Quite commonly, money is conceptually defined across a continuum from narrow money to broad money. Narrow money typically includes highly liquid forms of money that serve the function of medium of exchange, while broad money additionally includes other less liquid forms of money that serve the function of store of value. Monetary aggregates are conventionally denoted in ascending order by M0, M1, M2, M3, etc. Smaller aggregates like M0 and M1 correspond conceptually to narrow money supply, while larger aggregates like M2 and M3 correspond to broad money supply. We should note that in the heady days of monetarism, economists have further elaborated those aggregates and have devised M4, M5, M6, etc.
Did you catch that? M0 is "ready money", and the higher aggregates, M1, M2 and so on are paper derivatives of the lower aggregates that serve as a store of value!
In the above article the authors compare only the global M0, or all the paper money in the world, to all the gold in the world. This is a useful comparison, but it is only a mere fraction of the whole story.
First let's go back to the pre-Nixon Bretton Woods years. M0, or paper money, was essentially a derivative of the value of gold. Gold was valued by the whole world, so paper money derived it's value mainly from the gold held in Fort Knox. That is the very definition of a derivative; something that derives its value from something else. In the case of money and banking, we use a system of fractional reserves. So while the M0 derived its value from the gold, it was allowed to exceed the amount of gold by strictly controlled multiples. (Or not so strictly controlled as the case may be.)
Now let's look at M1. This includes checks, ATM cards and traveler's checks (in the amount that they are backed by deposits). M1 also includes all the physical paper money in M0, but for the purpose of this post, I would like to refer to each level of M as only it's new contributions. So for the purpose of this post, when I say M1, what I mean is M1- (minus) M0. And when I say M2, I mean M2-M1-M0. Okay? Good.
So now we can say that M1 is all the "derivatives" we can use to spend our ready money. These are not money in and of themselves, but they serve as "access" to our money when we want to spend it. And once again, these are allowed to exceed the amount of actual physical cash in the world because they will never be all converted to physical cash at the same time. (At least that's the theory.) So M1 is a derivative of M0 which is a derivative of gold. (Or was a derivative of gold until Nixon closed the gold window.)
M2 includes savings accounts, CD's and money markets. This is the money you've socked away which isn't readily spendable like M0 and M1. In fact, the people you have entrusted this money to do more interesting things with it. That's why savings accounts pay interest, CD's have time limits, and money markets invest in bonds. So we can call this M2 a "close substitute" for money, or we can simply call it a derivative of M1.
M3 is basically the same as M2, only on the institutional level. So it includes LARGE money market funds and even short term re-purchase agreements, which are essentially short term contracts. So while this wealth is fairly liquid given a short amount of time for liquidation, it is not really money, and it is a further expansion of what we call "money" and it is yet another level of derivative.
M4, M5 and M6 broaden the definition of money further. And in so doing, their monetary aggregates are further away from being liquid and more of a means of storage of wealth, than the traditional use of money in commerce. So I think it is fair to say they are derivatives beyond derivatives.
And not included in any of these monetary aggregates are all the derivatives that we have come to love, like Credit Default Swaps, Collateralized Debt Obligations, Mortgage Backed Securities, even stocks, bonds, ETF's, mutual funds, index funds, and just about any other paper instrument you can find to "store your wealth in". These all require some work in order to "deleverage" them down to "ready money". But that is what is happening right now.
So let's build a "derivative ladder". The bottom, the "foundation" as it were, will be the "raw value" that everything else derives its value from. This first one is pre-Nixon:
CDS's, CDO's, MBS's
ETF's and Funds
Stocks and Bonds
M0 "Cash dollars"
Gold "The foundation"
Notice that everything above the M's is what we currently call "investments". Or more specifically, "paper investments".
Now let's look at that ladder post-Nixon. Since gold is no longer the "foundation", and it is instead an "investment", we'll move it up the ladder.
CDS's, CDO's, MBS's
ETF's and Funds
Stocks and Bonds
M0 "Cash dollars" "The foundation"
Now, supposedly we have a "liquidation" or a "deleveraging" happening right now. Other's call it a "flight to safety". Basically what it works out to is a mass scrambling down the ladder to the safety of the foundation.
But unfortunately the foundation is made out of paper right now. So certainly we see a lot of value flowing into that. But how long can that paper foundation hold up? Some value scrambles down the ladder only to find a paper foundation and then scrambles back up into bonds, or more specifically, sovereign bonds, TBills and such. But there again, you are sitting in a non-liquid derivative which derives it's value from a paper foundation. So how long will that last?
If you have read this blog for any length of time, you know that what is happening right now is that "all paper is burning" as Another told us it would. And you know that the only safe place to run is into gold. And not only is it safe, but it has EXPLOSIVE upward potential, since sooner or later, everyone else will realize the same thing you were lucky enough to stumble upon here. And then, all will pile into gold and it will be forced by the weight of the world back to the position of foundation once again.
This is FreeGold.
So let's try to figure out how much value will pile into gold! Let's have some fun with numbers!
I believe that M0 will still be necessary in our new FreeGold economy. Probably M1 as well. But for the rest of it, gold will clearly be the best option as a place to "store value" as the article put it. So how much value must fit into how much gold?
If we looked at the entire net worth of the entire world, including land, property, machinery, and everything... it would be in the range of $500T to $1 Quadrillion. Perhaps even double that if you include the marked to myth (MTM) derivatives. But those have already deflated, even if the banks won't admit it.
Anyway, we aren't concerned with all that tangible wealth like land and factories. That will still be here and it will still be owned by someone. What we are concerned with is this "paper" wealth that is right now on fire. So let's consider some statistics.
The global net worth of high net worth individuals is estimated at $50 Trillion. Those are the individuals with more than a million dollars not counting their primary residence. This includes Bill Gates. But it does not include corporations or banks.
In order to throw in all the little people, we need to look at Global Assets under management, or AuM. This has dropped in the last year to around $100 Trillion. And this is defined as "bankable assets".
So basically we can say that aside from corporations, governments and central banks, all the people in the world have about $100 Trillion worth of "paper assets".
Now we also know that the banks have about $1 Quadrillion or more in "paper assets" (OTC derivatives anyone?) that the governments and central banks are trying desperately to prop up with bailouts, quantitative easing and so on. But for the moment, let's just ignore this silly sideshow.
The article at the top of this post told us that all the gold in the world is now worth about $4.3 Trillion. But remember, we are ignoring governments, corporations and central banks for now, and we are focusing on individuals the world over. And really only those individuals who have saved some money over and above their tangible assets like property. So we must also ignore the gold held by governments and central banks at this time.
Wikipedia tells us that central banks hold about 19% of the gold. So we'll multiply $4.3T by .81 to get $3.48 Trillion worth of gold in the world in private hands. That is based on a price of $806.62/oz. and the current price is 12% higher so we will adjust and get a total value of above ground gold in private hands of $3.92 Trillion.
So if private paper value of $100 Trillion were to flow into this much gold, the price of gold would have to jump to $23,205 per ounce. This is the price it would take for gold to soak up the paper "savings" of individuals the world over.
Of course there are some things we are still ignoring. For one, for that value to all flow out of paper would probably halve the value, as the paper would decline until there were no more bids and then it would plunge. But we are also ignoring corporate and bank money and debt as well. And also central bank buying, like China, who would like to increase their holdings to 4,000 Tonnes.
Another thing we are ignoring is inflation and/or hyperinflation of the world currencies. But again, we are just looking at flow from paper assets into hard assets, namely gold.
As I have said before, I believe the FreeGold valuation to be much higher. I believe that gold will have to reach a height at which it can not only absorb people's savings, but also the obligations and debts of nations.
The article at the top of this post concludes by telling us that the long term price of gold is driven by global money supply. But what if Another was right? What if we are witnessing "all paper burning"? What if paper as a "store of value" loses the confidence of the whole world? Where will that value run to? Can you tell me any place other than gold that will not degrade with time? In this case would not the "price" of gold be driven by the flow of wealth instead of by mere M0 printing?
This is why I say that FreeGold and hyperinflation are two totally separate events. We may get one or the other, or both. At this time, my money is on both.
As a bonus, I leave you with this snip from Steve Hickel:
In order to determined what value gold needs to “be risen” to in order to pay off $20 Trillion in debt and still have one-half of US gold free and clear, we simply need to divide $20 Trillion by 256,000,000 ounces and double the value (keeping half – remember?). The author’s calculator suggest that amount to be $XX per ounce ($XX per ounce doubled). Or, if you prefer, divide $20 Trillion by one-half of 256,000,000 or 128,000,000 ounces. In any case, the answer is 20 trillion divided by 128 million = one hundred fifty-six thousand two hundred fifty or $156,000 per ounce.
We need to factor in the current value of the audited US gold at $42.22. Subtracting $42.22 from $156,000 gives us the amount that the gold needs “to be risen to” in order to pay of the assumed $20 Trillion in US debt and to keep half of US gold in the process. That amount is $156,182.78. To put this in perspective, gold needs to rise from $860 (current value last Friday) to $156,128.78 – that is a 181.54 increase in the current price of gold. If someone disagrees with the above math, please speak up now.
As far fetched as this plan would seem and to account for any variances that may arise due to European confessions and audits and accounting of debts and other countries such as China and Russia factoring their thoughts, it will actually keep the DOW from falling to 1,000 and will put the US and Europe and other countries on much more solid financials. DEBT Free!
If some financial institutions failed to confess that they may have been naked short gold as this process unfolds (and failed to go long), they may find having to buy gold at $156,128.78 per ounce daunting. In fact, it would most likely bankrupt them and their 3rd generation offspring. But that was what the process of confession was to accomplish – show us where all the skeletons are so we can deal with them prior to “having gold rise” to $156,128.78 per ounce.
Some may take exception here and state that this is the same as inflation rising by a factor of 181 times. They may also claim that it is the same as going on the gold standard. The author respectfully disagrees. He thinks that this a one-time adjustment. Raise the price of gold, pay off the debts, then figure out a better way to do things going forward.
In case the confessors believe that gold should be kept from the hands of the masses by attempting to confiscate gold or make it illegal for common man to own, the author believes they are missing the point. The points is to raise the price of gold one time very quickly to $156,128.78. Pay the debts public and private and come out the other end with a better system that those smarter than the author would know how to do.