Browsing the archives for the Bank Balance tag.

Demystifying The Price of Gold

Economic Reality, Financial Crisis

Putting long-term savings into GICs is turning out to be riskier than investing in hard asset such as precious metals, land, or other commodities such as oil, copper, etc.

The World Gold Council just published a historical view of central bank “balance sheets” since the 2007 crisis: (click on the chart if you need to make it larger)

A central bank’s “balance sheet’ is a relative measure of money supply.  Although there are more exact measures of money supply, when you see a central bank’s “balance sheet” tripling in the case of the USA, or quadrupling in the case of the UK, it really doesn’t matter which one you use and this one is good enough to understand the price of gold.

The buying power of money over time reflects the forces of supply & demand in an economy.  Basically you have money supply on the one side and economic demand for money on the other (i.e. the size of the economy).  If these are not in balance, then inflation or deflation will occur.

  • Suppose a country has $1 T dollars and an economy measured using a hard asset (like gold) worth $1 T dollars.
  • If the economy grows, as it has since 2007, by roughly 2% compounded per year, it will have grown 10.4% after 5 years – i.e. to $1.1 Trillion.
  • If money supply had stayed constant, each 2007 dollar would be able to buy 10% more in 2012 than it did in 2007 since there is more economic value for the same amount of dollars.
  • But if the money supply tripled over the same time period, as it did in the USA, there would be $3 T dollars to balance that $1.1T in economic activity.
  • So each 2012 dollar is actually worth 1/3 x 1.1 = $0.37 compared to its buying power in 2007.

Can that be true?

  • Consider that the price of gold on Jan 2, 2007 was $639.75 in USD.
  • On Oct 18, 2012 it is $1752 in USD.
  • Deflating back to 2007 dollars, we get $1752 x 0.37 = $642.33!
  • Not quite spot on since we used an average of 2% for economic growth over 5 years instead of individual values.  But you can plainly see what has happened.

By inflating the money supply beyond the natural growth in the economy, the buying power of our long-term savings has dropped by 60%.  The reason why we haven’t seen prices radically increase depends on the type of good:

  • Any commodity which is consumed by economic activity (oil, copper, iron, etc.) will have its price primarily determined by the forces of supply and demand for that commodity (to establish a value) and secondarily by the buying power of money (to establish a price for that value).
  • As an example, we’ve seen a significant increase in the cost of oil & gas but this increase is also affected by global consumption of the fixed supply of oil.  Recently global consumption has been dampened by the global recession being experienced everywhere except Asia, causing a drag on what would otherwise be a soaring price.
  • A manufactured good contains both commodity and labour as inputs.  While the input commodity prices in a manufactured product like a refrigerator or car has increased, the labour cost has decreased since most manufacturing has moved to low cost labour centres such as China, Thailand, and Vietnam.
  • Cheap labour has acted as a brake on inflation in developed economies – effectively exporting the inflation problem to Asian economies.  As an example, the official inflation rate in China has been 2 – 4x the North American rate since 2007 and the actual rate is widely believed to be higher than the official numbers.
  • A precious metal such as gold, or a non-consumable good such as land, will act as a perfect reflector for the buying power of money.  For example, although the value of land in the USA was artificially depressed by the explosion of the housing market bubble in 2007, the price of housing in economies unaffected by that crash, such as Canada, has soared.
  • Much of this increase is not due to another bubble forming, but due to the decline in the buying power of the dollar.  In other words, the house is still worth what it was in 2007, it just takes more 2012 dollars to buy it since a 2012 dollar buys less than a 2007 dollar.

So if you think that the banking crisis is over in Europe and that the USA can afford its ridiculous debt levels without either raising taxes or cutting military spending, then go ahead and invest your hard-earned savings in GICs.

Or you can invest some of your savings in gold as a safe hedge against further erosion of your buying power in future.

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Calculate Carbon Footprint of Your Bank Account

Climate Change

Bank Funded GHG

Is government intervention necessary to kick-start funding of alternative energy projects in Canada? 

According to ClimateFriendlyBanking.org , the top 5 Canadian banks provided $55 B in direct funding for coal, gas, and oil production in 2007.  To put this in perspective, Canada’s entire military budget that year was only $17 B. 

If indirect funding is counted, the total credit extended for greenhouse gas (GHG) emitting fossil fuel production totals $155 B as illustrated below:

Bank Funded GHG 

This funding resulted in 625 M tonnes of CO2 emissions per year from fossil fuels – most of which is domestic GHG emission.   For example, in 2006 Canada’s entire GHG production was 583 M tonnes from all sources.

Meanwhile these same banks provided a total of only $6.8 B in direct funding for renewable, alternative energy production.  In other words, Canadian banks directly funded over 8x more GHG-intensive energy production than green energy production.

Your GHG Account

So what does this have to do with your bank account?

From previous posts on this site, you know that banks leverage their deposits by a ratio of approximately 10:1.  So for every dollar that you leave in a bank account, the bank lends out $10. 

By dividing the total funding of GHG-producing loans by the total amount deposited, it is easy to calculate the proportion of deposits that fund GHG emissions.  Multiply that by your bank balance, and voila, you have calculated the carbon footprint of your bank account.

To simplify this, you can readily calculate the carbon footprint of your bank balance by using the onlne calculator at  ClimateFriendlyBanking.org.

You can also determine how you can trim your personal funding of GHG emissions just by switching banks! 

For example, moving $5000 from the Bank of Montreal (535 Kg of CO2) to the TD Bank (485 Kg) will save 50 Kg in CO2 emissions – roughly equal to parking a small car and not driving it for 9 days.

Fund Green Jobs Instead
A study by the David Suzuki Foundation found that a $16 B investment in renewable energy—wind, solar, low impact hydro, biomass and geothermal—could in Ontario alone create:

  • 5,000 jobs in the wind energy sector by 2010
  • 77,000 jobs in wind energy by 2020
  • 18,750 jobs in geothermal energy within 2 years
  • 51,000 jobs in geothermal energy systems by 2020
  • 25,000 jobs in solar energy systems by 2025

This funding, which is less than 1/2 of what our banks are lending to generate fossil fuels, would install more than 12,000 megawatts of renewable energy capacity by 2020—enough electricity to entirely phase out all of Ontario’s coal plants.

These are not idle claims, the UNEP reports that Denmark created 17,000 permanent jobs within 5 years of launching a major investment program in wind energy production.  In Germany, over 45,000 people are employed in the wind energy industry.

Wind also presents a unique opportunity for a new cash crop in rural Ontario.  Farmers can lease their land to a wind developer. Or farmers can install, own and operate the turbines themselves. According to the Ontario Sustainable Energy Association, if 1/2 of Ontario’s farmers install only one 1 MW wind turbine, they could pump $4 billion through the rural Ontario economy by harvesting the wind!

Who says we have to choose between economic prospertity and a green future? 

And why are we focusing on bailing out the auto-industry when we could be replacing lost plants with green jobs?

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