Friday, September 24, 2010

The Shoeshine Boy

To set up this post I will share with you two brief predictions I recently received by email. These were both in email blind copied to large groups of recipients that included me. The two senders do not know each other. In fact, their only connection is that they are both supporters of my blog on the highest order, I know what they each do for a living (very respectable), and I therefore hold them both in high regard:
Email 1:
This is a very orderly secular bull market. The bubble, that WILL come, is still about 2 or 3 inches to the right of the margin on the right side of this chart...
Email 2:
Perhaps we are talking about the first general realization among the investing public that the Fed cannot/will not rescue us with their magic wands and QEs… This may be it, the beginning of Stage 2 of gold's rally, where the smart money starts moving in. Stage 3 is next when the shoeshine boy tells you: Buy gold!
For those of you that don't know the meaning of the shoeshine boy reference, JFK's father, Joe Kennedy claimed that he knew it was time to get out of stocks in 1929 when he received investing tips from a shoeshine boy. Ever since, the shoeshine boy has been the metaphor for "time to get out"; for the end of the mania phase in which everyone, even the shoeshine boy, wants in.

Joe Kennedy

Joe Kennedy's credibility on this "bubble top calling" issue is bolstered by the fact that from 1929 to 1935 his fortune went from $50 million to $2.85 Billion in today's purchasing power. And the take-home lesson in this story is that it is time to sell ANYTHING once the shoeshine boy is recommending it. Because the next phase is the blow off phase where the item in question comes crashing back down.

Bubble Phases

And the fact that two of my favorite readers are now calling for an eventual bubble in gold reminded me that it has been 9 ½ months since I wrote Gold: The Ultimate Un-Bubble. Perhaps it is time for an update.

Now I'll grant that the point in both of the quotes above was that we are nowhere near the bubble top. And they were addressed to people that are very jumpy when it comes to bubbles because they have been burned by a couple bubbles in recent history. But even so, I think they expose a fundamental misunderstanding of what is actually happening today.

How Gold will handle even the Shoeshine Boy

Before I get into what is actually happening with gold today, I want to show you WHY it is happening to gold. And WHY gold is different. There's a unique thing that happens with gold. ANOTHER said it pretty clearly (even if still a bit cryptic) in his very first post:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In a future post I'll explain the context in which ANOTHER made this statement because it portends vast changes in the international monetary system directly in front of us. (Remind me of this. I was going to include it here but the post grew too long even without it. :) But for now, we need to look at why this statement is true. For this I turn to John Law. Well, not the real John Law, but another pseudonymous blogger like me using his name back in 2006:

An illustration

Let's start by comparing two hypothetical cases.

In case A, a million Americans decide right now to move all their savings into Dell stock, buying at the current market price no matter how high.

In case B, a million Americans decide right now to move all their savings into gold, buying at the current market price no matter how high.

In both cases, let's say each of these test investors has an average of $10,000 in savings. So we are moving $10 billion.

Neither gold nor Dell can instantly absorb $10 billion without considerable short-term increases in price. Because it would require us to predict precisely how other investors would react, we have no way to precisely compute the effects. But we can describe them in general terms.

In case A, the conventional wisdom is right. Our test investors should expect to lose a lot of money.

This is because Dell has a stable equilibrium price which is set by the market's estimate of the future earning power (price-to-earnings ratio) of this fine corporation. Because it is not the result of any new information about Dell's business, the short-term surge should not affect this long-term equilibrium.

Since there will almost certainly be a short-term price spike, many of the test investors will be buying at prices well above the stable equilibrium. In fact, the more investors we add to the test, the more each one should expect to lose. Doh!

But there is no way to apply this analysis to case B.

Precious metals have no price-to-earnings ratio. With gold formally demonetized (that is, with no formal link between gold prices and currencies such as the dollar, as there was until 1971), there is no stable way to price it. There is no obvious equilibrium to which the gold price must converge.

It is true that gold has industrial uses. It can be priced on the basis of industrial supply and demand. The conventional wisdom is that it is.

Thus we can say that gold, for example, is overvalued if gold miners are selling more gold than jewelry makers and other industrial users want to buy. At present (with gold near $700), they probably are. So if you follow this reasoning, the right investing decision is not to buy gold, but to sell it short.

But this just assumes that there is no investment demand for gold. On the basis of this assumption, it shows that gold is a bad investment. Therefore there should be no demand for it.

Therefore, when our case B investors put $10 billion into gold, that money has to be used to bid gold away from its current owners, many of whom already believe that the price of gold in dollars should be much higher than it is now.

So the result of case B is that the gold price will, as in case A, rise immediately. But it has no reason to fall back.

In fact, quite the opposite. Because the gold price is largely determined by investment demand, any increase in price is evidence of increasing investment demand. Mining production, noninvestment jewelry demand, and industrial use are relatively stable. Investment demand is a consequence of investors' opinion about the future price of gold - which is, as we've just noted, largely determined by investment demand.

This is not a circularity. It is a feedback loop. Austrian economists might call it a Misesian regression spiral.

Suppose you believe this. It's all well and good. But what does it really prove? Couldn't gold still be just another bubble?

And why should gold be a better investment because it has no earnings to price it by? This makes zero sense.

To answer these sensible objections, we need a few more tools.

Nash equilibrium analysis

The Nash equilibrium is one of the simplest and oldest concepts in game theory. (Nash is John Nash of A Beautiful Mind fame.)

In game theory jargon, a "game" is any activity in which players can win or lose - such as, of course, financial markets. And a "strategy" is just the player's process for making decisions.

A strategy for any game is a "Nash equilibrium" if, when every player in the game follows the same strategy, no player can get better results by switching to a different strategy.

If you think about it for a moment, it should be fairly obvious that any market will tend to stabilize at a Nash equilibrium.

For example, pricing stocks and bonds by their expected future return (the standard Wall Street strategy of value investing) is a Nash equilibrium. No market is infallible, and it's possible that one can make money by intentionally mispricing securities. But this is only possible because other players make mistakes.

(Nash equilibrium analysis of financial markets is not some great new idea. It is standard economics. The only reason you are reading a Nash equilibrium analysis of the interaction between precious metals and official currency now on the Web, not 30 years ago in the New York Times, is that the Times gets its economics from real economists, not random bloggers, and the profession of economics today is deeply tied to the institutions that manage the global economy. Real economists do not, as a rule, spend time thinking up clever new reasons why the global financial system will inevitably collapse. They're too busy trying to prevent it from doing so.)

What Nash equilibrium analysis tells us is that the "case B" approach is interesting, but inadequate. To look for Nash equilibria in the precious metals markets, we need to look at strategies which everyone in the economy can follow.

Let's focus for a moment on everyone's favorite, gold. One obvious strategy - let's call it strategy G - is to treat only gold as savings, and to value any other good either in terms of its direct personal value to you, or how much gold it is worth.

For example, if you followed strategy G, you would not think of the dollar as worthless. You would think of it as worth 45 milligrams, because that's how much gold you can trade one for.

What would happen if everyone in the world woke up tomorrow morning, got a cup of coffee, and decided to follow strategy G?

They would probably notice that at 45mg per dollar, the broad US money supply M3, at about $10 trillion, is worth about 450,000 metric tons of gold; that all the gold mined in human history is about 150,000 tons; and that official US gold reserves are 8136 tons.

They would therefore conclude that, if everyone else is following strategy G, it will be difficult for everyone to obtain 45mg of gold in exchange for each dollar they own.

Fortunately, there is no need to follow the experiment further. Of course it's not realistic that everyone in the world would switch to strategy G on the same day.

The important question is just whether strategy G is stable. In other words, is it a realistic possibility that everyone in the world could price all their savings in gold? Is strategy G in fact a Nash equilibrium?

There are no market forces that would tend to destabilize it. Or are there? Actually, it turns out that we've skipped a step in our little analysis.

Levitating collectibles

The problem is that the exact same analysis works just as well for any standardized and widely available asset.

For example, let's try it with condoms. Our benchmark of all value will be the standard white latex condom. We can have a "strategy C" in which everyone measures the worth of all their assets in terms of the number of condoms they exchange for. Cash payments will be made in secure electronic claims to allocated boxes of condoms, held in high-security condom vaults in the condom district of Zurich. And so on.

This is obviously ridiculous. But why? Why does the same analysis seem to make sense for gold, but no sense for condoms?

It's because we've ignored one factor: new production.

Let's step back for a moment and look at why people "invest" in gold in the first place. Obviously they expect its price to go up - in other words, they are speculating. But as we've seen, in the absence of investment the gold price would be determined only by industrial supply and demand, a fairly stable market. So why does the investment get started in the first place? Does it just somehow generate itself?

What's happening is that the word "investment" is concealing two separate motivations for buying gold.

One is speculation - a word that has negative associations in English, but is really just the normal entrepreneurial process that stabilizes any market by pushing it toward equilibrium.

The other is saving. We can define saving as the intertemporal transfer of wealth. A person saves when she owns valuable goods now, but wishes to enjoy their value later.

The saver has to decide what good to hold for whatever time she is saving across. Of course, the duration of saving may be, and generally is, unknown.

And of course, every saver has no choice but to be a speculator. The saver always wants to maximize her savings' value, as defined by the goods she actually intends to consume when she uses the savings. For example, if our saver is an American retiree living in Argentina, and intends to spend her savings on local products, her strategy will be to maximize the number of Argentine pesos she can trade her savings for.

Here are five points to understand about saving.

One is that since people will always want to shift value across time, there will always be saving. The level of pure entrepreneurial speculation in the world can vary arbitrarily. But saving is a human absolute.

Two is that savers need not be concerned at all with the direct personal utility of a medium of saving. Our example saver has little use for a big hunk of gold. Her plan is to exchange it for tango lessons and huge, delicious steaks.

Three is that from the saver's perspective, there is no artificial line between "money" and "non-money." Anything she can buy now and sell later can be used as a medium of saving. She may have to make two trades to spend her savings - for example, if our saver's medium of saving is a house, she has to trade the house for pesos, then the pesos for goods. If she saves directly in pesos, she only has to make one trade. And clearly trading costs, as in the case of a house, may be nontrivial. But she just factors this into her model of investment performance. There is no categorical distinction.

Four is that if any asset happens to work well as a medium of saving, it may attract a flow of savings that will distort the "natural" market valuation of that asset.

Five is that since there will always be saving, there will always be at least one asset whose price it distorts.

Let's see what happens when that asset is condoms. Suppose everyone in the world does adopt strategy C, just as in our earlier example they adopted strategy G. What will happen?

Just as we predicted with gold, there will be massive condom buying. Since condom manufacturers were not expecting their product to be used as a store of wealth, demand will vastly exceed supply. The price of condoms will skyrocket.

Strategy C looks like a self-fulfilling prophecy. Condoms will indeed become a costly and prized asset. And the first savers whose condom trades executed will see the purchasing power of their condom portfolios soar. This is a true condom boom.

Let's call this effect - the increase in price of a good because of its use as a medium of saving - "levitation."

Sadly, condom levitation is unsustainable. The price surge will stimulate manufacturers to action. Since there is no condom cartel - anyone can open a factory and start making condoms - the manufacturers have no hope of maintaining the levitated condom price. They will produce as many condoms as they can, as fast as possible, to cash in on the levitation premium.

Levitation, in other words, triggers inventory growth. Let's call the inventory growth of a levitated good "debasement." In a free condom market, debasement will counteract levitation completely. It will return the price of a condom to its cost of production (including risk-adjusted capital cost, aka profit). In the long run, there is no reason why anyone who wants condoms cannot have as many as he or she wants at production cost.

Of course, condom holders will realize quickly that their condoms are being debased. They will pull their savings out, probably well before debasement returns the price of a condom to the cost of producing one.

We can call the decrease in price of an asset due to the flow of savings out of it "delevitation." In our example, debasement causes delevitation, but it is not the only possible cause - savings can move between assets for any number of reasons. If savers sell their condoms to buy Google stock, the effect on the condom price is exactly the same.

Because condom debasement is inevitable, and will inevitably trigger delevitation, savers have a strong incentive to abandon strategy C. This means it is not a Nash equilibrium.

The whole sad story will end in a condom glut and a condom bust. The episode will be remembered as a condom bubble. In fact, if we replace condoms with tulips, this exact sequence of events happened in Holland in 1637.

So why won't it happen with gold?

The obvious difference is that gold is an element. Absent significant transmutation or extraterrestrial trade, the number of gold atoms on Earth is fixed. All humans can do is move them around for our own convenience - in other words, collect them. So we can call gold a "collectible."

Because it cannot be produced, the price of a collectible is arbitrary. It is just a consequence of the prices that people who want to own it assign to it. Obviously, the collectible will end up in the hands of those who value it highest.

Since the global bullion inventory is 150,000 tons, and 2500 tons are mined every year, it is easy to do a little division and calculate a current "debasement rate" of 1.66% for gold.

But this is wrong. Gold mining is not debasement in the same sense as condom production, which does not deplete any fixed supply of potential condoms. In fact, it only takes a mild idealization of reality to eliminate gold mining entirely.

Gold is mined from specific deposits, whose extent and extraction cost geologists can estimate in advance. In financial terms, gold "in the ground" can be modeled as a call option. Ownership of X ounces of unmined gold which will cost $Y per ounce to extract is equivalent to a right to buy X ounces of bullion at $Y per ounce.

Since this ownership right can be bought and sold, just as the ownership of bullion can, why bother to actually dig the gold up? In theory, it is just as valuable sitting where it is.

In the form of stock in mining companies which own the extraction rights, unmined gold competes with bullion for savings. Because a rising gold price makes previously uneconomic deposits profitable to mine - like options becoming "in the money" - the total value of all gold on earth does increase at a faster rate than the gold price. But the effect is not extreme. 2006 USGS figures show 30,000 tons of global gold reserves. This number would certainly increase with a much higher gold price - USGS reports 90,000 tons of currently uneconomic "reserve base" - but the gold inventory increase would be nowhere near proportional to the increase in price.

In practice, modeling unmined gold as options is too simple. Gold discovery and mining is a complex and political business. The important point is that rises in the gold price, even dramatic rises, propagate freely into the price of unmined gold and do not generate substantial surges of new gold. For example, the price of gold has more than doubled since 2001, but world gold production peaked in that year.

The result is that gold can still levitate stably. Even if new savings flow into gold stops entirely, debasement will be mild. The cyclic response typical of noncollectible commodities such as sugar (or condoms), or theoretical collectibles whose sources are not in practice scarce (such as aluminum) is unlikely.

Of course, if savings flow out of gold for their own reasons, it can trigger a self-reinforcing panic. Delevitation is not to be confused with debasement. Again, it is important to remember that debasement is not the only cause of delevitation.

What we have still not explained is why gold, which is clearly already levitated, should spontaneously tend to levitate more, rather than either staying in the same place or delevitating. Just because gold can levitate doesn't mean it will.

Money in the real world

In case it's not obvious, what we've just done is to put together a logical explanation of money, using gold as an example, and using only made-up terms like "collectible" and "levitation" to avoid the trap of defining money in terms of itself.

Now let's apply this theory to the money we use today - dollars, euros, and so on.

Today's official money is an "artificial collectible." Money production is limited by legal violence, not natural rarity. If in our condom example, the condom market was patrolled by a global condom mafia which got medieval with any unauthorized condom producers, it would resemble the market for official currency. No one can print Icelandic kronor in the Ukraine, Australian dollars in Pakistan, or Mexican pesos in Algeria.

It may be distasteful to hardcore libertarians, but this method of controlling the money supply is effective. There is minimal unlicensed production of new money - also known as counterfeiting.

It should also be clear from our discussion of gold that there is nothing, in principle, wrong with artificial paper money. The whole point of money is that its "real value" is irrelevant. In principle, an artificial money supply can be much more stable than a naturally restricted resource such as gold.

In practice, unfortunately, it has not worked out that way.

Artificial money is a political product. Its problems are political problems. It does no one any good to separate economic theory from political reality.

Governments have always had a bad habit of debasing their own monetary systems. Historically, every monetary system in which money creation was a state prerogative has seen debasement. Of course, no one in government is unaware that debasement causes problems, or that it does not create any real value. But it often trades off short-term solutions for long-term problems. The result is an addictive cycle that's hard to escape.

Most governments have figured out that it's a bad idea to just print new money and spend it. Adding new money directly to the government budget spreads it widely across the economy and drives rapid increases in consumer prices. Since government always rests on popular consent, all governments (democratic or not) are concerned with their own popularity. High consumer prices are rarely popular.

There is an English word that used to mean "debasement," whose meaning somehow changed, during a generally unpleasant period in history, to mean "increase in consumer prices," and has since come to mean "increase in consumer prices as measured, through a process whose opacity makes chocolate look transparent, by a nonpartisan agency whose objectivity is above any conceivable question, so of course we won't waste our time questioning it." The word begins with "i" and ends with "n." Because of its interesting political history, I prefer to avoid it.

It should be clear that what determines the value of money, for a completely artificial collectible with no industrial utility, is the levitation rate: the ratio of savings demand to monetary inventory. Increasing the monetary inventory has a predictable effect on this calculation. Consumer price increases are a symptom; debasement is the problem.

Debasement is always objectively equivalent to taxation. There is no objective difference between confiscating 10% of existing dollar inventory and giving it to X, and printing 11% of existing dollar inventory and giving it to X. The only subjective difference is the inertial psychological attachment to today's dollar prices, and this can easily be reset by renaming and redenominating the currency. Redenomination is generally used to remove embarrassing zeroes - for example, Turkey recently replaced each million old lira with one new lira - but there is no obstacle in principle to a 10% redenomination.

The advantage of debasement over confiscation is entirely in the public relations department. Debasement is the closest thing to the philosopher's stone of government, an invisible tax. In the 20th century, governments made impressive progress toward this old dream. It is no accident that their size and power grew so dramatically as well. If we imagine John F. Kennedy having to raise taxes to fund the space program, or George W. Bush doing the same to occupy Iraq, we imagine a different world.

The immediate political problem with debasement is that it shows up in rising consumer prices, as whoever has received the new money spends it. If we think of all markets as auction markets, like EBay, it should be clear how this happens.

Debasement and investment

We haven't even seen the most pernicious effect of debasement.

Debasement violates the whole point of money: storage of value. As such, it gives savers an incentive to find other assets to store their savings in.

In other words, debasement drives real investment. In a debasing monetary system, savers recognize that holding money is a loser. They look for other assets to buy.

The consensus among Americans today is that monetary savings instruments like passbook accounts, money market funds, or CDs are lame. The real returns are in stocks and housing. [Written in 2006]

When we debasement-adjust for M3, we see the reasons for this. Real non-monetary assets like stocks and housing are the only investments that have a chance of preserving wealth. Purely monetary savings are just losing value.

The financial and real estate industries, of course, love this. But that doesn't mean it's good for the rest of us.

The problem is that stocks and housing are more like condoms than they are like gold. When official currency is not a good store of store value, savings look for another outlet. Stocks and housing become slightly monetized. But the free market, though it cannot create new official currency or new gold, can create new stocks and new housing.

The result is a wave of bubbles with an unfortunate resemblance to our condom example. When stocks are extremely overvalued, as they were in 2000, one sign is a wave of dubious IPOs. When housing is overvalued, we see a rash of new condos. All this is just our old friend, debasement.

This debasement pressure answers one question we asked earlier: why should gold tend to levitate, rather than delevitate? Why is the feedback loop biased in the upward direction?

The answer is just that the same force is acting on gold as on stocks and housing. The market is searching for a new money. It will tend to increase the price of any asset that can store savings.

The difference between precious metals and stocks or housing is just our original thesis. Stocks and housing do not succeed as money. Holding all savings as stocks or housing is not a Nash equilibrium strategy. Holding savings as precious metals, as we've seen, is.

Presumably the market will eventually discover this. In fact, it brings us to our most interesting question: why hasn't it already? Why are precious metals still considered an unusual, fringe investment?

The politics of money

What I'm essentially claiming is that there's no such thing as a gold bubble.

This assertion may surprise people who remember 1980. But markets do not, in general, think. Most investors, even pros who control large pools of money, have a very weak understanding of economics. The version of economics taught in universities has been heavily influenced by political developments over the last century. And your average financial journalist understands finance about the way a cat understands astrophysics.

The result is that historically, the market has had no particular way to distinguish a managed delevitation from an inevitable bubble. Because of Volcker's victory, and the defeat of millions of investors who bet on a dollar collapse, the financial world spent the next twenty years assuming that there was some kind of fundamental cap on the gold price, despite the lack of any logical chain of reasoning that would predict any such thing.

Even now, there is no shortage of pro-gold writers who predict gold at $1000, $2000 or $3000 an ounce, as though they had some formula, like the P/E ratio for stocks, that computed a stable equilibrium at this level. Of course, they do not. They are only expressing their intuitive feeling that gold is very, very cheap right now, and tempering it with the desire to be taken seriously.

Gold's main weapon is one we alluded to already: a sudden, self-reinforcing, and complete collapse of the dollar. In a nutshell, the problem with the dollar is that it's brittle. When Volcker did his thing, the US was a net creditor nation with a balance-of-payments surplus. Its financial system was relatively small and stable. And it had much more control over the economic policies of its trading partners - the political relationship between the US and China is very different from the old US/Japanese tension.

For the Fed, what is really frightening is not a high gold price, but a rapid increase in the gold price. Momentum in gold is the logical precursor to a self-sustaining gold panic. If the US federal government was a perfectly executed and utterly malevolent conspiracy to dominate the world, let's face it. The world wouldn't stand a chance. In reality, it's neither. So a lot of things happen in the world that Washington doesn't want to see happen, and that it could easily prevent. Anticipating surprises is not its strength. [1]

Holy Cannoli, Batman! I think this is the longest "snip" I've ever used in a post. Nine pages in Word, just for that quote. And I even edited several pages out of it, "to tighten it up!" I hope you enjoyed it.

To recap, a rising gold price is evidence of increasing investment demand, which confirms the belief of those that already invested in gold that it was a good investment. And because investment demand is over and above the relatively stable industrial supply and demand dynamic, any new investment dollars must bid gold away from its current owners. And because saving in gold is a Nash Equilibrium, the price will rise very high. And because gold is THE monetary metal with the highest monetary to industrial use ratio, it will have no reason to fall back when it reaches its top.

And, as ANOTHER said, "So many people worldwide think of it as money, it tends to dry up as the price rises."

Stock, Flow, Supply and Demand

Let's try a little thought experiment and see where it leads us. This might be a bit of a mind bender and a challenge for me to articulate, but what the heck, we're already 11 pages into this thing. Why stop now?

Let's think of all the physical gold in the world in the same terms as our price discovery markets classify the gold they hold secure for private parties. (You do know that the gold for sale does not belong to the exchanges, don't you?) There is that gold which is "eligible" for delivery. And in our experiment this would be all the physical gold in the world. It is ALL "eligible" to be handed to someone else in exchange for something else. (The only requirement for eligibility in our thought experiment being that it is a physical object made of gold.) And then there is the gold that is actually "registered" for delivery. In our case this would be the gold that is up for sale or expected to go up soon.

So "eligible" is the "stock" and "registered" (for delivery) is the "flow," sort of. (Yes, I know that flow would mean the gold coming out of the ground and then being used up in jewelry and electronics if gold was like other commodities, but it's not, so get over it.)

Now what I just wrote is not entirely correct. You cannot simply compare stock to flow like that because they have different measuring units. Flow is measured in units/time and stock is just units. They do not and cannot compare. The only meaningful relationship they have is a ratio. Stock:Flow, or units/(units/time), which = time. This yields us a time value in which the flow will deplete the stock. So "our flow" is the amount of "registered" gold that actually gets delivered in exchange for something over a given time unit.

In the world as a whole, gold has the largest stock to flow ratio of any commodity, which is why it is unique. This means a very high time value for the depletion of gold stocks. In fact, it is an infinite time value since gold is not consumed, it is merely shuffled around until it ends up with those who value it most. So in our case we'll think of flow as delivery demands actually being met with "registered" stock over a period of time. And in this view, "stock to flow" is a dynamic system that is complicated by many factors.

One complication is that, today, physical and paper gold exist as "stock" at par with each other inside the system. And the flow of paper happens prior to the flow of physical stock (on the price discovery exchanges). In other words, price is discovered in paper and then delivery comes later. Price is not discovered at the physical delivery window. In fact, whether there is any physical at that window when you finally show up with your paper depends on dynamic changes that happened earlier.

As the paper flow precedes the physical flow, the supply and demand dynamics can change very fast, perhaps even so fast as to give the impression that they traveled faster than the speed of light like a tachyon, went back in time, and originated in the past! (Making them impossible to get out in front of!) As demand increases while registered gold is depleted and/or deregistered one of two things must happen. Either the price must skyrocket or the supply of paper must explode to take up the slack.

And as either of these things happen – or they both happen together – we end up with John Law's self-sustaining Misesian regression spiral. Where today's demand is determined by yesterday's performance. (We can call it "the tachyon effect" if you'd like.) This applies to both physical gold and paper gold, and the feedback loop will have separate effects on these separate elements of the market. It will be the cause of the separation and the result will be a flood of paper and no registered gold to service the delivery demand portion of it.

Ultimately the stock to flow ratio of physical gold will go inverse to that of paper gold. Infinite flow demand against zero registered stock. Zero time until physical depletion, concurrent with infinite time until paper depletion. At this point the price will have to go infinite and paper supply will separate because parity will no longer exist.

And in case you haven't noticed, we are now, apparently, at a novel stage in the game. The stage when it is becoming obvious to almost everyone that the Fed can do nothing but print more money (QE), and that it plans to do just that. I draw your attention to gold trading at $1,301 today as evidence! And regarding the Fed, what does a monkey with a hammer do? That's right. It hurts itself.

Being at this stage in the game right now, when clarity is spreading like wildfire, we can expect a further run up in the price of paper gold. Of course the price discovery market buys and sells paper gold so a move in either direction is possible in the short run, but the general trend in gold should now be obvious, even to monkeys. And don't forget that delivery of physical in this market is secondary, and only comes after price discovery occurs in paper.

So with this dynamic situation we find ourselves in, we should expect conflicting signals and responses in the gold market. The flow of gold should increase as demand from dollars pulls on the market. And the supply of gold bullion should be withdrawn or "deregistered" as the people holding it realize their investment belief has been confirmed.

From a demand perspective, flow should increase per the economic law of demand. And from a supply perspective, it should decrease. But how is this possible? Well, this is where price factors into the dynamics of the situation. In most commodities (and all other markets for that matter) flow would be measured in the weight of the good. "How many ounces are flowing?" But gold is a little different.

Because gold is behaving in this case primarily as a savings instrument, flow can be measured in the amount of savings being exchanged. Just like exchanging dollars for euros. In other words, to properly judge the flow we should look at the aggregate amount of wealth flowing "into" gold rather than the weight of gold changing hands. And in this view, the flow can increase with demand even as the stock is withdrawn. Price takes up the slack. It can even accommodate the shoeshine boy without threatening a top.

But there's another element in this dynamic situation that must be considered. And that is paper gold. As I said, price discovery occurs in paper only, and delivery comes after the fact. So paper supply creation can easily absorb the pressure of increasing demand while relieving price of its "taking up the slack" burden.

However, unless the ratio of physical stock "registered" to become flow rises along with the creation of new paper gold, well, "Houston, we've got a problem." And I'm talking about registered physical stock measured in weight, not value! Which is QUITE a problem!

Fortunately, to quote John Law (not the real one), there is no need to follow this challenging scenario further. Instead, we can just repeat ANOTHER's line once again:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In economic terms, ANOTHER was referring to gold's price inelasticity of supply here. In other words, gold seems to violate the economic law of supply. As the price rises, the supply dries up.

But another funny thing also happens when gold "tends to dry up as the price rises." Even more people join the "many people worldwide that think of it as money." And this means that gold violates the economic law of demand as well, delivering a positive price elasticity of demand. In other words, gold is a Veblen good. But unlike a Rolls or the Mona Lisa, gold is divisible and fungible making it the Veblen good that puts the common man on equal footing with the Giants!

This is what FOA meant:

In this world we all need much; blessings from above,,,,, family,,,, home,,, friends and good health. But after all that, one must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us,,,,,, gold!

And this is how and why gold WILL accommodate even the shoeshine boy without collapsing!

There is no such thing as a physical gold bubble.

So, to wrap this beleaguered post up, let's just say that we have the distinct makings of a parity break between paper and physical gold in the works. The supply of paper gold must rise while the supply of physical is withdrawing (deregistering). The flow must also rise, at least in nominal terms, so the price will skyrocket to take up the slack. And as expanding paper competes with a rising price for the "slack taking-up" role, who do you think will win?

Could they each have their way? Could the price rise to take up the extra demand while supply contracts at the same time as easy paper dilution wins itself a lower price? Confused yet?

Well, this situation leaves us with an uncomfortable question. If the only price of gold we know today is the price of paper gold, what is going to happen to "the price of gold?" Will it skyrocket? Or will it plummet?

And if we apply the principles learned in John Law's amazingly long piece in a logical way to this uncomfortable predicament, we'll find ourselves at the conclusion that the true Nash Equilibrium is to take possession of physical gold. And, if you already have some, not to sell it while the price is rising OR falling (this time).

And with the supply of paper gold rising to meet demand while physical is being withdrawn, the only conclusion we can come to is that the gold buyers **IN SIZE** will have to stop buying from the price discovery marketplace because, if they do their due diligence, they'll clearly see that subsequent physical delivery has become impossible at the present price.

So, in conclusion, the price of gold will plummet!

That's right. At some point in the future, after the price of gold rockets upward, it will fall like a box of rocks! And right about that time you'll see more of Robert Prechter on CNBC than you ever thought was possible.

But here's the challenge. When the price of gold falls to $200 per ounce, try and get some physical. I'm sure that Kitco will sell you some from their pooled account. And GLD will be standing ready to sell you a share at $20. But just try to take delivery. I think you'll find it will be impossible at that point.

And that's why you've got to take delivery NOW, at the current "high" price of $1,300. Don't wait for the dip. Oh, yeah, the big dip is definitely coming. A **BIG** "correction." But will there be any physical available? Perhaps at $1,200 if you're really lucky. At $200? No way.

When I look into MY crystal ball, here is how I see a future gold price chart developing (roughly, of course):

And with that, I'll leave you with my replies to the email at the top:

My reply to email 1:
Is this an orderly bull market in paper gold or physical gold?

The bubble that "WILL come"... will it be in paper gold or physical gold?

Is there a difference between paper gold and physical gold?

Is your chart showing paper gold or physical gold?

My reply to email 2:
You may be right on stage 2. But my gut says that stage 3 is when it's obvious everyone's flooding into gold and the real physical **IN SIZE** decides its best move is to withdraw from delivery registration. At that point the paper market won't be able to handle the flood.

My bet, when the shoeshine boy tells you to buy gold he'll be talking about small gold coins only. GLD probably won't even exist anymore. And in this unique historical case, the shoeshine boy will not be the bad omen of a bubble top mania phase, but he will instead be the amazing bell-ringer of a new era. One in which even shoeshine boys can save their surplus wealth in gold. One I like to call Freegold. Because a physical-only gold market can actually handle everyone PLUS the shoeshine boy, unlike any other market.


[1] From Why the Global Financial System is About to Collapse
by John Law
Edited by me for length and content.


«Oldest   ‹Older   201 – 247 of 247
David said...

Thanks for the link dojufitz.

costata said...


I generally try to steer clear of discussions about the political aspects of this transition but what the heck here's my 0.02.

"#3 The FDA will hire an army of new inspectors to enforce all of the new provisions in the bill."

How many "armies" do these idiots think they can pay for with a debased currency?

As Chuck Butler of the Daily Pfennig pointed out recently 35 US states have launched legal challenges over the Federal Government overstepping their legal authority in imposing costs on the States.

According to Chuck you only need 38 States to convene a Constitutional Congress and start tearing up Federal laws. Every mainland State in the USA that united under the Constitution is a REPUBLIC in its own right under the Constitution.

According to an Irish Professor named Quigley, who specialises in US Constitutional law, you can argue that legally payment of all of the Federal debt issued is the SOLE responsibility of the District of Columbia. The States could therefore redudiate the entire Federal debt if they so choose.

At the local level Sherrifs have significant powers under the Constitution if they choose to excercise them in defiance of the Feds.

The legal flaws emerging in the title transfers are bringing home foreclosures to a grinding halt. The big Bank prop desks are now trading in markets where volume has evaporated.

The TBTF banks will be shedding staff in huge numbers to save the executive suite. Do you think those people will like life outside the ivory tower? Will their ex-employees remain "loyal"?

You can only oppress a well resourced middle class up to a point. Gerald Celente of the Trends Research Institute is 100% correct when he says that there will be a revolution. History is on his side.

Edwardo said...

"Of course you realize that many "great" Americans such as Lindberg and Ford could be blamed for assisting the Nazi rise to power far more than the Swiss."

You leave out Prescott Bush, but that's utterly beside the point, the point being that you attempted to exculpate the Swiss without justification. As for your comment that "Roosevelt was always a communist sympathizer", well, you have now thoroughly discredited yourself. Even if, on some level, there is evidence Roosevelt felt a certain personal affinity for "Uncle Joe", that hardly qualifies FDR as "always a communist sympathizer."

With your following comment,"Either way you are making my case" you have entered the realm of delusion and incoherence since I only refuted your bogus claim about the Swiss, nothing more, except to ask what Tea Party you were referring to? As such I've buttressed none of your claims.

Desperado said...


Like you I believe that the breakup of the union and likely revolution as well is where the path that the US on leads.

I live in Switzerland, but am a native Californian. I am not under any illusion that my state will be on the right side of a states rights secession fight. But looking at the US from the outside I find the tea party movement inspiring on many different levels. Start with the name, harkening back to the beginnings of the revolution with brave civilians defying the crown, dressing as Indians and refusing to submit to the crown's authority. Or the grass roots, bottom up, non-elitist, fly-over country nature of the movement. Or its libertarian, small government goals. And the fact that the left and the MSM despise it so, that they stoop so low to call it racist merely enhance it's credentials. All truly remarkable.

And yet none of my family or American friends is a believer or supporter of this movement. Many of them believed in and voted for Obama, and now realize how they have been played for fools. Still they stand frozen like a frightened deer before oncoming headlights, and cannot even conceive of any way out. I try to get them to diversify into gold, but none seem ready to accept the fate that awaits them if the US continues on it's current path. I find it extremely disheartening.

I love P.J. O'Rourke's book title "don't vote, it only encourages the bastards". This seems reflect the current boomer attitude towards government. But doing nothing and simply accepting the fate awaiting our friends and families at the end of this long, slow economic train wreck seems like the Jews who stayed behind in Germany and watched the holocaust unfold without resisting it.

costata said...


I understand your frustration. It seems that the situation simply hasn't become sufficiently dire to galvanise people into action. R Buckminster Fulller spoke of "emergence through emergency" as a human response to the need for change. He believed that people will not embrace change until their situation was sufficiently dire.

If you pick up a copy of Jared Diamond's book "Collapse.." you will find many examples of societies who failed utterly because they never made the hard decisions soon enough. There are also examples of communities who did embrace necessary change. History isn't destiny.

I have some concerns that the Tea Party movement is being subverted by the Koch brothers and Sarah Palin's handlers but I realise that they give voice to some legitimate grievances.

I personally would rejoice to see the USA return the Constitution to its rightful place in society, the legal system and government. I hope that it will come to pass but as Deng Xao Peng said (when asked his opinion of the outcome of the French Revolution) "it is too soon to pass judgement".

I fear that it may be a long road for the USA before something better emerges.

miked said...

Desperado, we have had food laws like that for years under the EU.

It amazes me that people were able to sell uncontrolled food production legally until now in the States.

Not that I agree with these laws. You are right, it damages the small suppliers. Still, the EU has resisted the urge to use these laws for population control.

samix said...

FOFOA said:

In a future post I'll explain the context in which ANOTHER made this statement because it portends vast changes in the international monetary system directly in front of us. (Remind me of this. I was going to include it here but the post grew too long even without it.

Reminding you FOFOA...

littlepeople said...

You said, "It seems that the situation simply hasn't become sufficiently dire to galvanise people into action."

I agree. The CBs and pols know that they must do everything possible to delay the inevitable. You have likely read that some 43 million people are receiving food stamps.

Another 30-40 million people are receiving unemployment benefits. Congree voted to extend benefits further than law normally allows.

Something like 53% of the population of the U.S. pays no income taxes--though some of them pay FICA for the social security system (which is going to pay for food stamps right now).

These people haven't felt the pain--yet. Wait until China stops accepting dollars for their manufactured goods, and food manufacturers start raising prices to reflect the loss of fiat purchasing power.

The powers that be have been fighting with everything they have (unlimited fiat currency) to maintain control of the system, and that includes paper gold and silver. They spend vast amounts of fiat to create paper gold and silver in a rear-flank fight to keep some perceived value in the dollar--and they are losing. And, the losing is becoming parabolic.

It will be interesting to see if they can stage one more big correction in gold and silver . . . if not, freegold may not be too far away.

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

FOFOA, I think your writing is being taken more seriously on other economic blogs. At least I can't help to think the last comment in following section is a nod in your direction:


"Goldman is now convinced that the November 2-3 meeting will bring at least $500 mbillion in either "big bang" or staggered QE2. And stocks have pried it in. If this fails to materialize the market will crash, as the next meeting after that is not for almost another 3 motnhs, on January 25, by which point the economy will be firmly in re-recession (now that it is uncool to say Double Dip thanks to a few overcompetent Ph.D.'s), and any monetary stimulus will be too late, which would lead the Fed to overextend and do something really stupid... Like send gold to $50,000." --Tyler Durden

Desperado said...

Proposal Would Expand Reporting of Money Transfers

The Treasury Department on Monday proposed a requirement for banks to make weekly reports of all electronic money transfers into and out of the United States.
The proposed regulations would expand the requirements so that banks would have to report all cross-border transfers of any size, whether or not cash is involved. (For money-transfer businesses, the threshold would be $1,000 as opposed to that at banks, which would report all amounts.)

Up to 300 deposit-taking banks and 700 money-services businesses, like Western Union, would be affected. Under federal rules dating to 1995, financial institutions already must internally retain records on transfers of $3,000 or more and make them available to the authorities.
Mr. Hudak estimated that it would cost about $33 million for the financial crimes network to put the rules into effect, as part of a broader $120 million effort to modernize the handling of data gathered under the Bank Secrecy Act, the 1970 law that set out requirements for financial institutions to help the government combat money laundering.

They just keep turning the screws. Sure, physical gold is a great start, but IMO anyone serious about retaining wealth through the coming transition needs to have some assets out side of the country.

robert said...


I haven't been reading all the posts that are politically oriented - no interest - however my suggestion to you is that you don't let this great blog on gold go too far in that direction.

Robert Campbell

Paul said...

"The puffed up images of gold and silver,
which after the sack were thrown into the lake,
when found, shall astonish and disturb everybody.
The inscription[s] on the marble shall be interpreted as laws."

Nostradamus, 1558

"An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you."

Statement by James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/BusinessRelations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, before the Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010

"Fourth Turning - Crisis

A CRISIS arises in response to sudden threats that previously would have been ignored or deferred, but which are now perceived as dire. Great worldly perils boil off the clutter and complexity of life, leaving behind one simple imperative: The society must prevail. This requires a solid public consensus, aggressive institutions, and personal sacrifice.

People support new efforts to wield public authority, whose perceived successes soon justify more of the same. Government governs, community obstacles are removed, and laws and customs that resisted change for decades are swiftly shunted aside. A grim preoccupation with civic peril causes spiritual curiosity to decline. A sense of public urgency contributes to a clampdown on “bad” conduct or “anti-social” lifestyles. People begin feeling shameful about what they earlier did to absolve guilt. Public order tightens, private risk-taking abates, and crime and substance abuse decline. Wars are fought with fury and for maximum result."

William Strauss and Neil Howe, The Fourth Turning, predicted to begin around 2006.

If I had been involved in any fraudulent behaviour in the financial industry, at any level, I would be very concerned about my future right now.

costata said...


I wouldn't worry too much about this blog drifting far from the subject of gold for long.

We delved into vegetarianism at one point without lasting damage.

In a humble effort to get back on track:



robert said...

Thanks for the reassurance, Costata,

when it comes to politics, religion, and same-sex marriage, I've seen things get out of hand fast.

John said...

That's what I said to my life partner when we were talking about the president in church yesterday.

costata said...


I'm voting for that as comment of the year.


Desperado said...

@Robert, so you would have Fofoa not "let this great blog on gold go too far in that direction" when "posts are politically oriented. Here are some excerpts from Fofoa's last few posts:

"Gold discovery and mining is a complex and political business

Artificial money is a political product. Its problems are political problems. It does no one any good to separate economic theory from political reality.

The immediate political problem with debasement is that it shows up in rising consumer prices.

The version of economics taught in universities has been heavily influenced by political developments over the last century.

the political relationship between the US and China is very different from the old US/Japanese tension.

The same political will that always changes the rules to suit its needs as surely as the sun rises. And it is this political will that makes dollar hyperinflation a certainty this time around.

As FOA warned 12 years ago, these bailouts were always baked into the cake. They are a mandatory function of the political will that backs the entire system.

The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action.

The world debt system and currency exchange, as we have now will implode and leave little room for political maneuvering.

The removal of the political "world dollar settlement" price of gold will revalue this asset in terms that noone of "western thinking" can understand."

If it weren't for politics we would already be living in a world of freegold, and only politics are standing in its way.

Apparently, when I make the statement "the teaparty movement is our best path towards the peaceful implementation of freegold" you would have Fofoa censor this. IMO, that makes you part of the problem.

costata said...


I don't think Robert is calling for censorship. FOFOA and other good blogs benefit from having a Moderator.

There are two main themes in FOFOA's writing here: Freegold and hyper-inflation. I think Robert was merely suggesting that the focus shouldn't become politics (or rolling bearings?).

miked said...

Anyone got any opinions about the end of the current rally?

I have twice seen projections of 20-25% above the 200 day moving average which would put it at 1450-1500$, and then a several months long consolidation or a drop.

I am not thinking of selling my gold by rather hedging it for a while in the paper markets after we reach those levels.

Jimmy said...

On this moment, IIF (Institute of International Finance) is calling for a renewed Plaza-accord... (Sorry, text is written in Dutch)

The Plaza Accord or Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987. Most of this devaluation was due to the $10 billion spent by the participating central banks. Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. Unlike some similar financial crises, such as the Mexican and the Argentine financial crises of 1994 and 2001 respectively, this devaluation was planned, done in an orderly, pre-announced manner and did not lead to financial panic in the world markets.

The reason for the dollar's devaluation was twofold: to reduce the U.S. current account deficit, which had reached 3.5% of the GDP, and to help the U.S. economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had overvalued the dollar enough to make industry in the U.S. (particularly the automobile industry) less competitive in the global market.

Desperado said...


Robert used the words "don't let" in the context of "all the posts that are politically oriented".

He was not referring to Fofoa's posts, he was referring to the comments. Sorry, I believe he was referring to my comments, and that he wants Fofoa to censor them. This is precisely what the left has been doing for decades, stifling free speech, and it is the reason the progressives were able to get Obama elected. All discussion of his very checkered past were censored and ignored.

As hyperinflation sets in you can be sure that things are going to get far more political. There are certain factions in the country that will try to suppress the free flow of ideas, just witness Obama and Cass Sunstien's take over of the internet kill switch and the never ending accusations of racism towards their primary opponents, the tea party.

And I will close with this highly political statement:

The Democratic party has been the enemy of freegold for over a hundred years. From William Jennings Bryan (cross of gold), Woodrow Wilson (The Fed), Roosevelt (gold seizures) to Larry Summers. So I am not surprised that many Democratic party members reading this comment section would like Fofoa to ban "politics" from it's comment section.

miked said...

There are plenty of conspiracy forums where you can extrapolate new food safety laws into population control. Your comments would be most welcome there.

I can recommend www.davidicke and

Seriously though, it's tough to keep theoretical when emotive issues are thrown into the mix. Personally I find it interesting but it's easy to lose sight of the ball.

ShockonT said...

@FOFOA and all:

From Mish's post "Japanese Politicians Fed Up with Deflation, Challenge BOJ Independence":

"Politicians Know This Time is Different!

It's hard not to laugh out loud at the sarcasm in the last paragraph above.

Not only did QE fail to do what the Bank of Japan wanted (raise prices), QE has also failed to stimulate bank lending as Bernanke wants. Moreover, Japan's currency intervention efforts have not accomplished anything, ever.

But yeah... this time is different, because .... politicians know better!

By the way, this exercise in stupidity by all the central banks in question, shows just how hard it is to destroy a currency, even when you try (except against gold of course)."

This is playing out exactly how FOA and Another said it would. To allow deflation in fiat currency terms infers that politicians would have to stand back and do nothing as the financial system collapsed. There is NO WAY that politicians will stand idle as fiat deflation occurs. But make no mistake, it is deflation on the grandest scale that we will experience! The purchasing power of gold will skyrocket - that is deflation. For those still anchoring their world in dollars, yen, pesos, etc. the grand deflation will look like......hyperinflation! Surprise!

robert said...


I don't think Robert is calling for censorship. FOFOA and other good blogs benefit from having a Moderator.

There are two main themes in FOFOA's writing here: Freegold and hyper-inflation. I think Robert was merely suggesting that the focus shouldn't become politics (or rolling bearings?).


Yes, Costata, that is exactly how I feel.

I think we all know that political policy comes in to play with respect to what the final outcome will be, I was simply stating that I would not like to see differing political views that can quickly turn highly emotional start taking center stage.

Robert Campbell

Desperado said...


"I can recommend www.davidicke and"

Ha, ha. The food link was from Perhaps a little conspiratorial for your tastes, but I like it for it libertarian bent and for Gary North.

As far as "population control" and food laws in the EU vs USA, I don't think your comparison is in any way valid. The countries of the EU still have far more autonomy than US states, and they all protect their farmers. And this new Senate act will serve precisely to rob the states of any remaining autonomy in the regulation of food production, distribution and sales.

When I travel in Europe, especially the east and south, I see far more regularly scheduled local markets in virtually every town. These markets all have stands selling locally grown fruits, vegetables, dairy products and even meat. In Budapest there is a 2 story market chock full of stands selling a complete variety food stuffs, I am sure produced by small farms in the countryside. This would already be impossible in the US, and by all appearances this will get far worse with the pending legislation. In the US that I know, there are very few farmers markets and virtually everyone gets all their food from supermarkets or possible whole foods chains. IMO my debate with Fofoa concerning the possibility of the US using food stamps for rationing and "population control" has much merit, and I did not read it on any of your dreaded "conspiracy websites".

Finally, I resent your insults and your attempt to divert me to some other website or blog. If you don't like my posts, then simply ignore them. As I have stated before, we all have the right to our own opinions even if someone else thinks they are invalid, what is wrong is to attempt to deny these from someone else.

Jeff said...

I agree with Robert. Political commentary leads to nothing but hard feelings.

Interesting action in gold today. Currency debasers gone wild. Hello Weimerica.

miked said...

Take it easy Desperado, we are all friends here. What kind of place would the world be if everyone resented a good natured insult now and then :)

Michael H said...

Back to silver ... here is a good FOA quote:

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

As a side note: This will not apply to the paper silver markets as silver will not have the Euro vs. Dollar political struggle. A struggle where the ECB members are trying to loosen their main asset (gold) as a reserve wealth backing to replace the massive loss of dollar reserves. Remember, further back on the trail we covered how these reserve dollars will be simply cast down. In this light, silver trading will bear the brunt of selling in an effort to balance loses from a gold exchange that no longer works. Because silver has no hope of an official free market, it's paper pricing system may run amuck until it's price plunges to??? This is the reason so many countries that are contemplating a switch from dollar to Euro use are selling physical silver and buying gold (China, India, etc). It also explains to movement of gold between countries that planned outright Euro conversion. "

I will not attempt an interpretation, but FOA seems to think "Freesilver" won't happen.

David said...

Gold silver ratio now less than 59. Should I trade out some silver for gold now or wait to see if the ratio goes even lower?

Desperado said...


Before we can have an honest and fair discussion, we have to establish certain ground rules, the most important of which is freedom of speech without intimidation or censorship. Having been arbitrarily banned in the past on other blogs, this is a critical issue with me, likely far more than quoting "conspiracy websites" is to you.

That being said, I value your comments and would like to be able to discuss and debate the unfolding of freegold with you, and Robert as well. I can certainly live with any number of insults and have received them from friends and made them myself in the heat of the moment. Threats or actions in the direction of censorship or intimidation of my right to free speech are another thing altogether.

I would also mention that I am very careful what I write. I would never write the comment this at the beginning of a fresh, new thread from Fofoa. I take the liberty of delving into this subject now because this thread is getting stale and we are all eagerly anticipating Fofoa's next post...

littlepeople said...

David, Michael H:

Regarding silver, there are a few fundamentals to consider. While I am no expert (one who has done primary investigation), I follow several experts who are primary investigators, and who are known silver experts.

As we know, silver is money, as is gold. Silver is also becoming an ever-more important industrial metal, as it is indispensable in several processes, not least of which is the best electrical conducting metal there is, so it necessary in critical switching devices, etc.

Unknown to many, I think, is the fact the the U.S. government, the agency of which I forget the name of, recently indicated that the in-ground supply of silver will be gone in just a decade or two. Think, "peak silver." Now, I am getting long in the tooth, but I hope and expect to still be here then, as do many world leaders, bankers, pols, etc.

Now, a world devoid of silver would not be pretty. Silver has been held back by the same forces that have held back gold, for the same reason--they are canaries in the coal mine--when they rise in price, it is a signal that the fiat currencies we have come to know as money are turning to $hit.

The powerfully appropriate members of our societies know the importance of silver to modern life. They will, they know they MUST, let silver run to very high prices--that is the only way to bring the hidden billions of ounces of silver tied up in teapots, crosses, coins, jewelry, etc. back into the public domain, and then into a higher and better use.

They cannot "confiscate" silver--there is simply not enough of it in useful form to even try--the bulk of above ground silver is tied up in silverware and teapots and jewelry and the like. No, they must let the price run high--high enough to flush it out of hiding, or else there will not be enough to manage modern society after another decade or two.

They may nationalize the silver mines, or silver ores from other mining operations, and ration it out to users. The national defense industry uses lots of silver for smart-bomb circuitry, and many other uses. Silver will likely be labeled a strategic metal at some point.

There are ads and jewelers all over the country scouring up old gold teeth, jewelry, etc. as the price makes it worthwhile. Almost nobody is trying to round up silver, except old coins. It's too cheap--not worth bothering with--at today's prices.

I agree that gold is the best money there is, and will be a dependable wealth storage device. But, silver will have to go much, much higher in its own right, in my humble opinion.

Michael H said...

@ littlepeople,

First, let me apologize for not responding to your earlier 'silver certs' post. I just do not know enough about the history of them to make any informed remarks.

Do you know of a reference regarding silver certificates, better than wikipedia?

As to your latest comment -- I agree with you that silver is an important monetary as well as industrial metal. I myself do not know whether gold and silver will travel together or diverge, and if they diverge I don't know which will come out ahead! But I am trying to get my head around why Another and FOA argued the way they did against silver.

There are two possible counterarguments for a silver price rise as high as freegold:

1. Because silver is such an important industrial metal, TPTB would prefer that it not be priced out of industrial use. This is unlike gold, which, as everyone is wont to remind us, is useless, and you cannot even eat it (or eat with it, in this case!).

I would almost say that perhaps silver will be managed the way oil is managed now, but I can't quite get my head around how that would work.

2. In the coming hyperinflation and collapse of the world reserve currency, the price necessary to bring silver out of hiding may be lower than expected in current purchasing power terms.

At this point, I'm not really arguing against silver so much as trying to further discussion. I'm really hoping that FOFOA will do a few pieces on silver soon.

littlepeople said...

Michael H:

Re: silver certificates, go to ebay and type it in. There will be many there for you to peruse. They are still legal tender, though the govy will no longer give you silver dollar(s) in exchange!

As for FOA, Another, and FOFOA, they know that gold is the chosen reserve instrument of the world--and shall be in the future. They compare gold and silver only as monetary instruments, of which gold is unparalleled. There is a good reason that silver is called the poor man's gold.

However, FOA and Another wrote in a time before silver was known to be so useful--many, many of silver's current uses were not known then, even 10 years ago. Or if they were known, they weren't in usage as they are today. Their writings, I think, are only in terms of use as a monetary utensil, a wealth holding device. They didn't write about such mundane things as the thousands of uses of silver. They wrote of the one-time reset of gold. In their minds, this (the one-time reset)was a gold-only event, and so it may be. That does not mean silver will not become exceedingly valuable, albeit for different reasons

Nor did they ever contemplate that silver would possibly be, or even could be finite--used up--ever, much less in their own lifetimes, perhaps.

Silver has been used as a defense against gold rising in price by the bullion banks at the behest of the Fed and other CBs. Silver has been an easily manipulated pawn due to the tiny size of the overall market--illegal, sure, but done none-the-less by the powerful banking/Fed cabal. Some would say this has been done for the "public good" and I say fine--it has allowed some to accumulate physical silver (and gold) at prices wildly below their true value.

FOFOA says this all the time about gold. FOFOA concentrates on the gold aspect, and because he is so cued in to gold, he denigrates silver (comparatively), which is his prerogative. In MHO it is true of silver as well, that it is priced far below its true value. Time will tell. I think it makes sense to have as much as possible of both--but everyone must go according to his gut belief, as the world has become a monetary facade.

I have enjoyed your posts, and I again thank FOFOA for this great forum.

Michael H said...

One more aspect of 'future prediction' that I don't see A / FOA discuss is peak oil. Peak oil and peak silver / gold are closely related, since scarcity of oil makes mining poor deposits on a large scale impossible.

Peak oil could cut two ways with regards to silver: it would make new silver very difficult to extract, but it would also remove most of the industrial demand for silver use.

Wendy said...


"It will not be purchased as a currency replacement. But, in the minds of persons with private holdings, it will be as a currency in time of change. I think it will gain much, but only after a trading halt by gold. Percentage wise, it will not equal gold as many expect."

Another was not antagonistic towards silver, and mentioned many times that he thought it would do well. But the focus of his discussions were about the one time revaluation of gold, and painfully and patiently repeated his Thoughts on why he believed that gold was the one and only true wealth preserver, and superior to silver in this regard.

Although FOA was rather colorful in his references to silver, I don't beleive he was antagonistic toward silver either. He appeared to enjoy the use of "emphasis" in his writings.

Texan said...

Silver will never be a reserve for the simple fact that there is too damn much of it. Just wait for the scrap ads "silver is at an all time high, sell your wedding silver now".

Not to mention the storage aspect. Quick - how many pounds is 1 million dollars? 1 billion? Its a lot of weight to store, even at sharply higher prices.

It may however supplement paper money as a semi hard "transactional" currency. Sort of like cash does now versus credit cards, ie a discount to transact in something that retains value. Its worth having round, I just don't know how much you really need.

And that's the last thing I will ever say about silver. Oh, it has good antibiotic properties I believe, so it is very good for flatware!

Copper could fill that roll also.

littlepeople said...

Yes, FOA was tolerant of silver, and felt it was certainly a valuable item, but would not participate like gold in the one-time reset.

I think silver was given short shrift, as FOA viewed it only through the lens of a monetary instrument. Does money have value beyond anything else? Even when the money is gold? I think not.

Copper is not a natural antibiotic--in fact, it can be poisonous. No metal is as reflective or conductive as silver--only gold is more malleable.

If you think only money (gold) has value, then buy gold. If you think that man will continue to progress, and will want to function as well in the future as in the past (or better), then silver is an item that is so undervalued today as to be laughable.

There is less silver available today in tradeable form than there is gold--some experts say that there is 4 or more times as much tradeable gold as there is silver. I grant you that there is much, much more paper silver today than paper gold--and that is the rub.

There is more silver out there, as I said, in current uses not very much more useful than if they were made of pewter or stainless steel, or even plastic . . . but it will take much higher prices to get people to bother to sell their silver to smelters who must melt it down, separate alloys, etc.

It will also take much higher prices to cause more recovery of executed silver--it simply doesn't pay, at current prices, to take apart cell phones, TVs, etc. to extract their content, except in low-cost labor facilities such as in China. It will take higher prices to construct modern, capital-intense facilites that can reclaim otherwise lost silver.

Silver is becoming more indispensable by the day to modern man--and the source is drying up.

Gold is money. Silver is life (as we have come to know it).

Wendy said...

little people,

The more uses they find for silver the more "comodityish" is becomes and less monetary. That isn't such a bad thing when you consider Rhodium, for instance, that's trading at about $2000/ounce, but off it's high of $10,000/ounce.

I stand on one side of the room and look at all those things that analysts state as bullish for silver, but if I move to the other side of the room, those same qualities could be viewed as bearish.

But really in terms of the outcome it makes no differnce what I believe. I prefer to keep it really simple for myself:

CBs want gold so that's a good enough reason for me to own gold.

China wants it's Chinese populace to own silver and gold; that's enought reason for me to not sell my silver.

I'm just comin along for the ride, where ever it might take us.


intuitivereason said...

Silver is now an industrial material that has a history as money. It no longer has the stock to flow ratios required to allow it to perform a stable currency role.

People remember it as money, even utilise it as such. But the qualities that made it monetary are fading.

Proposals such as the one that got put up in Mexico may work around that issue, but otherwise silver is a vehicle for speculation and a material for utilisation.

There is a good reason silver doesn't sit at 1:15 anymore.

miked said...

Hello Desperado.

For the future, remember I am a just a cheeky chappy and I enjoy a little banter :)

I was joking about davidicke and godlikeproductions of course. They are both completely ridiculous websites. I thought it was obvious I was just having a jab and not seriously suggesting them.

Regarding free speech, I think everyone agrees it should be allowed within the scope of the forum of discussion.

miked said...

David, I am looking for silver to hit 26$ before I close out my silver trade. That's 40% above it's 200 day MA which it has hit a couple times before in this bull run.

santia said...

I like Dinar.and its revaluation of currency.

santia said...

I like Dinar.and its revaluation of currency.

Desperado said...


Actually my Son was for a few years an Ickes believer, and I at least scanned the links he sent me. Some of them were provocative and believable. I still tease him about the lizard men running the world though.

Fortunately he has since moved on and now has a steady girlfriend and a steady job...

miked said...

I used to watch David Icke present the football on southern UK TV when I was a kid.

Next thing I heard of was that he was the son of god and was saying the queen was a Lizard.

We all have our own reality :)

bryan-x said...

What is your opinion of this video?

TL;DW: the problem with fiat currency is

(1) quantity (and who controls it), and

(2) interest paid to private individuals on debt-based currency is inherently problematic.

(3) Furthermore, gold does not work because the rich can withhold gold from an economy, thereby sending the economy into a depression. IE: Plutocracy.

The video's proposal is:

(1) fiat issued by Congress alone, resulting in

(2) no interest paid or accumulated by gov't, and

(3) sufficient money for economy to function.

Of course during times of duress, Congress will deflate the currency. I can only assume the author believes this to be the lesser of aformentioned evils.

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