Posts Tagged ‘currency’

How will the market perform from now on?

Thursday, May 27th, 2010

This is what Marc Faber thinks:

Note the last part of the interview- currencies are on the race to the bottom.

How to buy and invest in physical gold and silver bullion

Gold and the strong state

Thursday, March 19th, 2009

Have you walked into a shop that specialises in selling paper money from the past and present from all over the world? Indeed, when holding a Riechmark (the German currency from the 1930s) on our hands, we felt a sense of nostalgia from the past. At some point in time, that piece of paper was used as money by another person to buy his/her daily essentials. Or if you want to be a billionaire, you can easily buy one of Zimbabwe’s currency at a price of say, AU$10.

Alas, all these paper money (currency) met their end and became of value only to collectors. Perhaps as an exercise, you may want to immerse yourself in one of those paper money shops and get yourself acquainted with the history of some of these currencies. Who knows, perhaps one day, the currency that you hold in your wallet will find its way into that paper money shop?

As we explained in our previous article, the whole idea of gold is money. The proper way to understand gold is to see it as money that is not currency. The fundamental reason why you accumulate gold is that (as we said before in What should be your fundamental reason for accumulating gold?) you want it as a hedge against loss of confidence in currently legal tender currency. On the other hand, if you have supreme confidence in currencies, then you will have no reason to hold gold.

As one of our readers, Pete, astutely pointed out before, there are many ways for currencies to lose the people’s rejection as money. Hyperinflation is only one of them. To illustrate this point, we have a story…

In 1940, as the German tanks rolled down to France, many French citizens hopped on to their cars to flee Paris. On the way to somewhere, some had to stop by petrol stations to refuel. It turned out that petrol stations did not accept the French currency as payment. After all, who will trust that the French currency will still be money once the Germans took charge? But if you had some gold coins in that situation, then you are in luck. Of course, when the Germans took over, they issued their own occupation currency and gold went underground.

The point we are trying to make is that gold as money is anti-thesis to a strong state. A strong political state may seek to ban gold on pain of death. That was what happened to China during the Mongol occupation of the 13th century. Marco Polo marvelled that the Mongol Khan had mastered the art of alchemy because paper currency issued by the Mongol empire became money on pain of death. It came to the point that gold, silver and other treasures were exchanged for the Khan’s paper money. Thus, Marco Polo remarked that the Khan was the richest person on earth. Thus, from this perspective, we can see that gold is a symbol of resistance against tyranny, subversion against state power and freedom.

But if you look at history, gold wins in the end because the strong state eventually falls (but the catch is, they may not fail within your lifetime). The Mongols, in enforcing their expensive occupation of China, printed money until there was hyperinflation. It was at that time that the Chinese rebelled against the Mongols and eventually drove them out of China. The subsequent Ming Dynasty continued the Mongol’s monetary policy of using paper as money. But by 1455, China had to revert back to commodity money.

Thus, the major risk of holding gold is that you can be up against the strong state (assuming that strong centralised political power will be the future) who may want to ban gold. But yet again, who knows? For example, Zimbabwe, for all the despotism of Robert Mugabe, has not or were powerless to ban gold.

But if the future turns out to be one in which political power is weak, de-centralised and rivalled by non-state power, then gold is a better bet than pieces of paper called the US dollar. This is the thesis of a strategist in the US Army War College (see From the New Middle Ages to a New Dark Age The Decline of the State and U.S. Strategy).

So, in summary, there’s risk in holding gold. But there’s also risk in NOT holding gold. So, what’s the alternative? Hold real asset (farm land, timber land, barrels of oil, food, guns, etc) instead? Well, there’s also risk as well and furthermore real assets serve a different function from gold. We will talk more about holding real assets later.

Australia’s monetary growth update?February 2008

Monday, April 28th, 2008

Today, we will show you the latest chart of Australia’s money supply growth from July 1959 to February 2008. Our previous update was at Aussie money supply growth- December 2007 update. Click on the below chart’s thumbnail to see it in full-size:

Australia?s monetary growth (July 1959 to February 2008)

The terms used in this chart was explained in What is money?.

The left axis: The dark blue line represents the growth of the monetary base, while the light blue and red line shows the growth of M3 and broad money respectively.

The right axis: The black line represents the ratio of the monetary base to broad money. As at February 2008, this ratio stands at a wafer thin margin of only 4.37%. As we said before in Australia?s monetary debasement & credit expansion, this means that approximately, every $4.37 of original cash

… in the economy gets lent and re-lent, over and over again until it becomes $100 of credit (broad money)

Please note that in that previous article, we used the currency/M3 ratio. Today’s graph uses the monetary base instead of currency in that ratio, which is more accurate representation.

Finally, the growth of M3 from February 2007 to February 2008 was still at a high level of 21.6%.

What is money?

Friday, April 25th, 2008

This is a deceptively simple question. Last time, money was simply gold and silver. But today, in this modern age of finance, money is far more complicated than what it was used to be. It has come to the point that it is very hard to even define what money is, let alone measure its quantity. Alan Greenspan, the former head of the US Federal Reserve was believed to have said ?We don?t know what money is, any more.? Today, we will explain what money is by explaining the various measures of money supply, according to the definitions of Australia’s central bank, the Reserve Bank of Australia (RBA).

A good way to see money is to think of it as an inverted pyramid, the apex of which is the most liquid form (and most favoured by drug dealers). This most liquid form of money is defined as currency. Currency is the (1) physical notes and coins that can be seen, touched and smelled and (2) held by the “private non-bank sector” (which is basically institutions, companies and individuals that are not banks and governments). Currency is mentioned in the graph in our previous article, Australia?s monetary debasement & credit expansion.

The next broader measure of money is the monetary base, which is (1) physical notes and coins held by the “private sector” (which is anything that is not of the government), (2) banks’ deposit at the RBA and (3) what the RBA owes to the “private non-bank sector.” The central bank (RBA) is the bank of the government and banks. Therefore, your bank will have an account at the RBA where it keeps its money, which is the previously mentioned (2). For (3), an example would be the Medicare rebate that you receive from the Australian Commonwealth government. It will come in the form of a cheque drawn from the RBA. The difference between component (1) of currency and component (1) of monetary base is that the former excludes physical money held by banks (e.g. notes stored inside the ATM machines).

The next measure of money is M1. It is comprised of (1) currency and (2) bank current deposit held by the “private non-bank sector.” In Australia, you may have a current deposit account that pays almost no interest and you can withdraw your money from it at any time. This money will be included in M1.

The next broader measure of money is the M3. It comprised of (1) M1 and (2) other deposits with bank (e.g. term deposits, certificates of deposits, etc).

The broadest measure of money is broad money, which comprised of (1) M3 and (2) borrowings of financial institutions from the private sector. Your money kept in high-yield cash management accounts will be part of broad money.

So, how can there be so many measures of money, from the most limited currency (AU$39.4 billion as at February 2008) to massive broad money (AU$ 1074.5 billion as at February 2008)? Well, you may want to read our earlier article, 363 tons of US dollars to Iraq?how much money will eventually be multiplied into the economy?.

Next article, we will show you an updated graph of Australia’s money supply.

Why is China printing so much money?

Thursday, December 7th, 2006

In our previous article, Cause of inflation: Shanghai bubble case study, we explained that the root cause of price inflation is monetary inflation. The Chinese economy is awash with growing liquidity (that is, the economy is soaked with ever-growing supply of money). The next question to ask is: why is money supply growing in China?

One of the culprits for this problem is the inflexible exchange rate of the Chinese currency (RMB). The RMB is not a freely floating currency?its exchange rate is still controlled by the Chinese central bank albeit having some semblance of flexibility. At the current rate of exchange, the RMB is undervalued. Since it is undervalued, foreign capital will want to enter China in the form of foreigners buying up the RMB. If the RMB is a freely floating currency, the demand for it by foreigners will bid up its price, which will reduce its demand as it becomes more expensive. Conversely, as its price rose, domestic sellers of RMB will sell down its price. Finally, a market equilibrium price will be reached where the quantity supplied will meet its quantity demanded. Since the RMB?s undervalued exchange rate is still barred by the Chinese central bank from rising, foreign demand will exceed its domestic supply. So, the question is: where is the RMB going to come from? In the absence of capital controls freedom, the only choice the Chinese central bank has is to print RMB to maintain the undervalued exchange rate. Now, with foreigners armed with freshly printed RMB, they bided up the prices of Chinese assets, including stocks and properties. In the case of Shanghai, real estate prices had reached dangerously bubbled prices. As those newly printed money permeate its way into the rest of the Chinese economy, the result is price inflation. We are hearing reports from the grassroots level that prices of many things (including everyday goods and foodstuffs) in Shanghai are increasing.

Lately (as we mentioned before in Are you being ripped off by fund managers?), we are not keen in handing our hard-earned wealth into the managed fund that is sinking more money into the massive pool of raging liquidity in the Chinese economy. There are better alternatives to take part in the growth of China than to join in the bubble.

Gold & Oil, hand-in-hand

Friday, October 6th, 2006

We love to observe the market. One of the observations we made is that oil and gold seems to rise and fall together, with oil leading the way. What is the unsound thinking of the market that results in this kind of behaviour?

This is how the market thinks: inflation is good for gold price. Rising oil prices result in inflation. Therefore rising oil prices is good for gold price.

In the short term, this unsound thinking will be a self-fulfilling prophecy. But in the long run, it will be exposed as no more than a passing fade. Regretfully, we shouldn?t even call it ?thinking? in the first place- the market?s ?thinking? is often pseudo-thinking that frequently change drastically along with the tide of unreliable human emotions. Today, the market finds it fashionable to ?think? this way. Tomorrow, it will be fashionable to ?think? another way.

So, what is the real deal with gold anyway?

Now, let?s go to the fundamentals. For much of human history, gold was often used as a store of value. That is, gold was money. Initially, with the introduction of paper currency, gold was still used as a backing for paper currency. Therefore, a gold-backed currency instills as much confidence (in its use as a store of value) as gold itself.

In 1971, something happened that shook the foundations of the financial world. The relationship between the US dollar and gold was severed. That is, the US dollar was no longer a gold-backed currency. Since the US dollar is the world?s reserve currency, the money that most of us hold today is no longer backed by gold.

Therefore, fundamentally, the value of gold relative to a currency is an expression of confidence of that currency in its utility as a store of value. This fundamental reason is based on the assumption that gold is trusted as a store of value. Based on the fact that gold had always served this function for most of human history (except from 1971 to today), we doubt its use will significantly change for the rest of human history.

What will result in a loss of confidence of a currency that is not backed by gold? In truth, an un-backed currency is nothing more than a piece of paper (or in this age, digital information). Therefore, monetary inflation (printing of money) will result in a currency losing its value. The effect of monetary inflation will be general price inflation, which is the general trend towards higher prices across all goods and services.

As we said before (see The story of gold), gold was rising quietly (though not so quiet for the past 12 months) for the past several years. What does this tell us?