Archive for the ‘Currency’ Category


The Gold Price of Cotton.

In Currency,Inflation on 十月 16, 2011 by CQCA

From the Economist: “John Barrett, a cotton producer based in south Texas, explains that around March of last year most of the farmers he works with were happy to contract for that year’s crop at roughly 80 cents a pound. It was, historically speaking, a good price. Hardly anyone expected that, by harvest time, prices would have nearly doubled. In December cotton futures hit a nominal record of $1.59 a pound. The last time prices were so high was during the civil war and its aftermath.”

The Dollar price of cotton is at an all-time high, but the gold price of cotton is at an all-time low. Fiat currency and hard money are telling us completely different things. Both of them can buy the same thing, but one has seen constantly rising prices, and the other has seen constantly lowering prices.

In a market economy, lower prices should be the norm, not rising prices. Economies of scale and competition will bring prices down, and therefore increase the purchasing power of the common person. Instead, we have a fiat currency where the norm is for prices to rise every year. This is a monetary policy problem, not a market problem.

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Which Currencies are the Most Overvalued Against Gold?

In Currency,Inflation,Money Supply on 七月 15, 2011 by CQCA

Ever wonder what the price of gold would have to be if governments wanted to back up the full money supply? It is really only a simple matter of division, the hard part is finding the data.

The World Gold Council provides data on gold reserves by country. (Free registration is required to see their data.) I took the gold reserves of each country, and then matched them up with the data I used to calculate the money supply growth of most countries’ currencies between 2005 and 2010. I then used the current price of gold in each currency to calculate how much each currency would have to be devalued in order for that government to establish par between its money supply and gold reserve. The results are below.

The IMF issues SDRs, or Special Drawing Rights, which are magical receipts for something—no one is quite sure. The IMF has issued 182 billion SDRs, and has 90 million ounces of gold, which means the price at par would be about 2,000 SDRs per ounce. The current price in SDRs (.6343 SDRs to US$1) is about 995 SDRs per ounce. This means that the IMF would need to devalue the SDR by 50% in order to establish a par price.

Venezuela came in second because it recently devalued its currency by half against the U.S. Dollar.

The United States Dollar came in 24th place, at 95.3658% devaluation. Put another way, $100 in the future could possibly only buy $4.63 worth of goods today.

China came in 69th place, at 99.5262% devaluation. Put another way, 100 Yuan in the future could possibly only buy 0.47 Yuan worth of goods today.

Hong Kong is the biggest loser, at 99.9885% devaluation. Put another way, 1,000,000 HKD in the future could possibly only buy 115 HKD worth of goods today. I also wrote earlier about how the money supply of the Hong Kong Dollar has grown much faster than the U.S. Dollar’s, meaning the fixed price of 7.8 HKD to 1 USD over the last 14 years is nowhere near reality.

There are a few things that need to be said about these results. The first is this only considered gold. Most of these countries have foreign exchange (like Hong Kong), so if the U.S. Dollar were tied to gold, and other countries held U.S. Dollars, their “gold holdings” would increase, and therefore change the results.

Another problem is that gold has almost never been par to the entire money supply of a country. A full devaluation of this magnitude would indicate a complete collapse of humanity’s confidence in the monetary system. A much more likely scenario is that currency is completely devalued and we then go back to bartering chickens. Decades later we can start to rebuild the gold standard. Ever seen the movie Water World? If you watch it backwards, you will see that “water” is a metaphor for “inflated currency.”

The biggest problem, though, is that the data I used relies on the assumption that governments of the world are honest about their gold holdings. Ha.


If Gold Reaches $3,264 Per Ounce, It Will Surpass the Dollar as the World’s Reserve Currency.

In Currency on 七月 10, 2011 by CQCA

The U.S. Dollar is currently the world’s reserve currency, meaning most foreign countries rely on the Dollar as a hedge against domestic instability. Any discussion about replacing the U.S. Dollar always ends with the same uncertainty about which currency should replace it. The Japanese economy has too much debt, the Chinese Yuan is too restricted (and has a picture of Chairman Mao on it), and the Euro is trash.

Gold, on the other hand, is not issued by any government, and cannot be controlled by one. It is the only true denationalized money, to borrow a term from Hayek.

According to the IMF’s data, governments of the world disclosed that they held $3.2 trillion worth of U.S. Dollars as apart of their total foreign exchange reserves. There was a total of (U.S.) $9.6 trillion worth of foreign exchange in the world. (That means some governments were too embarrassed to admit which currencies they hold as reserves.)

At about the same time, governments of the world held about 30,684 tones (986 million ounces) of gold. (World Gold Council data, free membership required to access the data.) If we divide $3.2 trillion by 986 million ounces, we get:
3,219,964,000,000 / 986,521,284 = $3,263.96

Meaning: If the price of gold reaches $3,264 per ounce, the value of national gold reserves would surpass the value of allocated U.S. Dollar reserves. The current value of one ounce of gold (July 8th, 2011 Monex closing price) is $1,544 per ounce. That means the value of national gold reserves is $1.5 trillion. This is more than the value of allocated Euro reserves, which stood at US$1.4 trillion at the end of 2010.

Gold has already surpassed the Euro, which is the Dollar’s most likely alternative as a reserve currency.

The problem with these calculations is that we only know the allocated reserves of the world. There are still $4.4 trillion worth of reserves that we do not know which currency they are held in. Even if we assume this total amount is held in U.S. Dollars, which is not likely, the price of gold would only have to reach $7,713 per ounce to surpass the U.S. Dollar as the world’s reserve currency.

Anyone who believes the U.S. Dollar will remain the world’s reserve currency should ask why gold has already surpassed all of its most likely competitors, yet no one seems to be talking about it.

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