http://marketoracle.co.uk/Article10999.html

How’s this for a bubble?

In 1965 one in ten Americans owned stocks. It took 25 years for stock ownership to double. And most of that growth came between 1983 and 1990 with the introduction of 401(k)s, IRAs and other stock-based retirement plans: suddenly anyone with a large scale employer could invest in stocks without having to open a brokerage account.

Thanks to the Internet and low fee online brokerage accounts, it only took seven more years for stock ownership to double AGAIN. Put another way, the rate at which new participants entered the market accelerated four fold between 1990 and 1999. At the end of the 20th century, 48% of US households owned stocks.

This is the one bubble no one talks about. The bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2001. And it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes.

Particularly gold.

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50% making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years was 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks.

When exactly this will happen is anyone’s guess. The gold vs. stocks trends over the last 106 years have ranged in length from three years to 29 years. However, judging from the Fed’s money printing and the recent action in gold, it’s quite possible we’ll see a mammoth run in the precious metal sometime in the next 18 months.

You should prepare your portfolio accordingly.

Interesting post, thanks--that's some fascinating information. Why did Richard Nixon remove America from the Gold Standard, and what would be the benefits or problems of putting America back on it?

Interesting post, thanks--that's some fascinating information. Why did Richard Nixon remove America from the Gold Standard, and what would be the benefits or problems of putting America back on it?
Nixon removed the gold standard because European countries were stampeding to cash in their US dollars for gold.

Because they knew the US government was printing fake money to pay for the Vietnam war.

Much like what is happening RIGHT NOW!

I would throw out pre-1955 history of Dow to Gold because I feel that was a different world.

If you do that the current Dow to Gold level is about correct.

But what if both the Dow and gold are overvalued?

http://marketoracle.co.uk/Article10999.html

How’s this for a bubble?

In 1965 one in ten Americans owned stocks. It took 25 years for stock ownership to double. And most of that growth came between 1983 and 1990 with the introduction of 401(k)s, IRAs and other stock-based retirement plans: suddenly anyone with a large scale employer could invest in stocks without having to open a brokerage account.

Thanks to the Internet and low fee online brokerage accounts, it only took seven more years for stock ownership to double AGAIN. Put another way, the rate at which new participants entered the market accelerated four fold between 1990 and 1999. At the end of the 20th century, 48% of US households owned stocks.

This is the one bubble no one talks about. The bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2001. And it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes.

Particularly gold.

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50% making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years was 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks.

When exactly this will happen is anyone’s guess. The gold vs. stocks trends over the last 106 years have ranged in length from three years to 29 years. However, judging from the Fed’s money printing and the recent action in gold, it’s quite possible we’ll see a mammoth run in the precious metal sometime in the next 18 months.

You should prepare your portfolio accordingly.

How is any of this relevant or even true? How can you compare gold prices to gold durring the period between 1933 and 1972 when private possession of gold was illegal in the US and the price of gold for foriegn exchange was fixed by government fiat ($32 per ounce)?

http://www.the-privateer.com/1933-gold-confiscation.html

But given your inclinations from previous posts. This is my advice to all of you conservatives or whatever you want to call yourselves...sell all of your stocks (if you have any) now now NOW and run for the hills. And I will buy buy BUY the good ones. My portfolio is up by 31% thus far this year...keep it up boys and girls I like taking your money!!!!

How can you compare gold prices to gold during the period between 1933 and 1972 when private possession of gold was illegal in the US and the price of gold for foreign exchange was fixed by government fiat ($32 per ounce)?
I agree, but not all forms of gold were illegal, and these complications only apply to the US. The market would primarily reflect true values aside from government price fixing.

I agree, but not all forms of gold were illegal, and these complications only apply to the US. The market would primarily reflect true values aside from government price fixing.

If you agree, since there was no domestic unregulated gold market in the US...gold price in the US was fixed by the government. You cannot logically tie it to an asset that is market priced...makes no sense.

http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml

But given your inclinations from previous posts. This is my advice to all of you conservatives or whatever you want to call yourselves.
My inclinations are to avoid associating with any party. If I say something critical of the democrats its not because I prefer the republicans.

In fact, I dont believe there should be any parties at all.

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks
But these, I take it, are measures of price against index.
The BIG question is: what happens when you factor in DIVIDENDS?

I agree with the sentiment that gold will take a big rise at some time in the next year or two, but I am mostly invested in resource stocks and shall probably keep it that way -- except for moving into real estate, hopefully at the right moment (which may not be far away).

I am told that the day when gold can be recovered from sea water (via genetically engineered phytoplankton) is getting closer. Beware!

All I know is that it's never a bad time to buy gold. Not in the nickel and dime way, but as a strategy overall.

It's a rainy day investment. I for one still predict more rainy days...

"I am told that the day when gold can be recovered from sea water (via genetically engineered phytoplankton) is getting closer. Beware!"

Seriously? How long have they known how to get gold from sea water???

I am going to go on record as predicting gold $500 in five years.

At the moment, there is no indication that we have an inflationary problem with the economy despite all of the money the Fed has pumped into the economy. What people tend to forget is that the money supply is dynamic. The Fed can increase the supply of money just as easily and as rapidly as it can decrease the supply of money.

There is definately a lot of speculation going on related to inflation. But I do not see that as a likely outcome given the key players in this government. If we had a George II or a George III as president, I would be buying gold, silver and a lot of ammunition.

Seriously? How long have they known how to get gold from sea water???
They don't . . . not yet. It comes as a big surprise to most people to discover that much gold may be of biological origin -- having being concentrated out of solution by bacteria. Genetic engineers have merely to discover the trick performed by nature at certain stages of Earth's long history and implant the technique in a suitable organism. Guess: say 15 to 25 years from now.

... It comes as a big surprise to most people to discover that much gold may be of biological origin -- having being concentrated out of solution by bacteria. ...Do you have some links or argument to back this claim? I find it very strange as gold is not very reactive - what process could the bacteria use to select it?

They don't . . . not yet. It comes as a big surprise to most people to discover that much gold may be of biological origin -- having being concentrated out of solution by bacteria. Genetic engineers have merely to discover the trick performed by nature at certain stages of Earth's long history and implant the technique in a suitable organism. Guess: say 15 to 25 years from now.

All I can say is that REALLY spooks me out, but i'm not going to tell you why.

It doesn't matter, it will not be cost effective, probably ever, considering human labour is going to cost less in the future.

Do you have some links or argument to back this claim?
This came under discussion at the big Science Festival currently taking place in my home town (Cheltenham, UK). I don't regard myself as having expertise in this subject, but if you research it on the Internet (e.g. Google "gold origin bacteria" etc) you will get plenty of hits and discover a lot of research has been done over the years.

Although this ratio thingy is interesting to mess with, since the Dow is not a standard group of stocks but a constantly changing indicator, the comparison is invalid.

Basicly you can not really use the Dow for historical comparison because once a company goes down, they replace it with a successful one...

...once a company goes down, they replace it with a successful one...GM & Citi two days ago but effective on Monday.

There are several popular ratios that used together can be a reliable indicator.

Oil price per barrel vs. gold per ounce
Gold vs. a basket of currencies
Gold vs. the currency that you hold your gold in is the one that really means something. My bullion is at BullionVault and I do recommend them, and gold even now at these levels. Todays decline is an entry point for a portion of what you want to invest. Try dollar cost averaging into gold like you would any investment to smooth out the buy points.

If you decide to use BullionVault or any of the services that hold your physical bullion, be aware that it takes about two weeks to set up and fund an account due to verification procedures. Get started.

...If you decide to use BullionVault or any of the services that hold your physical bullion, ...How can one know they (and others like them) are not just like the original middle ages inventors of Fiat money gold certificates? I.e. They issue more gold certificates than they have gold in the vault, and depend on fact not all (in fact few ever do) want to take physical possession?

This is the “Madoff era,” and that may not even be illegal. – All the banks do it. (Total of savings account deposits far exceeds the money in the vault they can pay out as most of it has been loaned to others.) In the contracts they issue is there the same “fine print” that banks have, which reserves the right to not deliver the gold for some period of time? (Long enough to declare bankruptcy.)

I checked them out to my satisfaction. They have vaults in NY, London, and Zürich and each vault is audited daily and the audits are done by a reputable and independent company. The audit is posted on the BullionVault site home page and each 400 oz bar is accounted for by account. Each account has an assigned anonymous number and you can look up you number and see your share of the bullion bar that is held in you account. I searched the net for complaints and there are none. They have verification procedures for deposits and withdrawals. Of course I could get screwed.

At the moment, there is no indication that we have an inflationary problem with the economy despite all of the money the Fed has pumped into the economy. What people tend to forget is that the money supply is dynamic. The Fed can increase the supply of money just as easily and as rapidly as it can decrease the supply of money.

It would be in the Federal Reserve's best interests as a private cartel to do just that...erase the digital money they created out of nothing.

Devaluation of the currency would hurt them too as they are one of the world's biggest holders of treasuries.

However, they wont be able to do that...and will probably create even more fake money.

Obama wont give up the expensive military empire, and baby boomers have already started the great wave of drawing benefits from the government.

China has a similar problem with its one child policy and an aging population of seniors.

I expect a W shaped recovery...stretched out over a decade.

The BIG question is: what happens when you factor in DIVIDENDS?

Yes, and fees and taxes!

I agree with the sentiment that gold will take a big rise at some time in the next year or two, but I am mostly invested in resource stocks and shall probably keep it that way -- except for moving into real estate, hopefully at the right moment (which may not be far away).
I expect central banks might still have some gold they can sell to offset a devaluation of currencies.

It might take a while for gold to take off!

BTW...its starting to emerge that the recent gains in the financial sector amount to little more than an ACCOUNTING ILLUSION!

Stress tests? Ha!

They've been compared to releasing thousands of gerbils on a bridge to test its structural integrity!

http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8

June 5 (Bloomberg) -- Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6.

Treasury Secretary Timothy Geithner, after “stress testing” 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.

“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed.

The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

‘Bogus’ Profit

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The accounting rule changes that matter most for the banks came on April 2, when the Financial Accounting Standards Board gave companies greater latitude in how they establish the fair value of assets. Lawmakers, including Representative Paul Kanjorski, a member of the House Financial Services Committee, had complained that existing mark-to-market standards worsened the financial crisis.

The Federal Reserve does not create fake money! Fake money is created by counterfiters...not the Federal Reserve. Two it is obvious you have not training in accounting. Accounting is completely theory....meant to represent a theory of profitability. There is a lot of room for judgement in accounting. Companies can and have gone bankrupt being profitable the entire time.

There is no evidence of funky accounting in the banking system. If there were the banks would not be up so much in the last few months. In short there is no new news here. You can debate "mark to market" all you want but it will not change anything of substance.

The bottom line is times are good for banks. The spread, their cost of money vs the loan rates they offer is big. How they account for assets is of little importance to anyone but the bank regulators.

What we are seeing now is a recapitalization of the banking system...that means banks are selling equity for more cash to cover potential losses. And they are doing it successfully. New sophisticated equity buyers would not be pumping in billions of dollars into new equity for the banks if there were any serious issues related to bank integrity.

Let me explain what the accounting change is so you have some understanding. Every loan has a present value. Present value is the present value for a stream of cashflows/payments given a certian interest rate. The change in accounting rules allows banks to use the present value method. Present value is a common way and reliable method of valuing cashflows.

The "Market to Maket" approach says you have to mark all of your assets to what the market would pay if you had to sell them today. It is a fine concept in normal financial times...values should be fairly close in both methods.

However in times of crisis as is the case now, if the banks were to sell these financial assest the interest rates used would be much higher and thus would have a much lower present value. Since most of these banks have no intention of selling these assets, Mark to Market method undervalues these securities.

Let me explain what the accounting change is so you have some understanding. Every loan has a present value. Present value is the present value for a stream of cashflows/payments given a certian interest rate. The change in accounting rules allows banks to use the present value method. Present value is a common way and reliable method of valuing cashflows.
The "Market to Maket" approach says you have to mark all of your assets to what the market would pay if you had to sell them today. It is a fine concept in normal financial times...values should be fairly close in both methods.
However in times of crisis as is the case now, if the banks were to sell these financial assest the interest rates used would be much higher and thus would have a much lower present value. Since most of these banks have no intention of selling these assets, Mark to Market method undervalues these securities.Present value is not some well defined value because of two factors:

(1) The incomes steam expected in the future has a definite maximum value but the minimum valve can be zero. (Debtor defaults) In the case of debtor default the present value is zero. No one knows what fraction or when the contracted payments may not come. Thus, unlike mark to market, when a market exist, this makes "present value" for every assets except US government promises to pay a judgment call. Mark to market fails to provide a "judgment free" value only when there is no free buying and selling of very comparable assets. For example, in a politically unstable country the discount rate is high and the promise of payment of $1000 five years from now is worth much less now (the present value) than in a country which has record of political stability.

The market can often tell what a CURRENT suitable discount rate is. For example, a now issued $1000 US treasury bond maturing in 10 years and paying 3% interest if sold for less than face value by 2% ($980) has a market set discount rate (about 5%, but the calculation is more complex as the first interest payment comes this year, the second next year, etc.) In contrast a GM issued $1000 face value to be paid in 5 years from now, may have a very high discount rate. E.g. be worth only $50 now.

(2) The present value of an income stream, even if all payments due are made when due, is determined by the choice of interest rates (usually called the discount rate in this application). The interest rates change and with them the discount rate. For example a few years ago, the risk that Brazil would default was real so Brazilian bonds needed high interest payments to sell. Now there is essentially no failure risk to them, so you must pay 13% more than face value to buy them in the open market.

SUMMARY: Present value is far from a fixed value, very subject to arbitrary judgments, changing opinions about the creditworthiness of the issuer, and to the Changing interest rates. Market value is much less subject to arbitrary judgments but they too can change with the market.

IMHO it is a mistake to abandon mark to market as that permits unknown and self serving, fudging of the books - distortions that may bear no resemblance to what the assets are actually worth. This destroys confidence in annual reports etc. and in general weakens the market system as no one knows what a company is worth. False and self serving high evaluations of the tranches built on sub-prime mortgages is partially how the current mess was created.

However, mark to market may, especially during bubbles, also grossly mislead. Present value calculations are a useful tool which can and should be used to guide the market evaluations to help prevent bubbles.

Billy T, I was refering to Present Value of a given contract. It is very easy to calculate present values as debt contract has fixed all of the elements needed for a Present Value Calculation (term, interest rate, Payment amount and frequency). When a debt contract is created the present value of the contract is calculated and the debt/loan is booked as an asset on the bank balance sheet based on the present value of the loan.

Interest rates are determined at the time the debt instruments are created and reflect the risk free rate plus a risk premium which includes default rate, interest rate, etc risks. Over time the expected interest rate may not equal the contracted interest rate as you post noted.

Now in the aftermarket when these instruments are marketed a new interest rate and a new present value will be established for these debt insturments which would again include the risk free rate plus a risk premium. Given our current state of affairs, the risk premium would be/is higher. Thus the present value of the contracts would be lower...causing banks an asset problem. Since banks are required by law to have a certian level of assets to support their debt portfolio. This is in essense mark to market accounting. The bank is required to book the loss on its balance sheet even if it has incurred no loss of cash.

So market to market can give a skewed view of bank assets. In good times it can give an overly optimistic assesment of a banks assets. In theory, mark to market is a great practice. In practice, it has some issues.

Default risk should be reflected in loss provision reserves...not the value of its assets.

The Federal Reserve does not create fake money! Fake money is created by counterfiters...not the Federal Reserve.
The only difference between new money created by the Fed and counterfeiting is the Fed dollars are created out of thin air AS DEBT and are legal tender.

Counterfeit dollars are not legal tender and are not created AS DEBT.

Please Enjoy:

http://en.wikipedia.org/wiki/Quantitative_easing

The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

In practical terms, the central bank purchases financial assets, including treasuries and corporate bonds, from financial institutions using money it has created ex nihilo (out of nothing).

This process is called open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy. However, there is a risk that banks will still refuse to lend despite the increase in their deposits, and in a worst case scenario, possibly lead to hyperinflation.

Quantitative easing is sometimes incorrectly described as 'printing money' as the central bank actually creates the new money electronically by increasing the credit in its own bank account.

The only difference between new money created by the Fed and counterfeiting is the Fed dollars are created out of thin air AS DEBT and are legal tender.

Counterfeit dollars are not legal tender and are not created AS DEBT.

Please Enjoy:

http://en.wikipedia.org/wiki/Quantitative_easing

The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

In practical terms, the central bank purchases financial assets, including treasuries and corporate bonds, from financial institutions using money it has created ex nihilo (out of nothing).

This process is called open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy. However, there is a risk that banks will still refuse to lend despite the increase in their deposits, and in a worst case scenario, possibly lead to hyperinflation.

Quantitative easing is sometimes incorrectly described as 'printing money' as the central bank actually creates the new money electronically by increasing the credit in its own bank account.

Quantitative easing is not the issue. You said the Fed makes fake money. It does not. If you believe the Fed makes Fake Money, I will take all the Federal Reserve Notes you want to get rid off.

I pointed out to you that FAKE money is counterfiting and it is a crime. The FED is not criminal and does not produce FAKE money.

Quantitative easing is not the issue. You said the Fed makes fake money.
I'm referring to its value not its legality.

You could argue that money printed in Wiemar Germany or Zimbabwe was perfectly legal and therefore REAL.

Are the new Bernankebucks real?

Nope!

Are you telling me you cannot take that newly minted dollar from the Federal Reserve and use it to buy something like a car or loaf of bread?

I suggest you look at the standard measure of inflation:

http://www.bls.gov/news.release/cpi.nr0.htm

I see no evidence to support your supposition...got any proof?

Are you telling me you cannot take that newly minted dollar from the Federal Reserve and use it to buy something like a car or loaf of bread?
Again, I'm not arguing about its legally.

The current deflationary currents are like the powerful undertow experienced before the inflationary Tsunami hits!

http://www.shadowstats.com/article/hyperinflation

Hyperinflation Special Report

"How has the hyperinflation outlook changed since the Hyperinflation Special Report was published in April 2008?"

Such is the most frequently asked question I receive these days.

The answer is that the outlook is little changed, since the following report outlines the basic issues and limited options for the U.S. government that were in play well before the current crises broke.

The actions taken since by the federal government, U.S. Treasury and the Federal Reserve, in response to the still-deepening recession and ongoing systemic solvency woes, just exacerbated the long-range problems described in the report.

The official actions likely have advanced the timing of the hyperinflation to the much nearer future, perhaps within the next year or two. Since September 2008, the Federal Reserve has been attempting to debase the U.S. dollar at an extraordinary pace, and such now is recognized widely among the major U.S. trading partners.

Billy T, I was refering to Present Value of a given contract. It is very easy to calculate present values as debt contract has fixed all of the elements needed for a Present Value Calculation (term, interest rate, Payment amount and frequency). ...That is not the normal concept of present value, even on the initial day of the contract.
The interest rate in the contract is not the one used to compute the present value. I.e contract's interest rate is not the discount rate.
For example, the US government will AUCTION bonds, which have a fixed interest rate in the them. The bidders do not aggre on what their present value is as they do not used that interest rate to discont to the present each of the interest payments (discounted for various differernt periods) and the final payment of the principle discounted for the term of the bond. They use their own value for the discount rate.

In the case of US govenment bonds the default probably is assumed to be zero so the bidders who selects the least discount rate to use in their present value calculation will place the highest bids in the auction and buy the bond.

What you are stating makes no sense as if all the rates of the present value calculation were as stated in the contract, then all (unless a math error is made) all would bid the same amount at an auction. There would be no point in even having auctions. Just drawn name from hat to see which of the potential buyers becomes the actual buyer.

Present value depends very much on what you expect will be (1) The probably the contract will be honored and (2) Your expectations of future inflation. People's expectation differ, so their present values differ and their bids reflect this difference.

My present value of assets A and yours can differ greatly if we disagree on these two factors.

A dramatic example of the error you are making is in the "zero coupon" bond I.e. one that has zero interest rate in the contract. Say it will pay in 10 years $1000. Its present value is much less than $1000 but that is what the present value calcultion would compute if the discount rate were set at the zero interest rate of the contract. Some one using a 7% discount rate would bid approximately $500 for that zero coupon bond. Some one using a 3% discount rate would bid more, roughly $750 for it. NO one will bid the $1000 that your proceedure for calculating the "present value" produces as that is not the correct way to calculate present value.

----------------
Back on the "mark to market" subject, see:
http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8

Where you can read: “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”
There are about 5 other accounting changes which convert losses into profits.* One of the more false is that if the bank states it plans to hold asset, like mortgage form an already under water home owner, to maturity, it can be carried on the books as if it will be paid!

*For example Citi with these false tricks showed 1.6billion profit in the first quarter, instead of significant loss as would be the case with correct GAAP accounting applied, but the market is not fooled. - Look at what happen to Citi's stock price and it is tomorrow removed from the list of 30 making up the DOW.

The best line I have read on all this is that "The "stress tests" were like stress testing a bridge by marching gerbils across it."

Again, I'm not arguing about its legally.

The current deflationary currents are like the powerful undertow experienced before the inflationary Tsunami hits!

http://www.shadowstats.com/article/hyperinflation

Hyperinflation Special Report

"How has the hyperinflation outlook changed since the Hyperinflation Special Report was published in April 2008?"

Such is the most frequently asked question I receive these days.

The answer is that the outlook is little changed, since the following report outlines the basic issues and limited options for the U.S. government that were in play well before the current crises broke.

The actions taken since by the federal government, U.S. Treasury and the Federal Reserve, in response to the still-deepening recession and ongoing systemic solvency woes, just exacerbated the long-range problems described in the report.

The official actions likely have advanced the timing of the hyperinflation to the much nearer future, perhaps within the next year or two. Since September 2008, the Federal Reserve has been attempting to debase the U.S. dollar at an extraordinary pace, and such now is recognized widely among the major U.S. trading partners.

So are you now admitting that your statement about the Fed issuing fake dollars was untrue? Are you admitting that there is no evidence of inflation at this point in time? Are you admitting that you are assuming hyper inflation will occur? And if that is the case, you are ignoring the Feds ability to decrease the money supply just as fast as it increased the money supply.

That is not the normal concept of present value, even on the initial day of the contract.
The interest rate in the contract is not the one used to compute the present value. I.e contract's interest rate is not the discount rate.
For example, the US government will AUCTION bonds, which have a fixed interest rate in the them. The bidders do not aggre on what their present value is as they do not used that interest rate to discont to the present each of the interest payments (discounted for various differernt periods) and the final payment of the principle discounted for the term of the bond. They use their own value for the discount rate.

In the case of US govenment bonds the default probably is assumed to be zero so the bidders who selects the least discount rate to use in their present value calculation will place the highest bids in the auction and buy the bond.

What you are stating makes no sense as if all the rates of the present value calculation were as stated in the contract, then all (unless a math error is made) all would bid the same amount at an auction. There would be no point in even having auctions. Just drawn name from hat to see which of the potential buyers becomes the actual buyer.

Present value depends very much on what you expect will be (1) The probably the contract will be honored and (2) Your expectations of future inflation. People's expectation differ, so their present values differ and their bids reflect this difference.

My present value of assets A and yours can differ greatly if we disagree on these two factors.

A dramatic example of the error you are making is in the "zero coupon" bond I.e. one that has zero interest rate in the contract. Say it will pay in 10 years $1000. Its present value is much less than $1000 but that is what the present value calcultion would compute if the discount rate were set at the zero interest rate of the contract. Some one using a 7% discount rate would bid approximately $500 for that zero coupon bond. Some one using a 3% discount rate would bid more, roughly $750 for it. NO one will bid the $1000 that your proceedure for calculating the "present value" produces as that is not the correct way to calculate present value.

----------------
Back on the "mark to market" subject, see:
http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8

Where you can read: “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”
There are about 5 other accounting changes which convert losses into profits.* One of the more false is that if the bank states it plans to hold asset, like mortgage form an already under water home owner, to maturity, it can be carried on the books as if it will be paid!

*For example Citi with these false tricks showed 1.6billion profit in the first quarter, instead of significant loss as would be the case with correct GAAP accounting applied, but the market is not fooled. - Look at what happen to Citi's stock price and it is tomorrow removed from the list of 30 making up the DOW.

The best line I have read on all this is that "The "stress tests" were like stress testing a bridge by marching gerbils across it."

http://en.wikipedia.org/wiki/Present_value
Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.

I think we are talking past each other. And perhaps I have not made myself very clear. Above is the definition of present value. When a contract is created it will sell at market for the present value of the obligation. Why woulld anyone pay more than the present value of a contract? Why would a seller accept less that the present value of a contract?

In your example of zero coupon bonds, they are never sold at par or at a premium because as you stated there is no stated interest rate only the promise of a future payment. But the zero coupon bond does still have a present value which is based on an interest rate the market feels appropriate for that debt obligation. The present value is the price of the bond or debt to the buyer of the instrument.

The issue is that interest rates change over time. The quality of the asset may change over time, which again affects the interest rate. That is the problem with troubled assets. How does one price them? A change in interest rate has a big impact on the present value of a debt instrument. Markets tend to be imperfect at time, especially when driven by fear as we have recently seen. In times when markets become overly emotional on the up and down side, can lead to imperfect pricing in a mark to maket enviornment.

If a debt contract is not sold. It can be booked at the original present value. If the quality of the debt errodes over time, then the owner of the debt (e.g. bank) is required to reserve it (provision it as a loss) on its books. So just because a financial institution is not booking it to market does not mean that it is allowed to not book bad debts and potential losses.

So are you now admitting that your statement about the Fed issuing fake dollars was untrue? Are you admitting that there is no evidence of inflation at this point in time? Are you admitting that you are assuming hyper inflation will occur? And if that is the case, you are ignoring the Feds ability to decrease the money supply just as fast as it increased the money supply.
Do you understand the difference between 'legal tender' and 'buying power'?

Yes, I'm assuming that hyperinflation will occur...or more accurately hyper*stag*flation.

The excessive money printing will continue to drive up rates and strangle the GDP...thats the stag part.

Is inflation happening RIGHT now? Not in the housing sector, but in the general economy yes. The blue line is the CPI as it was calculated up to 1980 before the government started monkeying with the numbers.

http://www.shadowstats.com/charts_republish#cpi

Can the Fed erase the fake money it has created? Sure!

But it won't! :cool:

Do you understand the difference between 'legal tender' and 'buying power'?

Yes, I'm assuming that hyperinflation will occur...or more accurately hyper*stag*flation.

The excessive money printing will continue to drive up rates and strangle the GDP...thats the stag part.

Is inflation happening RIGHT now? Not in the housing sector, but in the general economy yes. The blue line is the CPI as it was calculated up to 1980 before the government started monkeying with the numbers.

http://www.shadowstats.com/charts_republish#cpi

Can the Fed erase the fake money it has created? Sure!

But it won't! :cool:

Carcano, if you were not serious you would be funny. After accusing the FED of printing fake money. You admitted the FED only printed real money. Now you are falling back on a conservative arguement, "well you cannot belive anything not from a conservative sanctioned source" (CPI).

Why wouldn't the Fed contract the money supply if warranted? They have shown they can and will take actions to keep interest rates and inflation low. The Fed is independent of congress. They don't go to Congress to make these decisions. They make these decisions independent of Congress and the White House.

After accusing the FED of printing fake money. You admitted the FED only printed real money.
And you continue to misunderstand what is meant by the word 'fake'.

Why wouldn't the Fed contract the money supply if warranted?
Because they are under extreme pressure from a government who appoints them to their positions. Additionally, they are under extreme pressure from their member banks to keep them above water.

Government in turn is under extreme pressure from the public to at least create the illusion of prosperity.

Americans love show business!

And you continue to misunderstand what is meant by the word 'fake'.

Because they are under extreme pressure from a government who appoints them to their positions. Additionally, they are under extreme pressure from their member banks to keep them above water.

Government in turn is under extreme pressure from the public to at least create the illusion of prosperity.

Americans love show business!

Now you are redefining the language...coming up with your own unique definitions...making up new definitions to old words.

http://en.wikipedia.org/wiki/Fake

As for pressure on the Federal Reserve, they serve 14 year terms and by law cannot be replaced for their opinions.

http://www.federalreserve.gov/generalinfo/faq/faqbog.htm

The chairman serves a four year term. And he is only one vote out of seven. I suggest you learn a little before you go off making wild emotional laden statements. But that is not the conservative way is it.

… It is very easy to calculate present values as debt contract has fixed all of the elements needed for a Present Value Calculation (term, interest rate, Payment amount and frequency). ...Here in post 29 you clearly, but falsely, state that present value calculations use the interest rate stated in the contract. That is not correct as it is the discount rate not the contract’s interest rate, which is used. Many various DIFFERENT discount rates exist in the opinions of the different potential buyers of the bond, contract, or home. Thus the present value is NOT a definite value but each bidder for the contract has his own expectations and his own unique present value. The buyer is the one who calculates the highest present value.

You also clearly think that there is only the one unique present value that results from calculating present value with these values in the contract. That too is wrong.

... Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. ... Here in post 37 you have correctly used the discount rate but still seem to think there is a unique discount rate and thus a unique present value. For example, while your first sentence below is true it would be more accurate to say:
When a contract is created it will sell in the market to the bidder with the highest evaluation of the present value of the obligation. ... When a contract is created it will sell at market for the present value of the obligation. Why would anyone pay more than the present value of a contract? I never said anyone would bid more than their evaluation of the present value. It is possible that someone not bidding (perhaps because Federal trade commission would not approve their then larger near monopoly, or because they have too much debt on books already, etc.) may have evaluated the present value even higher than that of the winning bid.... Why would a seller accept less that the present value of a contract? The asset owner, say a home, may think his asset is worth $300,000. I.e. he thinks the "present value" = $300,000 but if he cannot keep it and no one bidding thinks his house is worth more than $270,000 then he sadly sells for less than his evaluation of the present value. (Perhaps he thinks the present value is $300,000 because he paid that for it only a month earlier but now has lost his job, cannot pay the mortgage, etc. so he must sell to avoid even greater loses if it goes to foreclosure.) Again it is clear that you still think there is a unique "present value."

SUMMARY: Now you have the definition correct. - I.e. you know your first quoted post was wrong as the interest rate in the contract is NOT used to make present value calculations; However, you still seem to think that there is a unique present value. That is also wrong. Generally speaking everyone has a different present value for any assets. When there is an auction, the bidder with the highest present value becomes the new owner, he can and often does, go home happy as his present value was higher than the price he paid. (i.e. the other bidders dropped out so he did not need to increase his bid to his present value.)

Now you are redefining the language...coming up with your own unique definitions...making up new definitions to old words.

As for pressure on the Federal Reserve, they serve 14 year terms and by law cannot be replaced for their opinions.

Am I making up new definitions?

No, I'm simply addressing the aspect of *value* while you cling for life to its legality.

Reserve governors are appointed to a 14 year term but have to be confirmed by the Senate every four years. Bernanke is up for confirmation in 2010.

But that is not the conservative way is it.
I can assure you I'm neither conservative or liberal.

Associating with official ideologies is usually an excuse to stop thinking.

For example, most American conservatives are against state run medicine. I live in Canada where the state run medical system works very well indeed.

I also believe many other sectors of the economy should be either state owned or highly regulated...an approach demonstrated successfully in some Scandinavian countries.

Again, Canada has strict rules constraining the banking sector...resulting in THE most stable banks in the world!

SUMMARY: Now you have the definition correct. - I.e. you know your first quoted post was wrong as the interest rate in the contract is NOT used to make present value calculations; However, you still seem to think that there is a unique present value. That is also wrong. Generally speaking everyone has a different present value for any assets. When there is an auction, the bidder with the highest present value becomes the new owner, he can and often does, go home happy as his present value was higher than the price he paid. (i.e. the other bidders dropped out so he did not need to increase his bid to his present value.)

No my first statement was correct. I was refering to a first time note, the kind typically originated by banks. Banks originate loans. You were mixing secondary markets and treasuries...two very different things. Determination of present value in the after markets or secondary markets is very different than determining present value in an original contract. When a loan is originated you do not have multiple parties as you stated. The interest rate used by the bank is a market rate...what other banks charge for similar quality loans.

My point is when a bank originates say a mortgage it knows the term and it knows the payment frequency and it knows the interest rate. The bank books the present value of that loan as an asset. The interest rate a bank charges is a market rate and reflects expectations about inflation and default risk.

A bank originating a loan is no different than a company buying an asset. It is recorded on the books at cost (present value). In mark to market, interest rate changes over time, raising or lowering the value of the asset. This makes long term planing more difficult for banks.

So there is no inconsistency or error in anything I have written.

In the after market or secondary markets, there is still an interest rate. But it may not be explicitly stated. In the case of a zero coupon bond, the price of the bond is discounted as you noted so that it will yield a given interest rate. Similarly, coupon bonds may be discounted because interest rates have risen or sold at a premium if interest rates have fallen.

joepistole,
No my first statement was correct.
No, Billy T was correct in his remarks. You are either confused or intentionally trying to confuse others.
Determination of present value in the after markets or secondary markets is very different than determining present value in an original contract. When a loan is originated you do not have multiple parties as you stated. The interest rate used by the bank is a market rate...what other banks charge for similar quality loans.

My point is when a bank originates say a mortgage it knows the term and it knows the payment frequency and it knows the interest rate. The bank books the present value of that loan as an asset.
When a bank first originates a loan, the value of that loan is the book value, the value that is carried on the balance sheets. At origination, book value, present value and market value should be appox. the same. As time passes, the market value will change as the asset either gains or loses value. If the asset gains in value, the bank will adapt the new, higher market value to gain access to the increased equity in the asset to borrow new monies against. Normal accounting practice requires the bank to write down the value of the asset on their books if it loses market value. In neither of these instances is it required that the asset be sold. The present value of the asset also changes with gains or losses in the market value of the asset, but present value is a calculation dependent on several parameters that can be manipulated in assigning a discount rate. Future inflation expectations can be assigned a low rate which increases the present value. The future value of the asset can be assumed to be the same as the book value, or higher. Future interest rates can be assigned a low level that increases the present value of the asset. In short, by assigning rosy values to the discount rate, the current value of the asset can be increased to levels much above the market value of the mortgage. The banks do not want to sell their troubled assets because they would have to book the loss immediately. By employing present value calculations, they can delay writing down the value of their assets to their true market value. For those present value calculations to reflect anything resembling reality, interest rates must remain low, inflation must remain low, defaults must not increase, and the asset must regain most of its book value over time. In other words, a sharp V-shaped recovery with assets gaining back to near where they were before the recession. The banks are not prepared to handle a wide 'U', high inflation rates (not 'hyper' inflation) or even worse, an 'L' with stagflation.

joepistole,

No, Billy T was correct in his remarks. You are either confused or intentionally trying to confuse others.

When a bank first originates a loan, the value of that loan is the book value, the value that is carried on the balance sheets. At origination, book value, present value and market value should be appox. the same. As time passes, the market value will change as the asset either gains or loses value. If the asset gains in value, the bank will adapt the new, higher market value to gain access to the increased equity in the asset to borrow new monies against. Normal accounting practice requires the bank to write down the value of the asset on their books if it loses market value. In neither of these instances is it required that the asset be sold. The present value of the asset also changes with gains or losses in the market value of the asset, but present value is a calculation dependent on several parameters that can be manipulated in assigning a discount rate. Future inflation expectations can be assigned a low rate which increases the present value. The future value of the asset can be assumed to be the same as the book value, or higher. Future interest rates can be assigned a low level that increases the present value of the asset. In short, by assigning rosy values to the discount rate, the current value of the asset can be increased to levels much above the market value of the mortgage. The banks do not want to sell their troubled assets because they would have to book the loss immediately. By employing present value calculations, they can delay writing down the value of their assets to their true market value. For those present value calculations to reflect anything resembling reality, interest rates must remain low, inflation must remain low, defaults must not increase, and the asset must regain most of its book value over time. In other words, a sharp V-shaped recovery with assets gaining back to near where they were before the recession. The banks are not prepared to handle a wide 'U', high inflation rates (not 'hyper' inflation) or even worse, an 'L' with stagflation.


I think it is you who is confused my friend. Essentially there is nothing new in your comentary that varies with mine except your description of mark to market is more explicit.

The point I was making is that present value or book value is created at loan origination based on a set of expectations which are reflected in the interest rate assumptions. Debt instruments have fixed obligations and the contract does not change over time. The assumptions used to value the contract may and often do change over time. Thus if a contract/debt is repriced it will need to reflect a new set of assumptions in the interest rate/discount rate used to calculate a new present value/book value for the obligation. In summary present value or a book value is determined at a point in time based on a given state of assumptions the market is pricing into debt instruments and prices change over time. But I repeat if a bank or other debt owner holds a loan to term the terms value of the loan, excluding opportunity cost, will not change.

And I repeat, Mark to Maket is a nice concept. But in practice it is a bit more cumbersome especially in turbulent times. As for your comments about rosy assumptions, accounting manipulations are as old as accounting itself. You should know that financials always included a set of assumptions....that is how earnings can be managed.

Billy T, I was refering to Present Value of a given contract. It is very easy to calculate present values as debt contract has fixed all of the elements needed for a Present Value Calculation (term, interest rate, Payment amount and frequency). ...

No my first statement was correct.{quoted above} I was refering to a first time note, the kind typically originated by banks. ...

joepistole, No, Billy T was correct in his remarks. You are either confused or intentionally trying to confuse others. ...

As I pointed out before, if the present value were the same for every bidder as it results from a calculation based only on the values in the contract, then why are there auctions? Why not just a lottery to select the winning bidder if all think the present value is the same? Perhaps if you try to answer that question you will understand your error.

Also your error is very clear, as I said before, if you do your suggested method of making a present value calculation for a 10 year, $1000 face "zero coupon" bond. The interest rate of them being zero causes your "first post error" method to lead you to the very silly position that the present value is $1000 even though you get only the promises of payment of $1000 ten years from now.

Recall from my prior post of this that someone (A) with a 7% discount rate will bid ~$500 for it and some else (B) with a 3% discount rate will bid about $750 for it. You, using the zero interest rate of the contract as the discount rate as the discount rate will calculate a present value of $1000 and bid $1000!!!

Have you ever done a present value calculation? ( The easiest to do is for the zero coupon bond.) I did my first more than 50 years ago. It was a little offensive for you to quote Wiki to me.

BTW, I did go to the Wiki link and can see why they mislead you into thinking that the present value is a fixed value all agree upon. Wiki is often wrong. In prior paragraph A's present value is $500 and B's is $750 and THIS IS FOR A JUST BEING AUCTIONED US BOND. (Stop trying to duck and weave by switching to discuss the fact that present values change with time.) If the contract were not a "zero default risk" US bond then various calculations of present value would differ even more.

You should stop defending your error. Thank 2inqusitvie and me for taking the time and effort to correct your error.

According to Dr Marc Faber, editor of the Gloom Boom Doom report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years was 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.


First, the Dow is a somewhat arbitrary basket of stocks, but stocks in genetral do not need to be thought of as "one asset class." Thyere are various different stocks with very different chanracteristics. Buy shares in a repo company and you will find it's almost directly countercyclical.

Second, the analysis above seems curious to me. Take *any* asset and compare it against the Dow and, in terms of its rates of return, sometimes it will outperform the Dow, and sometimes the Dow will outperform it. Almost never do two different assets have identical rates of return over any non-transient period. Even if that asset is a mutual fund that tracks the Nasdaq, or (especially) a single share of any goven stock that makes up the Dow. It would be something to find that there was a flip every 4.72 years or something, but if you can arbitrarily set the timeframes from period to period, all Dr. Faber found was the obvious. (He might might easily have found 5 "major phases" or 500 or onloy 2, depending on the asset he chose, but the same trick could have been done with pork bellies, and I guarantee a generally similar looking result.)

"...Those who think gold is a great investment need to think again, too. Sure, it can be one. And it has been one -- now and then. But over long periods, it doesn't have the best track record. Check out what $1 invested in various things between 1802 and 2006 would have grown to:

Investment / Real Return, in 204 Years
Dollar / $0.06 (All numbers are inflation-adjusted.)
Gold / $1.95 - {Gold does protect agains inflation, long term IF you ignore the storage cost and robbery risk.}
T-bills / $301
Bonds / $1,083
Stocks / $755,163 (Data: Jeremy Siegel, Stocks for the Long Run.)

$100 investment would have netted you more than $75 million in stocks, while your money wouldn't even have doubled in value if you owned gold. {Bily T adds: & you paid to store it or risked it be stollen, possible with your death during the robbery.}

I know, we won't be investing for 204 years. And gold has done well lately; it recently topped $1,000 per ounce. That's more than twice where it was five years ago. But check out these returns:

Between / Total Gain or Loss with Gold:
1900 and 2000 / 1,372%
1900 and 1950 / 83%
1970 and 1980 / 1,607%
1980 and 1990 / (38%)
1990 and 2000 / (27%) (Data: National Mining Association.)

Clearly, you can do rather poorly with gold over various long periods. The 1970-to-1980 period is legitimately exciting, with an annualized 33% gain.
But even the overall 1,372% gain isn't so hot, since it's over 100 years. Annualized, that comes out to just 2.7%.

You can do better:
So go ahead and invest some of your money in gold if you really believe in it. Just know that with prices near all-time highs, it might be more likely to fall in value than to keep rising -- which is why it's good to seek out investments that seem cheap. But consider parking much of your money in places where it's most likely to grow well for you, such as stocks. ..."

FROM: http://www.fool.com/investing/value/2009/10/07/stocks-that-are-better-than-gold.aspx

On "You can do better" final paragraph, Billy T adds:
Especially ADRs of companies with growing economies, like Brazil. - In dollars from Dec08 crash low until yesterday, the BoveSpa index, (Brazil's S&P 500 or dow) is up 180% ! - much more than the dow or S&P. Part of the is due to the dollar dropping from 4Dec08 peak of buying 2.536R$ to yesterday dollar worth only 1.750R$. I.e in ~10 months, the dollar has lost 31% of it value vs. the Brazilain Real. Also, in case you think this 10 months is cherry picking then note during Lula's 9 years, the BoveSpa in dollars is up 1100%, but that too is "cherry picking" as when "left wing" labor leader Lula was a "just elected" unknown, a lot of money was trying to get out of Brazil.

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/6546579/Barrick-shuts-hedge-book-as-world-gold-supply-runs-out.html

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/6546579/Barrick-shuts-hedge-book-as-world-gold-supply-runs-out.html

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold. ... Quite possibly Barrick is correct, but two factors need to be considered when evaluating their statement:

(1) It is strongly in Barrick’s self interest to encourage the belief that gold is well past "peak gold."

(2) Many parts of the world have not been explored with modern methods or if they have been, the controlling government is not telling the results.

For example China is now the world's largest gold producer and rumor has it that they have found a huge gold ore deposit in a several kilometers long East-West strip near their northern border. Even if the ore is not rich in gold, the scale of the deposit and a somewhat higher price may bring a large amount of gold to the market in less than a decade - postponing "peak gold" for many years. China has recently changed the laws to let foreign gold industry participate in gold production in China.

Also a large gold ore deposit has just been found in the mid east - one of the former USSR's Islamic states, but I forget which. - Search a little and you should be able to learn which.

Telling when “peak X” has occurred is not easy until years later, but I think we can safely conclude that “peak sperm whale oil” is long past now. :D

I was thinking that if a decent stable world currency, private or public, backed by companies or nations, linked intelligently to commodities and labor rates and global population, was created then all this storage of gold as currency and a inflation hedge would be unnecessary and the value of gold would plummet. I knew that industry, architecture decorations and dentistry were not consuming much of the gold. I was thinking that most of the gold produced was sitting around as gold bar in vaults. I was wrong.

Most of the gold goes to Jewelry. About 1/4 of the gold produced in the world goes to Jewelry for Indians. One of the reasons Indians like Gold is distrust in currency. I think crime will increase in India and then perhaps Indians will not want to keep so much of their wealth in Jewelry.

There is about $950 worth of gold in Jewelry, coins, bars dentistry and electronics out there in existence for each of the earth's six billion people. Since 3/4ths of the earth's people have very little wealth the other fourth must have about $3,800 worth of gold per person mostly as jewelry. I did not think Middle class Americans had that much gold. The Wealthiest 10% of Indians must have more like $12,000 worth of gold per person in their jewelry.

Edit- there was a whole in my thinking. Current gold consumption does not =accumulated gold. Indians are adding about $25 worth of gold per person per year if I did my math right. That does not get them to owning so much Gold.

Gold does not wind up in the trash or blowing in the wind as dust so almost all the gold ever mined is still in use and it gets repeatedly recycled.

So, gold's value is peoples distrust of currency and people's particularly Indians love of Gold jewelry.


Quoting from various sources:

The best estimates available suggest that the total volume of gold ever mined up to the end of 2006 was approximately 158,000 tonnes, of which around 65% has been mined since 1950.

According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.[14] About 2,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

What percentage of Gold is used in Jewelery, Industry and Investment?
Around 70% of gold demand is jewelery, 11% is industrial (dental, electronics) and 13% is investment (institutional and individual, bars & coins). Gold jewelery has strong "investment" attributes in all countries, and in markets such as India and Middle East is sold by weight at the prevailing daily rate with a supplementary "making charge" which varies according to the complexity of the piece. Jewelery is not used as currency in any market. I hope this answers your question: for further details see our website where you can subscribe to access further demand data and commentary.



Who owns most gold?
If we take national gold reserves, then most gold is owned by the USA followed by Germany and the IMF. If we include jewelery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries.

India is the world’s largest consumer of gold, as Indians buy about 25 per cent of the world’s gold,[37] purchasing approximately 800 tonnes of gold every year. India is also the largest importer of the yellow metal; in 2008 India imported around 400 tonnes of gold

In 2001, global mine production amounted to 2,604 tonnes, or 67% of total gold demand in that year. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes.[35] This can be represented by a cube with an edge length of just 20.2 meters.

Gold is so stable and so valuable that it is always recovered and recycled. There is no true "consumption" of gold in the economic sense; the stock of gold remains essentially constant while ownership shifts from one party to another.

Indian consumers buy about 25 per cent of the world’s gold, the vast majority of which is imported, making the country the largest market for the metal.

According to James Burton, chief executive of the World Gold Council, the global miners’ group, in the first half of 2007 India was on track to buy more than 1,000 tonnes of gold for the year, but demand “tailed off at the end of the year”, as gold prices rose. Jewelers in India have been particularly hard hit and tell of subdued sales as consumers baulk at high prices. Even families of marrying couples, traditionally obliged to drape newlyweds in the precious metal, are passing on family heirlooms instead of buying new gold.

India’s handful of gold mines produce about 2.5 tonnes of the metal each year, a fraction of the country’s annual consumption of about 800 tonnes. It is unclear how much gold India could yield, although Mr Reddy has alluded to possible domestic reserves of 25,000 tonnes.


"Most observers calculate central bank reserves are supposed to have about 30,000 tons of gold worldwide in their vaults, but we believe the amount of gold actually there may be more like 15,000 tons," Murphy said. "The rest of the gold is gone."


The world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion, e.g. every cubic kilometer of water could contain 10 to 20 kg of gold).

Rank Country/Organization Gold
(tonnes) Gold's share
of total
forex reserves (%)[8]
1 United States United States 8,133.5 78.9%
2 Germany Germany 3,412.6 71.5%
3 International Monetary Fund 3,017.3 -
4 France France 2,487.1 72.6%

Rank Country/Organization Gold
(tonnes) Gold's share
of total
forex reserves (%)[8]
1 SPDR Gold Trust 1,104[12] -
2 iShares Gold Trust 66.9 [13]