What are the desirable characteristics of money?
It’s a straightforward question, and it’s tempting to answer it as follows. Money should, first and foremost, be a store of value. Otherwise the only thing it’ll be good for is today’s exigencies.
But there’s more to it than that. A lot more. After all, there’s no mystery about how to ensure money retains its purchasing power over time: You tether it to something finite, scarce and dear, like gold.
The problem with that approach is self-evident, even as committed hard money types pretend otherwise. Such a system’s inherently inflexible and it’s vulnerable to unexpected supply events (i.e., positive or negative supply shocks) for whatever it is that backs the money.
Suffice to say those systems aren’t fit for purpose in modernity. Put differently, it’s easy to argue for a gold standard when you’re not on one. It sounds good in theory, but in practice it’s unworkable.
What you want in money isn’t pure excellence in the value preservation department (because outside of very small economies, that isn’t feasible nor desirable, conducive as it is to deflation), but rather relative stability.
If you can achieve that and sustain it over a long period of time (and the linchpin of that project is the maintenance of inflation below a level that’s noticeable to the typical, “median” economic actor), congratulations, you have a working system of money.
Implicit in the above is the notion that excessive volatility can negate store of value considerations when it comes to assessing the viability of an asset’s claim on being money.
Bitcoin’s the extreme example of that. This time a decade ago, Bitcoin was worth about $400. Today, even after falling nearly 40% from the highs, it’s worth $77,000. Suffice to say it protected your dollar-based purchasing power.
But can something that volatile be money? No. Not really. Think about it in car terms. Let’s say I have one Bitcoin to spend on a new vehicle. Right now, I have a brand new, well-appointed BMW X6. If next week’s a good week for Bitcoin, I could have a Range Rover SE by Friday. If next week’s another bad week for Bitcoin, I could be looking at a Honda Passport instead.
That won’t work. Car dealerships — nor any other business — couldn’t operate on a system where the money’s that volatile.
Indeed, the sheer scope of Bitcoin’s meteoric rise (and “meteoric” doesn’t do it justice) over the last 10 years almost turns this discussion on its head. In a perverse, upside-down sort of way, something that rises in value by 30,000% over 10 years isn’t really a “store” of value on a common sense definition of the word “store,” which invokes canned goods in a pantry or, you know, physical gold in a safe.
That brings us to gold’s historic rally and, on January 30, abrupt correction. Have a look at the chart below.
What you’re looking at there are simple measures of implied volatility on the largest gold ETF and the popular long-end US Treasury ETF.
That shouldn’t happen. The enormous disconnect, I mean. Gold and long-tenor US sovereign bonds both price, in their own way, the same general set of fundamentals.
For expected swings in one to become completely untethered from expected price variance in the other suggests one of the two “knows something” the other doesn’t — or else that one’s gone rogue. I’ll go out on a limb and say that in this case, one’s gone rogue, and it’s gold.
The figure below gives you some context for gold’s run-up.
In percentage terms, the current gold rally’s larger than the pre-Lehman housing bubble. (Of course, that’s where the parallels stop. There’s nothing “systemic” about a bubble in — mostly paper — gold.)
The same disconnect illustrated in the first chart above’s likewise observable in the juxtaposition between realized volatility for precious metals as a group versus realized vol for US breakevens.
“The remarkable thing about the current episode is the lack of equivalent volatility in inflation,” SocGen’s derivatives team noted last week, commenting on that latter point. “Precious metals volatility isn’t driven by fears of inflation uncertainty.”
In an entertaining piece detailing the extent to which Chinese speculators (and, as I warned just hours before the bottom fell out, CTAs) “set the stage for a gold and silver crash,” Bloomberg quoted a trader at a bullion refiner. “It’s definitely the wildest that I’ve seen in my career,” the person said.
Gold, the same trader went on, is supposed to be a paragon of dependability. But moves like those observed in recent weeks, and particularly what happen last Friday, are “not a symbol of stability.”
Maybe the answer for gold’s rocket rise lies not in the usual market factors, but in Trump’s unpresidented behaviour. And, once it reached what was an understandably unstable high, it could be toppled by small things
When Shanghai’s markets open later this evening, it should be Chinese investor’s first chance to respond to the action we saw here on Friday. We should see some more fireworks there.
We have heard it said that Bitcoin was the new “digital gold.” It is not, and we are now seeing paper gold become the new Bitcoin. More “investors” are listening to social media than they are common sense. Physical gold and silver markets are largely unregulated and the integrity of dealers varies from vendor to vendor. I have heard that some shops are currently paying $15 under spot for silver, and that is if they are buying at all as they are mostly now out of cash reserves. That’s about a 15% haircut at current prices, and minimal to no liquidity on the sell side. I don’t know about physical gold, but I would not be surprised to hear things are somewhat similar, and most paper gold cannot be redeemed for the real thing without heavy fees being involved.
Such a large difference to the spot price, sets up an opportunity for ordinary investors.
Go to your silver dealer and offer to buy some physical silver. Buy about one futures contract worth. You must get a favorable price. You’re the one who’s now getting the spread (or something close to it). If the dealer has lots of sellers, beating down his door, he won’t mind. He has no risk because he has a seller right there waiting to take the risk off him.
Then buy one deep in the money put, on silver futures, about 3 months out.
You won’t pay a lot of time decay on that put option, because it’s deep in the money. But you will tie up a lot of capital.
Now you are hedged. You don’t care if the price goes up or down.
You have to clear out of your position within about 3 months.
Your cost of carry is the time decay on the put, and the capital tied up in the put, minus whatever spread you got on the silver from the dealer.
Eventually, the refiners will be able to take all this excess silver.
They will convert it into pure bars, and it will end up, on the commodities exchanges, as satisfaction, to a futures contract.
So ultimately, all this excess silver, will be bought up and become part of the futures market.
It’s just a question of time. The refiners need time to process all this excess silver.
I think 3 months is about the amount of time that you would need. Normally an acute squeeze, would not last more than 3 months. You can always roll that put forward if you really needed to. But you hope to exit within about 3 months.
I think it’s a reasonable assumption, that every silver dealer, and every gold dealer, in the country, knows about the futures markets.
They, already, are hedged.
They don’t really need to charge this $15 spread.
The problem for “ordinary investors” (meaning not options or futures traders) is trying to sell physical silver at the peak without being told “sorry,” or having to take a 15% haircut. Some of those poor bastards have been holding large amounts of bars and rounds since 2012 hoping to turn a profit, and now they are being shut-out with the excuse that the wholesalers and refiners are backed up. As Mr. H has said, it’s a circus, and it always has been.
H-Man, twas a good, but a really good trade.
It is so clear. Trump is Crazy and incredibly powerful -weapon-wise and zombie-flunky-wise. Biggest army, biggest Navy and biggest airorce > And Also ICE. He can take anything away from you. If you are a government and responsible for your country or if you were a multi-gazillionaire. wouldn’t you do anything to keep your money away from Trump. HE CAN’T TOUCH GOLD. All other giant piles of assets can be mauled by Trump as they are all dollars: U.S. Treasuries, the dollar itself or U.S. equities (75% of all equities are U.S.) Gold is the only one beyond his reach. Well – I think it it. How did he let that one get away???
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HE CAN’T TOUCH GOLD
/unquote
oooh, but you know how much he wants to.
And at this juncture I would not be surprised if he tried to.
He just loves gold, more than anything else. Just think of the “decorations” on the walls of the White House or Mar-a-Lago.
This situation is made of so many layers of irony, it resembles a mille-feuille of the absurd
GOLD is physical and if it resides in a vault in Hon Kong or Switzerland he can’t get it. I agree that he will make it illegal to ship it out of the U.S. He also sees himself as smarter than FDR and will make it illegal to own it because he neds to control it.. That way he can conrol rates. It sucks to be here now.
Milles feuiles are nice – don’t ruin them for me. The man will stop at nothing.