Friday, August 21, 2009

Confiscation Anatomy - A Different View

Foreword

Please do not take this post as a definitive, final statement on this very complex topic. This is only one view of many that explains why confiscation will not happen. Once you understand the dynamics of a completely demonetized, free, non-fractional, physical-only gold market (freegold), it will become clear that this is where the river of time is taking us. This particular post is meant only to encourage a focused discussion on this "concern", for the benefit of us all. In fact, think of this post as a primer or introduction if you will. Or if you prefer, think of it as a dose of ocular Xanax for your "gold-angst".

Anatomy of a Straw Man

This tired old topic of gold confiscation seems to surface far too often within the online gold community. In the spirit of colorful analogies I'll liken it to a noxious vial of fox urine strategically placed to scare hungry little bunnies away from the delicious golden strawberry patch. Fox urine seems more appropriate than a simple scarecrow. But as we all know, a scarecrow is not really alive, and urine does not really eat bunnies.

The most important thing to keep in mind during this discussion is the macro, or global economy. The US is but one global player among many. This is not a simple story about stupid US politicians versus helpless US citizens. Instead, it is a grand story of giants. It is a story about the US government versus the rest of the world. And it is not just about this present crisis. It is a story that covers many crises and 96 years in the life of a single paper contract called the US dollar. In this global macro view, that a 1933 confiscation happened at all means that a 21st century one will not. That option has already been fully exhausted!

Anatomy of a Dollar Collapse

The dollar is going down, and there are a couple of ways this could play out, but one is more likely than the other. To understand why this will not lead to the confiscation of our gold, we must first understand the corner the dollar has painted itself into, and what its future options really are.

As I have explained many times, freegold and hyperinflation are separate events. Freegold is the establishment of a physical gold market after the paper gold market is arrested through default, breaking the dollar's grip on gold, and also breaking the dollar's international settlement function.

The first way this collapse could play out is a quick devaluation of the dollar, say, over a couple weeks, followed by the emergence of freegold. Think of it as the riverbed at the bottom of the waterfall.

The second and more likely way this will play out is with hyperinflation thrown in, perhaps lasting many months or years after the initial plunge/devaluation. The overwhelming evidence that this will be our path is the political control the Executive Branch is exercising over dollar monetary policy. Jim Sinclair believes this is a serious threat:
China wishes the annihilation of the Fed policy of “Quantitative Easing.”

The Fed wishes to accommodate China.

The US Treasury is absolutely opposed to any such consideration as it would cement the present Administration into a one term wonder.

The US Treasury must win this battle because the boss of this opposition has the power to appoint the new Chairman of the Fed, either Summers or Geithner.

Political control of the US Fed and therefore of monetary policy is in the cards...

...political control of monetary policy is CERTAIN as the Fed cannot win this contest against the Administration in the form of the US Treasury.

Bernanke becomes a team player or a team player will replace him.

The latter is becoming a probability as it is hard to trust a prior adversary. (Link)

I suppose you could picture this one as a waterfall with no riverbed at the bottom. Instead, the water falls all the way to the fiery pit of Zimbabwe hell where it burns into nothing but a curiosity for future historians and possibly a cheap eBay collectable, "The $11 trillion bundle - Now even YOU can pay off the US national debt".

Anatomy of a Gold Run

In the 1920's, if you had a dollar you held a contract for 1/20th of an ounce of gold. In essence, you had loaned your gold to the US Treasury and the dollar was your note on that loan. You could walk into the bank and present your note and it was the bank's job to provide you with gold or to die trying.

The problem was that the Federal Reserve system issued more notes than it had gold. So the whole "fractional reserve system" relied solely on the confidence that you COULD receive your gold, knowing full well that all people could NEVER receive all their gold.

By taking a look at the modern paper gold market, a striking similarity should start to emerge.

COMEX is primarily a betting operation that pairs up long bettors with short bettors. Only a very small percentage of these bettors actually take the physical gold. So the COMEX relies on the market's confidence that you COULD receive your gold, knowing full well that all the bettors could NEVER receive all of their gold at the same time (or ever for that matter).

So COMEX is essentially existing the same as the banks during the Roaring 20's.

In the crisis of the early 1930's, too many people went into the banks to withdraw their gold. And fulfilling their duty to provide gold or die trying, many banks died. This is the fate the COMEX has to look forward to.

Imagine if one favored entity, say Goldman Sachs, decides to take delivery on futures contracts that amount to perhaps 3% of the total open interest. Then imagine that all the short sellers exit the market through a cash deal with an offsetting long position. Where does the Goldman gold come from? Let's say for convenience that the entire registered stock of COMEX gold is eligible to meet Goldman's delivery. Great! The bank (COMEX) was able to cash Goldman's check! But what happens when the other 97% open interest sees this action and wants delivery too? Or even just part of it?

In any bank run, the first few people in line do get their cash. But ultimately, it is the flood that ensues that kills the bank. An innocent bystander might hear a rumor that the bank is about to fail. When he arrives at the bank he sees the long line and starts to panic. But then he sees a few customers coming out with their cash, so he calms down and gets in line. But will he make it through the doors before the bank closes for the "holiday"?

Anatomy of a Gold Default

In its role as the global reserve currency, the dollar must have two vital things: value and function. It is indisputable to rational minds that gold is true money. The universal way fiat currencies are measured for value is by how much gold they can be exchanged for. So the dollar has value on the global stage because of its ability at any given moment to buy gold. For function, the dollar is needed to repay all dollar-denominated loans and contracts around the world. But a dollar will always be able to pay one unit of any dollar-denominated loan, no matter what the value of that dollar is. So a failure of the dollar would be defined as a failure of value, not function. A dollar collapse would be defined by its inability to be exchanged for true money, gold, at any reasonable price.

What does it mean for a bullion bank to fail? Just as a regular bank would fail from a massive withdrawal of deposits beyond its ability to pay, we could say that a bullion bank has failed if it can't supply the gold necessary to honor its obligations. You can be sure it will first exhaust itself by trying to obtain whatever gold can be obtained on the spot market to fill its obligations prior to failure as an institution. But this is where the price would race away on the spot market paving the way for a complete run on all physical gold, permanent backwardation in the forward gold market, the withdrawal of all offers to sell physical gold, and a complete failure of the spot market to exchange gold for dollars at any reasonable price. And so, we would have the official failure of the dollar as well.

This is how a failure of the paper gold market, a DEFAULT on paper gold, will mean the collapse of the dollar. You will have the dollar on one side, gold on the other, and COMEX contracts in between the two of them. This will essentially pit gold and the dollar against each other, forcing them to arrive at a settlement in a dollar-rich/gold-starved arena. Could the dollar ever deliver on its physical gold contract obligations? No way. Which do you think will be left standing?

Back in 1933, the dollar DID default on its contractual gold obligations. In essence, the US government kept the gold that its citizens had loaned it and told the citizens to eat the loss. The government told them to simply keep the paper promissory note and pretend it was still "as good as gold".

At the time, the Bretton Woods agreement was more than a decade away, but there were still a whole lot of dollars floating around the international arena. So in order keep international trade goods flowing into the US, the US government said that dollars that worked their way into the international central bank clearing system could still be exchanged for physical gold.

To facilitate this convertibility in a time of dire crisis, it took three more drastic steps. First the government defaulted on 41% of its outstanding international gold obligations by devaluing the dollar 70%. (The world DID take notice of this 41% default!) Second, it called in the local gold to establish a fresh hoard for backing the international dollar. And third, it made gold ownership illegal in the US, a capital control move to prevent capital flow out of paper and into physical gold on the open market.

Then, in 1971 the US did it again, this time defaulting on 100% of its gold obligations to the rest of the world. Something to think about: The US did this while it still had a lot of gold. Why was that? If it was going to take the world off the gold standard, why not do it when the gold ran out? At least then it doesn't make you look like a cheat. As Another liked to say, "think long and hard on that one"!

Gold is off the table

The US gold hoard is now off the table. Think of a poker cheat who pockets his winnings yet still wants to play. When he loses he writes paper IOU's to the other players. Can he ever pull his money back out of his pocket without having it taken away? Think of an individual who declares his own insolvency and defaults on his obligations to pay, only to resurface later with a windfall inheritance. What problems will he face?

In 1971 the US refused to ship any more gold. It defaulted on its international obligations. It took its golden chips off the table but continued to play in the game. But the dollar didn't change. It still remained an international contract for gold. Watch the announcement:

Nixon Closes the Gold Window
As a politician, the President did not want to interrupt television viewers watching the tremendously popular TV series Bonanza, not wishing to potentially alienate those voters who fanatically followed the cowboy series. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On 15 August 1971, that speech and the price-control plans proved very popular and raised the public’s spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis.



This was cheating, plain and simple. The international financial system and the global market place run on procedure protocols that are not binding. They are not binding, but without them, international trade would stop altogether. Just because a rule is not binding does not mean it is not important. And just because a non binding rule is broken, does not mean it disappears.

Why do you think the US gold hoard was never publicly audited after this? And why do you think the book value of that gold was left frozen at $42 per ounce, never marked to market bringing it "back into play"?

There are two international bodies that facilitate the international financial and monetary system, the IMF and the BIS. These two bodies are in opposite camps. The IMF is in the dollar camp. Its sole purpose is to ensure that third world countries can pay their dollar-denominated debts in order to keep the dollar alive. If that debt from third world countries could no longer be serviced, it could no longer be held as an asset within the financial system. Therefore, the IMF issues highly leveraged dollar loans to these countries to make sure that payments continue. In exchange, it locks up real world capital as collateral for the loans. This is NOT a system that supports third world economies. It is a system that supports the dollar's reserve function at the EXPENSE of third world economies. If the IMF stopped functioning, so would the dollar. And the US government would lose its external funding.

The BIS, on the other hand, coordinates central bank transfers to facilitate international trade balance. If the BIS stopped functioning, so would international trade. This clearing system is fractal in that imbalances are first cleared locally, then regionally, then nationally, then internationally. If the BIS didn't deliver, food would not arrive at your local store, at least until a local production, distribution and clearing system was set up.

This leaves us with a one-sided dependence dynamic in which the BIS and the rest of the world could, if they wanted to, stop supporting the IMF and let the dollar die. But on the other side, the dollar cannot survive without the BIS. But why does this matter? What could make the dollar even think about abandoning the BIS?

Well, if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!

If the coming dollar collapse takes the first waterfall route and hits the riverbed, how would an insane and illogical confiscation play out? Well, if the US dropped out of the BIS to secure sovereignty over its confiscated gold, the BIS would halt all international dollar traffic and probably try to use those dollars to buy gold on the international free market. The dollar would be instantly dead.

But what if the dollar falls all the way to the pits of Zimbabwe hell? What if the US simply declares the dollar dead, confiscates the gold, and then starts a new gold backed currency? Wouldn't that work? I will tell you now that it would never be accepted on the international market as an exchange contract for gold! Even at $10,000 or $100,000 an ounce. The world is not that stupid. The US has defaulted on its gold obligations to the world TWICE now. The first default was 41% and the second was 100%. What will it be next time? No, the US will never be trusted to issue paper promises for gold again! Freegold is the only option!

The US government and the US dollar is caught up in this massive Catch-22 because of its own past cheating actions. This is why a future gold confiscation is simply not in the cards. This is why the Fed will appear more and more INSANE in its futile attempts to save the current system, all the way to the fiery bottom. And this is why freegold is the only possible end to this system.

Bottom Line: It takes AAA credibility to gain the confidence needed to run a fractional reserve paper gold scheme. The US government spent all of its credibility on a failed scheme long ago. And now the current COMEX scheme will face the same fate, thanks to the inflating of paper contract supply to meet demand, far in excess of physical supply, in the sole support of the US dollar printing authority that needed support since it had already defaulted TWICE!

And when the dollar finally collapses in value, a THIRD and final default will take place. The US government's existing dollar-denominated debt of $11 trillion will become instantly worthless.

And once the printing press source of funding is gone, the US will be forced to settle its trade deficit with real money on a 1 to 1 basis, no more fractional reserve shenanigans. If this is done centrally, as it is now, then the government will face a whole world of claims saying the gold already belongs to them. For its past sins, the government cannot take this chance. The other way to settle an ongoing trade deficit is on the local level, through millions of small transactions.

This is freegold. And this will pit trader against foreign trader, rather than government against government, or central bank against central bank. It will allow for trade goods to flow across borders and keep the economy alive so that the government can continue to collect taxes. This system will become very clear, very fast. It may be hard to imagine right now, but once it is forced into action by necessity, it will be clear. Even to the US government.

Freegold is not about huge profits for owning gold. It is only about the protection of wealth for everyone in the world. The huge profit only happen once, during the waterfall. It is a one time event. After that gold becomes the only store of value that keeps up with inflation... automatically!

I had wanted to end with a recent comment on this subject which prompted this post. But rather than extend this already long post any further, I will end with a simple link. Here is Ender's excellent explanation of why a freegold financial system is the only option left to a government that cornered itself long ago. Ender's comment will give you a glimpse at how this new freegold system will actually benefit governments while gold confiscation would hurt them. Remember, the government already has a monstrous system of confiscation in place. It is called TAXES. And freegold will stimulate the exact activity that generates the most confiscation, er... taxes. That would be local business investment! So take a break and then come back and read Ender's great two part post.

Sincerely,
FOFOA

26 comments:

Airedale said...

FOFOA,

Thank you for pulling this together in such a clear and understandable presentation. It is my belief that Free Gold has been planned for and engineered by a group of “Good Guys”. Bix Weir, in his Road to Roota series has presented this theory: “Wait… fear not my friends! As I discussed in my Road to Roota articles there is a group of true Americans that are trying to take back the Liberty that these people stolen from the American people. At this point it is all going
according to plan although the Enterprise and friends are not going down without a fight.‘
For an overview of Mr. Weir’s thoughts and links to some of his Road to Roota series: http://news.goldseek.com/GoldSeek/1222882627.php
It is interesting that the Federal Reserve Bank of Boston is the author of ‘Wishes and Rainbows’: http://www.bos.frb.org/education/pubs/wishes.pdf
It is comforting to hope that there are good folk working behind the scenes to bring our world Free Gold. The bankers cabal has inflicted much misery and death.
Airedale

Sabretache said...

FOFA - Only recently tuned in but, nice blog. Some impressive stuff. Thanks.

I've held some physical gold for about 5 years now. I follow GATA and take more than a passing interest in the trade, monetary and political issues surrounding the metal. I would value your (and other commentators') observations on the following:

There is evidence which I won't bore you with right now but which, after considerable research, I find persuasive, that the global physical (ie above ground) stock of refined gold is anything up to 100 times greater than the 47,000 tonnes (approx) usually intimated by organisation such as the LBA and WGC. For want of a better description, let's call that vast additional stock 'black gold'.

I agree the the prospect of 'offical' gold representing only about 1%-10% of the actual physical total is a bit hard to take. However, on the assumption that 'black gold' DOES exist in said quantities and that it is effectively controlled by government, banking and other powerful interests in approximate proportion to their current control of paper assets, how does that affect the march towards a Dollar denouement?

FWIW I have obviously given this a bit of thought myself. The actual amount of 'black gold' is clearly debatable but the existence of MUCH more than the publicly acknowledged figure 47K tonnes could, on some plausible assumptions about its deployment, go a long way to explaining both the arrogance of the paper gold shorts and the longevity of their operations.

Shanti said...

FOFOA,

Nice profound post !

FOFOA said,
"Freegold is not about huge profits for owning gold. It is only about the protection of wealth for everyone in the world. The huge profit only happen once, during the waterfall. It is a one time event. After that gold becomes the only store of value that keeps up with inflation... automatically!"

Shanti asks,
Is the profit than in fiat or in the intrinsic value of GOLD....?

Bron said...

Interesting take on the confiscation issue. You may find my analysis of it from an Australian perspective of interest http://goldchat.blogspot.com/2008/11/australian-gold-confiscation.html

Anonymous said...

There is merit to this line of thinking. I see that the Chinese have begun to encourage their own citizens to accumulate gold and silver. I suspect they are trying to get rid of the reliance on the dollar that still exists inside of China. This has to be a good way to export the dollars from China and collect more gold with which to base their own economy upon.

Another interesting move that took place day before yesterday was the removal of some 700,000 ounces of gold in the COMEX warehouse from the dealer category to the customer category. In the latter category it's not available for delivery. So without an equivalent number of delivery notices, a large amount of the registered gold in the COMEX warehouse was transferred to customer(s). This may have been to cover a large spot sale, it's not clear but it is very interesting as it indicates less confidence in the paper game and certainly reduces the backing of the paper gold for delivery.

Kind of similar to the point made about GS taking delivery on 3% of the paper market. This is pretty close to exactly that.

Anonymous said...

The problem with your vision of currency collapse is your imagined system of enterprise depends on the continued system of government.

You will need to tie your vision of currency collapse to the reality of the collapse of national (and probably regional) government. You cannot remove the lifeblood of government (fiat) and expect continued operation.

I hope you don't expect the continuation of the present oligarchy without concentration of capital?

What system of national and international government to you see as facilitating your "freegold" system of exchange?

Jim

S said...

look at the legacy hedge book of barrick gold - it is somethign like 9-10m oz at a price in the 200s or so. These are perpetual contracts that roll forward unless terminated by the other side annually. Wonder who is on the other side.

A shadow inventory of gold would not be terribly difficut ot ascertain, considering you have a fairly good track record of prodution to reverse engineer. Sounds like a hail mary. The arrogance of the paper shorts lies in knoing that the collective central banks will do everything in their power to supress prices through gold's primary dealers (bullion banks). Thus it becomes a protracted slow bleed not unlike at all the game of russian rullete the Fed is playing in the Mortgage market.

Glenn Hubbard had some fascinating comments re BB from the banker get together in Jhole. He essentially argued that the assets should be taken off the fed balacne sheet and transferred to the treasury so th Fed could maintain its independence. It was sureal to hear this - and even more interesting when someone said you mean dump the losses on the taxpayer - his response was silent. Columbia and its Alumni should be embarrassed by this shill and his 5% mortgage for everyone WSJ editorial.

It remians my contention that the Fed has but two options: (1) realize it has been outbluffed, contineu to play for a dignified exit/negotiation or (2) create an exogoneous event that would divert attention and casue a flight to safety therby enabliung the US to lean on its core compeitive advanatage - the military (and complex). The first option makes the most strategic sense and benefits all players - but there will be heavy resisitance from entrenched parties to "negotiate with terrorists." The later option is in essence the first strategy with a optional kicker for the percieved leverage the anvil offers.

A slightly different take on confiscation is the US printing regime. If the US can get away with printing money and seeing only a margin devaluation of the dollar in gold terms it is able then to go through the bullion banks and deploy those dollars to buy real gold. In essence, confiscation from weak hands and foreigners! it is not surprising that the germans and the chinese and much of asia have ramoed up their gold buying in spades - while the jewelry makers in India have reduced their purchases (which might be indicative but for the geopolitical tsunami that is surely missed by the artisons).

The issue for the US is that everyone knows the playbook - and has for a while. IT will be interesting to see what the Japanese opposition says to the US when the win in a landslide. And the Chinese are not nearly as stupid as the US MSM would have you believe. The Russians are already lightening up on dollars per TIC.

Perhaps those tankers loaded with oil are simply another manifestation of the US confiscating? Doesn;t printing money backed by nothing at artifically low/no interest rates constitute confiscation?

Mantis said...

FOFOA, I'm still new to your blog, but not new to finance or the gold trail. Excellent post, as always. A few thoughts I had whilst reading...

....strategically placed fox urine indeed!

....COMEX also exists as a direct descendent of Medici banking.

The paper gold market as we understand it today did not exist before the gold window was closed, nor could it have, for the dollar, as the primary derivative of gold, was the de facto paper gold market. Gold's role as money never was and never has been in jeopardy. The paper gold market merely reorganized after the closing of the gold window, and it is the paper gold market that people mistakenly look to. Gold never changed, and in reality, neither did the intentions of they who seek to control gold, yet the layers of paper promises surrounding gold have obscured it to the average man, leading gold to be foolishly deemed a commodity by nearly everyone except they who understand gold and have the most of it.

Can we not call fractional reserve banking a Ponzi scheme, for, during a bank run, it is only they who first enter and first leave who receive payment? All others are left with nothing. It is the compound interest equation that is the mechanism of both growth and failure at the heart of this system. Gold is the deus ex machina.

Correct you are that dollar failure is a failure of value, not function. Failure of function may come later.

Speaking of function, I posit that a currency's value is directly proportional to the ease with which it can purchase gold in the open market, and all things being equal and that an open gold market exists, and despite many decades of historical stability, a currency may unravel or unwind rapidly. Enter quant easing.

...a AAA credit rating may be easily bought.

...gold has little to do with profits, but everything to do with protection, as you so rightly expound. Profits would be gilding the lily, but if the lily is itself gold, then why not enjoy the added gilt?

...I would put nothing past the bankers and legislators of this world, yet I lean towards your position on gold confiscation. I can foresee the confiscation of Federal Reserve Notes happening before gold. Think on this: have you considered that there is a reason why there is no clearly defined modern definition of a United States Dollar? What is a dollar in 2009? Is it so many grains of gold? Of silver? A US Note? A Federal Reserve Note? 100 cents of copper? 100 cents of zinc? A cupronickel manganese alloy? A notional value on an accounting ledger? All of the above or none of the above? I question is half rhetorical.

...COMEX delivery notices are not the same as actual physical delivery.

...There have been few times in history when gold was not manipulated. Nevertheless, all attempts at manipulation have eventually failed. Legislating gold is like legislating the weather. All derivatives of gold, including fiat paper currencies, are indirect attempts at gold manipulation, and as such, have failed or will fail.

Lastly, following in the footsteps of giants makes for a clear path.

Thank you.

Mantis said...

Also, I can easily foresee exchange controls in the United States that would include precious metals.

Also, I find it no coincidence that in the United States, gold has not been officially re-priced in decades, whereas in Europe, the ECB regularly re-prices gold. (Quarterly, if I remember correctly.)

Dave Eriqat said...

Good analysis. On the the hand, I would never count on the government to behave rationally, especially if it thinks its survival is threatened.

Dave - Erstwhile Urban Wanderer

Shanti said...

Antal Fekete seems to have a new piece who has remarkably some simularities with your post.....

"The Last Contango in Washington will eclipse the Great Depression of the 1930’s. Be prepared!"

http://www.professorfekete.com/articles/AEFDressRehearsalForTheLastContango.pdf

The Mad Scientist said...

FOFOA,
I know you may disagree but I think this is your best work to date.

FOFOA said...

Shanti,

Thank you! Fekete's latest is a MUST-READ! Similar to this post and then some!

HOT Link

FOFOA said...

Mad,

Thank you. I do disagree. But this is not the first time! ;)

Mantis,

Thank you. You do sound like you have been on the Trail a while! Did you ever go by another name?

Jim,

Freegold is an emergent system. Not a government engineered system. Although some will help it along.

Bron,

Very thorough piece you wrote. I liked it!

Sebretache and Airedale,

Perhaps black gold will be a subject for another day. Personally, I find it less probable and less consequential to my way of thinking than you might think.

S,

Good thoughts, as always.

Dave,

Yes, a cornered animal can be very dangerous. But less so when it has been neutered and de-clawed.

All,

Happy anniversary! At least two of you have been here since the beginning of this blog, one year ago today!

Sincerely,
FOFOA

Anonymous said...

Interesting post.

I too have been studying Professor Fekete's thesis on permanent gold backwardation. I think the professor is spot on and I that gold backwardation is unavoidable, given the inexperience of the current regime. Yet I am not at all sure it will end in no trade (Fekete) or freegold (the author of this post). Historically, the Chinese have placed a greater value on silver than gold, recently the Chinese government started allowing the Chinese to buy silver. When you consider that the US central bankers, during the last big crisis, had the US Govt assign silver to base metal status, I can't help but wonder if silver was intentionally sidelined, that it has been waiting in the wings to take on gold's place when gold went into backwardation.

I see a silver-backed Chinese global reserve currency in the works. The once in a hundred year price explosion is going to be in silver, though gold will not suffer.

Neo said...

Hi FOFOA,

Just in response to the idea of taking control of FED: I am not really sure if administration can truly take control of FED. The president is merely a rubber stamp when it comes to approving the chairman. The committee decides possible candidates for the Chairmanship of FED and president simply picks one of the 5 or 6 suggested names. So, even if Ben is ousted i see very little possibility of Summers or someone else becoming chairman unless blessings of the committee is bestowed upon him.

Something to consider when it comes to looking at who will take control of FED. I dont see this plausible unless there is complete meltdown and FED is decommisioned and some other institution is in works to take over responsibilities of FED. Again, even this will turn ugly as old order wont just make way for new one.

Otherwise excellent work as always. Keep up the good work.

Sabretache said...

FOFOA

Here's some evidence of the existence of the 'Black Gold' I referred to above. Worth a read before solidifying your thoughts on the way it might affects things - or not as the case may be.

On S's point about it being relatively straightforward to reverse engineer the production track record to estimate the hidden stuff. That may be so over the past 100-150 years or so but what about the preceding 5,000 years? It is the above ground inventories held, plundered and re-hoarded by every civilisation in history that is the problematical number. That number is very far from being agreed upon. In fact it is clouded in vast swathes of obfuscation and disinformation which only tend to confirm its existence to an open mind. It is the contention of those who have survived seriously researching and publishing on the matter, that the number results in a total above ground stock anywhere between 10 and 100 times the generally accepted figure used by the World Gold Council, London Bullion Market etc.

Given such a potential vast discrepancy and the obvious implications for 'legitimate' (if that word can EVER be applied to today's markets)trade in gold and its derivatives, I find it surprising that it is NEVER mentioned by mainstream or 'alternative' commentators alike.

On second thoughts perhaps it is not so surprising, given that 'hidden in plain sight' is always the preferred strategy of the 'official narrative' when deception is the order of the day.

After all it IS just too ludicrous to warrant a second thought isn't it?

Ender said...

@Sabretache above

I have to admit that I have not read the information pointed to via your link, but have investigated stories like this before and find that they generally twist fact and fiction. If time permits, I will give this ‘black gold’ a read but will do so with an eye towards misinformation.

The general conclusion with other stories is that the reader is left feeling that if they buy this cup of water, which is currently relatively very expensive, the value will be overrun the day that hidden damn up in the hills is allowed to flow! Yet, no one can find that damn up in the hills and everyone knows that damns don’t build themselves.

Looking at this issue from another point of view, a simplistic supply and demand model would show that anyone holding a huge amount of gold would/could directly affect the exchange value of that metal. That is, if they were to put it to work and liquidate any large amount, the tiny market would be overwhelmed. This act, would render the remainder much less valuable. A simple profit driven motivator would suggest that the holder would maximize profits thus reducing liquidation.

From a historical perspective, anyone holding huge amounts of gold will ALWAYS issue receipts. Fractional reserve banking allows someone holding that much gold (a banker) to not have to liquidate their reserves, but simply deal in the local script. I don’t know how the quote goes, but if you have the right to print a local currency, you own that economy. That’s what huge amounts of gold do for you.

From another perspective, if you owned the military would you now take an easy target like this to back your local currency?

Fear not any huge stockpile of gold. If it were to flood the market driving the price to zero, all people would stop using all paper in a heartbeat. If there is any huge stockpile of metal hiding, I would suggest that it would simply back another script.

Reality has it that if the gold existed, it would be in use.

Common sense leans towards non-existence of some hidden city/vault/mega-tonnes of gold. But I’m sure it will make a good read.

stibot said...

Ender, i've no idea such gold exists or not, but it was said those elitists do not think for short term.

Admitting there exist tens of thousands tons of gold in US vaults, now the dollar is going to zero. Perhaps all US debts are zeroed, quite good, isn't it?

Well, let us start with gold payments now. It is not as nice as debt backed money, but still good enough.

Sabretache said...

Ender. Thoughtful reply and refreshing absence of dogma. Thanks.

I agree with much of what you say too. My problem is that I know the author of the referenced piece personally. He is a retired merchant banker with antennae more finely tuned to disinformation than anyone else I know. He certainly has no interest whatsoever in promoting disinfo himself. Neither does he have an agenda outside an insatiable curiosity about the hidden drivers of most major events.

My guess is that vast quantities of 'Black Gold' DO exist but that the great majority of it is under the control of the same community of interests that are determined to defended the post-Bretton woods globalised fiat currency system at almost any cost - which in practical terms requires that the price of gold be suppressed or at least tightly controlled. If so then, in simple terms, 'Black Gold' becomes the mother of all insurance policies and, in that sense is ALREADY in effective use.

I have no idea how all this will play out. As I said in my first post I do have some physical gold myself but, and it's a BIG but, I'm not about to bet the farm on an exploding gold price either. The interests I would be betting against are simply too powerful, devious and downright criminally vicious to simply roll over - and it's just possible they have this enormous wild card to play that few people seem to have a clue about.

Anonymous said...

This post was great. Better than Fekete's latest by far.

Anonymous said...

another post coming soon?? !!

FOFOA said...

The odds are in your favor!

Anonymous said...

kewl...

Anonymous said...

And what stops all of these claimants from suing now? Why didn't they sue when we went off the gold standard? It is hard to imagine that more lawsuits would result from going back on than on going off.

Nesses

Anonymous said...

This was part of debate I had with a friend about buying a 1/10 Oz. viking noble. This might help some of you in the jungle.

I understand your angle hear, I use to be of the same school of thought.But, I have bankers secret for you. In 1933 when FDR stole the gold, five ounces was the individual limit. Anything more had to be turned in for paper (counterfieght) money, but numismatic coins and jewelry were exempt from confiscation. Furthermore the IRS defined in 1984 numismatic coins as any coin selling for 15% over spot. I dont think they ever addressed backwardation or contango. Nonetheless 3 more ounces of silver isn't going to make me. As I approach the 5oz. milestone, numismatic coins feel safer. Also, I have no proof, but I have been led by others to believe that rarer coins rise even more during meltdowns. Maybe the hoarding psycology, I dont know. This coin was reccomended to me by the sovereign society, these guys are the cleverest market guru gamblers I have found that don't give that Goldman sachs bernie Madoff vibe of dishonesty.This purchase will determine our future business, they do a lot of rich dad seminars, most of which are appealing but to rich for my blood or involves forex or other markets I am less knowlegdeable of. I have a rare dime I paid $171 for 10years ago, when gold was about $330. Gold is nearly 3X that now and that dime booked for $530 or just over 3X, last I checked. Bankers buy Numismatic. And thats all I got to say about that. shrimp gumbo, shrimp scampi, shrimp sandwich...

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