Thursday, May 27, 2010

Reflection


One good thing that has come out of this blog is that new people are discovering ANOTHER and FOA every day. Another positive development is that gold price predictions are no longer capped at $2,000. Of course I don't presume to give credit for this second development to my small blog, but these are just two significant changes that I have observed since starting it in Aug. 2008.

Back then A/FOA were ignored and/or banned everywhere I looked. I found only one other person on the entire Internet who had read the archives and wanted to talk about them. Since then I have found hundreds more while gathering more than half a million total visits from 180,000 unique IP addresses.

Also back then, the highest gold price predictions I could find were $1,650 on JSMineset and $2,000 from Peter Schiff and Eric Janszen. That is, until I read A/FOA's predictions of $10,000 to $30,000 from back in 1997. Today high predictions are not uncommon at all. In fact, just yesterday Ben Davies was on CNBC talking about gold at $36,000 per ounce! (I wonder if he reads my blog! ;)














But as I believe I definitively demonstrated in my post Gold: The Ultimate Un-Bubble, the future price of gold is completely arbitrary. Unlike everything else, it has no economic restraints whatsoever, therefore it can go as high as is needed.

The gold base has always existed and has always been vital to whatever fictional monetary system was layered on top of it. The gold base is the volume of gold times the price of gold (GB=VOGxPOG). And this base is de facto vital on all scales, from global to national to individual.

The gold base not only exerts pressure on monetary systems but it also receives pressure from them. There is a symbiotic relationship between the gold base and monetary systems, whether money is exchangeable for gold at the bank or not.

Of course at one time physical gold and silver were the monetary system, and nothing else was considered money. But today, and for the past several systems the symbiosis between the gold base and money has been very active.

As monetary systems mature, be they a gold standard (pre-1922), the gold exchange standard (1922-1971) or the dollar reserve standard (1971-present), the price and volume of gold (the gold base) is under constant pressure to expand. Concurrently, whenever the gold base is restrained from its necessary and natural expansion (either through mining restriction or price appreciation restriction/fixed or semi-fixed parity) it exerts pressure back on the monetary system.

This symbiotic dynamic becomes a classic feedback loop that always ends in 1) a new or reworked monetary system and 2) an explosive expansion of the gold base. Today is no different.

What I write about here at FOFOA is the very meaning of this inevitable end, this "phase transition". And what this phase transition, or paradigm shift, will look like from the other side. I try to write about it from as many different perspectives and angles as I can come up with to not only share my understanding, but also to test my understanding. And so far so good. Here are a few recommended posts for the newcomers who find this subject interesting...

The 21st Century Bank Run
GOLD & MONEY: More Than Meets the Eye
Synthesis
Greece is the Word
Living in a Powder Keg and Giving Off Sparks
Gold: The Ultimate Hedge Fund
I can feel it coming...
Gold: The Ultimate Wealth Reserve
Metamorphosis
Gold is Wealth
Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3
Fair Value Gold?
Your Own, Personal, Freegold
Say Goodbye to Wall Street
Shake the Disease
The End of a Currency
No Free Lunch
Confiscation Anatomy - A Different View
The Waterfall Effect
The Call of the Century
Bondage or Freegold?
Call Me Contrarian
The Triumvirate of Wealth
Dead End
The Bermuda Triangle of Currency
Mona Lisa or Ben Franklin?
Weimar Reloaded
Taking Delivery of Physical
The Underwater Beach Ball Effect
Worst Case Scenario (12" Remix)
The Judgement of Value
All Paper is STILL a short position on gold
Bankrupt Economics
On "Hyperinflation"

As for price prediction calls, these are most difficult to make, second only to timing. Because once you realize what is actually happening, that paper gold markets like COMEX, the LBMA, GLD and others are the new restraining factor in gold base expansion, you must come to the ultimate conclusion that the next explosive gold base expansion will be a price reset of physical gold only. And that it must be large enough to solve today's biggest problem, infinite debt, or put another way, debt without any limit.

What makes it doubly difficult for the reader of such price predictions is that almost no gold-price prognosticators differentiate between inflation-adjusted and non-inflation-adjusted predictions. And rest assured, they do this for a reason! That reason is that by reserving differentiation, they utilize inflation as a hedge for their predictions. In other words, inflation will ALWAYS prove them correct in the long run.

But I have never taken such liberties. I have always been clear that when I guess at the future price of gold, it is in inflation-adjusted dollars. That is to say, my predictions are in today's dollar's present purchasing power. Non-inflation-adjusted or nominal gold prices in the future are simply impossible to predict. Just look at Zimbabwe. An ounce of gold could easily pay off the US national debt, nominally, if history is any guide.

But perhaps if the debt would have been allowed to collapse and default along with the banking system and a few of the most profligate governments, the marketplace would have only imposed a gold base expansion to somewhere between $10,000-$20,000 per ounce, that is, in today's dollars. But this was never to be.

We cannot know where the market will take the physical-only price of gold in order to solve today's debt problem. But we do know a few things that can give us a clue. 1) It will be a phase transition, or a paradigm shift that will knock your socks off. As someone recently wrote, you can heat water to 99 degrees Celsius and it will not boil. But go one degree higher and matter itself changes form. This is a phase transition. 2) The gold base expansion/phase transition will be completely unrestrained by economic forces, unlike any other physical material like oil, for example. In other words, it will appear completely arbitrary by all rational expectations and past ratios. The only scale on which it will make any sense is that it will solve the global debt problem.

But beware! This "market solution" to the global debt problem may not be as pleasant as you think. It might be, to borrow a fantastic phrase from Dan Amerman, a reluctant state of “Accidental Virtue”, to which we will all be dragged kicking and screaming.

The systemic rise of global imbalance, the creation of massive amounts of new and ever-more-worthless government digits, all to shore up unimaginable debt mountains held at the banks and central banks... all this and more, now demands settlement in very scarce physical gold metal. And with no international "window" to deliver such metal settlement at today's price, it must come from the global gold stock, from the holders of physical gold. The "flow" at today's price is not nearly sufficient. But the "stock" is plenty big... at the right price.

Gold must become free to settle all the massive imbalances that have accumulated for more than 88 years.

Before 1922, domestic debt claims in each nation were the "paper gold" of the day, as they were the only thing other than physical gold that the banks could hold in reserve and issue more credit upon during the gold standard.

After 1922 "paper gold" was expanded to also include British Pound Sterling and US dollars. But the banks receiving these new "paper gold reserves" (dollars and pounds) deposited them back in their banks of creation in London and New York. And as such, these "international paper gold reserves" doubled the money supply in amounts equal to all balance-of-payment deficits run by England and America. New credit was issued upon these reserves in both the surplus-running country and the deficit country of origin and deposit.

So the US and UK deficits never contracted the aggregate purchasing power of those countries after 1922, the way deficit settlements are supposed to. Instead, they exported their monetary inflation outward to the surplus-running countries. This was the very beginning of the US exorbitant privilege that continues to this day.

The collapse of the credit expansion bubble built upon this "double pyramid" contributed to the amplification of a simple recession into the Great Depression of the 1930's. This unforeseen development forced the overnight devaluation of all "paper gold" worldwide.

Following World War II the US dollar became the only "paper gold" accepted as international bank reserves, doubling monetary base in amounts equal to the crescendo that became the US trade deficit for the next 27 years. This "paper gold" pyramid finally collapsed in 1971, sending the price of gold up more than 2,000% in 8 short years.

And from 1980 until today, well, you all know what the modern "paper gold" looks like. And yes, the banks' reserves now consist of domestic debt claims, US dollars, "paper gold", other foreign currency, and yes, even foreign debt claims today. And yes, the recycling of trade deficit payments back to the country of issue continues to multiply the reserve base of the global banking system, the same way it did in 1922.

The "miracle" of modern banking is that all this exponential monetary inflation is cycled directly into assets and "investments". In other words, it is funneled into DEBT! It rarely hits the grocery store, at least not at levels that the people notice. Not yet that is.

But what this all means is that economic growth has no hope of ever keeping up with "financial growth". To stock market investors at certain times in history, like 1999, this seems like a new manna from heaven. Or for those lucky few who bought homes in 2000 and sold them in 2006. What a miracle!

But the reality is that we have a big problem today. And that problem is all the debt that is simply unserviceable on the physical plane of reality, let alone ever paying back the principle on collateral worth half what it used to be worth. This is a really big problem, and it will be resolved in a really big way.

Now, what is not going to happen this time like times in the past is that no one is going to manually reset the gold base at a new level to make things temporarily sustainable again. First of all, there is no gold window like before where they can reset the price. There is no sovereign hoard being dished out for them to protect. In fact, the higher the price goes, the more existing hoards are protected!

So, the way I have started looking at this, from a macro perspective, is; What will market forces do to fix the problem? And the answer is that the market will recapitalize itself through the gold base, just as it has done for thousands of years. This is a free market force I am talking about. It will not be resisted by those in power when it happens because they have bigger problems to worry about than trying to restrain the value of their only true reserves below market value.

This action I'm talking about could come at any moment. It is not something that relies on a specific metric hitting a specific critical number. Like a deep-water oil reserve, the pressure is already there, and the hole has already been drilled. All it will take is an event... any event. Like the forced default of a sovereign nation on its debt service, or a failed auction of new debt from Earth's biggest debtor, or a bad stock market crash, or a failure to deliver physical gold to the wrong recipient... or whatever. The list is long.

And the realization that I have personally come to is that the market wants to recapitalize the world, default some of the global debt and settle the rest of it after recapitalization. This is not a human-managed restructuring I am talking about. It is "the mountain coming down" via gravity. So in very rough terms I am looking for the worst transgressors to have to part with roughly half of their gold after revaluation. This will leave them with enough real capital to rebuild within the new, emergent meritocracy... the reluctant state of “Accidental Virtue”.

So the point of this post, what I hope will sink in, is that the future "inflation-adjusted" price of gold, the price in TODAY'S dollars, can literally be anything. Forget ratios. Forget technical analysis. Focus only on the debt! And this epiphany... this realization... this discovery... should be enough to convince anyone to get on the receiving end of this "very unfair" transfer of wealth. Actually, fair or not matters little. What else is fair in this world? Seriously. I am not here to pass on my moral fortitude, only to share my observations and understanding.

And here is the definitive issue. Does gold's "future price" need to suffice at a "gold window" in exchange for dollars? No. So does it need to relate to the $5T in existing monetary base? No. Does it need to credibly establish convertibility with all existing debt? Yes! And how much of the world's gold needs to establish this credibility? All of it? The stock... the flow? The answer is that the global stock doesn't matter. And present flow is irrelevant. What matters most is future flow and the existing stock of the biggest debtors. This is the incalculable calculation that will lead you to the future price of gold.

I put it most likely around $100K, but at least somewhere between $50K and... well... here's Steve Hickel's take...

Those [nations] with high dollar reserves and low gold reserves are exactly the point of a gold revaluation. By the US divesting itself of one-half of its gold reserves (let’s have an audit first, however) of 261M ounces of yellow at a value of $500K/ounce, it can swap $500K for each ounce of one-half of its reserves. In the end, China and others will not have any (or at least fewer) dollar reserves and much higher gold reserves and the US will (if it has not already divested without our knowledge or consent) still have half of its reserves.

Preferred buyers of US gold are those holding large tranches of US Debt. We have all heard (read) here that $60T appears to be the value of all US debt both internal and external. I would belabor the math again, but to summarize, if the US swapped half of its gold for $60T in debt, it would have to do so at $500K/oz. plus or minus a few 10’s of thousand dollars per ounce.

A one-time quick and unexpected valuation of gold at $500K per ounce, of course, would have unintended consequences. But let’s suppose the US and IMF decided as a measure to support International currencies [and debt] that such a one-time act was warranted (this was one of the measures of the G20 goals — "support international currencies"). It cannot be worse than the unintended consequences were are seeing by adding more debt on debt. Those left out in the cold regarding gold's value would be those countries such as the UK, who under PM Brown, divested most of its gold holdings at the low in the market. It would also leave out non-holders of gold assets in the investor class worldwide.

Again, I point out the absolute ridiculous nature of gold pundits who predict a price of $1600 as a high-mark for gold. It may hit $1600... on its way to $500K/oz... but only for a few seconds. I believe the reason there is the gold battle documented earlier today between Asia and the US gold markets is because there is a line in the sand. If this is breached then as we have heard cited, “we stare into the abyss….” I take this to mean that the dollar will be toast.

The cost of high gold in the eyes of those who spend so much to keep gold down (the Fed and some Banks who act as its agents) is a failed currency. Time does not favor the anti-gold. They who seek to control the paper gold market through outright intervention (manipulation) and secret back-room deals, have already lost the war. It is only a matter of time now that such matters will resolve themselves. Ammunition is running low. We only hope that US gold is not running low too — as I fear they may have tapped the hidden wealth of America to keep Humpty Dumpty propped up on the wall a tad longer.

Time for America to come clean and pay its debts…


Here is one final Thought for you all to ponder. Gold is not an investment. It is not insurance. Gold is the wealth consolidator.

I'll end this post of reflection with what I submitted as my "bio" to a couple spotlight sites. It consists solely of a few poignant quotes from two of the best friends I never met...

FOFOA
A Tribute to the Thoughts of Another and his Friend

Gold is about understanding the events that brought us here, and those still unfolding

"Brokers and traders will show you, "turn your gold into wealth", "put it to productive use, Trade It"! "Sell your gold and buy it again, many times". "Do this and find the value lost from your youth"!

But I say, spend your time in the company of truly wealthy ones, see how they make gold lie very still! Know this now, the world will again, in your time, feel value in gold as never before. And that value will be as the "productive use of holding wealth thru the fire of change". "Yes, you can also walk in the footsteps of giants".

"The economic game is ending! Watch closely as the world currencies and markets fall one by one. Watch in absolute wonder as the demand for oil plunges and its price goes thru the roof. Yes, oil stocks will crash with the markets. And gold? You will never know its price. It will stop all trading as it slices thru $10,000+."

"Sir, the world is going to change, and the rules of engagement will also change. Gold will be repriced, once! It will be enough for your time of life."

"Finally, we will all have a wealth reserve that places our footing in life on equal ground with the giants around us. Gold! Understanding the events that got us here and how they will unfold before us is what the Gold Trail is all about."

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists 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!"

"What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work."

"Hear me now, what the wealthy and powerful know: real value does not have to always be stated or converted throughout time. It need only be repriced once during the experience of life, that will be much more than enough!"

Sincerely,
FOFOA

135 comments:

radix46 said...

FOFOA,

With every post, the veil is lifted a little more..... Thank you.

One aspect that I cannot get my head around, is what will happen to silver.

Could you give any thoughts on this matter?

The Sim said...

One of your best posts yet, thanks.

The Sim said...

Gold is the anti-armageddon play

Fauvi said...

Very good exposé, inteligible for every simlpleton.Plausible as the only solution left to the debt saturation.
Question:
How do you see the societal development when this happens?
Why is the fight against freegold so fierceley fought by the US? Is it because they have less gold than assumed or they want to keep alive the hegemonial currency for longer?
Which entity should be most interested in freegold emergence (countries, CBs,IMF, Worldbank)?
Could this entity "provoke" Freegold?

Jimmy said...

Probably one of the most hot items ever posted on zerohedge: Goldprice at 1.700 dollar/ounce in Greece...

James said...

Excellent post. However, surely this revaluation-of-gold-to-repay-sovereign-debt scenario would, indeed could, only happen if the USA really does have the 8,000 tonnes of unadulterated gold which it claims?

If the USA has already divested itself of its gold, then it will do everything in its power to prevent such a revaluation.

Martijn said...

Jimmy,

That article shows that the link between paper and physical gold has at least temporarily been broken in Greece.

However, we have recently seen the same in Vietnam (if I'm not mistaken), so therefore this does not have to indicate the start of the big collapse, although it does reinforce the message of A/FOA/FOFOA.

Martijn said...

If the USA has already divested itself of its gold, then it will do everything in its power to prevent such a revaluation.

I would do so regardless as printing the reserve currency brings them enormous benefits.

Should they not have the gold (personally I tend to believe they still have most of it) they will just have to print/devalue some more.

They still have a massive army so they'll probably get out of this somewhat alright.

capt goodvibes said...

FOFOA, I take off my hat, sir. Well done.

@radix46
How many Central Banks hold Silver reserves?

@Fauvi
The US has the most to lose. Exorbitant privilege?

@James
If the US has less gold, they have even more to lose.
The rest of the world has about had enough of the US, in case the US hasn't noticed. They gonna declare war on everyone?

capt goodvibes said...

I suspect 'Cash$Gold' et al is Uncle Sam's attempt to play a little catch up. Confiscation ain't gonna fly this time.

radix46 said...

Capt Goodvibes,

I don't know how many central banks hold silver, but I would imagine not many as you asked the question.

However, silver is still a hard asset that cannot be printed into oblivion. It is also much cheaper than gold and hence more accesible to the masses.

Being cheaper, silver is more practical to get hold of if the price rises. At $100,000 per ounce of gold, most people may only be able to afford at most a few 100ths of an ounce. Do you know where I might be able to buy 1/100th ounce of gold?

With a much larger potential market and a much smaller above ground supply, might this then push the price of silver above gold, and hence make it more desirable to central banks or wealthier people?

Perhaps it might become the new gold? Just because things have been one way in the passed, does not mean that they will continue this way in the future.

GoldSubject said...

Wonderful. Every post casts additional light on this most murky of topics. Thank you!

capt goodvibes said...

Radix46,

IMHO, for what it is worth, I think silver will do okay, maybe even really okay, but it is not gold.
A whole lot better than paper, though!

FOFOA has recently posted thoughts relating to silver at http://www.goldsubject.com/thoughts-on-silver-as-a-store-of-value/

A quote I read recently (I don't know who to attribute it to, sorry):
Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves.

Martijn said...

The rest of the world has about had enough of the US, in case the US hasn't noticed. They gonna declare war on everyone?

Not fulfilling their obligations (by not paying their debts) would require others to declare war.

France did not do that in '71 and I guess this time it will be the same.

GoldSubject said...

Thanks for the link, Jimmy!

I am not at all surprised that the Greeks are willing to pay well above spot to get hold of physical gold. When people lose confidence in their currency, no price is too high for gold: the imperative is to get rid of that currency as quickly as possible. These are the consequences of the loss of trust!

I have been waiting for something like this to happen, and in my opinion this is merely the beginning.

Martijn said...

France did not do that in '71 and I guess this time it will be the same.

What I mend to say is that is probably will be the same if the US does not fulfill its obligations.

But perhaps FOFOA is right and they will settle with repriced gold.

What they will or will not do is subject to many political forces of which I have no clear sight.

Pershaps the solution FOFOA proposes is the most natural, although I find it difficult to conclude anything on this subject.

Martijn said...

The Mad Scientist just pointed me to this article by Rob Kirby arguing that the US have swapped part of their gold.

That would leave them less able to make whole on their debts with gold and more likely to default on some of it.

radix46 said...

Capt Goodvibes,

Thanks for that link.
Definitely food for thought there.......

Could anyone recommend the best way to get a good price for silver? :\

allen said...

The raft is fast approaching the brink of the falls. We have had business fail and banks fail in mass several times in this country, but we have never seen cities fall in mass.

=====================================

The city of Miami is in such financial dire straits that commissioner Marc Sarnoff is using the "B" word, bankruptcy.

"We are not the only city, municipality to be going through this. It looks like Los Angeles sometime next week or the week after will be going bankrupt. It looks like there will be 30 more cities following suit."

Increases in public worker salaries is one of the main reasons why the budget is so tight. The average salary for a Miami city employee is $76,000. The average salary for a Miami city resident is $29,000.

Employee pensions are choking the budget too. In 2000, pension payouts cost taxpayers $16 million. In 2009 that number spiked up to $70 million.

Should the city go into bankruptcy, the commissioners and their politics would no longer be in charge of city finances, the judge would be.

[Sarnoff] "You no longer have 5 people making political solutions. You now have one person who is looking after the best interest of the taxpayer of the city of Miami, without any politics getting into his or her way."

The Judge could order union contracts be renegotiated. He or she could decide what creditors get paid or not get paid.

....

Commissioner Sarnoff offers 3 options to avoid bankruptcy.

1. Renegotiate those union contracts
2. Layoff about 800 city workers
3. Raise your property taxes

In this economic climate that last option is not likely at all

allen said...

This guy is the anti fofoa :)

Why I Don't Trust Gold
by Brett Arends
Thursday, May 27, 2010

http://finance.yahoo.com/banking-budgeting/article/109666/why-i-dont-trust-gold;_ylt=AvNrGnbTb1B6hCBqOR6GVmK7YWsA;_ylu=X3oDMTE1NmFlMjVrBHBvcwM3BHNlYwN0b3BTdG9yaWVzBHNsawN3aHlnb2xkY2FuYmU-?sec=topStories&pos=5&asset=&ccode=

allen said...

Here is a piece of that article.

...

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous.

Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

And that's not the half of it.

Gold is volatile. It's hard to value. It generates no income.

Yes, it's a "hard asset," but so are lots of other things—like land, bags of rice, even bottled water.

More from Yahoo! Finance:

• Gold Prices Surge Past $1,200

• Economic Rebound Slowed Last Quarter

• Stocks Jump After China Shows Confidence in Europe
Visit the Banking and Budgeting Center
It's a currency "substitute," but it's useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking "facility" still trying to settle their debts with cigarettes. That's gold. It doesn't make sense.

As for being a "store of value," anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.

I get worried when I see people plunging heavily into gold at $1,200 an ounce. What if the price goes back to where it was just a few years ago, at $500 or $600 an ounce? Will you buy more? Sell?

...

Martijn said...

FOFOA,

You argue that gold is in an inverted bubble, will revalue once and remain there.

However, markets are likely to overshoot, as always, as this image illustrates.

Wouldn't you expect the same to happen to gold, albeit perhaps in a more dramatic way?

Martijn said...

Allen,

From the article you linked:

Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

I guess those Marsians would be scratching their head even harder upon seeing how governments do all they can to suppress the paper value of that metal that made them scratch their heads in the first place.

Martijn said...

Allen,

Gold is volatile. It's hard to value. It generates no income.

Paper money does also generate no income.

Ever seen a dollar multiply spontaneously?

It's the banks that pay you a risk premium for loaning your cash to them that generates the income, if any (as we have left inflation and real interest rates out of the equation for now), not the dollars themselves.

But still it's always nice to read a rebuttal of gold, so thanks for posting.

Martijn said...

Everyone knows the price has risen about fivefold in the past decade. But this is not due to some mystical truth or magical act of levitation. It is simply because there have been more buyers than sellers.

Banal, but true—and sometimes worth repeating.


Banal, but not necessarily true, and it would be worth for the writer to get his facts right.

It shows that people in total preferred holding gold than dollars at the given market prices, and gives less indication about the amounts of buyers and sellers.

Martijn said...

FOFOA,

Here is a discussion on what money is. Although is pro gold standard it involves some good quotes, such as:

The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods.

Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

CNK said...

FOFOA,

I see that your views are evolving. Sometimes, you adhere to the detailed narrative described by ANOTHER and FOA, other times, you look at the big picture/universal evolutionary movement of money and gold. I recently wrote that freegold will not arise from design, but from default... yet I will agree that there are those in high places that see the inevitability - and plan accordingly - but cannot speak a word - no one in high power wants to be the named cataylst. They would lose their membership in "the club."

What we are witnessing is akin to a murder mystery. We have all seen this movie before. We know the butler did it, and we know he will be found out by the other characters.

The fun is in watching the rest of the characters slowly uncover the evidence as they travel the path to discovery.

And you know what else? Just as in watching a movie, we will still have doubts along the way, and as the movie climaxes, we will still experience with wonder and awe the events we anticipated all along.

Please keep up the great work, and thanks.

-CNK

robert said...

FOFOA,

All your work is excellent; however, this was one of your best.

After the gold reset you see occurring, how do you see real estate being impacted?

Let's say you own a $200K home with a $100K mortgage today - then gold gets revalued.

How would this piece of real estate be impacted?

Thank you.

Robert Campbell

Jeff said...

On an individual level, prices at the level FOFOA forecasts are as much a problem as a benefit for a gold owner. How would one sell gold? Virtually no individuals could afford to buy even an ounce. Even dealers might be shut out. Shall we contact central banks and offer to sell them a few krugs?

Martijn said...

I would second Jeff's question. Gold at those prices would imply a drastic redistribution of wealth and leave those not holding gold without any wealth. How would those latter be able to buy gold from those holding it?

Just as gold needs to be distributed widely in order to have value, gold should be accessible to a relatively large part of the population to allow for freegold.

robert said...

re: selling gold coins after the coming revaluation

FYI, I called my coin dealer and he sells 1/10 ounce Maple Leafs for 16% over spot - compared to 4% over spot for one-ounce Maple Leafs.

Big difference.

Mark_BC said...

I am one of the newcomers to this blog and I really appreciate what FOFOA has done. I am not an economist, I am an ecologist and engineer, more specifically regarding industrial energy engineering.

It is interesting that I have always known something was very wrong with the current economic system. It basically flies in the face of ecology which supports our economies, and in a more fundamental sense it violates the laws of thermodynamics which dictate everything in our economy. The only reason the harsh hand of the limits of the laws of thermodynamics have not come down
to put us back into our place is because we are eating into the inherited ecological capital of the planet (we are depleting the resources faster than they can replenish themselves). This is eerily equivalent to the current financial debt problem.

FOFOA and others here have come to similar conclusions to mine regarding the current flawed economic system, but from a the other side, a financial perspective. I have come from a scientific perspective. I am trying to learn as much as I can about economics now so that I can fully digest all this information and integrate it with ecology and energy. Once I have a handle on this, I think I will be able to make some of my own contributions and link the monetary problems back to the fundamental ecological energy problems that are manifested in our economic system. Here is the interesting line of thinking. All money is a claim on human labour. All human labour is enabled by the food people eat. All the food people eat is created by ecosystems (99.9% of it). All food created by ecosystems is simply solar energy captured by plants and stored as chemical energy (this is what fossil fuels are too, from millions of years ago).

I have become fascinated by this topic and I would like to be able to relate it all coherently back to ecology, specifically what all this debt and phony bloated derivative money floating around actually means in an ecological context, because money is merely a claim on ecological productivity.

CNK said...

@Mark_BC

Google "Econophysics" and "Biophysical Economics."
Many scientists have made the same conclusions as you have. I use those disciplines in understanding economics.... unfortunately, modern Keynesian Monetarists believe in the free lunch that Thermodynamics tells us doesn't exist.

disclosure - I am not a scientists, but intuitively, the Econophysics views make much more sense to me than the current economic ideology does.

jon said...

I think the answer to those who worry about how anyone will be able to afford to purchase gold at Freegold prices I think you need to start thinking in terms of grams and not ounces.

radix46 said...

This blog is to the mind as chocolate is to women.

mortymer said...

I hoped for just such one, many thanks!

Jeff said...

Jon, that doesn't answer the question. Gold owners today own ounces, not grams.

Such high prices would destroy the private gold market, destroy the gold jewelry market, destroy gold liquidity outside central banks. Imagine every piece of gold jewelry in the world melted down. People will tear the teeth from their heads to melt them. This idea does not free gold, it makes gold hostage to central banks.

raptor said...

FOFOA said :
.... while gathering more than half a million total visits from 180,000 unique IP addresses.

Divided by two 90 000 * 10 oz avg holding ~ 1B $

by the end price of 100 000 $ per oz your subscribers will command close to 100T or the total US debt&liability ;)) i.e. they will be able to BUY USA :)))

raptor said...

Mark_BC,
You may wanna see this one :

http://www.youtube.com/watch?v=vVkFb26u9g8&feature=related

The day it clicked in my head like you said from scientific point (more mathematical, rather than ecological point of view) is when I understood that any monetary-system based on INTEREST sooner or later will blow up ... paying interest (esp in fractional system) requires creation of more money to pay the interest plus principal.

The only interest-system that can survive/work is one which can shrink too (allow someone to take the loss from time to time) that was why there were so many mini blowups in previous centuries if you look at history...
freegold system lasted 2000-3000 years... gold standard like money lasted for 300-400 y... around 40 years ago the world went on a path were it didn't allow shrinkage/defaults to compensate and 2 years ago non-default was institutionalized .. so the INTEREST again is doing its mathematical-work and this time the virtual-game is over, welcome reality.

dojufitz said...

Someone once said

'Money is always scarce.......

when it is no longer scarce...

it is no longer money'.

Bring on freegold i say!

tdfxman said...

FOFOA,
I see a lot of questions unanswered but I will throw 2 more out there as thoughts that popped in as I read your latest view on things.

1) "It will not be resisted by those in power"??? Isn't that what all the gold manipulation we think is happening now is?

Isn't GATA showing us, and the whistle blower guy who had is car run into, that they ARE fighting it?

I guess you will say they are fighting something else.

2) You talk about 1922 and the Pound/USD relationship.

I don't think the history is accurate at all in a few places, July 1, 1927 is significant in this regard, and I could go on and on but to say the "This unforeseen development forced the overnight devaluation of all "paper gold" worldwide." would be argued by Ben Strong, 1st Gov of the Fed Reserve in New York as "accomplishing the purpose for which it was designed". Strong said that. I don't think you guys are in agreement on the Fed/Bank of England CLOSE cooperation in the mid-late 1920's. But that is just me.

They caused inflation on purpose in the US, to help England tremendously, to cause an outflow of gold, loss of foreign markets and speculation on the stock market that LED to the experience in the 30's. We bailed out GB on 7-1-1927. ICK.

I am not trying to get into semantics but what are you saying with ..."contributed to the amplification of a simple recession into the Great Depression of the 1930's. This unforeseen development..."
NO WAY was it unforeseen. no way.

Isn't anyone else seeing these 2 claims as questionable?

Jeff this seems right on to me. "This idea does not free gold, it makes gold hostage to central banks." That makes sense since they have the raging fires of debt that need to be put out. 50K-100K gold doesn't seem to be necessary for J6P to pay off the Visa.

To me, I can't decide in the end if this A/FOA/FOFOA "freegold" concept is more a political theory or an economic one. Do more political blessings have to be conferred on it to happen or does the free market simply have the ability to bless it into being? And if there is no resistance why hasn't it happened yet?

I can see gold much higher but to me that doesn't equal freegold, or does it?

Andy said...

@Jeff, we see the answer in gold jewelry today where they deal in karats, or purity. We will have the .9999 pure coins like today constituting a full ounce bullion, and less pure coins for smaller denominations. Many businesses or mints would arise that offer to take your Krug and in exchange give you 1,000 of the less pure coins. The amount of gold would be the same.

radix46 said...

tdfxman,

I think the 1922 reference is probably with regard to the Genoa Conference http://en.wikipedia.org/wiki/Genoa_Conference_%281922%29, where the gold standard was switched for the gold exchange standard.

Jimmy said...

@Mark_BC:


You would like this:

It will be far worse than great depression, Marketskeptics.com

And Argentina survived hyperinflation, because it has many raw and agricultural commodities to produce and sell it.

America has nothing (enough for export) of natural resources, Europe also not, China also not...

You must not be an economist to know it and don't waste your time to study economics. Study only monetarism, it's only interesting thing to know about money.

Money is the blood of the economics'body...

The counterfeinter is the source of life...


Sincerly

Jimmy

Jimmy said...

Will The USD Be Replaced By The SDR Or The CNY As The Next Reserve Currency?, Jim O'Neill, Zerohedge

Jimmy said...

Finally good posts on Jsmineset.com:

http://money.howstuffworks.com/currency-channel.htm

How many gold is there?


@Marc_BC:

Here is the economic reality... (related to my last post about Marketskeptics)

sutski said...

@radix46 "Could anyone recommend the best way to get a good price for silver? :\"

I now own 4.2 kilos of silver bullion at bullionvault.com they only charge $8 a month for storeage and insurance (and $4 a month for your gold).

You can trade there 24hrs a day, and it is physical, allocated bullion.

Or so they say...

Jimmy said...

Funniest video of the month: Voting in Russia! Run, run to collect most votes...

What a banana-republic...

Kewl said...

Does it make any difference if those deputies were present and pressed the button themselves?

SatyaPranava said...

an interesting point about phase transitions from a physics perspective is that they require a large amount of energy to complete the transition.

So the analogy above is slightly misleading. In that technically the author is correct that at 99 degrees Celsius the water does nothing and at 100 it does. the amount of energy to get the water to change phases (from 99-100) is so much more than the energy needed to raise the temperature of that same water 1 degree. In fact, it's more than 5 times the amount of energy needed to raise the temperature of that same water from 0 Celsius to 99 degrees (actually higher).

Applying this to our current situation, and the interpretation of A/FOA, the phase transition may take an inordinate amount of energy (at least to the casual observer). There's no telling when we got to 99.98 degrees, or when we'll complete the gaseous phase transition, but my simple understanding of physics and chemistry suggest it’s going to get very bubbly 

Here’s a graphic illustrating the phase transition

Strap on your seatbelts.

Jasper said...
This comment has been removed by the author.
Ludwig von Mises said...

"The new Northern Euro currency is finally in its formative stage. Contracts have been forged. Relationships with the more independent Central European central banks have been arranged. Market mechanisms with the commodity markets have been delegated to Finland. A role for Russia is being planned, source of many commodities. The timing of the new Northern Euro is planned for June 2011, with perhaps little if any formal news releases. The key element of the new Northern Euro will be its gold component. Permit a Jackass conjecture of a 1% or 2% cover clause, meaning $100 million in Northern Euros could be redeemed for assets that contain $1 or $2 million in gold bullion. The new currency will be born in crisis. One must wonder if Saudi crude oil will eventually require payment in Northern Euros. Maybe it will contain not only a gold component but a crude oil component.

For over a year, my openly stated belief has been that the first nations to create a monetary and banking system with clear distance set from the USDollar will be the next global leaders emerging. It will be Germany and its cohorts that include the Benelux nations and Austria."

http://www.kitco.com/ind/willie/may282010.html

tdfxman said...

radix46

That League of nations meeting was indeed used to be able to export inflation. in Europe.

I look at it as the prototype for what the Cabal is doing now with the Federal Reserve and the World bank within the framework of the UN. I just don't look at that meeting as significant as when we were strapped into England in 1927. My mistake in missing FOFOA's reference.

Thanks for the additional detail!

Jimmy said...

What an euro sell off on 16:37 -0,40% ($1.235 to $1.230) in ONE minute after downgrading Spain to +AA by Fitch...

And in the second minute (16:38), it was going to $1.228...

You could see it here, but reset it to 1 minute livestream (button right under)

Never saw so big one sell off...

Jimmy said...

@Ludwig von Mises:

Your post was really hot stuff to read it...

If it's true...

Ludwig von Mises said...

Dunno. But it appears the Interpol part has got some thruth to it:

Diplomatic immunity interpol:

http://www.whitehouse.gov/the-press-office/executive-order-amending-executive-order-12425

Icelandig bankster. Counterfeiting would be shortselling:

http://www.interpol.int/public/data/wanted/notices/data/2010/68/2010_21468.asp

Ludwig von Mises said...

Better link. Google interpol and bankers. interpol is working overtime.

http://tinyurl.com/2dqmwzv

Jeff said...

fofoa pollinates itulip:

http://www.itulip.com/forums/showthread.php?t=15719

Segestan said...

This is really a good blog... and I sure hope you are right. I have miners and they would do very well in this revaluation.Looking forward to more views from FOFOA.

panika2008 said...

Wow. I don't know what you're smoking, guys. But go figure: a typical, low end 14k golden ring contains maybe 5 grams of pure Au. That is 0.16 oz. With gold repriced at the "modest" 50k$ in real terms, as stipulated by FOFOA, this ring would all of a sudden be worth 8 grand. 8 grand, in most places around the globe (not top class, but even low-profile US whereabouts) would be enough to get you fed, clothed and sheltered for a quarted to a year. Come on, you really believe this, right? These numbers just don't add up. Such a high gold value is plain impossible, as it would make large part of the earth's inhabitants instantly (relatively) rich vis a vis such things as food, shelter, real estate, industrial machinery et cetera. And anyone that has an ounce Krug or two would get very rich by most of the world's standards. I know that this sounds pretty nice for anyone with a long gold position (I will politely just stop short of phrasing it as a wet dream), but guys, please get a grip with reality. Gold will most probably rise in value allright, both real and nominal. But 50-fold real increase or 500-fold as suggested by the Hickel quote... oh come on!

Now yeah, I know perfectly well that there was once a time you could hire an educated personal servant in the world's capital city (Rome then) for a year for like an ounce of gold. But then again, times are somewhat different now and a well salaried legionnaire (Blackwater mercenary) no longer has to work a full hour to earn a loaf of bread worth. It would be closer to a minute now, no? And go figure: the world's top empire's budget income is not as low as to allow for hiring just 100 thousand of such mercenaries any more.

Times they are a-changin'.

mortymer said...

Got gold?

Ludwig von Mises said...

I think, Panika, you overestimate what a dollar would be worth by then.

Paul said...

To Silver, From Gold
By: Yi-Chang Wang | Wed, Sep 1, 2004
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During the past few weeks of summer respite, I had been reading The House of Medici: It's Rise and Fall by Christopher Hibbert. Precious metals naturally take a relatively important part in the history of such an illustrious banking dynasty. The fiorino d'oro, or florin, was minted in 1252 at Florence. The florin was already internationally known and well respected during the fifteenth century. This coincides with the heyday of the Medici's as the most powerful banking and political family in Florence and possibly the wealthiest family in Europe during that time. Their wealth, combined with their passion for art, turn them into generous patrons of many Italian artists during that time. This effort fostered a period of proliferation of artistic achievement, later known as the Renaissance.

The florin is the focus of this article. It's a coin containing fifty-four grains of fine gold. The coin has the city's Latin name, Florentia, stamped on its reverse side and the city's emblem, lily, stamped on its obverse side. In terms of purchasing power, here is what the florin can buy in about 1430's:

A "handsome palazzo" can be bought for a thousand florins.

A maidservant costs about ten florins a year.

A man can live very comfortably with an income of 150 florins.

A "cashier" in the Medici bank is paid with forty florins a year.

An "apprentice" in the Medici bank earns twenty florins a year.

The Medici Palace was worth about five thousand florins.

One troy ounce in weight equals to 480 grains.

Assuming that gold has been remonetized and that gold's remonetized value is calculated in the manner proposed by Jason Hommel: equating current M3 value with current official US gold, one gets a value of approximately $35,000/oz (= $9 trillion divided by 261 million ounces; see Hommel's "I'm Insanely Bullish on Silver")

Paul said...

This is an outrageously high value for gold!

But consider first, a "handsome palazzo" can be bought for a thousand florins. One thousand florins has a gold content of 112.5 ounces (= [1000*54]/480). Remonitizing that amount of gold would equate to $3,937,500 (= 112.5*$35,000) of purchasing power today. Today's equivalent of handsome palaces ("palazzo" is the Italian for palace) would be luxury estate, which is usually defined in the real estate profession as single-family residences in excess of $1,000,000. But many would be in the range of several million dollars.

Ten florins, which was a maidservant's yearly salary back in the days of the Medici's, would equate to today's $39,375 (= {[10*54]/480}*$35,000). This roughly equals to CIA's estimate of US GDP per capita: $37,800.

Considering the IRS' highest income tax bracket in the recent years is in the range of $200,000 to $300,000, a man can certainly live very well with amount of gold contained in 150 florins. If remonetized, 150 gold florins would have the purchasing power of $590,625 (= {[150*54]/480}*$35,000).

The Medici Bank was considered the bank in the fifteenth century. It was the most profitable organization in the Europe during that time. Certainly the bank's cashiers and apprentices should be relatively well paid. An apprentice's 20 florins roughly correspond to $78,750 (= {[20*54]/480}*$35,000) today. Goldman Sachs, arguably the most prestigious investment bank on Wall Street today, pays its analysts $55,000. In addition, in good years the entry-level analysts of a typical Wall Street "bulge-bracket" firm can easily be rewarded with approximately $10,000 of bonus (as some of my friends who worked there informed me). This would add up to $65,000.

While I don't know what a typical Wall Street investment bank associate's annual salary is, I do know that top MBA programs are such banks' favorite recruiting destination. Therefore, the average starting salary of, say, a Harvard MBA, should be a fair proxy of an associate's first-year income. Since an associate is the next employment level of an entry-level analyst in an investment bank, an associate's salary should roughly reflect the Medici bank cashier's 40 florins annual salary. For the class of 2002, a Harvard MBA's median first year total compensation is $125,000. This amount approximates 40 florins current purchasing power of $157,500 (= {[40*54]/480}*$35,000).

Finally, the ultra-luxury real estate market routinely sells at $38 to $75 million dollars as reported by a recent Forbes survey of Most Expensive Homes in America. The price of Medici Palace, 5000 florins, represents today's purchasing power of $19,687,500 (= {[5000*54]/480}*$35,000). This is lower than the low-end of recent ultra-luxury estate price range. But considering the Medici's purposely built their main residence "far from grandiose" to avoid jealousy, this "undershooting" of purchasing power should not be surprising.

So, while some may have expressed objection at Hommel's projection of gold's remonetized value of $35,000 per ounce, such a price actually has some validity if one uses it as a proxy for comparing the purchasing power of gold between today and the Italian Renaissance. Put it the other way, if we were to go back to the tradition of using gold and silver as money, an ounce of gold can buy up to $35,000 of goods!

Segestan said...

@ Panika.

The Derivatives market has effectively replaced the CB's who print the notes , it won't be the CB's who decide. They gave that power up wanting a society based on socialism. All the Gold ever mined only amounts to a cube 88x185 .. less than half the Washington Monument. Think about it.

Ludwig von Mises said...

A point can be made - if one understands the dynamics of the credit default swaps markets unwinding- that de derivatives market "blew up" the central banks.

Aleksandar said...

satya:

There are different types of phase transitions, or at least different types of phenomena that are categorized in that broad class of "phase transitions".

You took as an example a first-order phase transition - the boiling of water. There is always with the first order transition an associated "latent heat". It is however not always necessary.

A second order phase transition is different in that you need not add or remove internal energy in the system as you pass the critical point.

I think that we should, if we for the moment assume that it makes sense, view the complexities of human endevaour as more similar to physics that do not involve "hard" and rather simple natural truths such as thermodynamics.

I think that when FOFOA talks about our socio-economic ecology, he thinks of it in abstract terms rather than taking the material (observable) world as the substrate where we project our human exchanges.

Think about his fractal analogies, the "emergence" of a Freegold system (the bottom-up approach) etc. Removed from the thermodynamics of matter but close to things such as collective behaviour and condensation under certain "crtitical" circumstances.

Software and not hardware, if I may be blunt.

It is actually, from a hard philosophical plane, the most compelling reason why he may be right at the end. It is also probably why we like his writings so much although it is very difficult to give specific reasons. It somehow "adds up" and "simply sounds right", very similar experience as to when Arsmstrong says "it is just time".

KnallGold said...

Jimmy, on the euro sell-off: what coincidence, right at the moment when the eyes started to turn to the US and UK debt-bergs, Fitch comes out with a Spain downgrade?!

Or do they want to shoot in their own foot by this "too obvious" action!?

panika2008 said...

Ludwig, please note that all my considerations were in real terms. Nowhere was dollar mentioned for purpose other than an intermediate for strictly arithmetic comparisons. For example: gold is around $1200 today and a loaf of bread, say, $3, so an ounce buys you around 400 loaves. The dollar appears in the calculation, but is totally irrelevant. You could as well use yuan, euro, or ounces of silver as the intermediate.

Segestan, I am very well aware of this. And because of this, and because of the peak gold phenomenon as well, I say that yeah, gold will most probably appreciate decently in real terms over the next decade or two. But 50-fold and 500-fold is simply beyond decently.

mortymer said...

@Panika... ok, your own words "...gold will most probably appreciate decently in real terms over the next decade or two".
Look at chart, the 10y average is ~40% per year, please just extrapolate...

stibot said...
This comment has been removed by the author.
panika2008 said...

mortymer, I don't think the current appreciation of gold can be sustained in real terms beyond 5-10 years. Actually, taking your 40% figure and accounting for, say, 5% inflation, it would make gold exactly 20x as valuable in real terms as it is today, in a decade. I would bet against such outcome. Personally, I would be very surprised even if gold ever during my lifetime was worth ten times as much as today. I would be surprised, but I don't rule it out. 20x is a lot of stretch. 50x is pretty ridiculous. 500x is plain insane.

If I would be to bet on such grand geopolitical-global macro things as FOFOA describes routinely, I would put the line in the sand for the gold value where it gets valuable enough either to cover all of american M1 or all of government's short- and medium- term debt servicing needs. And for these, even 10x real appreciation from now is more than enough.

Shanti said...

@Paul
http://www.youtube.com/watch?v=7ubJp6rmUYM

look at 4:10

0,3 gram for a bread seems more in line with reality, but than, the question is, how many zero's you have to add on paper to buy the bread?

stibot said...

@Panika: it is believed 5 billions ozs are above ground. If you multiply that amount by 50 thousands US$, you get 250 trillions US$. Now compare with Credit pyramid and consider again, whether price mentioned is plausible.

Also, it is hard for you to accept one can become rich once gold is revalued. Why are you not wondering it is common that people/countries are in debt in magnitude of hundreds of thousands US$?

raptor said...

panika2008, if and I say if gld goes to 50k or so nominally (just speculating here)... do you think the rest of the prices will stay the same..

It is possible in such a scenario for coffee to become 100$ and house prices to may be quadruple..etc...

BTW, I've lived trough high-inflation...where coffee went from 2 to 100 currency units in mater of months... so because we are talking about the whole world (or most of it) instead of a single country it does not mean it can't happen... it is just matter of different scale...

Just another thought how much can the M1 increase before everything collapses ?
The Fed doubled it last 1-2 years.... let say they double again next 1-2 years...this means the third time which will be 8 times bigger than the start M1 i.e, 2^3 ... i don't think they will succeed the third time. Even if it is orchestrated with the other CB to do it one after the other...

and they need to expand M1 if they want to backstop the banks and all gov entities.. etc... btw there is already ~23T guarantee on loans, so the printing is almost on autopilot.

panika2008 said...

Stibot, gold does not have to (and historically, at least in the history of economy that we can get a grip of, never has) cover all of the pyramid's value. That would be pretty extreme and would be anywhere close to realistic only after some kind of a total obliteration of our civilization. By this, I mean nuclear/volcanic winter, a pandemic wiping out 99% of humans etc. And I'm not quite sure it would happen even there. The machinery, the technology, most of the resources would still be available, life would just get a lot more difficult.

Raptor, my comments, as well as FOFOA's in this post, relate to real (inflation-adjusted) value. Yeah, I know what inflation (and hyperinflation) is about. I'm from Poland - we had like 300% inflation in early 1990s.

I am told a cup of mocha at starbucks in NY is currently around $5. Now, assume that the US experiences hyperinflation and by december it costs $100, as you (and I think all of the coffee drinkers) fear. What FOFOA says that it is possible, in this scenario, for an ounce of gold to cost 1.2 million dollars (1200*50*100/5 - the term 100/5 is inflation, as proxied by hypothetical starbucks mocha price rise). I say this is extremely unlikely to happen unless something colossal happens. And by colossal I don't mean such petty things as global financial crash or global banking wipeout or global hyperinflation. I mean something HUGE, like a global nuclear war or fear of extinction, and probably not even then...

mortymer said...

@ panika2008,
- its all about $ priviledge.
- "gold needs to be repriced once in lifetime and it is enough"./or fiat to fail.
- its just experience speaking, nominal-real not important if in play is whole currency.
- Look at the plenty of people from other than us$ area, offer them gold or dollars and let them choose.
- Sinuhet from M.Waltari said that "About tomorrow nobody knows".
- The life duration and future of dollar can not be extended forever.

@ Fofoa: perhaps you could again mention states of IPs :o) so you see the range.

panika2008 said...

I'd also like to disclose that I actually own a sizable amount of gold and silver myself. Even if the "modest" version of FOFOA's scenario (40-50x real appreciation) comes to pass, I'd instantly become quite rich, enough to buy outright a large, comfortable condo in downtown Warsaw (notorious for high real estate prices, nearing the prices in Berlin). If the 500x scenario materializes... well... I could just buy ten such condos and live a great, job-free life off the rent.

Would be cool. Do I anticipate it? Nah.

Ludwig von Mises said...

" panika2008 said...
Stibot, gold does not have to (and historically, at least in the history of economy that we can get a grip of, never has) cover all of the pyramid's value."

The sour fact is that credit default swaps do cover the whole pyramid. That boobytrap has been triggered. A deluge of money is coming our way.

Andy said...

@stibot et al: " it is believed 5 billions ozs are above ground. If you multiply that amount by 50 thousands US$, you get 250 trillions US$."

The amount of gold would need to cover not only the U.S. money supply, but other fiats as well. So, be sure to consider the amount of sterling, marks, etc., etc.

panika2008 said...

Ludwig, CDSes are not money. They are (unlike the core of money, be it central bank's M1 or gold), like most derivatives, zero-sum games and as such, their notional value has very little bearing on the monetary relations in the world apart from indirect and minor (crises aside) influence on cash flows related to sovereign debt. The lower interest rates, the weaker is this (minor) influence.

Assuming there is a worldwide financial crisis that wipes out all debt and derivatives, what really matters is what's left or what's realistically expected to be left during the demolition process - that is, hard real monetary assets (which pretty much includes only gold and silver), their relation to other valuable assets (Intel plants down to scrap aluminium cans) and the glue, which is geopolitical situation in such a crisis.

Aleksandar said...

panika, you dont seem to understand what FOFOA actually says. It is perfectly OK not to, especially if you started reading his blog recently. I read it pretty much since the beginning and I still am not entirely sure...

The price of gold, in future units, after the freegold transition (assuming it happens as outlined here) is irrelevant when viewed from this moment in the present. This is what you must first accept before going forward. It is difficult to do so because you view it as an "appreciating asset with good fundamentals", i.e. as an investment. But it is not.

Its role in the future, under this system will be entitrely different and I dare say unprecedented.

The wealth consolidation effect will push the price of gold to the level to which it will.. well... push it to. Thats why I dont like price projections based on monetary aggregates, but it is a start.

Also, dont forget that the message here is of a more broad prominence that only gold or finance. It is also a political statement: it is about new "emerging" social systems. Like meritocracy for instance. Or the elimination of other's debt as a wealth proxy, Keynesianism as a whole and public speding (welfare states).

All those unknowns together makes present price projections quite unreliable.

BTW, which hyperinflation did you live through?

Ludwig von Mises said...

Panika

I am not here to quarrel with you. But you write many misconceptions.

Credit default swaps are mutual insurences on debt. You default, I default. Your central bank gives me paper money and my central bank gives you paper money.

We both buy gold.

That is not a zero sum game, its an exponential game.

As to whether CDS or debt is money, I could write a book on that but will stick with JPM's quote: gold is money and nothing else.

SatyaPranava said...

aleksander,

thanks for the edifying comments on phase transitions. I did, however, not mean to imply that biological, let alone social, or ecological phenomena operate on the same simplistic thermodynamic level as water. Though I must admit that I hadn't considered the possibility of it not being necessary to have the latent effect.

So in your opinion, the latency period is irrelevant to socio-ecological phenomena; hence the software comment?

i only ask because it seems like the systemic (i.e. those in power attempting to manage this crisis) resistance seems like it might be creating a latency period.

i appreciate the insightful responses, always.

satya

raptor said...

panika2008 you make a good points...
(please raise more objections ;), always good to get the counterpoint)

But let me run the scenario with my country... we also had 300% inflation.
The exchange rate with $ jumped from ~1/30 to 1/3000 i.e. ~10 000% devaluation caused 300% inflation i.e. 10000/300 ~ 33% devaluation is equal to 1% inflation ;)

I think it is reasonable to expect 10% inflation in USA for at least 3-5 y (after the current deflationary period).. lets get the 3y.. this means 30% inflation will devalue the dollar ~990% (again I'm talking in a such stressful period like we have now.. devaluation in good times will be different)..

Devaluation against what ??
No other thing that gold, right !

So 1200 * 990% ~= 11880$

;) did I made the calculation correctly..
Maybe I will get different results with Poland or other famous devaluation like Argentina ?!

But this seem like a good point of calculating the gold price not mentioned anywhere ...

panika2008 said...

Ludwig, I'm afraid CDSes are nothing near mutual insurance. Like you say, let's not quarrel over technicalities, they can be easily looked up by anyone interested.

Aleksandar, I'm aware that FOFOA's ideas are way beyond strictly economic. Still, economy is a funny thing. Some things are impossible, some are very improbable. It is impossible to have, globally, more debt than deposits (or less, for that matter). It is practically/nearly impossible to have a currency with steadily, non-negligibly increasing value (because there is no debt market then). As well as it is practically/nearly impossible to bail out yourself out of debt by issuing more debt.

While it is not strictly impossible for gold to be 50x more valuable than it is today, it is very, very improbable, as it would actually make it historically most valuable and make the basis money market the most capitalized market in the world... which is quite impossible in a normally functioning, developed worldwide economy. 500x more valuable than today... that would make it dominate most classes of assets in the world taken together, which is practically impossible. There is no economic sense in such setup. There is no real market demand for such setup, because this would mean that in practice the vast majority of humans on the planet would prefer holding gold to anything at all and indulging in base money market only. Gold is just one of many assets humans want. In general, under stable conditions and healthy political/fiscal climate, humans in fact prefer real estate to gold, because personal utility of a home is in 99% cases higher than holding a bunch of golden coins. This is how the world works. This is why gold, even if remonetized and used as a strong basis for trade, will probably never rise in value as much as to completely dominate other markets. Unless, as I said, there is a very strong, global sense of a MAJOR catastrophe in progress or approaching - nuclear war, plague etc.

The hyperinflation I lived through was in the beginning of 1990s, actually I think 1990-1991. It was not that harsh, after all. On the other hand, the economic system in Poland was very primitive back then.

raptor said...

I think of 50k , 100k as improbable too... reaching such value gold may become from canary in the coal mine to a reinforcement of the crisis.
(that said most ppl in 2000 never thought gold will triple)

In general I grade my expectation in the following way :

- 2000-2500 - commodity gold price based on supply/demand conditions
- 2 to 4 times that "traded" as money (able to settle alot of debt over the world) - 4000 - 10 000
- one time peak during the mania phase, double monetary value - 8000 - 20 000

SatyaPranava said...

raptor, what country are you referring to w/hyperinflation?

FOFOA said...

Bravo Aleksandar! I think you get it.

Hello Panika2008,

Yes, things are very different now! The population is now 6.8 billion and the global gold stock has doubled to around 160,000 tonnes. 90% of the global population that was closed off from the last gold bull (1980) is now rushing into the gold mart. That's about 6 billion new gold customers! Global salary disparity from lowest to highest is six orders of magnitude! Toys of the wealthy now include private yachts the size of cruise liners and gold-encrusted private 747 jet airplanes. Times they are a-changin', as you say!

But probably the biggest difference today is the debt. Past debt, promised future debt, ongoing debt appetite. Imagine a small poker table, six guys playing poker. They empty their pockets of gold and put it in the kitty, then divide up the plastic poker chips to match the gold 1:1.

Next they play poker until a couple of the players have all the chips. At that point the winners return the chips to the losers so they can play again. But they make little marks on a piece of paper like this: III... to signify the return of the chips. These marks are IOUs. They play again until those same two players have all the chips, and once again they return those chips to the losers and make a few new marks.

They continue this game with the winners returning the plastic chips to the losers each time. And the winners are the same, each time. And this game continues for 88 years. How many pads of paper did they go through keeping track of those IOUs? And if they were to settle up in gold now, where gold's value was once equal to the plastic chips 1:1, but now they must incorporate the IOUs, what would be gold's new value relative to the chips?

You could say that the two winners should probably just get all the gold, right? Like France should have emptied Fort Knox in 1971. But that's not the way the real world or the free market organism really works. The way it works is it revalues that gold so that upon uncontrolled collapse, the winners are somewhat fairly paid and the losers still have enough gold to keep on playing.

So you can factor in population, gold stock, current wealth metrics, whatever you like to justify the old men's suit comparison all you want. But just don't forget the debt, the largest factor of all!

The relative value of gold has been suppressed longer than any of us can even imagine. As I mentioned above, the gold-exchange standard and even the gold standard had their own forms of paper gold. And even when gold was used physically in transactions, when the common man had a piece of gold to make some payment, gold's relative value was suppressed by the velocity of circulation.

This may be hard to comprehend, but "money" that circulates loses value the faster it circulates. And being the normal medium of exchange kept gold's value much lower than it would be as solely a store of value, a wealth consolidator, and not a physical medium of exchange. Look at Zimbabwe for how this works. The faster the Zim dollar circulated, the lower its value fell.

Cont...

FOFOA said...

...Back in December I wrote a short analogy to demonstrate this velocity dynamic: "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."


The point is, that in the past gold's value as a wealth reserve has been suppressed by either circulation velocity or one form of paper gold or another. And that which is transpiring today, for the first time in all of history, will remove all of these past factors and reset gold to balance the debt as the one and only wealth consolidator.

By the way, did you notice that I used a "price crescendo" in the post? This was intentional. The prices mentioned were... $1650 >> $2000 >> $10,000 >> $30,000 >> $50,000 >> $100,000 >> $500,000

The point is that to focus only on the $500,000 number simply because it is farthest away from today's price, and most difficult to imagine, is to COMPLETELY MISS THE POINT of my post. And that point is....

THE FUTURE PRICE OF GOLD IS COMPLETELY ECONOMICALLY ARBITRARY. IT WILL GO WHEREVER IT NEEDS TO GO TO SOLVE THE DEBT PROBLEM.

Arbitrary... look it up.

What I have always written about, and what Another and FOA wrote about, was the free market organism resetting the price of gold when it is finally "set FREE" from the restraining factor of paper gold. Ie. Freegold.

Cont...

FOFOA said...

...Remember that A/FOA always said "you will not know gold's price as it slices through $10,000" and "gold will go into hiding". And it will later emerge in the stratosphere at a physical-only price. This is what I'm talking about. I am simply pointing out that the price physical will emerge at, might be a lot higher than we even think or talk about. Because whether we realize it or not, we automatically, subconsciously apply "Western Thought", economic restraints, technical analysis and ratios we have lived with our whole lives when we make projections. And the true fundamentals of gold tell us that none of these things will apply.

What will apply is the debt, and the gold stocks to flows. Flow is velocity. It tends to lower relative value. But the thing about gold, as Fekete says, is that "in terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity." This is what sets gold apart from everything else as the only real modern wealth consolidator. Or as Another put it a different way, "spend your time in the company of truly wealthy ones, see how they make gold lie very still!"

As debt fails, what will happen is the price of gold will rise to the point that the flow of gold will be credibly sufficient to supply the exchange of any and all debt for physical gold. And this includes real debt that's hidden off the books. This is a difficult (or impossible) calculation to make, but it is very high and it has nothing to do with the total stock of gold, nor the total stock of transactional currency. It has only to do with the flow of gold (that prefers to lie very still) and the number of IOUs on the poker table.

And for those that like to read voluminous posts, this was an inspiring article for me with regard to the arbitrary nature of the future price of gold. It is, in part, responsible for my Ultimate Un-Bubble post:
Why the global financial system is about to collapse - Part 1
Part 2

Lastly, for all of you that think this will never happen because a few poor people will become super rich overnight, think again. Exactly how many people out of the 6.8 billion do you think have transferred more than a percent or two into physical gold? In fact, most people are dishoarding their future windfall today by mail, through Cash4Gold. I finally convinced someone close to me to buy some physical. He has a nice retirement nest egg. Know what he bought? 2 coins! Wow!

And of those that even read this, how many do you think will go all in? A good estimate is that over the next week 20,000 people will read my post. That's .0003% of the global population that will read this post. And of that .0003%, how many will take the step that merely retains the present value of their savings? How many will double their nest egg? And how many will laugh and do nothing?

Sincerely,
FOFOA

FOFOA said...

Raptor the math whiz, here is the breakdown by sub-continent based on 557,000 visits (unique visits, not pageloads which are closer to 900,000). Divide each by 3.1 to roughly estimate unique IPs:

1. Northern America 374,728
2. Western Europe 67,288
3. Northern Europe 30,135
4. Australia and New Zealand 24,265
5. South-Eastern Asia 12,869
6. Eastern Europe 12,425
7. Southern Europe 9,615
8. Eastern Asia 6,920
9. Western Asia 4,646
10. Southern Asia 4,470
11. Central America 2,705
12. South America 2,605
13. (not set) 1,974
14. Southern Africa 1,256
15. Caribbean 659
16. Northern Africa 300
17. Eastern Africa 195
18. Melanesia 150
19. Western Africa 74
20. Central Asia 52
21. Micronesian Region 16
22. Middle Africa 11
23. Polynesia 4
24. Outlying Oceania 3

Segestan said...

Would this revaluation make countries like India , Italy and Greece for example; nations who hold large amounts of gold both public and private the wealthiest nations on earth? And if history is any guide ...when Gold is the final measurement of wealth, a nation with a lot of gold is subject to conquest and plunder. We have Bankrupt nations with mass unemployment , these will lead to social unrest and war. Seems to me we are headed for global war one way or another. What do you think? How will the balance between the military giants and the gold giants balance?

raptor said...

Mirror, Mirror on the Wall, When is the Next AIG to Fall? | Marc Faber

1:07 hr long

http://www.youtube.com/watch?v=H0sS6a9RW2E&playnext_from=TL&videos=XGWHQjL6RF8&feature=sub

raptor said...

>>SatyaPranava said...

raptor, what country are you referring to w/hyperinflation?

Bulgaria

http://en.wikipedia.org/wiki/Hyperinflation

It was slow crippling inflation from 1989 (collapse of socialism, yupii ;), pls stop socialism in us. I can tell you it is no good ;)) until 1992 dollar/lev went from 1/3 =~> 1/30+ ...and then around jan-1992 in a matter of couple of months to 1/3000.

I got a MONTH salary in Jan-1992 ~6$ (six dollars) that was a very good salary, btw.
It was a socialist gov that caused it, and February! we forced them out of power.

costata said...

FOFOA,

Interesting, brief analysis of the recent ECB strategy for the Euro.

Euro Crisis; The Hidden Agenda

http://news.goldseek.com/TacticalInvestor/1275054906.php

Gody said...

Hi All,

It has been a while.

Cut out all the noise the final result is this, when/if a real revaluation occurs, most will be wiped out that hold paper in whatever form.

What remains will be tangible assets.

The best case scenario - All other "real wealth" is valued in gold. That means roughly-

World GDP approximately 55 trillion
Above ground gold approximately 5 billion
Real gold value approximately 11,000 units convertible to any fiat.

You cannot purchase more than exists. So, 500K per ounce buys what????

stibot said...

@Gody: Why compare against one year world GDP? Why not to compare against one week GDP? Or perhaps 50 years GDP?

Comparing to GDP is nonrelevant. Reread what FOFOA has written above.

FOFOA said...

Gody,

Do you know anyone on Social Security that plans to live ten more years? How about someone who is weighing the option to take it now, versus waiting a few more years to get mo' money? How about you? Do you live and work in the US? Do you get your Social Security statement... your "promise of future payment?" If you work legally here you do.

The world is full of unfunded promises of future payment. Only a small minority of them ever make it onto the $82T bond market. This is the offspring of the 1944 Bretton Woods accord.

But just because they aren't there on the bond market doesn't mean they aren't held as wealth by someone else. All debt is held as wealth by someone else! Even your stinky uncle Jody on Social Security. At some point in his life he accepted a promise of an $1,100 monthly check in June of 2015 in lieu of receiving a real wealth reserve. These are all "III..." notations on the poker table tablet. If I were an actuary I might try to figure out the present value of such liabilities, but alas, I am not.

GDP is only the nominal measure of annual human productivity. It is the market value of final goods and services produced in one year. What on Earth does this have to do with the future value of the wealth consolidator?

Some estimates put the total US unfunded "contingent" public liabilities at $110T today! That's just public. That doesn't even include the private unfunded "contingent" liabilities in the US, let alone the rest of the world. This is a huge number. Hundreds of trillions, without even including the derivatives. And yes, it is future, but it does have a definable present value.

And yes, derivatives are also "future unfunded contingent liabilities." Sure they are private, but they are most definitely debt. Contingent only on the failure of other debt. But once other debt fails, they become simply "unfunded liabilities." Unbacked promises to pay, held by someone else as wealth!

This presently insurmountable problem is the very offspring of Bretton Woods, as articulated brilliantly by ANOTHER:

"As we know, world war two left Europe and the world economy destroyed. Many thinkers of that period thought that the world was about to enter a decades-long depression as it worked to rebuild real assets lost in the conflict. It was this war that so impacted the idea of looking positively toward the future. The past ideals of building solid, enduring, long term wealth were lost in the conception of a whole generation possibly doing without! In these fertile grounds people escaped reality with the New Idea of long term debt, being held as a money asset. Yes, here was born the American Experience that comes to maturity today."

I am not talking about equity changing to a different (more solid?) form of equity, or even the conversion of annual human productivity into equity. I'm talking about debt into equity! Not by force. Not by orchestration. But by gravitational necessity. The end of usury as we know it today!

If you want to be so bold as to perform the impossible calculation that only the Superorganism is capable of making, then by all means, go ahead. But try not to think so small, like an Ant on the Antfarm, next time.

I am only trying to spare your fickle sanity from the brutal shock of reality when it finally hits, and perhaps your nest egg as well (if you are fortunate enough to have saved one). I remember someone here once made a pretty convincing argument for gold resetting at around $1.2 million or something like that. But I don't want to spread incredulous numbers around, so I'll stick to what I can personally visualize. ;)

Please read Metamorphosis for more on debt into equity.

Sincerely,
FOFOA

panika2008 said...

No, FOFOA, the price of gold is not arbitrary, as well as the price (value) of current money ("money") is not arbitrary. Should the price of gold, after "the crash" rise to such gargantuan heights as 500x current real value, the world economy would probably grind to a halt and the only functioning industries would be trading gold derivatives and gold mining. This ain't gonna happen because people needed, need and will always need, in the foreseeable future, shelter, food, clothes, transportation, energy etc. Which generates demand for these things. The demand to hold real estate (as in land) under normal conditions (and I guess you assume that conditions WILL normalize at some point in the future) and other durable assets will never be as low as to allow the gold market to dominate all other markets. This is human nature.

Which does not mean gold will not explode in value eventually. Sure, maybe a thousand of florins (3.5 kg of Au) will again buy you a luxury apartment in downtown NY. This point is not so far away, it would suffice for the gold to rise 10x in value and real estate to fall some more (which is very realistic). But 50x is gross, and 500x plain impossible for the reasons I listed.

Now I know that all the numbers you listed are purely expository, but I got the impression that the target you mention frequently, 50-100k$ in today's dollars (that is, 40-80x rise in value) is what you endorse.

panika2008 said...

Gody, I like your back-of-the-envelope calculation. This target (11k$/oz=9x price rise) resonates well with other targets, such as backing of US M1 and servicing short- and medium-term government debt.

I really don't think we will ever see anything greater than this number (in real terms, that is!). Except for maybe a very short panic, but even in the panic I don't think gold would get to the 500x mark, as it would mean, as Gody mentioned and I try to clarify in many comments above, that gold owners would own the world and the gold market would crush everything else.

mortymer said...

For me it is not relevant how wealth will grow in today´s terms, why do I need to know now anyway?; it is about how well it will be protected until empleyed.
Paper wealth is a debt of others and nothing else, potential walth clam parked in unfinished contract, this wealth will feel the heat and it will try to escape, we see it a tiny little now, from one speculative investment into other, one currency to another, tiny fraction flows into gold, there are injections of liquidity keeping status quo afloat. On what scale will be other things priced meaningwhile? Hard to say, imo, there will be disruptions of different kinds. Where I want to be? Bonds? Stocks? Currencies? Art I do myself and I do not collect. Real estate? What is sure that my state pension I can not rely on, so untill then I do not care and like a lemming take a little step at a time.

costata said...

panika2008,

Nice to see that you panicked early.

"Should the price of gold, after "the crash" rise to such gargantuan heights as 500x current real value, the world economy would probably grind to a halt and the only functioning industries would be trading gold derivatives and gold mining."

Why?

"...gold owners would own the world and the gold market would crush everything else."

How?

Thank you in anticipation of your explanation of these predictions.

Cheers

Gody said...

I hear what you are saying. Did any of you ever hear the story of the gold coin that someone kept 2000 years ago earning 5% interest per annum; That it would now buy the whole world.

Exponential growth is unsustainable. What has that got to do with freegold someone may ask?

Think of it this way, what would happen if all the paper money including digital money tried to purchase tangible resources at once? You cannot buy more than exists no matter what that money is.

Concerning future debts; what cannot be paid will be defaulted on (by the way hyperinflation is a default. No, I will not debate that one. Just look at the effect)

FOFOA said...

Gody,

"what would happen if all the paper money including digital money tried to purchase tangible resources at once?"

I am talking about gold as a physical wealth consolidating asset, not a transactional currency.

People with a lot of gold know they cannot convert it ("spend it") without devaluing it. Just like Bill Gates and his MSFT stock. The purpose of a wealth consolidating asset is to store value for later, not to spend it. Spending it "at the top" is a trader mentality.

"Concerning future debts; what cannot be paid will be defaulted on"

Paper wealth (other people's debt) certainly exceeds what you say should be a limiting factor for gold. Why does paper do better than gold? Is aggregate paper worth more than aggregate physical simply because it can go into default? Is this your argument?

FOFOA

miked said...

A couple questions for FOFOA

According to http://en.wikipedia.org/wiki/Gold_reserve voluntarily declared national gold reserves are exactly 30,000 tonnes (I added all the reserves on that page).The same page indicates all gold ever mined is estimated to be 165000 tonnes.

Less than 20% of all gold is in government hands. And a piffling 5% belongs to the USA, assuming they report honestly.

I have seen calculations bandied about recently stating that if Gold were 36000$ an ounce or even 500,000$ an ounce, the USA would be able to use that gold to repay its debt.

You have also stated previously that you think the mechanism by which a revaluation could happen might be through imputability"

"It's called imputability. If the CBs wanted to, they could put out the offer to buy and sell any and all gold at $50,000 per ounce. How much gold do you think they would get flowing in? The answer is they would get less than you think, because that price would be instantly imputed across the globe as long as the offer was credible. "

Here is my question. Do you think a handful of countries controlling a small percentage (say under 10%) of the gold store would be able to make a "credible offer" by pricing gold at what most people would perceive to be an unimaginable price? Let's say people thought it was not credible. Don't these countries run the risk of having to print enormous amounts of money to take delivery of this gold which could later become worthless if they are forced to retract their offer? And wouldn't countries without debt problems be likely to take up the kind offer and flood the market with gold?

Let's say China refused to swap their 2 trillion $ of American currency for 500,000$-an-ounce gold because they refused to believe this price would be sustained. Surely for such an event to occur it needs to be sanctioned by nearly all major governments, and even then there is a risk the public will cash in if they think the offer would not last a lifetime.

And a second question. In your writings you assume that gold will become currency and we are looking at 50 to 100 magnitude revaluation, but surely it can also just become the money base to back a paper currency? A money base can be one tenth of the money supply, meaning a 5 or 10 fold revaluation could be sufficient. Convertibility could be maintained at this level in the same way a bank is able to deliver cash with only 10% reserves.

capt goodvibes said...

Gody said:
"Did any of you ever hear the story of the gold coin that someone kept 2000 years ago earning 5% interest per annum; That it would now buy the whole world.
Exponential growth is unsustainable. What has that got to do with freegold someone may ask?"

FOFOAs post from 1 month ago, Life In The Ant Farm, told this very story, and addressed its relationship to Freegold.
With all due respect, I would like to suggest that you familiarize yourself with a little more of FOFOAs material. All of your observations have been addressed previously.
There is a list of suggested reading in the post above.

Jeff said...

I viewed freegold as meritocratic; a leveler of playing fields, destroyer of impossible debts, but at the prices described it seems something else altogether. Not just a wealth consolidator but a wealth amplifier.

Gold would flow one way, from suddenly rich Indian brides to central banks. If Saudi Arabia has been buying for decades they would be the most wealthy nation on the planet by far. Per capita, their wealth would be almost incalculable. Not to mention they still have oil. As FOFOA says many people would have their paper 'nestegg' severely devalued. Not just many people, but 99% of the worlds population. Such a radical redistribution of wealth would be extremely destabilizing. Is this freegold?

capt goodvibes said...

Jeff,

I think the majority of those seeing their paper 'nestegg' severely devalued would be the middle class of the Western industrialized nations.

Most people in the world are poor. They have little to nothing to lose. Those poor people with assets, outside the West, are likely to have 100% equity in those assets, never having had significant access to credit.

Large numbers of people in the East hold their wealth as metal, if they have wealth to hold. They have always been deeply suspicious of banks.

Generally speaking, we would be looking at a massive redistribution of wealth, predominantly from the West to the East.

The Saudis, with their foresight, and the millions of people who have always trusted in themselves to safeguard their own wealth, lived within their means without the use of credit (consuming the future), and generally been responsible for themselves will be rewarded.

The middle classes of the West, having lived beyond their means for decades, taken little responsibility for safeguarding their wealth by choosing to entrust it to bankers for a 'return', living within a welfare state, assuming they will be paid to spend decades of their lives in 'retirement', and generally clamoring for big government to assume more and more responsibility for them, will lose.

Sounds like the definition of 'meritocracy' to me.

panika2008 said...

capt goodvibes, do you really think that the would-be new order with Chinese, Indians and Saudis holding most of the world's wealth and totally dealing the cards would be in any way better, safer, stabler, normal or meritocratic than today? I would like you to remember that the nations whose leaders performed systemic ideologically-based genocide on the scale of tens of millions against their own population and the ones that totally approve getting you stoned to death for adultery are not USA, UK or France. Something to ponder.

And do you really think that these poor people and nations without the access to credit are so poor because USA or whoever actually exploits them? Because, as I see it, you have it backwards. It's not that they are poor because someone denies them access to debt markets. It' more like they are denied the access because so far they have simply not demonstrated commercial and technological prowess on the level of the western world. Giving them power and ubelievable (for them) wealth would not "fix" anything in the world. It would make it much, much worse.

panika2008 said...

costata, regarding your questions:

1. Having the worldwide stock of gold revalued at 500x in real terms would make trading, lending, minting, digging and transportation of gold roughly 500x more profitable (in real terms) than today, assuming roughly the same flow of species (which would or would not happen, this depends on many issues). Why do you think the global society would prefer to trade, dig, transport, lend, securitize etc gold instead of for example build roads, houses, research the cure for cancer, improve microprocessor technology etc? Because it would mean that in this world, the new financial, gold-based sector would probably be even bigger than it is today!

2. The "real" economy would grind to a relative halt becase a lot of people would be severely inclined to go for the freshly available profits in gold. Why do you think the main industry of many western american states in the late 19th century was digging and processing gold? Because there was a lot of it. The situation described by FOFOA would be almost exactly the same, with the minor difference that the supply would be expanded not by the increase of physical availability, but by extreme growth in value per unit. The second difference is that this time, the gold rush would be global, not limited to some underdeveloped wild west places.

3. Gold owners would own the world because if the value of gold was 500x where it is today, it would make it relatively easy (political barriers aside) for the current gold owners to just buy most of the world's real estate, factories, infrastructure, rolling stock, oil rigs, mines etc etc. The gold market would crush everything else in this sense and the sense described by me in the previous two points.

capt goodvibes said...

Panika2008,

Would your point of view not be different, if you were a native of India, rather than Poland?

panika2008 said...

capt goodvibes, probably yes, but probably not because of the reasons you think I would. None of the bad things described by me happened in India and I almost have nothing against Indian supremation of the world (apart from their quite strong nationalism, minor issues with the - hopefully vanishing - caste system, and the fact that due to sheer egoism I'd prefer it to be Poland - ha!). Out of Asia, I guess that Indians are closest to the values and, in general, ways of the west. Foremost, they can both work hard and know how to efficiently organize their work into an economy. That's the way of the west. And they are already very integrated with the world economic system, they achieved actually something similar to what Poland achieved - to earn their high place in the world through hard and honest work. This I like and adore.

capt goodvibes said...

Panika2008,

1. In-ground gold reserves would be nationalized.

2. In-ground gold reserves would be nationalized.

3. The current owners of the bulk of the worlds gold already own most of the worlds other assets.

panika2008 said...

And I actually believe this has a lot to do with the infusion of western values that was the result of the british colonization. Russia, China, North Korea, Vietnam - no such luck (or "luck" because yes, the colonization was a massive use of force. OTOH India was treated on an almost parter-like level by UK, they did not receive even 1% of the humiliation and barbarism Poland received in the years of German and later Russian occupation).

panika2008 said...

capt goodvibes, these are very good points. And it is exactly possible - through massive nationalization and manipulation of markets that would make 2010 look soooo libertarian. And come on, calling this freegold...

radix46 said...

FOFOA,

One problem that has been bugging me with regard to the Another/FOA gold/oil thesis and hence the freegold scenario is the patience that would be required by the OPEC countries before their gold is valued at its real price and hence their true wealth realised.

I could perhaps manage to get around this with the Saudis as they seem quite a stable forward looking bunch with a long term power structure. However, basket-cases like Venezuela?

How could a country like that possibly have the discipline to play the game over a period of decades in which their fiscal situation has created great hardship for the country? Same for Algeria, Nigeria, Lybia, Ecuador, Iraq and Iran. These countries have been far from stable. So for the eventual freegold plan to work, all of the leaders - the radically ideologically diverse leaders - would have to play ball over a very long period of time. This doesn't seem likely to me.

Is there something fundamental that I am missing? (there usually is!!)

miked said...

As far as I know what is in the ground is already government property so renationalisation of gold in the ground is not a big new infringement of civil liberties. Since gold would be money it's logical the government would control the supply. That's no different from the right of the government now to declare that paper currency is legal tender.

A gold mining tax is an alternative.

But for sure there would be a new black market in stolen gold.

What might disconcert some gold bugs is the possibility that all gold not in already central bank hands be excluded from the supply. ie - only gold with a government stamp could be money. That would spoil the party, but it would be more fair as when we get the big reset everybody would start with nothing.

miked said...

Radix46

I don't think those countries have a choice. They take the price which is determined by OPEC. If they buy gold with the money they get for their oil, good on them but it's not a requirement for the oil for gold trade to work.

radix46 said...

miked,

Why would these countries who just had to 'go along with it' not simply expose the game and get the true value for their oil?

Sure, this might upset the apple cart a little, but situation in some of those countries surely would have been seen to be significantly dire at some stage over the last few decades to warrant them making a play for short term riches?

In response to your point about any gold without an official stamp being outlawed: assuming this could not be counterfeited, then wouldn't this make gold significantly less valuable in comparison with something like silver or another currency proxy which would then be used by the freemarket?

miked said...

Hello again Radix46

As I understand it The Arabs are supposedly making forward contracts for delivery of physical gold directly with miners and in large numbers. They use the petro dollars they earn to pay for the delivered gold. If the cheap gold supply dries up they have less incentive to sell their oil into the market cheaply too, as it will cost much more to get an ounce of gold. What venezuela does with it's money is of no consequence. They can play the game too or they can squander their dollars on social programs. It's up to them.

Re: outlawed gold. It was just a thought I had. Not that gold would be illegal. Rather that freemarket gold could not ever be used for reserves unless the government chose to make it so by going into the free market and buying some. It would maintain the two tier market for gold. Central bank gold would retain its premium. That's not to say gold in your pocket would not be very valuable. After all gold was illegal for 40 years in the USA until 1971 but it still had a value in anticipation of the day the law would be changed.

radix46 said...

miked,

Thank you for that clarification and indulging my fuzzy thinking. So the future oil for future gold is a way of mopping up excess dollar profit and keeping the system alive and this requires a low gold price.

This means that Venezuela are also doing the future oil for future gold program or otherwise they would be getting fleeced out of a large portion of their profits. If they weren't playing this same game then that could only be because they didn't understand it existed and therefore believed in the current dollar oil price as being the true one.

Assuming that this system does in fact exist, then I also assume that they aren't that naive and would have knowledge of it. So they do have an option outside of the two that you mention, ie playing the game or squandering their cash on social programs, and that is to expose this system to the world which would force up the gold price and cause this one time transfer of wealth to them. I would have thought that this might be very attractive to a poor country who might decide to take the wealth now and take their chances in the new chaotic order that would transpire.

This may seem illogical to some in that it may interrupt future oil profits but to a country that isn't doing so well now, hasn't been in the past and doesn't have great prospects either it could be a good bet.

Leading from this - what was the eventual end game anyway? Was the future oil for future gold program to continue in perpetuity or did the gold receivers anticipate a revaluation of gold and hence a realisation of their immense riches at some point in the future? If so, was this point set?

GOLD FREAK said...

"Such a radical redistribution of wealth would be extremely destabilizing"

The current distribution of wealth makes for an unstable world. Look at the situation in Bangkok. The city was pure chaos a week ago. A revaluation of gold would help stabilize the country.

miked said...

Interesting questions Radix46

Why would Venezuela not expose the game? Some answers I can think of:

1) The game doesn't exist. There isn't hard proof it does. Just speculation on a few forums.

2) They don't know about it. Unlikely, as most OPEC members would probably discuss wealth enhancing strategies.

3) They don't believe that gold is going to the moon. This is also likely as megapriced gold is a relatively new concept.

4) Governments talking of gold at astronomical levels is political suicide as it will bring on an enormous crash and nobody wants to take the blame for that.

And the endgame? Another good question. From what I have read the Arabs merely wanted to protect their wealth as oil gets burned and gold does not. It's no secret that there are 6 times as many people in the world as 1950 but gold is probably significantly cheaper - inflation adjusted. That's got to be a deal.

One thought I had was that if all the gold does end up in one place it will no longer have any value. It needs to be spread around for there to be a market. Otherwise the rest of the world would just move on and use something else to denominate money.

mortymer said...

The biggest fundamental change is in the mentality of masses, going from addiction on cheep credit and spending into savers. This takes time. I see more clearly in future what happens with credit and the destruction of excessive debt system rather than how the gold will play out. That was also my question from few posts ago on: "what after freegold?" Anyway gold surely will appreciate against the debt system and that is the point.

mortymer said...

I see also next steps, after Iceland, Dubaj, etc now it is Spain and next it will be something outside Europe. Same story again and again. And slowly more will go to gold. (More investors will find the truth in: "spend your time in the company of truly wealthy ones, see how they make gold lie very still!") So in reversal to present situation more invested capital will flow into gold and lie untill it will be employed in future. Future huge price of gold will erase the debt and then the landscape is different. The capital will see many new opportunities and flow out of gold in search for profit. Do I care what items I can buy in future? For next few years good small business will be secondhand shops. Many will find true value of small items and owing/providing the part of local market(s) is where to be next.

FOFOA said...

Howdy Folks,

For whatever it's worth, I am going to stop playing the defender of $500K gold. I made my point. Some of you got it. And most of you know where I stand on this issue.

And if anyone is interested in Steve Hickel and his $500K gold idea, here is a different piece in which he wrote about the much more "reasonable" (and quite specific) price of $156,128.78/oz., as it was linked on GATA back at the height of the 2008 crisis.

And here you can preview and then purchase Steve's book, The Bright Shiny Gold Lie: A Constitutional Crisis, if you are so inclined.

Sincerely,
FOFOA

Segestan said...

Every man, however wise, needs the 'advice of some sagacious friend in the affairs of life'.
Titus Maccius Plautus

'How great in number are the little minded men'.
Titus Maccius Plautus

Just to let you know you're view is the best I have read on the topic of Gold and Finance... keep up the good work FOFOA.

carpenter said...

Hello FOFOA and fellow gold trail hikers

I followed A/FOA from the Kitco forum to the USA Gold forum. I have walked the Gold Trail and haven’t taken off my backpack yet. My back pack holds gold, “ all metaphorically speaking of course”, except the part about reading A/FOA for about a decade.
I like to barter for my work as a wood worker, let me explain; when I can, I like to trade my service for gold. It started in jest at first when a customer asked how I would like to get paid, I jokingly said gold. To my surprise he claimed that he could do that. That was a couple of years ago. Now I explain to my customers that if we trade work for gold I can take 25% off the bill, kind of like settling delivery on a gold contract in cash plus 25%, only backwards. It’s not as easy as it sounds because most people don’t know where to get gold but want to take advantage of the discount. I give them a list of local dealers that know that I send them these patrons. Naturally a lot of people pay me in cash or check regardless. If gold ever becomes legal tender my bartering days will be over. Well enough about me. FOFOA I enjoyed Reflection so much it made me post.

Gody said...

People with a lot of gold know they cannot convert it ("spend it") without devaluing it. Just like Bill Gates and his MSFT stock. The purpose of a wealth consolidating asset is to store value for later, not to spend it. Spending it "at the top" is a trader mentality.

Bingo Fofoa.

Once Gold becomes a store of value, will the "system (this includes the people)" not continue to accumulate it for this very purpose?

So, it's store of wealth will be illusionary (Just like paper is now if its perceived worth is greater than what it should be).

My point is simple, will gold soar? certainly. It has been suppressed for so long that it will find its true value. But if it is overvalued, then it too shall be forced to shrink and stabilize.

You cannot own more than exists.

dojufitz said...

In a FreeGold World let us not forget the enormous capital gains Tax the government of the day would receive each time a person sold their little ingot.

Jeff said...

interesting interview re: gold

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/28_Felix_Zulauf.html

Andy said...

I suppose we are all now walking the latest path on the Gold Trail.

Aleksandar said...

panika:

You are mixing (subjective) moral judgements about the "deservability" of resources and wealth within free-markets. There is no such thing as "I (we, they) deserve this" in a free market. The market exists as a natural law (like gravity) and we should neither demonize nor praise it. It simply is. A free market is a physical state and not a choice (despite socialists that want us to believe otherwise).

Note that nobody says that meritocracy is moral and ethical (when viewed from todays standards of what is moral and ethical). Nor that, as a socio-economic order, it is better than current setups. For many people it will be actually worse.

Besides, a freegold system would reward producers and punish wasters. Even the Saudis need German machines and foreign labour. They also need to protect their oil wealth and pay for it. Remember, "there is no such thing as a free lunch" even when it is flowing from a hole in the ground.

(This is also part of the answer to radix's question as to why the Saudis tolerate the paper-gold system for so long. They dont really have a choice. Other countries have a leadership that does just fine in these circumstances- Gadhaffi case to the point)

So, even if Saudis and Indians suddenly find themselves very wealthy, they will be parted with their wealth quicky unless they prove to be as industrious and sophisticated as the "West". No problem there for me.

Segestan said...

@Alexandar

Right you are. Nothing new in all this wealth redistribution; those nations who have the human resources will acquire the material resources from those who only by accident find themselves wealthy beyond natural ability.

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