Wednesday, October 14, 2009

Fair Value Gold?

I was asked by email today what would be my counter-argument to this new piece by Paul van Eeden. I thought I would share it with you. But first, here is a snip from Paul's article, "Gold is over $1000 an ounce - Now what?"
Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory. That is not to say that the gold price could not continue to rally - markets can remain irrational far longer than rational people ever imagine they would. Personally, though, I have no interest in buying an over-priced asset in the hope that it will become even more over priced - not even gold.

Here was my reply...

The dollar is so much more than just its quantitative body, its size. If it was not, it would have surely collapsed back in the 1970's after being set free from gold. But something else developed, an insatiable demand for dollars that allowed for the supply of money to be increased time and time again with little inflation showing up in prices and almost a negative affect on gold over a 20 year period. How was this possible in a world that was supposed to actually perform under Austrian principles of monetary inflation?

Obviously the printing of money and the expansion of credit had little to do with gold price inflation, at least from 1980 through 2001. 1971 to 1980 and 2001 to 2009 were different, but what was happening? Was it a shift back and forth between a quantitative monetary effect or something else entirely?

What changed in our first and only 38-year experiment with a completely symbolic, unbacked fiat currency was that, from an Austrian perspective, we were shocked and surprised to find such a tremendous demand for such a singularly worthless currency.

This demand came from its ease of use and from the ease of credit creation and international transactions. We got little plastic cards and key fobs that could pay for anything from gas to groceries. The banks got the equivalent of the Midas touch when it came to credit expansion. And the globalization movement got the most liquid capital movements ever imagined.

Perhaps it took 9 years for all this new demand to mature, but once it did, we got the 1980's!

But did you notice something about all the demand developments I listed? The were all based on the dollar's ease as a transactional unit. None of them were based on its intrinsic value. None were based on its store of value function. None were because of its superior use as a denominator of debt. Only for its ease in issuing debt.

But for hundreds if not thousands of years these two separate functions of money have been ingrained into our human psyche as one and the same. Money, as we know it, is both a transactional medium and a store of value.

So in the 1970's, we watched as acceptance of this new symbolic transactional unit grew. In the 80's and 90's we watched as the dollar exploded in quantity and global use, with relatively little inflationary impact. And then in the new millennium, we are seeing another shift: the recognition that the dollar is really only good for its transactional use. But quite poor as a store of value.

So gold's price rise is not a function of inflation, as van Eeden says, but is instead a function of a global sea change away from using the dollar as a store of value. When viewed from this perspective, gold's rise has only just begun.

What do you think allowed for 20 years of dollar expansion with no gold price inflation? It was the soaking-up of newly created dollars as people all over the world held them as a store of value. Wall Street exploded as the enabler of this misguided demand, while the real demand was for the dollar's transactional ease. China followed, as did much of the developed world. But now this trend has reversed.

This is why van Eeden's money supply analysis is meaningless. I fully expect transactional dollar demand to swell from time to time as large holders of debt liquidate into a new form of savings. This is because that fading value must pass through dollars to get where it is going. But you must understand that whatever the USDX does, it does not represent new savings flowing in.

The transactional money supply is tiny compared to the supply of dollar-denominated savings. It is a bottleneck that must be traversed to get into gold. So the USDX is a misleading metric for those of us watching gold rise in value. Jim Sinclair will be right in the end, but the path there may still hold some confusing hiccups along the way.

The quantity theory of money DOES apply, but in a much more complex way than van Eeden shows. Too complex, in fact, for anyone to fully understand. The QUALITY of money also applies, alongside the quantity.

For this reason, my personal focus on the quality and quantity of money revolves around hyperinflation, a currency event that is separate from the rise in gold which is driven by the first ever separation of monetary functions. The various qualities of modern money can be simply viewed as M0, and then M1, M2, and then M3 and broader. My argument is that only M0 matters once hyperinflation takes hold. And that all of the money creation over the last year has been M0. I argue that large swaths of wider money have been converted to M0 by the Fed, like turning a living creature into stone. I also argue that guarantees foreshadow future M0 conversion, and that guarantees are being handed out like candy on Halloween. For all these reasons I see the tinderbox of hyperinflation being rained down upon by hot embers from the forest fire of burning dollar-denominated derivatives and other Ponzi paper.

It is the principles above that must be understood because any quantitative analysis in today's rigged financial environment will deliver dubious results.

I notice that van Eeden focuses on the collapse of credit money but discount's the Fed's current monetization as being "only" $900 billion of base money (M0). Then he says,
And while the increase in the US money supply as a result of the Fed's priming is material, and has maintained US monetary inflation at historically high levels, it is nowhere near hyper-inflationary rates, nor is there any reason to believe that hyperinflation is remotely likely in the US.

Here is where Richard Maybury's description of "velocity" (as opposed to money supply) comes into play. Velocity, as Maybury says, can turn on a dime, and has the same effect as increasing the supply!

Hyperinflation begins as the dollar is first repudiated as a store of value (a reversal of velocity), and second as an international transactional unit. Hyperinflation does not begin with the printing of million-dollar-notes. That comes later as the government responds to the failing dollar value in the way we all know it will. Iceland's government did not have this option last year. But the US does. It will print to "slow the pain". But in reality it will be causing long term pain that will be felt by the whole world, especially us in its legal tender zone.

To make the kinds of quantitative conclusions that van Eeden makes is to assume that free market adjustments to the real value of the dollar are fully up to date. This is the wrong assumption, as the dollar's (non) value has been masked for 38 years by both willful acts of the Fed, and also an irrationally exuberant market for Ponzi paper.

In 1971 the dollar became intrinsically worthless. But the advent of computers made this symbolic currency explode in value as a transactional unit. Only now, 38 years later, are we starting to realize that transactional value and time-store-of-value are not the same thing.

So to assume, as van Eeden does, that gold's value should simply counter-lever the supply of worthless dollars completely ignores the global separation of monetary roles that is happening today. This is NOT simply a figment of Another's imagination. You can see it on all scales from individuals on up to the CBs if you bother to look outside of the United States.

From a quantitative perspective, like van Eeden takes, we could be looking at something on the order of a $60 Trillion flow that will move from symbolic-idea-denominated savings into hard gold savings, when all is said and done. And as this happens, the very denominator of the former will explode numerically so that the final outcome will appear much different than any quantitative analysis could even deliver at this point in time.

On the issue of interest rates, the dollar is only as valuable as what it can purchase either inside the US or outside. The outside is now working on other forms of pricing, so the dollar's only future value must be juxtaposed against what it can purchase inside the US, even for those holding dollars on the outside. And any increase in interest rates, whether market-driven or Fed-driven, will have a decidedly negative affect on an already failing economy. In other words, 'not much to purchase here'. This is why, and how, an increase in interest rates this time around (unlike 1980) would only exasperate hyperinflation and send the price of gold into the outer solar system.

The dollar is in a serious Catch-22 this time around, which is why I say my conclusions are unavoidable.

Van Eeden assumes that gold is always going to be the inverse of the dollar. But even Another and FOA said that, in the end, the dollar and gold will rise together. I have been saying this for a while too. It will be the final exit from paper into gold that must pass through the bottleneck of a few trillion transactional dollars. But this belief that van Eeden and so many others have will cause them to miss out on the greatest transfer of wealth ever.

In this same vein, technical analysts and Elliot-wave deflationists will also sell gold as it hits $1,300, the worst trade in the history of planet Earth!

Regarding China: China is in a badly manipulated and rigged position right now as well. Only its position is the inverse of ours. In my last post I said that (Savings) = (Production) minus (Consumption). The Chinese people are in a position of forced savings by their communist collective. They are being forced to produce, but not to consume the fruits of their own labor while it is being shipped to the USA. And the communist collective is stockpiling this windfall profit by printing local currency like it's going out of style, stealing purchasing power from its own people as it forces them to save.

But as trends reverse, which they are now, these same people who have been forced to delay consumption will suddenly find themselves supporting their own economy as they use their savings to purchase a higher standard of living. On top of this, they are now starting to save gold! Which will only AMPLIFY this effect as we transition to Freegold!

Another concept that van Eeden ignores is that at the same time as the dumping of the dollar in international transactions is being discussed, China is signing new international deals for the renminbi. I don't believe that China wants to print the new global reserve currency. But this new usage demand for the renminbi will have the de facto result of soaking up some of this Chinese inflation. And as this slow, global process moves forward, I think a lot of people (including the Chinese themselves) will be surprised at the result.

I do not believe that Chinese communism has created a great economy. I only believe that the mistakes they have made simply happen to be the inverse of ours. Dumb luck! And that everyone will be surprised how things actually play out.

I believe that we are witnessing a market-driven global shift to meritocracy; economic power based on merit and credibility. I believe Martin Armstrong nailed it when he said this will be the end of socialism. And honestly, I wouldn't be surprised if the transition to Freegold signals the beginning of the end for Chinese communism. I'm not predicting this (it would take 20 years or more), I'm just saying I would not be too surprised!
Given that the gold price is trading at a 25% premium to its fair value

Fair value against what? A piece of paper? Or fair value against the REAL wealth of the world?

In my opinion, time will reveal who was "the Greater Fool".



Anonymous said...

Today's oilprice spike ($75) says something more about the qualitative non-value of the $-unit.

"Sterilizing" some of the $-glut with the circulation and accumulation of more petro-$$$.

More reason to consolidate real wealth in goldmetal.

Van Eeden should know better because of where he comes from.


FOFOA said...

Jim Sinclair...

"...Interest rates cannot be raised to favor the dollar without throwing the MOPE recovery directly into the circular file.

Confidence in the dollar is waning with every passing day. As Armstrong has told you, one day soon confidence will simply implode.

This is a product of a lifetime of mistakes of which no one person can be considered the author. It is the sum of wrong economics, rewarding activities that produce nothing but paper shuffling, and punishing activities that produce goods, human services and employment.

Within one week of the countdown the dollar will take out areas expected to be the bottom of this decline by many talking heads today. That is a dynamic event as was what Trader Dan spoke of here on JSMineset last evening.

What has occurred are the things that economic history is made of> Few outside of Trader Dan and the most attentive CIGAs were really shaken by the occurrence.

This is what the countdown is all about. Look out the window and see it happening. It is history in the making but no more than what happened yesterday at lower levels.

The end is NOT coming. It has already happened. Are you insulated from the results thereof?


Tekin said...

Would you expand this comment? Trying hard to understand it!

"Van Eeden assumes that gold is always going to be the inverse of the dollar. But even Another and FOA said that, in the end, the dollar and gold will rise together. I have been saying this for a while too. It will be the final exit from paper into gold that must pass through the bottleneck of a few trillion transactional dollars."

An attempt to detail the logic:

Dollar holding investors buying gold would not generate dollar demand - therefore, this must be non-dollar holders trying to buy gold. They would have to buy dollar first, in order to buy gold.

Is the above thinking on the right track?

Thanks in advance.

Anonymous said...

London shopping :

Harrods to sell gold bullion for first time :

It is renowned for its glitzy clientele and upmarket Knightsbridge location, but shoppers at department store Harrods will from today be able to buy the ultimate luxury accessory – gold bars.


Martijn said...

Dollar holding investors buying gold would not generate dollar demand - therefore, this must be non-dollar holders trying to buy gold. They would have to buy dollar first, in order to buy gold.

I have paid my gold in Euro's.

FOFOA said...

Hi Tekin,

I was talking about dollar-denominated debt assets, mostly bonds. The bond market is huge, and hugely vulnerable to a loss of dollar credibility. The global bond market is about $70T with about half of that denominated in dollars.

The final gasp will be a fleeting demand of necessity, not desire. But some traders will misread it expecting a predicted correction and will miss out on the phase transition itself!

This is exactly why Jim Sinclair warns against trading right now...

"Everything we have discussed here for many years is NOW taking place.

Everything we have suggested is coming is NOW on your doorstep.

Any ideas of trading have been smashed not only by common sense, but also by the flash systems against which you do not stand a chance."


FOFOA said...

Hi Martijn,

"I have paid my gold in Euro's."

It is the decisions of giants that move markets. You and I are just along for the ride.

When I talk about all the dollars absorbed internationally over the last 4 decades, I am talking about assets denominated in dollars. When this move starts in earnest all liquidity will vanish in an instant, and no one will know what is happening. The Fed's printing press will go into overdrive to restore liquidity not realizing its need is only fleeting. This flood of fresh base money will only exacerbate the dollar's problem and send gold to the moon as stuck entities desperately trying to exchange dollar bonds for gold are suddenly relieved of their illiquid Ponzi paper. It will be an unbelievable sight to those of us watching from the trenches, wondering what is happening where we cannot see!


Tekin said...

@ Martijn - I have paid my gold in Euro's... Well, my understanding is that the central banks act as intermediaries. What I assume is that, your gold was paid in dollars thru ECB. Am I missing something here? This also triggers another question in my mind. Here, it was said that millions of individual investors would settle in gold in the freegold system. Consider a Chinese exporter holding dollars, intending to buy gold from the local market. He would sell dollars to buy Chinese currency, and use that money to buy gold from the local market. To whom he would sell his dollars? I presume, to the Chinese central bank... Which would lead to accumulation of dollars in the CB. This is how it looks to me.

@ FOFOA - Sorry, but I still have questions :)

Is it something like this: There is a pool of "transactional dollars". All exporters, importers and dollar denominated asset holders use this identical pool to make a transaction. When bond holders raid this pool to liquidate their bonds, less "transactional dollars" are available for exporters and importers? ... This is counter-intuitive for me, I am surprised.

Martijn said...

For those interested in some historical perspective on money and economics here is a rather diverting documentary called the ascent of money

Martijn said...

As for Tekin: I obviously did not buy from the central bank, and do not know the path my Euro's travelled. I believe however that Europa does have some gold of its own (in both central banks and the private market) so I do not believe it necessary for all transactions to be in Dollars.

jerry said...

As a reader of many writers in the Blogosphere, FOFOA is one of most articulate, and well written writers out there.

Here is a writer, economist living in China writing about China's economy.

maff said...

New to your blog but I find it excellent (and entertaining). Great work.

ed said...

thanks for the article, now the "storage of wealth" function of gold really sink into my mind.

i am from asia, and still remember just 10 years ago, my relatives and friends would use $US for storage of wealth. it was a symbol of prosperity, stability, and reliability, contrast to our own countries' ever fluctuated political and economical conditions. we called it "American Gold". imagine how much $US are stored in family's closets, bank accounts, etc.

how ironic. now seeing this piece of paper with pretty colors, is being recognized as what it actually is by people around the world.

thanks for your insight. it will serve as a great guidance for us to navigate this chaotic world in this uncertain time...

FOFOA said...

Hello Tekin,

You said, "Here, it was said that millions of individual investors would settle in gold in the freegold system. Consider a Chinese exporter holding dollars, intending to buy gold from the local market. He would sell dollars to buy Chinese currency, and use that money to buy gold from the local market. To whom he would sell his dollars? I presume, to the Chinese central bank... Which would lead to accumulation of dollars in the CB. This is how it looks to me."

Do you remember this diagram I made for Bondage or Freegold?

Notice that the US importer must be the one who goes to the currency exchange and buy yuan if he wants to import from China. In Freegold, the importing country must first test its currency at the exchange! This is a new balancing feature of Freegold. No reserve currency! Just like you wouldn't accept yuan if someone wanted to buy your car.

And when I say millions will settle in gold, I am talking about putting their savings into gold. That is the equivalent of settling the IMBALANCE portion of trade in gold. It is another balancing feature of Freegold, and localized at that!

So there is no accumulation of foreign currency anywhere! It is traded at the currency exchange and if an imbalance develops, it is reflected in the price of gold in one of the zones and market arbitrage for gold in the "cheaper" zone balances out the currency exchange rate at the exchange! All of these features are automatic and market-driven by the way. They don't need to be legislated.

"pool of "transactional dollars".

Yes. And this is why Bernanke did the $500B swap. To increase the size of the pool. Yes, importers and exporters bid on the same dollars that sellers of bonds bid on with their "ask price". If all bond holders at once wanted to sell, they would have plummeting "ask prices", but still, with the size of the bond market it would suck up transactional dollars like there's no tomorrow.


S said...

Is not clear that the gov't is reflating markets in hopes of breaking the fixation on gold. The question is will it work. One suspects that the retial campaign here and its cheerleaders will fail in epic fashion

MichaelB said...

Yes, they will fail. But one of their primary aims is to transfer the wealth of gold and people to themselves. Monetary and fiscal policy deliver the goods but all these political and financial grand conspiracies are secondary to the main process and goal.
As the sheeple deliver their gold and future savings at historically fire-sale prices, 'confiscation' of gold is in it's final stage.

Calum said...

Thanks for putting the masses straight. Until the last 4 months I was ignorant about the central banking cartel's gold and silver price suppression scheme. Have since learned to trust the bloggers/authors who have a solid track history - too many sponsored talking heads out there, most calling themselves 'economist' (Keynsian isn't an economic study, it's unprove fairy tales). Many experts gather at - here's a list of trustworthy authors to start tracking on the gold market and other economic factors: Jim Sinclair, Richard Russell, Bill Murphy, Jim Willie, Howard Katz, John Williams, Gerald Celente and Bob Chapman.

Anonymous said...

in a "meritocracy" would a doctor and a farmer be on the number one positions?! they seem like very essential for all the other humans...

could you give examples what positions (jobs) would benefit the most in this system ?

i understand "the added value of the person" to humanity = meritocracy...

when you are smart and just make money with selling loans to people, that is not like a good thing for the humanity

FOFOA said...

A meritocracy unfolds when savers choose hard assets like gold bullion to store their savings outside of the financial system. They will not loan the excess fruits of their labor and hold debt as an asset unless and until a borrower proves his credibility and merit.

They likewise will not hold excess currency digits for more than the few days needed to spend them unless and until the currency manager proves his credibility and merit.

The problem right now is that everyone holds the excess fruits of their labor in the same paper that denominates debt with very loose standards. The standards are loose because the savers are lemmings.

When people finally wake up and start saving in something that cannot be debased and diluted, this will remove power from the banking sector. Banking will become nothing more than a utility, like the delivery of water and electricity to your home. (See: Say Goodbye to Wall Street)

People WILL wake up to this when the dollar finally loses its grip on price discovery for the physical gold market.

As for good jobs in a meritocracy... I think you can figure that out. You seem to be on the right track. Real (not rigged) supply and demand will play a big role in determining a person's value. Something we have not seen in a while.

A meritocracy is not about us deciding which jobs have the most merit in society to determine a pay scale. It is about letting the free market decide in the absence of centralized control over the deciding factor, the allocation of society's wealth.

Anonymous said...

when reading Paul Eeden's article, my immediate reactions were why he thought the 2008 price was fair valuation for gold, and why he only considered US money supply, not the total of all countries(or at least the basket currencies used in $US index).

later i found his another article written in 2003, which outlines his detail analysis of gold valuation. in this article he valued gold fair price in 2002 was $700, and in my opinion, quite accurate.

further, if using his own method, comparing Dec 2002 money supply(5784.7 b) and Dec 2008 money supply(8155.9 b), then gold price would be $986.94/oz. 2009 fair price would be $1016.47/oz, fairly close to current market price.

data source:

so while this calculation disproves Paul's conclusion in his current article, it approves his method in valuing gold in his 2003 article.
see this link:

his 2003 analysis goes back to the date when gold standard was still in effect(1920s), so FOFOA, do you see his analysis threatens the base of your theory?

The Mad Scientist said...

Great Post. I agree with most of what you are saying, I only believe that the complete collapse will come when Gold is already at a much much higher price.
In 1980's Gold reached what was close to a $3,500 an ounce price in today's dollars.
And the system was not even close to collapsing.
Like every bull market in history,Gold is slowly converting people. We have less than 1% of the population invested in Gold. Will it climax with 1% invested?
Possible. I doubt even 1% held Gold in Zimbabwe before the currency collapsed. Could happen...But I would say the odds suggest it may take a bit longer.

FOFOA said...

Hello Anonymous 8:08,

You ask, " you see his analysis threatens the base of your theory?"

I don't know how much you know about "my theory", but the answer is no, it does not.

In 1971 we were told that gold was officially demonitized. But this was only a half-truth. In 1980 the price of gold was brought back under monetary control. This process was further refined in 1994.

As a truly demonetized wealth asset, gold has a much higher value to mankind than it does as a transactional money. To get an idea of the gap, compare the money supply with the supply of Ponzi paper wealth, thanks to the $-financial industry post 1980.

1971 set free not only the creation of transactional dollars, but more importantly, the unrestrained creation of dollar-denominated "wealth". With this innovation came huge fortunes, like Hank Paulson's $700,000,000 nest egg. At one point one single American, Bill Gates, was "worth" nearly the entire US gold treasury! And that's assuming the US still holds title to all of it. It is possible that Mr. Gates was (is?) actually worth more!

In the 1920's gold was being used as a transactional currency, not a tradable wealth asset. Van Eeden's analysis is still stuck in this paradigm. This is understandable because the $-system has been resisting the paradigm shift for 38 years. Yet now it is happening! This is why van Eeden now registers a PREMIUM! But it is not a premium. It is gold finally starting to break free from its transactional currency chains!! What a shame for gold investors like van Eeden who think gold is overvalued at the exact time it is breaking out... of its PARADIGM!

Anonymous, please take note of one of my more popular posts, All Paper is STILL a short position on gold. Notice that it says "All Paper", not "Transactional Currency" is a STILL a short position on gold.

One last thing. Here is an old article by Paul van Eeden archived on USAGOLD. What a shame!... that some gold investors think we are now in a gold bubble at the exact beginning of the long awaited phase transition!

Just out of curiosity, Anonymous, are you planning to sell your gold now that you have discovered it is overvalued? Or are you going to wait until it gets a little more overvalued? ;)


FOFOA said...

Hello Mad,


"I only believe that the complete collapse will come when Gold is already at a much much higher price."

Have you seen this? Not saying its true, just sayin...

"In 1980's Gold reached what was close to a $3,500 an ounce price in today's dollars. And the system was not even close to collapsing."

1980 was different than now. And anyway, gold is not collapsing the system. The system is collapsing the system.

"Like every bull market in history,Gold is slowly converting people. We have less than 1% of the population invested in Gold. Will it climax with 1% invested?"

As I said to Martijn here, and I will quote, "it is the giants that will drive this bus. Not all the morons and lemmings that you worry about. They'll learn by witnessing, while the giants will learn through necessity, lest they become poor lemmings themselves!"

"I doubt even 1% held Gold in Zimbabwe before the currency collapsed."

Look at 2001-dated pictures of Zimbabweans and tell me that it was gold ownership that collapsed the Zim-$.

As I said. We physical gold holders are just along for the ride.

Thanks for the comment Mad! Did you notice I now have a donate button?? Hahaha... Just kidding!


Tekin said...


Notice that the US importer must be the one who goes to the currency exchange and buy yuan if he wants to import from China.

Thank you very much. This is crystal clear.

pool of "transactional dollars

Thank you for the answer. I am still surprised. It looks like I have long road to walk to understand the ramifications of a reserve currency.

SatyaPranava said...

@ mad scientist...

curious to know if you've seen these charts using John williams's dat from shadowstats re: inflation peak of gold.

these are versions of gold and silver charts posted on the Solari Blog, from Catherine Austin-Fitts.

gold's cpi inflation adjusted peak was $7267.41 in august FRNs.

while silver's 's cpi inflation adjusted peak was $353.91 in august FRNs.

FOFOA said...

Hello Tekin,

"Transactional Dollars" are simply the money supply. This is greatly confused by most people... thanks to the Fed who defines money supply to include ASSETS specifically to CONFUSE people.

So some people see "M3" declining while the "M0" is exploding. F--king confusing. Can you see the problem?

Assets must pass through transactional dollars to achieve final settlement! Interesting because the Fed's own M2 includes MMMF's (Money Market Mutual Funds) which are definitely not money!

Hmm... I just noticed that Wikipedia updated the Money Supply page, adding a new measurement, MB. I wonder why. That was not there a few months ago...


SatyaPranava said...

fofoa, i noticed that too when trying to reference keeping all the Ms straight. so basically MB is blowing sky high in the past year!?

but why create that stat (depending on who did so).

FOFOA said...

Hi Satya,

M0 was always kind of ambiguous. Monetary Base is more descriptive as it includes reserves held at the company that can print bills. M0 only included bills already printed (technically).


SatyaPranava said...

drift? ahh...your drift is gentle. i thought you were talking about THEIR drift, which is more like a hurricane.

fortunately for me, ever since seeing how things worked during the rabin assassination, and seeing all the dedicated editors on the site hack every bit of proven piece of evidence, whose ip addresses were always governmental....yes. i'm catching your drift :)

i always tell people, if it's a controversial topic in the least (is freegold up there? is it on their radar?) it's a great place to go when you want to learn what you're supposed to know, and if you're extremely lucky, some kernels of truth will just happen to be there when you peruse. go find the sources of that truth and start your research.

Anonymous said...

So, bankers that set this system up over 100 years ago, are just going to allow their system to collapse and allow the Lemmings and Sheeple to have a freegold system and not be in bondage anymore to their banking elite masters?

Im just saying, if the elites were smart enough to set this complex system up and run it all this time, maybe they have something a little different planned for when theyre system collapses. After all theyve had a hundred years to plan for it.

You really are making me a believer, but you havnt addressed what the outcome of these banker elites will be.

How will these bastards fit into a meritocracy after the collapse, with their big fat vaults of hoarded gold?

Martijn said...

Things going wrong in the gold market

FOFOA said...


Things going wrong in the gold market

SatyaPranava said...

anon: since many of the central banks seemed to have turned to being buyers of gold, of late, woulnd't it make sense that many of them were buying it up personally, taking advantage of the end of the line of the neoliberal bus?

i have the same question on many levels, only bc my program tells me (i think like martijn's): something's not right. it can't be this easy. what's the catch? how are they going to be able to pull ANOTHER (no pun intended) fast one on everyone? etc.

some of us definitely understand how these people plan these things, and are waiting for the other shoe to drop. hoping that no matter the case, we own a precious commodity, store-of-wealth, transactional currency (at one point), resource.

but when's the other shoe gonna drop, and is it going to feel like an Orwellian boot?

Anonymous said...

I hope for Freegold, but prepare for the Orwellian boot.

FOFOA said...

FOA: "Sir, This is your perception and perhaps that of a few others. I and many other readers do not accept your big brother scare innuendoes and feel the prudent allocation of wealth assets will see us thru most of this."

Goodnight all, and sweet dreams!


Martijn said...

Nice one

The Mad Scientist said...

Thanks for those charts.
No I had not seen them. $3500 was my rough estimate.
I do not know shadow stats exact methodology, it is certainly likely to be more accurate than the official CPI.
I will say this though, considering that most commodities are below or just above their 1980 peak price, in nominal terms, some 29 years later,
I have to lean towards my inflation adjusted number rather than that of shadow stats. Although prices for many things went up, prices for raw commodities have declined quite drastically from the 1980's.

SatyaPranava said...

@ fofoa: touche :)

@ mad scientist. are you implying that you believe gold and silver are simply raw commodities?

Anonymous said...


my calculation at 8:08PM was a mistake. i re-read Paul's articles and discovered that when he valuated gold at $700 in 2002, he was using M3 as US money supply metric, but in his current article that he thinks gold over valued, he is using M2 as money supply metric.

we know FED has stopped publishing M3 data in 2006, as it "is not accurate measure for money supply"(err...maybe it is simply a straight up line on the graph?). so my (mistaken) calculation implies the current market price is in fact much lower than gold's true value.

fofoa, i will re-study your theory. it takes time to truly understand new things.

appreciate your blog.

Anon 8:08PM

Ender said...

The paradigm shift that FOFOA talks about has at its root the concept of wealth reserve. When you hold a wealth reserve, you hold the ‘art’ that is at the heart of defining what is real and what is not. When you stand side by side with two BMW owners, where one will let you touch the car and the other will only let you see the title, it is obvious with regards to who enjoys their wealth!

At the same time, the BMW owner that holds the title might say, I hold an investment that is returning 20% annually and market value states that it’s worth thousands of dollars! I am a wealthy man! Yet the BMW owner that drives his car knows that not only does he enjoy the annual marked to market adjustments, but – he gets to drive the car.

Who owns the wealth here?

When you look back at the marked to market run that gold had in the late 70’s, was the wealth reserve in play? No. What played out at that time was a 100% hedge play against the dollar that morphed into an investment bonanza that was tamed by fractional gold futures. No one had any plans of dethroning the dollar as the reserve currency. Nothing stood to replace the dollar and most all ‘things’ were valued against the dollar.

Those that bring up old charts comparing the price of gold today to the adjusted price of gold from yesteryear miss the key concept that will define a new era. Nobody, in the late 70’s, bought gold for any other reason than to gain more dollars. Tomorrow, nobody will sell gold with the intention of gaining more dollars!

The wealth function is moving into gold and away from dollars. This throws out all historical charts! You will either be wealthy owning gold or you will poor once your convert into dollars.

Anonymous said...

From the article: "But in reality it will be causing long term pain that will be felt by the whole world, especially us in its legal tender zone."

Ouch. I hate pain in my legal tender zone. Let's leave the tender zones alone!

SatyaPranava said...


even (especially?) for me, this paradigm shift can be difficult to fully digest and assimilate. I catch myself at times with feet in both paradigms, probably unaware of the times at which I either contradict myself, or leave questions that seem unanswerable.

this is why i appreciate you all repeating things on this website too. to explain it in different terms, ways, and examples. it helps w/the digestion, and the ability to test the theory out.


The Mad Scientist said...

I knew I should have specified. No I am talking about Corn, Wheat, Soybeans, oil etc.
Till 2005 all were below their 1980's highs.
Even now many are still below.
I have some more thoughts on Gold and Silver and the 1980's price which I should put up on my blog over the weekend.

SatyaPranava said...

MS - don't you think that price suppression in the futures of these commodities is along similar (if not complete) lines as gold and silver? i.e. has paper crops artificially suppressed the price of those crops and other commodities?

The Mad Scientist said...

Satya, that is certainly possible and may have played a role in keeping prices low.
That said, look at our yields per acre in the 1980's to now. We quadrupled our use of pesticides and fertilizers and also improved our irrigation techniques.The most high tech Monsanto seeds produce almost 5 times the yield per acre than a 1980's seed without the use of fertilizers.
My point is that the very high high real prices did bring about some significant supply side responses.
While more of the same is possible I think we will require much much higher "real " prices to induce that.

SatyaPranava said...

MS, my studies indicate that while initially yields were up slightly because of agricultural technology, unfortunately, those yields have actually declines, to the point that yields are actually much lower now, than shortly after introduction (maybe due to resistance, mono-cropping, too many inputs into soil, dead soil, etc), and even lower than before they were introduced in some cases. in other words, much of the agro-business hype tells the tale of much hype; it's two paths, substance and marketing, which rarely ever meet.

The Mad Scientist said...

I would love to see your research on this. Maybe I have been a victim of the hype as well :)
Will look into it.

SatyaPranava said...

i'm trying to think of some fabulous sources off the top of my head. William Engdahl's book, seeds of deception covers the topic. but here are a few links:

btw, it's important to note that GM seeds are pretty bad for a number of reasons, this is just one of the misleading claims of benefits.

Am Acad Environ. Medicine

Monsanto acquired company research


counter currents (progressive site)

i realize this isn't the focus of this blog, which is why i rarely discuss these issues here, but thought these might help.


Chris T said...

Hello FOFOA!

A very interesting commentary, found it very thought provoking.

As one, who believes that Dr. Fekete's take on gold and rising/declining interest rate structures are correct also, I try to square what I read in those terms.

I think your point about the pass-through of wealth to gold via the dollar, is another way of showing what John Exter showed with his inverted pyramid.

Dr. Fekete has talked many times about the collapse from one layer into the one below it, and this necessarily will lead through the dollar into the final layer, gold.

The transactional function fo this medium found in the second layer you illustrate very well, and it helped me to understand the notion better.

One other point, as you mention the Elliot Wave defaltionists:
Because they still focus on the value-store aspects of the dollar, they perceive gold just as a commodity that will, necessarily, have to fall in the deflation they see.

However, granting the deflation they perceive is happening, so long as gold resumes its store-of- value function (and thus RETURNING gold to its status of "Gold IS Money"), gold will have to rise, as that is what money does in deflation, it gains value rel. to everything else. With gold=money, they can be right about deflation, yet wrong about the direction of gold.

FOFOA said...

Hello Chris,

Yes, my position is that of "real" deflation. That is, deflation in real terms (gold)! What makes it so difficult for traditional "deflationists" to grasp is that it will end in hyperinflation of paper dollars, which I have shown has much more in common with their understanding of "deflation" than with commonly understood inflation. As I have said many times, the only thing hyperinflation and inflation have in common is a portion of their names. I have also said that in the end we will have hyper-DE-flation in gold and hyper-IN-flation in dollars.

I try to avoid using standardized, stereotyped words because they carry such baggage and confuse people. I try to explain my thoughts using descriptions rather than dogmatic words.

Hyperinflation, however, is one dogmatic word I do use, because I think it portrays the best description I can give as to how the collapse of the dollar will unfold. At the same time, I am careful to explain that I believe gold's price explosion is a totally separate event that is coming. It is not DEPENDENT on hyperinflation. In fact, hyperinflation could theoretically be avoided but gold's explosion could not.

As for the "Elliot wave deflationists", they are viewing their cycles in a dollar-denominated context. When you consider the collapse of the denominator they are using, their predictions fail. And because they cannot let go of the denominator, they see down cycles coming that would argue for a rising denominator. So when they see the dollar's final gasp of breath, they will think their predicted cycle has arrived... with catastrophic results to their portfolio.

Does this make any sense?

I, too, agree with Fekete, almost 95%. You mentioned Exter's pyramid. I assume you have read my post about it. If not, here is a link.


Chris T said...


thanks for the tip to your Exter article. Look forward to reading that. Most of what I know about is is from looking at his work directly and from Fekete's discussions.

Another aspect of the Elliot wave analysis is that they use their tools in markets that are not free. As Chris Powell says (probably not quoting verbatim): There are no markets anymore, just manipulations.
Thus, these technical tools are often questionable at best. And besides, they can never really find the correct counting starting points until its already over...

While they look at their waves, I will keep watching the basis!

Anonymous said...

Thanks guys for explaining the Elliot Wave thing for me.

Because what E.W. says sounds good, but only if you view dollars as a store of wealth.

And who in in their right mind will view dollars as a store of wealth when this thing really gets going?

Anonymous said...

Van Eeeden has more confidence than competence.

Anonymous said...

Harrods of London is now selling Gold Bullion at its store....

David Alexander said...

In the analysis of the demand for dollar liquidity as dollar denominated assets are sold to exchange for gold, a clear distinction needs to be made between purchasing dollars to provide liquidity as transactions occur and holding dollars to have available for potential needs for liquidity. During the 2008 financial crisis, many investors attempted to hold dollars to provide for potential needs for liquidity such as when they expected that they might be subject to margin calls in the near future, and it was this holding of dollars that created the shortage of dollars. Now that investors are less leveraged and asset valuations have already fallen substantially in many cases , if there is a selloff related to loss of confidence in the dollar there will be less demand for dollars to hold in case of margin calls. Investors who purchase dollars to immediately sell to buy gold will not create so much of a bottleneck since much of the buying of dollars will be simultaneously offset by selling of dollars. During a time when there was a sudden loss of confidence in the dollar, demand for dollars to buy gold would also be offset since so many investors would attempt to hold liquidity in the form of other currencies knowing that their dollars could lose substantial value even if they were held for a relatively brief period of time to provide for potential liquidity needs. Although there may be a very brief rise in the dollar as the dollar collapse runs its course, it will probably not be very much if it occurs at all and it won’t last very long.

Anonymous said...

I am looking for Chinese exporters of Bags and travel goods

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