Suggestion on how to calculate the "true" price of gold in U.S. dollarsgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
When I used to subscribe to the Wall Street Journal I attempted to calculate the ratio of the U.S. National Debt to U.S. gold reserves to find out how high the price of gold would have to be pegged in order to liquidate the debt. The answer came out to something like $12,000 per ounce as I recall.
I would appreciate it if someone with access to current information would do a similar analysis, using a ratio of U.S. currency in circulation plus government debt in relation to gold reserves.
-- Y2K Pioneer (Pioneer@aol.org), October 16, 1999
i've heard $30,000, based on a hyper-inlated dollar in the forseeable near term...
in today's value... i have no idea but it will be "enough"... :)
-- Andy (No6InTheVillage@webtv.com), October 16, 1999.
The problem with that asset liquidation ratio is you are not taking into account the value of government owned land. I have always felt, we could sell off vast tracts of government owned land to pay down the national debt. There is no more concern about paying it off though, so why anger yourself trying to caculate ways to do it.
-- Bill (firstname.lastname@example.org), October 16, 1999.
In my earlier Libertarian days we talked a lot about how the government could liquidate the debt by selling off assets like land & buildings. I don't see that as a practical option at this point because these assets are not all that liquid and TPTB aren't about to give up any of their kingdoms. Gold, on the other hand, is highly liquid and it does not have a bureaucratic constituency supporting it.
I don't see this as an exercise in futility and frustration. If there's only so much gold in relation to all that paper & debt then, given the recent re-coronation of gold by European central banks, any unwinding of dollar-denominated inflation would almost certainly have to be settled in terms of gold.
I ignored the impact of money substitutes like private savings & checking, money markets, stock & bond portfolios, etc. These assets can be converted into electronic cash in a heartbeat, then used to buy gold. If all that hit the fan within a short time, the market would just break down---along with much of our culture.
-- Y2K Pioneer (Pioneer@aol.org), October 16, 1999.
Such calculations may be interesting, but whatever name you might wish to asssign to the result of such calculations, calling it the "true" price of gold would be very misleading.
True prices are actual exchange ratios that occur in actual transactions. Anything else is not a true price.
-- Jerry B (email@example.com), October 16, 1999.
About paper money
"It [the French ruling body, the National Convention] decreed that any person selling gold or silver coin, or making any difference in any transaction between paper and specie [gold and silver coin], should be imprisoned in irons for six years; that anyone who refused to accept a payment in assignats, [paper money not convertable to gold or silver] or accepted assignats at a discount, should pay a fine of three thousand francs; and that anyone committing this crime a second time should pay a fine of six thousand francs and suffer imprisonment twenty years in irons. Later, on September 8, 1793, the penalty for such offenses was made death, with confiscation of the criminal's property, and a reward was offered to any person informing the authorities regarding any such criminal transaction. To reach the climax of ferocity, the Convention decreed, in May 1794, that the death penalty should be inflicted on any person convicted of "having asked, before a bargain was concluded, in what money payment was to be made." -Fiat Money Inflation in France by Andrew Dickson White, p. 78 & 79
-- dave (firstname.lastname@example.org), October 16, 1999.
The "true price" is what it will fetch on the open market. Period.
-- Ken Decker (email@example.com), October 16, 1999.
we DON'T have an "open" market for gold or silver - they are both held down for a reason -
so the true price isfar far higher than what we have now - ut was $850 20 years ago - compare it to the dow back then and extrapolate...
factor in world forces that have now "had enough" of the us foisting it's dollar-debt burden on them...
$10k would not be outrageous at all...
-- Andy (No6InTheVillage@webtv.com), October 16, 1999.
Can anyone tell me why American Eagles have "50 dollars" written on them? They sure cost more than $50!!! Thanks!
-- Diane (DiR9290343@aol.com), October 16, 1999.
This may be hard to accept, but just because Decker writes something, doesn't mean it isn't so. :-)
A market is open when participants, buyers and sellers, have the option to trade or not to trade at prices they consider acceptable or unacceptable respectively; i.e. when they are not compelled e.g. to sell at a low price, or to buy at a high price, by e.g. threat of injury, incarceration, etc. Even if some participants in that market are "manipulating" that market, that market is still open if it meets the above criteria.
One can make any kind of guesses that one wishes about what prices would be if some major change occurred to supply or demand in that market, but those guesses are guesses, not "true prices". Sorry, but that is how it is.
When you bought gold recently, the price you paid was the true, real, actual, etc etc price. If you bought at two different times, you may have paid two different prices, and both of them were true etc prices.
If each participant to a conversation were to come up with their own definition of the word price (or of any other well definded word), that word would become rather useless.
I realize that you have great expectations for the price of gold. I worry that those expectations may be very unrealistic, and, of course, I may well be mistaken. But I do know that redefinition will not bring about those expectations.
-- Jerry B (firstname.lastname@example.org), October 16, 1999.
In a nutshell, I think that if gold did skyrocket in value now, it would become an irresistable target for government confiscation. Expect draconian edicts along the lines of the "assignat" laws to make it easier for our masters to steal our gold. Remember that Clinton is a master of setting one group against another to get what he wants. How long do you think your friendly neighborhood coin dealer or mail-order house could stand up to, ah, some "persuasion" to name names? Could certain neighbors, friends, or even family members turn down a nice cut of the 'take' (in fiat money of course) for informing on you (for the children)? "Store not up for yourselves earthly treasures, where moth and rust destroy and [perhaps government] thieves break in and steal..."
-- Jeremiah Jetson (email@example.com), October 16, 1999.
DAVE: There is a subtlety in your post about about what happened in France that is very interesting. You mention the draconian law passed in 1794. Well, France became a republic 15 years AFTER the USA, in 1791. I'm not sure when the French Constitution was drafted, but if it was BEFORE 1794, then you can see that in times of extreme stress/unrest, it doesn't mean squat.
So now does that tell you anything about what may unfold in the USA, REGARDLESS of the Constitution?
All it takes is one Caligula to ruin the show.
After all, Russia had a Constitution early in the 20th century, but what good has it done them?
-- profit_of_doom (firstname.lastname@example.org), October 16, 1999.
Why worry about the price of gold? The government can just confiscate it from you, give you fiat money and sell the gold to pay off the debt. Everybody wins right?
-- haha (email@example.com), October 16, 1999.
Jerry - you are wrong.
There are 3 values of gold now, the street price, the spot price, and the 'oil delivery" price.
For example... silver is now $5.39...
Try buying over the counter OTC at that price! Yiu will pay minimum $5.75 and much more in any quantity.
Same for gold - just try getting any quantity at $314!!!
You are in cloud cuckoo land.
Wait and watch what unfolds.
I highly recommend you read the hall of fame posts at www.usagold.com for a 101 on all of this.
-- Andy (2000EOD@prodigy.net), October 16, 1999.
That response does not address the issue.
Three prices? (BTW, don't confuse value and price; they are different.) There are many more than three prices of gold if you want break it out into different forms and units and quantities and locations and purities and payment terms etc etc. None of that has anything to do with the issue of whether a price is, or is not, an exchange ratio of an actual trade.
Yes, we could cloud the issue by listing many prices of gold e.g. in 1/10 oz coins in such and such city in such and such currency, and then in 1 oz coins in some other city in some other currency, and then in 100 oz bars and so on, and then list another set of prices for all of the variations merely hinted at by the above when traded in various quantities, and fill up reams of bandwidth. Or we can simplify the discussion by referring the price of gold in the common form and unit used by some entity such as COMEX.
Either way, prices are real exchange ratios that have occurred in real transactions, not guesses about what they would be in some set of circumstances other than the actual circumstances.
Presumably you, and others, who may buy gold (in whatever form, quantity, etc), will eventually want to sell some or all of that gold. If anyone who has bought gold (or anything else) and decides that they want to sell (some of) it when the they find someone who will offer them what they regard as a "real price" which they concoct based on very optimistic asssumptions, they may very well miss opportunities for gain, and instead reap losses. The more optimistic the assumptions, the greater the likelihood of waiting too long for a price that may never occur in one's lifetime.
P.S. A personal note: while I do not follow current gold markets in any detail, and while I do not post much detail about my background, sending me to a goldlbug site for 101 (or for that matter 4xx) anything would be like sending yourself to tricycle school. :-)
-- Jerry B (firstname.lastname@example.org), October 17, 1999.
Jerry - believe me I know what I'm doing - I am a long time y2k researcher who concludes that we are in for a 6/7+ - with banking hosing, bank runs, depression, hyperinfaltion and war in the near term.
For that reason, after all preps are taken care of, Gold is the way I plan on protecting my savings and prospering in the next century when/if things settle down. I may well go back to england/europe so that is another reason for going for the portability of gold...
I know you're a clever guy, it's never too late to learn, knowledge is a beautiful thing so that 101 recommendation was meant as no insult...
Sometimes you need to revisit what you "thought" you knew inside out...
There are many different prices for gold. Or, more accurately, there are many different ways in which gold is formed and stored, and those differences cause prices to differ between the resulting products.
A one-ounce gold JM bar, a Krugerrand, a 1999 U.S. gold Eagle, a slabbed 1908 MS-65 St. Gaudens (ignoring for the moment that it's not precisely one ounce of fine gold), a one-ounce portion of a London Good Delivery bar, a one-ounce portion of a vault claim ticket for same, a one-ounce portion of a futures contract, a one-ounce portion of a derivative contract for same, and one ounce of fine gold formed into a piece of jewellery, all have prices which are somewhat independent of one another.
True, at their core, they all centre around what the market currently feels an ounce of gold is worth, but each has its own additional factors (premiums, risks and quantities) which cause its price to differ, often substantially, from the others.
The U.S. gold Eagle differs in price from both the JM bar and the Krugerrand because of a Patriotism premium. The St. Gaudens differs in price from similarly sized bullion coins because of a Numismatic Rarity premium.
The officially quoted Spot POG differs from the price of one JM bar bought at a coin shop because Spot POG is the price per-ounce at which very large quantities of physical gold trade. By large quantities I mean hundreds-to-thousands of ounces and upwards. Some of these sales are between mining companies and refiners or mints or jewellery manufacturers, where the buyer intends to reshape the metal into some new form, be it ingots, coins, or next month's necklace special at Marks & Spencer.
But in many cases, the purchaser has no plans to remanufacture the gold. Rather, he simply wants to own it. In such cases, the gold itself typically remains in a third-party repository in forms such as London Good Delivery bars (400 ounces), with only the Right to Claim those bars being transferred from buyer to seller.
Since these rights can be transferred electronically, this allows Spot market participants to make brief forays into the market, then retreat, with minimal overhead expense. Money centre banks are better known for their similar operations between paper currencies (buy Swiss Franc sell Yen this morning, then reverse that this afternoon, etc.), but no doubt a great deal of daily Spot POG setting is the result of trading rather than buying to own. Regrettably, I do not have detailed information on the various global Spot markets, so I have no way to discern the proportion of speculators to commercial traders.
In any event, this speculative access to Spot POG makes it susceptible to the same sorts of "professional" day trading which is usually associated with paper markets.
In addition, most of the gold sold at Spot POG has yet another factor influencing it, one which can easily place it more in alignment with the various paper forms of gold when market conditions become abnormal: the risk that the gold is not entirely under the supposed owner's control.
If you have a few gold coins buried in your back yard, and if you bought those coins anonymously with cash, you control that gold. If you have a claim ticket for a few hundred kilograms of gold held at the Federal Reserve Bank of New York, or a few hundred tonnes of proven reserves in a mine whose location is known to tax assessors, or even a few dozen U.S. gold Eagles in a unit trust, don't be so sure you're the one in control of that gold.
If or when a breakdown in the paper gold market occurs, it's quite possible we may see the officially quoted Spot POG remain in lockstep with paper prices, very possibly plummeting even in the face of blatant shortages of physical metal. But all this would mean is that a make-believe price is being impressed on market participants who are large enough to be easily identified and coerced.
If a private citizen holds the claim ticket to a London Good Delivery bar stored at the Fed, guess who has the power to insist on knowing details of any sale of said bar. Even if a private citizen takes possession of the bar and buries it in his back yard, Uncle Sam will be very keen to periodically bother him about its whereabouts. Although Spot POG is a measure of physical gold, it adheres to the paper world more so than to the physical world because of this one point: the risk of governmental intervention.
This ties in with points about gold mining shares made by Another and FOA: mining companies theoretically are at liberty to sell to the highest bidder, but governments have a way of convincing their subjects to accept less and be happy with it. If during an emergency the U.S. government were to declare Spot POG to be $50, and if Homestake Mining were to begin selling gold privately at a higher Street POG, the U.S. government could very easily make life unpleasant for Homestake.
By contrast, the government would have a much more difficult time coming after you and the handful of gold coins you've anonymously buried in your back yard. Most likely, they simply wouldn't attempt it. A wise politician never frightens his citizens too much, most particularly during emergencies. A government can achieve its goals by oppressing the majority owners (few in number) of a desired commodity while graciously allowing the minority owners (vast in number) to retain their property.
The confiscation in the U.S. in 1933 was along such lines: the government's intent was to take direct possession of the vast majority of gold within U.S. borders (common gold coins) by pulling them out of circulation, yet not overtly injure citizens who had sentimental or numismatic attachments to specific coins. There weren't any jack-booted thugs banging on Americans' doors after midnight in search of every last gold coin, and I can't imagine any present or future administration doing so either. It's far too expensive to be worthwhile... not to mention that it's far too likely to start a revolution (or in your case, re-start one :-).
And yet, despite the very convincing scenario of complete meltdown painted by FOA and Another, I still find myself clinging to the hope that the supply/demand cycle will re-assert itself as has happened in other industries (the recent history of the airline industry being my beacon in the darkness).
I would never touch futures or their derivatives even under normal market conditions, but a small stock investment in the most efficient, best established global mining companies seems to me still to be worth the risk (note again my use of the word "small"). Whether those shares are ultimately sold for Euros instead of dollars, I still am optimistic enough to wager that they will indeed trade on some market for some price in some currency. In any event, though, I plan to keep an eye on potential warning signs that such optimism may be about to be dashed.
So where will we find a "real" price of gold amidst the make-believe? Clearly neither Spot POG nor futures POG will be realistic during a full-blown emergency, nor will the share prices of gold mining stocks. Of course, if I find myself still in possession of such papers during an emergency, their official resale value will be all too real to me.
Even under normal market conditions, the paper price of gold is not the perfect guide because it is determined by constant repetitions of FOA's analogy of the two neighbours betting over the fence. Perhaps one in a thousand participants in the daily setting of the official prices of gold plans to acquire or deliver physical gold. The other 999 participants are merely there to bet on it and claim their winnings in some other currency.
Put another way, how many people at a racetrack are attempting to buy a horse? If you want to know the going price of a physical horse, don't look to a racetrack for answers. And don't assume that being a partial owner in a horse farm (thanks FOA) in any way assures you of being able to own a physical horse at some future date.
Likewise, if you want to know the going price of physical gold, don't look to the paper chase, most especially during any sort of financial emergency when paper-related numbers will become very distorted. Frankly, even though the emergency has yet to be publicly declared, things in that arena are already becoming increasingly distorted.
Most of us here at the USAGOLD Forum do not buy and sell thousands of ounces at once, and most of us take immediate possession of our purchases. From that, it's clear where we should look to find the price of physical gold which is most appropriate for our activities: in fact, our very conversations here are being hosted by someone who spends most of his waking hours discovering that price.
Street POG --------------
The Cash or Street price of gold is the number of dollars (or pounds, or euros) you take out of your wallet and hand to your friendly, neighbourhood coin dealer in return for a one-ounce Krugerrand.
Why a Krugerrand? Because it's the least numismatic, most commonly encountered, least lovely form of gold. It has no numismatic premium and no jewellery premium and no patriotic premium. It's even less attractive than a one-ounce JM bar.
That makes the Krugerrand the perfect unit of measure for Street POG. Its only special quality is that it contains exactly one ounce of gold (mixed with much too much copper).
The only circumstance which would disqualify the Krugerrand would be if suddenly coin dealers were willing to sell Maple Leaves or Eagles for less than Krugerrands. But to deal with that case, let us define Street POG as the price of the cheapest one-ounce coin or wafer available for sale at that moment.
You will know that the governmentally influenced markets are becoming highly distorted when you see a Krugerrand selling on the street for significantly more dollars than the Spot POG quoted by the paper markets that day.
A Krugerrand will always have a little premium built into its price (hi, I just bought these coins and I'd like to sell them to you without making any profit at all on the sale... my, that would be daft).
At some point in August 1999 when Spot POG was quoted at $260, I bought a single Krugerrand for $268. That's within the range of normality. We're not in uncharted waters yet.
But let's say that Spot POG drops to $200 (sadly still not out of the question even with the September 1999 rise in POG towards $270). What will a Krugerrand cost on the street then? If Spot POG drops no more abruptly than has been its wont in recent months, there's a decent chance Michael and his fellow coin dealers might then be able to profitably sell Krugerrands for $205 each. In that case, the shorts and the financial ministers are still in control.
But if you see Spot POG drop below $200 while a Krugerrand selling on the street never falls below $230-$240 ... or if you see Spot POG remain at $256 yet Krugerrands leap to $300 and Eagles to $310 ... hello new gold market. That would be a clarion call that things are starting to become seriously distorted.
The American Civil War ------------------------------
I think maybe the hardest mental hurdle for people to clear in understanding Another and FOA is this notion of two gold markets occurring simultaneously. There's an historical example (and it's Western :-) in which very much the same thing transpired...
In 1864, the USA and the CSA were reaching something of a stalemate in their war. Contrary to what most Americans learn today in (the winner's) school system, had but a very few decisions been made differently, the Confederacy would have won.
This, by the way, is why we see so many Americans (descended from both sides) re-enact Civil War battles over and over. How often (except on Monty Python) have you seen re-enactments of Pearl Harbour? The only battles worth replaying are the ones that could have gone either way.
In any event, to the average person living in Either the USA or CSA in 1864, the near term future was incredibly unclear and terrifying.
In the pre-war USA, national government funding was handled by the levying of import/export duties. The IRS was not yet a glimmer in politicians' eyes. For a nation at peace, duties provided sufficient income to run a minimalist national government.
In time of war, however, expenses magnify dramatically. Both the remnant USA and the new CSA needed to acquire vast funding very rapidly to raise an effective military. The both of them did so in the time honoured way: they borrowed the money. Have a peek at Lincoln greenbacks and Confederate paper money sometime. They are promises to pay the bearer with gold and/or silver at some significant time following the cessation of hostilities.
These documents were by no means the equivalent of today's Federal Reserve Notes (try redeeming a $20 FRN for a St. Gaudens sometime). No, Civil War paper banknotes were the equivalent of today's Gold Futures Contracts.
Oh, Lincoln greenbacks and Confederate dollars passed from wallet to wallet during the Civil War years as if they were currency, and in the first year or so they were regarded as 1-for-1 equivalents of coin. But as 1864 drew nearer, something odd began to happen.
"Howdy, I'd like to hand you this crisp $1 greenback in return for ten silver dimes change."
"I'll give you 8 silver dimes for a paper dollar, not a penny more."
Realise that this happened in the North, in the remnant USA. It happened too in the Confederacy, but modern people remember it there only in association with the final default on paper which happened when the CSA government was extinguished.
But the sole difference between a Confederate dollar and a Lincoln greenback was that one paper issuer was still in existence in 1866 and one was not. In 1864, no one could confidently say that either government would still be there a mere two years hence.
Notice that, in this regard, not much has changed since then. In 1933 for US citizens, then in 1971 for the rest of us, the USA government voided its obligation to pay gold for paper dollars.
If you hand me silver or gold, I won't care whether the symbols impressed on it are from a reliable government, an unreliable one, or a defunct one. But if you hand me paper, I'd better be firmly assured the issuer will live long enough (and be inclined) to pay off this debt to me. Even if you hand me a paper claim ticket to silver or gold stored in a vault somewhere, I'd better be firmly assured the vault keeper is of a mind to let me take possession of that metal without the slightest hesitation.
Another and FOA, by saying wise people should avoid paper and only hold physical, are indicating that they expect the LBMA and Comex Gold Contract documents will go the way of the Confederate Dollar (or maybe more appropriately, the way of the pre-1933 paper dollar: "Yes, a dollar is still a dollar, we just won't live up to it in quite the way we used.").
At the very least, they're saying the risk of such a systemic change is so substantial that one should not be standing too near the fault line should the quake come sooner than predicted.
What the both of them are describing is an official Spot POG (and its kindred future months' POGs) which may well plummet to $200 or even, as Another allowed some time ago, perhaps $10. Realise, though, that Another is by no means predicting that Michael will be able to profitably sell Krugerrands at $10 each. Far from it.
What Another and FOA are anticipating is a situation much like the paper money situation in both the USA and the CSA in 1864: how likely is it that the paper contract you're handing me today will be redeemable for any amount of gold by this time next year?
Tell you what, I've got a spare ten bob I feel no desperate attachment to. I'll buy your one-ounce IOU just for kicks. If LBMA completely expires, I'm out only a small amount. If LBMA unaccountably fails to expire, I've struck it rich. Of course, I may still not receive a physical ounce of gold on settlement day. I may find I've become the proud owner of a 1/400th part of a London Good Delivery bar, which I'm then told may not be removed from the vault. If I'm lucky, I might be able to sell my claim ticket for some amount of whatever paper currency is still worth accepting.
Meanwhile, those of us with less of a gambling inclination will sleep more soundly holding physical. After all, a silver or gold coin firmly in your possession remains silver or gold even after its issuer expires.
Does this give you a little more insight Jerry???
-- Andy (2000EOD@prodigy.net), October 17, 1999.
Andy, it's too much of a paradigm shift for these guys. You and the rest of us aren't going to be able to change their minds. They won't get it til it's affecting their wallets, and maybe, not even then...no one ever said the truth was easy to believe, ey?
-- OR (email@example.com), October 17, 1999.
I read the Holtzman article, as well as the rest of the "Hall of Fame" articles. It is not surprising that a web site of a PM dealer would call attention to articles which encourage readers to buy physical gold, just as it is not surprising that a web site of a stock broker would call attention to articles which encourage readers to trade stock market shares.
But, these goldbug articles make the hype of stock brokers look tame. At least stock brokers can be expected to publish "target" prices for the stocks that they hype. None of these goldbug articles even hint that that some expectations of future gold prices may just possibly be unrealisticly high. The moon? Hey, why not?
One set of articles seems to rewrite some history by attributing the drop of oil prices from their highs to various gold based banking arrangements. Did I miss any discussion about the higher oil prices leading to increased drilling, improved recovery methods, etc, or any number of demand reduction measures such as more fuel efficient cars, more insulation in buildings, etc? Or were such discussions not there to be found.
I did not notice any mention of the probability that higher and higher gold prices would lead to higher and higher gold production, as well as some reduction in gold consumption. Such factors would be likely to set some upper limits on gold prices, but if there were any such comments in any of those articles, I could not find them.
And throughout the articles runs the theme that only gold is really money, and all that other stuff that people use as money really isn't money. If these folks can't understand that money is whatever people actually use as money (i.e. a common medium of exchange), it would be prudent to have at least some doubts about their financial advice.
What do you do for reality checks on this stuff? Please, please, please, have some grains of salt handy when you read it. :-)
-- Jerry B (firstname.lastname@example.org), October 17, 1999.
Currently, I see the "True' POG is at such a bizzare level, that a One Ounce of 1.000% Pure gold Kruggerand is the "current POG" plus a Mere $8.00 U.S per One Ounce Coin! Whole at the Same time the 'American One Ounce liberty gold coin" at One Ounce of 1.000% pure Gold ( differing circumferances and diameters of course ) but at "supposed face/weight POG Value"- it costs the "current "POG" PLUS an additional $28.00 per ONE OUNCE COIN..!!?? I have read it correctly -why does an "american minted single ounce" cost $20.00 or more for the same "weight of 100% pure Gold"??? Something strange here-or the deal of the century?? Thanx, K.C. Moll CEO/Owner EarthSpell LLC
-- K.C. Moll (Kapcrazz@air-internet.com), December 27, 2004.