Friday, September 11, 2009


Let us take a trip back in time to visit the first users of gold. We'll travel back 6,000 years to the very end of the Stone Age, a period where the first metal tools start to appear along side the stone tools that were used for the previous 6,000 years. This was a time of human transition, sometimes called the "copper age" or the "bronze age", followed by the "iron age".

Stone Age tools

During this period of time we see the emergence of agriculture which allowed for the storage of food which created the first cities that could support the first division of labor. We also see the emergence of the first long-distance trade routes between cities and civilizations. 5,500 years ago we see the emergence of Mesopotamia, "the cradle of civilization", on the Tigris and Euphrates rivers in modern-day Iraq, followed a couple hundred years later by Egypt on the Nile.

The discovery of metal literally changed the world, bringing it out of the stone age and into civilization. This "cradle of civilization", called "The Fertile Crescent", was also the birthplace of writing, recorded history, and the wheel!


During these ancient times, the force which most drove the development of civilization was trade. Trade, or commerce, allowed the division of labor to flourish and spread. But money had yet to be conceived. To ancient man, trade meant the exchange of real goods. Spices, silk, oils, incense, ivory and live animals were popular long-range trading items because they were transportable and durable. But for one who was setting out on the trade road with his camel bearing the weight of his goods, one item stood out head and shoulders above the rest.

That item was gold. Its most precious quality was that it always traded for the most goods, especially on the road. In town, you could trade your perishable items directly for other needed items. But on the road, gold ruled.

I can imagine that the first man to trade gold would have offered it at a pretty low price. But as the shiny metal began to circulate throughout this young economy, its unique qualities quickly raised its value above all else. Gold was a beautiful, soft, malleable metal. It was easily divided, melted or bent into form. And it was rare, in an age when metals were just coming into wide use.

Bronze Age weapons

As copper, bronze and iron quickly found their place in agricultural tools, cooking wares, weaponry and armor, gold found its home in the luxury of kings! And once again, this gold was not money. It was simply one of many metals and trade goods. But it was by far the best. You might find it difficult to trade silk to a pig farmer for a pig, especially if that farmer had no wife. But you would have no trouble trading gold for whatever you needed as it found its ultimate backing in the lust of kings and giants.

Store of Value

As division of labor matured, a new need arose in this ancient economy. Through division of labor, some men were able to find a trade craft at which they especially excelled. No longer did everyone have to spend half the day tending to food. Some men were able to produce goods of a value in excess of their own daily needs. And for this, a good store of value was needed so that men could hoard their productive efforts for later use.

As the exchange good which brought the most value in trade for its weight, gold quickly became the store of value of choice. And it also had other important qualities which made it an excellent store of value for these ancient "super-producers".

Because gold was proving itself most valuable as a mere medium for trade and as a luxury for kings, it was not used in essential activities like fighting and cooking. So an ancient "mogul" could hoard as much gold as he could muster without depriving his countrymen of the necessities of life. It was a stand-alone store of value that did not invade the rights of others to their share of the limited resources necessary to the support of life.

It was completely durable. It did not rust, tarnish or rot. And it was soft and malleable making it easily divisible when called upon for trade. It was rare and difficult to remove from the earth, and most importantly, it was coveted by kings! Its value was assured and backed by the lust of Giants!

What needs to be understood from this story is that gold, as a simple good for trade, assimilates the qualities of our modern understanding of money. And not only that, but it is democratically elected through unanimous participation for this singular task. In the monetary and currency vacuum of antiquity, gold became both the medium of exchange par excellence, AND the store of value of choice for kings and commoners alike. This was natural selection. This was evolution!


The first known use of the word 'money' was in the 1200's at the height of the Dark Ages which ran from the fall of the Roman Empire in 476 AD until the Renaissance of the 1300's. [To be fair, I should note that modern academics (who also notably embrace Keynes and Marx) no longer refer to this period as "the Dark Ages". It is now called "the Middle Ages".]

The word 'currency' did not enter the lexicon until more than 400 years later, in 1699, 12 years before the founding of the South Seas Company and 21 years before the infamous "South Seas Bubble" which cause massive international financial ruin.

I bring this up because the very concept of money and currency is most certainly a modern construct that has been imposed on gold to the detriment of society at large. Historically, gold filled two purposes by popular demand. It quickly evolved into the medium of exchange of choice in the absence of any forceful government interference. And it has, for 6,000 years, filled the need for a durable store of value that does not infringe on the rights of any other living human being.

Gold Coins

The coinage of gold in ancient times marks the emergence of a third function. By coining gold, it also became a standardized unit of account. This not only made trade easier, but it also allowed for the emergence of taxation!

The first gold coins were made by the Egyptian Pharaohs around 2700 BC and were given as gifts from the king, not circulated in commerce. Not until more than 2,000 years later, around 560 BC, did gold coins start circulating. From that point in history, gold coins have had a very long run as 1) a medium of exchange, 2) a store of value and 3) a unit of account. This run lasted from 560 BC until 1933, a total of almost 2,500 years!

Through most of this 2,500 year history, gold coins functioned and circulated solely because of their intrinsic premium ability to fill an essential need. Only in modern times has man's collectivist association found selfish advantage in legislating a specific, faulty medium of exchange and a unit of account.

Survival of the Fittest

The next stage of this evolution is upon us today. Society's collective ambitions have betrayed the working producers of the world. And now no store of value endorsed by the collective is safe. Yet physical gold's store of value function is still backed by the desire of kings and giants all over the world (e.g., India, Arabia, China, Russia, Central Banks... all physical gold advocates - all net accumulators).

As a collective society engaged in the stealthy proliferation of contractual paper debt, we have evolved a paradox in which it is commonly understood that more wealth comes from less work. The individual has forgotten the age-old wisdom that he is responsible for his own well being, and exchanged it for the illusion of collective responsibility.

The individual still claims all the rights which have been hard won through centuries of blood, sweat and tears, yet now he shifts the obligation of providence onto the collective. Now in full, unstoppable, political swing, this movement has turned the world's producers and savers against the infantile collective. Their goals and desires are no longer aligned. Their future plans no longer coincide. Their support for each other, no longer exists. The warning bell has rung.

This debauchery has led to the rediscovery of gold by individuals the world over as a self-defense reflex against the lust of the collective. Gold will increasingly be held privately and physically as all other "on the record" stores of value are taxed and pillaged to oblivion by the hungry collective. This cycle will continue, growing exponentially, until the hunger is broken through either starvation or a return to responsible production.

3 Stage Rocket

Some say that biological evolution happens in fits and starts, a theory called "punctuated equilibrium". It states that evolutionary change is characterized by short periods of rapid evolution followed by longer periods of stasis in which no change occurs.

In economic terms, we have just entered one of the rare short periods of rapid change. And in so doing, an unparalleled opportunity is presented to all commoners who would hold physical gold through the duration of this "punctuation". It is a de facto transfer of wealth that will rival some of the greatest windfall gains in history.

Imagine with me a three stage rocket which has just launched to take us to our next level of stasis and equilibrium. In the first stage of this ride, the fractional reserve paper market for gold will break up and all the existing gold demand will rush from paper into physical. These are the "gold bugs" that were fooled into paper promises. This stage represents a newfound equilibrium between already existing supply (physical gold) and demand (all gold investors). You can do your own calculation of the ratio of paper gold to physical, but I will tell you it is not small.

The second stage of this rocket ride begins as the first stage propellant (paper gold market) is jettisoned. During this second stage we will witness the massive force of trillions of dollars as dollar reserve holders all over the world bid on rising physical gold as there will be not much else for them to do with their dollars at that point.

As the first stage brought "the gold market" into equilibrium, this second stage will bring "the dollar" into equilibrium, as it finally reaches a depth of value to match its long term history of over-creation - 50 years worth!

The third and final stage of the rocket ride could be called "the momentum effect". Seeing the first two stages in full swing, everyone else will rush out of any paper asset still liquid enough to obtain even a tiny amount of gold. And with this stage will come the hyperinflation in the prices of all other real goods as the US Fed frantically prints more dollars to pay the government's nominal obligations in addition to its hyperinflating daily expenses.

This printing response will add fuel to "the momentum effect" stage rocketing it from what would normally be a bubble into a sustainable rise which will only plateau once the madness ends.

And may I remind you, the madness has only just begun.


When things finally settle down, we will enter a new era of equilibrium. Some things will remain the same while others will have changed forever. Here are just a few of the changes I imagine.

Gold will trade in physical form only. No longer will the owners of gold trust the custodianship of foreign nations.

Fiat currencies will still function in trade and as a unit of account, repositioned at their new values, wherever debt is required. But they will have to undergo a process of credibility re-establishment, much like a bankrupt individual, before they will ever again be used by people as a reliable store of value.

For producing individuals and nations alike, gold will become the wealth reserve of choice for the preservation of purchasing power earned through productive labor. Believe it or not, I think that our freshly neutered governments will support this development as they will ultimately view it as the only means to slowly rebuild what has been lost, in a sustainable way.

So am I an optimist or a pessimist? I guess that is for each individual to decide. But I'll give you a tip. Get some physical gold before you think too hard on it!



Brian said...

Do you think Bullion Vault is a safe way to buy an hold Physical Gold, or coins and bars only?

FOFOA said...

Hi Brian,

I don't give out specific investment advice for many reasons. Perhaps other's will pipe in with their opinions about your question.


FOFOA said...


A light goes on in Russell's brain
-- Driving back from a restaurant last night we were listening to National Public Radio from China. They were interviewing many Chinese who had lost their jobs in the big cities and were heading back to be with their families in the country. We noted what terribly hard lives these Chinese lead. The problem the Chinese leaders have -- is to keep the populace employed or at least semi-content and not in a revolutionary mood.

I have been wondering why the Chinese government has been almost pleading with the Chinese people to buy and hold gold and silver. And it suddenly occurred to me that the Chinese government sincerely believes that gold and silver are heading substantially higher. The Chinese leaders want the Chinese people to benefit from any higher prices of the precious metals.

The idea is that if the people are happy and richer by holding gold and silver, the leaders will be that much safer. The one thing the leaders of the Communist party want is a peaceful, contented (and richer) population.

So far, the leaders of China have been very smart, and it occurs to me to tell my subscribers -- "Do likewise."

-Richard Russell

FOFOA said...

Flashback! (approx. 1 month ago?)

A light goes on in Russell's brain
-- In 2005, the government brought out the 100% pure gold one-ounce Buffalo coin. Now it's bringing out a new "Double Eagle" gold coin, announcing that it will produce all the coins that are requested. It's clear that the US government is now in the process of distributing gold to all Americans who want it; in fact the US government is literally suggesting that its people OWN gold. Why? What's going on, I ask?

I think the government clearly wants its people to OWN gold so that when the US government starts its inflation campaign to pay off its debts, Americans won't complain and they won't march on Washington. Instead, as the "big inflation" enters, Americans will see their gold coins rise in price and they'll keep quiet. It's as if the government is saying, "Protect yourself with these beautiful pure gold coins. We're going to inflate in coming years, and your coins will protect you and keep you quiet."

Anonymous said...

Hello FOFOA. I don't know if you've posted about this before, but what are your thoughts about physical silver as it relates to what you wrote above? Thanks.

FOFOA said...

Hi Ben,

I personally have higher expectations for gold in the wealth reserve function, but I do also have some silver which I think could prove valuable in the medium of exchange role during a crisis.


Anonymous said...


The idea that "government money" might cease to function as a viable store of value began dawning on me eight years ago today when I was trapped on a subway in New York reading, by coincidence, Murray Rothbard's "The Mystery of Banking." In my "stop this economy I want to get off" moments since then, I have kept coming back to privately owned gold and silver. I believe this is analogous to what you call "freegold".

I am grateful for how you generously continue to flesh out the logic for, and mechanisms by which, this will happen.

everson said...


I have been considering your very question for some time now and have looked into a number of such services. I believe them to have value up to a point. Basically, no matter the service, you are left with an unavoidable counter-party risk. If things get too out of hand (a mad max scenario perhaps) it is likely that a service such as Bullion Vault or Goldmoney will be unable to comply with your requests for your bars. Even if they did not run off with the gold themselves how would you go to the vault to get it? You are better off with physical bars under the mattress so to speak.

In a more controlled scenario I think that there is a good chance that they would honor their commitments and that you could benefit from ownership there.

It really comes down to your view of how the events described on this blog will transpire. The wilder the ride the more you should have the gold on hand.

One use for these services though, especially for the small retail punter like myself, is to accumulate gold over time and in small amounts. Once you have enough you can go and fetch it for placement under the mattress. You may just find that if things get sufficiently bad that you can not access the gold that is left in the vault.

Hope that helps and I would love to hear what others may think as well...

Museice said...

FOFOA: How do you feel about this piece by Ted Butler, "The Bubble To Come"?

The demand for Silver could match the demand for Gold?

FOFOA said...

Must read!

Has Barrick Been Barricked by the U.S.?
by Antal E. Fekete

"What people do not seem to understand is that gold locked up in ore is one thing, and gold locked up in vaults is another. There are times, such as now, when their values part company. Why? Because too many gold mines are just a conduit to make the shareholder and his money part company.

...When everybody sees Barrick as the latter-day Sysiphus, the company will give up the ghost, and the cheerful creditors will happily carve up the rich caracass, with former shareholders looking on in dismay."

Then read these prescient words written on the USAGold forum in 2001...

Another way to veiw hedging -

It is called "Busting Out The Joint." It works like this: The individual (or business) gets his tit caught in a wringer and needs to get protection or cash to keep afloat. He usually has to go to criminal types (loan sharks) for "help." When he signs this pact with the devil it is only a matter of time before the inevitable occurs. If the business can't meet its payments it goes out of business. Usually the product and assets are stripped over a period of time by these newly acquired bankers (loan sharks). Then the business is destroyed. In the end the business is torched. In Mafia parlance it is called "Busting Out The Joint."

The hedged miners find themselves in a similar situation. Ashanti (ASL) and Cambior (CBJ) have already been "Busted Out" and for Barrick (ABX) and AngloGold (AU) it is only a matter of time. They have made a pact with the devil by getting in bed with the Mafia (Bullion Bankers). When POG really takes off these poor companies will be "Busted Out" leaving their shareholders poorer for the experience.

- Black Blade 4/18/01

FOFOA said...

Hello Muse,

Ted is certainly a silver bull in the first degree!

But as long as gold and silver are both available for purchase, I'll be choosing gold.

I am looking beyond the chaos of the "punctuation" to the newfound equilibrium on the other side. And I just can't give silver the near-certain odds that I give gold, to perform as a world class wealth reserve. I see it more as a likely medium of exchange, driven into circulation by Gresham's law when the choice is gold or silver.

Perhaps as long as our commodity speculation markets are functioning within the current status quo we will see a great spike in the price of silver. Perhaps. I hope so. I have more silver than you would probably guess!

But I'm not buying any more.


FOFOA said...

A glimpse of how Freegold works... millions of small transactions...

Why encouraging the population of China to import gold makes sense
by Hugo Salinas Price

Queenbee said...

What a great story and I have recommended it to all my readers.
I am not an investment advisor, but I can recommend taking possession of gold and a safe place to store it. Tell no one you have it except your most trusted just in case you die they will know how to get to it. If you are in the US I have found that is a reputable dealer with great service and fast delivery. Also

Queenbee said...

BTW FOFOA I have your blog on my blog list as you have done some really good posts.

Museice said...

It seems like almost everyday I read something 'huge' about gold. Thanks FOFOA! China encouraging their citizens to buy gold: Huge. China threatening to default on commodity derivatives: Huge. And now you give me Barrick's disolving power play: Huge.
What is next?
I'm waiting for something crazy now like Joe Bidden saying, in his 'can't keep his mouth shut way', "There's no gold in Fort Knox."

This is getting very interesting very quickly.

Martijn said...

Well Museice, here is something on gold:

It's good old Ambrose once again...

Jimmpy said...

Ambrose switches from Bull to Bear in a second. He once even professed favouring the Austrian School of Economics. I mean this guy would call on the government to help him tie his shoes . . .
The term manic-depressive comes to mind. Come to think of it that perfectly describes our current economic situation. Just ranting a bit . . .

Anonymous said...

The warning comes from UBS. Recall that UBS was one of the banks that got screwed when China said they would default on gold and silver derivatives. UBS is trying, desperately, to push the gold price down because they're short gold. They used to hedge their short position with the derivatives contracts with China, but now China's not going to honor them so they're in deep doodoo unless they can somehow scare the gold market with their warnings.

S said...

Reade was bearish at 750. The guy has been wrong for the last 350 pts. Telling that he is favored by the bullion association forhis accuracy. Really pathetic to sight the speculative ferver. so basically if gold trades at 930-970in a range it is a no comment. Move $50 and it is a speculative boom and will bust. Not even worth commenting on.

MichaelB said...

Everson, my thoughts aren't much different from yours. However, what will happen soon will not leave most paper certificates safe. Granted there will be exceptions, but few enough that those holding balanced physical gold and silver positions will see very old value conceptions resume in mass consciousness.
Interestingly, Fofoa spoke of "evolution" whereas gold and silver as money have devolved and swung to the extreme like a pendulum, away from their natural uses.
Not unlike the way government functions (and taxes precious metals).
Holding gold and silver soon will be seen as more simple than complex and no longer be vilified or dismissed as a matter of course by varied elements with diverse agendas.

Ender said...

For someone buying gold, I always recommend coins held in hand. That way, you really know what you’ve bought.

Trace Mayer has some good information about GLD in this little video. I can’t find his video that goes into more detail, but I’m sure it can be found somewhere, if you dig a little. One has to wonder what they’re selling…

FOFOA, keep up the good work.

SatyaPranava said...

interesting observation: we've just recently had one of the most interesting weeks in gold since march of 2008 and, ironically, this site is very quiet.


Anonymous said...


Anonymous said...

Celente commented -

'there is no recovery - it is just being papered over with worthless paper'.

He calls it 'A cover up....not a recovery'.

S said...

Watching the equity markets is priceless -- US markets go up and pull up asia in an economic dogfight to make sure no leg up is achieved. The equity market inflating is the greatest referendum on the growing worthlessness of USD

Jimmpy said...

Below an article about Gold Price Discovery in Vietnam. Shows how quickly people and merchants adapt and search for alternative ways in finding the price at which to price their goods or "savings vehicles" :

Closing with the message :

Analysts deny the rumour that a single powerful institution dictates the domestic price.

Siege said...

Hi FOFOA et al. I was reading a great article on Automatic Earth detailing to collision of four waves. I highly recommend it. :)

Museice said...

I forgot about Russia:

Gold Wars, Part II: The Empire Strikes Back

"With every purchase of gold made by Russia with its hoard of U.S. dollars, this simultaneously puts downward pressure on the U.S. dollar and upward pressure on the price of gold – the exact opposite of what the U.S. government wants (and needs) to occur. Since gold and the U.S. dollar often move in opposite directions, this is a very easy game for the Russian government to play.

Perhaps more importantly, it is a game that the Russian government must win. With Russia having a much larger supply of U.S. dollars than the Manipulator's supply of bullion, their last ounce of gold will/would be gone long before Russia has spent all its dollars. In the meantime, Russia can engage in economic “attrition” against the U.S., much like the U.S. harmed the Soviet Union through military attrition, when the Russians were foolish enough to invade Afghanistan."

FOFOA said...

Some might wonder what was the turning point that resulted in hired hitmen to be under contract against certain US financial markets. Some might say the failures of Lehman Brothers, American Intl Group, and Fannie Mae. Not so! In my opinion, it was the invasion in the South Osettia region of Georgia in August 2008. The events around Georgia lit a fuse that set off a chain of events, with reaction starting in Moscow. In time, events led to orders given by high level powers, for the US fraud kings on Wall Street to swallow the medicine no later than first thing Monday morning on >September 15th<. When the Jackass inquired as to the nature of the urgency leading into that understood stated deadline date, no answer was given. The guess of the Bank For Intl Settlements was submitted by me, and it was confirmed. Other sources, the USTreasury Bond creditors, also applied the pressure, it was told. The US financial sector has been under siege since last autumn.


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