother Rafigh, who’s studying computer engineering as well as playing music. ‘Bitcoin is so interesting for me,’ Rafigh wrote in an e-mail. ‘I wish the culture of using digital money spreads all over the world, because it does not have any dependency on anything like politics.’ Rafigh has translated some bitcoin software into Farsi for his friends. ‘I love Iran, and if bitcoin is good for me, it can be good for more Iranians like me.’”

“Iranian-American bitcoin consultant Farzad Hashemi recently traveled to Tehran and talked up bitcoin to his friends. ‘They are instantly fascinated by it,’ he says. ‘It’s a flash for them when they realize how it can solve their problems.’ Iranians working or living abroad can send bitcoins to their families, who can use one of the online currency matchmaking services to find someone willing to exchange bitcoins for euros, rials, or dollars. Bitcoins are useful to Iranians wishing to move their money abroad, either to children studying in Europe or America or simply to stash cash in a safe place.”

“As the value of the rial plunges, many Iranians are trying to acquire foreign currencies. ‘We have no idea what will happen,’ says Amir-Hossein Madani, who says he’s traded tens of millions of street market dollars in Tehran over the past two years. ‘These days prices change every 10 minutes.‘”

“The uncertainty has led some Iranian software developers to ask clients to pay them in bitcoins. ‘Anyone with a computer is able to own, send, and receive them. You can be at an Internet cafe in Iran and managing a bitcoin account,’ says Jon Matonis, a founding board member of the Bitcoin Foundation, a Seattle nonprofit that promotes the currency. The exchange rate in Iran is 332,910 rials per bitcoin. It isn’t known how many Iranians use bitcoins to skirt sanctions. According to localbitcoins’ Kangas, 32 people in Iran have contacted each other through his site.”

“For now, Iranians are using bitcoins to maintain a fragile connection to the outside world.”

View the post in its entirety here.

Saturday’s raids on the shops and dealers in central Tehran’s Jomhuri and Ferdowsi streets saw 30 currency traders detained, state officials said, closing the entire market save for a handful operating under a central-bank license.

“They are bringing down the [Dollar] rate by force,” the Financial Times‘ correspondent quotes one employee at a currency shop now closed down. He put the total number of arrests at “more than 100.

“They confiscated all our banking cheques and assets in the shop.”

The authorities said they also seized large quantities of Gold Coins. Last week the Central Bank of Iran opened its own foreign-currency outlets, offering to undercut the informal market by 2%.

This weekend’s close-down came after the Rial lost 30% of its US Dollar value last week alone, taking the total drop to almost two-thirds so far in 2012 – caused, analysts say, by a shortage of foreign currency inside Iran following international sanctions aimed at deterring the ruling Revolutionary Council from developing nuclear weapons.

Police have since been patrolling Tehran’s open currency market, where unofficial exchange rates had hit 30,000 Rials per Dollar, some 6% above the government’s published rate. But currency traders also continue to walk the street, reports the FT, inviting passers-by to swap Rials for foreign money.

With consumer-price inflation already running well above 25% per year, last week brought marches and strikes across Iran by traders and shopkeepers protesting at the Rial’s plunge. Police fired teargas on Thursday to disperse a crowd of some 200 people near the Ferdowsi currency market, according to Bloomberg.

Previously the major supplier of Gold Coins to private citizens, the Central Bank of Iran was forced to suspend its direct sales in December 2011 due to a surge in demand and shortage of stock.

Gold Coin and other bullion imports from neighboring Turkey leapt to $6.2 billion between Jan. and July from just $22 million in the same period last year.

“Iranians have made some very big purchases recently,” says one Dubai Gold Dealer quoted by Bloomberg, suggesting that ex-pat Iranians are sending Gold Coins home to help their families weather the crisis.

“Iranians have always been good customers. It’s just that we’ve seen more sales.”

-View the post on Bullion Vault’s website here.

A Greek economist calls for regulation of digital currencies in a BBC article. http://www.bbc.co.uk/news/business-19785935

Crossing the Line in the Sand. “The bankers have drawn a line in the sand at $1900 for gold. The sand, however, is far more important than the line.”

“The U.S., in fact, is…an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth.”

http://www.24hgold.com/english/news-gold-silver-crossing-the-line-in-the-sand.aspx?article=4075801504G10020&redirect=false&contributor=Darryl+Robert+Schoon

A Telegraph article gives details of the LIBOR ‘Cartel’ including instant messages between bankers, such as…

“Where would you like it, Libor that is?”

“OK, I will move the curve down 1 basis point, maybe more if I can.”

“Nice Libor, our six-month fixing moved the entire fixing, hahahah.”

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9568087/RBS-traders-boasted-of-Libor-cartel.html

Judge throws out CFTC’s position limits rule http://www.gata.org/node/11782, http://www.gata.org/node/11795

Hyperinflation in Iran. http://www.cato-at-liberty.org/hyperinflation-has-arrived-in-iran/

And it would seem that Iranian officials are blaming black market currency traders for ‘exacerbating conditions’. http://www.zerohedge.com/news/2012-10-04/iran-arrests-gang-16-currency-manipulators

Andrew Maguire: Investment banks don’t have all that metal. http://www.gata.org/node/11787

Bitcoin makes it into the Economist http://www.economist.com/node/21563752

The Bitcoin Foundation is formed to help people exchange resources and ideas more freely by standardizing, protecting and promoting Bitcoin. “Freeing People to Transact on Their Own Terms.” https://bitcoinfoundation.org/

Bitcoin Usage for Political Donations Expands to Vermont. http://bitcoinmagazine.net/bitcoin-usage-for-political-donations-expands-to-vermont/

Ukash expands into UK gift card market. http://www.finextra.com/news/announcement.aspx?pressreleaseid=46519

Bill Gates understands that digital currencies can prevent corruption. While being interviewed by Charlie Rose he says “You want to designs systems that make it harder for there to be corruption … that’s partly why we would like to get digital currencies on cell phones.” But I don’t think Bitcoin is what he has in mind as he also mentions “The government has to set some standards.” http://blog.coinbase.com/post/32700273456/bill-gates-on-digital-currency

Is India’s Golden Age About To Disappear? The Indian government has been attempting to “persuade people to save in cash rather than importing gold.” But it doesn’t seem to be going too well for them. http://www.forexpros.com/analysis/is-india%E2%80%99s-golden-age-about-to-disappear%20-138138

“With everything from the data retention hearings, the internet filter talk and telecommunication interception activities all going on at once, is it any wonder that more and more Australians are turning to the anonymised Tor network to do their illicit browsing?” http://www.gizmodo.com.au/2012/10/aussies-love-online-anonymity-local-tor-use-on-the-rise/