Realcent.org

Just doing a little thought experiment. A lot of people blame the recent declines in PM on euro weakness with Spain debt issues and whatnot.

So lets assume this is why...

So how does this affect the gold and silver priced in dollars? I understand how this should make gold more expensive in euro terms, but if the dollar is stronger, how come a bushel of apples didn't go down in price, or a new car, imported european chocolate? To me it makes sense for gold to stay the same vs dollar terms, and just go up in euro terms, and shouldn't the pms be rising in price in other currencies, Yen/yuan/peso bought gold should be higher.

For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?


http://www.24hgold.com/english/gold_silver_prices_charts.aspx?money=Euro

I'm not good at investing, I'm not a trader, I'm a small business owner who happens to stack... help me figure this out in a way that actually makes sense?

Thanks in advance.

Becouse the USD is a joke and the rest of the world knows it.

You have to understand the concept of rigidity. For the purposes of this post I will call it stickiness.

Wages are sticky. If the US dollar deflates (and therefore your purchasing power goes up) you should be paid less. Needless to say, you will be pretty unhappy if your employer cuts your pay. How often should pay be changed? Annually? Monthly? Currently the answer is annually; and generally it will be a raise. However, its not really a raise if it is in line with inflation. They are just paying you the same purchasing power.

The same holds true for most things. A company will not lower the price of an apple, if people are still willing to pay for an apple at previous prices. People will still demand a good even if it is "slightly" more expensive than it should be. What is the value of two cents? Will you rather go hungry than buy an apple that is two cents more expensive than it should be? This also gets into the concept of elasticity of demand (ie. normal, inferior, and luxury goods).

Now lets talk about your other question: "For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?"

The Euro to Dollar exchange rate is 1 euro = 1.2945 US dollars.
On the website you provided gold is 1228.93 Euros, and 1589.00 Dollars.
1228.93 Euros x 1.2945 Dollars = 1590.84 Dollars

Gold is not cheaper in Euros. It is just about the same price as in Dollars.

The exchange rate is about right. With 1 euro = 1.2945 US dollars, the prices for silver that the kitco charts have for both the dollar and the euro are close to parity. There is actually an arbitrage opportunity if you can buy silver in Euros and sell in Dollars with any trading costs you could make about 7 cents on each ounce...

Unfortunately the price of silver does not follow any real logic because it is a manipulated market, so it will go up only when the number of buyers overwhelm the fictional paper market... But since paper silver can simply be created by a back writing a contract that says it has X amount of silver to sell, and then selling that silver to its own subsidiaries at lower and lower prices in the paper market, they have unlimited ability to drop the price at will. Like when people might think of getting out of other paper assets (dollars, stocks, bonds) they will investors them buy them up for a little bit and then hammer the price down as a lesson to stay out of silver and gold, and retreat to the "safety" of (dollars, stocks, bonds).

But the fundamentals are still on the side of silver. If you're interested I can go farther into this, I just graduated with my economics degree and am currently looking for a good masters program to continue in.

I see deacon and I had the same basic thought on exchange rates.

But for a liquid market such as gold and silver with homogeneous products sticky prices shouldn't hold. Especially if you hold to the any of the strong efficient market hypothesis, or even the semi strong.

deacon wrote:You have to understand the concept of rigidity. For the purposes of this post I will call it stickiness.

Wages are sticky. If the US dollar deflates (and therefore your purchasing power goes up) you should be paid less. Needless to say, you will be pretty unhappy if your employer cuts your pay. How often should pay be changed? Annually? Monthly? Currently the answer is annually; and generally it will be a raise. However, its not really a raise if it is in line with inflation. They are just paying you the same purchasing power.

The same holds true for most things. A company will not lower the price of an apple, if people are still willing to pay for an apple at previous prices. People will still demand a good even if it is "slightly" more expensive than it should be. What is the value of two cents? Will you rather go hungry than buy an apple that is two cents more expensive than it should be? This also gets into the concept of elasticity of demand (ie. normal, inferior, and luxury goods).

Now lets talk about your other question: "For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?"

The Euro to Dollar exchange rate is 1 euro = 1.2945 US dollars.
On the website you provided gold is 1228.93 Euros, and 1589.00 Dollars.
1228.93 Euros x 1.2945 Dollars = 1590.84 Dollars

Gold is not cheaper in Euros. It is just about the same price as in Dollars.

Hey Snake,

That was a really great succinct explanation. Look forward to more. Very nice!
Thanks.

Kitco says price of Gold is down due to predominant sellers, but thats for a now -.20 drop.
I guess that its going down slowly due to a concerted effort by the big banks to get well
I hope to make a few buys at a coin show in Albany May26 27 so lower prices will help my Buy.
But I fear the prices will turn before then

Cool. I studied Econ as well. I've been looking for a decent school to get a masters. I should have started it a few years ago, but after years of school I just wanted to earn money.

I used to be a Keynesian guy, but no longer.

DebtFreeMe: "But for a liquid market such as gold and silver with homogeneous products sticky prices shouldn't hold. Especially if you hold to the any of the strong efficient market hypothesis, or even the semi strong."

I was talking about his question regarding why don't all prices drop if the dollar is stronger.

In regards to your statement; I agree. Commodities in a liquid market will fluctuate as the market dictates - to an extent. However, if the price of silver drops several percent (in a day) I will guarantee you that your Local Coin Shop will start pulling silver from their shelves. This will make it harder to trade in silver. If the internet didn't exist, the price of silver would be a lot stickier than it is now. With the internet I will say it is semi-strong. Without it would definitely be weak.

Weak or strong - prices will always move as the market dictates. The difference between them is how quickly this will happen.

I'm honestly confused as to how people don't know why gold and silver are down. It's simply that the USD is up, which is no surprise.
Cheers!

Actually, a bushel of apples did go down today. As did corn, beans and wheat. I was asked by a customer if I could promise him $6 corn all year. I couldn't make the promise.

deacon wrote:You have to understand the concept of rigidity. For the purposes of this post I will call it stickiness.

Wages are sticky. If the US dollar deflates (and therefore your purchasing power goes up) you should be paid less. Needless to say, you will be pretty unhappy if your employer cuts your pay. How often should pay be changed? Annually? Monthly? Currently the answer is annually; and generally it will be a raise. However, its not really a raise if it is in line with inflation. They are just paying you the same purchasing power.

The same holds true for most things. A company will not lower the price of an apple, if people are still willing to pay for an apple at previous prices. People will still demand a good even if it is "slightly" more expensive than it should be. What is the value of two cents? Will you rather go hungry than buy an apple that is two cents more expensive than it should be? This also gets into the concept of elasticity of demand (ie. normal, inferior, and luxury goods).

Now lets talk about your other question: "For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?"

The Euro to Dollar exchange rate is 1 euro = 1.2945 US dollars.
On the website you provided gold is 1228.93 Euros, and 1589.00 Dollars.
1228.93 Euros x 1.2945 Dollars = 1590.84 Dollars

Gold is not cheaper in Euros. It is just about the same price as in Dollars.

You must have studied some serious economics! I have my last Econ test tomorrow.....

deacon wrote:You have to understand the concept of rigidity. For the purposes of this post I will call it stickiness.

Wages are sticky. If the US dollar deflates (and therefore your purchasing power goes up) you should be paid less. Needless to say, you will be pretty unhappy if your employer cuts your pay. How often should pay be changed? Annually? Monthly? Currently the answer is annually; and generally it will be a raise. However, its not really a raise if it is in line with inflation. They are just paying you the same purchasing power.

The same holds true for most things. A company will not lower the price of an apple, if people are still willing to pay for an apple at previous prices. People will still demand a good even if it is "slightly" more expensive than it should be. What is the value of two cents? Will you rather go hungry than buy an apple that is two cents more expensive than it should be? This also gets into the concept of elasticity of demand (ie. normal, inferior, and luxury goods).

Now lets talk about your other question: "For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?"

The Euro to Dollar exchange rate is 1 euro = 1.2945 US dollars.
On the website you provided gold is 1228.93 Euros, and 1589.00 Dollars.
1228.93 Euros x 1.2945 Dollars = 1590.84 Dollars

Gold is not cheaper in Euros. It is just about the same price as in Dollars.

and this is why you always ask for a raise, with a curve for inflation.

It's simply that the USD is up, which is no surprise.

But the dollar being up is only relative to other currencies... So if each nation prints a bunch money, but the US prints $1000 dollars less then anyone else, then it will relatively go up, compared to those other currencies, but the price of a relatively fixed commodity, like silver, should still go up in relation to all of those currencies, including the dollar, not down... In the long run this should be true, not so much in the short run where humans can be persuaded that more money printing is actually less, more taxation is actually good, and more laws actually mean a greater amount of freedom...

First thanks all for the thoughtful responses, some follow ups...

deacon wrote:Now lets talk about your other question: "For the love of god how can gold and silver now be cheaper when bought in euros when euro weakness/dollar strength is the supposed cause of the decline in the first place?"

The Euro to Dollar exchange rate is 1 euro = 1.2945 US dollars.
On the website you provided gold is 1228.93 Euros, and 1589.00 Dollars.
1228.93 Euros x 1.2945 Dollars = 1590.84 Dollars

Gold is not cheaper in Euros. It is just about the same price as in Dollars.

ok I'm not an economist, but I'm not that dumb lol, and I appologize for making you type all that out as its pretty obvious. I understand the price is effectively the same in both euro/dollar at any point in time, and if there were any sizable discrepancy somone would just buy gold in euro, sell in dollar, buy euro with dollar, rinse and repeat until the market balanced itself out.

So to rephrase my question, look at the 5 day chart, gold/silver is now less costly in euros than it was a week ago before the euro dropped vs the dollar, so is nearly every other commodity as priced in euro. I can't seem to explain that based only on "the dollar is strong", if the euro is weak, shouldn't everything be more costly in euros, and everything else basically remain constant? what am I missing


Lets say I'm a spanish banker, I have 10k euros in the bank. now a month ago I could by 1x oz. gold, now that due to my malfeasence and that of my countrymen, my bank has been socialized, my countries debts are out of control etc, I can now use the same 10k euros to buy 1.05x oz gold, how does that make sense? Substitute barrels of oil, tonnes of grain, whatever, its the same point, and the charts show the same thing... Why would I not want to "crash" my currency if it results in a stronger dollar and everything still ends up cheaper for me to buy, plus the wonderful added bonus of our exports are now cheaper than our competitors on the world market? Think of how strong of an economy we can build by crashing our currency...

And Debtfreeme... feel free to be as long winded and detailed as you have time for, I'm here to learn and hopefully I'm not the dumbest guy in the room so someone else might pick something up too

As Keynes put it, it's the animal spirits... And as Mises and many of those in the Austrian school like to put it (which is where I stand), it's due to the fact that valuations are subjective and not mechanical, thus peoples perspective of value (or the value of things to one another) can and will change over time, and with their own perspectives and needs; Mises refers to this as Human Action...

Unfortunately economics is called the "Dismal Science" for a reason, which is that although nearly all economists really want everyone to believe economics is a hard science, like physics (I actually majored in this for three years before joining the Air Force) and chemistry, ruled by clear definable equations that can be proven to be true and hold universally at all times and in all places, the fact is it is a social science...

Which means that although we can define guiding principles, like supply and demand, efficient markets, the Laffer Curve, etc., we can not state that they will always and forever hold, or can we calculate exactly how long it will take for them to assert themselves within the market. All we can say is that over the long run, if a market exists long enough, these principles will hold, if all other variables are held constant (which they never are, nor can they be).

Thus, in the case of your specific question of how the Euro can do so poorly, yet still have the price of commodities go down in relation to it, the answer is that peoples perspective of the value of government issued currencies seems to have shifted to a more favorable position, even though the fundamentals of the value has actually gotten worse (this is my own normative determination).

In the end all I can tell you is that economics can give you guideposts, but it can't tell you where the yellow brick road will end, or even where it begins, or what path it will take.

Oh, but it is yellow... Maybe, if the market decides yellow is the right color.

Hope that helps more than it confuses...

DebtFreeMe wrote:

It's simply that the USD is up, which is no surprise.

But the dollar being up is only relative to other currencies... So if each nation prints a bunch money, but the US prints $1000 dollars less then anyone else, then it will relatively go up, compared to those other currencies, but the price of a relatively fixed commodity, like silver, should still go up in relation to all of those currencies, including the dollar, not down... In the long run this should be true, not so much in the short run where humans can be persuaded that more money printing is actually less, more taxation is actually good, and more laws actually mean a greater amount of freedom...

I think you are speaking in theory vs answering the original question posted here.
The USD has gained against the primary currencies, metals, food and energy. All things are cyclical. The USD has gained across the board. That is the answer.
Demand for USD is also typically seen (as has been the case recently) from being the primary reserve currency. That causes a natural bid in global trade where the USD is the primary trade currency (crude oil, PM's etc)

As to the other points, base money is down. Fewer people have fewer dollars. Bank reserves are not the same as currency float. Perhaps that's also why more people are living off of gov't assistance than previously seen for decades. This is also why $billions are vanishing from the system as leveraged assets are unwound (Think foreclosure). However, when the velocity picks up (And it will. The Fed always wins) then you'll see inflation. PM's will suffer in a high inflation environment. .Sorry to be so short in my response. Time is of the essence.

Cheers!

mflugher wrote:... feel free to be as long winded and detailed as you have time for, I'm here to learn and hopefully I'm not the dumbest guy in the room so someone else might pick something up too

+1

Thank you all for your research and explanations. This is quite an interesting discussion. I especially was intrigued by the thought of economics as social science rather than hard science. Makes sense.