tag:blogger.com,1999:blog-6704573462403312459.post2683377383298861907..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Gold's rising convenience yieldJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-6704573462403312459.post-77423606079371390152014-12-09T15:48:24.833-05:002014-12-09T15:48:24.833-05:00A futures contract that is in backwardation incent...A futures contract that is in backwardation incentivizes holders of future production or holders in storage to sell at the spot. Basically it is getting supply on the spot market due to the market's perception of a current supply shortage. This typically applies for oil or other commodities. The fact that it is happening in gold tells me that there is a great amount of current physical demand. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-60457859952587059512014-12-01T21:22:08.991-05:002014-12-01T21:22:08.991-05:00The liquidity premium arises from the convenience ...The liquidity premium arises from the convenience yield on reserves, which is just a market return. The interest rate paid on reserves is also a return. As they are both returns, they are substitutes: one can do the job of keeping the inflation rate on target as well as the other. The one difference is that at some point the supply of reserves will be so high that the convenience yield can no longer be reduced. The IOR, however, can in theory go towards some infinitely negative amount. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-15766611731751091072014-12-01T20:36:42.273-05:002014-12-01T20:36:42.273-05:00"....a path through our current debt crisis.&..."....a path through our current debt crisis."<br /><br />Maybe a debt crisis is on the horizon, I have no idea. But I don't see any evidence of a 'current debt crisis'. Yields on government debt are still very low. Why can't we just muddle on?<br /><br />As for manipulation, one central bank is buying equities, the Bank of Japan, but they aren't trying to set a price. Not like the London Gold Pool back in the 1960s, which you may be referring to. But that was to enforce its $35 promise. I don't think central banks really care about the price of gold anymore.<br /><br />Thanks for the link, interesting.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34099633082461738802014-12-01T07:32:46.281-05:002014-12-01T07:32:46.281-05:00Very good post , one way of clarifying the questio...Very good post , one way of clarifying the question is to read http://www.unz.org/Pub/Reason-1975jun-00086Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-57890304939550125982014-12-01T06:05:06.457-05:002014-12-01T06:05:06.457-05:00Interesting post. Thanks.
I tend to eschew the te...Interesting post. Thanks.<br /><br />I tend to eschew the term 'Gold Bug', but there seems to be great sport- Bron, Kid Dynamite - in being really derisive toward people so termed. The thing I struggle with most - and I've asked KD point blank about it - is that no one has been able to articulate a path through our current debt crisis that doesn't lead through a currency crisis on the way to a debt-clearing deflationary bust. The currency crisis will be the result of a policy choice, but the debt crisis is the result of past policy choices. <br /><br />Gold seems, in the past, to have done well during periods of currency debasement, and fared well during the 30's as well.<br /><br />I will be happy to be wrong about this - I don't want my family to live through the crisis that is coming - but I have yet to get a reasonable explanation that explains how an open money spigot ends well. That's, I believe, the thing that the folks you deem "Gold Bugs" struggle with. <br /><br />When I asked KD about it, after some of back and forth, he finally admitted that things are going to end very, very badly. So perhaps the disconnect is merely in timing - with many seeing Gold as a store of value during crises, while others are more interested in shorter term trading.<br /><br />One thought about the disconnect between spot and paper (CME) prices. The preponderance of CME trading is not about physical changing hands, but is about trading profits - making it an easy target for manipulation by interested parties (Fed, etc.) . And lest you say the Fed would never manipulate gold, consider that central banks worldwide are buying equities, the CME published pricing for central banks trading the ES, and think back to Paul Volcker's comment about the late 70's, something,like "The big mistake we made was in not controlling the price of Gold". <br /><br />If this makes me a gold bug, so be it, but to me it seems basic prudence.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91910840918816737762014-12-01T02:54:04.934-05:002014-12-01T02:54:04.934-05:00Yes, thanks, I seem to have got my head around it ...Yes, thanks, I seem to have got my head around it now!<br /><br />What I'm still struggling with is whether the central bank paying interest on reserves (after having created a QE glut) can genuinely substitute for the "liquidity premium" in terms of generating inflation. My gut feeling is that perhaps you can't substitute for a scarcity induced liquidity premium with interest on reserves. In the interest on reserves situation, the reserves will be issued at a "steady state fair value". That situation comes about because only banks get the interest on reserves and they don't need to pass it on to deposit holders and the banks don't set general prices. In the scarcity (pre-QE) situation, banks did need to compete for reserves so they did pass on the liquidity premium value to depositors. But I'm happy to be corrected on this.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-18221062719946903922014-11-30T20:47:45.518-05:002014-11-30T20:47:45.518-05:00I think that makes sense. The premium at which res...I think that makes sense. The premium at which reserves can be issued is their liquidity premium. It arises in part because a central bank like the Fed keeps reserves in short supply. Central banks used to massage this liquidity premium, raising it a little bit with open market sales and lowering it with open market purchases, so that the price level would fall either faster or slower. When QE brought a glut of reserves, their marginal liquidity value fell to 0 at which point there no longer existed a liquidity premium to shrink in order to create more inflation.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-9107258493117177282014-11-30T12:58:13.008-05:002014-11-30T12:58:13.008-05:00JP Koning, when you say, "Do Bank of Canada l...JP Koning, when you say, "Do Bank of Canada liabilities fall because of the bank's promise? Wouldn't they have fallen anyways since they are highly liquid and don't need to tempt holders with an expected capital gain?"<br /><br /> -It reminds me of your great, "sign wars" post. It all makes me wonder whether, when bank reserves are in short supply, they can be issued at a premium because they have a scarcity value for use for bank settlements. Once QE has created a glut, then new bank reserves will only fetch a "fair value" that represents what value they have as a store of value. That fair value does not incorporate the premium price that creates inflation. <br /><br />I really don't know, is my understanding mangled on this?stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-45828078538584240882014-11-30T11:52:20.417-05:002014-11-30T11:52:20.417-05:00Stone, as I pointed out in the post, I don't t...Stone, as I pointed out in the post, I don't think any of gold's growing convenience yield is related to any supposed augmentation of its qualities as a general medium of exchange. Your 'looming need' theory makes much more sense to me.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27604821572647212302014-11-30T11:36:13.870-05:002014-11-30T11:36:13.870-05:00Thanks Nick. I think a world in which gold dust or...Thanks Nick. I think a world in which gold dust or coins had entirely displaced paper media as highly-liquid exchange media might demonstrate a future gold price below the spot price, or at least a very flat curve. People would be willing to hold these bits of gold despite a negative/flat return since their monetary conveniences would more-than outweigh the capital loss. <br /><br />Do Bank of Canada liabilities fall because of the bank's promise? Wouldn't they have fallen anyways since they are highly liquid and don't need to tempt holders with an expected capital gain?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-79992748612214127892014-11-30T08:35:04.623-05:002014-11-30T08:35:04.623-05:00I guess I'm just wondering whether gold curren...I guess I'm just wondering whether gold currently has a convenience yield not because it has become sort after as a general medium of exchange but rather because there is (perceived looming) very specific need for it to cover short trading positions.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-33140185867372510702014-11-30T08:17:19.101-05:002014-11-30T08:17:19.101-05:00I have no idea how significant gold (and gold deri...I have no idea how significant gold (and gold derivative) trading really is for banks. Like you say, gold bugs seem to spout a lot of hot air and that makes the whole subject very murky. <br /><br />How much basis is there in the legend that Gordon Brown sold off UK gold stocks because they had been leased to banks that sold them and then couldn't buy them back from the market -ie it was really just a bank bailout? If banks have once again got in such a pickle then the issue would be a risk of bank collapse rather than the (inconsequential) risk that people won't have new gold rings etc.<br />http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/<br /><br />I suppose people who currently hold the gold would be persuaded to sell it into the market if the price were high enough but perhaps banks won't be able to wait that long or afford to pay enough to cover their positions. The current gold lease rates may reflect a perception that there is a risk of such a fiasco. stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-68056816283937490802014-11-30T06:14:16.126-05:002014-11-30T06:14:16.126-05:00Another good post. The Bank of Canada promises tha...Another good post. The Bank of Canada promises that the future price of the financial asset it issues will always be falling at (approximately) 2% per year relative to the spot price.<br /><br />But could we imagine a world where the future price of gold is always less than the spot price?Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com