Browsing the archives for the Measures 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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Update on Canada’s Track Record on GHG

Climate Change

In a previous post, I highlighted Canada’s poor record on climate change based on 2002 per-capita data that puts us 4th worst in the world. 

In the meantime awareness on climate change has grown, so how are we doing now?  Not good – based on the most recent data on total change since the 1990 benchmark year.

Background

In 1992 most countries (including Canada and the USA) joined an international treaty — the United Nations Framework Convention on Climate Change (UNFCCC) — to begin to consider what can be done to reduce global warming and to cope with whatever temperature increases are inevitable.

In 1997, a number of nations (including Canada) approved an addition to the treaty: the Kyoto Protocol, which has more powerful (and legally binding) measures. 

This protocol was ratified by Canada in 2002 by accession, meaning that Canada accepted the legality of the binding resolution without issuing explicit consent to it. 

1990-2004

Canada’s tepid response on ratifying Kyoto was no doubt based on our appalling and shameful compliance to the objectives of Kyoto.  According to Canada’s 4th National Report on Climate Change:

“On September 28, 2006, the [Canadian] Commissioner of the Environment and Sustainable Development released her 2006 Report on Climate Change. The Report described that even though the [Liberal] federal government had announced billions of dollars in funding since 1992 toward meeting commitments to address GHG emissions, as of 2004 Canada’s GHG emissions were 26.6% above 1990 levels.

The Commissioner urged Canada’s New Government to come up with a credible, realistic and clear plan that should address the long-neglected need to help Canadians cope with the consequences of climate change and to commit to specific actions with timeframes for completing them.”

In other words, the Canadian Commissioner was quite sickened over our lack of progress and kicked our government’s butt to get serious or give up. 

1990-2006

Ok, so we changed governments, how are we doing now?  According to the most recent data available from the UNFCC, Canada is now the 3rd worst nation in the world having gone from a 27% miss to a 54% miss in our Kyoto targets!  

 Changes in GHG Emissions 1990 - 2006

 LULUCF = Land use, Land-Use Change and Forestry Total emissions and removals from activities relating to land use, land-use change and forestry (from the following categories: forest land, cropland, grassland, wetlands, settlements and other land).

Why We Suck
In the 4th National Report on Climate Change, our new Conservative government responded with:

“The cornerstone of Canada’s new approach is legislation tabled in Parliament on October 19, 2006. Canada’s Clean Air Act takes a comprehensive approach to the problem of worsening air quality and GHG emissions. … The Act represents a significant shift from a voluntary to a regulatory approach.”

So far so good, but (here comes the water):

“Over the next three years, new regulations on all major sectors will be implemented. … Compliance options being examined include:

  • an industry-led emissions trading system; [industry-led – what happened to regulation??]
  • a technology investment fund that would support the development of transformative technologies for emissions reductions to which companies, and potentially governments, could contribute; [potentially contribute?  so its up to industry to invest, wonder how much?]
  • opt-in mechanisms that would enable entities not covered by regulation to voluntarily assume emissions targets; [opt-in?? what happened to regulation??]
  • incentives that could see companies receive credit for investments in technology; [more investment, but where’s the regulation??]
  • mechanisms to recognize credit for early action; [pats on the back!!]
  • domestic offsets in which verified emissions reductions outside the regulated system are recognized as eligible for compliance in the regulated system. [more pats on the back!!]”

Thats it. Thats all the compliance that we have in place to enforce our “regulations”. Basically our shiney new “regulatory compliance program” is entirely based on industry-led initiatives and investment fueled by “atta-boys” from our cheer-leading government.

Wow – no wonder the rest of the world thinks we’re idiots.

Intense Pollution
But it gets even more ludicrous when we look at our regulatory targets in more depth:

“Targets are an important dimension of Canada’s new approach. … Short-term intensity based GHG reduction targets will be set in consultation with provinces and territories and all affected industry sectors.”

Intensity-based targets are a made-in-USA concept (courtesty of G.W. Bush) where your GHG target is based on efficient you are at polluting.  Suppose you crank out X tons of GHG to generate Y dollars of revenue.  Your intensity is X/Y. 

If you cap your emissions but raise your revenue, then your intensity is less. So even though you are still polluting the same amount, you get an atta-boy from the government because you are more efficient at it!

But we are ALREADY the 3rd worst country in the world relative to our 1990 baseline target.  We can meet all our government’s intensity targets and still fail because we are not making absolute progress in REDUCING GHG emissions that we are already 54% behind on.

Is it time for a completely new political approach?

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