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Are we headed for a deflationary coin market?
GOLDSAINT
Posts: 2,148 ✭
Many of the metals analysts are now starting to make statements about having a late 1990’s type metals market. I have added several quotes from the last couple of days below. I was not in the coin hobby in the late 1990’s but wasn’t that when the market broke and headed south with the metals? Although most of our hobby is not subject to moves in the metals market there is a large part that is, in particular, many modern silver issues, almost all the Bullion issues, common date gold issues, etc.
How do you think the hobby would be affected by a sustained deflationary period accompanied by a bear market in the metals?
“In contrast, the mood at Calgary was far more somber and the London conference this week was almost as dreary as the worst conference I recall in 1999.”
“So the trillion dollar question ahead, as I see it, is interest rates. If rates head up from here, there's going to be hell to pay. There is now about $22 trillion in domestic debt. On top of that there is an estimate seven times that outstanding in derivatives. Roughly 85 percent of all derivatives are interest-rate oriented. So the truth – nobody knows what will happen if rates start up, and more importantly if rates spike up. Nobody, I repeat, NOBODY including the Fed, has the answer to what could or will happen if rates suddenly start to spike.”
“The debt situation in the US is ballooning. At the Federal level the national debt is rising at almost a 10 percent rate annualized rate. Total debt in the US is now about 300 percent of the US Gross National Product, a situation never seen before.”
“ Let me tell you something – the process of building debt is inflationary UP TO A POINT. But past that point – the debt situation become DEFLATIONARY.”
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Right now, the major play in the metals market is to massively discredit them while they can. And they are doing a good job of it.
Everyone seems to be running for cover......though I doubt if the Asians have bought this line. Nothing has changed in the economy with respect to debt, the dollar, inflation, etc. World tensions have only worsened. I have to figure Osama's offer of 22 lbs of gold is driving the market down!
roadrunner
How does this effect the metals market? What are the fundamentals that would cause this to happen?
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Randy
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Ladyship, the derivative market is sort of difficult to explain here in 100 words or less. And I'm certainly not the expert to do it. Many web sites have written about this topic, I would go to them and do a little word search at: www.financialsense.com / www.jsmineset.com / www.safehaven.com .
Briefly stated, derivatives are used to spread out risk in contracts or agreements. You can write a contract for anything, and then try to hedge your bets so you don't lose your fanny if something unexpected happens. Many of the major gold producers (such as Barrick) have had major hedge positions in gold, essentially betting their future gold production against the price of gold NOT going up.
Barrick made a few Billion dollars in the 1990's doing this. Betting against their own product. What a great thing huh?
Hence if gold goes down or stays even, they make out. The gold carry trade of the past 10 years or so basically ensured that the gold price did not go up...only down. So companies like Barrick and JPM made billions....at the expense of the average guy who had no idea the market was being played. These hedge contracts were essentially derivatives. They linked (or derived) their value with the price of gold and one's future production. Banks and financial houses have TRILLIONs in contracts betting that the interest rates went down or stayed bottomed. They have made billions and probably trillions with this bet. Everything from mortgages, futures, etc. are all intertwined with interest rate derivatives. The trail is so foggy no one knows who holds the ultimate bag when the contract unwinds or reverses to a loss. Unfortunately all these interest rate contracts cannot be unwoud in a short period of time. So if interest rates get moved up it must be done slowly or the possibility of major companies defaulting is very real. (because they hold the derivative that is becoming worth less and less...and ultimately worthless).
You can bet the majors are already starting to unwind their interest rate hedges to start going the other way.
And unlike defaults in the past decade of only a few billions, we are now talking hundreds of billions or trillions. It is a potential scary picture. The major derivative holders say no problem. They have it all covered with fail-safes, etc. Yet all of this is conjecture. The derivative models themselves are all mathematical theory, invented by some phD's. Very few in the finance world really have a handle on them. LIke computer trading, you have computers handling all the derivatives contracts. Warren Buffet has called derivatives "financial sewage."
roadrunner
motor stock which allows you to vote, or maybe just the part that pays dividends. One
can sell such parts despite not owning them or leverage for future delivery. Many of these
new derivatives are so complex that they are not easily understood and their intercon-
nectedness to the operation of the overall economy is incomprehensible. Most of these
are bought in bunches by individuals or institutions trying to lay off some risk or to profit
on some esoteric expected change in the economy. There are huge dollar values of such
instruments which are sometimes controlled by very little money and huge profit or loss is
possible.
It seems to many observers that there is a huge financial stake in continued low interest
rates and this is likely the view of the fed also. This may be just another cause of a very
slow rise in interest rates as the economy heats and inflation returns.
in accordance with the Heisenberg principle and the laws of chaos.
Camelot
The bond market got blasted in June and July of 2003 due to fears of higher interest rates and/or inflation. I find it arrogant to conclude that 11 months later "they" remain unprepared for higher rates.
It is a market where the FTC will hit again soon like the years between 1989 and 1991! Grading companies and dealers will be hit hard and it couldn't happen soon enough!
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<< <i>Moderns, YES! Rarities and pre-1930's, a resounding NO!!!! Metals are based off international exchange rates, not the US dollar! Look at the past week in exchange rates which effect the metals market. Sorry, it's not the reverse and the rise again of the US dollar will drop trade rates of gold, silver, platinum, etc.. It's a balance of trade through exchange rates. Precious metals are of no concequence to numismatic collectables. It is dealers who use this information to jack up the prices of another wise non-rarity!
It is a market where the FTC will hit again soon like the years between 1989 and 1991! Grading companies and dealers will be hit hard and it couldn't happen soon enough! >>
Metals, moderns, currencies and stock markets all move independently and are constituent
parts of a greater whole. There are relationships which will cause markets to often increase
or decrease in tandem but disparate markets are always independent and will behave diff-
erently.
For instance much of the money which was being made in the precious metals markets recent-
ly was being put into modern coins so the drop in metals will likely have a greater effect on mod-
erns than on older coins despite many of the older coins containing precious metals and few of
the moderns having precious metals.
It would seem likely that if the FTC won't concern itself with coin doctoring, conservation, off brand
encapsulation, artificial toning and other hobby concerns which affect primarily older coins that they
would concern themselves with how much a collector pays for a 1968 cent.