Inflation, Report

By Keith Weiner

What is inflation?

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).

There are different ways that the quantity of money can expand. It depends on what kind of monetary system you have. For example, the miners increase the quantity of gold. In free banking, the banks increase the quantity of gold-redeemable notes. In our irredeemable monetary system, the Fed increases the quantity of dollars.

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A Post-Powell View of USD, S&P 500 and Gold

By NFTRH

The Fed blinked. This was not news to Macro Tourist Kevin Muir or readers of Biiwii.com, which is very pleased to publish his work.

Fed Finally Blinks

Amid a weakening global economy, gathering signs of weakening in the US economy and a dump in inflation expectations, Jerome Powell implied that the Fed may be going on hold for a while after a December rate hike.

This graph from SG Cross Asset Research/Equity Quant by way of Kevin Muir’s article attempts to show that the accumulated rate hike tightening and “shadow” tightening as a result of QE suspension has now met or exceeded the levels that preceded the last two economic recessions.

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A Golden Renaissance, Report

By Keith Weiner

A major theme of Keith’s work—and raison d’etre of Monetary Metals—is fighting to prevent collapse. Civilization is under assault on all fronts.

The Battles for Civilization

There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travellers to provide the password to their phones so the government can go through all your data, presumably including your gmail, Onedrive, Evernote, and WhatsApp. China is now developing a “social credit” system, to centrally plan the economy and control citizen behavior. Canada has made it a crime to call someone by the wrong gender pronoun. Even in the US, whose First Amendment has (mostly) stood as a bulwark against censorship now has a president who threatens antitrust action against Amazon, because its CEO Jeff Bezos owns the Washington Post, which prints things he does not like. On college campuses, professors are harassed if they say one thing that the professional sensitives are sensitive to. If a controversial speaker is invited, he risks an angry mob coming to disrupt his talk (or worse).

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The Ultimate Stablecoin, Report

By Keith Weiner

A long time ago in a galaxy far, far away we wrote a series of articles arguing that bitcoin is not money and is not sound. Bitcoin was skyrocketing at the time, as we wrote most of them between July 30 and Oct 1 last year.

Back in those halcyon days, volatility was deemed to be a feature. That is, volatility in the upward direction was loved by everyone who said that bitcoin is money, in their desire to make money. In the first instance of the word, the term money refers to bitcoin. In the second, it refers to the dollar. The same problem we see with gold:

  1. bitcoin is money
  2. bitcoin is going up
  3. buy bitcoin now
  4. sell bitcoin later at a higher price
  5. to make money

From what we remember from a logic class in the philosophy department back in university (in the halcyon days long before the halcyon days of bitcoin skyrocketing), there may be a fallacy or two in here that have Latin names.

Anyways, in our bitcoin articles, we were careful not to get into the game of setting price targets. We didn’t know (and no one else did either, as it turned out) where the price would go. Other than, we did say that bitcoin has no firm bid and its price will drop when the speculators turn. Bitcoin had just hit $3000 when our series began. We were careful to say that the price could go a lot higher, and we made no prediction as to how high or when it would turn.

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The Failure of a Gold Refinery, Report

By Keith Weiner

So this happened: Republic Metals, a gold refiner, filed bankruptcy on November 2. The company had found a discrepancy in its inventory of around $90 million, while preparing its financial statements.

We are not going to point the Finger of Blame at Republic or its management, as we do not know if this was honest error or theft. If it was theft, then we would not expect it to be a simple matter of employees or management walking out the door with the gold. $90 million is about 2.6 tons. Unless it happened very slowly, over many years, that seems like a lot of gold to disappear. And if it occurred over years, why didn’t regular audits and other internal controls catch the discrepancy until now?

We want to make a different point altogether. We define inflation as the counterfeiting of credit. Legitimate credit has four criteria. Most of the focus is on the latter two: the borrower has both the means and intent to repay. Did Republic have the means to repay? They had a good business for 38 years, so we will assume yes. Did they have the intent? Well, unless this was a simple theft and theft by the owners, then we have to answer yes again (with one quibble which we will get to, in a moment).

The other two criteria are often overlooked. Does the lender know he is extending credit, and does the lender agree to do so?

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Wizard’s First Rule

By Keith Weiner

Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing. However, for purposes of this essay, the important part is the rule itself:

“Wizard’s First Rule: people are stupid.”

“People are stupid; given proper motivation, almost anyone will believe almost anything. Because people are stupid, they will believe a lie because they want to believe it’s true, or because they are afraid it might be true. People’s heads are full of knowledge, facts, and beliefs, and most of it is false, yet they think it all true. People are stupid; they can only rarely tell the difference between a lie and the truth, and yet they are confident they can, and so are all the easier to fool.”

Does this not aptly describe the belief that the dollar will lose its reserve status, will collapse relative to other paper currencies, and is facing imminent hyperinflation with a skyrocketing gold price?

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Brinkmanship

By Trey Reik

[biiwii comment: very pleased to welcome Trey, a senior portfolio manager at Sprott, to our group of quality authors]

Over our two decades following global monetary affairs, we have often marveled at default confidence awarded the Federal Reserve. Don’t misinterpret us — the Fed’s power borders on surreal. Seven governors and twelve regional bank presidents set the price of money not only for the world’s largest economy, but through auspices of the dollar standard system, for the entire globe. No matter how practical “don’t fight the Fed” logic has proven over time, it does not diminish the folly that 19 capable and well-supported individuals might possibly price the world’s reserve currency more efficiently than free markets.

Record valuations for U.S. financial assets have inured investors to the daunting risks of unwinding eight years of QE and ZIRP. Because such radical monetary policy has never before been deployed, our 19 monetary mandarins, by definition, command no special insight into broad implications of Fed policy normalization. Into this unprecedented monetary vortex steps new Fed Chairman Jerome Powell, a seemingly low-key and forthright communicator bent on rational steps to normalize Fed policy. In this report, we share our perspective that the Fed’s dual policy agenda of simultaneous rate hikes and balance sheet reduction, rather than constituting some sort of scientifically-formulated policy elixir, amounts to little more than glorified brinkmanship — the Fed’s signature policy tool. Events of the past few weeks only serve to support our contention that Fed tightening is pinching global liquidity to a degree which threatens reigning valuations of traditional financial assets.

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Useless But Not Worthless

By Keith Weiner

Let’s continue to look at the fiasco in the franc. We say “fiasco”, because anyone in Switzerland who is trying to save for retirement has been put on a treadmill, which is now running backwards at –¾ mph (yes, miles per hour in keeping with our treadmill analogy). Instead of being propelled forward towards their retirement goals by earning interest that compounds, they are losing principal. They will never reach their retirement goals. If you disagree, we encourage you to model it.

We say “fiasco” because living in retirement in Switzerland is like trying to live on a farm which does not grow crops. The farmer has to sell off pieces of the farm to buy groceries. As the Swiss retiree has to sell off pieces of his accumulated savings. Except the bank is also consuming his savings at -0.75%. It’s like a negative race.

Quantity Theory of Money

This disaster provides an interesting test of the quantity theory of money. Since mid-2013, the quantity of Swiss francs (as measured by M0) was around 380 billion. It went sideways until the end of December 2014. In January 2015, it was up to 450 billion. That move in itself, in 2-3 months, was 18%. But it first went off to the races, after that, hitting 561 billion by May 2017. In just over two years, it rose another 25%. Prices in Switzerland did not rise commensurately with these increases in the quantity of francs.

But we are interested in matters monetary. We want to see how the franc fared against the dollar, from which it ultimately derives (the US M0 admittedly rose faster during this period—44%). Here’s a graph of the price of the franc against Swiss M0.

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You Can’t Eat Gold

By Keith Weiner

“You can’t eat gold.” The enemies of gold often unleash this little zinger, as if it dismisses the idea of owning gold and indeed the whole gold standard. It is a fact, you cannot eat gold. However, it dismisses nothing.

This gives us an idea. Let’s tie three facts together. One, you can’t eat gold. Two, gold is in backwardation in Switzerland. And three, speculation is a bet on the price action.

The fact that gold is inedible is supposed (by the enemies of liberty) to be proof positive that a gold standard wouldn’t work. Of course, there’s always the retort: You can’t eat dollars!

That may be emotionally satisfying, but there is a deeper issuer that the anti-gold crowd is missing. Yes, money makes terrible food but, also, food makes terrible money. A car makes a lousy airplane. And a shoe makes an awful TV. Cow poop is putrid as food for people, but it works well as fertilizer for plants. Each thing fits a particular purpose.

Why does food make terrible money? One reason is that it’s perishable. No one—other than a refrigerated warehouse—can make a bid on food beyond his own short-term needs. Without this robust bid, food has limited marketability. That is, it has a wide spread between its bid and offer prices.

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The Toxic Stew

By Keith Weiner

Last week, we shined a spotlight on a crack in the monetary system that few people outside of Switzerland (and not many inside either) were aware of. There is permanent gold backwardation measured in Swiss francs. Everyone knows that the Swiss franc has a negative interest rate, but so far as we know, Keith is the only one who predicted this would lead to its collapse (and he was quite early, having written that in January 2015).

Of course, in hindsight, it makes sense that durable negative interest rates would lead to permanent backwardation. What use to decarry gold—i.e. sell the metal, buy a future, and use the cash for some productive purpose—if there is no productive purpose? If no one bids a positive interest rate for said cash, then traders will not part with their gold to get the use of it.

There is an analogy to gold. In today’s world (other than us), the bid on the gold interest rate is negative. Gold typically serves no better purpose than to be stored. Which has a cost.

As an aside, this is how they manipulate the value of gold! How many people are like Warren Buffet, seeing no utility in gold because it pays no yield (and hence who own none)? If the government did not force people to stop using gold productively in 1933, then gold would still have the same utility today as it had then (and everyone would own some).

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Permanent Gold Backwardation

By Keith Weiner

Sometimes, one just needs to look in the right place. And often in those cases, it just takes a conversation to alert one where to look. We had a call with a Swiss company this week, to discuss gold financing for their business. They reminded us that there is a negative interest rate on Swiss francs. And then they said that a swap of francs for gold has a cost. That is, the CHF GOFO rate is negative (the dollar based 12-month MM GOFO™ is +2.4%).

Let’s review what GOFO means. The London Bullion Market Association described it:

“[the] rate at which contributors were prepared to lend gold to each other on a swap basis against US dollars.”

In other words, the bank gives you gold and gets dollars in exchange. This is not a sale, but a swap, which means that the gold and dollars return to their original owners at maturity. Here are the steps in the mechanics:

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“Fiat Franklin” D. Roosevelt Signed Gold Seizure Order In 1933

By Anthony B. Sanders

Purchasing Power Of US Dollar Destroyed (But Gold Prices Rise)

In 1933, President Franklin Delano Roosevelt (aka, “Fiat Franklin”) signed an exective order #6102 confiscating gold coin, bullion and certficates owned by private citizens. Why? So the Federal government could print and spend almost without constraint.

Executive_Order_6102_0

Between order #6102 and the Gold Reserve Act of 1934, gold held in Treasury and Federal Reserve Banks skyrocketed!

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