2012/2013 Fiscal Cliff

[Petunia 100]

I knew little about leasing as a result of my aversion to third party risk.

The strategy revolves around interest rates, gold forward contracts, and the spread.
It's all math, there is no speculation, only third party risk.

The risk is whether or not your contract to purchase gold in the future will be honored.


My reason for owning sound money is not the same reason you invest.

Do you invest in stocks and bonds at all? Just curious.

[kv968]

As I stated earlier I was certain a determined individual could participate in gold leasing.

It appears to be quite simple.


Sell the gold outright, and buy a gold futures contract.

Place the proceeds from the sale in an interest bearing time deposit.

Stand for delivery of gold at maturation of the futures contract.

Pay with the proceeds from the time deposit.

The lease rate as stated is the difference between LIBOR and GOFO .

We all know what LIBOR is.
GOFO stands for Gold Forward Purchase Agreement.
The cost of which is published daily by the LBMA.

A futures contract is an agreement between two parties to buy or sell a specified commodity at some point in the future for a price agreed upon today.

If the price goes to $2000 my contract will be honored at the agreed upon price.

Gold is rarely in backwardation (worth less in the future than the current spot)

The futures price of gold reflects the carry cost plus interest forward.


Edit:
Non standardised contracts known as forwards are regulary traded.
Like a futures contract it involves the exchange of commodities for a specified price.
They are not traded on exchanges, and do not require interim partial payments.

What does leasing and "selling gold and buying a futures contract" have to do with one another? In one you're getting paid to lease the gold for a specific amount of time and the other you're just selling your gold and buying a futures contract to buy gold at a specific price in the future.

And you're right gold, or almost any futures contract for that matter, is seldomly in backwardation, they're mostly in contango. So in other words you'd be paying more to buy the futures contract than the spot price. So if the spot price of gold doesn't rise to the price you paid for the futures contract you're losing money.

In the case of leasing gold, you said you'd have to put the proceeds in an "interest bearing time deposit" (a.k.a. bank, a.k.a. fiat money). Now you're back to currency risk.

[Wino]

Well, at least there's good humor here. Seems that other than gold, no other ideas for protecting against a dollar devaluation.

Sorry I didn't post this before. I still haven't hear any "operoinks" and wasn't going to do any more singing lessons.

I have a plan that I am considering, and for me it is somewhat radical. I won't do this until I see the "Carter Years" of inflation returning, but my plan is:

Borrow money, as closely as I can, equivalent in dollars to my savings.

As the value of my savings goes down due to inflation, the value of my payback goes down, which should mean "spend $10000 in today's money; pay back $10000 in inflated money." Of course, I need to spend the borrowing on tangible items such as ammunition, survival food (shelf life for 10 years, etc.). You know: the necessities. Because if we go this route to pay off the federal and state government debt, it's going to take at least a three to four times devaluation of the dollar to do it. The stock market will surge, then crash, as folks find their $200 grocery bill is now $750, and their $50 tank of gas is now $200. They'll need their savings, and that means more money in circulation, which will cause more inflation.

Oh... and short the heck out of Apple stock, because the iPhone8 will be so expensive that no one will buy it. What else is Apple's business plan than "ride the market hype that their new product is so much better than their old product that young people will spend a month's income to purchase it?"

So, I'm looking at "debt" to help me weather the loss of value of savings in the event of a crash. It will work for a few years. After that, I'm hoping Mel Gibson will drive my tanker truck past the feral tribe circling my compound.

[Carpenter]

M-kay.

And what is your gold futures contract worth when the economy collapses? At least with physical gold in your possession you can do something with it. When the economy fails and companies go bankrupt who is going to pay out on your contract?

You say that gold is better than paper money because of some inherent worth and ability to trade it. But you've just traded your gold for paper that is -- as far as I can tell -- even more worthless than currency. At least I know currency is recognizable and hard to counterfeit. Now you have no gold AND no money...

Try and follow along BB.
The strategy is for those with an appetite for third party risk.
If you're willing to trade sound money for pieces of paper, leasing can be profitable.



As for dollars being hard to counterfeit...
When was the last time you passed a $20 that wasn't checked?
They're checking $5's around here.


"The U.S. Secret Service estimates that North Korea has produced $45 million in superdollars"

"According to the United States Department of Treasury, 70 million counterfeit dollars are in circulation"



The "Super Dollars" out of North Korea are undetectable except by electronic means, that leaves you, and me exposed.




Armed with a digital scale, and a set of calipers, I can authenticate most coins.
Or you can buy one of these:

Why the Fisch Works for Fake Coin Detection


I own a set, and they work beautifully.
The technology goes back hundreds of years.

[BuckyBadger]

Try and follow along BB.

Hence why I knew I shouldn't have gotten into this.

Gold bugs tend to lash out when they can't convince people to join their religion.

[Wino]

If you're willing to trade sound money for pieces of paper, leasing can be profitable.

And get you even more worthless pieces of paper. You are VALUING YOUR GOLD in the very currency you are telling others to avoid. I cannot believe you don't see any contradiction in this.

Gold is a commodity. Nothing more. Nothing less.

You really should be, instead, suggesting everyone work on the barter system. You can trade your skills for corn, dental care, and time shares. Of course, you'll need a way to keep track of how many of your skills have been put into the system, so you can get your bartered value back out. We could write it down centrally, so some dentist who wants a time share can do dental work for a farmer who sold corn to a timeshare builder, but that would be cumbersome. Instead, we could give the dentist, farmer, and builder vouchers they could use to trade their services for, and then use those vouchers with others in the system to get different goods or services.

Hmmm... We need a catchy name for the vouchers. "Credits?" No... been taken by Visa and MC. "Markers?" No... sounds too much like the old German paper.

I know! Let's call them "dollars" or, in general, "money!" That's a good way to allow people to trade their services to others for equal value.

And that's why the "pieces of paper" are NOT worthless. They are the bookkeeping of MY goods and services contribution to trade for the goods and services of others. They are the way we trade unlike services fairly and equitably. Your gold is just heavy dollars, and JUST AS WORTHLESS.

[Carpenter]

What does leasing and "selling gold and buying a futures contract" have to do with one another? In one you're getting paid to lease the gold for a specific amount of time and the other you're just selling your gold and buying a futures contract to buy gold at a specific price in the future.

And you're right gold, or almost any futures contract for that matter, is seldomly in backwardation, they're mostly in contango. So in other words you'd be paying more to buy the futures contract than the spot price. So if the spot price of gold doesn't rise to the price you paid for the futures contract you're losing money.

In the case of leasing gold, you said you'd have to put the proceeds in an "interest bearing time deposit" (a.k.a. bank, a.k.a. fiat money). Now you're back to currency risk.

It's the same arrangement as leasing.
If I lease gold, the lessee takes possesion, and returns it at the end of the lease period.




Losing money could only be a function of the interest rate.

The price of a forward contract is agreed to in advance.
Whether the gains from interest are greater than todays price minus the future price is a known.

The August 2013 gold contract opened at $1668 per ounce. It's been as high as $1671.30
The low today on that contract was $1668 it settled at $1668.10
Gold



I could have sold gold at a high today of $1669.20

What's the best interest rate avaliable today?

[Carpenter]

And get you even more worthless pieces of paper. You are VALUING YOUR GOLD in the very currency you are telling others to avoid. I cannot believe you don't see any contradiction in this.

Gold is a commodity. Nothing more. Nothing less.

You really should be, instead, suggesting everyone work on the barter system. You can trade your skills for corn, dental care, and time shares. Of course, you'll need a way to keep track of how many of your skills have been put into the system, so you can get your bartered value back out. We could write it down centrally, so some dentist who wants a time share can do dental work for a farmer who sold corn to a timeshare builder, but that would be cumbersome. Instead, we could give the dentist, farmer, and builder vouchers they could use to trade their services for, and then use those vouchers with others in the system to get different goods or services.

Hmmm... We need a catchy name for the vouchers. "Credits?" No... been taken by Visa and MC. "Markers?" No... sounds too much like the old German paper.

I know! Let's call them "dollars" or, in general, "money!" That's a good way to allow people to trade their services to others for equal value.

And that's why the "pieces of paper" are NOT worthless. They are the bookkeeping of MY goods and services contribution to trade for the goods and services of others. They are the way we trade unlike services fairly and equitably. Your gold is just heavy dollars, and JUST AS WORTHLESS.

I'm not telling anyone to avoid anything.
I never claimed dollars were worthless, only that they may become so.

I use dollars every day, I earn a living denominated in dollars.

I place my savings in metal to avoid the theft of inflation, and hedge against catastrophe.


Gold is a commodity, just like orange juice, pork bellies, and labor.

If you want a barter system based on commodities what is the problem with gold?

Gold has certain properties that make it suitable as a medium of exchange.
It's fungible, durable, divideable, relatively scarce, easy to authenticate, and it's purty.

If you think carrying a few ounces of gold is inconvenient, consider the number of trades that might be necessary to get shoes for a family of four.

In a community of corn farmers, all needing shoes, just how much corn could the towns lone cobbler consume?

Ever seen a grain silo?

[Wino]

OK.. Last attempt.

If you're hungry, one pound of gold is worth one bushel of corn. Your gold fever is not a hedge against inflation. Nothing except stockpiles of all the goods and services (how does one stockpile services, I wonder?) is a hedge against inflation. Having it already rather than still needing to buy it is the ONLY hedge.

Once I realized the above, I came to my conclusion that one can only hedge against inflation for the short term led to my "invest in debt" realization. Though the debt will need to be used to buy necessities so you won't have to buy them later. Gathering debt for a car is still stupid. Gathering debt to build a warehouse where I can store enough living materials for years is the ONLY debt that will hedge against inflation.

Your gold is not a hedge. It has no intrinsic value. It does not contribute to subsistence in any way.

In short, it's a gamble, just like every other "investment" out there. So, if you're really concerned that the economy is going to crash and inflation is going to skyrocket, you should be buying grains, and digging wind-powered water wells, and black powder and lead block and reloading essentials, and maybe a forge, and wood-burning stoves, and the plethora of other things you'll need when the trucks and trains stop delivering.

Or you can continue hoarding gold and hope that enough of civilization still craves it when the bottom falls out, so you can still trade it for goods or services you need to survive.

For my part, I'm storing up money now, and if I see inflation hitting, I'll be pulling out my shopping list to stock a compound in the foothills of Dakota until the zombie apocalypse subsides.

[Carpenter]

Hence why I knew I shouldn't have gotten into this.

Gold bugs tend to lash out when they can't convince people to join their religion.

Well Bucky, you asked questions that had already been covered.

I've got a grand total of 35 or 40 posts so it shouldn't be that hard to keep up.



Lash out? I give as good as I get.


Your first responce to me was under the banner of grammer police, I invited you in anyways.
Next you referred to me as fanatical, when called on it you happily reaffirmed.
Now, because my strategies don't align with yours, you accuse me of proselytizing.

For one as thin-skinned as yourself, you certainly don't mind needling others.

While you're here Bucky, check my spelling, will ya'?

[Carpenter]

OK.. Last attempt.

If you're hungry, one pound of gold is worth one bushel of corn. Your gold fever is not a hedge against inflation. Nothing except stockpiles of all the goods and services (how does one stockpile services, I wonder?) is a hedge against inflation. Having it already rather than still needing to buy it is the ONLY hedge.

Once I realized the above, I came to my conclusion that one can only hedge against inflation for the short term led to my "invest in debt" realization. Though the debt will need to be used to buy necessities so you won't have to buy them later. Gathering debt for a car is still stupid. Gathering debt to build a warehouse where I can store enough living materials for years is the ONLY debt that will hedge against inflation.

Your gold is not a hedge. It has no intrinsic value. It does not contribute to subsistence in any way.

In short, it's a gamble, just like every other "investment" out there. So, if you're really concerned that the economy is going to crash and inflation is going to skyrocket, you should be buying grains, and digging wind-powered water wells, and black powder and lead block and reloading essentials, and maybe a forge, and wood-burning stoves, and the plethora of other things you'll need when the trucks and trains stop delivering.

Or you can continue hoarding gold and hope that enough of civilization still craves it when the bottom falls out, so you can still trade it for goods or services you need to survive.

For my part, I'm storing up money now, and if I see inflation hitting, I'll be pulling out my shopping list to stock a compound in the foothills of Dakota until the zombie apocalypse subsides.

Don't think for a moment I've not prepared.


Here is my last attempt.
Gold For Bread - Zimbabwe - YouTube

[kv968]

It's the same arrangement as leasing.
If I lease gold, the lessee takes possesion, and returns it at the end of the lease period.




Losing money could only be a function of the interest rate.

The price of a forward contract is agreed to in advance.
Whether the gains from interest are greater than todays price minus the future price is a known.

The August 2013 gold contract opened at $1668 per ounce. It's been as high as $1671.30
The low today on that contract was $1668 it settled at $1668.10
Gold



I could have sold gold at a high today of $1669.20

What's the best interest rate avaliable today?

I must say I'm still confused with your scenario. So you lease the gold and then BUY a futures contract and as long as the interest rate you receive from the leased gold is greater than the spread of the spot price at the time of expiration and the price of the futures contract you've made money?

Leasing aside, do you know how options work since futures are very similar. If you BUY the Aug 2013 future contract, as you've previously stated, for $1668 you won't be SELLING the gold at that price, you'll be BUYING it at that price at settlement. So if gold was trading then at its current price of $1660/oz. you'd be losing.

If gold were to be higher than $1668 on Aug 2013 then you'd make money but how would you take delivery. Futures and other options are leveraged. Each contract is worth 100 troy oz. which is 3110 oz. You have $5.2 million to take physical delivery? Even if you did a mini-gold contract that's still 10% of the regular contract and would require $518,000 to take delivery. And that wouldn't even be delivery of physical gold but a certificate which represents 10% ownership.

And then what happens if gold dips down to say $1500/oz? As you said, a futures contract is an agreement to buy or sell the underlying at a fixed price, which you're right, it is. Well in this case the contract stipulates that you'd be willing to BUY the gold at $1668/oz. Since these contracts are American style you could sell it before expiration but if gold is trading lower you'll take a loss on the sale of the contract. And the loss will be MUCH bigger than any interest you might have gotten from leasing gold.

Maybe I'm just not getting everything you're saying but I've traded options and futures and I don't understand some of your thinking.

[Carpenter]

I must say I'm still confused with your scenario. So you lease the gold and then BUY a futures contract and as long as the interest rate you receive from the leased gold is greater than the spread of the spot price at the time of expiration and the price of the futures contract you've made money?

Leasing aside, do you know how options work since futures are very similar. If you BUY the Aug 2013 future contract, as you've previously stated, for $1668 you won't be SELLING the gold at that price, you'll be BUYING it at that price at settlement. So if gold was trading then at its current price of $1660/oz. you'd be losing.

If gold were to be higher than $1668 on Aug 2013 then you'd make money but how would you take delivery. Futures and other options are leveraged. Each contract is worth 100 troy oz. which is 3110 oz. You have $5.2 million to take physical delivery? Even if you did a mini-gold contract that's still 10% of the regular contract and would require $518,000 to take delivery. And that wouldn't even be delivery of physical gold but a certificate which represents 10% ownership.

And then what happens if gold dips down to say $1500/oz? As you said, a futures contract is an agreement to buy or sell the underlying at a fixed price, which you're right, it is. Well in this case the contract stipulates that you'd be willing to BUY the gold at $1668/oz. Since these contracts are American style you could sell it before expiration but if gold is trading lower you'll take a loss on the sale of the contract. And the loss will be MUCH bigger than any interest you might have gotten from leasing gold.

Maybe I'm just not getting everything you're saying but I've traded options and futures and I don't understand some of your thinking.

I'm starting with physical gold.

1)I sell gold at todays price. (currently $1658)

2)I invest the proceeds from the sale of gold in a 1 year time deposit.

3)I make an agreement to purchase gold at a given price in the future. (Aug 2013 currently $1668)

4)Convert the CD at maturity

5)Pay for delivery of the gold forward contract with the proceeds from the time deposit.

In the above example as long as the interest rate is above 3/4% a gain can be realised.

Yesterday, for a period of time, gold was in backwardation.

People who wish to earn a return on their gold, and retain the inflation hedge that gold offers can take advantage of something similar.

Private mints, refineries, depositories, and unallocated metal funds all take advantage of leasing.

I don't participate in leasing.
This was a mental exercise to illustrate the mechanics, and justify the gains I claimed were possible from gold leasing.

Gold forward contracts are between individuals, and require no initial outlay of cash.
They don't occur on an exchange, and are exempt from commission fees associated with futures contracts.
They are structured to suit individuals, and not subject to the restrictions of comex futures contracts.

[bjl584]

I don't participate in leasing.
This was a mental exercise to illustrate the mechanics, and justify the gains I claimed were possible from gold leasing.

So, you don't actually do this? So then, you really don't earn any return on the gold that you have? You just wanted to prove to others that you could if you wanted to? Actually, you probably couldn't because the actual amounts of gold and the money that would be required is simply out of reach for the average person. So, your gold is really just for your peace of mind? To each their own I guess. I'm perfectly happy investing in the markets.

[Carpenter]

So, you don't actually do this? So then, you really don't earn any return on the gold that you have? You just wanted to prove to others that you could if you wanted to? Actually, you probably couldn't because the actual amounts of gold and the money that would be required is simply out of reach for the average person. So, your gold is really just for your peace of mind? To each their own I guess. I'm perfectly happy investing in the markets.

I never claimed to do this, I claimed the gains were possible.

I believe you're wrong about the amounts neccessary to participate.

Gold forward contracts are entered into with mines throughout the world.

I was just reading about a small mine in Spokane, and the gold they owe on forward contracts.

Many of the contracts were within the reach of individuals.

I won't belabor the point further, the fact remains, an individual with the desire to do so can.

The gains that I pointed out are entirely possible, and have been taken advantage of.

The lease rates are posted on a daily basis, and not without reason.

I wouldn't be suprised to find a fund set up that takes advantage of the strategy.