Tuesday, December 29, 2009

Gold: The Ultimate Wealth Reserve


What is the main difference between a commodity and a currency? Consumption! A currency circulates through the economy as a medium of exchange but is not consumed. A commodity is a useful basic economic good that is produced, traded in common units and prices all over the world, and then consumed by industry or individuals.


Here is a list of commonly traded commodities from Wikipedia:

Agriculture
Corn
Oats
Rough Rice
Soybeans
Rapeseed
Soybean Meal
Soybean Oil
Wheat
Cocoa
Coffee C
Cotton No.2
Sugar No.11
Sugar No.14

Livestock/Meat
Lean Hogs
Frozen Pork Bellies
Live Cattle
Feeder Cattle

Energy
WTI Crude Oil
Brent Crude
Ethanol
Natural Gas
Heating Oil
Gulf Coast Gasoline
RBOB Gasoline (reformulated gasoline blendstock for oxygen blending)
Propane

Precious Metals
Gold
Platinum
Palladium
Silver

Industrial Metals
Copper
Lead
Zinc
Tin
Aluminium
Aluminium alloy
Nickel
Recycled steel

And what is the difference between a currency and a wealth asset? Time and appreciation! The main difference is the amount of time that each is held. A currency is earned and spent in a short timeframe and wealth assets are accumulated and held for longer timeframes. Here is a list of some common wealth assets:

Endurable Wealth Assets
Real Estate
Fine Art
Antiques
Collectibles
Gold
Other Precious Metals
Gemstones
Rare Classic Cars

Securities
Stocks (Equity Ownership)
Bonds (Debt Ownership)
CD's (Currency Time Deposits)

What separates "endurable wealth assets" from the rest of the physical world of consumer goods is their tendency to appreciate against the currency. Take classic cars for example. They usually appreciate versus the dollar while regular every-day cars depreciate as soon as you drive them off the lot! The same goes for Fine Art versus Not-So-Fine Art, and antiques versus their contemporary equivalents.

It all comes down to time... and appreciation over time. This is the difference between Wealth, Currency, and the rest of the real consumer world. The goal of wealth is, and always has been, to retain and/or gain purchasing power during the test of time.

But what is Purchasing Power? In a world where our currency is an ever-depreciating piece of paper such a concept is difficult to measure. I suppose it depends mostly on what you will need and want to purchase in the future when the time comes. And with a world full of things to buy and always new things coming to market, how can one possibly track such purchasing power accurately?

As a whole, we (the human race, the marketplace) are constantly measuring our currency and our wealth against a world full of physical things to buy. You see, there are two sides of this fence. On one side is our money, on the other is the things we buy. And as a group we measure the two sides against each other as time passes to make sure that the present and future division of the real physical world matches up with the currency and wealth scheme we are running parallel to it.



This process of measuring the two sides of the fence against each other is a very complex process, perhaps too complex for even a super-computer. Both sides of the fence experience the push and pull of supply and demand. Currency is in constant demand as men work in order to feed their families and, because currency is only held for a short timeframe, it is also in constant supply. So a very high, almost infinite demand for currency can be quite easily met with a relatively small supply when time is factored in.

Imagine an island of 100 men with a money supply of 1,000 sea shells. That's 10 sea shells for each man. But over the course of a year each man on the island works and earns an annual salary of 100 sea shells. So the total economic power of the island over a year is 10,000 sea shells. We could say that the GDP of the island is 10,000 ss. We could also say that the demand for sea shells is 10,000 over the period of one year and that demand is met by a supply of only 1,000 sea shells.

Now imagine that ownership of a piece of real estate on this island costs about 2 year's salary, and that there are enough pieces of land for each man to either own or rent one. So each piece of property might cost about 200 ss. The entire island's worth of residential real estate would be in the ballpark of 20,000 sea shells, twice the GDP. Yet the money supply still remains at 1,000 sea shells and that limited supply somehow meets demand.

The reason this works is because sea shells are the currency. They circulate and pass from hand to hand over a short timeframe. This is called velocity and it has the exact same effect on the value of a single sea shell as does the size of the money supply. On our island 1,000 sea shells change hands 10 times per year creating an island GDP of 10,000 ss. If they changed hands 20 times a year the GDP would be 20,000 ss. Or if we doubled the money supply to 2,000 sea shells that changed hands 10 times per year it would also yield a 20,000 ss GDP. So velocity and money supply of the currency have exactly the same effect.

This is the main difference between currency and wealth on their side of the fence as we measure their value against the other side of physical things. Currency has a fast velocity of circulation while wealth items have a very slow velocity. We hold a currency unit for maybe a month while we hold wealth items for years and years. So wealth items, as a store of purchasing power measured against the physical world, carry an almost 1 to 1 value ratio across the fence while high-speed currency carries a fractional value.


It is my contention that the denouement of our current state of affairs will carry gold from the commodity zone, across the fence, over to its ancient role as THE wealth reserve par excellence, bypassing completely the velocity-suppressed state of transactional currency. And that this shift will alter all value perceptions in the most astonishing ways one can imagine.

Consider that it is the bankers and central bankers that have gradually compressed the spring that is gold wealth first into velocity-bound circulating currency coins, then into fractionally reserved currency and finally into the mold of a common commodity, all the while protecting their own hoard and calling it a "reserve". What do they know that we don't? It is simple really. They know that eventually the spring must explode.


In the meantime, these same bankers have made a KILLING selling us all on the idea that paper indentures are the real value to be had. That by indenturing each other in perpetual debt servitude we can, as a planet, rise to a new and unlimited level of wealth in a world of limited resources. But the problem is that all this debt has now finally exceeded its own ability to continue existing parallel to a productive world. It can only exist now by Ponzi-cannibalizing itself to its own end. This is where we are today. The spring is held down by only a thread.

To get a handle on the potential energy stored in this "spring", let's take a look at how gold in its commodity mold compares to just one small piece of the rest of the physical world... oil. The total of all "proven" oil reserves in the ground are about 1.2 trillion barrels. Currently oil in the ground is trading at around $15/barrel. So the oil "slice of the pie" is worth around 18 Trillion USD. [1] Meanwhile all the gold ever mined is around 160,000 tonnes or about $5.5 Trillion at today's price. [2]


So confined to its central bank-commissioned commodity prison all the gold in the world is only worth about ONE-THIRD of all the oil in the world! Or said another way, oil could corner the gold market THREE TIMES OVER. This is what Another meant when he said:
Oil is the only commodity in the world that was large enough for gold to hide in.

Here is the full context of his statement:
Date: Sun Oct 05 1997 21:29
ANOTHER ( THOUGHTS! ) ID#60253:

Everyone knows where we have been. Let's see where we are going!

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold.

This line of thinking is very real in the world today but it is never discussed openly. You see oil flow is the key to gold flow. It is the movement of gold in the hidden background that has kept oil at these low prices. Not military might, not a strong US dollar, not political pressure, no it was real gold. In very large amounts. Oil is the only commodity in the world that was large enough for gold to hide in. No one could make the South African / Asian connection when the question was asked, "how could LBMA do so many gold deals and not impact the price". That's because oil is being partially used to pay for gold!

You see it was oil in the ground that was used to secure gold in the ground through the paper gold market of the 90's. But those "gold in the ground contracts" would ultimately be backed by above-ground gold from the central bank vaults, at least to oil they would, or else oil agreements would be similarly discarded. This was the message Another brought. His insider knowledge that explained not only the volume explosion on the LBMA, but also the low ($300) price of gold happening at the same time as physical was drying up to the point that central banks had to provide supply.
People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up.

In my last post, Gold: The Ultimate Un-Bubble, I made a few predictions about the purchasing power of gold after the restoration of its ancient role. But probably the most important line in that post was this:

The price of gold is completely arbitrary.

Understanding this concept is the key to understanding coming events that will confound almost any observer. So let's expand it:

The value of gold relative to the value of anything and everything on the planet Earth is completely arbitrary.

Or:

The value of gold is completely arbitrary.

Gold is neither expensive nor cheap. It is theoretically free. It is a monetary conversion, like buying a Treasury or a money market fund. To the Giants, do you think gold is a game of "how big is my slice of the pie?" Or is it "how much is my slice of the pie worth?" Is it better to have a 15% slice of a commodity pie, or a 5% slice of the wealth pie? Is it more likely that all the gold in the world combined, when used as a wealth reserve, will be worth a large percentage of everything? Or that it is worth only 30% of the known oil reserves?

My friends and I are Physical Gold Advocates. We own physical outright and do so employing the same reasoning mankind used in owning gold throughout most of history. However, there is a major difference between our perceptions of this historic reasoning and the current Western perceptions so many of you are attuned to. Our's is not a mission to unseat the current academic culture concerning money teachings; rather it is to present the historic and present day views of the majority of gold owners around the world. Those of simple thought and not of Western education. Plain people that, in bits and pieces, own and use the majority of above ground gold.

Most contemporary Western thought is centered around gold being money. That is; gold inherently has a money use or money function; built into it as part of the original creation. This thought presents a picture of ancient man grasping a nugget of gold, found on the ground, and understanding immediately that this is a defined "medium of exchange"; money to buy something with. This simple picture and analysis mostly grew in concept during the banking renaissance of the middle ages and is used to bastardize the gold story to this day. Even the term "money", as it is used in modern Bible interpretations, is convoluted to fit our current understandings.

Much in the same way we watch social understandings of music, literature, culture and dress evolve to fit current lifestyles, so too did gold have a money concept applied to it as it underwent its own evolution in the minds of political men. This is indeed the long running, background story of our Gold Trail; an evolution, not of gold itself, but of our own perceptions of this wealth of ages. A evolving message of gold that is destine to change world commerce as it has never changed before.

Onward my friends

In ancient times there was no concept of money as we know it today. Let me emphasize; "as we perceive money today". Back then, anywhere and everywhere, all things known to people were in physical form. All trade and commerce was physical and direct; barter was how all trade was done.

If one brought a cart to market, loaded with 20 bowls and 20 gold nuggets, he used those physical items to trade for other valued goods. The bowls and gold had different tradable value; as did every other thing at the market. Indeed, gold brought more in trade than bowls. Also true; if a barrel of olive oil was in short supply, it might bring even more in trade than all the gold in the market square.

The understanding we reach for here is that nothing at the market place was seen as a defined money value. All goods were seen simply as tradable, barterable items. Gold included. Truly, in time, some items found favor for their unique divisible value, greater worth and ease of transport. Gems, gold, silver and copper among others, all fit this description. These items especially, and more so gold, became the most tradable, barterable goods and began to exclusively fill that function.

But the main question is: was there money in that market place? Sure, but it was not in physical form. Money, back then and today, was a remembered value in the minds of men. Cumbersome it may have been, but even back then primitive man had an awesome brain and could retain the memory values of thousands of trades. In every case, able to recall the approximate per item value of each thing traded. That value, on the brain, was the money concept we use today.

Eventually gold climbed to the top of in the most tradable good category. Was gold a medium of exchange? Yes, but to their own degree, so were the bowls. Was gold a store of value? Yes, but to a degree, so were dinner plates. Was gold divisible into equal lesser parts to define lesser barter units? Yes, but to a degree one could make and trade smaller drinking cups and lesser vessels of oil. Perhaps gold became the most favored tradable good because the shear number of goods for good traded made a better imprint on ones memory; the worth of a chunk of gold in trade became the value money unit stored in the brain.

Seeing all of this in our modern basic applications of "money concept", almost every physical item that naturally existed or was produced then also held, to a lesser degree, gold's value in market barter. But most of us would have a hard time remembering a bowls value and thinking of a bowl as money. The reason this is such a stretch for the modern imagination is because bowls, like physical gold, never contained or were used in our "concept of money". Back then, as also today, all physical items are simple barterable, tradable goods; not of the money concept itself. Their remembered tradable value was the money.

Money, or better said "the money concept", and all physical goods occupy two distinct positions in our universe of commerce and trade. They have an arms length relationship with each other, but reside on different sides of the fence and in different portions of the brain.

For example: say I take a bowl to the mint and place an official government money stamp on the underside. The bowl now is stamped at $1.00. Then I take one tiny piece of gold to the mint; one 290th of an ounce or at today's market a dollar's worth. They stamp that gold as $1.00. Which
physical item would be money? Answer; neither.

Using ancient historic reasoning and the logic of a simple life; the bowl could be taken to the market square and bartered for another good. Perhaps a dinner plate. In that barter trade, we would most likely reach an understanding; that the "bowl for plate trade" imprinted our memory with what a digital, numeric dollar concept is worth. Again, the 1.00 unit was only stamped on the bottom for reference. While the dollar concept is only a rateable unit number to compare value to; like saying a painting is rated from one to ten when judging appearance.

We could do the exact same thing without 1/ 290th ounce piece of gold as with the bowl above. In the process we again would walk away with the knowledge of what a $1.00 unit of money value was worth in trade. The physical gold itself was not the money in trade; the value of the barter itself created the actual money value relationship. Again, the most important aspect for us to grasp here is this:

----- The use of physical gold in trade is not the use of money in trade. We do not spend or trade a money unit, like the dollar, to define the value of gold and goods: we barter both goods and gold to define the worth of that trade as a remembered association to the dollar money unit. That remembered worth, that value, is not an actual physical thing. A dollar bill nor an ounce of legal tender gold represent money in physical form. Money is a remembered value relationship we assign to any usable money unit. The worth of a money unit is an endless mental computation of countless barter trades done around the world. Money is a remembered value, a concept, that we use to judge physical trading value. -----

Onward

Naturally, for gold to advance as the leading tradable good it had to have a numerical unit for us to associate tradable value with. We needed a unit function to store our mental money value in. In much the same way we use a simple paper dollar today to represent a remembered value only. Dollars have no value at all except for our associating remembered trading value with them. A barrel of oil is worth $22.00, not because the twenty two bills have value equal to that barrel of oil: rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 22 units. Money is an associated value in our heads. It's not a physical item.

The first numerical money was not paper. Nor was it gold or silver; it was a relation of tradable value to weight. A one ounce unit that we could associate the trading value to. It was in the middle ages that bankers first started thinking that gold itself was a "fixed" money unit. Just because its weight was fixed.

In reality, a one ounce weight of gold was remembered as tradable for thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that barter value. We do the very same thing today with our paper money; how many dollar prices can you remember when you think a minute?

This political process of fixing money value with the singular weight of gold locked gold into a never ending money vs gold value battle that has ruined more economies, governments and societies than anything. This is where the very first "Hard Money Socialist" began. Truly, to this day they think their ideas are the saving grace of the money world. It isn't now and never was then.

When investors today speak of using gold coin as their money during a full blown banking breakdown, what are they really speaking of?

In essence, they would be bartering and trading real goods for real goods. The mention of spending gold money is a complete misconception in Western minds. Many would bring their memories of past buying with them and that is where the trading values would begin. Still, it would take millions of trades before the "market place" could associate a real trading value to the various weight units of gold. It took mankind hundreds of years to balance the circulation of gold against its barterable value. Only then could a unit weight value become a known money concept. In that process, in ancient times, gold had a far higher "lifestyle" value than it has seen in a thousand years. This value, in the hands of private owners, is where gold is going next.

If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold's value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments. A better knowledge and understanding of the value of all things.
-FOA (2001)

What does "Gold is Wealth" really mean? It means that gold, all of the gold, is set parallel, on the opposite side of the fence from the rest of the world of consumer goods and endurable wealth assets, as the numéraire of wealth in its role as the one physical holding par excellence for the purpose of preserved purchasing power over long timeframes. That is, denominating global wealth in its physical form only, non-fractionally reserved, non-transactionally diminished through the velocity of exchanges, but in its stationary, one-to-one relationship with the rest of the world's wealth, plus or minus a few lesser competitors.

What's next

Time and volatility are now the greatest threats to the current global fiat regime. As time passes volatility will rise. Volatility means price action in BOTH directions, with only one possible conclusion. For this you must be mentally prepared to not end up a victim of meaningless signals.

The current façade of stability is highly manipulated and controlled, but cracks are opening and we are starting to see through the curtain to the wizard at the controls on the other side. Things are not as they seem. Signals are much more confusing in times like these.

Debt is the very essence of fiat. But as debt fails, the fiat currency can spike sharply in response. Expect the end game to look very different from what you have been told. The dollar as rated by the USDX, a flawed rating system, may rise briefly to something like 150, a level certainly not expected for a currency on the verge of a hyperinflationary collapse! The COMEX gold price, which is really just the price of paper, may drop to $200 or lower before trading is halted.

You can expect this kind of "spiritual experience" price volatility to be heralded as proof that the goldbugs were wrong all along. But don't be fooled. Many a strong hand will turn weak at the worst possible time. Many a bug will be lured by the warm glowing light only to be electrocuted. Don't be one of them.

Remember that ANY volatility is the enemy of the system. Even the price movements that don't go your way are still bringing down a system that has become a complete farce. Hold tight your gold wealth for a brighter day comes. The world of paper debt is, and has been, circling the edge of a lavatory vortex from which there is no escape.

The “PRICE” of short-term paper simply “cannot” be seen to go above PAR …as that in itself rings the death-knell of the System.

Yield in the short-end is essentially determined by how much you pay NOW ..to get back Par over the time period. When you pay $1001 to get back $1000 in 3 months …you're in negative yield. Of itself an oxymoron …and declaring for all the World to see …there IS no monetary Future.

Can ONLY happen in a “Global” Fiat construct FOFOA …the likes of which holds sway at present.

This System is unique in that we've "never" had an arrangement in place before where there was "no escape" monetarily speaking.

In the past, when the economic situation in (say) the UK deteriorated, one simply transferred to a stronger currency ...or Gold ...or Silver ...as they were all monetary functionaries of specie ...or at least "some" of the available currencies were.

We now have the situation where the entire System is stressed beyond coping ...with the $US/Oil configuration back-stopping said System.

It (the REALITY) will permeate ALL facets of "future-derived" valuations FOFOA. Bonds, Stocks, Real-estate ...and even our beloved PM's. (as they are NOW priced with a futures-leaning bias)

The closer you get to the Kernel however (short end of the curve ...<6mo)>DX

...that's why it's SOOO important NOW to dis-associate mentally from the $US pricing of PM's.

We KNOW they're "worth" more ...what we have to realise is ...they're essentially "priceless" under the current regime ...despite what the current market tells us.

What is being priced as Gold ...TODAY ...and what you hold in your hand ...are vastly different. (but you already KNOW that ;-)

-Topaz

Sincerely,
FOFOA

46 comments:

idi said...

Most excellent conclusions FOFOA. The following is a must read;

http://earthblognews.blogspot.com/

Happy New Year to all and fasten your safety harnesses!

Jimmy said...

Martin Weiss made a list of weakest and strongest banks in America.

(But I couldn't guarantee for the accurancy of his ratings...)

Jimmy said...

Scary of gold forecasts by Jim Rogers, Marc Faber and Nouriel 'Liar and corrupt' Roubini

Jimmy said...

Obama makes top 10 list of corrupt politicians


Move your money, the new solution...

No jobs for 10 years?

There are 3 big concerns for the upcoming Year of the Tiger (China): Inflation, protectionism and inequality

Jimmy said...

Euro Zone Grapples With Debt Crisis (with a good map, click on the countries to get an oversight)

The Mad Scientist said...

Using my own words against me FOFOA? LOL. I need to be more careful next time.Did I get the sense that you see the possibility of a hyper-deflationary collapse prior to a hyperinflationary one?

Kewl said...

Hi FOFOA,

what are your thoughts on the new bullion coins from the United Nations? With the new ATMs being able to identify them these coins would offer great liquidity for public. Freegold starts here?

Topaz said...

Yes FOFOA, it's a pity really that the perception of Gold Wealth - so readily accepted in the past - has been polluted by a few hundred years of Gold as Money.
Money per se, ie: the "concept" of value ...the third wheel in a transaction, the chaperone on a date ...etc, etc. is actually far better served by a Fiat regime than a Specie contrivance IMHO,
...provided there is a clearly defined depository for "wealth accumulation" outside of ...but/and denominating the functioning of the system of course.
How would your "friends" A-FoA view this current monetary landscape eh?
I can't imagine Another would have envisaged these last 10 Years evolving as they have done. 9/11. Iraq, terrists, Afghanistan ...all completely off the screen then ...and I'm sure, ALL most relevant to the matters at hand.

Great post as usual Sir.
All the skittles are lined up FOFOA - and the Administration it would appear, is aiding and abetting this outcome to boot.
Although, if things transpire as I've anticipated, it will occur in a lot shorter timeframe than they can possibly hope to control methinks.
3 months = good for the FreeGold concept ...3 Yr's = BAD!
If they'd only get out of the way ...3 weeks!

FOFOA said...

Hello Mad,

hyper-deflation? I suppose that depends on your definition of hyper-deflation. To what I assume you mean the answer is no. As far as everything collapsing in real terms, yes. But the Fed and the USG will print to save the banks and any other favored son (also pensions for political reasons). Topaz says things may play out for 3 weeks to 3 months once it starts in earnest. I say the real damage will happen within 3 hours to 3 days.

The Fed can solve a liquidity crisis relatively fast now (see Money Talk Continued). The problem next time is withdrawing those crisis guarantees afterward. I don't think it can happen and the "swaps" will have to remain permanent, backed by physical printing. The USDX spike would be from the onset of the debt selloff until the swaps are in place, IMO. And at the same time we would see the Fed buying up debt like never before trying to support a price that is in freefall.

It is also possible that a liquidity crisis/debt collapse comes in waves, like a tsunami, drawing out the timeline.

I imagine the POG will be demolished during such a crash, which will signal the separation of paper and physical leaving those poor souls nowhere to run to for safety until a physical-only market later emerges.

"Q: Debt is designed for default as fiats are for debasement. [Right?]

FOA: My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationist get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"


FOFOA

FOFOA said...

Hi Kewl,

Yes, I agree with your assessment. It smells suspiciously like Freegold.

"A number of years ago, "I" began to learn of some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people."
-FOA (10/3/01; 73 days before he disappeared)


Where did these "people" go? And what are they up to now?

Sincerely,
FOFOA

costata said...

Another good post FOFOA. Thank you.

Topaz,

What is silver telling us? ie. moving back up to the 65:1 ratio.

Is Freegold disengaging some of the carriages in the van as it builds up a head of steam for the next climb?

Happy New Year to all and best wishes for a prosperous (eventful?) 2010.

FOFOA said...

2p ET Wednesday, December 30, 2009

Dear Friend of GATA and Gold:

GATA today brought suit against the U.S. Federal Reserve Board, seeking a court order for disclosure of the central bank's records of its surreptitious market intervention to suppress the monetary metal's price.

The suit was filed in U.S. District Court for the District of Columbia and targets Fed records involving gold swaps, exchanges of gold with foreign financial institutions...


http://www.gata.org/node/8192

Topaz said...

costata:- Silver is certainly not going where I'm willing it at present ...thats for sure ;-)
My Ag is a kind of alternative PaperGold. Where I fully expect $PoG to crash during the upcoming Firestorm, (as does FOFOA)..I WAS of the belief $Ag would fare better in the lead-up to and during the process.
The "plan" was to migrate out of Ag and into Au as the "Ratio" dropped, irrespective of "price" action. ...still is! (sheepish uncomfortable grin)
FreeGold has ONE ally in this process - TIME.
If this systemic devolution happens quickly (3 nanoseconds - 3 mth's) a FreeGold based Fiat System is a no-brainer.
SLOWLY (over 6mth's - 3 Yr's)...might cause knee-jerk reactions here in the West.
There'll be pain aplenty either way Sir C.
IMHO.

TomB said...

Here's a story of how bad things can get WTSHTF, it's written by a man who lived through the collapse of Yugoslavia.

http://www.survivalblog.com/2009/12/letter_re_the_bosnian_experien.html

costata said...

Topaz,

I have been entertaining similar thoughts about using silver as a bridge to gold.

(I'll have to whisper this very quietly so FOFOA doesn't hear!) We were holding most of our silver in a certificate program with a certain Mint. A few weeks ago at around 56/57:1 we converted about half of it to physical gold.

I have a vague plan to buy silver at anything north of 70:1 and wait for an opportunity to convert it to gold on more favourable terms.

My rationale is twofold.

1) I think the ultimate repricing of silver will be an industrial user driven event rather than an investor event (a la rhodium). In other words a repricing to ensure that recycling of silver rises to a level closer to that of gold (say US$150 to US$300 per Ag oz). I suspect this may be some way off in the future.

2)I think there may be a solid floor under silver at somewhere around US$10 based on scrap sellers witholding supply from the market (please see below).

http://www.recyclingtoday.com/precious-metal_january_2010.aspx

“We saw a lot of product at $10 to $15; $15 was a threshold,” says Aaron Batelic, vice president of Gemark Corp., a precious metals processor in Bluefield, W.Va. While the silver that came in was lower quality, sellers sought to recycle it all."

“The higher silver price enabled customers to send product in and get a payable rather than a bill,” Batelic says."

Sooooo ... If gold gets one more hammering before the great paper/physical divide I think silver will be belted even harder. As a result there might be a good arbitrage opportunity.

costata said...

FOFOA,

Re: UN Sales of Gold and Silver Coins

I am starting to wonder if this is a spoof. Look at some of the "quotes" below (or perhaps FOA has returned).

"In its wide-ranging report this fall, the UN Conference on Trade and Development (UNCTAD) stated that the system of currencies and international banking practices within today’s economies were inadequate, and responsible for the present economic crisis."

FOFOA did you ghost write this?

"The report advocates that the present monetary system, wherein the dollar acts as the global reserve currency be re-examined “with urgency”."

"The UNCTAD Report was the first time a major multinational institution had forwarded such a suggestion or measure ....... China’s central bank chief Zhou Xiaochuan has mentioned that the dollar could become a basket of currencies instead."

"The UN commission dismissed such a widening, saying a multiple-country system “may be equally unstable, and not transparent.”

"The panel is seeking more monetary balance for developing countries, and a means for them to retain their reserves and domestic savings independent of foreign agencies and arrangements."

"Panel Chair US economist Joseph Stiglitz, a Nobel economics laureate, has made plain that there was “a growing consensus that there are problems with the dollar reserve system. Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves,” Stiglitz stated."

"A report contributor, Detlef Koffe, concluded that “Replacing the dollar with a bullion currency would solve some of the problems related to the potential of countries running large deficits and would help stability,”

"US Fed spokesperson Patrick Paulsen acknowledged that there could be some strong reaction in the US to the global currency, and that it would “be viewed as a step toward a New World Order. But those same people have probably lost patience with the money-changers as well.”

The Giants?

"He clarified that he would “…nonetheless anticipate that the western currencies will continue to depreciate ...... to find their own value and enable their economies to compete. This is a UN perogrative we cannot and should not control ......”

Freegold - a UN prerogative?

"The UN decided to provide a “public option” savings currency, whereby currency mints will be licensed to mint two kinds of bullion coins...... the size of the 1€ coin – the Uno (silver ~$5) and the Oro (gold, ~$500). The names were adopted from the book “The Humanist”......UN better funded by 2015 via its licensing fees........."

Co-incidentally 2015 is Martin Armstrong's next major high for the Dow in his Economic Confidence Model.

"The coins have a marker chemical in them that enables their authentication and processing by modified retail ATM and exchange machines in Europe, which will be distributed globally."

The sting in the tail. The PTB can track it as well.

"Any licensee, public or private, can produce such bullion coinage under contract."

Wow!

"The United Nations is doing no more than what most countries do already, except that the value of its coins will reflect their bullion weight."

"Armand Dufour of the European Bank welcomes their introduction. “People have enough Fiat currency options, government and banks cannot intrude on bullion coins – they will have their own inviolable value.”

Double Wow!!

"He does have one concern, however. “If we see a dismounting from the US dollar, as is inevitable in the main view, there will be a strong move to the Oro, which may drive its price up to the point where governments will not allow its circulation; they will try to isolate it.”

Is this the throwing down of the gauntlet to national Governments?

Gody said...

FOFOA,

Good article.

To the Giants, do you think gold is a game of "how big is my slice of the pie?" Or is it "how much is my slice of the pie worth?" Is it better to have a 15% slice of a commodity pie, or a 5% slice of the wealth pie?

I appreciate what you are trying to say that Gold is more valuable as a store of wealth than as a commodity. But having said that, "how big is my slice of the pie?" is still dependent on "how much is my slice of the pie worth?" for either case. When gold becomes a store of wealth, how much of it you have will determine how wealthy you will be. I think you ought to be careful in how you represent some things as to the simple minds, like mine, this can be misleading.

Gold will still be gold. The mindset and usage may change but the quantity and quality possessed will still determine the wealth effect.

As always regards.

FOFOA said...

Hello Costata,

Those statements are amazing indeed. Don't for a moment think that we are all alone here. I have seen enough to know that there are men in high places with similar thoughts. And no, I did not write that. :)

Here was an interesting inference by FOA. To me it sounds like he had been relaying messages from more than just himself and Another. It sounds like perhaps a group of men were helping to guide the Trail Guide...

"I will begin using "I" while talking and, from here on out, clearly indicate when I'm speaking the thoughts of a friend or associate. Over the years I have very often spoken the words from others, as they wanted it produced. Often doing entire posts while stating other's positions or inserting their views in my posts, mid stream, without saying I was doing such. We have all come far enough now, that our understanding can grasp the changing tide without this. My planting seeds of thought in such a way may no longer be needed, but your leg work is far from over. This change is a result of the evolution of our political and financial world just as much as your growing in insight."

This was from the same 10/3/01 post as the quote I used in my reply to Kewl.

These two lines from your comment intrigued me the most...

"The UN decided to provide a “public option” savings currency, whereby currency mints will be licensed to mint two kinds of bullion coins...... the size of the 1€ coin – the Uno (silver ~$5) and the Oro (gold, ~$500).

"The United Nations is doing no more than what most countries do already, except that the value of its coins will reflect their bullion weight."


~$500 means "about $500". In other words it is named the Oro (meaning "gold" in Italian or Spanish), but not denominated in a number attached to a fiat! "the value of its coins will reflect their bullion weight"!! This is the key to Freegold! This is like the Krugerrand. A legal tender gold coin with no fiat denomination, only a weight!!

From Wikipedia: "The Krugerrand has no face value; its legal tender value is the bullion value of its metal at the current market price of gold. The Krugerrand was the first bullion coin to have this kind of legal tender value."!!!!!!!

Cont...

FOFOA said...

...

FOA wrote the following on 10/10/01, a week after the above and 2 months before he disappeared...

"Right now, I can tell ya what's most likely out there, but in those strange areas; not really sure?

Take this Euroland gold coin thing? My guess is we won't see this anytime soon. I suspect it will be something like a K-Rand, with no marked currency denomination, but different in that it will be a hybrid legal tender. If you look here in the US, gold coins are somewhat a currency as they stand. Just like IBM stock, real estate and most any other asset, we just have to sell it for currency first; pay our taxes and then use the money to buy something. The process only becomes illegal if you use the stock, land or gold to trade directly for something and don't pay your taxes.

Mr. Strauss pointed out that the current trend in motion is that all VAT taxes are being lifted or phased out on gold trading. Eventually, most of the world will have only some form of capital gains taxes on gold. This is fine and is bringing gold into focus as the one and only metal asset the official sector is trying to work with. But I think there is more to it than this.

As I said many times; Europe it looking to bring gold back into use as a very tradable asset. Perhaps "the most very tradable asset" but still outside the fiat money context. They want to keep the government's and socialist's hands off gold and its market function so it will serve everyone as a savings medium. But, they also want it to gain as a trading medium so the combination of the two will create immense demand.

To gain in the "use department" I suspect we will see some push to drop all gains taxes on gold used in official coin (Euroland) form. In place of that, there will be some form of excise tax charged on payments / trades done using these gold coins. Most likely, you will have a choice of paying completely in gold or Euros but not a combination of both. Probably, gold will be used for large purchases because gold will carry a very high price by then. And too, 1 gram coins will be the norm; being the size of our one ounce now, but with alloys. I doubt gold will ever be used in regular store / retail sales. In other words, I could go into my bank and use 50 Eurolands containing, say one ounce fine gold each, and pay off my $200,000 mortgage; minus some 15% excise tax on the deal? I could probably do the same thing with regular bullion, too, but would pay a somewhat higher gains tax rate; instead of the lower excise tax.

Anyway, this is all in the "for what it's worth area". Go ahead and take your hike,,,, I will be here giving the car a tune-up and changing the oil when you return. Then I want to talk some more about the words of Mr. Strauss (smile).

TrailGuide"


By the way, I didn't laugh at this you wrote: (or perhaps FOA has returned) as it is entirely possible.

Sincerely,
FOFOA

Gody said...

All,

At gold is money check out this

To foretell the future, think like a banker

The banker's guide to owning it all

1. Become majority lender in an economy of people with assets you want.
2. Encourage indebtedness by loaning generously while securing on assets of interest.
3. Loosen lending standards until the assets you seek to capture are attached.
(this makes the economy debt dependent)
4. Once debts are significant for the bulk of the population, sharply tighten lending standards. <-- Economic shock - Onset of deflation
5. Backstop losses with public guarantees if possible. This is gravy if one can get it.
(Fannie and Freddie guarantees, for example)
6. Permit default 'without risk' on the assets you wish to sieze to maximize wealth transfer.
(stall foreclosure, stay repossession orders etc)
7. Stall the economy to maximize default positions and deplete private liquidity. <-- We are here
8. Successively ratchet the economy downhill, while bettering secured positions.
9. In a series of large actions, sieze all security for default. Target the assets of greatest interest first.
(This deals a heavy economic blow and can help cause the ratcheting required for step 8.)
10. Transfer asset ownership, but retain prior owners as renters where possible.
(This reduces public lashback and helps maintain the asset for resale)
11. Once the bulk of assets of transferred, write them down to leverage the public financial backstop.
12. Buy up as many remaining assets on the cheap as possible. Hide this action.
13. Hyperinflate to destroy the external claims on wealth. <-- Onset of hyperinflation
(This destroys treasuries, gov't bonds, currency. Ensures free title on new assets. May cause war.)
14. Stabilize the currency or devise a new one, resume lending at a reasonable pace. Sell the assets back, secured of course, at your chosen price in new currency.


Hyperinflation is only a risk to the wealthy if the population has the assets.
Make note of that statement. It is key to timing the shift from deflation to hyperinflation.

FOFOA said...

Hello Gody,

I think you are confusing (or combining) pecan pie and pumpkin pie (which I also did on Christmas day!). Pecan pie is 160,000 tonnes of gold. Pumpkin pie is all the tangibles in the world. "how big is my slice of the pie?" refers to pecan pie. "how much is my slice of the pie worth?" means "how much is my slice of PECAN pie worth in PUMPKIN pie?"

If you were a giant facing the fact that confidence in your fiat as the denominator of wealth was gone, it would be a perfectly logical deduction that a reduction in your slice of pecan pie would still buy you MORE pumpkin pie, which is what you REALLY want.

And us little mice that also understand this simple truth can still hoard a crumb or two of pecan pie in order to secure the new value versus pumpkin pie... what EVERYONE really wants and needs.

Sincerely,
FOFOA

costata said...

FOFOA,

Every time I revisit the archives I am stunned by how clear and far sighted the analysis was in the discussions between FOA and other forum participants.

A few hours from the beginning of the last year of the decade, this from ORO and FOA in the first.

"ORO (10/24/00; 23:00:45MT - usagold.com msg#: 39827)
Trail Guide and Traveler - bankers liquidity

The banks themselves can not survive a credit crunch where more than 10% of debt is unrecoverable. That would wipe out the whole of the banking system.

In order to save the banks, the Fed must print enough funds to bring back the banks to a point where they are at least liquid, if not solvent. Meaning that as banks sell surviving assets to meet withdrawals

The market value of these assets from distressed sale will fall substantially below what it otherwise would have been. In order for the banks to survive, the Fed must pay above market prices for bank assets till bad bank assets are at a low enough level that they cover remaining liabilities.

Since the market value of bank assets (not the fictitious book value) under current circumstances (higher general interest rates and high spreads) is falling, while bank liabilities are still growing at an interest rate similar to that of treasuries, Bank capital is falling at 10 times the rate at which bank assets are falling===============

Even though ORO was describing a deflationary event response, once a real price inflation is accepted and expected by people at large, the rising rate levels force the government into this same circle of events.

Looking at all we can see today, "inflation is in the air" as never before. Expecting traditional credit cycle events to save our financial structure this time will be asking the system to do what no one wants it to do. The very best and clearest early indicator that a super inflation is upon us, will be seen in the next "one way" fall of the dollar from it's overvalued level.

Our system of hiding past dollar currency inflation within a falsely valued credit structure is about to break wide open from a falling exchange rate. In the era before us, understanding the failure of our dollar at the end of it's timeline will require little more than knowing the price of bread at a grocery store. High finance is about to be "distilled" down to it's true worth; knowing the physical gold price an honest bullion dealer that can deliver at the same.

Now, let's hike back into town to continue on the USAGOLD forum.

Thank You
FOA/ Your Trail Guide"

Shanti said...

Nice discussions here, thx, keep up the informative works !

@FOFOA,

Again a good piece !

Indeed WANTS & NEEDS is all that finaly counts.

Just one need to make a the clear rational fence between the two.

Enjoy the pies & the last day of the old year.

Shanti

Gody said...

FOFOA,

This is what I meant.

"how much is my slice of PECAN pie worth in PUMPKIN pie?"

By making it clear, we can know that it is pecan pie vs Pumpkin pie.

Which is why I said gold will still be gold. As in the more Pecan pie I have, the more wealthier I am in obtaining Pumpkin pie. As the saying goes, we are now comparing apples to apples and not apples to oranges since your slice of Pecan pie determines your wealth.

S said...

FOFOA,

The one glaring flaw in the free gold concept is that it is by itself a one worlder concept. The very uniqueness of the individual fiat - at least as far as the US$ goes - is the flexibility it affords (ed) in perpetuating the debt backed money scheme. While almost no one would disagree that the scheme has run its course it is tantamount to full scale capitulation (flying the white flag in other words) to suggest that the Fed and the US bankers generally with massive dollar denominated books would so readily trade off the entirety of that flexibility (barring war).

so, one wonders when you look at trillion dollar balance sheets, myriads of them, loaded with dollar denominated debt, how a bank could hedge itself against the massive losses that would accompany on rapid devaluation other than foreknowledge which at this point is all but backed in the cake. but how would they hedge it with Freegold when they are basically the entire other side of the trade?

i suppose the question really is that if a devaluation in the form of hyperinflation of default is coming, what is the hedging mechanism that the giants are using to prepare to fortify their balance sheets and "reserve" assets against being firsaled?

it is clear already that something like GE has already been fortified by the likes of the FDIC debt backstop. but that is a fiat rescue predicated on confidence in the USD/treasury guarantee. What I wonder is what that short term fix was a bridge too? Was it simply to use the goodwill early and in force to shift the liabilities to a suspecting but still gullible public before the confidence game is lost?

The move to uncap the drawdown at FRE is definitly a consildiation move that fits the broader USD devaluation thesis. the real question is when is everyone hedged enough to uncork the drain?

Chris said...

@Gody 12:34

I am glad you liked my post Gody. I am aka Ishkabibble. :)

Applying the model you linked, future value of Ag and Au can be seen steadily rising for some time. Armstrong, Alf, A, FOA, FOFOA... are all proven right.

The model I posted on GIM lacks any form of sensationalism, such as is often seen in the predictions. It's based on history, which rhymes. I pull nothing far left field into the mix... at least nothing I can identify. The most significant change is that I examine depression as a tool used by the elite to extort wealth from the middle. I very much expect that's how it's used.

Through the experiences of ourselves and those around us, we have seen the bulk of this model in effect on a micro scale. Each buyer that banks finance becomes most profitable when they default on an equity position. It's like a mini-SHTF. One life from which the wealth is extracted. The difference is that, on a macro scale and with only minimal adjustments, bankers repeat the process for a larger windfall.

The SHTF scenario people fear is happening today. Millions of individual SHTFs are happening all around the world. More will come as the full effect of this depression takes hold. I see posts all the time mentioning when SHTF. They don't realize it has. Collapse isn't SHTF, it's TEOTWAWKI, the result of not reigning in SHTF.

To tie this back to gold, I can offer the following. Our current system is currency starved. Gold and Silver are maintaining a strong position despite this fact. Just think about this for a moment! People need currency to cover day to day expenses, but what a larger and larger percentage wants is gold... and tangible gold at that. If there was ever a reason to be bullish on gold in hand, that's a pretty strong one!

As more and more mini SHTFs occur, more wealth is transferred into the hands of the top. When the point of deminishing returns is reached titles will transfer, the dollar will cease to be king, and it will be time to reset the currency.

GOLD will rule while new currency is established, and for many years to follow. Eventaully, faith in the new fiat will supress gold prices... the people will chase new digets, and when they too fail, gold will retain it's position on top.

Ishkabibble said...

If you appreciated my last post, this one will likely be of interest as well.

Waiting for SHTF? It's here.

Gody said...

Ishkabibble,

Very insightful post. Goes in line with what I believe they do and will continue to do to the "no ones"

costata said...

Gody, Ishkabibble

Interesting posts. Thank you. You might want to read this:

The Royal Scam
http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm

FOFOA,

Do you recall a post by FOA where he discussed the gold vs silver issue in terms of the near infinite divisibility of gold?

I think he suggested that if necessary atoms of gold can be placed into another medium such as a metal alloy coin. Therefore silver would not be needed in the system to accomplish the transition.

Placing a "chemical marker" in the Oro coins would facilitate this ability to produce micro-denominations would it not?

This may seem trivial but in terms of a production process it would be very cost effective to have standard physical sizes with "infinitely" variable gold content. This would also be a big asset in the context of a gold ATM system.

Re: Gold ATMs

Perhaps Volker was making an in-joke when he told that group of bankers (in London?) recently that the only socially useful thing they had contributed in the past 25 years was the ATM.

Re: Widening the market for physical PMs

The more I reflect on this the more sense it all makes. In order to ensure that your store of wealth is convertible into EVERY other thing (pumpkin pie?) you may want to buy it has to be as widely accepted as possible. This explains China and other regimes encouraging, or at least allowing, their citizens to buy PMs.

I am also coming to the view that there will be at least two stages in this "waterfall effect" leading to Freegold.

First the collapse/abandonment of paper gold should provide a big uplift to physical.

Who might want this to happen? A growing list of actors: ECB and friends, Middle East, India, China, several SE Asian States, gold producers (SA, Australia, Russia, China etc).

Second the hyper-inflation/currency destruction phase takes gold to some higher level again and ensures that it remains there for at least a few generations. Plenty of time to cement the family fortunes in the best of the new (old?) generation of asset classes.

FOFOA, I think your analysis is correct. Freegold is probably inevitable. Regrettably, our participation is not inevitable BUT we can try.

FOFOA said...

Costata,

Here are the FOA "atom" quotes. I think they are appropriate to this post...

"The point made here is that gold has no set currency price and never has. In fact, we don't even need any more gold produced! All the gold in the world could easily convert all the currency, bank accounts and wealth in existence into gold value,,,,,,, at some currency price. As pointed out above, it will always be available for wealth replacement even if we have to put just one atom of gold in a one ounce coin. Don't laugh, it may happen (big logical smile)!"

-------------

"Once the trading is done, before walking away from the flea barn, we will square the books by trading any left over silver and currency for ("single atom" if needed) gold coins that have then become the world's secondary saving accounts."

FOFOA said...

And here's the full context...

FOA (01/10/01; 17:50:30MD - usagold.com msg#53)

Silver, you ask?

Same old song for a brand new generation, all ready to hear those wore out verses being sung once again. It seems it doesn't make any difference that silver has failed every MODERN human attempt to include it in hard money use and thought. Yes, just like the various failed gold standards, we keep trying to convince people that silver is better than fiat money, even as good as gold. Perhaps, a poor man's gold, no?

Ha! Ha! The last thing a poor man (or woman) needs is silver. Actually, any metal could be a poor man's gold, even iron! One ounce of iron is more affordable than silver and has just as good a chance at outrunning gold,,, percentage wise of course. Isn't that right Randy? I saw your face back there in the group (smile).

The only real argument all the silver pushers have is based on it someday outperforming gold and holding that gain for good,,, again percentage wise. This is the same old worn out logic all the various paper gold substitute players also use. Throw it into the same waste basket with options, futures, leveraged gold contracts, delta hedging both long and short paper positions,,,,, even gold mines, silver mines and the like. All of it is pushed because of the same thought; "why own physical gold when these items will go up faster in the next move"!

Yea,,,, somebody forgot to mention that the next move in gold may be of a nature like "noone" has ever seen before. Oh, you didn't hear that this time the entire paper gold marketplace may crash and burn,,,, taking all those above leverage vehicles down with them? Exposing silver for the play it always truly was,,,,, just another leveraged metal being pushed to poor people standing next to gamblers?? Yea, poor people shouldn't use gold,,,, that's only reserved for rich people hedging their big wealth. Ha! If ever there was a way to increase the gap between have and have nots,,,,, just sell the nots silver while the haves keep gold.

Try this "Thought" on for size:
--- In the beginning, the earth and Western style gold trading was created (smile). All we had were these big 5,000 ounce gold bars moving around. At say, $5 an ounce one of those bars cost $25,000. But one day, as the years went by and use / need pushed it's price ever higher, $100 an ounce became the norm. Oh my, what will we do, who could possibly afford a bar that cost $$1,000,000? I have an idea, said a smart woman (us guys didn't get it), let's melt the bar down into one ounce units and everyone can afford (use) them. Especially now with an ounce being $100. We can call it "poor man's gold money" or "poor man's gold wealth"!

-----Then the price went to $800 an ounce and once again, the poor man couldn't effectively use gold as money. Once again someone had an idea, let's melt the ounces down into 1/10 ounce coins so they will be $80 each. Once again it will be "poor man's money". Boy, we can even build on this logic and add alloys to the gold! Making one gram coins that are the same size and feel as a full ounce. Great day, now gold will always be the "every persons gold";

-----because it can always take the place of paper fiat,,, no matter how much any currency inflation drives up the conversion value of paper money into gold!-----

The point made here is that gold has no set currency price and never has. In fact, we don't even need any more gold produced! All the gold in the world could easily convert all the currency, bank accounts and wealth in existence into gold value,,,,,,, at some currency price. As pointed out above, it will always be available for wealth replacement even if we have to put just one atom of gold in a one ounce coin. Don't laugh, it may happen (big logical smile)!


Cont...

FOFOA said...

That day, when gold first hits $5,000,,,, we will all see something "not as before". You see, price inflation will not be the initial driving factor for gold. No, it will be a realignment of the gold price discovery system. There,,,, in that destruction of paper,,,,, anything with leveraged perception attached will tarnish,,,, silver included (smile). Then,,,, after that value adjustment,,,,, all hard and real assets like gold, silver, real estate, oil, natural gas, soap, etc.,,,,,,,, will be at the starting gate of the great dollar inflation race. The gun will fire and we will all run the trail. In that environment, none of us will "AFFORD" anything of hard value. We will, however trade for what holds value the best,,,, not what gains currency price the fastest or the most-est. Gold, with the greatest history of holding the highest numerical value of world wealth in lieu of assets,,,, will outrun any and all contenders. And do so from a new higher level.

At the flea market, you will, along with others bring boxes of silver and wallets of currency for trade. But, the least discount for real trading value against "real use economic goods" will belong, always, to gold.

Once the trading is done, before walking away from the flea barn, we will square the books by trading any left over silver and currency for ("single atom" if needed) gold coins that have then become the world's secondary saving accounts. Indeed, people will have to accept a discount on silver and or cash to exchange it's excess back to gold. The Free Gold marketplace will do what no government ever could; make gold a savings wealth, not a medium of exchange.

My friend, for a free life, choose gold!

costata said...

Hello FOFOA,

Thank you for the extract. Something troubles me about FOA's logic and arguments about silver.

If we take for granted that both gold and silver are fractionally reserved through the paper markets then:

"You see, price inflation will not be the initial driving factor for gold. No, it will be a realignment of the gold price discovery system."

No problem so far.

"There,,,, in that destruction of paper,,,,, anything with leveraged perception attached will tarnish,,,, silver included (smile)."

This seems to be inconsistent. Destroying the leveraged paper market for gold BENEFITS gold but destroying the leveraged paper market for silver DOES NOT benefit silver.

Assuming that FOA's logic is, in fact, consistent could he be saying that the silver market is not leveraged ie. the shorts aren't naked.

"Trail Guide (04/25/01; 15:04:48MT - usagold.com msg#: 52536)
Comment to Randy's post of:

Randy (@ The Tower) (04/24/01; 10:38:48MT - usagold.com msg#: 52458)
Follow-up on my comment last week that China has lately been a net been seller of silver
------Philip Klapwijk, managing director of GFMS, explained at Monday's conference of the Gold and Silver Institute that China sold near 60 million ounces of silver in 1999, with additional sales of 40 million ounces per year likely over the next couple years. Continuing...----------------"

"Following your chain of thought about China silver,,,, I noticed a comment from Bush that we would fight them over Taiwan. Then silver gets hit real good (the day the comment was made). Could it be they are unloading silver so as to buy Euros and gold prior to calling it splits with us?"

Consider this tantalizing snippet from further into the same post:

"They do have more silver than their needs require (possibly more than all of us require)."

FOFOA, I realise that you have posted the following extract before. Bear with me while I try to piece this silver puzzle together.

"http://www.usagold.com/goldtrail/archives/goldtrailfour.html

FOA (06/12/01; 11:23:21MT - usagold.com msg#77)
A discussion

This failure of price matching,,,,, this failure of contract conversion into metal,,,,,, this failure in the world gold market to any longer be able to correctly price real bullion,,,,,, will lead to a wholesale dumping of all dollar contracts that have US based performance,,,,,,and start a fall away of all dealings based on present protocols dollar market gold exchange."

No probelm. This is how the dollar based paper gold market dies.

"As a side note: This will not apply to the paper silver markets as silver will not have the Euro vs. Dollar political struggle. A struggle where the ECB members are trying to loosen their main asset (gold) as a reserve wealth backing to replace the massive loss of dollar reserves. Remember, further back on the trail we covered how these reserve dollars will be simply cast down."

FOFOA, again this seems reasonably straight forward. But the following leaves me scratching my head.

"In this light, silver trading will bear the brunt of selling in an effort to balance loses from a gold exchange that no longer works."

Selling of what by whom? Physical silver to cover gold shorts?

"Because silver has no hope of an official free market, it's paper pricing system may run amuck until it's price plunges to???"

By official free market does FOA mean a state sanctioned market?

"This is the reason so many countries that are contemplating a switch from dollar to Euro use are selling physical silver and buying gold (China, India, etc). It also explains to movement of gold between countries that planned outright Euro conversion."

This last paragraph seems to reinforce FOA's earlier hint that there is a lot more silver out there than we realise.

Continued in the next comment......

costata said...

FOFOA,

More on silver. Your analysis would be greatly appreciated. Naturally, any insights from other contributors are welcome.

http://www.usagold.com/goldtrail/archives/goldtrailfive.html

"FOA (08/09/01; 10:27:19MT - usagold.com msg#93)
"everything to do with a gold bull market"

This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too."

So no monetary nirvana. Perhaps, just a system reset and another generation of depredation by one or more fiat hegemons?

"However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

Again IMO this makes sense if the Euro is the ultimate victor in this contest.

"Clearly, the coming drastic constriction in dollar financial trade will trigger a super "print press" response from the Fed. They will not be pushing on a string; rather picking up the ball of twine and throwing it! All the while using the old 1980s "monetary control act" that opens their use of magnetizing (monetising?) almost anything and everything. They won't be adding reserves to the banking system in the future; rather buying any and all debts from anyone that needs fresh cash. Believe it!"

FOFOA, isn't this exactly what is happening now? I ask myself, should a simpleton like me bet against someone capable of extrapolating so insightfully?

"For the first time,,,,,,,, our industrial production, along with the demand for industrial metals like silver, will fall away even as hyper inflation in prices takes hold."

FOFOA, what is the mechanism that could cause this to happen? Deflation?

FOA seems to suggest that hyper-inflation and currency collapse will occur in a later stage of this process.

"For the first time,,,,,,,, demonstrating that no other asset is equal to gold, even though promoted to be!

When the coming paper illusion price of gold is destroyed, sending its trading price way up and way down, several times, before shutdown,,,,,,,,,,,,,,"

This prediction seems to be playing out too.

"the thinner paper markets of lesser metals will be absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00 for a hundred ounce bar,,,,, that is! No less a relative price decline for the other metals is in store."

Ouch!

"Even if these actual dollar numbers prove incorrect,,,,,, relative inflation adjusted prices will show the exact same ratios to gold. The gain will truly be in gold!"

So silver doesn't have to fall in nominal terms. Gold just accelerates into a low earth orbit.

"Gold,,,,,, a wealth for changing times,,,,, a wealth as new as it is old!

thanks
TrailGuide"

Amen

FOFOA said...

Hello Costata,

As requested, here are some of my Thoughts on your comments...

""There,,,, in that destruction of paper,,,,, anything with leveraged perception attached will tarnish,,,, silver included (smile)."

This seems to be inconsistent. Destroying the leveraged paper market for gold BENEFITS gold but destroying the leveraged paper market for silver DOES NOT benefit silver.

Assuming that FOA's logic is, in fact, consistent could he be saying that the silver market is not leveraged ie. the shorts aren't naked."


I hear your complaint, and you will notice that I do not argue much against silver. At least not on this blog. I am personally in a similar situation to Topaz, overweighted in silver versus my expectations.

But you are applying the term leverage as FOA is using it in the wrong context. True, FOA confused the term himself by talking about leverage in gold (meaning the paper market) and leverage in silver (meaning the perception that the Au:Ag ratio will return to some "historic norm").

The perceived leverage he speaks of in silver is just that, perception versus gold. Same with mining stocks. Perception that we will see a repeat of the 70's. Notice he said "anything with leveraged perception attached".

I personally do not believe silver will drop like FOA said at times. Honestly, I don't think he believed it either. I think those "$50.00 for a hundred ounce bar" comments were rhetorical on his part. Even Another said that silver would perform. Although he never touted it as an alternative wealth reserve.

What I believe is that the failure of the paper markets will explode gold across the fence as I stated in my post. It will also explode silver, but not across the fence, because it does not have the backing of the giants and the 75% non-dollar part of the world that gold does.

"By official free market does FOA mean a state sanctioned market?"

I think he means that gold will have the backing of the giants. They will buy up any physical gold that is offered by those fooled by the falling paper price, while silver will not have the same level of support. "Official" means Central Banks. That is my understanding.

"if you hated our last one, you will no doubt hate this new one, too."

So no monetary nirvana."


My read of this is that the people who hate all monetary systems are the people with no money. No surprise there. The main difference, though, between the old and the new is that the people with money will have a way to protect it. Those giants (or even a few mini-giants) that were able to convert their money from the old system to gold will no doubt be fine with the new system, as they likely were with the old system.

And those that made lots of money in the old system but lost it all in the transition to Freegold will likely appreciate the new system once they start making money again.

Those looking for socialist handouts hated the old "capitalism", and will probably hate Freegold even more!

Cont...

FOFOA said...

...

"the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

Again IMO this makes sense if the Euro is the ultimate victor in this contest."


Two of the mistakes many people make when interpreting these writings is thinking that a) they are only about the introduction of the Euro, and b) that this "supposed plan of the Euro" has now failed. Both of these assumptions are wrong IMO.

Regarding "a)", the plan described by FOA and Another was one that is positioned to succeed when the tide rises, not to try to restrain the tide. It just so happens that FOA was writing at the exact time the Euro was introduced. Regarding "b)", we can see now that some things take longer than expected, and through Chaos Theory, they often unfold in unexpected ways even though the final destination never changed.

"They won't be adding reserves to the banking system in the future; rather buying any and all debts from anyone that needs fresh cash. Believe it!"

FOFOA, isn't this exactly what is happening now? I ask myself, should a simpleton like me bet against someone capable of extrapolating so insightfully?"


Here you have identified one of the seminal reasons I not only started this blog, but also reversed my own wealth preservation strategy and put off other personal interests in order to spend an inordinate amount of time writing about what was previously a foreign subject to me.

""For the first time,,,,,,,, our industrial production, along with the demand for industrial metals like silver, will fall away even as hyper inflation in prices takes hold."

FOFOA, what is the mechanism that could cause this to happen? Deflation?"


Yes, this is deflation, in economic terms and in real (golden) terms. Hyperinflation IS a deflationary collapse combined with Ben Bernanke and the entire USG "saving the debt" at all costs.

"FOA seems to suggest that hyper-inflation and currency collapse will occur in a later stage of this process."

Perhaps he was. I don't know. I think it was possible, but now it is probable that hyperinflation and Freegold will coincide. I have a hard time imagining a way they don't at this point.

"So silver doesn't have to fall in nominal terms. Gold just accelerates into a low earth orbit."

I personally agree with this statement. I think and hope silver will rise. I view my silver in two ways. If the ratio drops I will convert a good chunk into gold. Regardless of what happens I imagine my silver could become a valuable barter item in the absence of a functioning currency.

But in this function it becomes a currency. And currencies are somewhat depressed in value by their circulation velocity. Just something to toss around in your bimetallic head.

Sincerely,
FOFOA

FOFOA said...

For JR

I took a stab at your question in the open forum a couple weeks ago but forgot to post it until today. :)

raptor said...

Most of the info I've read on silver shows that silver is nearing depletion in the next ~10y... my point is that long term silver can outrun gold percentage wise, even if the gold is the monetary metal.


In short term i think silver will also beat gold percentage wise, it will just be more volatile ... i.e depending when you buy and sell you can lose more OR make more ;)

One reason why silver may not reach gold price is because if it reaches price of say 10 000 there will be incentive for it to be recycled or extracted of places where now is not economically feasible (autos,fridges...).

I've been following price movement the last year and it seems like first gold goes up, after a while silver takes off ... then when the gold goes down silver follows abit later. In both direction silver outraces gold.

So to recap silver does get drained OR flooded by the banks like gold (with all the consequences).
But once gold "actions" help to break the derivative paper game of off the commodities I think silver have a good chance to skyrocket too.
The difference is that how high the prices can be is dependent on industrial usage and to a little extent monetary demand. The cap of the price is may be where it become profitable to recycle (if the projection of the silver depletions have some merit).

what do you think ?

costata said...

raptor,

FWIW I think the projections of silver becoming extinct "in the wild" are decades from now rather than years.

At some point I think that the price of silver has to go up to a level where recycling becomes the norm rather than something that is confined to the photo processing labs.

I think the key points that were being considered in that exchange with FOFOA in relation to FOA's thoughts on silver are as follows:

1. Are the silver shorts naked or is someone with loads of silver underwriting them? eg. China and India.

FOA hinted that he thought so. If true no boom for silver unless Chindia wish it.

2. Will silver rise as much as gold under a Freegold system?

Resounding no if you believe FOA. Only gold will have the support of the Giants.

3. Will bi-metallism return?

Again if you believe FOA it appears that this is a resounding no as well.

Due, in part, to the ability to divide gold into increments down to a single atom and place it in an alloy. If gold can do the job why complicate matters?

There is also the matter of the stock to flow ratio. It strongly favours gold as the preferred "store of value" over silver.

Again, FWIW if silver has another run into the 50:1 ratio with gold I will be tempted to quit it in favour of gold. I differ on the barter issue in so far as I think that it wont go that far where I live (Australia). In other countries .... no idea.

FOFOA indicates that:

"I view my silver in two ways. If the ratio drops I will convert a good chunk into gold. Regardless of what happens I imagine my silver could become a valuable barter item in the absence of a functioning currency."

My concern is that silver and gold may go into a final divergence phase that we wont recognise until silver is, say, 80:1 or 100:1 gold and it stays sky high. So even if silver goes to US$100 gold is sitting at US$10,000 and the gap remains constant until industrial demand forces a repricing of silver.

raptor said...

I think gold-atoms in coins is non-starter... In general i don't think coins with less than 99% purity to be very feasible.. no easy way to distinguish fakes... unless the gold-coin becomes also legal tender i.e. faking of them punishable by law.. I think they are nonstarter.

Under freeGold system I don't think X% purity-coins will become widely used.

I myself definitely won't accept such ones unless there is certain way to prove.

Don't know may be 99% coins can be faked with tungsten , too... ;)

Silver coins seem much more natural and acceptable to me rather than X% gold coins...

FOFOA said...

Raptor,

My opinion on this matter is that all of your arguments are exactly what FOA was warning against when he said "perceived leverage". Things like...

"Most of the info I've read on silver shows that silver is nearing depletion in the next ~10y... my point is that long term silver can outrun gold percentage wise, even if the gold is the monetary metal...

In short term i think silver will also beat gold percentage wise, it will just be more volatile ... i.e depending when you buy and sell you can lose more OR make more ;)"


And my opinion about your next statement is that are that you are watching the rear-view mirror too closely...

"I've been following price movement the last year and it seems like first gold goes up, after a while silver takes off ... then when the gold goes down silver follows a bit later. In both direction silver outraces gold."

Everything is going to change. Don't be fooled by the calm in the eye of the storm. It is already changing behind the curtain.

Costata,

I don't believe FOA was referring to secret silver hoards backing the "naked shorts". I think he believed there is a lot more silver out there than the Silverites say, but I don't think he was alluding to a conspiracy. His "perceived leverage" statements were just that, the perception of a repeat of the 70's.

And the amount of silver in the world was immaterial to his rationale on gold. It is just another commodity with a monetary past. Bimetallism will not return. I have not seen a logical reason why it would.

I don't see any reason to buy any more silver, myself. Read my old post, Ratios.

Why buy a metal based on a perceived leverage sold to you by only a handful of analysts (out of hundreds) like Wier, Hommel, Morgan and Butler. Do you really believe it? Or do you want to believe it?

Are the hundreds of other analysts that talk mainly or only about gold, and seem to be blind to the Ted Butler view of silver, stupid? Or are they hiding something from you? Or are they just naive and simple, and you know better?

Do you realize you are taking a big risk to gain a little "leverage"? If not, then I would question why you are even here at FOFOA.

Sure silver may or may not perform in the short run. But it is the long run we are preparing for because it may be here tomorrow. Are you a trader or a saver? Are you prepared to miss the boat if FOFOA, FOA and Another are right?

Hyperinflation is a deflationary collapse in the worst way. It will demolish all industrial demand for silver just like FOA said. All that will be left is the investment demand. And without the giants and the other 75% of the world that is in love with gold not silver, will it be enough? Will the American Libertarians be enough to take "silver to the moon"? Look at the charts again. Wier, Hommel, Morgan and Butler have a pretty optimistic view of things. Way too optimistic for me.

Yes I have silver. I bought it ALL before I discovered the message that led me here. No I have not sold it yet. Yes I am prepared to miss the boat on my silver. But I am also not buying any more. But that's just me. Do what you think is best. You won't see me argue this case much because I hope to see 45:1 at some point. But I expect it to be brief.

That is all on the subject of silver for now. Go buy some if Ted Butler gets your heart racing, or Bix Wier's $6,000 silver makes you tingle inside. Or if Hommel's ideas that silver may someday be worth more than gold simply because it is more rare makes you question; why even buy gold? Then go buy some silver.

I have read it all. I don't buy it myself (anymore). It's all commodity arguments. And the commodity train is not what we are on. That is my opinion on silver.

Sincerely,
FOFOA

Jimmy said...

After reading your discussion about the monetary value of gold and silver:

I agree with FOFOA that Silver is more commodity-related than monetary-related on this moment. The same argue for Platinum, Palladium and Rhodium, it’s more industry-related.

The volume of the total reserves of silver is so big, that the value will not rise so much on the long term. Only a sharp rise on short term, then it would be very interesting to invest in the silverminers now: look to the commentaries of Bob Moriarty). Maybe after selling the ‘new’ silver would stabilizing the silverprice (there is so much silver to mine and flood the market…) On the short term very interesting to speculate with the ratio’s (buy now silver, later to swap in gold when the ratio is high, for example 1:10 (1kg gold = 10 kgs silver)).

But I’m more interested in Platinum and Rhodium than Silver because the volume of Platinum is 10 times littler than gold and Rhodium is again 10 times littler than Platinum. These are called rare earth-metals. After the crash in 2008, are the prices of these two PM’s on all time lows (maybe it could going lower, because the industry demand is bigger than investors demand…). But be aware that the Japaneses are buying Platinum like fools (see the review of Johnson Matthey)… Chineses are also looking out for this PM… And on the long term I think they will discover Rhodium as better bet than Platinum, because Michelle Obama is very proud on her jewels of Rhodium and it’s rarest PM of the earth…

And these PM’s (Platinum and Rhodium) are very good bet when the economy will recover… You will not plunge with the plunging goldprice (most scary prediction of one fool, that I couldn’t believe it: $200 per ounce gold, then it will be hard to caught this sledgehammer) But the price of Rhodium will then recover to $10.000 per ounce (ratio gold/rhodium: 50:1, then you could swap more into gold than with silver into gold…) or with platinum the same argue…

And also a very, very important argue: These PM's are all hyperinflation-hedge… So you’re safe against this ‘Precious Swan’…

Sincerely

Jimmy

Martijn said...

And as a group we measure the two sides against each other as time passes to make sure that the present and future division of the real physical world matches up with the currency and wealth scheme we are running parallel to it.

Correct. Over a short time span we measure physical objects against each other through money, while over time we measure the two sides of the fence against each other.

David Alexander said...

To complete the pie analogy, we need to add dollars as apple pie (American as apple pie) and other currencies (the pound could be a British meat pie) along with other pies to represent other assets.

If pecan pie will eventually hold most or all of the value in the world, there is value in holding a percentage share of pecan pie regardless of its current value in terms of either pumpkin pie or apple pie. However, if apple pie is expected to fall in value, it can be used to claim slices of pumpkin pie before they can be claimed with a percentage share of pecan pie which has not yet risen
in value.

The Chinese are now exchanging apple pie for pumpkin pie. The Chinese might soon have a near monopoly on some rare commodities that are important for the production of electronics. If the Chinese have a monopoly on these commodities, they will eventually be able to charge a high price regardless of whether the price for them is in dollars or gold. Therefore those who only consider the current percentage of all the pecan pie that they own will eventually lose some of this percentage when the Chinese and others ask for a large percent of pecan pie in exchange for rare slices of pumpkin pie.

Rolf said...

I would prefer silver over gold due to the gold-silver ratio as well.
Silver is currently 63x less expensive than gold. That's a bargain.
www.thesilvermountain.nl

Ore em' said...

First (of many) FOFOA Hall of Fame posts, and the first to really stitch together a lot of very macro level thoughts. It foreshadows future posts in that explaining these difficult concepts is best done using simplified examples. FOA rocks too.

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