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How's that gold trade working out for 'yall?

Great! Bought mine at $780.00, and as you repeatedly and correctly point out, nothing has been solved, and IMO there is no path to success from here. I am on record predicting one final deflationary sag before the final print-fest begins; if you watch the hedgie punditry, they are coming around to my way of thinking, not yours. This current sag might be "it," and it might not. Besides, gold started the year at $1400, and now it's at $1600. And, there's a debt ceiling raise of $1.2 Trillion coming up real soon.

Deflationists' views on the inflation / deflation debate suffer from one major flaw: the conflation of money and credit in any discussion of "monetary aggregates." It is undeniable that vast "monetary creation from nothing" (which we handily refer to as "printing") has occurred. Fredgraph "Adjusted Monetary Base" shows this. It is undeniable that "printing" destroys the value of all currently-existing money. It is undeniable that FDR deliberately and forcefully devalued (inflated) the USD by 70% during the Great Deflation, credit aggregates be damned.

If it was acceptable and not harmful to create real money from nothing, then the solution to this problem would be easy: print everyone a $Million, hand it to them, and then housing debts, student loans, etc would be paid off instantly. But they're not doing that; they're just printing enough to keep the banks in the lap of luxurious bonuses, while the middle class dies a slow death. But, printing THEY ARE.

In a deflation, this happens:
1. The buying power of money increases w.r.t. nearly everything else
2. Money becomes scarce and sought-after
3. All of the knock-on effects occur (unemployment, downward wage pressure, increased BK, etc)

What is money? Is the buying power of USD increasing or decreasing? Look back ten years and tell me whether the buying power of USD has gone up or down, and then the same question for gold. The buying power of gold has increased w.r.t. nearly everything, including USD, GBP, CHF, EUR, CNY, BRL, etc etc. USD is a commodity, gold is not. Gold is money.

USDX has barely moved since January 2011. The buying power of gold has increased since January 2011. What's your point?

I confess I could be caught up in a massive confirmation bias, but everything that is happening makes perfect sense to me. The final blow will probably be a ME war which will be blamed for all of the deficits to come, and to cover up the resulting inflation. To do this, though, they need a real war, not some smallish Iraq thing; they need something that will run for years in a big way. That's what scares me. The ME war could easily morph into something larger, given that Iran has allies, Russia in positioned to roll into the Caucasus virtually unopposed, Japan has signed a currency deal with China and agreed to buy Chinese bonds (!), Kim Jung Whackyf*ck is dead, etc etc.

Big wars don't improve the finances of any country involved unless they are the only productive system left standing or if they steal everything not nailed down in the defeated countries via outright theft or via reparations.

I'm not sure why people think otherwise.

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I confess I could be caught up in a massive confirmation bias,

You are. The entirety of the commodity complex prices on the use of CREDIT, which you claim (correctly) is the problem. Yet your price is determined by a levered instrument running at 10:1 or more gearing. When that credit disappears pricing will contract, perhaps by as much as 90%. All "things" in the economy that price off a credit instrument will fall in nominal price.

In other words your thesis of advancement (or even simple holds) in commodity prices are dependent on ever-expanding credit.

This goes beyond logical inconsistency and well into the realm of willful blindness, and the continued insistence that physical metal will "decouple" from those levered instruments and skyrocket while the levered instrument will not move has been run since I became aware of the financial markets more than 30 years ago and has been wrong every single year since.

Somehow, the MF Global situation will have dire consequences in 2012. Specifically, the confidence in the markets is shaken because customer funds are not generally assumed as sacrosanct in any given institution. When confidence wanes, follow the money and see where it goes.

Let's assume that the current rate of money leaving the futures markets increases over the next 12 months. At a certain time, there is a tipping point where the futures markets lock up due to lack of liquidity. (Gen may be able to shed some light on this one when it happens.) The after-effects will be felt almost immediately. Then if the derivatives market comes to a halt that will be the time when the big bank failures happen. My best guess is that one or two of the banks with the biggest derivatives exposure will be the ones that go down.

Subsequently, the anger and calls to "do something" will be 10 times louder than 2002 after Enron and Worldcom. I'm not going to predict the re-imposition of Glass-Stegall yet unless it becomes politically expedient to do so. MF Global is the wake-up call for 2011 as Enron was ten years ago.

The MF Global thing is already far more serious than is being let on. I've talked about this repeatedly. There are many grain producers who have said "**** it!" and are moving to direct contracts with users of their products (e.g. cereal makers) rather than using these markets.

They will NOT get ****ed twice. The entire premise of hedging and everything that is implied by it (including reasonable price stability) is going to right out the window unless this is addressed damn soon, and so far there's been NOTHING coming from DC that has indicated they understand the severity of the problem or intend to deal with it;.l

Genesis wrote..

. . . many grain producers . . . are moving to direct contracts with users of their products (e.g. cereal makers) rather than using these markets.

Why would this be a problem? From my layman's POV, this seems like a GOOD outcome.

You'd like to buy an airline ticket for more than a month in advance at a fixed price?

That's going to disappear, among others.

No, it's NOT a good thing.

Absent the ability to reduce risk (which hedging does), said risk will need to be "priced in" at the producer level. This won't help consumer prices. And, as Gen points out, some pricing will simply disappear, as the risk level will simply be unknowable absent these hedging markets.

"Very good then. Now, make sure that a draft for the entire amount is deposited with my clerk. I don't ship until I have the cash in hand."

Start at index 9:30...

Yep.

People who think this is "good" are out of their ****ing minds.

This market function has existed since LITERALLY the time of the East India company! It is NOT a "modern" construct. If it disappears, and it looks like ti might, the consequences will be catastrophic.

Failing to immediately indict and jail Corzine and the entire rest of the executive suite of MF Global until the funds were coughed up was a HUGE mistake. Someone knows where the money is and the fact of the matter is that the integrity of this market is utterly critical to the orderly markets for everyday transactions we all enjoy and depend on.

Humans are not very good at predicting the future.

In calculus class they teach you to take little time slices to approximate large curved systems. This is what I think humans do - they find themselves in some complex cyclical or wildly curved system, and because they can only process small time slices - they assume because things are going up or down at that point in time ( ha the second derivative - I remember something LOL) that that is the way it will go forever.

Then the curve rolls over or worse - stutter steps instantly - and we are ****ed.

A good example of such a stutter step would be Dec 7 1941. All changes overnight. Taleb's black swan there.

IMO - if you want to predict things - it makes more sense to look at how the fundamental institutions of your society are performing and how the emotions are changing.

IMO - echoing Karl - MF Global is far far more important than almost anything that has happened, maybe since 911. One of the primary institutions propping up trust in the system has imploded and no one is exhibiting any drive to fix it.

That's beyond bad.

There is a ****ton of events out there waiting in the wings to black swan us - it may not matter so much what 'particular' event happens next, all that matters is that you understand that they are out there, standing in line, just dying to drop kick you in the nuts.

So my advice is, buy a cup. Hell buy a lot of cups - whatever you think they might be - and don't forget to wear them - cause I think you're going to get less and less warning as time goes on.

My my most helpful 2012 prediction is ... we're gonna get kicked in the nuts LOL.

I will add - as a long time gold bug - I think anyone holding gold right now is doing about as well with it as they ever will. Look at my sig. The price of gold is controlled by TRADERS - now it is possible that that could decouple - but it never has, so why would it now. Traders use CREDIT. Credit is going to DIE. Ergo, gold, will, at some point DIE ALONG eith it.

And I say this in the most helpful manner possible. I bought gold at $270. Buying it here is insanity. Holding it here takes giant ****ing balls. See above. Big balls makes for a big target. You like risk - knock yourself out, but considering all the troubles that are in the wings, betting the farm on a commodity, ANY commodity, does not strike me as 'buying a cup'. YMMV

Yah, DC will get right on it...and hold a few more hearings...and ask a few questions...

http://www.humanevents.com/article.php?i....
Thune: What Corzine Won't Tell Us, the FBI, CFTC Will Tell Us

In an exclusive Human Events interview, the senior Republican on the Senate’s Agriculture Committee's Jobs, Rural Economic Growth and Energy Innovation subcommittee discusses his take on the MF Global bankruptcy scandal.

“I have heard from several South Dakotans who were affected by the apparent fraud that occurred in the final days of MF Global before its collapse,” said Sen. John R. Thune (R-S.D.), who worked in the Small Business Administration​ under President Ronald W. Reagan.

[Video of Thune's December 13 questioning Corzine is at the bottom of the article.]

The firm’s Halloween bankruptcy was followed by the November 4 resignation of its chairman and chief executive officer, former Democratic New Jersey senator and governor Jon S. Corzine. In addition to the confusion surrounding the bankruptcy filing, the company cannot account for $1.2 billion in client funds.

Always clinging to Corzine is the ghost of his reputation as a leading captain of Wall Street and an adamant supporter of government regulations, exemplified by his roles in crafting and sponsoring the 2002 Sarbanes-Oxley financial regulation bill that sought to make corporate officers more responsible for the misconduct at their companies.

When he joined MF Global in May 2010, his contract including a “key man” insurance policy to make the firm whole in the case of Corzine accepting a position in the Obama administration.

Thune said he and other senators are more than aware of bizarre circumstance of such a celebrated financier and civic leader would be at the center of this scandal.

“Jon Corzine​ is someone the Obama administration has consistently looked to for financial advice,” he said. “In fact, President Obama called Corzine ‘Our Wall Street guy’ and Vice President Biden​ called Corzine the ‘Smartest guy I know in terms of the economy and on finance.’”

The senator said, “Jon Corzine is a key insider in the Democrat party and the reliance and trust placed in him by this White House raises questions.”

Thune said the co-mingling and other shady practices hurt innocent clients, who did not realize they were at risk. “Customer funds should never be at risk in the event of a bankruptcy such as MF Global’s and their accounts must be made whole.”

In addition to hearings in front of Thune and other senators on the Agriculture Committee, Corzine has appeared before House hearings. The Senate Agriculture Committee has oversight over the Commodity Futures Trading Committee, the regulatory agency for commodities brokers, such as MF Global.

Thune said some of his constituents have been surprised and hurt by the firm’s collapse.

“Farmer co-ops to individual producers have significant amounts of money frozen on account of MF Global mismanagement,” he said.

“In some cases, if the customers do not recover their funds, their ability to stay in business is in serious jeopardy,” he said.

“Crop and livestock producers in South Dakota and throughout the country rely on futures contracts to hedge against losses due to volatility in the market place,” he said.

“Many producers and agricultural businesses lost not only their investments, but also their trust in the futures market. I will continue to work diligently in the Senate Agriculture Committee to investigate this calamity,” he said.

“I had the opportunity to ask Corzine and other MF Global executives to provide a situation in which $1.2 billion of customer funds could disappear without any laws or regulations being violated and I received nearly 11 seconds of silence from the panel,” he said.

“I think Corzine’s silence was telling. While we do not yet know with certainty that any laws were broken, up to $1.2 billion simply does not just disappear from customer accounts overnight,” he said. “I am confident that the ongoing FBI and CFTC investigations and future congressional oversight hearings will get the answers that MF Global customers deserve.”

New regulations are not the answer, he said.

“We do not need more regulations; rather, existing regulations must be enforced to ensure that businesses entrusted with customer funds are playing by the rules,” he said.

“It is unlikely that any Dodd-Frank regulation would have prevented the customer money from disappearing in the event that MF Global improperly used customer segregated funds to buy European sovereign debt, as many have speculated,” he said.

“Customer funds at futures commission merchants have been regulated since the 1930s and the U.S. has never seen a bankruptcy at this scale with up to $1.2 billion in missing customer money,” he said.

The senator said the role of CFTC Chairman Gary Gensler in the scandal feeds his skepticism in relying on regulations, since the chairman’s friendship with Corzine may have given MF Global private considerations.

“Chairman Gensler and Mr. Corzine have known each other for several years. I am concerned that Chairman Gensler recused himself of the investigation on account of this relationship, but did not take a similar action when Mr. Corzine lobbied the CFTC on a rulemaking provision to tighten restrictions on how customer funds could be invested,” he said.

“Ongoing investigations must also focus on any preferential treatment that MF Global may have received from the CFTC,” he said.

“I will continue to ask tough questions to ensure that both regulators and those directly responsible for MF Global's collapse are held accountable,” he said.

Truth -

Not intending to argue, just trying to understand the system.

It seems to me that the risk is not reduced by hedging in these markets: it is merely spread over a larger number of players, each of which expect to get a piece of the action by accepting a portion of it. Thus, I would think that the risk would already be priced in, plus some additional amount necessary to make it worthwhile for the players to play.

Also, just like the grain producers, the airlines could contract directly with petroleum companies, etc., etc.

Certainly the convenience of using these markets would be lost, thus increasing prices to some extent, but it is not clear to me that those price increases would be greater than the decreases due to removing some of the middlemen who would otherwise take their own cuts.

You mean we are gonna get kicked in the nuts again and again.

The STABILITY of prices goes in the toilet without these markets.

This may be a little off topic and a pretty simple idea, but I'd never really put it together until a few minutes ago reading an article on Japanese debt.

The reason we have these huge govt deficits is because the politicians want more power and they want to spend more money, but they know they will lose their jobs if they raise the taxes required to sustain their spending.

I don't think it was an intentional act to boost GDP, at least by the politicians. I think the socialist central bankers probably look at it that way, but not the politicians.

Genesis wrote..

The STABILITY of prices . . .

OK, the light begins to dawn. The inability to make other than very short-term economic decisions by individuals and companies results in a much more chaotic system which discourages investment, which curtails productive economic activity, which etc., etc., etc.

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"I didn't want him to die. But the ******* over there WAS going to shoot, and once he did, well, the bullet was loose, so since someone had to get hit by it in the crowd, I pushed him in front of it."

This analogy doesn't accurately illustrate the situation though. The analogy is: "I didn't want them to spend the money because it was irresponsible. But they always spend the money anyway. And once they do, I'm not going to let the taxpayers that I represent be discriminated against when it comes time to hand out the looted taxpayer funds. If I did, that money would just be spent on projects in all the other districts." Think of it this way. Even though I oppose the idea of Social Security, I will still accept Social Security payments because I am in the system and that is the way the system works. That is unfortunately how the game is played in Washington. If you don't play, you get screwed. There are no opt outs. Paul does not have the option of cutting his district's tax burden instead of earmarking funds for them. The taxpayers of his district would simply be paying for pork projects in everyone else's districts. The whole system is corrupt.

When you dance with the Devil you grow horns.

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Credit is going to DIE. Ergo, gold, will, at some point DIE ALONG eith it.

If you are in this camp then gold at any price point is a screaming BUY. You’ll need it as a means to barter for a few chickens, eggs, and milk.

If we're reduced to the level of bartering for food staples why would a farmer give you something he can eat in exchange for something he can't eat or even use to increase or protect the food he is producing?

Maybe because his tractor needs an engine part and the person who has said part wants gold in exchange.

Point being it can and probably will be used as a medium for exchange.

Krzelune wrote..

The reason we have these huge govt deficits is because the politicians want more power and they want to spend more money, but they know they will lose their jobs lives if they raise the taxes required to sustain their spending.

Fixed it.

With just the national election picking a new mascot so we can hang a flag on top of the WH, 2012 is gonna be packed full of lulz.

i can't wait

sounds like the year for small, nimble companies who can turn on a dime and that have lots of cash.