Saturday, June 19, 2010

How Can We Possibly Calculate the Future Value of Gold?

Stefan brings up a recurring topic of discussion here at FOFOA. He asks, "How could gold ever be worth more than $10,000 in today's dollars?" And I reply, "How could it not?"

Then again, look at what we're arguing over. As Michael Maloney said, It'll either be breathtakingly spectacular or stunning, one or the other.

Stefan Pernar said...

Have been doing a bit of math:

Total world wealth in 2007 in 2000 US$ = 125.25 Trillion [1]
Equivalent 2010 dollars = 125.25 TUS$ * 1.25 [2] = 156.56 TUS$
Total above ground gold = 158'000 metric tons [3]

Theoretical maximum gold value assuming ALL wealth flows into gold = 156.56 TUS$ / 158'000 tons = 30'816.55 USD / oz

Comments: this assumes that all the value of all other assets (silver, commodities, stocks, gems, houses, currency, land, etc) drops to zero. Assuming that only half the value of all other assets flows to gold then we are looking at a rationally defensible 15'000 USD / oz in 2010 dollars.

Considering that since 2007 total wealth dropped significantly due to the stock market correction this figure will have to be corrected downward 25% again. So we are looking at a realist maximum 2010 dollar gold price of around 10'000 USD / oz.

Projecting a 50'000 2010 USD gold price assumes world gold wealth alone (50'000 USD / oz x 158'000 tons of gold = 254 TUS$) eclipsing total 2007 world wealth (all assets) by about 2/3.

Conclusion: A future gold price of 50'000 USD / oz in 2010 dollars without an accompanying global total wealth increase by about an order of magnitude is grossly unrealistic.

[1] Estimating the Level and Distribution of Global Household Wealth, United Nations University, 2007

June 18, 2010 7:58 PM

Hello Stefan,

I don't think it is as simple as pouring a hundred cups of water into one large beaker and noting the total volume. But you do bring up a few common misconceptions. There are a few trillion possible methods to attempt to presage the full impact of this thing called Freegold. So as I said in Metamorphosis, "Let's spin this globe and take a look at things from a slightly different angle."

Instead of looking at wealth, or even debt, let's look at "purchasing power". Better yet, let's look at the concept of "Stored Purchasing Power". Now I realize that most people's "stored purchasing power" will be deployed at some point over the next ten or twenty years... those that have any. But for the sake of understanding the theoretical concept, imagine that I have immense stored purchasing power. Imagine that I am a "super-producer" giant. Imagine that I make something that everyone in the world wants and needs.

Let's suppose that I am similar to Bill Gates, only much more necessary to the human race. Yes, I have moral charity obligations that come with my significant wealth, but do I not also have the right to store some of it for future use? Should it be illegal for me to store my productive effort so that my descendants could benefit from it for generations to come? If you make such a thing illegal or impossible I will likely not produce as much of what everyone wants and needs! Is this a good economic strategy? Or is it an economically limiting (perhaps even deflationary) strategy spawned only by envy?

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people. This is perfectly understandable. But does this mean that I should forfeit the fruits of my labor after some point in time or at some maximum? Of course not! That would be socialist nonsense. As long as my storage of wealth medium does not infringe on anyone else's industrial growth, then my accumulation actually contributes to economic expansion.

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time.

With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.

And an interesting side effect of spending my considerable wealth in the here and now is that it not only reduces the purchasing power of the rest of my wealth, but also everyone else's who holds a similar medium as me. In aggregate, a faulty storage medium is self-limiting.

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today? This is a good question, yes? But how could we possibly know? Today it is all denominated in worthless paper! As Another said:

One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds its worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms".

Your past holds little of knowing value outside of currencies, this does block the good view!

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

Stefan, is an American home on an eighth of a desert acre really worth 200 men's suits? Is an Ivy League education in Investment Banking really worth 2,000 barrels of crude oil? Who knows? We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades. How will we ever know what things are really worth before it all collapses?

I am not as smart as the Superorganism that makes up the marketplace. No one is. So how much "stored purchasing power" exists in the world today? It is an impossible question to answer, yes? But let's try thinking about it for a moment anyway.

For at least 66 years now the whole world has been operating under the $IMFS. But when we really look at "who is the dollar faction" and "who is the non-$ faction" we see that roughly 25% of the world profits greatly from this system and 75% of the world is essentially "taxed" by it. In other words, roughly 25% of the world has been running a trade deficit for 66 years while 75% has been running the necessary surplus to support the other 25%. I know this is a bold, generalized statement to make without full explanation, but these are conservative numbers that I have used and explained in many posts.

For simplicity, let's call these two zones "The West" and "everyone else". Now what are a few broad, sweeping generalizations we can make about these two zones? For one thing, those in the West, unlike most everyone else, operate, as ANOTHER put it, "without 'loss of currency' Experience." And because of this they exhibit a level of confidence in paper storage of purchasing power that is quite surprising to everyone else.

The West loves its paper wealth. It loves to record it, to publish it, to know where it is, to know where it stands, to throw its weight around with it, to tax it, to track its movements, and occasionally to take it away. It is this $IMFS fascination with paper wealth that made it possible for you to even find a number for "Global Household Wealth", Stefan. And when I think about this number for a while, it is hard not to laugh at the absurdity of it.

Let me ask you this. Does that UN survey take into account the "stored purchasing power" of the Indian wives? How about the sovereign wealth hidden in Saudi Arabia? What about "old money" and "royal wealth" hidden in Europe? Large swaths of the "everyone else" 75% never stopped storing their purchasing power privately in gold, knowing that one day it would be restored.

Other recently liberalized regions are now playing extreme catch-up. And yet other subsets of "everyone else" learned the hard way how "all paper can burn" under a soft money regime. How are they all storing their productive efforts these days? What lessons did they learn from 'loss of currency' Experience?

And what about the 66 years worth of surpluses centrally accumulated in national central banks and sovereign wealth funds? Were they counted as part of the "Global Household Wealth"?

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

So when the plug is pulled on the matrix and the pitcher of water disappears, how much water will be revealed in the physical plane beneath? I guess this is the $50,000 question, yes?

If you are just dying to be able to visualize the actual mechanics of this transfer of wealth that could explode aggregate value to a much higher level than your linear model allows, Stefan, I'll give you a brief glimpse. Gold holds its unique position because it is pretty much used for nothing else. It has an extremely high stock to flow ratio. "Stock" means those who are sitting tight on their physical gold, letting it lie still for the future, and "flow" means those who are presently trading their gold.

One of the false assumptions of your linear model is that real physical gold must hold the same time-value-durability confidence level throughout 100% of the world that paper wealth holds in 25% of the world. So as people sell their paper wealth and buy physical gold, the price rise will bring down the stock to flow ratio to a much lower equilibrium point somewhere around $10,000 per ounce.

Gold is not like other commodities where supply is economically driven to ramp up and meet demand as prices rise. Nor is it like paper investments that have objective metrics like price-to-earnings ratios and interest rates. With gold, a rising price sends the exact opposite signal to the place where supply comes from. It confirms the belief in those that already hold the "stock" that it is a good investment and it is best to sit tight and not re designate it to "flow".

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand. And this dynamic obviously has nothing to do with today's paper gold market where physical stock lies very still and paper stock meets most of the demand.

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

The true Giants of this world that hold large amounts of gold have a good idea what their gold is worth. And yet, when it finally gets there they will still not liquidate their "stocks". This is because gold as a store of purchasing power has an infinite time horizon. These Giants are not interested in "catching the top" like Western traders. They are interested in storing purchasing power well into the future.

I guarantee to you that the Noble families of Europe still possess some of the same exact pieces of gold that were in their families in the 16th, 17th and 18th centuries. And this is purchasing power stored (and increased) through several currency collapses!

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude. Here is what my supercomputer spat out:

Take it for whatever it's worth, which, of course, only you can decide for yourself. The $IMFS is failing. Please don't let the fears, envy or baseless doubts of others obscure this reality. You can choose to participate in the recapitalization of world finance or you can be a victim of it when the lights go out. The choice is right in front of you. So decide what you'd rather be: a participant in the rebuild, or a victim of the collapse. Amazingly you still have this choice available as I type these words.



Patrick said...

The transfert of wealth from the old west to the new east will not be done using the dollar...that is IMPOSSIBLE..although uncle sam would love it...

William said...

First of all, I appreciate this blog a great deal. It has regular updates that are well thought out and the visual aides really help.

I have a question:

What will be the role/price/disposition of the various "rare earth" metals in a Free Gold scenario? Unlike in the past, are we not now dependent on electronics, aviation, and computer chips? Most people do not view something like, say, palladium as a "store of value", but certainly it and metals like it are "hard assets" and inherently limited in supply. Is there any possibility that the "useful" metals will give gold a "run for its money"?

Saul said...

As for the price of gold, my understanding is that this is set "at the edges". Consider a stock on the stock exchange. You don't sell all of the stock in a company to change it's value. Instead, the last sale sets the price that all the rest of the stock assumes. Prices are set at the buy/sell coalface. More buying pressure puts the price up, more selling pressure and the price goes down. This happens one transaction at a time, and can be paraphrased as "the market". When you buy or sell something, for that instant, YOU are the market. Multiply your experience by hundreds or thousands, and that's what you see. This whole argument about total world wealth versus total gold ounces seems somewhat bogus to me.

What's more of interest is if more people "want in" to gold - which will drive it's price up and up. It comes down to faith in currency, as gold is the fall-back. Governments all over the world are backed into corners. The are mathematically bound to fail, as exponential graphs behead their publicly stated plans for the future. They know what's ahead. Currency pegs are the Goliaths of this world.

ps. The "gold porn" pics are a bit too much. Makes my oh-so-few ounces seem miserable....

Blondie said...

William, read the post again, and then you can delete your comment before too many others see it.

Saul said...

Further my comment. It is quite possible that I'm missing something major about this concept of "freegold". Without sounding too much like the Grinch, perhaps the price of gold is a little bit more than "the market"....

(I'm hoping my brain will grow three sizes with a comment like that, but I doubt it).

song! said...

Hello FOFOA, I have been reading your blog for quite awhile now, without commenting.
My question is what benefit is freegold, if the larger amounts of gold are held by Royalty, Banks etc? Seems to me, that wealth will be further centralised, undermining any possibility for democratic nations to be preserved? This sounds so Merovingian--beehive like, the eternal tessellation of the ruling elite at the top of the pyramid merely changing the monetary system for further gain. As for France? well what a better name for them than the Hexagone as depicted in Thouret's map--template for the European Union built from what else? The top down.

So, even if gold should become worth 50,000 an ounce? What good will it be as humanity around us is starving, fighting, and dying.

Gold, just like the solar God entity is the ego's ultimate bauble.

Jimmy said...


I really like to read your writings and your humor (for the other articles). I agree with the most of your writings.

But I've ONE question about the practical use of physical gold after revaluation: How will the international/local trade happen? Carrying physical with planes or boats? Legalising private use of guns to defend your transport? It doesn't looks very practical to me and it looks an expensive joke...

So I believe in a new 'gold-backed' fiat currency, only for the practical use and cost-reducing process.



PS: In the last book, Eurocrash, of Brendan Brown, he believes the dangers of great inflation could begin in 2012/13 (p180), grace to QE of the nutty professor Bernanke. Very good book to read it, but also difficult (sometimes must reread it two, three times to understand his meanings).

Sackerson said...

Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?

Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?

Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.

Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.

But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.

This farmer ( reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.

Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.

So if (as seems most unlikely)gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.

Blondie said...

In how many posts does FOFOA have to say this?...

Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way.

Any commodity in the "medium of exchange" monetary role experiences value suppression through velocity, which is identical in effect to increases in quantity.

In the "store of value" role, separated from the "medium of exchange" role, gold will achieve a much higher valuation.

Simply put: the store of wealth function of 'money' will split off from paper currency, and be replaced by gold, out of necessity. Paper will continue to perform as the everyday medium of transaction, your everyday 'spending money'.

Looking at some of the comments... the post may need rereading, a little slower this time.

Saul said...

I wonder about this common human problem : lying. Who will believe what the governments say, when they claim to have x tonnes of gold? In the US, Fort Knox has been unaudited for decades, and even if the gold bar is there, who knows how many times it's leased out?
The whole tungsten salted bars rumour also damages gold's credibility. Fraudulent paper we are used to. It may be that there is a great deal of fraudulent gold also. See further
Won't this credibility issue hamper "Freegold"?

Stefan Pernar said...

"The biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow."

Touché. An example to illustrate this - albeit from the opposite direction - is the drop of several S&P 500 stocks to 1 cent during the 5/6 flash crash. Will keep paying attention.

Andrew said...

Remember the adage of the "noise is loudest as you near the end zone..."? Yep, we are getting close... Paper burns... Thank you FOFOA for your continued efforts to illuminate the path. Too many people, I suspect, are tied to a system that has taken from the productive and re-distributed to the non-productive; and that is now over. That will be fought to the end, but end it will.

Terry said...

What if gold could be used to cure cancers and aids? What if gold had been used as a mystical substance such as "Manna" of Biblical times? What if gold was the mythical "Tree of Life" mentioned throughout history. What if gold was the key to immortality. What if gold was a room temperature super conductor? What if gold was the key to faster than light travel, and time travel? Would that not make gold the ultimate store of value? What if these uses of gold had been lost 5000 years ago, and recently been re-discovered by David Radius Hudson. What if the government knew this?

Segestan said...

Jesus tried to tell the truth and few listened. Some things never change.

Best site on the net for facts and reality.

Dave Narby said...


I'm confused. The lower bell graph contradicts what you've said earlier, that 1bbl oil ~= 0.1 oz. gold.

That bell curve has 1bb oil ~= 0.02 oz gold.

Unless my math is wrong, that's a staggering drop in the price of oil relative to everything else.

Greyfox "It's the Debt, Stupid" said...

Too much debt, too many unfunded liabilities, ruined economies, unending war, etc. will compel gold to replace fiat/paper assets as a store of value. Gold will recoup its historical value status as fiat unravels like a cheap suit.

Gold reclaims its currency status as the global system unravels
20 June 2010

"The World Gold Council said on Friday that the central banks of Russia, the Philippines, Kazakhstan and Venezuela have been buying gold, and Saudi Arabia’s monetary authority has "restated" its reserves upwards from 143m to 323m tonnes. If there is any theme to the bullion rush, it is fear that the global currency system is unravelling. Or, put another way, gold itself is reclaiming its historic role as the ultimate safe haven and benchmark currency."

carpenter said...

Blondie said….

In how many posts does FOFOA have to say this?...

"Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way."

When I first came home with bartered gold for my services my wife was terrified.
She said, how are we going to pay our bills? I explained, we will use our savings. With her objections that is exactly what we did. Now over two years later she no longer thinks it’s as crazy as it sounds, our savings now ”gold” is a store of value for our hard earned work. And cash is used for the day to day economic transactions all of us face. As FOFOA implies one day we probably will hold gold very quietly like the giants and use a credit/debit card for quick trade. In my present day micro economic situation it makes total sense.

William said...


Why would I delete my comment? I am asking how the collapse of paper fiat will affect the prices of rare metals in relation to gold. It is a relevant question, since, unlike in previous times, society has an ever-growing demand for these metals for use in computers, cell-phones, etc. Obviously people here think gold will become the new "store of wealth" - but that doesn't answer what will happen to other non-paper assets, specifically other precious and rare metals.

For instance, say gold goes to $50,000 an ounce. Under previous monetary regimes and various gold standards, silver traded much higher in relation to gold than it does now. But what about Free Gold? Will the gap widen even more than it already has? If gold goes to $50,000 in today's dollars and silver doesn't move with it, can you really predict the market would value 1 ounce of gold more than 2,500 ounces of silver? I find that hard to believe given that for most of human history, silver sufficed for trade and money where gold was unavailable or impractical for reasons of unit size.

Jeff said...


Real earths are commodities; they are unrelated to gold. They are used up. What was the value of rare earth metals before electronics? What will be the value after the next generation of electronics uses fewer, lesser, or different rare earth metals? Lithium will never be gold.

costata said...


I can relate to your story, minus the barter for gold part. My wife had similar concerns. Now we share the attitude that cash is for expenses and gold is for long-term savings.

costata said...


Sometimes tempers fray when some topics and questions have been revisited many, many times.

In relation to rare earths and other perceived or actual stores of wealth. Will they still have value after the transition to Freegold and recognition of gold as the premier store of value?

The short answer is yes. Will the ratio of exchange value be the same as it is today? Many here would answer with a resounding NO. Gold will have a much higher exchange ratio with everything else because of its role in the new international monetary system that replaces the current $IMFS (see Glossary).

To understand why, you need to read the FOFOA archives.

William said...

Well partly I am playing devil's advocate, but also I am just curious about why the other metals are rarely mentioned (which I am not criticizing, its just that most gold folks tend to talk about silver too). I had the impression that folks here were eager to explain their reasoning - In fact this article was just that; FOFOA explaining his logic to someone who questioned his thesis.

Forgive me if this has been asked and answered, but why should gold be valued more AFTER the paper collapse then it was BEFORE paper wealth existed. If, because paper wealth has replaced gold as the common money the price of gold is thus artificially suppressed, then why wouldn't gold simply go back to its pre-paper money value when the paper money tanks? Gold was not worth $50,000 equivalent an ounce in Babylon, Rome, Venice, or Peking prior to modern fiat currency, so why should it be afterward? Or was it? These are honest questions I am not trying to prove anything.

costata said...


Referring you to the archives isn't an attempt to deflect your questions. Some of the answers to your questions are complicated and require a lengthy response. That is why FOFOA has written so extensively on these subjects.

Let me respond to one of your questions. This will be overly brief, of necessity. Bear in mind I am only responding to one of the issues that you have raised.

"Forgive me if this has been asked and answered, but why should gold be valued more AFTER the paper collapse then it was BEFORE paper wealth existed."

1. There is no directly comparable era in monetary history to the one we are living through. Never before has a single global reserve currency been as dominant as the US$.

2. This is the first time in history that all of the global currencies are pure fiat currencies tied, directly or indirectly, to one reserve, the US$. All fiat currencies are debt.

3. By orders of magnitude, the largest pile of debt instruments in history has been built on top of these debt based currencies. The largest portion of this overall debt (currency and other debt) is denominated in US$.

4. These debts cannot be settled (extinguished) by the payment of more debt (fiat currency). The only way to settle these debts, or some fraction of their face value, is through the exchange of something tangible i.e. goods or services.

5. There are not enough goods and services produced by the whole planetary economy to settle these debts, or some fraction of their face value, except one substance.

6. The reason that other goods cannot settle these debts is because most of the goods are consumed, including rare earth metals AND silver.

7. The reason that services, human + ecosystem + extractable resources, cannot satisfy the debt is because they are either already pledged as collateral or the future output of labour (that's what a 20 year mortgage is!) for the existing debt or they are not available as a surplus. Human beings and other species MUST retain a certain portion of their productive output for their own consumption and sustenance or they quite simply die.

8. Gold is neither consumed nor does it detract from the necessary consumption of other goods and services. It can re-capitalize this bankrupt system easily. It cannot do this by expanding in quantity BUT it can do this by expanding in price.

This response is way too brief. A/FOA and FOFOA have discussed these matters in their posts and explained them far better.

Now do you understand why you have been urged to invest some time in private research through the archives?

William said...

Thank you very much for the summary. No doubt I will seek out the archives - I have been reading off and on for a few months. What you argue makes sense in the abstract, but I fear that the US Govt would rather go to WW3 than lose its USD printing press. I suppose if it happens overnight, they may not have the chance.

Also, it appears gold has just hit a new nominal high in Asian trading at $1266.30/oz about 90 minutes ago. Interesting times, eh?

Sackerson said...

Historically, an ounce of gold buys a good hand-made suit. If gold becomes worth $50,000 that's more a reflection on the dollar at that point than on gold, I'd suggest, though there may well be a temporary speculative spike that well outruns inflation. Good luck with finding a buyer at exactly the right moment.

costata said...


"No doubt I will seek out the archives - I have been reading off and on for a few months."

I suspect you will be glad of that decision.


"Good luck with finding a buyer at exactly the right moment." (My emphasis)

Good luck with finding a seller at exactly the right moment.

Michael H said...


"It's not the stock that matters, it's the flow."

Agreed, and I think this is a point often missed.

In real terms, the amount of stored wealth that can be converted into goods and services must equal the savings happening at that time.

This is my fear for the future with regards to gold: if oil extraction peaks, population declines, and technology fails, then there may be no surplus to save for the future, and so gold may not find savers willing to buy.

"This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued."

Brilliant way of looking at things. Paper dollars has a way of clouding our view of the underlying reality, as Another wrote.

Regarding the FFPPDC - is it discussed in any of FOFOA's earlier posts? What are the underlying methods and assumptions?

@ Sackerson
"This farmer ... reckons maybe 160 acres to support a family"

As stated in the article, that answers the question "How many acres would it take you to totally support your family with today's economy in mind?" -- one would imagine that, if events lead to a revaluation of gold relative to land, then the assumption of 'today's economy' goes out the window. Also, 'stocks vs. flow' from FOFOA's article would apply to both gold and land in your discussion, making a simple ratio of gold:arable land likely meaningless.

"Historically, an ounce of gold buys a good hand-made suit. If gold becomes worth $50,000 that's more a reflection on the dollar at that point than on gold, I'd suggest, though there may well be a temporary speculative spike that well outruns inflation. Good luck with finding a buyer at exactly the right moment."

FOFOA's prediction is for gold to be values at $50,000 in 2009 dollars, ie increasing vastly in purchasing power, regardless of what the dollar does.

@ Dave Narby
"Unless my math is wrong, that's a staggering drop in the price of oil relative to everything else."

More likely a staggering rise in the purchasing power of gold relative to everything else. Oil is used up in the transport and manufacture of goods, and so the ratio between oil and the price of goods (and services) is not likely to change as significantly as purchasing power of gold.

@ William
"Gold was not worth $50,000 equivalent an ounce in Babylon, Rome, Venice, or Peking prior to modern fiat currency, so why should it be afterward?"

As FOFOA wrote in this post, the price of gold is set by the flows, both of people selling gold to finance current consumption based on past earnings, and of people buying gold to save for future consumption. With massive productivity increases thanks to technology and the leverage of fossil fuels, and with large increase of the human population, the ratio of savings to gold flows will be much different under freegold than they were in ancient times.

Martijn said...

Great writing FOFOA:

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

Excellent description.

Martijn said...


Send history my regards...

GoldSubject said...


A very deep post. Worth reading several times. It’s such a subtle topic, and yet so intuitive once one gets it. How very true that aristocratic families in Europe have physical gold as a wealth reserve, some of which has been in their position for centuries, without ever being deployed! A concept that the (former) middle class needs to take on board if they ever want to become “landed gentry” themselves.


FOFOA has clearly and repeatedly written that the $50,000 figure refers to non-hyperinflated dollars – that is, without correcting for inflation. If you take inflation into account, the figure is even higher. (And don’t forget that the $50,000/Oz. figure is a purely indicative one anyway.)

The whole deal about an ounce of gold buying a high-end suit has nothing to do with Freegold. This is about the revaluation of gold in real terms, over and above compensation for inflation.

raptor said...

>Forgive me if this has been asked and answered, but why should gold be valued more AFTER the paper collapse then it was BEFORE paper wealth existed

Another simple answer, banks hold it in big quantities ;) and started hoarding again ..(they don't hold silver or platinum ...)

This of course does not mean silver is not bad thing to have..
I think at least for diversification point of view is good to have some.

mr pinnion said...

william said

Is there any possibility that the "useful" metals will give gold a "run for its money"?
If this lot are right, thats like saying ...
Is there any possibility that the "useful" metals will give gold a "run for its self"?

I de like someone to answer one of the other questions you asked about gold not being worth $50 000 equiverlent in roman times when it was used as money.

I ve heard it said that gold still buys as many loafs of bread as it did 2000 years ago.And still gets you a good suit , so on.

I find it hard to beleive 1 ounce will buy me a house in a few years time.If that were true, then a working class person would not be able to protect his ounce of gold if he had one. And as soon as he tried to spend it in the mad max ish world he was in ,then it would be stolen from him.
Read Ferfals book about the Argentina collapse.It realy does explain what happens in the real world.


William said...

Saudis hold twice as much gold as previously believed:

mortymer said...

1 year old Flashback:

mortymer said...


raptor said...

raptor said...

Gold cannot be “just a commodity” if gold is the only metal owned by central banks

Central banks don’t own silver, or platinum, or copper, or lead, or aluminum, or zinc, or nickel, or any other metal for that matter but only one metal, gold, and not a few pounds but 30,000 tonnes of it. So the next time you come across the uninformed opinion that gold is a commodity like platinum and over-priced due to the irrational enthusiasm of crackpots, kooks, and cranks, remember that gold is the one and only commodity owned by central banks and in monumental quantities. Literally.

Why do central banks still own gold? I wondered back in 1998. Why didn’t central banks sell the useless yellow metal and use the proceeds for more constructive purposes than hoarding?


Brad said...

I just like the pictures.

costata said...



costata said...

Heads Up Everyone,

Forget the blogger's name and focus on the story. IMHO after the currency wars have run their course we will see the capital wars.

Russia Scraps Capital Gains Tax Hoping to Attract Investment

raptor said...

A comment from prev article is worth mentioning :

>While a new reserve currency is likely years off - much less a gold based one - perhaps you might expound on how present gold reserves might translate into future purchasing power (or not)

>> A temporary return to a fractional gold-backed dollar for international transactions does not require all nations to have the same amount of gold relative to the domestic money supply, only enough gold to cover foreign exchange needs.

Sackerson said...

@ Costata & Michael H:

If we take 1980 as an exemplar, we see the spike was very short in duration. Chances of selling at the right moment are slim - but lovely if it works for you. The message it seems to send to me is that when the gold bugs look like becoming insanely wealthy, the system changes. I did recommend gold to others in the early 2000s, when it was undervalued compared to its historic long term average. But if you expect to walk away from the poker table with all the chips, don't turn your back.

FOFOA said...

On future gold taxes...

From an email: "I think for a variety of reasons they will not attempt to confiscate gold, though they can impose various kinds of taxes (especially on dollar sales of gold)."

From my reply: Taking Freegold to its logical conclusions one can deduce a few things about future gold taxes:

1. Capital Gains tax will almost certainly NOT be applied to physical gold carried through the fire. Government today makes no distinction between ETF shares and physical, and does not track small cash transactions. There will be no possible cost basis on which to widely attempt to collect such a tax. And in "gold" (most Western "gold investments") it will be capital loss write-offs that will be "taxing" the tax man.

2. The filp side to the "cost basis" conundrum for CGT is the change in "liquidation mentality" that Freegold will usher in. Michael Kosares put it well in his recent newsletter: "I have been asked on many occasions if there might be a set of circumstances when selling one’s gold holdings in toto might make sense. Since I view gold more as a form of savings than as an investment for gain, selling it simply to make a gain doesn't make a great deal of sense to me. If your intent was to purchase gold as a hedge starting out, why would you sell it simply because the price reached some arbitrary plateau? Like dollar-based savings, you should tap your gold reserves based on need."

3. The only tax that will be logistically plausible will be a sales tax (6% to 10%).

4. The burden of this sales tax will be carried by the unstoppable stream of gold BUYERS, not those who carried it through the fires of change. What I mean is that, like any sales tax, it will simply "raise the price of the product" in that particular tax zone, relative to everywhere else.


FOFOA said...


5. But because physical gold is fungible, divisible and private real capital on all sides of all borders, any nation with a high sales tax on gold will see ZERO capital inflow, and will likely see black market capital OUTFLOW of the most CRUCIAL capital in the new world. This is the primary rationale for saying there will likely be NO tax on physical gold in Freegold, period, only on the mining operations that will be viewed as "digging up the public's reserves."

6. Governments already know this. They don't need to learn it. For example; see the 0% tax on gold in Europe while silver and everything else still carries a VAT. And see the recent news that Russia will drop capital gains tax to attract new investment. Governments already know winning is all about taxing economic activity.

7. Gold will not deliver capital gains, it will denominate them through the fires of change. And you don't tax the denominator!

8. Zones with NO tax on gold will experience massive capital inflow and new, taxable economic activity. This will be the goal of governments after transition. Encourage self-sufficiency and then tax it. The ROI on taxing real, private, physical capital (physical gold) will be quite negative, gold bug paranoia notwithstanding.

The case for gold seems almost too good to be true to some gold bugs. Well, surprise! It is about 10 times better than most of you even imagine.


FOFOA said...


Click Here

(Updated "profound graph")

Gilligan said...

What you're doing with this blog is admirable FOFOA. If only more would recognize it.

My family has lost a lot of wealth in the past through usless paper. It was only the hard assets that remained. That is, land and gold. I still have some of my grandfather's sovereigns.

Interesting to note: during that time it was possible to buy a house with a few sovereigns (maybe that's an exaggeration, I don't know). But then again, you could also do the same with a tine of oil (the yellow, edible kind, not the black). This was seen as predatory though, and after order was restored all such transactions could be reversed. Or so i've been told.

Greyfox "It's the Debt, Stupid" said...

If you believe the second sentence from the article quoted below then I also have a bridge to sell you at a dicounted price. The investment is about wealth preservation, control, influence, domination, and power.

An investment fund backed by Lord Rothschild has joined the World Gold Council to put £12.5m into BullionVault, the online gold investment platform.

Tim Levene of Augmentum Capital, a fund backed by Lord Rothschild's RIT Capital Partners, said the investment was not a bet on the gold price but on "the future growth of the BullionVault platform", which stores physical gold for private clients in London, New York and Zurich. RIT currently has 9pc of its assets in physical gold.

Greyfox "It's the Debt, Stupid" said...

Take note of the name of the author of this article, Michael J. Kosares, USAGOLD (FOA/A).

June, 2010
Michael J. Kosares, Editor

The TRUE inflation-adjusted price of Gold

There is good reason to think that gold’s best days might still lie ahead. These charts show the degree to which it is undervalued based on the historic rate of inflation. The first shows the inflation-adjusted price using the
current Bureau of Labor Standard’s (BLS) consumer price index. The second shows the inflation adjusted price using the same statistical model the BLS did in 1980 -- data still tracked by Shadow Government Statistics (SGS)
without the current CPI’s hedonic adjustments. This chart could very well reflect the true inflation-adjusted price of gold. Even I was surprised at the over $7500 per ounce result.

raptor said...

> (Updated "profound graph")

Ouch,... thanx FOFOA

Next stop infinity ;)

Greyfox "It's the Debt, Stupid" said...

Views similiar to FOFOA on gold/silver ratios.

Gold/Silver Ratio Rethink
Sam Mathid
Jun 21, 2010

But beyond that initial point, if the gold to silver ratio has increased from antiquity to now, from 10 to 70, then is there anything to suggest that it cannot blow out to 200 or 300, or even 500?

Rather than the value of silver going exponential, it could well be the ratio of gold to silver that goes exponential.

Gold is the best money and has been for thousands of years. It is entirely possible that in our immediate future it will be the only money.

Greyfox "It's the Debt, Stupid" said...

Points of interest per Stewart Thompson.

Gold Correction Tactics Part 2:
Stewart Thomson
June 22, 2010

3. Write this down and paste it to your computer: The further away from the gold 1033 neckline that the gold price moves on the upside, the further away from that “protection” the gold price is. You are on your own, like a gold cork in the ocean away from the mother ship. Monumental volatility is coming. My prediction is the next 12 months will see more leveraged gold traders wiped out in the gold market than all the wipeouts since the gold bull market began, combined! For all practical purposes, gold is on the verge of becoming untradeable for leveraged traders. Are you prepared?

4. Remember, the banksters make the rules in the paper markets. They can change those rules. Those naked shorting gold against no physical core position are taking unimaginable risks. All the traders I know engaging in such activity here and now are lifetime losers in the market and there are a boat load of these top calling wieners in action right now. Think very carefully about what I’m saying before joining the wiener patrol. In the 1970’s, many members of team gold shorty pants seriously considered suicide, after their gold shorting master play blew up in their face as gold went limit up, “impossibly”, day after day as the US dollar rose. Don’t think limits and margin rules currently in force can’t be changed with no notice. They can, and likely will be. This time, if the banksters change the paper gold rules in a surprise move, team gold shorty pants is going to be in a far worse position than they were in the 1970s. Of course, the gold shorts “know” this time is different, they are much smarter now, much smarter than gold bullion.

5. Combine the growing volatility with the risk that real hyperinflation rears its mighty head as the paper money crisis moves to Japan, the UK, and America, and those with no physical bullion may meet the same fate at the hands of the gold punisher that poor Bob Prechter did, trying to surf a gold bullion tidal wave with a cardboard surfboard made for the paddle pool.

Greyfox "It's the Debt, Stupid" said...

Reckon we have more people realizing the long-standing truth about gold being the best wealth preserver bar none.

Gold’s Good Times 6/22/2010

The favourite ancient wealth preserver is also an excellent barometer for what’s going on the world, Brian Milner writes

raptor said...

What G20 will not discuss this weekend (but probably should)

By James G. Rickards

This is the first time I see a possible scenario of playing the whole thing out..
FOFOA I think it will be a good scenario for article if you put your thoughts on how you think this can play out..

raptor said...

I thought it is was very interesting scenario of the possibility of a future pact between most of Europe & Russia that can start to pull us off of this.... instead of perceived expectation that China will fulfill this role !

Because as he said this pact has many of the things needed ...
1. Europe and Russia dont hate each other so much as in the cold war era. US & Russia still oppose each other very much.
2. Europe has the biggest gold holdings...i.e. it will be able to pay for resources from Russia and Scandinavian countries even if paper dive.
3. Germany is a manufacturing powerhouse and can help pull of the region for short term.
4, It is unusual combination

carpenter said...

The Most Expensive Suit

One oz. of gold can buy a good custem tailored suit. Well how much $ is that today?

mortymer said...

At one point people will notice that the monthly increase in gold price denominated in paper currencies and gains from it compared to risk of pull back (which are noticably smaller each year as the crisys intensifies) is much greater than the interest on borrowed money. In that moment the avalanche will start and no physical will be available soon. I dissagree that paper gold will go down as many will be fooled and run anywhere. Therefore even silver could do fine but it will alsonot be traded/available and gain does not need to go very high.

pdxr13 said...

"Gold is not like other commodities where supply is economically driven to ramp up and meet demand as prices rise. Nor is it like paper investments that have objective metrics like price-to-earnings ratios and interest rates. With gold, a rising price sends the exact opposite signal to the place where supply comes from. It confirms the belief in those that already hold the "stock" that it is a good investment and it is best to sit tight and not re designate it to "flow"."

Plenty of AU is in circulation for any utilitarian use. Cosmetic bottles, snow-globe flakes, mosque-dome covering, Elvis car parts, circuit boards, IC pins, etc.

Miners who primarily produce gold shift production to WORSE grades of ore when prices rise, because those ores are suddenly plentiful and profitable, while leaving known higher grades for working when the price of gold gets back down around the cost of production (or below). Opening and closing mines is expensive and to be avoided in favor of steady work as much as possible.

Nice article.


raptor said...


The next three chapters revisit History, Economics 101, and Civics 101 to correct the myths about the system within which we live today--a monolithic financial empire...

Segestan said...


costata said...


The Euro Freegold transition isn't comparable to the 1980 spike in the US$ price of gold. Many here agree with A/FOA and FOFOA that it will be a singular event, a revaluation of gold to capitalize a new system that replaces the $IMFS.

After the transition gold will plateau at much higher prices and thereafter it will be the inflation barometer expressed through local currency exchange rates. The transition to Freegold isn't an event driven by present, recent or future expectations of inflation.

It will be a market response to 30-40+ years of imbalances that have built up in the present system. Some of these imbalances are due to inflation, others to the massive build up of debt and the attempt to operate a monetary/financial system with mismanaged fiat currencies. The shift will be tectonic because the forces at work are of a geological magnitude.

FOFOA has written extensively about this.

When this transition comes the earth will move in a way that Ernest Hemmingway could only dream of.

Martijn said...

some respected guys on gold 10.000

Martijn said...

on money as a wealth denominator

Same point as A/FOA/FOFOA have been making: your wealth isn't as great as your currency says it is

Martijn said...

(Saudi Arabia officially has about 260 billion barrels (4.1×1010 m3) of oil reserves)

They only need 200 million ozs. When the system breaks that gold would be worth all the oil in Arabia and then some

That would leave us at 1 oz/1000 barrels as was noticed before.

samix said...

with respect to tax on gold sales, then in India, on most Items a VAT tax of 12.5% is levied, whereas on gold only 1% is levied.

Further, most gold in India is sold/bought without any official records, without any bills or invoice's.

And another thing is that when it comes to gold we Indians/ME/most Asians do not believe in bullion vaults or paper gold, we all firmly believe in physically having our gold with ourselves.

Martijn said...

FOFOA, or anyone,

Could you help me out here?

The BIS will not allow the distribution of all gold to settle claims. The mines of the world will be forced to sell to the BIS at the "locked" existing commodity price of gold. This will happen over many, many years as no other "official" market outside the BIS will exist.

"No other official market outside the BIS"...

Does that mean no freegold?

samix said...

Also, in India if you are flying in from any foreign country, you can get in as much gold as you want in the form of jewelry without paying even the mandated 2% I described above.

This is more of a casual policy then official one, as no one is ever prosecuted for wearing jewelry and walking in at an airport.

The only condition is that you should be wearing it, But if it's in your bag then be prepared to face the officials at the airport if they detect it.

miked said...

Where do you store it Samix? What if you get robbed?

samix said...


Depends from person to person, some city dwellers may store it in the bank lockers, but that's a minority

Most of the gold owned by Indian's are worn most of the time by Indian women, they feel incomplete without it.

Traditionally in India we store it in our houses and considering that most of the Indians live in joint families the chances of a burglary are pretty meek because there are always a couple of people in the house to guard it.

Also, as we live in a joint family the gold never concentrates with one person but is more often evenly divided among relatives so thus we spread the risk.

Traditionally guarding money/gold/valuables generally goes to the old and retired people as they are in the house most of the time.

basically we hide it in our houses in the most unusual places (smile)

and nothing comes without some amount of risk associated.

Andrew said...

FOFOA, when freegold comes, what happens to my shares of nyse:cef stock, the gold and silver bullion fund? Is it worthless or golden.

Thanks. AD

dojufitz said...

A mate at work checked his online bank account - he found $735 Million in his account!

It was still there 24 hours later...eventually he called the bank manager about it....they took it away.

He seems to think another account number he had became a money amount as it had the first 3 numbers 735....

KJ said...


I'm having a problem wrapping my head around all this. My view was that after paper either defaults like here in the US The Yellow Metal would be a vault reserve to maintain one's wealth at whatever level and silver such as SEs could be used on a daily basis for groceries, etc. Of course one has to hope that there are things on the shelves to use the SEs for purchase. While I have a very very small amount of each, the silver to gold is about 5:1. Am I missing something here? I see no future playing the markets they are all rigged anyway!


costata said...


At a guess, most people who have become intimately familiar with the A/FOA and FOFOA concepts and predictions and agree with them would put far more emphasis on gold than any silver in their holdings.

Some people argue that silver could become critical for barter in a "Mad Max" style breakdown of society. You will have to assess the strength of the silver fans' arguments for yourself.

A/FOA were adamant that silver was NOT going along for the Freegold ride. FWIW I would feel more comfortable with silver's prospects if the ECB, EU Central Banking system and EU countries held silver as a reserve asset. At present they don't. Not one ounce. They are in gold.

Dave Narby said...

@cosata & KJ

There's a good possibility that Mexico will go to a silver standard, as they have large reserves and mines. That would help silverbugs.

Even if silver doesn't 'go along for the ride', I think it will do well, because when the system resets, the COMEX will be revealed as having allowed naked shorting of a lot more silver in proportion to the amount of naked shorting of gold.

If silver is revealed to actually be *more scarce* than gold, even if it ceases to become money (which IMO is more likely to happen if it is discovered to be more scarce) and as a result is reduced to the state of an 'industrial precious metal', it could land price-wise somewhere in between gold and the other industrial precious metals (platinum, palladium, rhodium). So using those "industrial precious metals" as a guide, that puts silver's price anywhere from $500-1500 or possibly higher (assuming that price discovery is allowed, and Freegold happens).

But silver is highly speculative compared to gold. I own some, but from here on out I'm buying gold. The good thing is if the above is correct, buying industrial silver is a better option than bullion, as you will pay less of a premium for purchasing it.

Dave Narby said...

A little more fuel to the goldfire... Here's a comment I left at Harvey Organ's Daily Gold:

Page 20 of this report indicates that gold and gold stocks account for a miniscule 0.8% of global assets. Given that during past peaks it is usually around 30%, this seems to indicate that gold could climb many multiples from where it is here (the math would indicate a ~35x gain, which puts the price of gold squarely in FOFOA territory).

So... There's another yardstick to measure it by, and it gives us approximately the same height.

costata said...

Dave Narby,

I agree silver is intrinsically undervalued. At some point I expect a revaluation. My concern is that if buying silver means that you are buying less gold then it may prove costly if A/FOA are right.

If the gold:silver ratio stays within its historical range then it is a true "call option on gold" as Stewart Thomson remarked in one of his recent Graceland Updates.

If the ratio blows out to 300:1 in the transition to Freegold but silver goes up 10x it would be a lot better than nothing but clearly not the best result for the holder.

Another concern I have is with the military-industrial importance of silver. Some folks seem to believe that silver will save them in a "Mad Max" scenario. I assume that war would be part of the mix in that scenario. AFAIK none of these folks have ever explained why the military wouldn't grab silver as a top priority since the US no longer has a strategic stockpile.

I have other reservations about silver but I'll leave them for another day.

Wendy said...

@Martijn june 35, 5:05

This was addressed by Aleksander on Jan 22 in "Gold the ultimate Hedge fund"

bernie said...

Excellent breakdown. Just FYI, I linked to your photo from Gold is Not Afraid of the Riots in Egypt

knowledge thirsty said...

hello sir

I have read your blog.As far as i have understood you are telling us that usa is deliberately pressing the price of gold so that the value of dollar should rise and we all believe in mighty dollar.But i have few questions in my mind
1 What is the benefit of this?I mean usa central bank has largest gold reserve in the world.the true price of gold will help usa also.she will be able to deal with her problems very much.

2 why only gold ? we have lot more other natural resources which can serve us far better. And suppose scientist find out a way of extracting gold from the inner most surface of the world than what will happen ?

3 we are living in present world and we normal people have limited resources.when we want to sell our gold for our needs we will get the present value and not future oriented freegold price so what is the use of this theory for us.

4 what is the timeline for this freegold concept i mean 5 years ,10 years, 30 years or more. what if government find out other ways to suppress the price of gold than what?

5 let us suppose the freegold concept prevails than what do you think government will sit quiet . they will definitely strip us from our gold .they will definitely nationalize gold . who knows our effort may become useless.

please clarify my points . thank you

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