What Does An Ounce of Gold Cost?

172
Thu, Jan 30, 2014 - 1:17am
This is a metals site, right? Is this not a simple, basic question that one would ask when one first decides to investigate the purchase of an ounce of gold? Of course. But, think long and hard about this simple question, because it sets up the whole discussion:
What does an ounce of gold cost?
No, it is not a trick question. The correct answer requires an understanding. But, the smart ones say, sure, spot, futures, what is the premium, etc. But, stop right there. Let's talk about the real issues.
Before we get there to the answer, let’s look at some facts and connect a few dots. Oh yeah, and let’s brag a little for getting the taper correct, too.
Mr. TF, as good a chartist as he is, is also a mighty fine prognosticator.
TF called the BLT long ago (Bernanke Legacy Taper). Of the pundits, TF was the first one ever, from what I recollect, to correctly make this call. I recall agreeing with him, but I was not 100% committed at the time, as my analysis was more like guesswork. I really did not understand why he was so damn sure of himself, and even more puzzling, how the hell could he have gotten it so damn correct? No one else got it close.
So, let's look as some more. Just a short time ago, TF expressed, eloquently, but firmly, and even posted an excellent guest post from an astute thinker which explained, convincingly, that there was and is NO CHANCE that QE ends, ever. Stated succinctly, QE in the form of FRN creation to purchase US Treasury debt, cannot ever end. Ever.
The reason for that is simple: interest payments paid to hold new debt must increase, to absorb the new borrowing, to reflect the risk and devaluation over time of the dilution of the FRN by the constant increase in their supply by the FED. Simple, right? We all agree on that concept, don't we?
So, as interest rates increase, the existing payment obligations on existing debt increase; the flow, as they say on ZH, will have to increase simply to be able to service the debt. The interest payments are not at all about paying OFF the debt, or paying DOWN the debt. No, not at all.
The interest payments are SOLELY about debt service; that is, keeping payments current so as not to default. IF interest payments, and interest payments only are timely paid, then the market says: Go ahead USA, keep creating FRN's out of thin air, we know you will pay off eventually, but we need to NOT lose money so we need to be paid interest to make up for the loss of purchasing power from your central bank creating more and more FRN's from thin air. Keep the payments coming, and we will gladly let you borrow forever and ever.
Eventually, though, as more debt gets piled into the system, from continued creation of FRN’s by the FED to purchase US debt, the interest payments alone–no principal is being paid at all–will surpass the GDP of the USA. Once that situation is reached, that payment obligation, that is, simple debt service of existing debt, in the form of interest only payments, will go parabolic eventually, the timing being defined mathematically depending upon the interest rate. It is NOT IF, IT IS WHEN!
So, IF the FED stops QE of Treasury debt, that demand sopped up by the FED purchasing US Treasury debt will have to be made up somewhere else. That fall off in demand will have to be made up somewhere, for sure, but there will not be an increase by others unless something changes. Since there is no other good collateral that can be posted, or anything of a secured nature that can be liened, because the sovereign debt repayment pledge is about as good as it gets, short of the creditors occupying the debtors' land and physically taking the goods and services in repayment, the creditors can only accept the sovereign debtor's promise to pay backed by the taxpayers' efforts. As Jim Willie says it, the USA debt is backed by the IRS payment stream.
If interest rates do not increase, then no rational market participant will risk buying US Treasury debt which will in essence guarantee losses unless interest rates go up accordingly.
Simple thought, really it is. QE of US Treasury debt stops = interest rates increase on new debt = higher debt service payments.
The whole scheme collapses once interest rates result in payments exceeding current cash flow revenue. So, either revenue increases, or interest rates must NEVER go up, or else the system collapses. Guaranteed.
Everyone here has been warned, repeatedly, of this reality.
Now, the facts are coming in fast and furious. One need only look in a cursory manner to see signs everywhere.
Today, the readers here all saw with clarity the TF magic of his predicting what the FED would do. Note well, that Pining equally called this outcome, he even had a pretty picture, too. Heck, even a lowly humble attorney, like me, was able to make this easy prediction. How did we know?
Remember, I said it was a near 100% certainty. How could I know?
Easy.
I have been reading this blog since the inception. I have read and read and read, and studied, and questioned everyone and everything. I read everything that people post, I have no agenda, I censor no one, and I prefer to be challenged in my viewpoints, rather than have a monolithic echo chamber. I am a critical thinker.
I am sure that I have also sounded like a complete dufus, knowing nothing, but asking questions and trying to learn, and getting angry replies to my posts from people who would rather attack than help. No matter, any of it.
Slowly, over time, the basic kernels of universal truth took hold, expanding, until at one point, it became clear what the western banking system was really about. When was that magic moment? I am not sure. But it happened here, on this blog, from all the great thinkers, teachers, and the patient types who put it all together, every day and night, for free, out of a spirit of sharing and helping. I am truly grateful.
Now, it is time to pay attention again, in a most important way.
The FRN system is under severe pressure. Signs are everywhere. Western banking will radically change, forever, and those forces of change are acting on the system in a major way as I write this.
Capital controls (China, Russia, Argentina, et al.), forced purchase of USA FRN by the populace (announced by Obummer last night) bail-ins (Cyprus for sure, and other western sovereigns pending), currency devaluation (Venezuela, Argentina), US dollar hegemon collapse (look at all the trade agreements that allow for trade to be settled in currencies other than the US dollar), all of this, is happening in real time right now.
Now, ask WHY such dramatic steps are being taken by the western banking system?
Now, ask WHY the stories are coming fast and furious that gold is moving to the East, that demand for gold by the East is INSATIABLE, and then add to that the anecdotal stories by Andrew Maguire, Jim Willie, and others that gold is both moving East dramatically and per Willie, simply vanished from western control, forever, and what conclusions can be drawn?
None of this is mysterious to anyone that has been a regular reader here at tfmetalsreport for any length of time.
The FED HAD TO TAPER, a BLT if you will, because the only important thing going on now is MOPE. Of course the FED cannot end QE for US Treasury purchases, but paying lip service as to MBS purchases is critical for the banksters to keep alive any semblance of confidence in western banking. There is no longer any real housing market. It is broken beyond repair. There are pockets, but not any real market. Finance is broken. MBS is broken. Freddy and Fanny are broken and broke. Asset values are historically completely out of whack compared to median incomes. Yet, home prices are high, and climbing. Who is buying with all cash? Who is the landlord renting out millions of formerly owned homes? What segment of society will step forward and buy homes like before? Who is going to buy all of the boomer homes once they pass or downsize?
From what source will the formerly consumer driven economy find a new revenue stream? If there is no consumer consumption, then what is going to expand the economy and help pay debt service on the massive interest payments?
Is the picture starting to become clear?
Now, knowing all of this, let’s go back to the question above:
What does an ounce of gold cost?
If you said anything relating the cost of one ounce of gold to a fiat currency, then there is simply more work to be done on your part, and you best get educated before this fiat scheme collapses.
The correct answer is, naturally: Priced in terms of fiat? Who cares? Just get more as soon and as fast as you can while these low prices in terms of fiat exist and the physical gold is available.
The same goes for silver, too.
Please prepare accordingly.

About the Author

  172 Comments

SilverRunNW
Jan 31, 2014 - 5:12pm

Miners stength?

Though these didn't end in the green, they were well off their lows. Sure looks like strength to me.

¤
Jan 31, 2014 - 5:15pm

More on gold/interest rate correlation

The incredible gold-interest rate correlation

Opinion: One model pegs gold’s fair value at $800 an ounce


AFP/Getty Images

CHAPEL HILL, N.C. (MarketWatch) — If the 10-year Treasury yield rises to 5%, gold will fall to $471 an ounce.

And if that yield rises to just 4%, from its current 2.8%, gold will still plunge — to $831.

Those sobering forecasts come from an econometric formula based on the last decade’s relationship between gold and interest rates. Assuming this past is prologue, the only way for gold to make it back to its all-time high above $1,900 an ounce is for the 10-Year Treasury yield to fall to 1%.

To be sure, a comprehensive model of gold’s price needs to include more than just interest rates. But, according to Claude Erb, who conducted these statistical analyses, we should not be too quick to reject his simple “behavioral” model relating gold’s price to the 10-Year Treasury yield. Erb is a former commodities portfolio manager for Trust Company of the West and the co-author (with Campbell Harvey, a Duke University finance professor) of a recent National Bureau of Economic Research entitled “The Golden Dilemma.”

Erb says we should not blithely dismiss his simple gold-interest rate model because it has had impressive explanatory power in recent years. Consider a statistic known as the r-squared, which reflects the degree to which fluctuations in one thing predicts or explains changes in another. The r-squared ranges between 0 and 1, with 1 indicating the highest degree of predictive power and 0 meaning that there is no detectable relationship.

In the case of the gold-interest rate correlation over the last decade, Erb told me in an interview, the r-squared is a very high 0.78. ( Click here for a summary of his findings. )

Most correlations on Wall Street don’t come anywhere close to being that high. Indeed, many of the drugs that get FDA approval have lower r-squareds between their use and positive medical outcomes.

Imagine using Erb’s model one year ago to forecast where gold would be trading when the 10-year yield rises to 3%. At the beginning of 2013, of course, that yield stood at 1.76%, and gold bullion stood at nearly $1,700. He told me that the model at that time would have predicted bullion’s price would be $1,196.70 when the 10-year yield hit the 3% point.

That point was reached on Dec. 26 of last year, and the London Gold Fixing price on that day stood at $1,196.50.

That counts as hitting the bulls eye.

Impressive as his simple model has been, however, Erb stresses that he is not recommending that gold traders focus only on interest rates when determining whether they should be in or out of the gold market. Nevertheless, he reminded us, the gold bulls shouldn’t now be claiming that bullion responds to lots of factors besides interest rates. That’s because it was the gold bulls who were quick — so long as interest rates were declining — to claim that the impressive gold-interest rate correlation justified a higher gold price.

As Erb puts it, “if gold traders want to live by the sword, consistency requires them to be ready to die by it as well.”

What factor or factors does Erb suggest that gold traders focus on? The one that he and his co-author Campbell Harvey suggested in their NBER study is the ratio of gold’s price to the level of the consumer price index. Since that ratio historically has averaged 3.4-to-1, a rule of thumb could be that gold is overvalued when the ratio is above that level and undervalued when below.

Currently, the gold-CPI ratio stands at 5.3-to-1, suggesting gold remains quite overvalued. That in turn suggests that gold’s fair value is just under $800 an ounce.

https://www.marketwatch.com/story/the-incredible-gold-interest-rate-corr...

treefrog
Jan 31, 2014 - 5:19pm
glimas
Jan 31, 2014 - 6:32pm

Emerging Markets

Since we are all hearing a lot about EM's here is an ETF you can all follow to get a little better grip on what is happening. Blackrock's ishares, the website is simple www.ishares.com. Type in the ticker symbol EEM, and take a good look at it's holdings of emerging foreign countries stocks, i. e. companies they hold shares in etc. This thing is no small fund it is very large and it is dumping and loosing value hard. Go into the profile section for the EEM and click on quotes and charts. Look where it was back in last quarter of 2013 and look where it is today. Again remember everything is all tied together, think interest rates swaps and credit default swaps. The EM's are increasing interest rates to help stop the bleed which can trigger OCD's. Also if the money keeps fleeing the EM's you are going to see co's go under which can pull a bank or two down. These small to medium banks will be tied to larger banks in countries like Brazil, India, Russia etc. This thing can start a domino effect and it will go round the globe and come to our shores. I would get a little nervous if this thing goes below 36.00 per share, today she sits at closing 38.18. Don't worry too much I am sure QEen Ellen has our back, she will be more than happy to buy shares and keep them at a non event level. As I have said before Ben, excuse me QEen Ellen will not let the 10 year go much above 3.0 %. Now I am beginning to wonder if we should be more afraid if the 10 year goes below .5 %. Remember he who flee's first flee's best. What drives markets? Fear and Greed boyz and I smell fear and lots of it.

Now where the heck is my beer?

bullion only
Jan 31, 2014 - 7:50pm

Gold price compared to 10 year note.

IMO Gold price correlates to 10 year note when America was the only one buying. Now with India, China and the middle east buying oit is more a function of supply and demand. So we should buy as demand increases and supply is falling. When the ETF Gld is up to it's eyeballs in gold again we can sell as supply will out strip demand and price will go down.

Wash rinse repeat. We did this between $1900 and $1100, we will again between $2500 and $1800 and $5000 and $3500 and again and again.

IMO

RT

flyinkel
Jan 31, 2014 - 7:53pm

Do you like where we are headed?

What can YOU do?

I can't cut and paste here anymore. If I try to type half of it just disappears. Go to zerohedge, read article "the powers that be are secretly terrified..." Give it some thought over the weekend. Be well.

Boswell
Jan 31, 2014 - 8:37pm
¤
Jan 31, 2014 - 9:38pm

China's PLA

Image Credit: REUTERS/China Daily China’s Deceptively Weak (and Dangerous) Military

In many ways, the PLA is weaker than it looks – and more dangerous.

By Ian Easton January 31, 2014

In April 2003, the Chinese Navy decided to put a large group of its best submarine talent on the same boat as part of an experiment to synergize its naval elite. The result? Within hours of leaving port, the Type 035 Ming III class submarine sank with all hands lost. Never having fully recovered from this maritime disaster, the People’s Republic of China (PRC) is still the only permanent member of the United Nations Security Councilnever to have conducted an operational patrol with a nuclear missile submarine.

China is also the only member of the UN’s “Big Five” never to have built and operated an aircraft carrier. While it launched a refurbished Ukrainian built carrier amidst much fanfare in September 2012 – then-President Hu Jintao and all the top brass showed up – soon afterward the big ship had to return to the docks for extensive overhauls because of suspected engine failure; not the most auspicious of starts for China’s fledgling “blue water” navy, and not the least example of a modernizing military that has yet to master last century’s technology.

Indeed, today the People’s Liberation Army (PLA) still conducts long-distance maneuver training at speeds measured by how fast the next available cargo train can transport its tanks and guns forward. And if mobilizing and moving armies around on railway tracks sounds a bit antiquated in an era of global airlift, it should – that was how it was done in the First World War.

Not to be outdone by the conventional army, China’s powerful strategic rocket troops, the Second Artillery Force, still uses cavalry units to patrol its sprawling missile bases deep within China’s vast interior. Why? Because it doesn’t have any helicopters. Equally scarce in China are modern fixed-wing military aircraft. So the Air Force continues to use a 1950s Soviet designed airframe, the Tupolev Tu-16, as a bomber (its original intended mission), a battlefield reconnaissance aircraft, an electronic warfare aircraft, a target spotting aircraft, and an aerial refueling tanker. Likewise, the PLA uses the Soviet designed Antonov An-12 military cargo aircraft for ELINT (electronic intelligence) missions, ASW (anti-submarine warfare) missions, geological survey missions, and airborne early warning missions. It also has an An-12 variant specially modified for transporting livestock, allowing sheep and goats access to remote seasonal pastures.

But if China’s lack of decent hardware is somewhat surprising given all the hype surrounding Beijing’s massive military modernization program, the state of “software” (military training and readiness) is truly astounding. At one military exercise in the summer of 2012, a strategic PLA unit, stressed out by the hard work of handling warheads in an underground bunker complex, actually had to take time out of a 15-day wartime simulation for movie nights and karaoke parties. In fact, by day nine of the exercise, a “cultural performance troupe” (common PLA euphemism for song-and-dance girls) had to be brought into the otherwise sealed facility to entertain the homesick soldiers.

Apparently becoming suspicious that men might not have the emotional fortitude to hack it in high-pressure situations, an experimental all-female unit was then brought in for the 2013 iteration of the war games, held in May, for an abbreviated 72-hour trial run. Unfortunately for the PLA, the results were even worse. By the end of the second day of the exercise, the hardened tunnel facility’s psychological counseling office was overrun with patients, many reportedly too upset to eat and one even suffering with severe nausea because of the unpleasant conditions.

While recent years have witnessed a tremendous Chinese propaganda effort aimed at convincing the world that the PRC is a serious military player that is owed respect, outsiders often forget that China does not even have a professional military. The PLA, unlike the armed forces of the United States, Japan, South Korea, Taiwan and other regional heavyweights, is by definition not a professional fighting force. Rather, it is a “party army,” the armed wing of the Chinese Communist Party (CCP). Indeed, all career officers in the PLA are members of the CCP and all units at the company level and above have political officers assigned to enforce party control. Likewise, all important decisions in the PLA are made by Communist Party committees that are dominated by political officers....(more)

https://thediplomat.com/2014/01/chinas-deceptively-weak-and-dangerous-mi...

benque
Jan 31, 2014 - 9:46pm

PLA

Now it all becomes clear to me. The Tiananmen Square episode was only due to the 1st tank driver's inability to negotiate speed bumps, and the others following were unable to exhibit sufficient initiative to go around him.

ag1969
Jan 31, 2014 - 10:01pm

Am I the only one...

...that thinks that "The Shark Tank" should be called "The Oligarch Tank?"

I'm just sayin'...

ag1969
Jan 31, 2014 - 10:02pm

Wicked Gun Hit Piece...

...by the driveby media on ABC right now. Just starting

Charles S. Hamlin
Jan 31, 2014 - 10:24pm

Shadow Recruit

Just saw the movie, Jack Ryan: Shadow Recruit...pretty good flick. Seems like they took a page out of Currency Wars with the black swan event timed with dumping Treasuries....

-Chuck

Esquaredx2
Jan 31, 2014 - 10:42pm
So It Goes
Jan 31, 2014 - 11:42pm

Today - LCS

This is just a cute little story that I thought I would share.

At the LCS today a dad had his son with him - maybe the dad was 50 and the boy about 7. The father was advising the child that this is silver - and he had pristine examples of new 1 oz ASE, CSM, and Austrian philharmonics in flips in front of him. He also advised the child on bullion - they ordered 100 oz bullion ASEs. The dad said that he wanted his son to begin to save this way. I am so proud of this dad - I nearly said to the child that he has an awesome dad, but precious metal transactions need to be anonymous - so I just watched.

The son also inquired about a gold PCGS 69 or 70 proof 1 oz gold Buffalo in the case and the dad practically fainted saying that the gold would cost as much as all the silver!

How pleasant to see that the public is catching on.

All the best - keep stacking.

So it goes.

johnnydow
Jan 31, 2014 - 11:50pm

Hotel GDX and NEM

You didnt think it was going to be that easy. Get out now. flash crashes in gold and silver coming.

Video unavailable
benque
Jan 31, 2014 - 11:58pm

Its a bottom!!

Our a-number one, all time best contrarian indicator is back!!

Hats off to jonny-scum-bag! Gold and silver can only go up from here!

Magpie
Feb 1, 2014 - 12:47am
ivars
Feb 1, 2014 - 4:28am

Reason Turkey got in its

Reason Turkey got in its current political problems-defying Western bankers over gold imports in 2013, with increase in December.

https://www.hurriyetdailynews.com/record-gold-import-hits-turkeys-trade-balance.aspx?pageID=238&nID=61826&NewsCatID=344

Quote:
urkey’s foreign trade deficit rose to $99.78 billion last year, marking an 18.7 percent rise from 2012, with the impact of record gold imports that jumped by over 150 percent over the year.

According to data announced by the Turkish Statistical Institute (TÜİK) on Jan. 31, the country’s foreign trade gap jumped by 37.3 percent to $9.92 billion in December. This marked an increase higher than market expectations, which had been around $7.9 billion for the month.

Quote:
Accounting for a considerable portion of the deficit, Turkey’s gold imports last year boomed by 150 percent to reach a record level of 302.3 tons that worth $16 billion, as Ankara continued paying for Iranian natural gas and oil imports with the Turkish Lira and Tehran used deposits held in Turkey’s state-run Halkbank to buy gold.

Some of the gold was held inside Turkey at the peak of the trade while some was taken to Dubai by couriers to be sold for foreign currency, which was urgently needed by Iranas sanctions have increasingly cut off access.

Nana
Feb 1, 2014 - 11:00am

@ SilverRunNW

Watch Nephilim, The Truth, on the link below. I think it will clear up a lot of things. https://www.youtube.com/user/treysmithnutshell?feature=watch

SilverRunNW
Feb 1, 2014 - 11:23am

@Nana - Trey Smith

Thanks for posting that. Will give it a look. I read the Book of Enoch again, a few months ago, and it reveals more on the Nephilim and exploits of the fallen angels. Found a pdf version published by Richard Laurence. It's a photocopy of the original book.

https://archive.org/details/bookofenochproph00laur

abguy4
Feb 3, 2014 - 11:37pm

Book of Enoch?

We're discussing "Book of Enoch" here?
Did I miss something?

PM me if necessary - Thanks

cliff 567 abguy4
Feb 4, 2014 - 12:26am

Book of Enoch?

yeah, I would like this conversation expanded also.

but then again, I only know what I know.

I only grow more more dangerous and more of a target of the PTB because of my knowledge.

FUCK-EM SAYS I.

feed me knowledge.

I will survive back stroking down the gutter of life doing it my way or the highway. When I die, it will of been by my own decisions and they may have been maybe be incorrect ones to some, but I am willing to let stand my actions that led to my untimely demise (if I should be determined to come to one), would be entirely pre planned by me.

I stand tall for the freedom a free man feels. I defend it in every movement I make every day. 24/7 /365.

That's why I am hunkered down now.

"I've stood all's I can stand and I can't stands no more".

If they want more from me, they will need armed troops.

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