Category Archives: Money

Predictions for the Price of Gold

We periodically see arguments for gold prices all over the map. For investors, the future of gold prices may be critical. This post will collect such arguments and estimates as they emerge. This may help us to form an opinion on where gold is going. Estimates, sometimes with supporting reasons, are shown below (bolding ours). We recently have stopped following the estimates since they bear little relation if any to the actual price and its trend. We still believe these estimates will be achieved – someday.

Understanding Money: Part 4 – The Value of Money

Money and Value

As discussed in Understanding Money: Part 1 – Introduction when nations’ currencies were made of precious metals, the actual value of the currency was carried by the currency itself. It had intrinsic (see next section for a discussion on intrinsic value) value. For a gold coin, the measure of its value was the amount of gold in it. The value of gold as a metal is due in a large part to its scarcity and associated cost of production.

If a bushel of wheat were our commodity currency, we could plant more acreage. For gold, it takes an immense amount of money to find and develop new deposits. It takes years to develop a new deposit before the first ounce of gold is poured. So the supply of gold is what economists term as inelastic. It can’t readily be increased to meet demand. Today, the commercial producers that own significant deposits have a production cost of around $1100 per oz. So its minimum price or value is its cost of production.

Have you noticed that very few people have enough money? This is particularly true of sovereigns – monarchs and governments. A key aspect of a sovereign is it’s control of the money supply. A sovereign may control the ownership of all gold production but it cannot control the amount of production to any degree. What is a poor sovereign to do when it wants more short of stealing another sovereign’s gold through warfare? Fiat or paper currency to the rescue.

Understanding Money: Part 3 – Measures of the Money Supply

In Understanding Money: Part 2 – Money Creation, we examined how money is created. The result is money with many different forms of representation – but, as we argued, nevertheless money. In this part, we consider different measures of the money supply. This information is useful for gauging the overall economic activity in the economy. If you want some insight into terms such as M1, MZM, monetary base, etc. read on, otherwise go directly to Understanding Money: Part 4 – The Value of Money and do not collect $200 as you may find out it’s worthless.

Understanding Money: Part 2 – Money Creation

In Understanding Money: Part 1 – Introduction we gave a definition of money, discussed the three forms that money has taken over time, and gave an example that should have the reader realizing that there is a bit more to their money than what’s in a pocket or purse. We explore the nature of money in more depth in this part. We begin by explaining what the origins of today’s money are, particularly of fractional reserve banking and its role in money creation. From there we extend the concept to a generalized form of money creation  that is used throughout the economy.

Understanding Money: Part 1 – Introduction

Money is one of the few fundamental creations or discoveries that has shaped human culture over several thousand years. It motivates and facilitates most of our daily activity. It has an apparent simplicity – everyone ‘knows’ what money is – but a surprising complexity when all its aspects are explored in depth.

Wikipedia defines money as “any object or record that is generally accepted as payment for goods and services and repayment of debts“. Wikipedia classifies three main types of money that have been used over time as commodity money, representative money, and fiat money. Further, it identifies three main functions of money, a medium of exchange, a unit of account, and a store of value, but notes that any kind of object or secure verifiable record that fulfills these functions can serve as money. In this part, we consider the common daily form that money takes, that of currency or cash, and what it means.

Understanding Debt

A debt is created when one individual called a creditor, lends an asset – usually money – to another individual called a debtor. Here “individual” can be a person, a business, an organization or a country. The transaction is usually recorded in a formal document or contract that has legal standing, even if written on the back of a napkin. Such documents have different names such as notes, bills, bonds, mortgages, student loans, and an vast array of other terms. These names are usually collectively referred to as debt instruments.

We now consider various aspects and forms of debt.

Central Banks and Gold: Part 2

Although central bankers talk down gold, gold remains an important, and in some cases dominant (Portugal at 89% and the USA at 75.5%) component of many countries’ international reserves. It is also a primary asset for interbank swaps and dealings. A case in point is the Bank for International Settlements.

Central Banks and Gold: Part 1

In this part on central banks and gold we answer the question who owns what. The question of where a country’s gold is is another matter. Many countries store their gold with the Federal reserve Bank of New York or in secure depositories in places like London and Zurich. Venezuela is in the process of repatriating their gold.

Gold has held a controversial position with central banks over the years. There was a period when countries such as Canada sold almost all their gold because the monetary return on their gold reserves was miniscule compared to the interest they could make on the cash equivalent. Despite this, may countries such as the US and Germany kept most of their gold and have a realized a considerable benefit on their balance sheets.

It should be noted that of the EU countries in financial difficulty, their world ranks in gold reserves are: Italy 4th, Portugal 14th, Spain 19th, Greece 31st and Ireland 72nd. Gold makes up 80% of Greece’s foreign reserves. To try and meet external financing obligations, EU countries are selling assets, implementing austerity programs and borrowing heavily but none are selling their gold!

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