Sunday, July 19, 2015

Gold and the Truth About Paper

There was an interesting piece from Jesse's Cafe, a snippet of Tocqueville's Q2 Newsletter, which shed valuable light, yet fell short of an important understanding:
COMEX synthetic gold and related over-the-counter derivatives are traded in macro strategies implemented by hedge funds, high-frequency trades, and commodity funds in pair trades with interest-rate, currencies, equity futures, or even more exotic offsets. The volumes traded are huge, and bear little resemblance to actual flows of physical metal. 
We suspect that shorting gold has come to seem like a riskless proposition as long as there is confidence in the Fed. 
Synthetic gold is the perfect substance for a carry trade: an easy borrow with very low carrying cost and little upside basis risk. Such a hypothesis, in our opinion, does much to explain the incongruity of a declining gold price while fundamentals for paper currency, and the U.S. dollar in particular, obviously deteriorate ...
The statement above makes such a fine point, it's a shame that it ends by contradicting itself. Of course, irony explains much in our modern world of "priceless debt." Yes, paper gold is the perfect pair trade against the value of debt as wealth. Even equities, in our paper world, are a form of debt - their true value is a byproduct of future stock performance, not current earnings. And yes, the confidence in the Fed referred to above, is confidence in the Central Banks ability to protect the systemic value of debt.

And that said, paper currencies, and the U.S. Dollar in particular, are behaving exactly as fundamentals would predict. While 1% of the world controls the issuance of it, with no supply constraints, 99% of the world has an insatiable and growing demand for it, above and beyond anything besides the essential elements of survival. And since the 1% control the flow of it, (not directly, but systemically), the middle classes will never get enough - which keeps demand growing.

As the wealth of the middle class is denominated by debt (the #1 high-output product of the 1%) your confidence in the system is well placed - it is perfectly perpetuated by the power of human nature, and the long history of predation by the ruling classes over the debtor classes.

Just as the Pharoahs demanded human sacrifices to appease the Gods in return for prosperity, todays middle classes readily accept that the value of their money demands suffering from within their own, when obligations cannot be met. The Greeks accept socialized austerity in return for the Germans accepting the reality of repayment. If what cannot be repaid ends in suffering, the value of the money is retained.

So if we would admit the truth, paper currencies and US Dollars are working exactly as they should. They are a long position on the ruling classes ability to squeeze the middle class in a prolonged period of relatively peaceful stagflation. Lost decades. For Japan, lost generations.

Holding gold is a long position over a much, much longer time horizon. For perhaps, if and when the entire world becomes an "Iceland" of sorts. But until then, every "Greece" is a victory for the sustainability of debt as the preferred form of wealth for the "developed" middle classes.

In the East, a lesson is underway about the frailty of paper wealth based on irrational exuberance. Rationale prevails ... for a people who's class politique encourages the holding of real wealth. A class which has a growing capability to redefine wealth in a changing world that responds to the long gold position.

As for the currencies, they will always work, but the trades that lie ahead will change hands in a shifting of wealth that will clear many trillions in dollar denominated derivatives. A collapse of sorts will take place, a clearing and revaluation of many things from the material to the spiritual.

The gold long is a true optimist in every sense of the word, even as the outlook of man's contempt for one another reaches the obvious crescendo of our unsustainable valuation system. The gold long is the ultimate contrarian who sees the triumph of justice among men. The gold long is irrepressibly long the freedom of truth.

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