Browsing the archives for the Economic Growth 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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GHG Reduction Leadership or BullShip?

Climate Change


For those of us who can recall JFK, Obama certainly echos that spirit of change and hope.

If you ever wondered what JFK might have said about climate change, check out Greenpeace’s creative video rendition John F. Kennedy’s famous speech on climate change. Sadly it never happened.

By comparision, in these videos, Obama sounds considerably less visonary by comparison but certainly can be more specific.


Meanwhile this video shows our Canadian leaders spend more time attacking each other on this issue than actually attacking the real issues!  

Meanwhile, even though we can clearly do more, our [former] government is busy taking a so-called balanced approach that avoids concrete targets and gives the illusion of progress on the issue.

Research by both the Pembina Institute and the C. D. Howe Institute confirm that the Harper government’s policies won’t result in any GHG reductions by even 2020.   That’s because the current federal climate-change plan focuses on emission-intensity reductions—rather than on cutting overall emissions.  

According to Canada’s lead scientist to the UN’s blue ribbon panel on climate change, Andrew Weaver, “From the information provided in the federal plan, we learn that by 2020 the oil sands sector will be required to reduce its emissions intensity by 23%.  But oil sands production is also expected to quadruple by 2020.”   The net effect, according to Weaver, would be a tripling of GHG emissions from the oil sands by 2020. [Keeping Our Cool: Canada in a Warming World published by Viking Canada]

So why is the Canadian government so ineffective on climate change?


Harper’s behaviour is entirely based on a belief that progress on GHG reductions is at odds with economic growth.  In reaching this point of view, it has been reported that Harper met once with leading environmentalist David Suzuki, zero times with accredited Canadian scientific experts on climate change, and over 40 times with representatives from the Alberta oil industry.

However, the point of view that GHG reduction equals GDP reduction is not a uniquely Alberta perspective. This is based on data that clearly shows that increasing GHG emissions have historically accompanied GDP growth.  It is also based on data that shows that the countries who have grown their economies the most also tend to be the countries with the highest per-capita GHG emissions.

Heck, that is how we got into this mess in the first place. So if increased GHG emissions is the price of increased GDP, then it seems logical that reduced GHG emissions must cause reduced GDP growth.

But what may be true in one direction is not always true when going in the opposite direction.  E.G. Just because my feet get wet when it rains doesn’t mean that drying my feet will cause it to stop raining.

Decoupling GHG from GDP
When applied to the question of GHG-GDP, several countries (India, China, Sweden, Denmark, etc.) have in fact proved this reverse logic to be false.  This is known as “decoupling” GDP growth from GHG emissions and many countries have shown that they can take aggressive action on GHG reductions without impairing GDP growth.

For example, according to the Danish Environmental Protection Agency, illustrated below, GDP growth has been achieved while simultaneously making progress against Kyoto commitments:

Denmark Decouples GDP 

A recent study in New Zealand also found that relative de-coupling (based on GHG / GDP intensity) can readily be achieved as a first step to absolute de-coupling.   “Relative decoupling is useful to highlight the trends in CO2 emissions relative to GDP.  Relative decoupling may mean a drop in emissions relative to GDP but that drop may still be insufficient to minimise climate change impacts.”

So in other words, the fact that you can reduce your GHG intensity as GDP grows is proof that GHG can be de-coupled from GDP.  The report presents evidence that the USA, the EU, and Japan have already achieved relative decoupling.

The report also states that a country cannot rely solely on GHG intensity metrics to lead you to overall declines in emissions.  The report concludes that absolute de-coupling is possible and must be the goal of national policies:  “Decoupling has shown that it is essential to reduce absolute CO2 emissions, i.e. to achieve absolute decoupling.”

So it is time to do away with the fear that our economy will suffer from Kyoto.  Our leaders also need to dispose of false intensity-based targets and adopt absolute GHG reduction targets.

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