Saturday, December 27, 2014

You Certainly Can't Eat a Credit Default Swap

Correlation does not equal causation. However... It is a fact that the vast majority of our world's gold reserves are owned by governments, central banks, and the ultra-rich. The price of gold over the past 40 years coincides with some very interesting events. You've heard the term "you can't eat gold", implying that its practical value to the everyday man is low? Well... For about 40 years after the Great Depression, the price of gold was pinned to the price of the dollar. Gold cost $35 per ounce. About 40 years ago, the Bretton Woods Agreement was dismantled, and the price of gold was "unpinned" from the dollar. Shortly after Reagan took office, the price of gold rose to $600 per ounce. That's a 1700% increase in a commodity that sat stable for the previous 40 years. 

If you haven't heard the term "profit-taking", that's when people sell commodities because their margins are ridiculously good and they're about to become seriously rich. Gold sat stable at $400 per ounce with some small fluctuations until the latter years of the Clinton administration. Since 2001, its trend has mimicked the same general behavior as it did about 40 years prior. And now it appears to be more or less stabilizing at $1,200 per ounce. Only a 300% increase in the average price this time, and it took longer to unfold. But this is based off of a previous 1700% increase just 40 years prior... So in about a 40 year span, we're talking about close to 4000% increase in the price of an actual physical measurable substance that is owned mostly by governments and banks. 

This below goes from 1800 through 2013. For some perspective. The Y scale is represented logarithmically so that you can actually see the few changes between 1800 and 1970, and you don't have to spend too much time scrolling from the top to the bottom like you might if it were linear like the graph above. The correlation here is between the inequality of wealth and the price of gold. Specific events have occurred which, through profit-taking, allowed a very few people and a very few nations to acquire previously unimaginably vast sums of wealth. This new wealth has been used to fuel a derivatives market that has ballooned to about $600 trillion in total "worth". Control of and benefit from that money is concentrated in the hands of a very few investment firms, banks, and governments. The actual inequality of wealth between the "powers that be" and "you and me" has grown exponentially and really unfathomably... 

The manipulation that has allowed this was first of the gold market, and now of the derivatives market. Here's the best part... the value of the derivatives market is called its "notional value". That it has any value at all is only a notion (it's literally imaginary). Since 2007 there has been $300 TRILLION imagined into existence by people buying insurance policies against other people's loans or some such bullshit. The "credit exposure" is the amount of this imaginary $600T that has been extended to a borrower by a lender. So there's about $30 trillion worth of money that people have imagined into existence and then loaned to someone else. As you can see, most of the notional value is tied up in interest rates... 

It's still true that correlation doesn't equal causation and one possibility is that all of this has come to be due to coincidence and mismanagement. But I think we can all agree that there is a lot of truth to the saying "money makes the world go round". So... the important question is... what makes the money go around? And it would be damned interesting to know who made out in profit-taking on Gold in 1980 and 2011...


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