Friday, August 13, 2010

Confiscation Anatomy – Part 2


Every few months or so a new farmer shows up here at FOFOA with a fresh vial of fox urine to scare the hungry bunnies away:
I hate to be the bearer of bad news but friends, we got problems! Phillips argues that we will face gold confiscation when a new currency is created to replace the US Dollar as the world's reserve currency and it will be backed, partially, by gold. He is probably correct. When FDR confiscated gold in 1933 the US was on the gold standard and in order to increase the money supply, the government needed more gold to allow them to create more dollars to fight the Depression. Since 1971 when we left the gold standard, there was no particular benefit for governments to own gold since gold was not needed to back a currency. But everything changes if a new currency is issued that IS GOLD BACKED."

If gold is confiscated, how will it affect FREEGOLD?

FOA had a good analogy to describe these Chickens Little. He said they were running forward while looking backward, and that they would surely run into something they didn’t see coming. That something being Freegold, the end result of an internationally induced movement away from using the US dollar as the global reserve currency. It’s hard to see (understand) Freegold coming right at you while focusing backward on the gold standards of the past and almost a century of dollars held as international banking reserves.

I call these guys Chickens Little because there are a couple more parallels with the Chicken Little fable. There’s Foxy Loxy, the unscrupulous fox that uses the fear spread by Chicken Little to lure the scared animals into the “safety” of his lair where he promptly eats them. Foxy is the financial advisors and “gold product” sellers that use the confiscation scare to sell you “gold products” with, sometimes, 60 times the markup of regular gold bullion. And of course there’s the lesson taught by the Chicken Little story; the necessity for careful deductive reasoning.

1933

Looking back to 1933 (but not running forward while doing so), we can see that a shortage of money existed at the time. This is what deflation is often called: “a shortage of money.” In a money shortage, the service of existing debt becomes more and more burdensome as debtors compete for scarce money to pay their creditors, often defaulting in the process. You also see falling consumer prices in a money shortage because products, like debtors, must compete for the money. And these falling prices deflate the profits of businesses that make the products forcing layoffs and downsizing, further burdening the – now unemployed – debtors.

Of course falling prices can be a good thing if you’re not in debt. Much of the 19th century was characterized by robust industrial and economic growth concurrent with consumer price deflation. This is when the economy is growing slightly faster than the money supply is expanding and/or circulating. In a healthy economy without too much debt this slight deflationary tension is a very positive thing.

But in 1933 it wasn’t. And when you’re the one running the global gold standard scheme, it turns out that the printing press is no solution to a money shortage. Prominent Swedish banker Marcus Wallenberg said as much in this 1957 Time Magazine article, The Capitalist Challenge: THE SHORTAGE OF MONEY. “Cranking up the printing presses is no solution, says Wallenberg. It would simply cheapen currencies.”

What FDR faced was a GOLD shortage! Not a dollar shortage. A REAL MONEY shortage! And as political administer of the global gold standard and the bank reserve fiat currency, his solution was to outlaw “real money” domestically, effectively eliminating the domestic money shortage, and to raise the official stockpile needed for servicing the “REAL MONEY shortage” internationally. He did this by calling in most of the circulating domestic US gold currency and melting it down.



And then, in January of 1934, with the stroke of a pen, he increased the US gold hoard by another 70% (in US dollar terms), thereby eliminating the international money shortage.

So he stole some gold from the US, and the rest from the rest of the world by devaluing the dollar. All to restock the gold standard vending machine.

This confiscation was really more of a forced monetization (sale) of gold assets, and a demonetization (melting) of gold coins. What made it particularly nasty was the 70% revaluation of the gold right after the forced sale. As gold was demonetized domestically, the citizens were forced by law to keep their tender legal by exchanging it in form.

But the people were allowed to keep up to 5 ounces in gold bullion or coin per person, in addition to their collectible coins and gold jewelry, even after the “confiscation.” So a family of four could keep at least 20 ounces of gold. If they had more than that it had to be sold to the government at the going price (which was raised AFTER the forced sale!)

Another nasty part of the “confiscation” was the enforcement clause that called for a fine of $10,000 ($170K in today’s dollars) and/or 10 years in prison for people that refused to turn in their gold. Of course not one single person suffered this fate, but the threat alone was (and still is) repulsive.

As it actually turned out, most of the gold collected was in the form of certificates, bullion and coins deposited and circulating in the banks. Many citizens who owned large amounts of gold quickly had it transferred to countries such as Switzerland before the deadline. And few in the general population had more than the five ounces to turn in.

In fact, many people turned in their last ounce even though they could have kept it, because they feared that it would no longer be legal tender and would therefore be useless. They failed to see how their gold could be worth more as a physical holding, a wealth asset, than it had ever been as a transactional currency. So they turned it in for $20. In total, only about 500 tonnes were “confiscated.”

Only one man was charged under the presidential order for not turning in 5,000 ounces of gold (worth $103K at the time). But the case was later dismissed and his gold was forcibly sold to the government. There were a handful of other cases through the following years in which someone was prosecuted for hoarding gold. In one case the hoard was 10,000 ounces! But those other few prosecutions were all for tax evasion or unrelated charges, not the “confiscation order.”

As it turned out, incredibly, FDR’s game-changing move seemed to cure the money shortage problem, at least temporarily. In March of 1933 the plunging CPI essentially “turned on a dime” and began to rise.


But here’s the thing. It wasn’t gold that caused the money shortage. There is no shortage of gold at the right price. There is only a shortage of gold when it is confined at a FIXED price.

So it was the US dollar’s fixed relationship to gold and the dollar’s use as an international bank reserve, equally interchangeable with gold, that caused a “shortage of REAL money.” And as we’ll see, this would happen again and again.

FDR’s confiscation and revaluation of gold did not increase its use as money as the solution to the money shortage. What it did was increase the percentage of the official US gold hoard as a portion of total US reserves to a level that would sustain centralized balance of payment clearing for a few more decades. In essence, it restocked the one-way gold market known as the international gold exchange standard. Gold is always a one-way flow (out) when the price is fixed. That’s why to get any “in-flow”, you have to force it!
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Sidebar: I am certainly not defending the actions of FDR. They were obviously hideous. But I am making the point that it is extremely important to view history as objectively as possible when deducing the future. Otherwise you inadvertently end up applying inductive reasoning, which leads to qualitatively different conclusions than deductive logic. Chicken Little used inductive logic.

Here is an example of inductive reasoning/logic:

1. All of the swans we have seen so far are white.
2. Therefore, all swans are white.

It is a form of logic that allows for a false conclusion even when the premises are correct.

Now here’s an example of deductive reasoning:

1. All fiat currencies are eventually worth no more than toilet paper.
2. The dollar is a fiat currency.
3. Therefore, the dollar will eventually be worth no more than toilet paper.

The difference is that deductive reasoning presents a conclusion that must necessarily follow the set of premises. Inductive reasoning, the kind that leads to fears of confiscation, does not.

I always try my best to engage only in deductive logic, because I don't like surprises.
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In hindsight, if FDR had instead declared the US gold window to be a two-way (buy and sell) physical gold exchange, open to all, not at a fixed price, but instead at a global market-discovered floating gold price, the economic and monetary results would have been the same, only without the nasty confiscation and repulsive criminal penalties… and it would have been perpetually sustainable.

The difference is that this act (had it even been considered) wouldn’t have had the same degree of perpetual deficit enabling/exorbitant privilege granting effect on the US dollar administrator. This is important because you can’t force the world to grant you perpetual deficits and exorbitant global privilege. It must be “the lesser of two evils” under consideration. Once it becomes “the greater of two evils,” it will end one way or another.

1971

Normally, a gold revaluation would be a dreaded mea culpa for a politician like FDR, something to avoid at all costs! But what made 1933/34 politically palatable was that it could be blamed on, well, the depression. But over the next 37 years there were no depressions to be found. And while a gold revaluation/dollar devaluation was warranted (and needed) a few times along the road, no politician with the necessary fortitude ever stepped up to the plate.

Then came Nixon.



Did you catch that? Yeah, he blamed it on “the speculators!” So much for fortitude.

So what led up to Nixon closing the gold window? Well, like 1933 it was another money shortage. I summed it up with this quote from Lamfalussy in "Gold: The Ultimate Wealth Consolidator"…
In 1969, shortly after the collapse of the London Gold Pool and the devaluation of the pound sterling, while the Bretton Woods gold exchange standard was imploding, Alexandre Lamfalussy gave a speech at the IMF titled The Role Of Monetary Gold Over The Next Ten Years. In it he addressed the fact that gold, being of relatively fixed supply, when also fixed at a specified par (price) with the inflating currency, automatically disappears as a source of new international liquidity. Here is a short excerpt:

"The striking fact apparent from this Table is that over the last ten years, gold has practically no longer contributed to the growth of international liquidity. In ten years, total foreign reserves rose by nearly 19 billion dollars; the greater part of this increase -- some 14 billion -- was due to increased holdings in foreign currencies, whereas the increase in the reserve positions with the International Monetary Fund was about 4 billion. The increase in gold stocks was less than one billion; in fact, there was a decline between 1963 and 1968 [thanks to the London Gold Pool]. Consequently, the share of gold holdings in total reserves, which was 66 per cent at the end of 1958, fell, to 51 per cent at the end of 1968.


"It is therefore right to say that over the last ten years and in particular since 1963-64, we have witnessed a gradual decline in the role of gold as a means of reserve and its complete disappearance as a source of new international liquidity. At the same time, the mechanics of the gold-exchange standard have ceased to function: the creation of reserves by the spontaneous holding of dollars or Sterling has come to a halt and has been replaced by the creation of negotiated reserves."

So this time it was more clearly just a gold shortage. And it was really, quite obviously, only a shortage of gold at the US Treasury gold window. (Remember, there is always plenty of gold at the right price. But there is NEVER enough gold at a fixed price.) And you see, the whole world was trying to buy gold at this particular window because it offered the amazingly low price of only $35 per troy ounce.

Certainly no one was at this gold window trying to SELL their gold to the US Treasury for $35/ounce. Why would they do that when they could sell it on the open market for $44/ounce? This is why gold is always a one-way flow (out) when the price is fixed. And it’s why, to get any “in-flow” of gold at a fixed price, you have to force it!
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Sidebar: The following quote is from ORO, one of the brightest hard money advocates that faced off with FOA. I think it sums up the flaw in hard money thought with one sentence: “In short: for a monetary system to work, someone, somewhere, must be able to exchange the currency for gold AT A FIXED RATE. We call this parity.” If you can detect the flaw in ORO’s statement you are well on your way to a surprising revelation.
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So why didn’t Nixon just force an inflow of gold like FDR? Well, for one thing, US domestic gold had already been demonetized, so there wasn’t any circulating gold currency to seize from the banking system like there was in 1933. So instead of trying to REPEAT the step of his predecessor, for which there was no rhyme or reason, Nixon took the next LOGICAL step following the direction set by his predecessor. He removed the NEED for a gold inflow. He closed the gold window.

Again, in hindsight, Nixon could have allowed the price of gold at the window to float with the market that was already pricing it at $44. Eventually the one-way outflow at the Treasury window would have stabilized at the price of golden equilibrium and the system would have become stable and sustainable for the first time in decades (if not centuries). But alas, he did not.

2010

The gold window of Nixon’s era was similar in many ways to the modern COMEX. It lent support to the illusion of a strong dollar (measured against gold) by providing a visible outflow of physical gold to certain parties in exchange for paper gold contracts (US dollars) that vastly outnumbered the physical ounces in the vault.

When global faith in this system started to wane in the mid-1960’s driving up the price of gold outside the system, official CB gold was deployed into the marketplace surreptitiously through the London Gold Pool. This was an effort to enhance the illusion of plentiful supply, both in London and through the US gold window. Ultimately this effort was abandoned in 1968 when some of the European central banks started taking in (exchanging their dollars for) gold.

This is not unlike what we have witnessed since the 1999 Washington Agreement to limit gold sales from European central banks. Since then, official gold sales have declined until last year when the trend reversed and the CB’s showed a net intake.

The WAG was a portent to the bullion banks in the same way the collapse of the London Gold Pool was to the US Treasury. In both cases it was a warning from the European CB’s to the Anglo-American paper gold printing machine to reverse the acceleration of fractional paper issuance or face the consequences of a REAL MONEY shortage.

And now that we know the bullion banks responded to their 1999 prodroma the same way the US Treasury did in 1968, by cranking up the printing presses, we can fully expect a similar result on the COMEX as we got with the gold window in 1971.

And using this analog as a roadmap, we can logically deduce some of the necessary and inevitable consequences, including the probability of an official “confiscation.”

The Future

In order to logically deduce the future we must first understand the past. And the applicable history here begins in 1922 when dollars were first accepted internationally as official bank reserves, equal to gold.

After 1922 the US slowly discovered that it was possible to run a perpetual trade deficit with the rest of the world as long as it had enough gold to trade with the few bankers who preferred heavy gold reserves to light and less filling paper dollars. This meant that the US economy, you me and the guy next door, could, in aggregate, import a higher value of goods from overseas than we manufactured here and shipped back to them.

In other words, unlike everyone else in the world, we would never face a balance of payments crisis because we could buy foreign goods with our own currency. We didn’t have to exchange our currency for that foreign currency in order to import stuff, a process that normally would have put pressure on the dollar to either devalue or increase real goods exports whenever a trade deficit went on too long.

This is the very definition of the “exorbitant privilege,” a term coined by the French in the 1960’s as the Bretton Woods system was starting to show a few wrinkles. And it can only apply to a national currency in use as a global reserve. It cannot apply to regional reserve currencies or supranational currencies.

As time went by, the US federal government also discovered that it had the ability to run a perpetual budget deficit in its own finances. This was an unexpected result of the perpetual trade deficit. As net goods accumulated in the US economy, net dollars necessarily accumulated in our trading partners’ central banks. These dollars had to go somewhere. And as it turned out, a lot of them were given to the USG in exchange for the rights to the future tax revenue of its citizens, a no-brainer swap for any short-sighted politician.

And the troglodyte (un evolved, undeveloped, simplistic) vision of a future US gold confiscation put forth by the Foxy Loxys and Chickens Little flows from a poor understanding of how these things (described above) actually work. And it goes something like this:

When the dollar loses its global reserve status TPTB in DC will lose their blank-check funding and will have to start paying for essentials like oil for the US war machine with gold from Fort Knox. This will quickly deplete the remaining US stockpile of gold and the USG will obviously fall back on its old habits like seizing its citizens’ gold to replenish the public purse.

This “early man-ish” view of reality ignores not only the way things actually work, but also logic, history and facts.

I have briefly addressed some of the history above. Now let’s hit a few of the facts.

Fact: Back in 1933 when physical gold was still plentiful within the system and circulating through the banks as a currency equal to dollars, the USG was only able to “confiscate” 500 tonnes. There were no “jackboots” going door to door grabbing gold coins. This has never happened. And it never will outside of total war where pirates (soldiers) grab coins for their own personal bounty.

If the USG (poorly/suicidally) decides it wants to steal some gold in the future, it will ONLY go after soft targets, like bullion bank accounts (most probably unallocated since there is no direct claim) and funds (like hedge funds, ETF’s, and other publicly reported/traded large hoards). It will also go after the gold mines to which it issues digging permits and therefore retains control. And it will not outlaw the physical gold trade. More on this later.

In the same way that bankers fear bank runs more than anything, governments and politicians fear civil unrest more than ANYTHING ELSE. Everything they do is to keep the public calm and sedate. And there’s no faster way to arouse your worst nightmare than ordering your underpaid forces to turn on their friends.

At the peak of the US-administered gold exchange standard, the US had 22,000 tonnes of physical gold. The 500 tonnes “confiscated,” at a time when it was easy because gold was circulating through the banks and could simply be swapped for paper dollars, was only 2% of that hoard. Any “jackboot confiscation” today would net much less than that. And it would carry significant (deadly) political risk.

Additionally… having New York City on US soil, those fancy funds holding OPG (Other People’s Gold) make a much softer target.

No. The US will NEVER confiscate physical gold directly from its citizens again.

Fact: There is plenty of gold at the right price. At the right price, there is no shortage of gold. At the right price, there is no profitable risk/reward calculation under which any major global entity would decide to steal someone else’s gold, especially its own populace. The risk would be much greater than the potential reward.

And if that “right price” is a FREE price, a FLOATING price, then there will NEVER be a shortage of gold to keep the gears of global trade lubricated. And as long as they are lubricated the USG will have international trade that can be taxed.

Fact: There can be no “money shortage” in a purely symbolic fiat currency regime that doesn’t fix its currency to gold. There can only be too much money, and/or a shortage of “asset valuations” if that currency’s debt-assets are mismanaged.

As I wrote in "Inflation, Deflation, Snails and 30 Days":
Just my two cents on Inflation/Deflation. If I buy a house on a street with 5 houses for $100,000, then later someone buys a house for $200,000, all of a sudden, all 5 houses are worth $200,000. My net worth went up $100,000. The street's net worth went up $400,000. But 400,000 dollars were not created. Asset inflation happened.

Asset deflation is happening now, which is the reverse effect. If I bought a house for $500,000, and now someone sells for $250,000, then all the houses on the street are now worth $250,000. So the net "loss" to the street is $1.25 Million. That is deflation.

This is happening with all types of assets, things that were assumed to be good investments. But as we bail them out, we take some of that phantom net worth, like the $400,000 in the first paragraph, and make it real, spendable cash.

That cash is no longer going to go into bad "assets" that were previously thought to be good investments, it is going to go into real things, like gas, oil, gold and milk. And because it is newly printed spendable cash, it is going to bid against the previously existing spendable cash. That bidding process will cause the cost of real things to go up. That is inflation.

So we can have both asset deflation and real world inflation at the same time. Necessities will cost more. Luxuries and Mortgage Backed Securities will cost less.

Fact: The purpose of the confiscation and revaluation of gold in 1933/34 was to weaken the US dollar; to stop deflation and to cause inflation. The confiscated gold was then used to pay off a few of the trading partners with a balance of payments surplus. This cycling of real goods into paper currency into gold only happens centrally (at the CB or Treasury) while the reserve currency is functioning.

A country or zone’s total reserves include international liquidity held anywhere within that zone by any entity, public or private. The official reserves are only part of the total reserves. The official reserves are the first line of defense in a balance of payments emergency. The total reserves are the last line of defense. The official reserves are effective in defusing a crisis as long as the international fiat currency system is still functioning. When it stops functioning, there is no longer a mechanism for funneling the international demand for international reserves into the central authority. At that point the demand must be met “where the rubber meets the road.”

The “gold liquidity” described in Julian Phillips’ piece is paper gold liquidity. He seems to be suggesting that countries running a trade surplus still prefer Treasuries over paper gold in a balance of payment function. This is the centralized decision of the CB’s. These CB’s still have this decision-making ability because dollars are still flowing to local exporters and then working their way through the local banking system into the CB. But when the dollar loses its global status this process will end.

Exporters “where the rubber meets the road” will require either their own local currency or acceptable international liquidity which at that time will be physical gold. This is the automatic and uncontrollable decentralization of the payment balancing mechanism. And this is the major flaw in most of the economic thinking today.

International liquidity schemes like the SDR only function at the centralized CB level. They still require a functioning international transactional currency like the dollar or the euro to cycle control of reserve composition from the marketplace back into the central authority. Without this mechanism the reserve par excellence will be decided by the marketplace. So let’s look at the possibilities that could unfold.

Possibility 1: Physical gold becomes the only acceptable international liquidity for a while. This is decentralization in extremis. And this is Freegold in extremis. It would likely be a transitory stasis followed eventually by possibility 2 or 3.

Possibility 2: Only local currency is accepted in international trade forcing all trading zones into a foreign (FOREX) currency exchange like I described in "Bondage or Freegold". But without the anchoring metric of a global currency like the dollar, this exchange would have to find a market-driven currency price discovery mechanism. And the logical (market) winner is the price of physical gold trading in each currency inside that currency’s zone to set the value of that currency.

This would be an extremely reliable and relatively foolproof mechanism due to the currency arbitrage that would happen whenever gold was underpriced in a currency. For example, if the US tried to keep the price of gold down, all the gold inside the US would flow out of the zone (purchased with higher offers). And if the US tried to prevent this outflow of gold, its currency would be ostracized on the global exchange. This would make it extremely difficult to trade for ANY real goods, including oil.

So the US will have the incentive to encourage a vibrant physical gold market within its zone with little or no restraints (like a VAT or sales tax) to increase the credibility of its printed fiat currency on the global FOREX exchange. If you add a VAT to gold it simply raises the price of gold in your zone relative to other zones without a tax, which lowers the value of your currency on the global exchange.

Possibility 3: A new international currency that embraces a free floating gold price for maximum international liquidity (no more money shortages) will replace the dollar when the dollar finally fails in its role as international liquidity provider par excellence.

This is what FOA meant when he wrote:

All of the many items ThaiGold posted today about government control of gold pertains to past policy in a different ""gold is official government money era"". The use of gold through that era is riddled with failure. In the future (see my latest Gold Trails) currency reserve competition will require a country to keep gold free for private trade. Making price discovery a physical affair only. This will come about in a completely different atmosphere from today where gold is still manipulated as a world "official currency" asset. Mostly now manipulated by a failing IMF/dollar system. The next reserve currency, the Euro will not compete with gold and will require it to find its FreeGold value level. The US will have absolutely no incentive to controlling gold to defend its currency in that era.

Price discovery will be “a physical affair only” because the dollar’s reserve status and the paper gold market are like conjoined twins sharing all vital organs. Their fates are inseparable. Once one of them goes, so does the other. And at that time there will be no incentive to control the price of gold like there was in 1933. In fact, the opposite will be true. There will be the ultimate incentive all over the planet for physical gold to quickly find its equilibrium price in each zone’s currency so as to alleviate the shortage of international liquidity that will follow the dollar’s demise as internationally liquidity provider par excellence.

At the right price, there is plenty of gold. When there is plenty of gold there is no good reason to seize gold. And with the right currency, there is plenty of money.

Sincerely,
FOFOA

See also: Confiscation Anatomy - Part 1

Postscript

Yes I am passionate about this gold confiscation issue. That’s because I view it as more insidious than even the mainstream paper-pushing BS we see every day on CNBC. This issue is targeted at those who are already so close to securing their future. And it is used to cut them off just before the finish line. As you can tell, I view those that spread this confiscation argument as belonging to two general groups; the Chickens Little and the Foxy Loxys. And within these two groups are five sub-groups:

Chickens Little

1. Individual gold bugs who tend to be genetically predisposed to paranoid psychosis.
2. Published gold analysts who insist on running forward while looking backward.

Foxy Loxys

1. Gold sellers that use this argument to sell more expensive gold numismatics to customers that have no business investing in numismatics, which requires years of experience to do well.
2. PM sellers that use this argument to steer customers into silver, platinum, palladium, rhodium or mining stocks instead of gold bullion. Akin to advising you to invest in socks, leg warmers, knee pads, garters and shoe factories when what you really need is something to protect your feet.
3. Gold haters that use this argument to scare people away from physical gold.

I find all of the above despicable, even when they stem from ignorance.

And I do realize that there is a whole ‘nother angle to this confiscation issue: confiscation through taxation. Not gonna happen. Not the way you think anyway. The phase transition/lightning (Freegold) revaluation cannot be taxed efficiently. And if it can’t happen efficiently, ain’t gonna happen. The risk/reward calculation facing any taxing authority will be as clear as this blog. 95% of the global private physical gold stock has no recorded cost basis on which to collect a “flash revaluation” capital gains tax. It is impossible. Only paper gold has such a widespread cost basis. And you can’t really collect taxes on a capital loss, now can you? But that is for another post. Perhaps it will be part 3.

I apologize if any of the above offended anyone. That was not its purpose, even though I used some biting analogies. I just think it’s important that certain normally private Thoughts are spoken out loud at least once before it’s too late. And IMO, it’s almost too late.



Have you ever been close to tragedy
Or been close to folks who have?
Have you ever felt a pain so powerful
So heavy you collapse?

No? Well...
I never had to knock on wood
But I know someone who has
Which makes me wonder if I could
It makes me wonder if
I never had to knock on wood
And I'm glad I haven't yet
Because I'm sure it isn't good
That's the impression that I get.

Have you ever had the odds stacked up so high
You need a strength most don't possess?
Or has it ever come down to do or die
You've got to rise above the rest?

No? Well...
I never had to knock on wood
But I know someone who has
Which makes me wonder if I could
It makes me wonder if
I never had to knock on wood
And I'm glad I haven't yet
Because I'm sure it isn't good
That's the impression that I get.

I'm not a coward,
I've just never been tested
I'd like to think that if I was, I would pass
Look at the tested and think there but for the grace go I
Might be a coward,
I'm afraid of what I might find out.

I've never had to knock on wood
But I know someone who has
Which makes me wonder if I could
It makes me wonder if
I've never had to knock on wood
And I'm glad i haven't yet
Because I'm sure it isn't good
That's the impression that I get.

Never had to, but I better knock on wood...
Cause I know someone who has
Which makes wonder if I could
It makes me wonder if I

Never had to, I better knock on wood...
Cause I'm sure it isn't good
Am I'm glad I haven't yet...

That's the Impression that I get.

FOA: It was pointed out that one need not invest in gold to negate the effects of inflation. All we have to do is buy real things that increase in currency value faster than the loss of buying power. True, in that light gold is but one of many things that should keep us at least even. However, we are in the process of experiencing a "breakdown" or at the very least a major change in the entire financial system. Not just an ongoing inflation during a phase of a longline expansion. Our goal for certain individuals, is to show this dynamic at work as the real life events unfold and document its progress. For private individuals that read these pages, historical purpose and present day logic will build further support for the holding of physical gold as these events reveal the true season. In this light I offer Another’s direction given some many years ago, “in this special season, let others buy things to hedge their present worth, let us buy gold in support of our future generations.”
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UPDATE:
Someone asked me to post the answer to Sidebar #2. Here it is...

“In short: for a monetary system to work, ANYone, ANYwhere, must be able to exchange the currency for gold AT A FLOATING RATE. We call this Freegold.”

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61 comments:

Tuco said...

I love it... smack everyone in the face with (what should be) the patently obvious!

It's obvious now.

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

FOFOA, you didn’t hurt my feelings, just demonstrated that you have a pair. If you ever need an assistant, I would be privileged to follow behind you with the necessary wheel barrow to carry your balls. Thanks for the excellent post.

David said...

Yes, great post. After reading your Confiscation Anatomy (Part I), I was convinced there wouldn't be confiscation/nationalization of gold. Now I'm super-convinced.

erik said...

Great post, awesome logic... but I don't understand how the US government or other nations nitwit leaders, that has done nothing but make stupid choices in the past will somehow show the kind of logic FOFOA has? Remember these people are tools of special interest groups. Why are they going to do the right thing now ?

Return to Resistance said...

Erik - I think FOFOA was alluding to the fact that Governments will be forced to do the "right" thing or else face civil insurrection, and/or ostracized from international trade. If we can't trade for oil our modern economy is toast...

erik said...

@RtR True. But I still can't get past the idea of Non-free market forces realizing they must do free market policy of face defeat. I'm not as educated as FOFOA but I never assume others will do the right thing unless facing the barrel of a gun.

Wendy said...

erik,

you just reasoned through your "but".

Metaphorically speaking: They ARE facing the barrell of a gun!

erik said...

@Wendy... OK , but I'll stay Locked and Loaded just in case they can't see the danger signs.

Desperado said...

Great post Fofoa, It explains very well why in any kind of a non-catastrophic scenario gold seizure is unlikely. I was never overly concerned about gold confiscation anyway since that would simply be the same as the confiscation of other property, such as the value of GM bonds in a gift to the UAW in 2009, and that merely implies that gold is no more likely than any other paper or even physical asset to be expropriated. Even in this moderately bad scenario, gold has the added advantage of being highly concealable.

That being said, when the dollar finally dies and all the entitlement parasites and government employees can no longer be provided for by the federal government, these obligations are likely to fall into the laps of state or local governments who are already unable to meet even their current obligations. At that point it is no longer clear whether certain regions could fall under the control of various thugocracies. In this extreme scenario, gold (and other asset) confiscation would not only be a risk, but also a likelihood.

Wendy said...

More accurately it's really not about "them" (western elite) getting to choose. Their course of action (choices) over multiple decades has provided the energy to summon a force that they are unable to stop, leading to the collapse of US dollare hegemony.

David said...

When the dollar crashes, there will most likely be social unrest, small or large scale. I'm thinking about getting a couple of concealable bullet-proof vest. The problem is; I'd have to sell almost an ounce of gold to buy the vests.

What to do, what to do....

ShockOnT said...

FOFOA:

From the WSJ:
The EU has ordered Germany to count the holdings of WestLB and Hypo Real Estate as government debt!

http://online.wsj.com/article/BT-CO-20100811-709050.html

This move is in lockstep with FOA's comments that private debt will be monetized and "dropped right on our front lawns".

The paper gold market will survive as long as it takes to complete the transfer of the bulk of the bad debts of the major banks to the sovereign balance sheets.

The toxic debt will then be liquidated from the sovereigns' by FREEGOLD.

We are moving closer every day!

costata said...

Hi Everyone,

(Great post FOFOA)

If you can't beat 'em join 'em. "Confiscate" some gold yourself.

Take some fiat currency down to a gold vendor and hand them an amount equal to the advertised price. Here's the good part. The legal tender laws force them to accept the currency in full settlement of the transaction.

If gold doubles while you are walking back to the car and that currency goes to ZERO legally they cannot do a thing about it. If the gold vendor comes chasing after you and tries to take the gold back you can have the cops arrest him/her.

That's right the STATE will enforce the contract. Of course if you walked out with a certificate instead of physical gold the law isn't quite so clearcut.

If the gold certificate vendor has a better legal team (and political influence?) you might be on the receiving end of a full refund of your original purchase price. Hopefully the legal system will deal with you fairly and you will receive the full current market value in currency for your certificate so that you can buy something of equal value to the gold (if someone wants the currency and you hurry).

"Time and tide (and hyper-inflation) wait for no man."
(with apologies to William Shakespeare)

BTW my favourite comment on gold at the moment is:

"Go gold and be your own banker."

From Mr Lennon Hendrix (via Zerohedge).

Chico_hawk said...

Won't the USG do everything in its power to prolong the inevitable meltdown in its currency (and simultaneous meltup in gold price), including starting a war, given what is at stake for them?

After all, loss of global reserve currency status will mean loss of global power & the ability to run indefinite trade & budget deficits - it will crush the majority of its citizens caught unprepared (i.e. without physical gold), turning them against the government and it may provoke the giant US military industrial complex into rash decisions...

I agree that when the collapse of comex happens, it will happen breathtakingly fast, and in the chaotic aftermath where Uncle Sam's impotency will be revealed and evident to all, personal survival will be on most every one's minds, including the police, army, etc...

In that kind of environment, it is difficult for me to envision an orderly (local) market for gold.

What legitimate authority will move in to fill the power vacuum in the US? What authority will be seen as legitimate? Europe? How will order (civil law) eventually be restored?

Interesting times indeed...

Jeff Allen said...

FOFOA

You are mistaken.

All new knowledge is inductive. Deduction is secondary, and depends on the validity of one's prior inductions.

From whence comes your syllogism's major premise, "All fiat currencies are eventually worth no more than toilet paper?" Was it deduced from a prior generalization, or was it induced?

The answer, of course, is that it was induced. Your deduction merely applies that general knowledge to the specific case of the dollar. If your inductively generated major premise is not necessarily true, than neither is your deductively generated conclusion.

From what prior principle did Newton deduce universal gravitation? Newton's theory is the product of a grand induction, an integration of prior inductions made by Kepler and Galileo, based on observations of planetary orbits, and of the behavior of physical bodies on earth.

Freegold, too, is a grand induction. Your method of approaching the issue from a variety of perspectives, all leading to the same necessary conclusion, after precisely defining your concepts, is essential to a proper inductive process (which, by the way, the mere enumeration of swans is not).

Simultaneous to this posting you fill find a donation, with my thanks, of $205. I suggest you go to www.aynrandbookstore.com, search under Leonard Peikoff, and find and purchase the lecture series "Induction in Physics and Philosophy." The price is $205.

You are a man who finds joy in the discovery of new knowledge. I know you will experience an exhilarating joy when you grasp how and why you can be confident in the certainty of your inductive conclusions. This is what Dr. Peikoff has discovered.

samix said...

What does GS mean when the say "We believe that the gold market is oversold ?"

Andillo said...

As for the confiscation, my way of thinking why it's not necessary nowadays is:

- as gold is not money, central banks are not constrained in actions and prices. So basically if the FED announces tomorrow that it's going to buy gold from everyone who wants to sell it and is willing to pay $4000/oz, then within weeks if not days 90% of privately held gold bullion would be back in the possession of the government (or FED).

And since they control the money, they can pay for it with "printed" money I guess.

Is my way of thinking correct?

Tuco said...

If we split a hair, does it change the hairstyle?

costata said...

Andillo,

"..they can pay for it with "printed" money I guess."

That's the only thing gold will be exchangeable for/priced in under a "legal tender system". Provided the issuer of that currency doesn't print too much money it will be acceptable to most people.

Under Freegold the bankers and politicians will still be able to apply the inflation tax but they will be restrained by the Freegold valuation of their currency.

Bonus Hunter said...

"2. PM sellers that use this argument to steer customers into silver,"

Your posts are truly amazing and unique. Yet, you are such a silver basher. Step back and realize you are doing the same thing to silver that you constantly ridicule others for doing to gold.

The world used a silver standard much longer than they ever used a gold standard. Reading through the history of currencies will show just how extensive silver was used as a standard between various currencies.

Silver is just as important of a component to sheltering yourself from fiat as gold is.

Silver is money.

The government can do whatever it wants. Again, reading through history will show that a desperate government trying to retain power will do just about anything to keep their system of currency in place. See ancient China, 18th c France, 17th c Spain, 20th c USSR and 20th c USA.

They will confiscate, criminalize, nationalize, de-monetize, and devalue by any means necessary.

My guess is they will nationalize retirement accounts way before they consider going after gold, specifically. Most likely, they won't confiscate outright but will highly restrict their sales and use.

The US is capable of doing just about anything in the name of "national security".

I own roughly equal equivalents of both. Gold is wealth. Silver is money.

Tina said...

Hi fofoa, the distribution of the Deutsche Bank German Goldfund DWS Gold plus (WKN: 973246) is discontinued without any official reason.
Any toughts.

erik said...

@Bonus Hunter... Historically; Gold has been the money of the upper class , silver for the common class. To me both metals offer security and profit potential. I agree government will do most anything, the only question remains is government action going to benefit enough wealthy individuals? If not a war may ensue, they won't get away with it. They don't give a crap about the peoples votes or anything else.

paladin said...

FOFOA

first time post...paladin

great post.

long time reader of Another.

paladin said...

The Hidden Meanings in the New $100 Bill!


http://www.roadtoroota.com/public/261.cfm


Bill Murphy posted this on the web page as a link 60 to 90 days

http://www.lemetropolecafe.com/


Bill gave no coment to the link....only the link


as a freind on Bill W.....I take only what I want and leave the rest.

paladin

paladin said...

Jim Sinclair at

http://jsmineset.com/


he told you all of the time frame....


$1650 gold.....tick....tick

FOFOA said...

Thank you Jeff.

And thank you for the donation! I just listened to the 3 min. sample of the lecture. It sounds very interesting. And I think, not as counterintuitive as it appears.

If I am understanding what little I have heard and read so far, then you are absolutely correct. The macro (overall) methodology of this blog is a grand inductive experiment in process. I wrote someone recently in a private email that the "secret sauce" in my analysis is one key axiom that I use. That is axiom defined as "a proposition that is assumed without proof for the sake of studying the consequences that follow from it."

And that axiom has been inferred for all to see on the top of this blog since day one.

As Dr. Peikoff says, if my axiom (generalization) is true, then I should not encounter contradictions along the way. The world will open up to me in a new light! And this will occur through my careful micro deductive reasoning along the Trail.

But as I look out onto the online "gold bug" landscape, I can see many axioms (generalizations assumed to be true) being used that I judge to be false. And when I apply them to my same deductive reasoning I run into frequent contradictions. And I can see these other analysts running into these same contradictions as well, as clearly as I can see the tree outside my window.

So what they do to get around these contradictions, rather than stepping back to reexamine the level of truth in their axiom, is they switch from deductive logic (on the micro scale) back into induction. They "enumerate the swans" and induce (force, make up) a conclusion that supports their troublesome generalization.

Tell me Jeff. Does this reconcile what I wrote in the post with the Objectivist view of induction/deduction? That I am engaging in a grand induction to prove that Freegold is the necessary conclusion. But I am using careful deductive logic along the way rather than inducing conclusions that simply fit my premises?

If you remember, I touched on this issue back in "The Debtors and the Savers" when I wrote, "And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises."

Marx, too, was engaged in a grand induction. Only he ran into a few contradictions, like the fact that many laborers are conservative, self-satisfied, self-sufficient savers, forcing him to induce his conclusions from a false generalization.

I guess my point in the above sidebar was to help people distinguish between forced conclusions and necessary ones.

Anyway, you have further opened my eyes and I'm sure I've only scratched the surface. So thank you.

Sincerely,
FOFOA

GoldenKnight said...

Chicken Littles don't own gold, they own GLD. Therefore, Chicken Littles WILL have their "gold" confiscated. A fitting and tragic ending to paper gold. Physical, in hand!!

Ivo Cerckel said...

FOFOA,

Here’s one of Immanuel KANT’s axioms more than two centuries ago:

A hundred actual dollars do not contain the least bit more than a hundred possible ones.
Hundert wirkliche Taler enthalten nicht das mindeste mehr, als hundert mögliche.
(Kant, "Critique of Pure Reason", 1781 first ed. p 599, 1787 second edition p. 627)

Ivo: I repeat that that was more than two centuries ago.

This was a decade ago;
All modern digital currencies do not go into an investment, they move THRU it. The US unit is only an exchange medium to acquire assets valued in dollars. US government bonds are the usual holding. No CB holds any currency! They hold the bonds of that currency. The major problem today, is that digital currencies have erased the currency denominations of all government/nation debt holdings! Even thou a debt is marked as DM, USA, YEN, they are in "real time" / "marked to the market" and cross valued in all currencies! No currency asset, held by CBs today are valued in the light of a single issuing country, rather "all currencies are locked together". To lose one large national currency, is to lose the entire structure as we know it!
There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies". Gold can be used to revalue any asset, and not be destroyed
(Date: Fri Jan 23 1998 19:01
ANOTHER (THOUGHTS!) ID#60253:
.usagold DOT com/goldtrail/archives/another2.html

Since PARMENIDES (5th century B.C.), the key word for this invisible, imperceptible whole implicitly manifest in all that appears, has been being.
(Hannah Arendt "The Life of the Mind", San Diego, Harvest Book, 1978 One-volume ed., Vol. I p. 144)

Being is only apprehended by the intellect.
The senses grasp the multiplicity of the sensible,
but the intelligence sees beyond appearances,
and knows that behind them lies only one reality: Being
(Ignatius Yarza, "History of Ancient Philosophy", Manila, Sinag-Tala Publishers, 1994 (first published in 1983 by the Ediciones Universidad de Navarra in Pamplona), p. 39)

HERACLITUS (5th century B.C.), the forerunner of relativism, maintained that reality is pure change (reality is in a pure STATE OF FLUX) or becoming, thereby denying the Principle of Non-Contradiction (PNC)
For him, nothing is, everything changes.
For his part, PARMENIDES (also 5th century B.C.) wanted to re-establish the truth of BEING,
in opposition to the dissolution of reality wrought by Heraclitus.
He formulated the famous statement: "Being is, non-being is not."
Nevertheless, by understanding this principle in a rigid, inflexible manner, he rejected every non-being, including RELATIVE non-being.
Thus he said that all limitation, multiplicity and change are impossible.
He concluded that reality is a single, homogeneous, immobile being.
PLATO (427 – 348 B.C.) developed a metaphysics which accepted the reality of privation and
affirmed that the sensible world participates in the world of Idea.
Thus he was to include the limited universe within the realm of being.
However, it was ARISTOTLE (384 –322 B.C) who emphasised the real meaning of RELATIVE non-being found in things when he discovered a real principle of limitation, namely, POTENCY.
Thus, he formulated in a more accurate way the PNC: "Something cannot be and not be at the same time and in the same sense. "
(Alvira, Clavell, and Melendo, "Metaphysics", Manila, Sinag-Tala Publishers, 1991 (first published in 1982 by the Ediciones Universidad de Navarra in Pamplona), p. 39-40)

KANT’s argument is in a section demonstrating according to him that it is impossible to give an ontological proof of God’s existence.(section IV of the final chapter "The ideal of pure reason",before the final part of book "the transcendental doctrine of method".)

Enough – for now ...

FOFOA said...

This is a very good and important interview. Check out this one snippet...
____
"Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller – the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S...

And the message is, “Buy now while it's still available.” I know it may sound like I'm trying to sensationalize it, but I'm really not."

____

What Andy Schectman describes in this piece, I have written about here, buried somewhere in the comments. It happened around Oct. 8th or 9th, 2008. That's when the global train ALMOST derailed. Please read this interview, especially if you are delaying your gold purchases "waiting for a lower price"...

The Best Gold Interview of 2010
Jeff Clark, Casey's Gold & Resource Report

Much of what passes for “insider” information these days is often conspiracy-edged or largely conjecture. True inside information is actually hard to come by. So what follows is the refreshingly candid and uncut version of my talk with a first-hand participant in the murky and little-understood world of gold bullion, mints, and bullion dealers.

Customarily, when considering a company for a potential recommendation, I hold a series of discussions with management. It was during one of these vetting procedures that I spoke with Andy Schectman of Miles Franklin – and heard some disturbing reports about supply that every investor should know. Andy is a bullion seller, so you’re welcome to take his comments with a grain of salt. On the other hand, what he sees week after week and what he hears from his high-level industry contacts might just make you pull back on that salt shaker and re-inventory the number of ounces you own...

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Andy: I’m associated with two of the six primary mint distributors in the United States. There are only six primary precious metal distributors here because the qualifications are very difficult to meet. Aside from having $100 million in annual sales, you have to extend a $50 million line of credit to the U.S. Mint, and very few companies can do that. So in working with these companies, I’m privy to information that many others aren’t.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Andy: I think in order to properly characterize what’s happening in the industry, it's important to start from a big-picture perspective, which is that by and large the masses in this country are not involved in precious metals. In my experience, the move we've seen in gold over the last decade has primarily been from international investment – sovereign wealth funds in the Orient, petrodollars in the Middle East, India buying from the IMF, Russia and Japan accumulating, etc.

Most U.S. investors have lived through nothing but prosperity and good times, where they perhaps didn’t think they needed to own gold – but I think the rest of the world isn't as optimistic about the future. So when you talk about supply, it's important to acknowledge that most people in this country don't own any gold and silver. To me, that's what should really alarm people.


...

FOFOA said...


Jeff: Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.

But it’s worse than that. When the market plunged 1,000 points in one day last month, two German banks bought about 35,000 or 40,000 one-ounce coins and cleaned out the Royal Canadian Mint overnight. Think about that: two banks cleaned out one of the world’s preeminent mints in one day.

Then you have the Austrian Mint recently announcing they were running into supply issues. And the U.S. Mint has been the model of inefficiency for the last several years. They have been either reluctant or unable to meet demand when it comes to Gold Buffalos, Platinum Eagles, and fractional Gold Eagles. They issue dribs and drabs of them, but certainly not enough to meet demand.

Jeff: And they frequently run out.

Andy: They frequently run out, they frequently have delivery delays, and it's a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we’re headed there again?

Andy: I do. In 2008, when gold dropped from $1,000 to $700 very quickly, all product worldwide disappeared. Within weeks the U.S. Mint was shut down. The Canadian, Austrian, and Australian Mints were all eight to 12 weeks back-ordered or shut down. The Australian Mint stopped taking any new orders in July or August for the rest of the year. The Rand Mint, for the first time ever, sold out of all its product. One wealthy Swiss businessman flew his own 747 there and cleaned them out.

So product was impossible to get, but not just from the primary mints; even the refiners that made 100-ounce silver bars couldn't get them. No one could get anything, and it was a very scary time if you owned a gold company. There were many days I sat at my desk wondering how I was going to get product tomorrow, and there were times we couldn't take orders whatsoever. And that comes from a company that’s done over $100 million in sales, is a member of the certified exchange, and that has contacts that run very deep in the industry – and I couldn’t get anything.

A friend of mine who owns a very prominent gold and silver company in Colorado has a store front, and back then he told me, "I want to put a sign on my window that says, ‘All we do is buy, we don’t sell,’ because one person will come in there and clean me out and there’s nothing to be had.”

So what I think is ahead comes from that experience. If you factor in that very, very few people in this country have even held a gold coin – let alone own any gold, or understand the reasons to own it, or will even accept the arguments for owning it – I think the primary distinguishing characteristic of this market will be that people won’t be able to get product when they want it. The rising price in and of itself will not be the main hurdle. For the most part, people will overcome price, because they’ll want to own it. The real issue will be getting product in a timely fashion, and that will become difficult for the average American.

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn’t that increase the available supply?

Andy: This is what I believe is a distinguishing feature of this market: there is a total absence of a secondary market. There isn’t one. Period. In years past, we used to do a lot of business with people wanting to sell. Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller – the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S.


...

FOFOA said...

Jeff: Why do you think no one’s selling?
Andy: People are afraid. They’re afraid of what's happening geopolitically, economically, fiscally, and want to hold on to their gold. As they should, because this is exactly the kind of circumstance gold is for.

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.

When you look at the fact that there is no secondary market, and then you throw into the mix that the mints are already running into production problems, and then add the troubles in Europe, which could easily spread, I think it’s easy to see how demand could outstrip supply. I assure you, there's an awful lot of gold acquisition going on in other countries – the Swiss and Germans, for example, see the handwriting on the wall. They were buying everything up when the European crisis broke. It was bedlam for awhile.

And if all of a sudden people here wake up and feel they really need to own gold but can’t get it, we’ll be right back where we were in 2008.

But to your point, yes, nobody is selling anything right now and almost anything you buy will be dated 2010. That’s because there are no backdatedcoins to be had virtually anywhere. Maybe 20 here or 50 there, but nothing on a meaningful basis.

Jeff: It sounds like regardless of what’s going on in America, global supply could be in jeopardy if this trend continues.

Andy: Absolutely, especially with the fact that there is no secondary market. Really, the people who enter the game late are going to be at the mercy of the mints. And if the mints run out of supply, or just stopped selling for whatever reason, it's “game over” for those who want to accumulate. Right now there's as good a supply as I've seen in a couple years, and that's at a time when we've already witnessed the Royal Canadian Mint running out of gold for a week or so, the Austrian Mint also running out of product, and the U.S. Mint rationing Silver Eagles for a short time.

Jeff: And you’re calling this a good supply market?

Andy: Yes. It’s as good as we've seen in a couple years.

Jeff: That's scary.

Andy: I don’t think you’re exaggerating by saying that. And the message is, “Buy now while it's still available.” I know it may sound like I'm trying to sensationalize it, but I'm really not. Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning. Supply is that small compared to the tremendous amount of money that's out there.

Here’s another example. I had a meeting with a money management company here in Minneapolis that manages some of the oldest money in the entire country, literally billions of dollars. And when I spoke with them, I discovered the principals of the firm had never held a gold coin. They asked me questions that were as rudimentary as what I would get from a complete novice. By the end of the conversation, they said they would start with a $5 million order. I later learned this was a small order for just one of their clients. It was just dipping a toe in the water for these people.


...

FOFOA said...

Well, it won’t take too many of these kinds of people waking up to gold to drain the supply chain. Most of the wealth in this country is driven through money managers, and at some point these people will tell their managers, "I don’t care what the price or premium is, get me gold." When they come knocking in large numbers like that, the supply chain will dry up overnight. I know this to be true. If we see an event that drives money managers to buy physical gold, the supply will be gone.
Jeff: Some of that money is already going into the ETFs.

Andy: Yes, but not when you consider the total capital that’s available. And keep in mind that the prospectus for GLD and SLV state that, more or less, you can’t take possession of the metal. So, do you “own” gold if you have shares in GLD or SLV, or any ETF, for that matter? If you can’t put the coin or bar in the palm of your hand, the answer is no.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Andy: We've seen a lot of demand for silver, probably more so than gold, and the U.S. Mint has already rationed Silver Eagles once this year. Junk silver bags are becoming much harder to get. And I think the higher gold goes, the faster silver will disappear. At some point the American public will realize they should have some gold and silver, and we could see a situation where the gold price could get out of reach for some investors. Those people will turn to silver and, as a result, it will probably be tougher to get than gold.

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Andy: Absolutely. In 2008 the premiums were astronomical. Silver Eagles were $5.50 to $6 over spot. Gold Eagles were $100 to $150 over spot. The premiums went parabolic. That could easily happen again.

Jeff: And that was due to constrained supply.

Andy: Yes. When the price fell off the table, everything disappeared quickly. That’s counterintuitive, I know, because logic would dictate that as the price of something falls, demand is waning. But as the price fell, I think it became more attractive to large interests around the world, and everything got gobbled up fast.

Looking ahead, I can tell you that the only way you'll see premiums stay where they are is if the mints are able to keep up with demand, and based on what I see I would argue there is no way they can. They can’t even keep up now. On top of that, as I stated, people aren’t going to sell their gold this time unless they absolutely have to, so there won’t be any supply coming from sales.

Jeff: So your message to someone who owns little or no physical metal now is what?

Andy: Acquire as many gold and silver ounces as you can. In the end it’s not about price paid, it's about number of ounces. View the supply issue as critically as you would the price, because I believe that more than anything else, the lack of available supply will mark this industry.

Jeff: Excellent advice, Andy. Thanks for your input.

seeweed said...

Have someone cut a $100 bill into two and take one half to a bank and ask how much it is worth. Take a gold coin and cut it in half and take one half to a coin shop and ask how much is it worth - compare the difference and ask yourself, why? What do you want your savings in, especially in today's environment?

Mike said...

http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=188282

oldinvestor said...

FOFOA, there is one part of your new post that you may want to think some more about , and that was your last part where you opined on taxation of gold. You said:

“95% of the global private physical gold stock has no recorded cost basis on which to collect a “flash revaluation” capital gains tax. It is impossible.”

You went on to say that it would not be possible to tax gold sales because of this.

I have bought and sold land for some time, and am very familiar with the basis and its relationship to capital gains tax. This tax is levied on the difference between what you paid for an asset (basis) and what you sell it for.

As you say, most gold lacks documentation of its original purchase price. What you may not know is that IRS rules in that case say that the basis must be set at zero, and thus the whole sales price will be counted as capital gains.

The sale of gold should in practice be taxed no differently than the sale of any other asset I would think.

costata said...

oldinvestor,

As I remarked in an earlier comment I'm an agnostic on the subject of taxation on gold. I understand FOFOA's line of reasoning. At the same time I also believe that governments are capable of just about anything when it comes to ripping off citizens.

That said, consider the challenges of confiscating or punitively taxing privately owned gold in a post-Freegold environment. Unlike land gold is highly mobile. If say, the EU, did not follow the "leader" on this how would any government stop gold from flowing to Europe from their jurisdiction? (Likewise China, India, Russia etc.)

Unless every government co-operated in this matter I cannot see how any government could achieve a high degree of success and significant revenue generation.

Another point to consider is that if A/FOA are right gold will be the capital par excellence post-Freegold. Attracting this capital will be crucial in an environment where currencies are relegated to being solely a medium of exchange. A government who causes capital flight (gold outflow) under this regime could be committing economic suicide.

Would that stop them from trying it? Possibly not, but if it harms their interests I expect that the politicians and bureaucrats will reverse course.

costata said...

oldinvestor,

This comment should have read:

"As I remarked in an earlier comment I'm an agnostic on the subject of taxation on privately owned physical gold."

Rather than:

"As I remarked in an earlier comment I'm an agnostic on the subject of taxation on gold."

Martijn said...

FOA on reconnecting the dollar to gold (and some monetary history):

Make no mistake, gold was and still is the center of the money universe. Only the way we utilized it was changed (indeed, it's about to be changed again). ORO, the US had already placed it's currency on an oil standard years before (in practical theory anyway). They were expanding the money supply directly in relation with the increased production of goods that modern oil use was providing. Of course they ran away with the process as is always the case. Gunning the debt money supply and justifying it by extrapolating growth at ever increasing rates. Dollar creation overran the ability of the gold exchange standard to balance it. Still, in all fairness, the old system was built on a much slower creation of production efficiencies and couldn't accommodate this modern surge of wealth (and debt). Let's face it, the world has no precedent for the last 30 years of growth. By adhering to the fixed money supply, currencies would have risen in value creating a deflationary effect on the debt created from this growth. Our first experiment with this came as the US decided to keep gold in the money universe but back the currency with oil. Better said: "continue to settle oil in dollars as long as the rate (oil price) creates more value from production than the inflation of the currency takes away". This is the reason the BIS did not lobby the US to officially devalue the dollar in gold (raise the dollar gold rate from $42 to say $200) and continue the system. Even though many people were hurt from this, the system was failing and had to change. The tactic was not to stop using dollars if the gold was not delivered, but rather for the US to just stop shipping the gold. In reality the dollar is still a receipt for $42 in gold, but the it will never be connected to gold again. Ever!
In the background, the value of the gold backing lost was found in oil. In reality, the value of oil to the world economy was increasing much faster than value of gold lost from dollar default. Even at the higher prices per barrel the need and demand for oil proved to be a far superior "monetary backing" for the dollar than gold. As long as the majority of oil producers agreed to receive dollars for oil, the stage was set for a renewed surge in growth the world over.
Yet, gold was still in the monetary game. Only this time the game was proving to be short lived and unstable. This new "free market" for gold was soon being leveraged in a way the old dollar was. Once again, the supply of gold contracts was exploding as they were responding to the new demands of an expanding world economic system. Only this time it wasn't the dollar that was about to default, it was the "new gold market".
Today, we find ourselves on the edge of yet another change in the world financial structure.

oldinvestor said...

Costata,

I agree that there is little likelihood of “confiscating or punitively taxing privately owned gold in a post-Freegold environment.”

What I was talking about is the current law on capital gains taxation. This law has been on the books for quite some time, and says that if you sell gold, you are taxed at capital gains rates on the gain, exactly the same way you are taxed on a gain in the sale of a stock or your home.

Currently this is 15% of the gain (this may go up), and in some cases gold is classed as a collectable and its gain is taxed at 28%

Under a freegold scenario almost all of the sales price would be gain, so you would be facing a fairly large tax bill. I am not saying this is necessarily bad. After such a windfall gain, it would perhaps only seem fair to most people to pay some type of tax on this capital gains. After all, with such a windfall gain most people would be quite happy with their net proceeds.

Again, there is no additional tax laws that need to be enacted, this is the law today.

To your point that one could move to a foreign country and sell their gold there where taxes may be less, I do not believe this is a reasonable expectation for ordinary everyday people in the US who are buying retail quantities of gold to protect their wealth. I tend to believe most of the readers of this blog would fall into that category.

Mike said...

how many of you think that war would be another way to fake and extend the paper gold scheme?

for instance it seems like iran/israel are close to war. something like that would in theory rush people into more safer paper instruments such as treasury's and contract gold.

but would also collapse everything else above it in the asset pyramid such as stocks, real estate, derivatives etc...

samix said...

Though I hate to see America or any country in the world start wars as modern wars don't really end they just drag, but I feel if the current system has to survive then American needs a war and as says marc faber 'America will find someone to attack'

I think a war is pretty much on the cards, sadly so.

Wendy said...

Mike, Samix,

I know history shows that war is the likely outcome. I may be naive, but I really believe this time might be different. If Israel attacked Iran, the world will divide in a way not seen since WWII. China, Russia, Venuzala and very likely the gulf states will support Iran, leaving the US and it's bankrupt allies to support Israel.

I can't believe that old world order/money will allow this to happen. Not because I believe they are a bunch of benevolent bankers, but because this disruption to world trade war would cause, has to be bad for business.


Also looke at what hasn't happened over the last couple of years: Georgia vs Russia eventually fizzled, Pakistan's implication in the bombing of India eventually fizzled, the accusation of North Korea in the attack of a South Korean vessel has more or less fizzled. Any of these instances in the past could have resulted in all out war, but they haven't, and I have to ask myself why!

If the BIS's mandate in the past was to:
1) take down the USSR in an effort to ensure world peace
2) remove the US dollar as the world's researve currency

Why should this change if it's now the US that threatens world peace.

Although no nation wants to been seen as causing of the fall of the US, the fact is that the US is the biggest debtor nation in the world. If for instance China decided to dump US treasuries and the oil producing nations demanded Euros for oil, I believe the US military, and industrial military complex would become impotent almost overnight.

As I mentioned, perhaps I'm naive.

William said...

The rush for physical is quietly taking place, check this out:

Fresh from King World News: Five tons of fake gold imported to the UAE.

"Several tons of gold imported into the UAE by traders and investors turned out to be fake on closer inspection, resulting in millions of dirhams in losses and high levels of stress to the victims. “We have inspected many consignments from African countries, especially Ghana, and found that there is not an ounce of gold in them.” These comments were made by Mohamad Shakarchi, Managing Director of Emirates Gold.

August 16, 2010
KWN Blog

Also from the Emirates 24/7 article:

“For importing pure dust or other metals with yellow colour, these traders have paid several million dirhams.”

...Dubai Customs sources confirmed the incidence of fake gold imports, but did not reply to a questionnaire sent by Emirates 24|7 ten days ago. Mohammed said that at least five tonnes of fake yellow metal is lying with Dubai Customs.

A tonne of gold will cost approximately $40 million. Merchants estimated that the minimum loss of fake gold imported by local traders is nothing less than $200 million.

He said many clients and Dubai Customs have requested the use of company’s expertise to verify the purity of gold. “The fake gold issue has affected many people. Some of the traders got heart attack, after our inspectors said there is no gold in the tonnes of imports brought from Africa,” Mohammed said.

Recent media reports suggested that several million dollars worth of gold with the Ethiopian Central Bank turned out to be fake. These bars of gold turned out to be gold plated steel bars.

The lesson here for all King World News viewers globally is to always do business with reputable dealers. Also, never use leverage and always pay for your metal in full and take physical delivery.

-Eric King
-KingWorldNews.com

costata said...

oldinvestor,

FWIW I think your analysis of the "yes" case is sound.

I think that FOFO's arguments for the "no tax on gold" case are also sound.

We wait and see I guess. Thank you for your response.

Wendy,

I don't think you are being naive. I have stopped trying to interpret war in a geopolitical context. These days I limit myself to trying to understand the economic and commercial implications. I "follow the money" as the saying goes.

The FIRE participants have their techniques for looting their host countries. IMO the military-industrial complex uses war to pursue the same objective. As the looting of the Anglo-US Empire runs its course I hope the wars will subside. Sadly for the people of the UK and the USA I expect this will come to pass when there is nothing left for these groups to steal.

I have to admit though that my sympathy for the victims of these wars is an order of magnitude greater than for the flag waving "patriots" who proudly feed their children to the military machine while the elites use their influence to protect theirs.

The most decorated US marine of his era, Major General Smedley Butler, wrote a book in the 1930s called "War Is A Racket". IMO nothing has changed.

Mike said...

contract liquidation. are longs realizing that they can't get what the contract promises. isn't the comex gold market still behind like 2million oz for delivery from June? all this with position limits just around the corner also. sounds like what another has said. now the paper price falls.

And now the commentary from Adrian Douglas:



Ounces transferred in silver fell 32.7 percent to a daily average of 57.2 million. 'The substantial fall in silver ounces transferred, for the second month in a row, brought this measure to the lowest level since these statistics were first produced in 1996,' the LBMA said.



With all the smoke billowing out of the physical silver market and a drain of silver inventory on-going at the Comex and JPM & HSBC reducing their shorts as shown by the Bank Participation report I can only interpret that this massive drop off in silver paper trading has moved to the physical market. Could it be that we have exposed the LBMA unallocated bullion fraud to the extent that investors are ceasing their business there on a massive scale? How otherwise could the trade suddenly decline to the lowest level since 1996? There is also a big drop off in paper gold trading. Could it be that the GATA exposure of the LBMA fraud has hit the bull’s eye? Only time will tell but if this is true that will not be very much time!

costata said...

FOFOA,

This may be a must read. Via DollarCollapse.

http://www.bloomberg.com/news/2010-08-15/china-favors-euros-over-dollars-as-bernanke-shifts-course-on-fed-stimulus.html

"China Favors Euro Over Dollar as Bernanke Alters Path"

According to this article other Asian nations my be drifting toward the exits as well.

Angel Eyes said...

Negative Euro talk all just MOPE, IMO.
Always was. USD is where the unsurmountable problems lie.

Angel Eyes said...

"From where comes the money?

The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.

These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?

The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt.

This movement from euros to dollars weakened the alternative reserve currency to the dollar, halted the dollar’s decline, and financed the US budget deficit a while longer.

Possibly the game can be replayed with Spanish debt, Irish debt, and whatever unlucky country is eswept in by the thoughtless expansion of the European Union.

But when no countries remain that can be destabilized by Wall Street investment banksters and hedge funds, what then finances the US budget deficit?

The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve’s purchase of Treasury debt.

Do goods and services expand by the same amount? Imports will increase as US jobs have been offshored and given to foreigners, thus worsening the trade deficit. When the Federal Reserve purchases the Treasury’s new debt issues, the money supply will increase by more than the supply of domestically produced goods and services. Prices are likely to rise.

How high will they rise? The longer money is created in order that government can pay its bills, the more likely hyperinflation will be the result.

The economy has not recovered. By the end of this year it will be obvious that the collapsing economy means a larger than $1.4 trillion budget deficit to finance. Will it be $2 trillion? Higher?

Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency. At that point wholesale dumping of dollars will result as foreign central banks try to unload a worthless currency. "


From: Zero Hedge article click here

Angel Eyes said...

The Daily Bell, having read the same article, have a different point of view:

"We tend to think that the euro-crisis in its largest sense is NOT manipulated (or at least has spun out of control) and that the elite – which evidently and obviously is behind the EU – has a problem on its hands that it may not be able to solve. We think the power elite is having a tough time keeping its promotions afloat in numerous venues."

From: Daily Bell article click here

Either way, does Freegold care?

dojufitz said...

Ben Bernanke turns to answer an important question from Congress at 1:51.

http://www.youtube.com/watch?v=k55NuWQCh78&playnext=1&videos=tStK95fJPvw

enjoy.....this clip also seems to involve the pouring of metals at various stages.....

Mike said...

Wendy,

i see what you mean with those past almost war attempts and you might be right.

maybe the BIS is involved more then what people think.

here is an interesting link that might confuse your thoughts though.

http://www.zerohedge.com/article/gulf-states-endorse-military-option-against-iran

samix said...

@wendy, if the US or Israel attacks Iran the gulf states will not support Iran.

Iran is a shia country and the rest of the gulf is sunni.

There is a big difference between the shia and the sunnis, the former being a minority and the later the majority.

Contrary to popular beliefs you should know that Muslims in the gulf and most sunni's in the world have a deep distrust of Iran and particularly the shia's and they would rather see them go happily.

In the effort to garner support for the war the western/American media clubs the shia and the sunnis together, punishing the majority for the adventures of a minority.

Iran/Hezbolla - both are shia's

dunno if FOFOA would like this discussion on his board.

Wendy said...

Thank you Mike and Samix... you have offered me much to think about.

Angel Eyes said...

"Iran imported 23 tons of gold in the four months ending July 22, the state-run Fars news agency reported. Imports of the precious metal totaled $855 million and came from Turkey, the United Arab Emirates, Russia and Switzerland, Fars said. The Persian Gulf country imported 22 tons of gold in the year ending March 20, the agency said."

Mike said...
This comment has been removed by the author.
Mike said...

hey guys i decided to look at prices for gold over the net on some of the most popular sites such as kitco/apmex/tulving and just compare premiums.
i noticed that for some reason kitco's premiums on krug's and eagles are off the hook, about $100 over spot but tulving and apmex show no where near that prices. apmex is selling for about $50 over.
i wonder if kitco is raising the bar with their prices because of supply issues or if they are getting high demands from owners of pool accounts converting to real metal.

any thoughts on this?

raptor said...

Very nice article... I have one remark (may be put it like a first line)...

There were never CONFISCATION ... ppl get paid for their gold at the current price at that time.

CONFISCATION means they get your gold and give you nothing in return.

CONFISCATION =!= FORCED SALE

I want ppl to stop using the word CONFISCATION, it wasnt... please.

Again there were never confiscation, period.

DiverCity said...

@raptor, I would have to disagree with you. Whilst it risks devolving into an argument about how many angels can dance on the head of a pin, here are definitions of the word "confiscate:" con·fis·cate (knf-skt)
tr.v. con·fis·cat·ed, con·fis·cat·ing, con·fis·cates
1. To seize (private property) for the public treasury.
2. To seize by or as if by authority. See Synonyms at appropriate.
adj. (knf-skt, kn-fskt)
1. Seized by a government; appropriated.
2. Having lost property through confiscation.

Nowhere in this definition appears your added requirement of a failure to exchange something of value for the appropriated thing. Indeed, the focus is on seizure under colour of law or state authority. In the U.S., the Constitution prohibits a governmental "taking" without just compensation. A taking is nonetheless a confiscation of sorts.

Of course, it can well be argued that FDR's seizure/confiscation/appropriation was a taking without just compensation as gold was revalued withing months.

raptor said...

@Divercity, point taken.
I agree ppl were not compensated 100%, but still it wasn't 0% compensation (like it will be in confiscation).

Like A Gentleman said...

"Here is an example of inductive reasoning/logic:

1. All of the swans we have seen so far are white.
2. Therefore, all swans are white.

It is a form of logic that allows for a false conclusion even when the premises are correct.

Now here’s an example of deductive reasoning:

1. All fiat currencies are eventually worth no more than toilet paper.
2. The dollar is a fiat currency.
3. Therefore, the dollar will eventually be worth no more than toilet paper."
-----------------------

Love your blog and agree with your point generally, but Nassim Taleb and I have a huge problem with the statement above. The second part could just as easily be written like this:
1. All of the fiat currencies we have seen so far have failed.
2. Therefore all fiat currencies fail.

I wouln't have posted a criticism, but you had to invoke the Black Swan.

Still love you FOFOA!

FOFOA said...

Hello Gentleman,

In your rewriting of the syllogism you removed its syllogistic elements, thereby changing its nature to that of an induced conclusion. Mine was a deduced conclusion based on the premises offered.

A syllogism consists of two premises and their necessary conclusion. Whether or not the premises are correct is beside the point. IF the premises are correct, THEN the conclusion MUST be correct -- is the point of a syllogism.

In yours, point 2 does not NECESSARILY follow point 1, even if point 1 is true.

In mine, point 3 DOES necessarily follow points 1 and 2 if they are true. This is deduction.

Debating the accuracy of the premises is an entirely different exercise. ;)

Sincerely,
FOFOA

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