Gold: The Ultimate Hedge Fund

For the FOFOA noobs, I'm talking about a >>personal "hedge fund"<<, as in physical gold in your own physical possession. Not a monthly paper statement that comes in the mail saying "John Doe owns x shares in the Acme Gold Hedge Fund in New Haven, Ct." I just wanted to clarify this right at the top because this is a long post and I know some of you will give up once you realize there aren't any more cool pictures. Also for the uninitiated, length and repetition on this blog are completely intentional.

Onward...

hedge vb hedged; hedging vt (14c) 1: to enclose or protect : encircle 2: to protect oneself from losing by a counterbalancing transaction (a bet) 3: to evade the risk of commitment esp. by leaving open a way of retreat 4: to protect oneself financially: as - a: to buy or sell commodity futures as a protection against loss due to price fluctuation - b: to minimize the risk of a bet

hedge fund n (1967) : an investing group usu. in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains

hedge hog n (15c) : an Old World, spiny, well fortified mammal

The dollar is the most fundamental of all markets because of the size and desire for a means of diversification.

All you need to do is to keep a weekly record of what China is spending on energy and materials to know dollar diversification is a simple business tactic for nations lacking debt.

-Jim Sinclair (today)

Our whole paradigm is about to change. It will feel like a tidal wave when it finally hits, and it will not be slow and measured. Literally everything today is completely unsustainable and one day soon, just when you least expect it, the marketplace will rise up and suddenly sieze reality. Prepare now because when the wave rises it will be too late for preparations.

The Dying Dollar

Today's dying dollar, in all of its incarnations, is a mind boggling web of contradictions. Massively inconsistent demands push and pull on an aged and crippled debt system. Inside versus outside the US are vastly different in their needs from the dollar. Wall Street versus Main Street require opposing strategies. Even the needs of the US Treasury and the Fed are not aligned. Push pull, tug of war, this is the life of a dying currency.

In its younger years the dollar had a wide berth in which to find its place, plenty of wiggle-room, a large margin for error. And yes, many errors occured, testing the limits of that margin several times along the way. This dollar is not a senior citizen that lived an easy life.

But today there is no more wiggle-room. Every error has the potential for instant death. And every crisis today requires the most extreme measures imaginable, both overt and covert, just to keep blood circulating in the patient for one more round of chemotherapy.

Debt

Truly, debt is the very essence of the dollar. The whole game has become "we must hold every debtor to his debts, in real terms, denominated in a dollar that can be expanded with ease." What a contradiction. What a hipocrisy. Every debtor but the biggest of them all, the dollar's own creator.

The dollar desperately needs a much higher gold price, denominated in dollars. It needs this so that the debt of the world CAN be serviced in real terms. It needs a very high priced gold so that it can service its own debts, with credibility. Shipping large weights of gold at low prices is not a sustainable activity for anyone. And these days, everyone seems to want the physical stuff rather than empty promises.

But for the financial industry that has sold forward into the low price of gold this would be catastrophic. And the dollar must save Wall Street in order to save the debt which is its very essence. So there will ultimately be a break between the Wall Street pricing of gold and the price paid for the physical stuff that everyone seems to want. This is inevitable, unavoidable.

Pretend and Extend

The how and why of gold suppression over the past 22-30 years is only one small piece of the pie that makes up the endgame of the dollar's timeline. One very small piece, albeit a key one for those who hope to sail through shifting paradigms, and of course a very important one to us physical gold advocates. But just like today's web of contradictions, the dollar's long path to its own end was a hodgepodge of contradictory missteps, fraud and false signals, some done for personal gain and other's with sincere intentions.

Here is another piece of the pie, presented only to add scope and perspective to our limited focus on gold:

...as far back as 1993, Fannie and Freddie were buying risky subprime and Alt-A loans, but routinely misrepresenting them as prime... I warned in the 1980s that government involvement in the housing market would inevitably produce catastrophe. Even Republicans attacked me as an enemy of home ownership.
-Fannie, Freddie, Fraud

The point is, that the dollar has been going to one extraordinary length after another, for decades now, in order to extent its timeline just a little bit farther. Talk about near-death experiences; there was 1970, 1980, 1990, 2000 and then today. And trust me when I say the dollar does not have nine lives.

But don't be too impressed with the dollar's talent for survival. None of these sequences of events requires a mastermind theory to explain it in the simplest way. It was a structural advantage that was built into the Bretton Woods system that gave the dollar its advantage that has carried it all the way to the present. An advantage that was plundered for profit along the way, but one that has always had a definite timeline, an inevitable end.

Hard Currency

The dollar's secret during the Bretton Woods years was that internationally it was considered to be as good as gold. Foreign businessmen, bankers and even central bankers held dollars as a hedge against their own currency. Holding dollars was just like holding gold, since the price of gold in dollars was fixed at $35. So as their own local currency devalued against a basket of consumer goods, their hedge, the dollar, took up the slack.

This international demand for dollars in turn kept the dollar strong and kept price inflation on the home turf of the dollar in check. As long as foreign economies were experiencing price inflation faster than the US, their products would be relatively cheap inside the US, masking the massive monetary inflation of the dollar.

And then, surprisingly, this masking effect accelerated after 1971, after gold backing was removed from the dollar. The world was now on a floating exchange rate system whereby every central banker in the world had to inflate just to keep up with the dollar if they wanted to seem economically competitive in international trade. This local inflation kept international goods ever competitive within the dollar's own currency zone and continued to conceal the dollar currency inflation that was underway, at least in the US it did.

Of course there was price inflation for everyone during the 1970's. But as the reserve currency of the world and the transactional currency for international gold and oil, the dollar's true printing volume was hidden well within a volatile global supply and demand dynamic.

And ever since the 1970's the US has enjoyed relatively falling prices on foreign-made goods. From French wine to German cars, to Italian leather, to Asian pianos, Korean TV's and cell phones, Chinese furniture, Japanese personal computers, even Arabian oil... the list goes on and on. Goods made overseas for American consumption have been relatively falling in price for Americans for decades due to the masking effect of true US monetary inflation. Meanwhile these laboring currency zones experienced higher price inflation than the US! What an illusion! What a contradiction!

The amount of dollars and dollar denominated paper assets that exist today has no correlation to the real US economy or its ability to trade goods in exchange for those dollars at current prices. This reality will soon wash over the world like a tidal wave.

Hedging

According to Wikipedia the first hedge fund was created in 1949 when Alfred W. Jones formulated a method for going long certain securities while shorting others in order to neutralize the risk of movements in the overall market. He was balancing his exposure to uncontrollable but inevitable cycles.

Today, the big money is all hedged. Almost no one with a sizable account holds only long position bets. The market isn't balanced by 50% betting on one side and 50% betting on the other. It is balanced within each portfolio through leveraged hedges. And it is the evolution of these hedging instruments that has both extended the life of the dollar like a steroid injection and at the same time, sealed its fate.

During Bretton Woods, foreigners held "good as gold" dollars, "the hard currency", as a hedge against their local currency risks. But once those paper gold derivatives we like to call FRNs grew too numerous, all bets were canceled, conversion denied, and those who still held the paper lost out in the immediate devaluation. The same thing happened 38 years earlier... and the same thing is happening 38 years later!

In the 1970's the liberated physical gold market proved to be an excellent hedge against both currency and default risk. Then in the 1980's we were treated to an amazing growth spurt in electronic exchange traded futures and new global exchanges trading these derivative hedges, ultimately netting more than 90 different futures and futures options exchanges worldwide.

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide.

We are now at the "end time run" in fiat dollar production that will soon crush all hedging vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system (see: Central Banks), will outrun everything by a wide margin. No matter the derivative's hold on it! Just like gold to the pre-'71 dollar, paper and physical will soon blast off in opposite directions.

Paper Promise Hedges

The purpose of modern paper hedging instruments is no longer to simply balance a portfolio with opposing bets, but it has instead evolved into a risk dispersion game. Like an insurance company, the writers of these instruments issue highly leveraged promises of protection from the risks inherent (and inevitable) in an unstable and unsustainable system.

The two main risks that are hedged today are default and currency risk. The primary instruments for hedging these risks are credit default swaps (CDS) for the former and interest rate swaps (IRS) for the latter. But the sheer number of promises that have been issued (for a fee) has become so large that it has now become the market driving force.

Think about this. The hedges are now guiding the markets. What do you think will happen when they all of a sudden fail to function? The financial world today turns on dollar assets that are all hedged, not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Today's Fed policy of saving Wall Street at all costs is in direct opposition to the risk transferring dynamic of derivatives that has kept the dollar alive. Contradictory forces! Of course the alternative would have been almost as devastating, but that's the problem with Catch-22's.

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.

Please read the following story about Harvard University's experience with derivatives, and note the key players who were true believers in this structural system as they led their own institution down this poisoned path. I realize it is long, but I have provided an excerpted, abbreviated version.

Harvard Swaps Are So Toxic Even Summers Won't Explain

Excerpts:
Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps.

Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers.

Borrowers use swaps to match the type of interest rates on their debt with the rates on their income, which can help reduce borrowing costs. Lenders and speculators use swaps to profit from changes in the direction of interest rates. A bet on higher rates, for example, means paying fixed rates and receiving variable. At Harvard, nobody anticipated some interest rates going to zero, making the university’s financing a speculative disaster. [Note that they were "betting" on something controlled by Central Bankers, not by market forces]

Harvard’s failed bet helped plunge the school into a liquidity crisis in late 2008. Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later.

Harvard would have avoided paying the costs of its swap obligations by waiting. Its banks, including JPMorgan Chase & Co., headed by James Dimon, were demanding cash collateral payments -- ultimately totaling almost $1 billion -- that Harvard in 2004 had agreed to pay if the value of the swaps fell. At least $1.8 billion of the swaps the school held were with JPMorgan, said a person familiar with the agreements. Dimon, a 1982 Harvard Business School alumnus, declined to comment.

Summers became [Harvard] president in July 2001, after serving as U.S. Treasury Secretary. He earned a Ph.D. in economics from Harvard, and became a tenured professor there at age 28. He served from 1991 to 1993 as chief economist at the World Bank, which initiated the first interest-rate swap with IBM in 1981. As president and as a member of the Harvard Corp., Summers approved the decision to use the swaps. Summers, who left Harvard in 2006, declined to comment.

When the plan was made public in 2005, Harvard’s financial team had been busy for more than a year behind the scenes, devising a financing strategy for the project using interest-rate swaps. These derivatives enable borrowers to exchange their periodic interest payments. They typically involve the exchange of variable-rate payments on a set amount of money for another borrower’s fixed-rate payments.

The agreements were so-called forward swaps, providing a fixed rate before the bonds were actually sold. Harvard was betting in 2004 that interest rates would rise by the time it needed to borrow.

While the university could have paid banks for options on the borrowing rates, the swaps required no money up front.

“There have been lots of forward swaps, but out longer than three years is relatively rare,” Shapiro said in a telephone interview. That duration increases the risk, because the longer the term of the contract, the more volatile the value of the swap, he said.

Corporations might use derivatives to lower their borrowing costs as many as four years before a bond sale, according to bankers who sell derivatives. Anadarko Petroleum Corp. used the swap market in December 2008 and January 2009 to secure rates for $3 billion it plans to refinance in October 2011 and October 2012

Other members of Harvard Corp. in 2004 and 2005, who served with Summers and Rothenberg, were former U.S. Treasury Secretary Robert Rubin, Summers’s previous boss and predecessor at the U.S. Treasury, who was an instrumental supporter of his bid for the Harvard presidency

All except Rothenberg declined to comment or didn't return telephone calls.

Harvard University’s finance staff worked with JPMorgan to develop the size and the length of the forward-swap agreements.

For more than 20 years, investment banks such as Goldman Sachs Group Inc., JPMorgan, and Citigroup Inc., all based in New York, have been selling swaps as a way for schools, towns and nonprofits to reduce interest costs and protect against rising interest payments on variable-rate debt. The swap agreements can be terminated if either the bank or the issuer is willing to pay a fee, which varies with interest rates.

“Swaps have become widely accepted by the rating agencies [Think of them as an "FDIC sticker"] as an appropriate financial tool,” according to a slide entitled “Swaps Can Be Beneficial” that was used in a 2007 Citigroup presentation to the Florida Government Finance Officers Association. Debt issuers can “easily unwind the swap for a market-based termination payment/receipt,” the slide said.

‘Rapid Meltdown’

The problem resulted from the rapid meltdown in the markets, which culminated in November when short-term interest rates and swaps rates collapsed.”

After credit markets seized up in 2007, central banks worldwide pushed some bank lending rates to zero in their effort to rescue the financial system.

‘Structural Problem’

Harvard not only lost money on the swaps last year. The value of its endowment tumbled a record 30 percent to $26 billion from its peak of $36.9 billion in June 2008, and its cash account lost $1.8 billion, according to Harvard’s most recent annual report. [They lost $11 billion in a year... that's some fancy Ivy League PhD hedging, eh?]

“They have a structural problem,” [Is he talking about the entire dollar financial system?] Lewis said in a telephone interview. “There’s something systemically wrong with [the dollar?] Harvard Corp. It’s too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking.” [Who's that? The Fed you say?]

By June 2005, the value of the swaps tied to Harvard’s debt was negative $460.8 million, meaning that’s how much it would have to pay the banks to terminate the agreements, according to the school’s annual report that year. [This was one freakin' year after the swaps were created!]

By 2008, Harvard had 19 swap contracts on $3.5 billion of debt with JPMorgan, Goldman Sachs, New York-based Morgan Stanley, and Charlotte, North Carolina-based Bank of America Corp., including the swaps for Allston, according to a bond- ratings report by Standard & Poor’s released on Jan. 18, 2008.

Financial Burden

The swaps became a financial burden [That is, the dollar's support structure became a burden...] last year as their value fell and collateral postings rose. In a contract with Goldman Sachs, the school agreed to post cash if the swaps’ value fell below $5 million, according to a copy obtained by Bloomberg News. The collateral postings with the banks approached $1 billion late last year as central banks slashed their target rates, according to people familiar with the situation.

The value of Harvard’s swaps plunged and its need for cash soared. Under contracts signed in 2004, Harvard had to post larger and larger amounts of collateral to cover the negative value of the swaps; the total amount would approach $1 billion.

Tumbling Index

On Nov. 13, the index used to value the agreements, the U.S. dollar 30-year swap rate, closed at 4.247 percent. By the time Harvard held its bond sale Dec. 8, the swap index had tumbled to 2.7575 percent. Harvard exited three of its swaps tied to $431 million debt on Dec. 9, when the benchmark fell again to 2.6885 percent. The interest-rate swap market reached a record low of 2.363 percent on Dec. 18.

Harvard’s decision to borrow money came at a time when the difference, or spread, between yields on corporate and U.S. Treasury securities was the widest since at least 1990, according to data from Barclays Plc. That meant AAA-rated Harvard was selling bonds when the market was demanding the biggest premium in at least 18 years.

Unwinding Swap

The school on Dec. 12 paid JPMorgan $34.5 million from the tax-exempt bond proceeds to unwind a swap tied to $205.9 million of variable-rate bonds it sold for capital projects, according to documents obtained from the Massachusetts financing authority. It also paid Goldman Sachs $41.6 million on Dec. 9 and $23.2 million on Dec. 11 to end agreements on another $226.8 million of existing debt. Harvard didn't disclose recipients of the other termination payments because it paid them from the taxable bonds.

Stability, Safety

“In evaluating our liquidity position, we wanted to get ourselves some stability and some safety,” he said in an Oct. 16 interview this year at Harvard. “It was to take the losses now rather than run the risk of having further losses if we continued to hold on to the positions.”

Opposing Regulation

Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures Trading Commission’s attempt in 1998 to regulate so-called over-the-counter derivatives, which included agreements like interest rate swaps. At the time, Summers was Rubin’s deputy secretary.

Now Summers is leading the Obama administration’s effort to write stricter rules for the derivatives market “to protect the American people,” he said in October at a conference in New York sponsored by The Economist magazine.

Harvard might have considered it a conservative step to lock in rates when they were low, said Shapiro, the New Jersey- based swap adviser.

“You can be very big and very rich and very smart and still get things wrong,” Shapiro said.

Please don't miss the point here. Harvard's story is not part of the cause of the ongoing systemic collapse, but it is a visible symptom of the rot which has permeated the dollar's structural skeleton. Today's dollar is so brittle that it requires a hedging mega-structure so leveraged, so large, and so unstable that it must... MUST collapse under its own weight. Some of it will be replaced with titanium implants (monetized) in an effort to save the banks, much like AIG was "rescued". Other parts will be dumped into a market that wants nothing to do with them in an effort to extract pennies on the dollar. Net effect -- dollar disintegration.

A fiat system cannot exist without a functioning counterweight, and today's mountain of derivatives is failing at this task.

So where does gold fit into all of this?

Well, the gold market is part of this massive derivative complex that is currently counterbalancing and supporting the dollar.

Today, countless gold analysts around the world acknowledge that gold is a manipulated item. While being on the right track, they are still using the wrong perception to grasp the dynamics of these markets. This lack of perception is what keeps them from positioning themselves and other gold people correctly: positioned to gain wealth when a stake is finally driven through the heart of this paper beast.

The efforts of most goldbugs are focused in one direction; to once again make our paper gold markets reflect the true rarity and actual fundamental value of physical gold bullion. I borrow a line from Mr. Moldbug to describe this position: "They are aware that this system does not work at all, but this does not lead them to question the entire tradition. Indeed, since their mind exists inside that tradition, they interpret it as mere reality." In other words, the chances of "gold to the moon" on the COMEX are the same as the US government returning to a gold standard: exactly zero!

FOA: Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

While so many of our gold bulls salivate at the prospects of some player calling for delivery and driving the gold derivatives market to the moon; it ain't gonna happen! Our world of dollar based gold derivatives has grown so large and become so integrated into supporting (hedging) international dollar assets, the central banks will band together to crush any delivery drive.

This is in the ECBs interest as I will explain in a moment.

If some big player said he was going to take 100 million ozs out of the paper gold market, the Central Bank systems would just order him to trade out for liquidation only and go to the cash market to buy his gold. Don't think I'm confusing Comex positions and their rules as being different from the rest of the world gold market. What works on comex works everywhere when the system is at risk. The controlling governments, who's domain Bullion Banks reside in, would, could and will force those holders of bank busting positions to simply cash out for the good of their system.

How many postulated, even just a few years ago, that with the fed expanding the money supply by a year to date "one trillion"; that paper gold could not reflect this inflation? This only further confirms that this form of market "hedge" is failing to function for its owners.

Paper gold derivatives became a major force in allowing this last, end time demand for dollars and subsequent surge in its value. This is why Another said it would run way up, even while being inflated, before the end would come.

The leverage today will be in a physical gold position, not any other form of gold ownership. By accumulating physical gold today, we are truly walking in the footsteps of giants; advancing with them as they work thru this singular, long term political move.


You know, modern financial engineering incorporates all the physical factors of "just in time delivery" management, and labels it "just in time dispersion of risk". In other words: they try to take all the perfect workings of a mechanical operation and replicate it into financial dealings. But, financial instruments, while understood by us as being paper bonds, stocks and bank accounts, are actually completely organic! They are, like money, really just concepts of value we hold in our head; not oil filters or fuel pumps we hold in our hands. The "worth" of things is a "value" we mentally create thru countless interactions with each other as we go thru the day: interactions we call "the markets".

It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. (It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

In our first real test of "just in time risk management" our Fed is and will provide buying power to gobble up any and all risk, "just in time" and without end. It seems that when our "free market" created assets are threatened to be exposed as an illusion of value, Americans embrace any and every form of government socialistic bailout known to man. Perhaps, our much exampled form of a "free market driven economy" was little more than "free as long as derivative risk is covered with social money"... "just in time".

Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy. Our wealth is and was nothing but an illusion of safety and created in our own minds. Within this mix is contained all the various gold derivatives we have come to love so well. The future failure of a gold contract does not mean that the long holder gets his price or his underlying good; it means his derivative fails to shelter his exposure by matching his other loses. In terms closer to a gold bug's heart; paper gold in any form will not match up anywhere near the price of free traded physical gold.

We are on the road to high priced gold and under priced derivatives. The same thrust will be apparent in all financial derivatives. Further, we are on the road to a fully "cash settled" contract market for gold; here in the US and abroad. In the time ahead, just before serious real price inflation rears its head, look for most all dollar based contract commodities markets to be restructured into pure "undeliverable" cash settlement markets. Markets that, also, many gold producers will be forced to use. The day of big premiums on gold coins and bullion is coming and coming fast.

Implore your minds to hearken back to what is real and alive in our world. While standing here among the mountains and trees, our financial perceptions begin a change; recasting our thoughts of accounts and credits into hazy feelings of virtual wealth we never really knew. Suddenly, bonds, stocks and paper investments descend to lower levels of importance.

It was as true yesterday as it is today, and will again be so tomorrow; that the touchable things in life are what make us whole as much as they make us wealthy. Our bodies are real, so too is the earth and all upon it: is it such an unreason that our wealth should not be real also?

For myself and many others that hear our message, the answer is no. No, it is not unreasonable to clearly own and touch what our efforts in life have brought us. I suspect that during this era, within this moment in time, events will eventually define such logic more clearly and prove it to be sound beyond any doubt.

Times change, my friends, history moves on and so too will mankind's perception of wealth. Our perceptions will evolve, not in a forward matter, but rather in an ages old oscillation that returns us back to saving wealth itself; instead of a paper promise of wealth. With a regularity of seasons, as sure as the phases of moons, a changing of "political will" is once again about to redefine what our virtual written worth really is. In response to these changes, often made with little more than the stroke of a pen, mankind will seek a secure position. A position that will more so value an ancient wealth: a golden savings that no politicians could ever write the value of.

What "IS" firmly grasped by every major player in this market is: -- If at any time a majority in the market were to attempt to use these paper markets to extract a gross amount of physical product, the rules would not be changed! Rather, the rules would be enforced and the players would be cashed out and sent into the real physical markets to do their deals. Only then would fundamental supply and demand, based on gross dollar liquidity, create a "non virtual" real price for the product.

We wanted a free market and a free market is what we got: -- but it doesn't move the virtual price toward the gold bull's favor. Now they are mad because their bets are countered while physical gold advocates scoop up an almost free metal: -- using the liquidity that dollar inflation is producing. Truly, if ever there was a way to profit from gold mining, today, it's by buying this almost free physical gold the mines are producing; while mine players and paper gamblers pound their wealth into the dirt. This is what PGAs call benefiting from the leverage in mining (smile).

In a convoluted stretch of reason, "virtual" gold bulls wanted these markets to be regulated so the supply side of these paper creations would pay off on their bets. The bulls wanted to be able to create all the buying leverage they wanted while the bears would be locked into delivering a metal who's total world amounts are fixed. The bulls wanted free leverage without the using full amounts of real cash but wanted the bears to mark to the market with real gold buying power for every wager they made. If there is manipulation in our paper gold arena, it's in this area of investor understanding. What these markets "truly represent" is the misconception about gold in our time.

Western paper gold bulls fueled the creation of these markets by supplying the demand for such gold vehicles and governments helped their currencies by using these same as FDIC-like "insurance stickers" on their reserve positions. They all wanted a place where they could bet on gold, using maximum leverage, and not have to fully fund the physical delivery of bullion if it came to that.

Somehow in the process, everyone was thinking they were doing an end run around the slow thinking, stupid gold advocates the world over. Hoping that coin and bullion buyers, who were creating the physical demand, would one day feed the leveraged paper profits of paper players. Hoping that the rules would be changed just enough so gold could be kept in a nice tight range.

We are seeing the results today of this fraud of a paper game as it comes to an end. It's not nice to watch. Busting not only the dollar factions that played this sector for their best interest, but also denying any profits to the whole gold industry that chose to ignore the long term best interest of gold's market value. The same industry that decided to cater to the singular greed of a small group by sacrificing high gold prices so that leveraged plays would work. In the process they played a political game to limit gold prices from getting too high and will now suffer on the altar of a "gold price without a range".

They can call the outcome anything they want: "bullion at a premium to comex" or "comex at a discount to bullion". Either way the whole system is destined to split and leave the paper players holding an incredible bag as bullion runs away with the help of fundamental gold factions in Europe.

Many of you are just now having that "a-ha" moment, when the light bulb goes off and you finally realize just how the dollar is doomed and gold will be set free. But then many of you "newly enlightened" ones say "ahh, but this could take decades to unfold." What you don't understand is that it isn't beginning now simply because your understanding is. No, it began 40 years ago and more, and we are right now knee-deep in the final end game.

More from Wikipedia: "As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied to certain funds that do not hedge their investments, and in particular to funds using "hedging" methods to increase rather than reduce risk, with the expectation of increasing the return on their investment.

Hedge funds are typically open only to a limited range of professional or wealthy investors."

But right now, for perhaps the first time in history, individuals can join central bankers and the true Giants of the world by participating in the ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge itself as the key investment with the most leverage, with the expectation of life-changing returns. And the main differences between this and traditional hedge funds are 1) much less risk, and 2) it is open to ALL individuals, including you!

I'll leave you now with this poignant message from the Tower...

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgement, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

Sincerely,
FOFOA