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Record-breaking household debt in Australia

October 30, 2015

A recent Bloomberg article notes that household leverage in Australia is now almost twice the developed-market average. Specifically, the article states that Australia’s household debt as a proportion of gross domestic product has risen to a record 134 percent, the highest among 36 developed- and emerging-market nations analysed by Barclays. This compares to a developed-market average of about 74 percent.

The article contains the following chart, which suggests that the easy-money policy of the country’s central bank is driving the housing-finance binge.

This is not going to end well.

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The gold-mining sector is ready to break out

October 28, 2015

As we enter ‘Fed day’ (the day on which the US monetary politburo is scheduled to provide a new set of clues on how it intends to manipulate the price of credit in the future), the gold-mining sector is poised for a breakout. Unfortunately, the HUI chart (see below) doesn’t clearly indicate the most likely direction of the breakout. This is normal. It’s always the case that price charts say a lot more about the past than the future.


Sentiment indicators and the HUI’s price chart suggest two different near-term outcomes. The first is that the HUI made a short-term top (a top that holds for at least a couple of months) 10 trading days ago and will confirm this top by breaking downward from its 2-week range in the aftermath of the Fed news. The second is that there will be an upside breakout in reaction to the Fed news followed by a quick move to a short-term top over the ensuing several days.

I think the second outcome is the more likely, but I’m not buying in anticipation. Instead, I will continue to do what I’ve been doing over the past 2.5 weeks, which is look for opportunities to raise cash.

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What Is Gold?

October 27, 2015

In my two “Gold Is Not Money” posts (HERE  and HERE) I explained why it is not correct to think of gold as money these days, and in a subsequent post I explained why it was not correct to view gold as an economic constant (there is no such thing as an “economic constant”). It is clearly also not correct to think of gold as “just a commodity”, because if it were just a commodity then its price would have collapsed relative to the prices of other commodities due to the massive size of its aboveground supply relative to its annual usage in commercial/industrial applications. Instead, the price of gold is near an all-time high relative to the CRB Index. So, if gold isn’t money and it isn’t an economic constant and it isn’t just a commodity, then what is it?

Is gold a speculation? That’s a matter of opinion. Some of the commentators who claim that gold is money tell us that gold is not a speculation, but they are only expressing a personal view. For example, if I buy gold with the aim of selling it in a few months at a higher price, then gold is a speculation to me.

Is gold insurance? It can be, but many of the people who own gold do not hold it for insurance purposes. Gold is certainly not inherently a form of financial/monetary insurance, but it can be held for such a purpose. Furthermore, of the people who believe that gold can be used as financial/monetary insurance, one group thinks that it should be used for this purpose all the time while another group thinks that it should only be used for this purpose when the risk of monetary collapse is high. For example, I own gold and recognise its ability to be a form of insurance against financial catastrophe, but none of my gold is currently held for insurance purposes. In my opinion there isn’t a good reason to hold gold for insurance purposes right now, because there will always be warning signs well in advance of a monetary collapse and those signs are currently not present (at least with regard to the US$). That’s my opinion. Other people think differently.

Is gold a good store of purchasing power? It depends on the starting point and the time frame. Gold has lost a lot of purchasing power (PP) since its September-2011 peak and lost more than 90% of its PP from its January-1980 peak to its April-2001 trough. Furthermore, despite the huge gold rally of 2001-2011, someone who bought gold at its January-1980 peak (almost 36 years ago) and held to the present day is still down by more than 50% in PP terms. However, someone who accumulated a long-term gold position during 1998-2002 and held to the present day would still have a substantial gain in PP terms, despite the large decline of the past four years. In this respect gold is similar to investments in companies or real estate. Regardless of the quality of an investment, if the purchase price is high enough it will probably generate a large PP loss.

As an aside, the importance of timing will be obscured by extremely long-term studies. Of particular relevance, studies that assess gold’s performance over centuries will suggest PP stability and will mask the fact that if you bought near one of the speculative peaks you would have sustained a permanent loss.

Is gold a financial asset? The answer is yes. Moreover, it is considered to be one of the world’s most liquid financial assets, which is why some of the world’s most important clearing houses accept gold — along with other liquid financial assets such as T-Bills — as collateral. However, physical gold is not someone’s liability, which means that gold can’t suddenly become worthless as the result of a default. In this respect gold is a safer financial asset than a T-Bill or any other security.

In summary, gold is primarily a liquid financial asset that can be held for speculative, insurance, store-of-purchasing-power or collateral purposes.

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Don’t be sucked in by one-sided commentary

October 26, 2015

It is always possible to find evidence to support any market opinion. If you want to find evidence to support a bearish view, you will be able to find it. If you want to find evidence to support a bullish view, you will be able to find it. If it’s evidence of an impending economic collapse or financial crisis you desire, if you look hard enough you will be able to find it. At the same time you will be able to find evidence that the financial/economic future is bright, if that’s what you really want.

For example, someone wanting to paint a bearish picture of the US economy and stock market could choose to single-out the performance of Wal-Mart (WMT).


Whereas someone wanting to paint a bullish picture of the US economy and stock market could choose to focus on General Electric (GE).


This year’s performances of WMT and GE largely reflect company-specific issues, but they can still be used to support opposing overall-market views.

The point is that there are always two sides to any market. Regardless of your current view, you can be sure that there are many people who are just as smart or smarter than you who have the opposite view. You should therefore always entertain the possibility that your current outlook is wrong and be wary of commentators who only present one side of the story.

Also, it is important to recognise and account for your own biases. One way to do this is to go out of your way to read the analyses of people whose views contradict your own. For example, if, like me, you tend to be too bearish on the US stock market, then you should spend at least as much time reading bullish stock-market commentary as you spend reading bearish stock-market commentary.

In general, there’s nothing to be gained by fixating on market analysis that confirms what you already think you know.

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There is no economic yardstick

October 23, 2015

My two “Gold Is Not Money” articles (HERE and HERE) provoked numerous disagreeing responses, the majority of which were polite and well-meaning. Despite presenting various arguments, these responses had one thing in common: they did not offer a practical definition of money that gold currently meets. As I mentioned previously, a practical definition of money cannot avoid the primary economic role of money, which is to facilitate indirect exchange*. If something is not generally used to facilitate indirect exchange, then regardless of what other attributes it has it cannot be money; at least not in the way that money is commonly understood today and has been commonly understood through the ages. When people willingly perform logical contortions in an effort to show that something is money even though it doesn’t fulfill the primary role of money, all they are actually showing is the lengths to which they are prepared to go to ignore a reality that is not to their liking. Would gold perform the monetary role far better than the US$ and any of the other monies in common use in the developed world today? Yes. Would I rather that gold was money today? Yes. Is gold money today? Unfortunately, no. However, the main purpose of this post isn’t to rehash the reasons that gold can no longer be correctly viewed as money in any developed economy. It’s to consider the claim, which was made by more than a few of the respondents to my “Gold Is Not Money” posts, that gold is an economic constant.

Such a claim ignores good economic theory. Gold, like all of the elements, is a physical constant, but there is no such thing as an economic constant or yardstick. The reason is that value is always subjective. Every individual will have his/her own opinion on what gold is worth and these opinions will change based on circumstances.

Currently, most people in the Western world own no gold and have no intention of buying gold. This will change, but the reality is that gold is presently very low on the ‘utility scale’ of the average person. At the same time, there are plenty of people who place a high value on gold, which is why gold’s price is what it is.

The market price at any time reflects the collection of all the differing opinions about value, but the market price is constantly changing. The market price, therefore, does not measure value in the way that the mass of a physical quantity can be measured.

The claim that gold is an economic constant also ignores the historical record. For example, there has been a large decline in gold’s purchasing-power (PP) over the past 4 years. Prior to that, there was a huge gain in gold’s PP during 2001-2011, a huge decline in gold’s PP from January-1980 through to early-2001, and a spectacular rise in gold’s PP during 1971-1980. Over the same period the dollar’s PP has been vastly more stable, although certainly far from constant.

It could be argued that the large swings in gold’s PP over the past 45 years are due to changes in the perception of the official monetary system. This is true — the perceived value of gold as an investment or a speculation or a vehicle for saving has undergone large oscillations over the past 45 years due to changing perceptions of the US$ (money in the US). These oscillations are secondary evidence that gold is no longer money in the world’s largest economy, the primary evidence being that it isn’t generally used as a medium of exchange.

It should also be understood that gold was not an economic constant even when it was money. In general terms, even the best money imaginable would not be an economic constant, because even if its supply were kept constant its demand would be continually changing. Again, we stress that there is no such thing as an economic constant (an UNCHANGING quantity against which everything else can be measured).

When gold was money neither its supply nor its demand were ever constant over what most people would consider to be a normal investment timeframe or holding period, although it still performed admirably in the monetary role. It would have performed even better — and its reputation would not have been unfairly tarnished — if fractional-reserve banking had not been permitted. Fractional-reserve banking was to blame for the financial crises that occasionally erupted during the Gold Standard era.

Over extremely long periods the swings in gold’s PP have evened-out in the past, but something that starts at a certain level and can be relied on to return to that level at some unknown point in the distant future cannot be legitimately called a “constant”. Moreover, to be useful as money it isn’t necessary that something maintain relatively stable purchasing power over centuries; it is necessary that it maintain relatively stable purchasing-power from one year to the next.

Something won’t survive as money if it tends to experience wild swings in its purchasing-power over periods of a few years or less, but it can survive as money if its PP can be relied on to change by no more than a few percent in either direction from one year to the next. There is no need for money to have constant PP to remain useful as money, which is just as well because economic constancy is an impossible dream.

*Here’s what I mean by “indirect exchange”. In an economy without money a tomato farmer who wanted bread would have to find a baker who wanted tomatoes. A direct exchange of ‘wants’ could then take place. However, in an economy with money a tomato farmer who wanted bread could sell his tomatoes to anyone in exchange for money and then use the money to buy bread. This is an indirect exchange of ‘wants’, with money providing the link.

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Another look at Goldman’s bearish gold view

October 20, 2015

Early last year I gave banking behemoth Goldman Sachs (GS) credit for looking in the right direction for clues regarding gold’s likely performance, which is something that most gold bulls were not doing. In November I again gave them credit, because, even though I doubted that the US$ gold price would get close to GS’s $1050/oz price target for 2014, their overall analysis had been more right than wrong. It was clear that up to that point the US economy had performed better than I had expected and roughly in line with the GS forecast, which was the main reason that gold had remained under pressure; albeit, not as much pressure as GS had anticipated.

But this year it was a different story. Here’s what I wrote in a TSI commentary in January-2015:

This year, GS’s gold market analysis begins on the right track by stating that stronger US growth should support higher real US interest rates, which would be bearish for gold. Although we expect that the US economy will ‘tread water’ at best and that real US interest rates will be flat-to-lower over the course of this year, GS’s logic is correct. What we mean is that IF the US economy strengthens and IF real US interest rates trend upward in response, there will be irresistible downward pressure on the US$ gold price.

However, the analysis then goes off the rails. After mentioning something that matters (the real interest rate), the authors of the GS gold-market analysis then try to support their bearish case by listing factors that are either irrelevant or wrong. It actually seems as if they’ve taken the worst arguments routinely put forward by gold bulls and tried to use the same hopelessly flawed logic to support a bearish forecast.

For example, they argue that the demand for gold will fall because “inflation” levels are declining along with oil prices. They are therefore unaware, it seems, that “price inflation” has never been an important driver of the gold market and that the latest two multi-year gold rallies began with both “inflation” and inflation expectations low and in declining trends. They also appear to be unaware that the large decline in the oil price is very bullish for the gold-mining industry.

Their analysis then gets even worse, as they imply that the price weakness of the preceding three years is a reason to expect future weakness, whereas the opposite is closer to the truth. They go on to cite outflows from exchange-traded funds (ETFs) and reduced investment in gold coins as bearish influences, apparently unaware that the volume of gold coins traded in a year is always too small to have a noticeable effect on the price and that the change in ETF inventory is a follower, not a driver, of the gold price.

Finally, just when it seems as if their analysis can’t possibly go further off track, it does by asserting that lower jewellery demand and a greater amount of producer hedging will add to the downward pressure on the gold price. The facts are that jewellery demand has always been irrelevant to gold’s price trend and that gold producers are part of the ‘dumb money’ (meaning: they tend to add hedges at low prices and remove hedges at high prices, that is, they tend to do the opposite of what they should be doing based on gold’s intermediate-term risk/reward).

I concluded by stating that in 2014 the GS analysts were close to being right for roughly the right reasons, but that in 2015 they could not possibly be right for the right reasons. They would either be right for the wrong reasons, or they would be wrong.

At this stage it looks like they are going to be wrong about 2015, but not dramatically so. My guess is that gold will end this year in the $1100-$1200 range, thus not meeting the expectations of GS and other high-profile bears and at the same time not meeting the expectations of the bulls. However, GS is on record as predicting a US$1000/oz or lower gold price for the end of next year. I think that this forecast will miss by a wide margin, but I’m not going to make a specific price forecast for end-2016. Anyone who thinks they can come up with a high-probability forecast of where gold will be trading 15 months from now is kidding themselves.

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The Zero-Reserve Banking System

October 19, 2015

Officially, the US has a fractional-reserve banking system (as does almost every other country), meaning that a fraction of deposits are backed by cash reserves held in bank vaults or at the Fed. In reality, the US has a zero-reserve banking system.

I don’t mean that there are no reserves in the banking system, as currently there are huge reserves courtesy of the Fed’s QE programs. What I mean is that there is no relationship between bank reserves and bank lending and that bank reserves do not impose any limit on bank deposits. It has been this way for about 25 years.

To further explain, the most important aspect of a fractional reserve banking system is that a bank can create new deposits by lending out existing deposits up to the point where its total deposits are a predetermined multiple of its reserves. The aforementioned multiple is called the “money multiplier” and the maximum “money multiplier” is the reciprocal of the minimum reserve requirement. For example, in a system where a bank’s reserves are required to be at least 10% of its total deposits, the potential “money multiplier” is 10. In the current US system, however, there is effectively no lower limit on reserves, which means that the so-called “money multiplier” can correctly be thought of as either non-existent or infinite.

Regardless of their deposit levels, US banks are able to reduce their required reserve levels to zero. This is possible for two reasons. First, only demand deposits are subject to reserve requirements. Second, banks employ software that shuffles money between accounts to ensure that they fulfill the regulatory reserve requirement regardless of their actual deposit and reserve levels. For example, you might think you have a demand deposit, but for regulatory purposes what you might actually have is a zero-interest CD.

The absence of any relationship between US bank reserve levels and US bank credit is illustrated by the following chart. The chart compares total US bank credit and total bank reserves (vault cash plus reserves held at the Fed) from the beginning of 1989 through to mid-2008 (just prior to the start of the QE programs that swamped the normal relationships). During this period, bank credit shot up from $2,400B to $9,000B while total bank reserves oscillated between $50B and 65B. Notice that the volume of bank reserves was actually a little lower in 2008 with bank credit at $9.0T than in 1989 with bank credit at $2.4T.


An implication, even prior to the QE programs that inundated the banks with reserves, is that the US fractional-reserve banking system will never go into reverse due to a shortage of reserves. In other words, US banks will never contract their balance sheets due to a lack of reserves. Another implication is that having a huge pile of “excess” reserves will never cause banks to expand credit. Instead, regardless of their reserve levels banks will expand or contract credit to the extent that their overall balance sheets can support additional leverage and they can find willing/qualified borrowers.

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Gold Is Not Money, Part 2

October 13, 2015

I opened a blog post on 7th October with the statement that gold was money in the distant past and might again be money in the future, but isn’t money in any developed economy today. I then explained this statement. The post stirred up a veritable hornet’s nest, in that over the ensuing 24 hours my inbox was inundated with dozens of messages arguing that I was wrong and a couple of messages thanking me for pointing out the obvious (that gold is not money today). The negative responses were mostly polite*, but in many cases went off on a tangent. Rather than trying to respond individually, this post is my attempt to rebut or otherwise address some of the comments provoked by the earlier post on the same topic.

In general, the responders to my earlier “Gold Is Not Money” post made the same old mistakes of arguing that gold is an excellent long-term store of value, which is true but has nothing to do with whether gold is money today, or confusing what should be with what is. Some responders simply asserted that gold is money because…it is. Not a single responder provided a practical definition of money and explained how gold fit this definition. That’s despite my emphasis in the earlier post that before you can logically argue whether something is or isn’t money, you must first have a definition of money.

Due to the fact that many different things (salt, tally sticks, beads, shells, stones, gold, silver, whiskey, pieces of paper, etc.) have been money in the past, a reasonable definition of money MUST be based on money’s function. Also, the definition must be unique to money. In other words, when defining money you must start with the question: What function does money perform that nothing other than money performs?

“General medium of exchange”, meaning the general enabler of indirect exchange, is the function performed by money and only by money within a particular economy. Now, there are certainly pockets of the world in which gold and other items that we don’t normally use as money in our daily lives do, indeed, perform the monetary function. For example, there are prisons in which cigarettes are the most commonly-used medium of exchange. It is certainly fair to say that cigarettes are money within the confines of such a prison, but I want a definition that applies throughout the economy of a developed country. Gold is not money in the economy of any developed country today, although there could well be small communities in which gold is money.

I’ll now address some of the specific comments received in response to my earlier post, starting with the popular claim that there’s a difference between currency and money, and that although gold is no longer a currency it is still money. The line of thinking here appears to be that currency is the medium that changes hands to complete a transaction whereas money is some sort of esoteric concept. This is hardly a practical way of thinking about currency and money. Instead, it appears to be an attempt to avoid reality.

A more practical way of thinking about the difference between currency and money is that almost anything can be a currency whereas money is a very commonly-used currency. In other words, “currency” is a medium of exchange whereas “money” in the general medium of exchange. The fact is that gold is sometimes used as a currency, but it is currently not money.

Moving on, some people clearly believe that gold is money because the US Constitution says so. Actually, the US Constitution doesn’t say so, as the only mention of gold is in the section that limits the powers of states and is specifically about the payment of debts, but in any case this line of argument is just another example of confusing what should be with what is. The bulk of what the US Federal Government does these days is contrary to the intent of the Constitution.

Some people apparently believe that gold is money (or money is gold) because JP Morgan said so way back in 1912. My response is that JP Morgan was absolutely correct. When he made that statement gold was definitely money because at that time it was the general medium of exchange in the US. However, today’s monetary system bears almost no resemblance to the monetary system of 1912. For example, when JP Morgan said “Money is gold” the US was on a Gold Standard and the Federal Reserve didn’t exist.

Several people informed me that gold must be money because some central banks are buying it or holding it in large quantities. OK, does this mean that something is money if central banks are buying/holding it regardless of whether or not it is being used as money throughout the economy? If so, then Mortgage-Backed Securities (MBSs) must now be money in the US because the Fed has bought a huge pile of MBSs over the past few years, and T-Bonds must now be money throughout the world because most CBs hold a lot of T-Bonds. Obviously, something does not become money simply because CBs hold/buy it.

A similar mistake is to claim that gold must be money because major clearing houses accept gold as collateral. The fact is that the same clearing houses also accept the government bonds of most developed countries as collateral. General acceptance as collateral clearly does not make something money.

Lastly, some readers came back at us with the tired old claim that gold has intrinsic value whereas the US$ and the rest of today’s fiat currencies don’t. At the risk of seeming arrogant, you can only make such a claim if you are not well-versed in good economic theory. All value is subjective, which means that no value is “intrinsic”. Most people subjectively assign a high value to gold today, but they also subjectively assign a high value to the US$. In any case, even if the “intrinsic value” statement had merit it wouldn’t be a valid argument that gold is money.

In conclusion, gold is something that is widely perceived to have substantial value. Furthermore, good arguments can be made that its perceived value will be a lot higher in a few years’ time. However, it is currently not money.

*Those that weren’t polite have had the honour of being added to my “blocked senders” list.

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Reverse Repo Follow-Up

October 12, 2015

Last week I wrote about the incorrect portrayal of the late-September spike in the Fed’s “Reverse Repo” (RRP) operations. Breathless commentary in some quarters had portrayed the RRP spike as an attempt by the Fed to ward-off a crisis, which didn’t make sense. One of the main reasons it didn’t make sense is that a reverse repo takes money OUT of the banking system and is therefore the opposite of what the Fed would be expected to do if it were trying to paper-over a financial problem.

I subsequently saw an article by Lee Adler that provides some more information about the RRP spike. If you are interested in the real reasons behind it then you should read the afore-linked article, but in summary it has to do with a “Fed stupid parlor trick and the temporary shortage of short term T-bills along with the resulting excess of cash.

According to Mr. Adler: “The two salient facts are that the Fed regularly does two quarter end term repo operations that add to the end of quarter amounts outstanding. They are not a response to any market conditions. The Fed reveals in its FOMC meeting minutes and elsewhere that it instructs the NY Fed to conduct these quarter end operations. It has done so every quarter this year. The NY Fed posts a statement laying out the operations a few days in advance of the end of the quarter.

I’ve indicated the quarter-end RRP spikes on the following chart. The latest quarterly spike was larger than the preceding three due to the fact that the weekly update of the Fed’s balance sheet happened to be published on the day after the end of the September quarter. Notice that the volume of outstanding RRPs plunged during the first week of the new quarter.


If the pattern continues then there will be another RRP spike during the final week of December, regardless of what’s happening in the financial world at the time.

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Reverse Repo Scare Mongering

October 10, 2015

Here’s an unmodified excerpt from a TSI commentary that was published a few days ago. It deals with something that has garnered more attention than it deserves and been wrongly interpreted in some quarters.

We’ve seen some excited commentary about the recent rise in the dollar volume of Reverse Repurchase (RRP) operations conducted by the Fed. Here’s a chart showing the increase in RRPs over the past few years and the dramatic spike that occurred during the final week of September (the latest week covered by the chart).

For the uninitiated, a reverse repurchase agreement is an open market operation in which the Fed sells a Treasury security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. The difference between the sale price and the repurchase price, together with the length of time between the sale and purchase, implies a rate of interest paid by the Fed on the cash invested by the RRP counterparty. In short, it is a cash loan to the Fed that is collateralised by some of the Fed’s Treasury securities. The Fed receives some cash, the RRP counterparty receives some securities. Note that the Fed never actually needs to borrow money, but it sometimes does so as part of its efforts to control interest rates and money supply.

As mentioned above, the recent large spike in RRPs has caused some excitement. For example, some commentators have speculated that it signals an effort by the Fed to paper-over a major derivative blow-up. As is often the case in such matters, there are less entertaining but more plausible explanations.

We don’t pretend to know the exact reason(s) for the RRP spike, but here are some points that, taken together, go a long way towards explaining it:

1) The Fed recently enabled a much larger range of counterparties to participate in RRPs. Previously it was just primary dealers, but eligible participants now include GSEs, banks and money-market funds.

2) Reverse Repos involve a reduction in bank reserves, which means that the volume of RRPs is limited to some extent by the volume of reserves held at the Fed. Eight years ago the total volume of reserves at the Fed was almost zero, whereas today it is well over $2T. It could therefore make sense to consider the volume of RRPs relative to the volume of bank reserves.

The following chart does exactly that (it shows RRPs relative to total bank reserves at the Fed). Viewed in this way, the recent spike is a lot less dramatic.

3) Prior to this year RRPs were overnight transactions, but in March of 2015 the FOMC approved a resolution authorizing “Term RRP Operations” that span each quarter-end through January 29, 2016. The Fed has recently been ramping up its Term RRP Operations as part of an experiment related to ‘normalising’ monetary policy.

4) A reverse repo involves the participants parting with the most liquid of assets (cash) for a slightly less liquid asset (Treasury securities), so RRPs are NOT conducted with the aim of boosting financial-system ‘liquidity’. They actually remove liquidity from the financial system.

5) A corollary to point 4) is that because RRPs involve the temporary REMOVAL of money from the financial system, the Fed cannot possibly bail-out or support a bank (or the banking industry as a whole) via RRPs. In effect, a reverse repo is a form of monetary tightening. It is the opposite of “QE”.

6) The recent large increase in the volume of RRPs could be partly due to a temporary shortage of Treasury securities — a shortage that the Fed helped create via its QE and that the US Federal Government has exacerbated by reducing the supply of new securities in response to the closeness of its official “debt ceiling”. That is, the Fed could be using RRPs to alleviate a temporary shortage of government debt securities. However, we suspect that interest-rate arbitrage is playing a larger role, because the RRP participants are getting paid an interest rate that in today’s zero-interest world could look attractive.

7) Lending money to the Fed is the safest way to temporarily park large amounts of cash.

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Gold Is Not Money

October 7, 2015

Gold was money in the distant past and it will probably be money in the distant future, but there is no developed economy in which gold is money today. In this post I’ll explain why.

People who argue that gold is money often confuse what should be with what is. They explain why gold-money would be vastly superior to any of today’s fiat currencies and their explanations are probably 100% correct, but they are sidestepping the issue. There is no doubt in my mind that gold is far better suited to being money than something that can be created at whim by commercial banks and central banks, but the fact is that gold is presently not money.

Part of confusing what should be with what is sometimes involves the claim that governments can’t determine what is and isn’t money. This is akin to someone claiming it can’t rain while standing in the middle of a rainstorm.

The hard reality is that governments routinely do many things that they shouldn’t be able to do. Governments shouldn’t be able to force people into slavery, but they sometimes do it. They call it conscription or the draft. Governments shouldn’t be able to steal, but they do it on a grand scale every day and call it taxation. Governments shouldn’t be able to monitor almost all financial transactions and most internet communications, but they do. They call it national security or keeping us safe from terrorists and drug traffickers. Governments, either directly or via their agents, shouldn’t be able to siphon away the purchasing-power of savings and wages, but they do it under the guise of economic stimulus. Governments shouldn’t be able to put obstacles in the way of peaceful, voluntary transactions, in the process greatly increasing the cost of doing business and thus reducing living standards, by they do it every day and call it regulation. One particular government (that of the US) shouldn’t be almost continuously intervening militarily in multiple countries around the world, but it is. They call it peace through strength or keeping the world safe for democracy.

So, please don’t insult my intelligence by asserting that governments don’t have the power to determine what is money!

Another common mistake made by people who argue that gold is money is to emphasise gold’s store-of-value (meaning: store of purchasing-power since value is subjective and therefore can’t be stored) quality. However, there are many things that have been good stores of value that obviously aren’t money, so acting as a store of value clearly isn’t the defining characteristic of money.

Which brings me to a critical point: Before you can logically argue whether something is or isn’t money, you must first have a definition of money. And since we are dealing with something that affects everyone, the definition must be practical and easily understood.

The only practical definition of money is: the general medium of exchange or a very commonly used means of payment within an economy. By this definition, gold is not money in any developed economy today. By this definition, the US$ is money in the US, the euro is money in the euro-zone, the Yen is money in Japan, the Australian dollar is money in Australia, etc.

Once something is the general medium of exchange it will generally be used as a unit of account. The unit-of-account function stems naturally from the medium-of-exchange function. Also, for something to be good money it should be a good long-term store of purchasing power, but, as noted above, being a good long-term store of purchasing power is clearly not the defining characteristic of money. Being a poor long-term store of purchasing power would almost certainly preclude something from being money in a free market, but we do not currently have a free market. Do not confuse what is with what should be!

Now, I acknowledge that it is possible to concoct definitions of money that lead to the conclusion that gold is money, but such definitions either aren’t practical, or are focused on a characteristic of gold that is shared by some obviously non-monetary assets, or are simply wrong.

In conclusion, if something is money then the average person will know it is money because he will be regularly using it as a medium of exchange in his daily life. In other words, money cannot be a secret to which only an elite group is privy. Gold is therefore not money at this time. If it were, we wouldn’t be in such a precarious economic situation.

So if gold isn’t money, then what is it? That’s an interesting question that warrants a separate post.

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Market Stuff

October 6, 2015

The US stock market successfully tests its low

I wrote in a TSI commentary published on Sunday that the S&P500 Index (SPX) appeared to have completed a successful test of its 24th August low early last week. This view meshed with the price action and the fact that by some measures, most notably the Investors Intelligence Bull/Bear Ratio, last week’s test occurred in parallel with extreme negativity.

More evidence of a successful test of the low emerged on Monday 5th October when the number of individual stocks making new 52-week lows collapsed while the number of individual stocks making new 52-week highs rose significantly on both the NYSE and the NASDAQ.

The SPX is now less than 1% from substantial resistance at 2000. I suspect that this resistance will cap the SPX’s rebound for now, but that it will be breached before year-end. Based on a number of long-term indicators, I also suspect that the July-September downturn was the first leg of a cyclical bear market and that several months of range-trading will be followed by a decline to well below the 24th August low.


The gold-mining indices are finally showing signs of strength

The gold-mining indices broke out to the upside last Friday. Furthermore, the breakout was solidified on Monday when the HUI/gold ratio closed decisively above its 40-day MA for the first time since April.

The breakout could still be a ‘head fake’, but it should be given the benefit of the doubt until proven otherwise.


Kinross Gold (KGC), the most under-valued of the major gold producers, broke above the top of a well-defined intermediate-term price channel on Monday. Based on this price action my guess is that it will rise to around US$2.40 within the next three weeks.


Ben Bernanke, Master of Tautology

Former Fed chief Ben Bernanke has apparently argued that poor productivity has held back growth in the US. This is like arguing that growth has been held back by a lack of growth, since the ONLY way that per-capita economic growth can happen is via an increase in productivity.

As a run-of-the-mill Keynesian, Bernanke is clueless about how fudging interest-rate signals and creating money out of nothing make an economy less efficient. If he had a clue he’d be arguing that the Fed has held back growth in the US.

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