Wednesday, October 8, 2008

Gold, Banks and Toilet Papers......

1. It's look like the stock market is crashing down. Is it time to panic ? I don't know either, I haven't been in the stock market. There's a crash in NYSE, LSE, DAX , and stock market around the world. The only few things that I saw that was rising again was GOLD and the strengthening of the US Dollar.

2. Why is the US dollar rising despite the bailout ? It is known that the US treasury and the Fed is flooding the market with USD 7 trillion with funny money ? It should trigger and inflation since the US government is debasing its currency. What is happening here ?

3. Although we've seen by now that gold has strengthen its position in the market, there is still cries mentioning that the it is still undervalued. Few are the reasons why they claimed that the price of gold should be much higher :
  • People still cant acquire physical gold in the market such as gold coins due to shortage of gold coins minted.
  • The cost of producing gold has increased, from mining till minting, thus the cost of gold should be on the rise.
  • Since investors are seeing a slump in the stock market, many are turning to gold instead of cash as a hedge from inflation. Some say cash is king, but gold is the emperor ...
The reasons given in the above might not be enough to justify why the price of gold should be higher. Maybe someone can enlighten me.

4. Some conspiracy theorist are saying that there is a "cartel" which is trying to keep the prices of gold from surging to its actual value. Why ? Its because they want the market to see that fiat currencies are still viable as savings and investments.

5. One might think why. The only reason I can think is, it is because, when people keep their wealth in currencies, they'll put it in banks. Why ? because commercial banks needs this deposit in order to create liquidity and to create funny debt generated money through the fractional reserve system.

6. In other perspective, when people still keep their wealth in fiat currencies. It means that the banks are still in business. But, when the public starts going panic. They will start withdrawing the money from banks, and it might create a run on banks. It means that the banks will not have the capacity to provide all the cash if the public is demanding cash all at the same time.

7. If run on banks occur, the banks will simply collapse. Thus, we see that the US government is raising its guarantee on savings in banks up to USD 250,000. The same situation is happening also in Europe. We could see the measures taken to guarantee all this savings is just to prevent a run on banks. They are trying to calm the public to prevent a run on banks. Some government is pledging guarantees on savings without limit. Why is the government trying to help banks eventhough the mess is created by the banks themselves ?

8. Some might feel relieved that the government is pledging a guarantee on their deposits. What will happen if the public starts to withdraw their savings and deposits and the banks cannot honor the publics withdrawals ? It means that the government will have to pump in more money . If the government has the resources to honor the withdrawals then, its good for them. What if there's no enough resources to meet the withdrawals ? Will the government print more funny toilet papers ? and devalue their currency ?

9. If the government is inflating the currency, the currency will lose its value. When the currency loses its value, it will create price inflation. It is not because that things costs more. But it is because the currency is losing its value.

10. So, have we seen the lowest point in this financial mess ? I dont think so. It is expected things will go worse from now on. It is said that the next quarter will be even worse which makes the current are still " acceptable".

11. Buckle up .... we dont know what will happen soon.

1 comment:

Badrul Zaman said...

on the US dollar rising, here's my theory:
it's because there are lesser USD in the market - on the contrary. no banks in america are lending out even to each other, simply bcos they hv minimal cash. i dont think tht the 'funny money' u're refering to are jst flood out into the market by their govt.
the appreciation however will not be for long. at most, mid-term long.

on 'cartel' agst gold price:
i believe there is. just as u said that someone out there 'engineered' the current financial mess, i believe tht those ppl are profiteering fr it by getting to buy the gold cheap. :)