The gold standard

Discussion in 'Business & Economics' started by Norsefire, Apr 17, 2009.

  1. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    One thing that gives some confidence in reasonably honest CPI index (Used to adjust principle value of TIPs) is that the Social Security payments are also adjusted annually by The CPI and for next 25 years or so the voting baby boomers will make politic pressure to demand government not play excessive games with the CPI. Also TIPs do have always full face value even if US were to sink in a deflationary period (negative changes in the CPI) I.e. TIPs have a floor under them. Terrible deflation would be a benefit / increase in purchasing power for recently purchased TIPs at least.

    I recently posted last week’s Treasury interest rates on regular issues and TIPs, pointing out both that the rate curve is rapidly growing steeper; (which I take to mean many now think the dollar will collapse in less that the long term. China has publicly expressed that fear and is buying real assets much more than it was) and that the "insurance cost" of TIPs is quite modest now,* IMHO, for the protection you do get. See that post at:

    http://www.sciforums.com/showpost.php?p=2248670&postcount=49

    SUMMARY: I like TIPs for holding dollar based assest, but best held in tax-defered fund (like IRA or 401 or 403 b) as otherwise the interest (perhaps the step up in principle?) is annually taxed even though not recieved. Mine are in TIAA/CREF & Vanguard's inflation protected funds but they hold about 20 or 25% non US TIPS so you have some diversification and active management for only about 0.2% annual fee.
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    *Mainly, I think because with current deflation fears people think: Why buy inflation protection?
     
    Last edited by a moderator: May 11, 2009
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  3. jmpet Valued Senior Member

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    I like gold but I am a silver man- Silver's the way to go.

    And in the big picture, Precious Metals are always the way to go- we mine a finite amount of it all while the world population is soaring.

    I personally don't care if I paid $50 too much or too little as much as know I physically have it in my hand to be tucked away. This has been my philosophy for the past 30 years and it's never proved wrong.
     
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  5. nirakar ( i ^ i ) Registered Senior Member

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    I don't have so much faith in baby boomers (I am one) ability to look out for their own collective interests. First the Baby Boomers would have to become economically literate.

    The impending crisis of baby boomers wanting Social Security money and Medicare money probably is what prompted the Clinton administration to start cooking the inflation accounting in the first place.


    What are "non US TIPS". The "T" in tips is for the US Treasury. I might be interested in buying other nation's versions of TIPS using their Inflation rates and denominated in their currencies. I am not aware of a way for me to do that.
     
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  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    You could go to vanguard.com and probably get a list of the holdings in their VIPSX fund to get specific issues. At TIAA-CREF.org, there is the more reasonably named "CREF Inflation-Linked Bond" fund, which is also not only US TIPs. There will be some corporate bonds in both that are inflation adjucted also - higher yields and higher risk, but that is why you pay ~0.25% for the management fee. I am reasonably sure that Great Britian has their version of TIPs.

    There are so many ETFs now days that there may be one that only buys non-US "TIPs" - I do not do much with ETFs as I think I can do as badly as they can by myself, without their fees.

    Please Register or Log in to view the hidden image!

    :shrug: Also, when credit is tight, like now, some ETF investors tap them for necessary expenses, forcing the ETF to sell assets at depressed prices - take losses - this can feed on itsself and drive the ETF price down.

    I tend to call all these inflation adjusted bonds "TIPs" but you are correct: the T is for {US} Treasury. I would not recommend buying any direct as that makes IRS filing more complex. I.e. I think the normally upwards adjustment is taxable in the year it occures even though you do not get any money until the TIPs matures. Hold them only in a tax defered account like an IRA or 401k etc. Your management fee also provides hopefully intelligent adjustment of the average maturity date. I think that is about 8 years at both CREF and Vanguard now. Like any bond the longer term is the more it will fluxate with interest rate changes, inflation expectations, fear/ greed indexes, etc.

    PS - Are you, as a "baby boomer," already collecting S.S.? If you are for more than a year, you are getting an annual letter telling how large is the inflation adjustment. It does not take much "economically literacy" to notice if it is larger or small. (Last was ~4% as I recall.) I expect that it will be near zero when the letter for 2010 S.S payments comes out in late 2009. You will see then how much howling the baby boomers can make to congress. They have already gotten the required minimum distribution from tax defered investiment normally due from all who are 72+ years old cancelled. - The argument was that it was not fair to force sales of assets that had fallen so much. I have taken the simple steps to kill all of my normally taken RMDs.
     
    Last edited by a moderator: May 19, 2009
  8. Nasor Valued Senior Member

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    That's nothing! My $100 bills sell for $2835 per ounce.
     
  9. nirakar ( i ^ i ) Registered Senior Member

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    No, I am from near the end of the Baby Boom. It's going to be a while before I start collecting Social Security especially if they raise the retirement age a few more times.
     
  10. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    "... the case for gold as a defensive asset is closed by its utter failure to protect and preserve wealth in the last three bear markets. The precious metals are still an interesting asset class that may, but not necessarily, offer some diversification. There also may be some monetary linkage, but the evidence for that is poor, as is the evidence of its role as an inflation hedge: The real value of gold has been whacked in half from its 1980 $850 peak to its recent new high.

    To wit, the real value of a dollar invested in gold at the 1980 peak of $850 is approximately 44 cents today. To be fair, had you bought at the low of $102 in 1976, you’d have done better, up a real 250% for about a 4% per year real return, but that still lags stocks. ..."

    From: http://www.moneyshow.com/investing/articles.asp?aid=GURU-16844&iid=GURU&scode=011415

    Also not mentioned is that you must pay for bank box to hold it, or trust some company to not issue more certificates than they have real gold backing for, or keep it under the bed and loss it all to a robber.

    SUMMARY: Even if you have great timing, long term, Gold has always been a loser but short term, if your timing is good, it is posible to profit with Gold buying and selling (at least a small fraction of what the trading gains available, at the same time, from well chosen stocks etc. would have given you.)

    There is also the fear that some central bank, hard pressed to balance its budget without making tax payers too mad (Perhaps the US ?) will dump tons of vault gold on the market.
     
  11. joepistole Deacon Blues Valued Senior Member

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    22,910
    As pointed out, gold is not and historically has not been the great preserver of wealth as is often touted...especially by the right wing pundits. I think one of the reasons folks seem to think it has value is because in times of crisis it tends to move higher in price. This I think contributes to the aura that it is the panacea for all financial ills.

    The reality is it is just another commodity with its own demand and supply curves. It has no "intrinsic" value. It is only worth what people will pay for it at a given point in time. As Billy T said if you are concerned about inflation, TIPS are a much better investment.
     
  12. Repo Man Valued Senior Member

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    Screw gold. Here is some real money!

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    Micronesia is an archipelago in the South Pacific in which dollars pay for most purchases, e.g., at local merchants that sell imported clothing, food, or cars. On the tiny Micronesian island of Yap, however, carved limestone wheels ranging in diameter from 31 inches to 12 feet were used to consummate transactions for over 15 centuries. Exchanges involving such traditional things as dowry rights or land occasionally still turn on payments using these ancient stone sculptures.
    http://www.unc.edu/depts/econ/byrns_web/Economicae/Essays/Focus/Comm_Money.htm
     
  13. Nasor Valued Senior Member

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    At least most other commodities have their prices somewhat closely linked to their intrinsic usefulness as industrial materials, foods, etc. Gold's price appears to be based almost entirely on people having a vague idea that it's suppose to be valuable.
     
  14. joepistole Deacon Blues Valued Senior Member

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    That is true, a good portion of gold demand comes from folks who like to stick it in a vault somewhere. That is why the human facination with the metal is so bizzare. We spend fortunes finding it, mining and refining it only to re-bury it in a vault somewhere.

    I would like for someone to explain that behavior to alien...bizzare indeed. It reminds me of birds decorating their nests with various trinkets.
     
  15. Nasor Valued Senior Member

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    But as somebody pointed out earlier, the fact that it's relatively useless actually makes it a better choice for use as money, since we aren't tying up anything particularly useful by hording it in vaults. If we used a commodity that was actually useful as money, we would be depriving the economy of something that actually had utilitarian value.

    The funny thing is, there seems to be zero chance of the world waking up tomorrow and saying "wait, why the hell would I actually want this?" for genuinely useful things like oil or rice or iron. But that could hypothetically happen with gold, which could result in a huge drop in its price, basically screwing everyone who is hording it as a store of value. But of course I don't know why that would happen now, since it apparently hasn't happened in the last few thousand years.
     
  16. joepistole Deacon Blues Valued Senior Member

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  17. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    It would have if Lenin had been sucessful with the creation of "the new soviet man." I.e. workers who would work for the good of the state, not be driven by greed, etc. "From each according to his abilities and to each according to his needs." etc. So Lenin pondered what should be done with gold, in the new world to grow from the USSR. The answer was that it could be used (in bricks or tiles) to pave the floors of public bathrooms.
     
  18. unexplained_mysterie Registered Member

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    I never was a fan of going back to the gold standard. it would take massive amounts of gold for it to work. I also think that just because a nations currency is backed by gold, doesn't mean it will stay that way. I think if we still had the gold standard we still would be in a recession from the 9/11 attacks because the government wouldn't be able to cover it with more gold.
     
  19. joepistole Deacon Blues Valued Senior Member

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    The system we have is really pretty impressive. The biggest threat to our economy is political closely followed by our educational system. I am truely amazed by how little folks know of our history and the lengths some will go in order to amass political power.
     
  20. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    I answered this in post 21 already but read more today on this question - See comments below your quoted post.
    "... TIPS have principal balances that are adjusted each day to keep up with changes in the Consumer Price Index (CPI). Although the CPI is a commonly used equivalent for the rate of inflation, some economists contend it overstates inflation by a small percentage—somewhere between 0.8 to 1.6 percentage points per year.***

    That's because the CPI measures consumer prices, not consumer purchases. If the price of steak goes up, some shoppers will substitute less-expensive chicken to stay within their grocery budget. But the CPI keeps measuring the price of steak, not the price of the substitute.

    As a result, economists contend, people's actual spending tends to increase a little less rapidly than the CPI suggests. For investors in TIPS, this might mean that the inflation adjustment might be a little more generous than the rise they experience in their cost of living.

    ***The Consumer Price Index and Public Policy, Joint Economic Committee brief, December 1996.** ..."

    from: https://retirementplans.vanguard.com/VGApp/pe/news/TIPS.jsf?SelectedSegment=LivinginRetirement

    **And here is a link to that:
    http://www.house.gov/jec/fed/inflat/cpi-2.htm

    I have made the point of the bold text above several times in the last few years when recommending TIPs to those without the balls to but money into Brazilian real. (When I first did a Dollar bought slightly more than the official 4 R$/ $ (on the grey market, which either is legal or is always tolerated.) today your dollar will buy only 1.889 Real - I.e. If I were foolish enough to use Real to buy back dollars today, I have more than doubled the dollars I put into real 6.8 years ago, just when everyone Brazilian with money wanted to buy dollars as it looked like that left wing radical, Lula,* might be elected. Confiscate the funds of the wealthy, repudiate the national debt etc. (Lula founded and lead the largest labor union.) I sold some dollars directly to one who had real he could not explain why to tax people if there was a record. 5 real for each of my dollars we agreed.

    When I made the bold text's point I said that if you have medical insurance and no college bills late in life your personnel inflation was surely less than the CPI correction but as bold text notes EVERYONE can make that true by being a little flexible in what you buy. Read my post 21 main point too -to see the government will not be able to change the way the CPI is computed, at least not until the "baby boomers" are dead.
    -------------
    *Lula is a little more than one year from end of 2nd term with an approval rating of 89% and among the very wealty more than 70% ! Some would like to see his do what they did in Argentia: have his wife run for the presidency to get around the 2 term limit. Others want to change the constitution, but Lula refuses and say he will not run if they do. Not bad for a man who can not even speak his own lagualge gramatically correctly, knows no others and got his first shoes at age 12 from his illerate parents. (I think they were "hand-me downs" from an older brother.)

    To get back on thread: Except doing nothing to end corruption, Lula is the gold standard in Brazil.
     
    Last edited by a moderator: Jul 24, 2009
  21. desi Valued Senior Member

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    1,616
    Government is not responsible unless its citizens keep it in line. The dollar was originally a standard measure of gold you could trade paper currency for. That was the value of the dollar. If the government printed more currency irresponsibly and the people found out there would have been politicians hanging from trees across the land because the theft would have been obvious, compared to the way they do it now by printing more money while the ignorant public no longer understands.

    The value of fiat money is an illusion which can be dispelled at any time by a collective lack of confidence. Try to buy a candybar with Monopoly money and you'll see what it will be like when the dollar crashes.

    If i offered you a gold coin for your phone, shoes, shirt, cooking pan would you give them to me?

    That is why bullion is a handy thing to use when backing up a currency. You warehouse it in a place like Fort Knox and pay the guards to watch over it.

    Its also easy to warehouse and using it does stabilize a currency.

    I would give money to see you carry around 4 gold coins worth of gasoline, canned goods, potable water and alcohol. Throw in a gun and some cigs for good measure.
     

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