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What the story doesn't seem to say, however, is anything about the inherent superiority of gold to currency, which you seem to imply.  The only reason people switched to gold seems to be because the bank couldn't make any more dollars available due to the economic isolation of the sanctions. With more gold also unavailable, gold is also in the same problem as dollars and euros. This means people would still prefer dollars, a foreign enemy's currency but one that is viewed as truly sovereign, like coins with Caesar's head, if they were still able to access them.
by santiago on Fri Dec 30th, 2011 at 05:22:29 AM EST
[ Parent ]
FT.com: Soros sharpens gold bubble debate
Mr Soros is not alone in cutting his exposure to the yellow metal. Investors sold 2.5m ounces of gold through exchange traded funds in January and February as prices slid 8 per cent, and bankers say several hedge funds were also selling gold on the physical market.

...

The fact that the Fed is set to turn off the liquidity pumps is seen as a negative signal for gold. First, it suggests increased confidence in the economic outlook - typically a bearish indicator for the yellow metal.

...

Even the normally bullish World Gold Council, a mining industry-backed group, concedes that the end of QE2 poses a threat to gold. "If and when central banks stop QE and then start raising interest rates, that is obviously a challenging environment for all asset classes - including gold," says Marcus Grubb, managing director for investment.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Carrie (migeru at eurotrib dot com) on Fri Dec 30th, 2011 at 05:27:11 AM EST
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The important part to always keep in mind about gold is that the people who invest in it are as a group, always the most nervous investors. Which means that as an asset, when it drops, it very strongly tends to crash. Because if the people holding it were inclined to take a calm approach to fluctuating pricing in the assets they hold, they would not have entered gold in the first place. Gold investing is thus always a gamble that you can get out and stay out before the inevitable crash comes.
by Thomas on Fri Dec 30th, 2011 at 04:14:46 PM EST
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... if it tends to crash, then that implies that investing in gold is a gamble that you can not always get out of before the crash.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Dec 31st, 2011 at 02:49:07 PM EST
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Santiago and Migeru,

The events last week in Iran (or perhaps in Teheran) are the best example that during a liquidity run gold can easily emerge as the most liquid asset. It was like this during the great depression, in 1968, in 1971 and again in 1980. This is not a question of "superiority" but rather of liquidity, which is determined purely by emergent forces.

Keynes himself was very aware of this dynamic and dedicated the last years of his life finding mechanisms to counter the problem. The result was the Bancor (which also addressed other issues) that unfortunately never came to be.

Today many so called Keynesians choose to ignore this problem. But ignoring it won't send it away, ask your regular Iranian.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Dec 30th, 2011 at 07:53:54 AM EST
[ Parent ]
The Bancor is not going to "solve" the problem of liquidity runs or of cultural preference for The Shiny.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Carrie (migeru at eurotrib dot com) on Fri Dec 30th, 2011 at 08:26:23 AM EST
[ Parent ]
This particular liquidity run is about balance of trade, as is common in soft currency countries.

However, if bancor was operating under some international governance, it could well have been subject to the same international political pressures that led to the existing Iranian sanctions ... so it seems like it would be no guarantee against an international sanctions-driven liquidity run.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Dec 31st, 2011 at 02:52:03 PM EST
[ Parent ]
The Bancor is not about liquidity, it is about balance of trade.

As long as the Iranian foreign balance is sound, the government can watch people go "ooh, shiny" about gold with relative impunity. The Iranian state has no commitment tied to gold.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 30th, 2011 at 08:48:46 AM EST
[ Parent ]
Iran Current account balance in percent of GDP
The Current account balance in percent of GDP in Iran was reported at 2.40 percent of GDP in 2009, according to the International Monetary Fund (IMF).

Whats more, Iran has been running a CA surplus since early 90ies, so they should have reserves.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Dec 30th, 2011 at 10:19:54 AM EST
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Unless their reserves are in vault cash, it could be vulnerable to an assets freeze.

They are, of course, not likely to hold much reserve in accounts under US sovereignty, which would explain why a principle focus of their policy is to prevent other nations from succumbing to US pressure to freeze assets held in those countries.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Dec 31st, 2011 at 02:54:36 PM EST
[ Parent ]
You're right, liquidity is the right word to use, but I don't think your story makes that case because of the fact that foreign currency's supply is fixed, just like gold.  This means you can't separate the demand for gold or dollars as scarce commodities -- investments to hold, not currency to trade -- from the characteristics of demand for either as a form of money.  If there were no limit on the supply of dollars, and people still made runs on the bank for gold and not dollars, then your account of cause and effect would hold.  
by santiago on Fri Dec 30th, 2011 at 11:03:11 AM EST
[ Parent ]
Santiago,

I'm not in Teheran and I don't speak Farsi. But taking the words from Iman a rumor emerged that fake dollars where flowing to the black market. Even if not true, this rumor itself creates the expectation of expanding supply and has an impact on the velocity of this asset.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Dec 30th, 2011 at 03:50:30 PM EST
[ Parent ]
Wouldn't a rumor of counterfeit have the opposite effect -- of creating an expectation of contracting supply for real dollars and a desire to hold onto the real dollars instead of use them since if the rumor were true it would mean that every dollar held contained the change that it would be unusable in an actual transaction?  It's the threat of counterfeit that would drive people away from using dollars as money, not that gold in of itself would be more preferred than dollars. The same could be said of gold if an effort to counterfeit gold or, lower the weight of gold coins, were also to occur, something which is easier to do than counterfeiting dollars. The issue isn't that you're wrong but that the Iranian case doesn't seem to have the elements necessary to back up your point.
by santiago on Fri Dec 30th, 2011 at 04:45:53 PM EST
[ Parent ]
I wonder if there is an easy way to get an accurate measurement of the purity of your gold cache.

Obviously you can weigh it, find the volume, and calculate the density, but can you do it accurately enough to get a useful result? Worse, I can think of several ways to make a counterfeit gold coin without even working at it; how do gold enthusiasts claim to protect themselves from this problem?

by asdf on Fri Dec 30th, 2011 at 11:29:36 PM EST
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Interesting how this thread became so gold focused. I find here the same religious attitude towards gold that I find at Kitco, all that differs is the stance.

If you're so interested in assaying gold coins at home you can do it by yourself using a bit of high-school chemistry, the periodic table and some instruments to measure volume and electrical conductivity.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Sat Dec 31st, 2011 at 05:38:08 AM EST
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Looks to me like the answer is that you can't actually do a good test at home.

http://commoditybullmarket.blogspot.com/2009/04/how-to-detect-counterfeit-gold-coins.html

If you have the facilities to melt a bar, you can adulterate the alloy to reduce the gold content. For example, if you start with a tungsten slug and wrap it in aluminum you can get the density of a core correct, and then surround it with gold you can get a bar that will pass everything except a melt-down or an x-ray. Whether that will be cheaper then the underlying gold is an interesting question.

Apparently it all boils down to trust, where you buy from somebody you trust and then trust that somebody else will buy it from you when the apocalypse arrives.

Also it seems, based on cursory investigation, that it's not illegal to sell "counterfeit" gold. It's a commodity, not government-issued currency.

by asdf on Sat Dec 31st, 2011 at 03:23:05 PM EST
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asdf:
Also it seems, based on cursory investigation, that it's not illegal to sell "counterfeit" gold. It's a commodity, not government-issued currency.

I would not be counterfeinting, but surely there are laws in most countries against selling a commodity while claiming it is another?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Jan 1st, 2012 at 06:08:35 AM EST
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Sure, but you can buy "copper" at the hardware store. What is the purity, the alloy details, etc?

The gold bug thing has fraud written all over it...

by asdf on Sun Jan 1st, 2012 at 07:32:27 PM EST
[ Parent ]
The only way I can think of it wouldn't be illegal would be by selling bars or coins without any information (fineness, metal, value) stamped/coined. Would you buy such a thing?  

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Jan 2nd, 2012 at 03:43:47 AM EST
[ Parent ]
well maybe not illegal to sell counterfeit gold, Apart from the fact that it would be fraud to sell gold, and it turns out to be gold wrapped round whacky metal composite. But most gold buyers buy in the form of coinage, and those it would be illegal to counterfeit. You do get jewelers buying in bar form and those odd gold bar vending machines, but I've always seen them more as a PR stunt than anything like a proper business venture.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Jan 1st, 2012 at 09:13:34 PM EST
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It's the threat of counterfeit that would drive people away from using dollars as money, not that gold in of itself would be more preferred than dollars.

Precisely. Under this scenario the velocity of greenbacks goes up while for gold it remains stable.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Sat Dec 31st, 2011 at 05:40:01 AM EST
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Except for the fact that it is a lot easier to rip people off with fake or reduced weight gold when used for currency than it is to print counterfeit dollars or euros, so the counterfeit threat doesn't add anything to the story here.
by santiago on Sat Dec 31st, 2011 at 03:05:20 PM EST
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It does not have to be more difficult to counterfeit gold for people to prefer gold to dollars. It only has to be believed that it is more difficult to counterfeit gold...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 31st, 2011 at 04:31:56 PM EST
[ Parent ]
True, but such a condition can only last for a short time before actual gold counterfeiters begin to compete with each other, and with currency counterfeiters, for business.  Once people stop trusting the weight of gold involved in everyday, local transactions, any advantage of gold over currency disappears and "bad money" starts again "drive out the good" as people hoard the gold instead of using it as currency.  
by santiago on Sun Jan 1st, 2012 at 12:06:12 PM EST
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People don't use gold as currency, they use it as a presumed safe store of value during a run on the currency. Runs are, of necessity, reasonably short affairs, so the belief doesn't have to last that long and the time window for the creation of fake gold to respond to popular demand is fairly narrow.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 1st, 2012 at 03:59:43 PM EST
[ Parent ]
Exactly. Gold is not being used as money, so any arguments about it being better than paper currency because people seem to want it (and also want foreign paper currency) now in Iran for wealth preserving purposes and not transaction purposes say nothing about gold used as money as the diary talks about -- just that people may want to hedge wealth in Iran now more than before for whatever reason.
by santiago on Sun Jan 1st, 2012 at 04:10:09 PM EST
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It comes down to a fundamental dispute over whether money should function as a long-term store of value. The gold bugs believe that money should store value long-term, and so see the failure of paper currency to do so as evidence that it is a poor form of money.

I believe - and you seem to agree - that money should store value only long enough that its depreciation is not an inconvenience in ordinary transactions, because money is an instrument for organising transactions. In this picture, the failure to store value over years or decades says nothing about the suitability of currency to function as money, because money only needs to store value on the order of weeks and months.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 1st, 2012 at 06:23:42 PM EST
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The beneficiaries of gold buggery are the traders, not the hoarders.

There are huge parallels here to the financialization of commerce that brought the booms and busts.

Gotta have booms and busts. Higher money velocity generates higher returns for financial parasites. I'm reminded of Kurt Vonnegut's analysis of lawyers:

"To encourage movement of money and always take ten percent."

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Thu Jan 5th, 2012 at 11:04:08 PM EST
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