Friday, December 17, 2010

Focal Point: Gold


In game theory, a focal point (also called Schelling point) is a solution that people will tend to use in the absence of communication, because it seems natural, special or relevant to them. The concept was introduced by the Nobel Prize winning American economist Thomas Schelling in his book The Strategy of Conflict (1960). In this book (at p. 57), Schelling describes "focal point[s] for each person’s expectation of what the other expects him to expect to be expected to do." This type of focal point later was named after Schelling.

Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square. Of course, the red square is not in a sense a better square; they could win by both choosing any square. And it is the "right" square to select only if a player can be sure that the other player has selected it; but by hypothesis neither can. It is the most salient, the most notable square, though, and lacking any other one most people will choose it, and this will in fact (often) work.

Schelling himself illustrated this concept with the following problem: Tomorrow you have to meet a stranger in NYC. Where and when do you meet them? This is a Coordination game, where any place in time in the city could be an equilibrium solution. Schelling asked a group of students this question, and found the most common answer was "noon at (the information booth at) Grand Central Station." There is nothing that makes "Grand Central Station" a location with a higher payoff (you could just as easily meet someone at a bar, or the public library reading room), but its tradition as a meeting place raises its salience, and therefore makes it a natural "focal point." [1]

Salience: the state or quality of an item that stands out relative to neighboring items.



There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split at this point in the long evolution of the money concept. This means no fixed gold standard, or any system that attempts to combine these units/roles into one, making easy money "less easy" and hard money "less hard." And by "must" I do not mean that we must do this, I mean that it is happening today whether we recognize it or not.

And the second concept, once the first is understood, is how and why gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold. People often ask why I don't mention silver. They assume that when I say gold I really must mean gold and silver, or precious metals. So let me be clear. When I say gold, I mean gold and only gold.

Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]

So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.

For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints.

Compare this concept to a gold standard in which you fix the value of gold to the dollar at, say, $5,000 per ounce. The assumption is that this is where the price of gold will stay for a long time, if you manage the system properly. So what is the result? You artificially constrain the expansion of the medium of exchange fiat currency while also restricting the value expansion of the store of value. You are locking the two together. Do you think this works and makes sense?

I said we need unrestricted money in order to ensure the lubrication of the vital supply lines in our modern world. This is it. This is what really matters. If we have a major monetary and financial breakdown, what do you think will be the worst consequence? Do you grow all of your own food? Do you make – or know someone who does – all of your own stuff? How long could you survive without any stores? Do you trust your government to be sufficiently prepared to take care of you with no supply lines flowing?

Have you ever stretched a rubber band until it breaks? You can feel the resistance grow gradually and observe the smooth thinning of the band until finally it loses its continuity and the two parts snap back stinging your fingers. A tiny observer of this exercise, perhaps a flea resting on your thumb (or an economist), one who doesn't really understand rubber bands, might swear that it could be stretched forever. The smooth change in the stretching rubber gives little warning of the abrupt (sometimes painful) deformation that is coming.

This is where we are today. The dollar standard is like a stretched rubber band. It has been stretched and stretched, but it cannot provide the unrestricted money that we need today. They think it can. And that's why they are spewing it out in quantitative easy money boatloads. But it's not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.

That resistance you feel is the artificial restraint built into the dollar system. It appears to be infinitely expandable, but it is not. It is just like the rubber band. Oh sure, you can print all the dollars you can imagine, to infinity and beyond! But it won't work. It won't do the most vital job, beyond a certain point. And yes, we are beyond that point.

I want you to imagine a tiny micro economy. Just two guys stranded on a tiny island. Let's call the guys Ben and Chen. They have divided the island in half and each owns his half. They each have a tree which bears fruit and three tools for fishing, a spear, a net and a fishing pole. For a while they both fished often. Fish were the main trade item between Ben and Chen. Sometimes Ben would take a vacation from fishing and Chen would provide him with fish to eat. Other times Chen would take a break.

But after a while Ben got lazy, and Chen got tired of giving Ben free fish to eat. At first they used sea shells as money to keep track of how many fish Ben owed Chen. Then they switched to leaves from the tree. Finally they just broke a stick off the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben drew (issued) a line in the sand on Chen's side of the island. There were only two of them, so it was easy to avoid cheating.

These lines sort of became Chen's bank account. Each one represented the debt of one fish that Ben owed to Chen. But after a while they started adding up, and Chen worried that he would never get that many fish back from Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting lines drawn in the sand for fish, but he wanted to be able to use them to purchase some of Ben's other stuff (since Ben didn't like to fish).

At first he used them to purchase fruit from Ben's tree. But after a while the pile of fruit just rotted on Chen's beach. Next he started purchasing Ben's tools. First the spear, then the net and lastly the fishing pole. But at this point Chen realized that Ben would NEVER be able to repay those fish without his fishing tools. So Chen rented them back to Lazy Ben.

Of course Ben was still lazy, and now he owed rent on top of the fish he already owed. The lines in the sand grew even more rapidly as lines were added to pay for rent even when Chen hadn't given Ben a fish. Then Ben had a great idea. Why even go through the charade of selling the fishing pole and then renting it? Ben could just sell Chen some "special lines" which had a "yield." For ten one-fish lines, Chen could buy a special "bond" that would mature into 11 lines in a year's time. They tried this for a while, but all that happened were more lines in the sand. So many lines! Nowhere to walk. Chen's "bank account" was taking up all of his real estate!

Finally Chen had had enough. He called Ben over and said, "Okay, since you refuse to fish for yourself, let alone to pay me back, I want to use these lines to buy some of your gold coins." Oh, did I mention that Ben had a treasure chest of gold coins that had washed ashore? Of course these gold coins were the last thing that Chen wanted, because what good are gold coins on a tiny island with only two inhabitants?

But actually, they turned out to be an excellent record of the debt Lazy Ben owed to Chen the fisherman. You see, at first, Chen bought half of Ben's gold with the lines he had already accumulated, transferring his "bank account" over to Ben's side of the island and consolidating his "wealth" into gold. It worked out to 100 lines for one gold coin, or 100 fish per ounce.

But after a while, Ben realized that he was running out of gold. He knew it would only be a short matter of time until he ran out, so he closed the gold window. And once again, Chen started accumulating lines and special yielding "bond" lines. Finally, they agreed that the value of the gold coins had to be raised higher than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the short-sighted flaw in his thinking. So Chen said that the value of ounces should float against the number of lines issued by Ben. This way, Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!

Now I do realize the glaring flaws in this analogy I cobbled together. So spare me the critique. It is far, FAR from perfect. But it does help with a few good observations.

First, the lines in the sand and the gold coins are both money on this island. One is the medium of exchange/unit of account and the other is the store of value. The store of value is quoted at any given time in units of lines, but its value floats, it is not fixed, so it never runs out. This method of accounting forces Lazy Ben to part with something more substantial than simply issuing more lines via line-yielding "special bond lines."

In this case it was the accounting of transactions between a consumer and a producer. But it works just as well between any two actors with unequal levels of production and consumption. Some people just produce more while others can't stop consuming. I'm sure you know a few of each type.

Also, notice that gold coins and lines in the sand both represent the debt owed from Ben to Chen. And with gold, Chen can wait forever to be paid back (which, on this island, is quite likely). The gold doesn't spoil, and Chen's possession of it doesn't interfere with Ben's ability to fish or eat fruit. But notice also that the more lines in the sand that Ben issues, the more the value of the gold (representing a debt of fish) rises. So the longer Ben runs his trade deficit, the more debt he owes for each ounce of gold that Chen holds.

This is not so dissimilar to the special bond lines, with a few notable differences. The bond values are not only quoted in lines, they are also denominated in lines. So the principle amount paid for the bonds drops in value as more lines are issued to lubricate the vital trade. To counteract this "inflation," interest is paid by drawing more lines without the reciprocal delivery of fresh fish. But these additional "free" lines also dilute the value of lines, which leads ultimately to infinity (or zero value) in a loop that feeds back on itself.

The more fish Chen supplies to Ben, the more lines he receives, the more bonds he buys, and the more lines he receives in service to interest. Eventually Chen will be receiving two lines for each fish, one for the fish and one for the interest. And then three, and then four. And so on. Wouldn't you rather just have one gold coin that floats in value? I know Chen would.

Another observation is that the medium of exchange on our island devolved into the most insignificant and easy to produce item. A simple notation in Chen's "account." Is that so different from what we have today? And Ben could issue them with ease as long as Chen let him. Once Chen had so many lines, he wasn't about to just abandon the system, was he? Wipe the (beach) slate clean? No, Chen wanted to get something for his lines. Something compact that didn't interfere with Ben's ability to work off his debt should he ever decide to do so. Something durable. Something physical from Ben's side of the island. Something… anything other than those damn-stupid lines!

I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.

The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…

If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.

Yes, the gold price must… WILL go much higher. The world needs MONEY! And by that, I mean recapitalization. Unfortunately the dollar is not the right money. And printing boatloads of it will no longer recapitalize anything. Today we are getting a negative real return on every dollar printed. That means, the more you print, the more you DEcapitalize the very system you are trying to save. Less printing, decapitalized. More printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22, until you understand Freegold.

There Can Only Be One

A "focal point" is the obvious, salient champion. But for many reasons, some things are not as obvious as we would think they should be. Mish ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:
As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years.

Now is it just me, or did he say that because gold is money, he is long both silver and gold?

Here's another one from a recent article on Zero Hedge:
Part 3. People lie…..

“…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.”
-John F. Kennedy, July 18, 1963

“That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.”
-William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963

Lesson: When someone says you can exchange paper for precious metals – make the swap before they change the rules.

Whoa. Wait. Did he just take two quotes about monetary gold and extend the lesson to all precious metals? Is this right? Should we all be assuming that "gold" always means "precious metals?"

According to Wikipedia:

A precious metal is a rare, naturally occurring metallic chemical element of high economic value, which is not radioactive… Historically, precious metals were important as currency, but are now regarded mainly as investment and industrial commodities…

The best-known precious metals are the coinage metals gold and silver. While both have industrial uses, they are better known for their uses in art, jewellery and coinage. Other precious metals include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which platinum is the most widely traded.

The demand for precious metals is driven not only by their practical use, but also by their role as investments and a store of value. Historically, precious metals have commanded much higher prices than common industrial metals.


Here's how I read the above description. Precious metals have a high economic value. But because of investment demand, they also tend to have a price higher than it would be on its industrial merits alone. Gold and silver carry some additional sentimentality for their past coinage. In other words, precious metals are industrial commodities with an elevated price due to levitation from investment demand. Fair enough?

Now to understand Freegold, I think there are two issues that need to be addressed. The first is the difference between money, or a monetary store of value, and an industrial commodity levitated by investment demand. And the second, once the first is understood, is whether silver belongs in category with gold as money, or with platinum as an elevated commodity. You see, the very key to understanding Freegold may actually lie in understanding the difference between gold and silver with regard to their commodity versus monetary wealth reserve functions.

So from here, I will explore the valuation fundamentals of money versus levitated commodities. And then I will explore the history of silver as money and ask the question: Is silver money today?

First, money. Money is always an overvalued something. Usually a commodity of some sort. But it can be as simple as an overvalued line in the sand, or a digital entry in a computer database. But the key is, it is always overvalued relative to its industrial uses! That's what makes it money! If it was undervalued as money, it would go into hiding, just like Gresham's law says, be melted down, and sold for whatever use valued it higher than its monetary use.

It is fair to also say that commodities levitated by investment demand are overvalued in a similar way. But there are a couple of important differences. First is that all of our experience with commodity markets during currency turmoil happened while the two naturally-divergent monetary functions (the spur and the brake) were rolled into one unit, namely the dollar. This left only the commodity markets as an escape. Second is that monetary overvaluation usually has official support while commodity overvaluation often has government disdain.

There is this idea out there that if you have a paper investment market for a commodity that is larger than the physical units backing it (fractionally reserved, so to speak), that the commodity's price must automatically be suppressed by the market. This is simply not true unless we are talking about money masquerading as a commodity.

A paper market brings in investment demand and leverage (borrowed money), two levitating factors that would simply not be present if the paper market disappeared. And these two factors, "the speculators," can take a commodity's price well into overvalued territory. Just look at oil for an example. Even the sellers of the physical stuff say they prefer a lower price than right now, not to mention during the all-time high in 2008.

You'd think the sellers of a physical commodity would love a higher price driven by speculators. But they don't, because it is only a real price if all the investment participants have a real use for, and ability to take possession of, your physical commodity. Otherwise it's just a casino.

Back to the Zero Hedge piece:
At today’s prices, a million dollars in gold weighs less than fifty pounds, but a million dollars in silver weighs more than 2,300 pounds! So ask yourself, how many rich people are storing their own silver? How many hedge funds hold physical silver in their own storage facility?

Cool! So a million in gold only weighs 50 lbs.? Sounds like low storage fees and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich people are taking possession of their silver? Not many, I'd guess.

To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce. But if you are counting on the industrial fundamentals of silver for your moonshot like the Zero Hedge article is, or on a busted paper market like the "vigilantes," you may be in for an unpleasant surprise. The same fundamental arguments that are used today were also used back in 1982. [3] In gold, at least, we know that jewelry demand rises and falls opposite the price of gold. [4] But then again, gold is money, right? So, is silver still money?

Easy Money

Silver was certainly used as money in the past. So why not again today? Maybe the people will rise up and demand silver money! Maybe China, or somebody else, will remonetize silver and start a new silver standard, right? After all, China was the last to use a silver standard.

I don't mean to pick a fight with silver. In fact, I write this post with a heavy heart. But there is so much silver hype right now that I feel I owe it to my readers to at least try to spell out Another perspective. And China is certainly on the minds of the silverbugs these days. How often have we heard about China encouraging its citizens to buy gold and silver lately? (There's that "gold and silver" again.)

But did you know that China was practically dumping its silver a decade ago? And to this day it is still a large exporter of silver. Not gold. Just silver. In 2009 China exported 3,500 tonnes of silver. That amount will probably be cut in half for 2010. The drop is due to increases in both industrial and investor demand, but also due to China's recent move to stem the shipment of all natural resources leaving its shores.

I'm sure many of you know that China was the last country on Earth to end its silver standard back in 1935, in the middle of the Great Depression. But do you know why? And would China ever want to start a new silver standard? Does it make any sense now that they've sold most of their silver? And what has changed since 1935 that would make them want to go back?

Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock.

In response to the falling price of silver, on June 19, 1934 (four and a half months later) the U.S. Congress approved the Silver Purchase Act of 1934 which authorized President Roosevelt to nationalize silver holdings (to buy silver). This decision resulted in an increase in the world price of silver, which forced China to abandon the silver standard in November 1935.

The US Silver Purchase Act created an intolerable demand on China's silver coins, and so in the end the silver standard was officially abandoned in 1935 in favor of the four Chinese national banks "legal note" issues.

Remember what Mundell wrote (See Mundell in The Value of Gold). The use of a commodity as money is the overvaluing of that commodity for profit by the monetary authority. When the US started buying commodity silver on the open market (to prop up the price artificially) the Chinese people found it was better to sell their silver coins for melt value than to use them in commerce for face value (which was lower than melt).

This effect to China's base money (silver) in 1934 was similar to what the US felt in 1933 and 1971 with gold. The main difference being that the demand for silver in 1934 was artificial (from one single entity, the US govt.) while the demand for gold has always been real, global and market-driven. This price supporting move (not unlike the Agriculture Adjustment Act and other destructive price control measures) by the US caused the "Shanghai Financial Crisis" which lasted from June 1934 until November 1935, finally ending in Currency Reform on Nov. 4, 1935.

So, in 1934, the US govt. wanted to devalue (set the price of) the dollar against gold and silver. In order to do so, it had to influence the market of each. For gold, it had to inflict capital controls internally and sell gold externally at the new higher price. For silver, it had to BUY silver at the new higher price. Sell gold, buy silver. The same exact thing that happened 45 years earlier with the Sherman Silver Purchase act of 1890.

Pushed by the Silverites, the Sherman Silver Purchase act of 1890 increased the amount of silver the government was required to purchase every month. It was passed in response to the growing complaints of farmers and mining interests. Farmers had immense debts that could not be paid off due to deflation caused by overproduction, and they urged the government to pass the Sherman Silver Purchase Act in order to boost the economy and cause inflation, allowing them to pay their debts with cheaper dollars. Mining companies, meanwhile, had extracted vast quantities of silver from western mines; the resulting oversupply drove down the price of their product, often to below the point where it was profitable to mine it. They hoped to enlist the government to artificially increase demand for, and thus the price of, silver.

Under the Act, the federal government purchased millions of ounces of silver, with issues of paper currency; it became the second-largest buyer in the world. In addition to the $2 million to $4 million that had been required by the Bland-Allison Act of 1878, the U.S. government was now required to purchase an additional 4.5 million ounces of silver bullion every month. The law required the Treasury to buy the silver with a special issue of Treasury Notes that could be redeemed for either silver or gold.

That plan backfired, as people turned in the new coin notes for gold dollars, thus depleting the government's gold reserves. After the Panic of 1893 broke, President Grover Cleveland repealed the Act in 1893 to prevent the depletion of the country's gold reserves. [5]

To "set the price" of anything, you must either buy or sell that thing. Governments cannot just "set" prices. Whenever they try, the items just disappear or go into hiding. If the price you set is lower than the value, then you will have to sell. If the price is too high, you will have to buy. More from Mundell:
"[In the 1870s] France pondered the idea of returning to a bimetallic monetary standard, but with American production of silver going up and Germany dumping silver as the new German Empire shifted to gold, France realized it would have to buy up all the excess silver in the world on its own."

So... if your standard is going to overvalue something, you must buy it. If you undervalue something, you must sell it. And what was the US doing with gold throughout the entire Bretton Woods system? That's right, it was SELLING gold through the gold window. So it wasn't the gold that the US monetary authority was overvaluing for profit. It was the cotton-pulp paper in the FRNs! Cotton pulp! That's the overvalued commodity today!

Remember what Another wrote? "Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"

Why do you think you need a stockpile of gold to start a gold standard? In the case of France in 1870 above, they realized they would have to buy all the excess silver in the world to keep a silver monetary standard. You don't need a stockpile to do that! Yet you don't need to worry about buying all the gold to have a gold standard. You need to be prepared to SELL! That's why you need a stockpile. So what's the difference?

Could it be that silver is only a commodity today (and for the last 150 years at least) and because of this, any monetary use is not backed by the free market? Any silver standard is an unnatural levitation requiring BUYING of silver by the monetary authority. While a gold standard gives the free market what it really wants, gold, requiring SELLING of gold by the monetary authority.

Can you find an example where the opposite occurred? Can you show me where a government ever had to buy gold and sell silver (at whatever price or ratio) in order to maintain its system?

The US quit bimetallism during the Civil War, prior to the Silverite movement. [6] This ended the government's "overvaluing" of all silver for use in money. After the Civil War, there was a difference between commodity silver (what the miners dug up) and monetary silver (overvalued silver in US coins) because in order for the US to sustain bimetallism (or a silver standard) it would have had to value (buy) ALL the excess silver in the world at the overvalued price of the coins.

This meant it would have to BUY any and all commodity silver that was offered for sale (to prop up the price). You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool). So rather than actually "valuing" silver, the government compromised with the Silverites and agreed to buy a specified quota of commodity silver. At least it did until it ran out of gold in 1893. Something must have been wrong with that 16:1 ratio in the 1800s, huh?

70 years later, when the price of commodity silver finally overran the value of the coins in 1964, it was because of cotton-pulp printing (inflation) only, not global monetary demand! This is exactly how commodities act. They respond directly to monetary inflation until the commodity value overruns the face value.

So it seems that the free market wants to exchange its "money" for gold. But "the people" (at least in the late 1800s) wanted silver to be money. They wanted to SELL their silver to the government while the government SOLD its gold to the market. This is a one-way flow that tends to end in a vault full of silver with no gold. So why did the US Government intervene in the silver market and support this folly?

The government caved primarily because of politics (pressure from the Silverites – the farmers and miners out west), and tradition secondarily (past use of silver as money, the US Constitution, etc.). Politically, "the people" will always want easy money. And silver was their easy money of the day.

Price deflation in the late 1800s was hurting the farmers. The farmer business cycle is seasonal. Borrow money for equipment and seeds to plant in the spring. Then grow your product. Then harvest and sell in the fall and pay off your debt with the proceeds.

The effect of causing an inflationary environment through "easy money" means that it is A) easier to pay off your debt in the fall than it was in the spring (or the year before), and B) you get more money for your crop than you did last year. The effect of a deflationary environment is the opposite. Your debt gets harder to pay and you get less money for your crop. It's the same for all businesses actually. But farmers were a big political group in the 1800s that were all roughly on the same business cycle.

This bears repeating: "The people" wanted silver back then (late 1800s) because it was the "easy money" of the time. "The people" NEVER want harder money. Today silver would be harder money, so it will never have the support of "the people" (other than the silverbugs). 16:1 was quite obviously an artificial monetary ratio, because whenever they maintained it, there was a run on the gold. The market wanted to push the ratio much wider, and the government, in service to "the people," fought that market force.

Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!

If you want harder money, it's gold. If you want easier money, it's cotton-pulp. So where does silver fit in? Well, it's just another industrial commodity with a lingering sentimental mystique as the old "easy money."

And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!

So what if gold really is the wealth reserve of choice for the giants that A/FOA said it was? That means silver is nothing but an industrial commodity today, being somewhat levitated by the lingering hype. What if silver is just a commodity, like copper or oil?

Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.

So... is silver really money today? I know gold is. Here's the evidence:


Does anyone have any evidence that silver is still money today?

Yes, I am aware that the stock of silver is disappearing into our landfills. These "properties" of silver have been with the metal since the early 80s, through decades of single-digit prices. [3] So, is jacking the raw materials from industry and holding them hostage for ransom at a higher price the real play today? (Hint: this tactic often ends badly for the speculator.) Or is the real play front running the new global monetary wealth reserve during a transition in our international monetary system?

Here's one silverbug who is starting to put two and two together! I think he might also be reading FOFOA. ;) (Hi Joe. I think you are confusing me with FOA in your video. But that's okay, it's a wonderful compliment to me! Tip to others: If you mention me in a video include a link in the description and I might just find your video.)



Did you hear him at 6:35? "Only one metal in the world that fits the bill for money, and that's gold!" That's right Joe! Good job from the "Silverfuturist". There can be only one! Did you see my subheading? And please read the description of a "Focal Point" again. It's the first thing in this post. Can you put two and two together like Joe?

I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one.

One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.

So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation.

So as you contemplate which commodity will be the monetary focal point of the future, I'll leave you, as I often do, with a little music.

Sincerely,
FOFOA



I've paid my dues
Time after time
I've done my sentence
But committed no crime
And bad mistakes
I've made a few
I've had my share of sand kicked in my face
But I've come through

We are the champions, my friends
And we'll keep on fighting - till the end
We are the champions
We are the champions
No time for losers
Cause we are the champions - of the world

I've taken my bows
And my curtain calls
You brought me fame and fortune and everything that goes with it
I thank you all

But it's been no bed of roses
No pleasure cruise -
I consider it a challenge before the whole human race
And I aint gonna lose -

We are the champions - my friends
And we'll keep on fighting - till the end
We are the champions
We are the champions
No time for losers
Cause we are the champions - of the world

[1] Focal Point – Wikipedia
[2] A brilliant piece on the complexity of today's division of labor and supply chains: A Capital Paradox by John Butler
[3] Silver Bulls, Silver Bulls: It's Celebrating Time In Precious Metals Bob Prechter reveals how today's silver boom is similar to that of 1980
[4] Gold Jewelry Demand
[5] Sherman Silver Purchase Act
[6] Bimetallism
[7] Congratulations to King's Highway!

138 comments:

Redwine said...

Heart of Gold

http://www.youtube.com/watch?v=wA5gkwLeHfU&NR=1

oldinvestor said...

The unique and quotable quote that will be repeated down through the ages,


“Money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. “

Dimmed aurum said...

@ FOFOA and all the others
“Today silver would be harder money, so it will never have the support of "the people" (other than the silverbugs). 16:1 was quite obviously an artificial monetary ratio, because whenever they maintained it, there was a run on the gold. The market wanted to push the ratio much wider, and the government, in service to "the people," fought that market force.”
In fact any commodity “stamped”/marked by the government in proven and binding size and quality is “harder money” nowadays. So why not we just call spade a spade and let all commodities flow against each other in any ratio markets see fit – any perceived “monetary”/store of value and industrial qualities to be judged upon by the free hand of the market. It is only sufficient to forbid any legal action on loans made in gold (so no one will have any legal protection and as a result no gold – the store of value, will not be lent or borrowed) to set it apart. Other commodities of dual and dubious properties - silver, PM`s should have an expiration date when lent and borrowed (a jubilee of a kind). Thus no excessive leverage will be allowed to build. And still other commodities will be left exposed to the whims and wishes of users and speculators alike. If the monetary system over-abuses the currency printing mechanism or any other sort of a cataclysm destroys the trust among market participants, those happen-to-be industrial, quasi medium of exchange, quasi store of value, PMs (especially silver) should be allowed to fill in the void as a monetary buffer of a sort or rather a backup plan for the continuation of society and its division of labour.
D. a.

Dimmed aurum said...

As a side note you may find it interesting (as I have found) to observe a clear tendency to obscure the “price” of silver commemorative coins away from the LBMA price by gold-plating them - http://www.bnb.bg/NotesAndCoins/NACCommemorative/NACCommemorativeEmissions/index.htm?toLang=_EN
Another tactic for alleviating the pain is the UNUSUAL issuance of copper coinage at ridiculous prices and also debased 500 grade silver coins.
Lastly,
In these (Balkan Peninsula) lands of ours silver was coined continuously for millennia while gold only occasionally – in rare times of plenty and stability; is the future that awaits us stable?!

Dimmed aurum said...

FOFOA said…
“Cool! So a million in gold only weighs 50 lbs.? Sounds like low storage fees and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich people are taking possession of their silver? Not many, I'd guess.”

I am not a giant, and or ridiculously rich person so this might explain the availability of storage space in my vault for both gold and silver and I say this with a light heart for I am sure there are thousands upon thousands like me that more than compensate the lack of giants in this silvery realm.
If gold is set to float against anything else why not (to some extent as always was) silver too. Is there always a merit in seeing the store of value vs. unit of exchange roles and nothing in between? Black and white tv set? Thanks, but no thanks.

scepticus said...

"oldinvestor said...

World Population pyramid does not appear to be inverting. At worst, it is squaring off."

Take a look at the USA pyramids for 1950 and 2050:

http://www.nationmaster.com/country/us/Age_distribution

and the USA has one of the best demographic profiles!

check out Italy in 2050:

http://www.nationmaster.com/country/it/Age_distribution

Less people working = Smaller economy = less goods but same amount of gold, which means inflation of gold.

So while it may be a good store of value its not going to avoid negative real returns.

costata said...

Hi FOFOA,

Great post. Brave. I hope it encourages a few more people to trust their instincts, intuition and intellect. Gold is the place to be for the transition IMO.

Cheers!

webabuser said...

Fine, but since one single ounce of gold amounts to about one month of salary of most people in "rich" countries, that makes it very unpractical to be used as medium of exchange, while silver could do it better at its current price. Moreover, as an anarchist I do not see any added value in what the state or central bank consider proper money; i see both gold and silver as commodities, useful for speculation and storing of value.

Gilligan said...

*sigh*

Did you even bother to read any of the posts?

But then as an anarchist, submitting to any kind of force is anathema to you.

This is why you will not understand the dominant market forces.

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Mike said...

webabuser

gold is divisible. do you feel more wealthy because you have 2 silver coins vs 1grm of gold. they cost roughly the same.

so why buy the silver coins?
the same gold in todays cost will do the job better.

you can use whatever you want to store value, look at how many people choose real estate, look at the stock market etc...but then unlike gold, more supply of the same thing you are storing is coming to the market and helps cause a bust.

read shoeshine boy from september to learn more.

littlepeople said...

FOFOA:
I assume that since you have written this article, much of which denigrates silver's role as money going into the future, that you are speaking to us who are not yet 100% convinced of the freegold concept as outlined by A/FOA.

Given such assumption, I trust nobody will dismiss my words as "that has been covered a thousand times--just read A/FOA!"

I have complained that while the freegold concept makes sense to me, the specific path and timing were not prophesied well at all.

It may well happen, in time, that gold will be money-king, and silver another commodity like copper, but I just don't see it that way.

Silver is a metal that has more uses than ANY OTHER METAL. It is being used up faster than any other metal--the in-ground reserves are the shortest of any metal commonly mined today, as per USGS.

Silver prices are suppressed by the ongoing, concentrated short positions put on by the Fed surrogates, JPM and others, moreso than even gold prices.

Why is that?

While gold may be the "chosen one" by CBs and certainly by other giants, would not these same giants buffer their gold holdings with another precious metal, but one with dwindling supplies (I think supply and demand pressures will still exist under freeegold), and with a current price all out-of-whack in terms of supply:price ratios?

Who says that there may not also be a "freesilver" in the future--separate from that of gold, more dynamic, and with a raison de ettre of its own?

As you described freegold above, gold is not money. It is wealth, like land holdings or water sources, moreso than money. Gold will not move.

Silver will move. It will become more valuable as it is used up, to the point where its higher price will warrant, and even force recoveries unaffordable today.

Silver and gold are both managed by governments today, because they are both still seen as money. Silver has the double-need to be controlled so as to continue to feed cheap inputs to industry in return for whatever favors were granted, IMHO.

Control is being lost, and in Harry Orphan's reviews each day of COMEX movements, he sees wildness in the silver markets growing, as the PTB rearrange existing silver stocks, and buy off longs with fiat premiums to maintain a semblance of "all is well here."

Times have changed since silver was seen as a lump like gold, but just more of it. Silver is moving. Silver is diappearing. What happens in the future is unknowable. I trust gold. Gold and silver have similar past histories, and their roles are changing--granted. But silver has a growing role in a modern, expanding world. I feel better having some of each. That's just me.

littlepeople said...

Meant Harvey Organ, not Harry Orphan. ;)

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lagedargent said...

Quite a read FOFOA, as always, but very worth the wile, if not frankly intriguing. And this Ag-futurist ADHD video, definitely a treat on its own ;-)
Almost convinced me, but then why are Au and Ag mostly running in tandem in the daily markets, presently? Ag outdoing Au by over 100% gains since last January, the JPM's of this world notwithstanding?

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Dimmed aurum said...

Once published twice gone ...
Whats up with this wall puppetmaster?

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Dimmed aurum said...

The GIANTS to FOFOA,
Great post as usual FOFOA, subservient to our needs of course. The problem with your predecessors FOA/Another was not that they spelled the truth out about gold and its monetary role in the oil market, oh no; it was the fact that they made people think more about value and intrinsic value that is that we disliked. So it was our ears that bit them farewell. You are strongly advised not to make their mistake again and it seems you`ve learned your lesson well. So what is it about value that we like to remain obfuscated, a?
First of all is that it is relative and notional to the individual and by extension to the greater society (outside of direct needs for food and shelter of course); it was great exercise for us to modulate the opinion of the masses according to the Schelling`s law. So we created focal points, some called it manias such as “South Sea Bubble”, Waterloo Speculation , Railroad Mania etc.) to name but the few. It made us rich by directing the “investments” of the sheeple - their savings of gold (=labour, blood and tears) into our coffers. That came about because we knew the real value (, we were brought up with the correct notion of it from children) and had the information in advance for our money to be the first to exit.
Second, we managed to hijack the democratic process in many countries and created agenda of our own there. We thought the masses what we wanted. We bent the economic science itself to serve our needs. We even fabricated the notion that fiat currencies are the ultimate “assets” and that gold, silver and the PMs are just commodities. So that the phrase “intrinsic value” lost its meaning and everything was “price-labled” according to the distortions of the ever expanding credit-debt based fiat. The truth as we see it is that every item has useful as well as monetary properties attached to it down to outright barter. Gold is by far superior in its monetary properties (everlasting, recognized world over) – compared to a perishable drop of water in the desert (with maximum utility for the thirsty). It is that knowledge combined with our political power that help us create easy money when the situation for the toiling masses comes to be untenable and then when the pain is somewhat alleviated take those easy money away from them to fleece the flock. You see why work and actually produce something when commanding the unit of exchange and store of value (united in the $IMFS or separated in freegold) helps us extract real value from the system. Either way we get served first. In the $IMFS we fractionally created the money and helped us (“Wall street”) first with it prior to general price inflation.
Third, because our current $IMFS is dying and people are awakening we should add gold (restore gold as wealth concept) to the menu for we own most of it (think foundation X). And remember gold is our loot from the labour, blood and tears of your forefathers; so don`t you dare thinking of anything else as wealth preserving metal par excellence. You want it=we own you, never mind those pesky goldbugs. And silver (and the larger PM group) is definitely out of the equation. We use it for our silverware and dishoarded it in general. Still we want it on the cheap (think value not price) for our factories our hygiene etc. Ratio GSR 16:1(think value not price) equals blasphemy.

To be continued ….

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Kansascrude said...

Me thinkist these are the sour ramblings of one with an empty bag.(silver). If one chooses to argue against silver because of circumstances in the late 20th Century a time of huge silver production, especially in the U.S. then only fair to review the gold price distortions of the 15th century when huge bounty from South America flooded Europe. In which case many of your arguments are countered and therefore moot.
One can effectively argue the 16:1 ratio as perhaps to rich, maybe the low to mid 20's more balanced. Regardless I remain totally unconvinced reflective but unconvinced.

Kansascrude said...

My bad line should have read late 19th Century for comps

Dimmed aurum said...

@ FOFOA
Sir,
It is very difficult to post longer excerpts here.
I am reconsidering my posts accordingly and I am sorry of not being able to quote your text directly because it will be very long and probably automatically rejected. Nevertheless …
“But the key is, it is always overvalued relative to its industrial uses! That's what makes it money! If it was undervalued as money, it would go into hiding, just like Gresham's law says, be melted down, and sold for whatever use valued it higher than its monetary use.”
Sold for what? Cotton-pulp?
Fixing the GSR in the monetary system at that time was a BIG mistake exploited to detrimental effect on the populace by the PTWere or still Be.
The demonetization of silver (or easy money if you wish) was a heavy blow, the same freegold might take in absence of fiat currencies. It was inevitable though because the ratio was artificially fixed and it may have survived if it flowed just like fiat to gold in a freegold system.

max said...

FOFOA marry me.

Mike said...

http://www.zerohedge.com/article/fofoa-golds-focal-point-or-silver-money-too

looks like the silver bugs are in full force in the comment section.

i also noticed in the comments they still use the same argument that webabuser used that 1oz of gold is too big in value and silver 1oz does the job better, not realizing they can get 1grm of gold if they are so concerned.
but they are looking at this through the eyes of a medium of exchange and not as a store of value.

Dimmed aurum said...

My next comment is on the silver in China story…
“Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock.

In response to the falling price of silver, on June 19, 1934 (four and a half months later) the U.S. Congress approved the Silver Purchase Act of 1934 which authorized President Roosevelt to nationalize silver holdings (to buy silver)….> This decision resulted in an increase in the world price of silver, which forced China to abandon the silver standard in November 1935.
What was the situation in China back then? How could China oppose such compelling economic changes worldwide? She succumbed to the circumstances and obliged because she could have not survived the silver deluge until trade balance is reached on a permanent condition of a currency constantly falling in value (I think of the recent history of the Turkish lira or the Indian rupee, so economic growth under such conditions is possible).
President Roosevelt was not a shining knight on a white horse. He was instructed to buy silver for just the same reason Nathan Rotschield bought the British bond in secret under the conditions he himself created. So Roosevelt bought silver because its gold value has fallen below its intrinsic one. Besides did the Chinese demanded physical gold for their silver or got just the 35$ greenback?
P.S.
Industrial value <Silver`s intrinsic value < purer monetary metal`s value (gold)
Silver`s intrinsic value benefits from increases of mine production, great fiat currency turbulence and gold going into hiding Gresham's law. Silver`s intrinsic value suffers from the industrial burn rate and the availability of easier fiduciary monetary unit that is not widely abused.
@ Mike
I am sorry to say that under different circumstances it is both a medium of exchange, a store of value and a constantly replenished consumable; to its downfall when all at the same time because governments try to fix its value when in fact it should be allowed to float just as gold does/should.

JR said...

Visca el FOFOA!!!

JR said...

Webabuser,

Hi!

You write:

Fine, but since one single ounce of gold amounts to about one month of salary of most people in "rich" countries, that makes it very unpractical to be used as medium of exchange, while silver could do it better at its current price

In contending silver is more likely to be used as a medium of exchange than gold, you make FOFOA's point!

One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.

So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation.

Dave Narby said...

Get ready, FOFOA just got Zerohedged, the financial equivalent of Slashdotting.

Michael Shedlock said...

I did not mean to imply silver was money in my awkwardly phrased sentence "As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years."

I have been accused of being short silver and wanted to stop such nonsense before it was repeated.


Like FOFOA I believe gold is money. However, unlike FOFOA I think money is whatever the free market says it is.

Might that be silver and gold?

Left alone the free market could conceivably decide that both is money. If so, who would FOFOA or anyone be to argue?

Could a dual standard theoretically work? Of course, why couldn't it? Could a dual standard work at a fixed rate of exchange between silver and gold?

Here I agree with FOFOA: Absolutely not.

Would the free market likely select both and silver? I doubt it, but it is possible.

I will reply in more detail on my blog

Mish

Jeff said...

FOFOA has been crossposted to Zerohedge. The comments there are fascinating, as the silverbugs trash your conclusions while actually agreeing with everything you say about silver 'leverage, historical ratio, industrial use'.

Silverbugs are as blinded by dreams of paper wealth as stock chasers. Amazing.

Jenn said...

Hi Mish!

"I think money is whatever the free market says it is."

"Might that be silver and gold?"

"Left alone the free market could conceivably decide that both is money. If so, who would FOFOA or anyone be to argue?"


Sure, the people could go out and buys lots of silver and they could say to each other, "Look at this silver. We treat it like money, yes? I'll give you some silver for those apples and maybe you can give the silver back to me for my shoes."

In step the Central Banks. Can you find me a Central Bank that has silver on the asset side of its balance sheet? How about gold -- can you find a Central Bank that has gold on the asset side of its balance sheet? One of these things is not like the other.

If you read through FOFOA's blog from the beginning -- you'll find the Central Banks are not the only ones interested in gold. Do you know who those other parties are? I'll give you a hint -- the other parties interested in gold produce a very important commodity that makes the world go 'round -- and they don't care very much for silver either.

If the people want to turn silver into money -- have at it! I wonder how the industrial users of silver will feel as the price goes up? What would the industrial demand for silver look like if the price were say, $200/ounce? Put another way, what would the industrial demand for oil look like if its price went to $500/barrel?

No, the big boys won't be playing that game -- and that my friend -- makes all the difference.

--Jenn

Dimmed aurum said...

I am sorry for the mess I`ve done.
I wish I could have cleaned the message stumps too.
I have no idea what a censoring type of a firewall might have provoked this.
I am so sorry.

Patrick said...

The road will seem so straight and fair to travel, you will kick yourself for struggling through the brambles for so long, and wonder at your neighbors who STILL can't see the path, though it is truly a freeway.

Everybody who still invests in silver is my neighbor....

In reading the comments it is very easy to seperate the posters who ar on the path, and the ones who are still in the brambles..

Mish.. you are still in the brambles

lagedargent said...

@ Jenn
>> I wonder how the industrial users of silver will feel as the price goes up? What would the industrial demand for silver look like if the price were say, $200/ounce? Put another way, what would the industrial demand for oil look like if its price went to $500/barrel?>>
Methinks, this comparison sucks. Silver to oil is more different than paper clips to elephants. Ag doubled in about a year, no complaints sofar from industry, they're hoarding; oil went from $30 to $147 and back again, resulted in a credit crisis world wide.
Ag $200 will have hardly any impact; oil $500 will save the planet from overheating, probably by a massive die-off.

Jenn said...

Hello lagedargent-

Perhaps I could have expressed myself a little better. The point that I am trying to make is the moment you take an industrial commodity and try to use it as money, things don't go so well. When you have industrial users in direct competition with the monetary authorities (or the users of that commodity as money) you have a recipe for an unstable currency. Industrial shortages and surpluses can dramatically affect the purchasing power of your money from month to month -- not a well thought out structure if you ask me.

I wonder what the value of Federal Reserve Notes would be if wood-fired electric generating plants used them exclusively for fuel -- assuming those Notes could be purchased at their manufacture price when valued as cotton-pulp?

--Jenn

costata said...

Since ZH is cross-posting FOFOA I thought I should return the favour. This is a recent comment on the Crash JP Morgan campaign by a ZH reader.

Food for thought.

by americhinaman
on Tue, 12/14/2010 - 01:02
#803879

"i'm new to this forum, but it's been impossible not to note the optimism for silver on ZH. while i'm sympathetic to the argument that monetary debasement leads to the need for alternative stores of value (real assets, which historically include precious metals), i think the JPM stories perpetuated here have made a heroic assumption that i can't find any evidence of.

i've done a lot of research on the ETFs and ETNs from a previous job at a big wall street bank. from the ishares docs, i see that JPM is both the custodian of the silver in the trust AND an "authorized participant" (which means they are a market maker who can create or redeem units of SLV shares in exchange for the silver represented by such shares). this puts them in a unique situation where they can effectively arb the various silver markets... between SLV, SI- futures, and spot silver.

i can tell you for certain, that the desk-level traders who run the arb are not authorized to accumulate naked short (or long) positions. if there is a naked short, it would come from the top... a head of trading or above. but based on the evidence, i cannot conclude that they have such a short. what i see is that JPM is running a 3-legged arb involving:

1) physical silver

2) SI futures

3) SLV shares

as needed, they take positions in zero-coupon treasuries with maturities matching futures expiry, to manage leverage and cash with the above.

my conclusion is that JPM probably does have a massive position in the futures market... which causes headlines which might annoy the NYMEX or the CFTC. but JPM's unique position as the custodian of one of the largest physical silver stockpiles in the world (i.e. they could easily manage physical deliveries with little marginal cost) AND as one of the AP's that regularly create/redeem SLV for silver, means that they are in a unique position to run arbitrage positions using silver futures against their other silver holdings. without further evidence, i would guess that JPM is indeed running a massive arbitrage between the 3 silver exposures listed above and NOT a naked short.

i would be curious if you can find evidence in the financial statements, suggesting that they do not have offsetting long positions as i assume. if not, i would be very careful buying into what i see as a phantom short squeeze."

Wendy said...

Patrick,

I prefer to walk at the very edge of the freeway, in fact with one foot in the brambles, in case some crazy driver loses control.

There's a storm quickly approaching and the roads are getting slick. I don't know how severe it is, what it might bring or how long it'll take to pass.

So, one foot in the brambles just in case I have to jump out of the way!!

nook said...

Silver satisfies all the necessary elements for a commodity to be money. Its rampant industrial usage and thus shortage IS A PLUS INSTEAD OF NEGATIVE to its value.

Using China's past decade selling silver as proof of silver being insignificant is as questionable as citing their mass acquiring of (junk) TBonds as proof that US$ is sound money. They were fooled into a long term silver contract the same way they were fooled into holding TBonds.

Not any more. Look at the trader info out of LME: Huge # of Asian buyers are draining LME of BOTH gold and silver, and they are particularly intensive in silver. Who are they? It's China busy dumping Dollars for silver. Wouldn't you say it's not just b/c they are "silver bugs"?

Were there no such goofy European VAT on silver we are talking about 40$ silver easily already.

Be nimble PM investors. Don't get religious. If gold overshoots its ratio against silver (which is what happens now) then trade some of your gold for cheap silver. If silver does gold then vice versa. I know it's hard to operate but I think it'll be an effective strategy to maximize your wealth.

costata said...

nook,

The problem with this notion of trading silver for gold is that you may not be able to obtain physical gold when you want to make the exchange.

IF your main aim is to be in gold at that time then silver is a stranded asset.

In regard to China's intentions, have you considered the possibility that they would like to make Shanghai the No. 1 international silver exchange to complement their No. 1 rank in silver smelting.

Thus 'cornering' the flow rather than the stock to ensure that they are in the best position to access a critical industrial input ie. silver.

Paul said...

my wealth will be infinite when I just stick to gold, I wish you good luck maximizing.

Rui said...

@ costata

Our aim should be altered by the market dynamics. We wanna be in the one that has the biggest demand vs supply gap so that we can profit, right? At this point I like silver better b/c its suppressed price makes it so consumed that there's a real shortage at this price range.

As for China's motives for LME raid. I simply cannot think of any other reasons than dumping dollar for sth more valuable. Not after their ongoing pain of inflation courtesy of Bernanke. Not after this outrageous QE2.

nook said...

Stick to anything you believe in. No problem. Gold will obviously be fantastic.

When silver is so vastly overconsumed to the point that there's more stock pile of gold than silver and the demand is not ceasing, and it's in addicto to it being an excellent monetary metal, I wanna take advantage of it.

Like I said, treat silver's industrial oriented shortage as a plus not negative.

Texan said...

There is no way wealth can be concentrated in physical silver. If 1 million is 2200 pounds, and someone has just a tiny billion or so to invest, well, that's more than 2 million pounds.

So I think this debate is really about two entirely different things. If you still don't understand this, go to a coin dealer and ask to walk around with a full green monster box. Just make sure to wear a back brace.

Texan said...

There is a huge problem with this comment filter btw.

Texan said...

Because I also wanted to say that I totally " get" why it might be useful to have some walking around money, just in case of whatever. So I think that's some part of the demand, in case dollars aren't accepted. Gold is not very well suited for that, not the least because there are so few small gram coins available.

So silver can go up also.

littlepeople said...

Texan said:

"There is no way wealth can be concentrated in physical silver. If 1 million is 2200 pounds, and someone has just a tiny billion or so to invest, well, that's more than 2 million pounds.

So I think this debate is really about two entirely different things. If you still don't understand this, go to a coin dealer and ask to walk around with a full green monster box. Just make sure to wear a back brace."

That's exactly what makes silver attractive--the potential for $1M of silver to weigh 110# when freesilver happens.

Freesilver will happen when the COMEX paper silver markets are destroyed--which will then cause the gold paper markets to burn as well, and voila, freegold as well.

Silver and gold will both approach zero value in the COMEX-driven spot markets--until reality sets in, and physical prices are divorced from paper.

Jenn said...

Hell Rui-

"At this point I like silver better b/c its suppressed price makes it so consumed that there's a real shortage at this price range."

Some wise person once mentioned to me an intriguing idea that I haven't been able to shake ever since. Perhaps you might find it interesting too.

Let's talk about the real estate bubble for a moment. What was it that fueled that bubble? Right, hot money flowing into the real estate paper markets -- Collateralized Debt Obligations stuffed with Mortgaged Backed Securities all built on home buyers promises to pay. So what effect did these expanded derivatives markets have on real estate prices? Did they suppress them? Nope, they lifted them up.

What if SLV and other paper markets and doing the same thing to silver, a commodity?

Now before you answer that question -- ask yourself this -- is it possible? Is it possible that silver and other commodities are being propped up by paper stimulus? If you answer, yes, it is possible, the next question is, who profits from this?

--Jenn

Edwardo said...

"At today’s prices, a million dollars in gold weighs less than fifty pounds."

That is wrong. Twelve (troy) ounces of gold equals a pound. Therefore, 120 ounces of gold equals ten pounds, and five times that amount, 600 ounces of gold,with a market value of well under a million dollars, weighs 50 pounds.

Wendy said...

I was hoping some might of read this:

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aabVrH10emoQ

and would comment on how this stratagy of quick default would effect the stability of the Euro.

Thanks

costata said...

Edwardo,

FOFOA's article did not reference troy pounds.

50 lbs. = 729.166 troy oz

http://www.metric-conversions.org/weight/pounds-to-troy-ounces.htm

729 x $1,376 = $1,003,104.00

Cheers

Rui said...

@ Jenn
A big difference is that for those CDO and MBS owners there’s a real property behind each CDO and MBS contract. It’s overpriced and the title might get screwed by the robo-signing but it’s there.


Paper gold and silver are different in that it’s pure fractional reserve. Should all the certificate owners wanna claim their metals, it’s game over like Bernie Madoff. We already know the paper gold to physical gold ratio is 40 : 1. We don’t know the silver counter-part yet but it’s definitely not pretty.

Quasimojo said...
This comment has been removed by the author.
Jenn said...

Hello Quasimojo-

"After all, have you converted all that previously bought silver for gold? If not, what are you waiting for...the as-yet illusive but favorable 40-to-1 ratio?"

Not everyone holds silver for the purpose of converting it to gold.

If leverage is what you are after, then only you can find the comfort spot to make the switch. If you are not sure, now is a good time.

--Jenn

Jenn said...

From Max Keiser's Blog:

“Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock."

"MK: The Gold Reserve Act of 1934 – and the split in Gold and Silver prices – is a unique slice of monetary history that can’t be extrapolated for comparative purposes to today’s market."


It looks like Max forgot about the 1934 Silver Purchase Act which nationalized US silver holdings propping up the world price, quite similar to the Sherman Silver Purchase Act of 1890 which mandated the US government buy silver for the same reason, to prop the price up.

A unique slice of monetary history? Well, that's two times. Maybe the third is happening right now?

--Jenn

julian said...

FOFOA,

yet another deeply informative and explicative post

thank goodness for your ability to weave a thorough thought!

Question:

i don't presume you to know or to have ever even contemplated this before, but: when you imagine a Freegold scenario, what sort of gold to silver ratio do you see? Is it possible to still have a low gold to silver ratio, even one where 1 silver > 1 gold, such as platinum today? Is it more likely that gold to silver ratio would be very wide since gold would finally be given its monetary role completely?

Cheers!

- Julian

Dimmed aurum said...

@ Jenn
“……What if SLV and other paper markets and doing the same thing to silver, a commodity?”
Another possibility is savings “money” trying to pull physical silver out of LME whereas at the same time leveraged credit money propping up the “price” (not value) are attempting to offset the strength of that pull.
Should a crash occurs it will mean that there is no physical silver left to protect.
Dimmed

costata said...

Dimmed aurum,

The scenario you outlined to Jenn works just fine for gold because investment demand is now the only driver for gold. That is not the situation in the silver market.

It's equally possible that industrial users of silver are stockpiling, fearing a (temporary?) shortage. Their annual consumption of the silver metal is multiples of current investor demand for silver. They are a crucial player in the physical silver market.

Did you see the comment I posted earlier by americhinaman? If his analysis is correct JPM have an extraordinary level of control over the silver market compared to other commodity markets.

Again if his analysis is correct, JPM can take profits in silver on both the long and short side.

nook said...

Quote from the article: "To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce. But if you are counting on the industrial fundamentals of silver for your moonshot like the Zero Hedge article is, or on a busted paper market like the 'vigilantes,' you may be in for an unpleasant surprise."

Or will we be?

Mass industrial usage is a plus for silver, especially at such cheap 30/Oz price. Think of it: do we ever worry about dental usage could shrink world's gold stockpile? Never, but why? B/c gold price is high enough to make sure #1 People have no desire to overconsume gold in dental work; #2 It's economically worthwhile to recycle gold from any dental work.

See? The solution to shrinking AKA shortage is high price. Heck the solution to any demand overwhelming supply and therefore shortage is high price. It’s high price that on one hand chokes off the demand and on the other stimulates more supply to finally reach a new balance.

I don’t want to go over how broad silver is used across board as the comment section does not provides enough space for that. Just remember it’s hot. The continuous reduction of silver stockpile above ground despite 400% price surge this last decade shows the supply cannot keep up with the demand.

Giving that picture of supply and demand, and adding in the lunatic CRIMEX naked silver shorting, could it remain at 30$/Oz? Could the solution to silver shortage be anything other than a price shock? Not a chance in heck.

And that’s just the industrial side alone. We haven’t even touched the monetary and the investment part. I'd stick my head out to say gold only has a perceived edge over silver as monetary metals. There’s no real technical strength behind that edge.

For a metal to be money it has to have intrinsic value, durability, divisibility, stability, availability and UN-print-ability (b/c of blackhawk Ben). While gold has superior durability, silver makes it up with better intrinsic value w/ its wide real world usage (might be too much so). When we want to use gold as money again, we revalue it higher. When we want to use silver as money again, we do the same, that is high enough to be worthwhile to recycle the silver to negate the impact of industrial usage.

Then again I admit that perception is, many times, sadly, the reality. Gold might be the only favored one as the future money after this FIAT debacle, a “Senator’s son” if you will. Who knows?

nook said...
This comment has been removed by the author.
costata said...

nook,

You clearly believe that the industrial usage of silver is a huge plus for silver's claim to be a monetary store of value.

FOFOA (and others) are arguing that this industrial usage demand is a liability if silver is expected to emulate gold in a Freegold transition.

Silver may be severely undervalued in terms of current fiat currency pricing. Silver may increase to a much higher price.

If A/FOA and FOFOA are correct physical gold alone will be the reference point for currency values under the new IMFS. This is the crucial point. The risk is that silver will hit a price ceiling at some point and stall. Gold may then leave silver far behind.

radix46 said...

One of the problems that many of the silverbugs have is that they argue from a viewpoint trapped within the current monetary paradigm. They are closet paperbugs, but they don't know it themselves. Maybe latent paperbugs is a better phrase.

Understanding FOFOA's argument cannot simply be done by reading this one post of his alone. It would take many hours/days/weeks to 'get it', especially if one is trapped inside the 'Western mind'.

I notice silverbugs are obsessed with price action, dollar price action. The more important consideration is value.

I don't expect many to see this as it is human nature to defend a position when it is one in which we are so deeply invested, financially and psychologically. I should know, I struggled as a silverbug/latent paperbug for many months before capitulating, so I have a lot of sympathy.

The other unfortunate symptom of the 'Western mind'/latent paperbug paradigm, created by the macro-culture, is the need for instant gratification, simplification, lack of time or willingness to study. So, I doubt that more than token percentage of the silverbugs will take the time to read through FOFOA's fully laid out argument.

This is cetainly no ad hominem attack on the silverbugs (I don't use that term in a derogatory fashion), after all, I used to be one.
Que sera, sera.

CrackWhoreGold said...

When I am looking for a dime bag of crack, I always carry silver. After all, that's why they call it a dime bag. And who wants to be carrying all that bling around, just waiting to get stolen?

Seriously though, with a GSR of 50:1, why wouldn't someone own at least an equal weight in silver? That way if for some bizarre reason the GSR ratio flip-flopped, us CWG's would be perfectly hedged.

And how about some bizarre scenarios:

1) One or more governments seize their citizens gold and not their silver
2) One or more governments offer preferred tax treatment to silver
3) One or more governments declare silver to be legal tender
4) After TEOTWAWKI, ownership of gold immediately identifies you as a financial terrorist

But the real point here is that even if we were to accept that freegold is inevitable, no one knows the path we will take to get there, and different countries or region's paths may be different.

FOFOA seems to be telling us: "don't worry about the lack of a silver safety belt because in freegold land the skies are always smooth". I just want to be ready for a crash landing, so not only do I have a silver safety belt, I am carrying a silver parachute.

Happy Trails,

Desperado

Patrick said...

this focal point should get those who are invested in goldmines thinking also...

The winner takes it all... ABBA

http://www.youtube.com/watch?v=92cwKCU8Z5c

Motley Fool said...

Greetings FOFOA

and others.

I think silver will be one of the Schelling points.

The problem I have with your Ben and Chen example is suppose Ben never repays the debt.

I agree the price of gold shouldn't be fixed, but also think payment should only be accepted in gold in order to ensure that Ben starts working to repay the loan at some point.

"You see, the very key to understanding Freegold may actually lie in understanding the difference between gold and silver with regard to their commodity versus monetary wealth reserve functions."

Hehe. This should be fun.

The question on whether silver is money today is about 90% no. I think you are missing some important things though.

Firstly, we need a store of wealth, such as gold, to be stable. The reason why gold is stable is because the stocks-to-flow ratio ( the amount of gold available compared to the annual production) is very high; about 90 or so ( that is 90 years worth of production).

For silver this ratio is between 25 and 30. Which makes it worse money than gold (in this aspect) but better than copper which has a stocks to flows ratio of about 0.25 ( about 3 months of production).

One of the things you are missing is that the higher the value of silver goes( relative to everything else), the more it becomes money. This is because as the price goes higher the industrial uses ( something which makes silver not money) will become less, as other metals will be used. Also as the price goes higher the scrap silver becomes more economical to melt down ( same as happens for gold). Also as the price goes higher, marginal mines become profitable to operate again, meaning more stock ( same as for gold).

So at present.. the question : Is gold money? has answer about 90% yes and 10 % no. The question : Is silver money? has answer about 90% no and 10% yes.

But. and this is important. As the price of gold increases, lets say a freegold revaluation of 100 multiple. Then if for example silver had the same multiple increase ( it wont, since it is more no now, but idk could be 80 multiple), then the answers to these questions change.

For gold : it becomes 99.9% yes and 0.1 % no. For silver it becomes 85% ( just thumbsucking numbers here) yes and 15% no.

There are also practical reasons why, when freegold happens, a lot of people will buy some silver ( such as they can't find any gold and silver is better than paper) which will affect the yes-no levels.

As to your giants and rich people bit. Alright sure... but there are a lot more poor people than rich people, and their collective buying power is actually more. As long as silver is freely convertible into gold at a Floating Rate of exchange people( little ones) will buy some.

Your next examples was largly due to two problems. The price of gold was fixed And the ratio for exchange between gold and silver was fixed. If these were floating they would not have required constant policy changes.

"Can you find an example where the opposite occurred? Can you show me where a government ever had to buy gold and sell silver (at whatever price or ratio) in order to maintain its system?"

Yes. Over the period of US monetary history there were many back and forth changes between people hoaring silver or alternatively gold, due to government policy changes( essentially changes in the then Fixed ratio between gold and silver).

Finally. I agree that gold is the better monetary metal.

Anyways. Just my two bits.

The Fool

Ps. I recently aquired a little silver to tide me over during the turmoil to come, since i most definately dont want to exchange my gold for food unless I have no other choice.

Texan said...

Littlepeople, nook, etc.

You obviously don't own much physical silver. Rough estimates, but I think $100,000 would weigh something like 400 pounds. It's making me laugh thinking about y'all lugging around 50 pound monster boxes.

Tom said...

It seems to me that both metals are exceptionally undervalued in the current situation. However, gold is relatively much more under-valued precicely because it is 90% money and 10% industrial, whereas silver is 10% money and 90% industrial. It is the 90% portion of gold that is gravely under-valued, and the 10% portion of silver. Silver's 10% may become 15% or 20% or higher, because gold will go into hiding and won't trade. So most people will settle for the next best solution. However, gold went into hiding because it is the more valuable money. When gold comes out of hiding, silver be reduced in monetary function again. Only the silverbugs who can trade their silver for gold, when gold is in hiding will be able capitalize on silver's current shortage. Methinks very few will succeed in this. I was a silverbug, and I am going to trade most of my silver for gold over the next while. I'm hoping to take advantage of my modest gains from the ratio before gold goes into hiding. I only came to this conclusion after re-reading old posts and comments on this blog regarding the values and uses of silver and gold.

sean said...

It occurs to me that the conclusions people come to depends on where they're coming from. ie:
"Traders", looking to maximize short term (max 1 year) gain, motivated essentially by greed, wanting leverage, argue for silver.
"Investors", looking to preserve wealth during the impending uncertainties, motivated primarily by fear/caution, want safety, argue for gold.

Speaking for myself, even while strongly believing the second, it's very hard not to sometimes feel tempted towards a little leverage! Even if I suppose it amounts to little more than "picking up pennies before a steam-roller". If FO/FO/A is correct though, there will come a very challenging time for the-trader-inside-us, when, if I understand correctly, gold (and silver?) descend temporarily to zero before resurrecting as Freegold. I expect then many "loose hands" will be shaken out, as they say in trader-speak.

JR said...

Mish,

Like FOFOA I believe gold is money. However, unlike FOFOA I think money is whatever the free market says it is.

FOFOA's post is focused on why he believes the free market will choose gold in the store of value function.

Reading the the piece before you comment is a often overlooked strategy.

I think you would really enjoy FOFOA's piece, but either way it seems like it would be a quality educational experience for you.

Cheers

ebikeguru said...

Morning all. Interesting piece FOFOA. Thanks!

I just made 439% profit on my 17th Dec. expiry, $24.50 strike, silver/usd call warrants!!!!

WWWWOOOOOHHHHHOOOOO!!!!!

Now, do I chuck my gains back into it for the March 17th expiry, strike $35 on the commonly held belief that silver should be $300 an oz!? or shall I just buy beer ?? haha

I also just got some more gold coins and trinkets whilst in Egypt last week. Loving the physical.

Moral to my rant? I think both of these metals are going to go up in the next few months....but what do I know!!?? What do you know??!! EXACTLY. We as humans cannot predict the future. We can think hope and wish and study, but we cannot know. Therefore, I have my excess money in Gold, silver, salmon, stem cells, lithium, Rare earths and water.

Just my 10 penneth!!

Cheers!!

Jenn said...

@Motley Fool

"One of the things you are missing is that the higher the value of silver goes( relative to everything else), the more it becomes money"

And what if the reason the price is going up is due to industrial users stock piling as Costata mentioned? After they have adequately supply in their warehouses and stop buying -- who is going to buy in quantities large enough to float the price?

"Ps. I recently aquired a little silver to tide me over during the turmoil to come, since i most definately dont want to exchange my gold for food unless I have no other choice."

You seem to keep running up against the same obstacle -- describing the merits of gold and silver as transactional currencies. You do realize we will continue to use fiat paper for transactions, right? If you get this far, then what follows is the merits of gold and silver as a store of wealth.

--Jenn

Motley Fool said...

Hey Jenn

The amounts they have stockpiled is a tiny amount of the above ground available silver. As such.. it could almost be said to be irrelevant.

To illustrate in the wrong terms : what profitable industrial use would silver have at $500 or $5000? The reason why silver was 'destroyed' as money is because the price was kept too low ( silver is currently only mined as a byproduct of other mining activities). However.. at the right price, it becomes viable to extract 'used' silver(similar to what happens for gold)... and thus our available stocks are not as small as they seem.

I do grasp the difference in meaning between store of value and transactional currency. I do however differ in opinion, since the store of wealth function is destroyed if wealth cannot change of ownership. Doing it via Fiat paper does not change the underlying dynamics, except to extract value from the transaction, in a inflationary system.

The point to having a store of value is to be able to exchange(transact) it for a income when you are in need of doing so.

Regards.

The Fool

Googel said...

http://www.youtube.com/watch?v=dwMykRhljCM

Jeff said...

Here is a long but good rickards video presentation where the euro, gold, and other things are discussed.

http://outerdnn.outer.jhuapl.edu/rethinking/VideoArchives/MrJamesGRickardsPresentationVideo.aspx

nook said...

Some food for thoughts: Hunt Brothers, Ford, JPM and China. What do they tell us about silver. Is it monetary metal or simply an industrial commodity levitated by investment demand?

If silver has no monetary role then why did CFTC go lawless to bust HBs. Look back at that part of history, CFTC kicked the table in the middle of the game. They changed margin requirement to squeeze HBs. And then on that particlular day they took sell orders only but no bids just to drop price enough to nail HBs.

Why did they go that length to fight silver surge? We know CFTC didn’t attack Ford during that palladium panic. Do you still think silver is merely an industrial commodity levitated by investment demand?

If you read HBs’ side of story they truly believe 70s’ could turn into a runaway inflationary depression, which was the drive behind their silver investment. They were unfortunately three decades ahead of time and went too far on margins.

That’s then. Let’s look at now. Let’s talk about JPM’s mass silver shorts.

If you look at the history of JPM and their current 75-trillion (yes, it’s a T not B) book including the OTC derivatives you’d understand JPM is part of FED / Treasury. They are a branch of US government.

Why does JPM take on the huge silver short? They are not exactly dumb. They know as well as anyone silver is undervalued. Taking a short here is asking for losses, and yet they still do it. They got lots of silver shorts from Bears Stearn during the take over. They could simply tell Fed and Treasury they wanted no silver shorts like what they did to other Bears’ toxic assets landed in Fed’s book. So why? Could it be any reason other than that TPTB wants silver price be suppressed so someone (in this case JPM) has to take it?

Look at this chart below on CRIMEX positions. The only things that get massively shorted are gold and silver. We don’t see much on Palladium or Platinum. Where does that put silver in, the camp of monetary metals or “industrial commodity levitated by investment demand”? The writings are on the wall.
http://v3.caseyresearch.com/images/Days-of-Production-enlarge-101218.gif

We’ve seen wealthy people getting in silver in the past in HBs and now in Eric Sprott. Note that Sprott is not an average clueless hedge fund manager. If you want to “follow the steps of giants” then those are two cases, but I’ll give you a big one: China.

How many Warren Buffet does it take to match China’s 2+ Trillions of reserver? Well, you get the picture so let’s skip the math and focus on this recent silver surge. I’ve seldom seen bullion banks getting knocked around like this. What’s unique about it is that It’s not the result of CRIMEX street fight like in the past. The drive was from LME where deep pocket Chinese are draining silver with a vengeance.

These are not average Chinese investors. People with that kinda bravado and disciplines can only be their state-run agencies backed by huge national reserve pocket on a mission to exchange zombie Dollars for real valuables. They buy both gold and silver but It’s silver they hit the hardest.

Do you think China will waste their reserve on “industrial commodity levitated by investment demand” that has no chance to be money while they can simply concentrate on gold? Some of you might say, wait, they still export silver so It cannot be. That has much to do with their past contracts and silver’s mass industrial usage. Western CBs were still selling gold recently with a comical 500 tons annual limit agreement but that doesn’t mean gold is no longer a monetary metal, does it? China, the biggest bully in town, has shown their hand in LME so don’t get surprised if that export simply evaporates in the future.

Rui said...

Back in the Weimar Hyperinflation, gold and silver ratio reached 1 - 150. It's a pure product of free market force that more people moved into gold than silver as gold carried more wealth on less weight so it helped the wealthy on the run. That ratio came down once things settled down.

Back in the 1920s there were about 10 times as much silver stockpile as today so I don't expect a 1 - 150 again in the coming currency collapse. 1 - 17 up and down is more like it.

Dimmed aurum said...

@ Jenn
You still keep on writing about price not value and sadly FOFOA`s historical examples do not help much this Western thinking at all. You see, paper was very well on the march there back then and it created its nasty distortions so people were duped and fell for it.
The best way this $IMFS presents to think about value is ratios although these too can widely be distorted by speculation, credit moneys (derivatives, leveraged options etc.), market participants of near monopoly status – JPM, HSBC et al.
So FOFOA did anyone a disservice there actually. He may have started with:
“Imagine that all credit has gone – replaced by base money printed by the CB`s to save the savers in the system. Then imagine that the giants had their way and everyone decides to follow them and their predilection for gold. Then imagine that the monetary pendulum swings away from easy money – debt in this $IMFS and stops dead at the bottom – freegold without “overshooting” towards a harder money equivalent – free gold-and-silver and a lot of commodities speculation…then silver sucks. ”
Now if you can imagine all that and if you can imagine that the people, after all this mess, will still be willing to entrust their governments with providing them with their form of easy money to borrow into (fiat currencies) and also their giants (part of the status quo too) with providing them with only one medium of savings. And not rebel and try to handcuff those governments by using commodity money until the big governments and their welfare withers away, then you can buy FOFOA`s ideas wholeheartedly.
@ Motley Fool
You`ve done pretty good job actually by dissecting value (intrinsic value?) into wealth preserving part, and useful (commodities-like) part. The only trouble I can see with this is that I cannot judge for now which part will be more important. See, if this world falls into disorder, and if the marginal utility of rising population falls, then how can people have enough savings to overvalue them as much by propping the wealth preserving part that much. From the other hand if new economic paradigm sets in and useful metals like silver and palladium for example are much more needed, will that not put a stronger emphasis on the useful part of their value?
P.S.
I like very much that recycling part of your writings. As I previously have mentioned, one cannot know the true value of something until one starts recycling it.

Dimmed aurum said...

@ Motley Fool
You write:
“I do grasp the difference in meaning between store of value and transactional currency. I do however differ in opinion, since the store of wealth function is destroyed if wealth cannot change of ownership. Doing it via Fiat paper does not change the underlying dynamics, except to extract value from the transaction, in a inflationary system.

The point to having a store of value is to be able to exchange(transact) it for a income when you are in need of doing so.”
I agree.
Until one has a floating pool of savings (– gold as a store of value) seeking return (investment opportunities) to match at the same time the propensity to save (excess currency profits) and with low transactional cost between them, then you cannot have freegold. In this pre- freegold world you have coin dealers (moneychangers of a sort) to go in-between (due to their superior knowledge and connections/trust) those willing to store their wealth and those willing to invest it. One can only hope that if (the jury is still out) that paper trade charade ends all these obstacles will fall away and that people will not be oppressed to “practice” freegold.

--Dimmed--

Robert said...

OK, leaving comments at ZeroHedge is of limited value, well there they are!

FOFOA has my intellectual loyalty! Gold first, then the rest (silver, food, etc.).

costata said...

Motley Fool,

You said:
"The amounts they have stockpiled is a tiny amount of the above ground available silver. As such.. it could almost be said to be irrelevant."

You have missed Jenn's point. The size of the industrial users silver inventory relative to above ground silver is irrelevant.

The key issue is that the industrial users are the largest source of demand for silver. ALL of them benefit from a LOW silver price. Their incentive is to assist the shorts not fight them.

The concern is that if the industrials are increasing their inventory rather than running a JIT strategy for this manufacturing input they could pull their bids when their inventory levels are high enough. This would put downward pressure on the price.

If the silver investors step up and continue bidding up the price of silver and VASTLY increase the quantity they are buying then no problem. If they don't, who will support the price in the absence of the industrial user demand?

costata said...

Who says JP Morgan and HSBC are naked shorts?

IMO the scenario outlined below is plausible. If this guy is correct the COT reports will tell you precisely ZERO about the structure of JP Morgan's silver book.

Comments section ZeroHedge:
by americhinaman
on Tue, 12/14/2010 - 01:02
#803879

"i'm new to this forum, but it's been impossible not to note the optimism for silver on ZH. while i'm sympathetic to the argument that monetary debasement leads to the need for alternative stores of value (real assets, which historically include precious metals), i think the JPM stories perpetuated here have made a heroic assumption that i can't find any evidence of.

i've done a lot of research on the ETFs and ETNs from a previous job at a big wall street bank. from the ishares docs, i see that JPM is both the custodian of the silver in the trust AND an "authorized participant" (which means they are a market maker who can create or redeem units of SLV shares in exchange for the silver represented by such shares). this puts them in a unique situation where they can effectively arb the various silver markets... between SLV, SI- futures, and spot silver.

i can tell you for certain, that the desk-level traders who run the arb are not authorized to accumulate naked short (or long) positions. if there is a naked short, it would come from the top... a head of trading or above. but based on the evidence, i cannot conclude that they have such a short. what i see is that JPM is running a 3-legged arb involving:

1) physical silver

2) SI futures

3) SLV shares

as needed, they take positions in zero-coupon treasuries with maturities matching futures expiry, to manage leverage and cash with the above.

my conclusion is that JPM probably does have a massive position in the futures market... which causes headlines which might annoy the NYMEX or the CFTC. but JPM's unique position as the custodian of one of the largest physical silver stockpiles in the world (i.e. they could easily manage physical deliveries with little marginal cost) AND as one of the AP's that regularly create/redeem SLV for silver, means that they are in a unique position to run arbitrage positions using silver futures against their other silver holdings. without further evidence, i would guess that JPM is indeed running a massive arbitrage between the 3 silver exposures listed above and NOT a naked short.

i would be curious if you can find evidence in the financial statements, suggesting that they do not have offsetting long positions as i assume. if not, i would be very careful buying into what i see as a phantom short squeeze."

Dimmed aurum said...

@ costata

Yes the Motley Fool may be missing Jenn`s point. What he is not missing though is that once silver is restored to value (“bi_componetial” value – 1.worse store of value then gold, 2.harder money than most currencies and less abused as such) not price (the industrial user`s stockpiling is out of fear that that may finally be happening) it will be a complete fish of itself not some kind of castaway larva. (Smile)
So if the “Giants” think they may postpone freegold much further they`ll lay down with a silver bullet longed in their collective head. (Bigger smile)

Dimmed aurum said...

And yes I`ve read that post
"
1) physical silver

2) SI futures

3) SLV shares"

JPM is sitting on that tree-legged chair right now. With 1). physical leg down. They soon will find themselves balancing on just two paper legs I am sure.

costata said...

Dimmed aurum,

So if the “Giants” think they may postpone freegold much further they`ll lay down with a silver bullet longed in their collective head. (Bigger smile)

LOL. I guess we'll just have to let time reveal who is right. If A/FOA and FOFOA are right you are betting against the BIS, Eurosystem Central Banks, EMU nations, Russia, China, ME, SE Asians, USA and the Giants. FWIW my money is on the big players to get their way.

"JPM is sitting on that tree-legged chair right now. With 1). physical leg down. They soon will find themselves balancing on just two paper legs I am sure."

You are "sure"! That should be very comforting to anyone who is long physical silver and holding less gold as a result.

I take it that you are presuming JPM are naked short. This silverbug article of faith appears to be based on the unproven notion that the custodians (JPM etc) of SLV have NO physical silver. Now all you need is a shred of evidence to back that up in order to invalidate amerachinaman's scenario.

Rui said...

@ costa

During the March CFTC hearing GATA revealed a whistle blower on JPM's silver shenanigans. This whistle blower called CFTC in advance about JPM's plan to raid the silver market on Fed 5th, and it happened play by play exactly the way he called it. This WB btw was almost assassinated the next day after the hearing. You can find out the details here:
http://www.gata.org/node/8466

Now think about this: A hedge is an insurance for the longs. If JPM was running a legitimate hedge position for SLV holdings then why did they engineer an attack like that of Fed 5th for that hedge? It simply could not be. The only explanation is that it's naked and they wanted get out so they had to rig it down to then cover.

Ponzi silver fraud has been across board among these banksters. Morgan Stanley was running one until their clients started to suspect and asked for the serial codes of their paid bars. MS threw all sorts of excuses not to provide the #s and eventually the clients had enough and threatened with law suits. MS settled it down off the court. This year both GATA and KWN reported similar cases of banks having trouble honoring their silver holdings. Check URLs below:
http://www.gata.org/node/8837

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/12/8_Turk_-_Swiss_Bank_Client_Battles_Over_2_Months_For_His_Silver.html

Now think of it: Why do these banks ruin their reputation on such fraud? What's the point if silver is only an industrial metal?

Motley Fool said...

Hiya Dimmed Aurum

"See, if this world falls into disorder, and if the marginal utility of rising population falls, then how can people have enough savings to overvalue them as much by propping the wealth preserving part that much."

Hum. Well. If paper currency fails tomorrow, then is all physical things worthless? I would say not. Sure, there has been some malinvestment, but even so a lot of wealth would still exist and a part of that wealth is simply skills such as dentistry and nursing.

"From the other hand if new economic paradigm sets in and useful metals like silver and palladium for example are much more needed, will that not put a stronger emphasis on the useful part of their value?"

This is a excellent question. I am curious though, how much silver do we really need to consume? From my view silver in jewelry and cutlery is not consumed.

What uses of silver do we have that cannot be replaced by another metal? Or put a different way...if aliens were to land tomorrow and beam up all our silver, what industries would suffer worst, that we would not be able to live without and that would not be able to replace it with another metal?

I don't know the answer. I'm just curious if that industrial demand is really that relevant.

@Costata

We shall have to wait and see. Time will tell. I do not pretend to be able to predict what will happen with absolute certainty. I'm just trying to extrapolate from current dynamics and underlying truths, same as you.

I sleep a little better at night for having bought some silver. It's not much, just 1 kg, so lugging it around is not that much of a hassle.

Peace all

The Fool

Dimmed aurum said...

@ costata

I do not want to be “betting against the BIS, Eurosystem Central Banks, EMU nations, Russia, China, ME, SE Asians, USA and the Giants.”; it is more the other way round – they are betting against the savers` patience.
FWIW, this is not a great “bubble” in the silver markets; it is more like the beginning of the GREAT “DENIAL OF SERVICE” or “CREDIT CARD REJECTION” AVALANCHE. It is the way the market is telling the debtor classes and governments to quit their profligate ways. If things continue this way, believe me, we will be talking copper – the poorer still man`s silver and I don`t want to do that. You see the store of value function belonged to the commodities at first. As societies grew more and more complex this function was transferred to few items/metals and now fiat currencies. It was transferred but not completely because trust was not given completely to the issuing authority. So now that this trust evaporates so does the store of value function that was previously given. What happens with the need to store value then? It is either consumed/sucked almost entirely by physical gold – freegold or it returns to the underlying commodities themselves (that originated it) – prices go hyper (not to be confused with the PROCESS of hyperinflation but rather with the result). Don`t get me wrong, I want freegold to happen and do its balancing act so to speak. It could rein the vast and growing debts in and as much as possible. If it fails to do that, then the entire commodities complex will take the hit (will start to counter the money printing machine) with unforeseen consequences. Complex societies will disintegrate as a result and much chaos will ensue.

God speed FREEGOLD.
Disclosure: if freegold does not happen in time I am a little bit hedged – silver (1000oz), diesel fuel (6000lt), wheat flour (3 tons) – all in physical storage (the flour at the mill).

--Dimmed--

samix said...

@Dimmed
Disclosure: if freegold does not happen in time I am a little bit hedged – silver (1000oz), diesel fuel (6000lt), wheat flour (3 tons) – all in physical storage (the flour at the mill

How are you storing the diesel fuel ?

costata said...

Dimmed aurum,

Read it. Crap. Actually nonsensical crap. Thanks - Not.

And for my sternest critics, despite the temptation I did not use the phrase 'shit for brains' for Dimmed aurum.

Dimmed aurum said...

@ samix
In empty motor-oil drums.
@ costata
Perhaps you know better or perhaps not. Not much of a reasoning anyway.

Motley Fool said...

Hey Dimmed aurum

Respectfully, copper can't be money(or rather wouldn't be for long, it has been tried in the past). The stocks to flows ratio is too low and it is too abundant.

The only likely candidates are gold, silver and oil, in order of likelihood. This doesn't mean exclusivity, it could (and likely will) be a combination.

At the end of the day my view is : don't presume to tell the masses what is best, let them make their own choices. i think the result will be that most will choose gold and some will choose silver.

In terms of human mass psychology there is some sense in this, as gold is symbolic for the sun and silver is symbolic for the moon.

Peace.

The Fool

Dimmed aurum said...

@ Motley Fool
Dollars bidding for copper (and not finding anything for sale) is a TEOWAWKI scenario. Most of you understand that. (Smile)

Freegold to you all

--Dimmed--

Syafrin Djohan said...

From wiki:
Beginning in the early 1970s, Nelson Hunt and his brother William began accumulating large amounts of silver. By 1979, they had nearly cornered the global market. The brothers profited by an estimated $2 billion to $4 billion in silver speculation, with estimated silver holdings of 100 million ounces.[7]

During the Hunt brothers' accumulation of the precious metal, prices of silver futures contracts and silver bullion during 1979 and 1980 rose from $11 an ounce in September 1979 to $50 an ounce in January 1980.

(Read once more: September 1979 to January 1980: 5 months at most)
(Read them once again: 2 billion to 4 billion profit, and the establishment was already at the brink of collapse)

Two persons could cause such havoc to the lawless giants (shameless indeed) in 1980, what do you think would happen to silver in 2011 and beyond when millions of poor men throughout the world rush for it trying to be one step faster from one another to flip their fiat money for something harder? Maybe their total global networth worldwide just amount to 4 billion $? or 13,65 billion* (inflation adjusted)? No?

Now this mathematics gets more interesting to me. Assuming 2 billion say poor people worldwide vote for silver as well (not just gold), and each has a target of buying daily necessities worth $50 at today's value (1 month consumables supply), that already amounts to 100 billion dollar. Adding persistent buying for at least half a year, it is half a trillion.

2 billion 'poor' people chasing 890 million ounce (2007) yearly production, that would be extreme! A ratio of 2 people for each ounce of silver.

Silver has also been accounted in historical (maybe not) story (Abraham and Ephron). Now simplicity could probably describe this better: at such relative abundance of stock back then, why didn't they just use gold? I assume they already knew gold, and I assume they were rational enough to consider using 1g of gold as small change if they chose to.

For me to choose 1g gold coin as small change and 1 toz silver coin, I would certainly prefer the later.

littlepeople said...

Costata:
Your argument explaining why silver will drop because the SUA will hoard, then pull bids, because they want low silver prices doesn't hold water.

The reason they will hoard is because they see shortages. They know that shortages cause price increases.

Remember that economics still holds true in any world, including freegold. The lower the price of a thing, the more it will be used; the way to stop usage from increasing is to allow prices to rise. Your argument, that keeping prices low will cause low prices, does not, therefore, follow.

Texan: your assumption would be wrong, as is your premise. You're not thinking ahead.

Nook:
Good explanation of what's happening right now, in the real (physical) world.

raptor said...

Great piece..thanx
Let me play devil's advocate ;)
(to me be clear I'm not pro silver - against gold or the other way around, just playing devil here)

You said that in all of the cases Gov's dumped silver..true, but there is one new dynamic which wasn't here before..
The silver is close to being depleted, because it was used in production over time.
You are right that the big boys, banks and gov won't stockpile silver (and give it the punch it needs to become money), but the world population is 6 Billion and counting, most of it poor i.e. can buy silver, but not gold.

What I'm saying is that the credibility of it being used as money will be given not from the banks, big investors and gov's but the vast human population, if so it happens that all world paper currencies go in a big do do ..

- 6B+, depleted, (6B oz =~ 170 097 tonnes = 8 times yearly(2009) production, don't know if this is enough)

OK. just entertaining the idea :)

PS> World citizen, thinking!!...
"I get paid 100$ monthly ...hmm what should I buy..50$ silver or 2500$ gold...hmm?"

JR said...

Hi Rui,

Now think of it: Why do these banks ruin their reputation on such fraud?

The same reason they do most everything else, to make money. They do the same thing with copper and oil and most every other industrial commodity. Do you contend oil and copper are monetary commodities?

The more insightful question, is why do Central Banks lease gold to suppress its price, yet not do the same for silver.

CBs aren't run to make a profit for themselves, unlike JPM and other big banks. CBs largely manage a currency and by extension impact the fiscal and monetary affairs of a nation.

It obvious what CBs think matters to their respective nation's fiscal and monetary affairs.

Dimmed aurum said...

@ raptor

Let me play theadvocate of the devil's advocate ;)
You write:
PS> World citizen, thinking!!...
"I get paid 100$ monthly ...hmm what should I buy..50$ silver or 2500$ gold...hmm?"

My modification:
PS> World citizen, thinking!!...
"I get paid 100$ monthly ...hmm what should I buy…50$/oz silver or 2500$/oz gold or why not 50 kilos of copper (I may be needing it someday to make an illegal distillery for booze should the Gov. decides to raise again the excise duty on liquor, anyway I`ll be not loosing anything compared to the negative 5% inflation tax after the meager 3% interest the local bank gives me)...hmm?"

LOL. Better freegold and still better NOW!

Mike said...

@raptor

everyone can buy gold, what you pay for about 2oz of silver is what you can get for 1gram of gold. is 1gram not good enough for storing your wealth for the common man?

people often talk about gold being expensive now at 1400 so silver is the better play but what about when its at say 30k for 1oz of gold. then 1gram will cost the same as 1oz today and do the exact same job.

if everyone just read through all of FOFOA's archive's you will have answers to a lot of questions about freegold. like FOFOA said its not something that can easily be summed up.

i did myself a favor and stopped reading all the gold analysts out there and just stick to FOA/FOFOA/FOFOA, Another and the comments section for USA Gold's News and Views sections. Once you do that it will all start making more sense.

Rui said...

@ JR

"The same reason they do most everything else, to make money. They do the same thing with copper and oil and most every other industrial commodity. Do you contend oil and copper are monetary commodities?"

The action in oil and copper is completely different, JR. There's NO SHORTAGE ISSUE in them. When Goldman and so on make money in those commodities, they only front-run a short/long position then rig it to profit. They then get out.

The game is silver is completely different. Bankers sell un-backed paper silver certificate or future contract to dilute the demand, which is pure Ponzi scheme. Now they are stuck. They cannot get out b/c of the rampant shortage going on.

"The more insightful question, is why do Central Banks lease gold to suppress its price, yet not do the same for silver."

Not true. Treasury department unloaded their huge stockpile of silver since 1980's into the market to suppress the price along the way. You don't see as many CBs doing it simply b/c a lot of them do not have silver stockpile in their hands.

Wendy said...

Jeff,

Thanks for the link to the Rikards interview. You're right it was very long, infact I had to stop when he starting talking about a fixed priced gold backing. I've heard his theory before.

What I found most interesting was his analogy that is something like: If a big American corporation should become insolvent, that would never put into question the stability of the USD, nor SHOULD the insolvency of eurozone members cause the Euro to become unstable.

Interestingly the author of the bloomberg link I had mentioned earlier asserts that insolvent EU members should default and do it quickly, even if it requires them to pull out of the EU temporarily.

I would think this action would enhance the stability of the Euro, and cause investors to focus where they should (USD).

But I don't have the background to really understand this, and was hoping someone else could comment on this.

raptor said...

@Dimmed aurum

Here is what :
Advocate of the advocate of the devils advocate, better known as AOAODA :)), has to say :

>...why not 50 kilos of copper...

]- naah, I wont buy that it is too big even for poor soul like me to carry 50 kilos around..

But I get the point ... but I think the guy on the video made a better point i.e. if silver become scarce it wont be a good candidate for money, good candidate for high-priced commodity yes, but not as money.
Still can hold some value for its owner albeit not as store-of-value par excellence.

Dimmed aurum said...
This comment has been removed by the author.
Dimmed aurum said...

@ raptor
My advocacy ends here ;-)
You get the point already.
I just want things to be happening faster. Before any chance of disruption or God forbid disintegration of society.

raptor said...

Are the central banks running a fractional gold system?

http://www.financeandeconomics.org/Articles%20archive/2010.12.16%20BIS.htm

Talks about BIS and it role in managing CB gold.

Kantaka said...
This comment has been removed by the author.
Rui said...

@ raptor

Silver is no scarcer than gold under ground. It's scarcity is purely b/c it's priced too low that leads to over-consumption.

Imagine if gold were priced to 100$/Oz, there'd be an instant boom in the Jewelry business. Everybody would be thinking of gold jewelry for holiday season. Gold stockpile will be drained down by such demand.

Silver's scarcity is not natural but pure result of banksters' price suppression. Once it's revalued high enough the mining supply will ramp up to replenish the stockpile and it'll be an excellent choice as money.

Kantaka said...

Brilliant, fofoa! Very fitting picture, too! Must be some of King Solomon's small change -- probably put them in the pot at the end of the rainbow. HE knew a thing or two about Schelling Points...

Rui said...

@wendy

Yes default actually strengthens the currency in the long run.

If someone defaults, his credit goes to zero and the bank foolishly loans him money take a hit as well. If the hit is too big the bank goes down then whoever foolishly save money in the bank takes a hit as well, which is what happened in Iceland's case. Default and bankruptcy are painful but healthy procedures to liquidate the incompetent elements from the system.

Politicians unfortunately don't think long term, not long enough past next election at least, and they are all bought up by the bankers so they don't want default or bankruptcy. When there's a threat just print money to patch the loss up. That's all they do. After a few round of this the currency gets diluted to death, which is what happens now.

Paul said...

Thanks for another good article FOFOA. My 2 cents on the whole silver gold debate – mainly I look at it from an international trade perspective, and just extrapolate current trends into the future. As nations increasingly phase out dollar usage, both as the currency of exchange and as the reserve currency, what will replace it?

Bilateral trade agreements in respective national currencies for exchange, and gold and smaller amounts of trade currencies for reserves. Where does silver fit into this? It just doesn’t.

We should all be contrarian to some extent, but surely using silver as a wealth reserve is just paddling upstream, or trying to be clever and looking for a short cut. It’s pure speculation. Turn your canoes around, silver dudes, and run with the current. It’s much easier on the arms (and everyone else’s ears).

Texan said...

All,

Physical silver is for flatware. Do you really think anyone with serious money is hoarding physical silver? Is there a run on at Replacements.com? Call and ask for their " buy" prices.....

Good grief. It's TOO HEAVY.

Wendy said...

Date: Wed Feb 04 1998 19:37
ANOTHER (THOUGHTS!) ID#60253:
Mr. H. Hitter,
Timing? Most of the very large buyers completed much of their conversion all of last year. When we speak of these entities one must know that they purchase much larger amounts than Berkshire. Most cannot understand that it is difficult to take five or ten million oz./gold in physical in a month or less. Note that Mr. Buffett has taken six months and only purchased about half of his silver! Even here we speak of only 300m for the amount taken. At this time the market is very, very tight for large money to go into physical. Paper, yes! I could move five billion US into paper metal very fast, but not physical.
Is silver being played to ignite ? Only the small paper movers are trying for the "fast buck squeeze". Most of them get eaten when the lions come for food. The big wealth is only trying to convert! Silver is good, but always to small. Perhaps at $150us it would work? Most are looking for a "currency/wealth" holding with history! They, ( this includes some CBs ) want a holding that is spread far and wide, and very deep! Gold is good.

Date: Sat Mar 07 1998 20:02
BillD ( ANOTHER...PERHAPS an unimportant question...but ) ID#261269:
What do you foresee for silver ???
Mr. BillD,
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.

Wendy said...

The day that gold resumes trading I will convert all my silver for more gold, because I beleive that we will have seen a top for silver, followed by a rapid decline.

If I'm wrong, I will be wrong without regret.

I beleive in the END it's gold and only gold that will be a world researve asset, and valued accordingly.

Wendy said...

Thank you Rui for your input. I do understand that Iceland is far better off for defaulting. Their GDP is awesome now, but my question revolves more about the questionable stability of the Euro inspite of the safeguardes put in place by the euro founders.

If I understand correctly, the Euro should not become unstable as a result of financial difficulties of member states, but it is??

I would appreciate any input in this regards.

BTW, it's feeling a bit like a ghost town here. I'm hopeful that I'm not the only live participant =8o)

Rui said...

Euro's problem is the same as that of US: Politicians cannot keep their hands off the printing machine.

Remember that Greece crisis? On the surface they were saying it’s bailing out Greece. It’s not. It’s printing money to give it to Greece as loan so that Greece can then pay off the European bankers that loaned money to Greece. The freshly printed bailout Euros went to the banks making the bad loans to Greece. Once that’s clear to the public then Euro becomes jokes just like Dollar.

You see the whole banking system has too much risk in it once you allow very aggressive fractional reserve banking. Government, instead of getting rid of fractional reserve, set up these useless programs such as Fed, ECB, FDIC, SEC and so on to control the risks. They cannot do it. It’s beyond their control.

To make matter worse, those programs end up being bought by the bankers. They end up telling public there’s no risk in the banking system so the risk grows and grows until it reaches a threshold. Once TSHTF the huge risk creates so much damage that a crash is inevitable.

Motley Fool said...

Hey Wendy

Thanks for the Another quote. I agree with it.

As to the people who keep arguing silver is too heavy. Gold : atomic number 79, Silver : atomic number 47.

Please use sensible arguments at least.

The Fool

Finn said...

As much as I've learned and appreciate fofoa we can chalk this one up and add it to the rest of the poor analysis on silver.

First of all nothing spoken of on this blog is guaranteed to happen. And even if it does it could take another 50-100 years. I don't believe it will but it's possible. That means that everyone on this board will likely be dead.

But in 50 years guess what won't be happening with gold and silver? They won't be mined. There will be nothing left. Actually this may be the case in 10-20 years. So silver, an industrial metal AND monetary metal will be one of the most prized metals on the planet.

Silver is the perfect hedge against gold NOT becoming "money" (we know it is already) any time soon. Nothing is guaranteed except the continued decline of above ground silver supplies.

oldinvestor said...

I have a question that I can not answer.

I live in a small town of about 25,000, so most of us know each other.

I do believe that the best way to store wealth is in physical gold.

During this holiday season I interact with a number of my friends. Naturally the question of the economy comes up.

My dilemma is that if I come out and actively advocate for gold purchases, the message gets out that I own physical gold. I believe that when the times get as hard, as they may, people will get tortured to revel people who own gold.

This does not bid well for the welfare of me and my family

On the other hand, I think that if my local community would as a whole own gold, we would be in a much better position to weather the coming storm.

This presents a dilemma, should I accumulate gold and keep this an absolute secret, or should I come out as an advocate for gold and reveal that I probably own some?

I am going to a local gathering of my friends tonight for a celebration of today’s solstice. I know this question is going to come up.

I put it out to our community, what do you think I should do?

mortymer said...

OldInvestor: Tell them to educate themselves and show them sources, let them drew conclusions :o)
http://www.goldsubject.com/ has some nice short intro; also this question has been discussed there. It is really hard to explain to people what this is about not as this is a paradigm change but because of the human nature.

Shanti said...

@oldinvestor

Write several nice pieces as anonymous in your local paper ;-)

Natalia said...

Forget gold, I have a better idea: moon rocks. See my post at http://blog.furkot.com/2010/11/moon.html

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

Wendy I think nobody knows the answer to your question about whether a defualt in the eurozone is a good thing.

My initial thought back in January when the Greek drama was playing out was that default has to be good for the euro. A default effectvely makes the currency vanish. Less currency chasing the same number of goods should make holders of good (undefaulted) euro worth more, right?

However, the answer is not so simple I am afraid. Traders get scared and sell the euro whenever there is a panic. Default also leads to a decline in business activity through fear and a decline in the velocity of money. These are negative factors for the euro.

As none of this can be modelled adequately we can only guess.

My gut tells me large scale defaults would decimate the euro in the short term for the reasons given above, but after a few years it would in fact become very strong as the economy recovered and the lower quantity of money in circulation became apparent.

miked said...

A statistic for the silver bugs I read somewhere but I cannot find it now.

I believe I read that 95% of the silver above ground is not investment grade and is not counted in official figures. Perhaps someone can correct me?

I believe the cost of smelting is about 200$ per kilo. A significant 6$ an ounce at present - or 20% of the cost of the end product (99% silver) even at today's elevated price of 30$ an ounce. No wonder not much is coming out of the woodwork. Imagine it became economic to smelt: Say silver reached 60$ an ounce. Wouldn't the large amount of sterling silver put a cap on prices for some time? A sudden flooding of the market with multiples of the exisitng stock of investment grade silver would be a significant hurdle for bulls to digest, and would be more of a challenge an increased mining output, I would wager :)

funthea said...

I think your linked video of the silver futurist did illustrate some lessons, just not the one you were implying. He states that, for example, palladium is not money because the Russians control the supply, thereby making it unstable via manipulation. This is the same type of thing you get when you have only one form of money; no competition. This makes for an environment ripe for manipulation. The squeezing out of silver as a monetary unit was done for that very reason. Gold was held and controlled by the CB. With silver in the way, they could not control the monetary system to the extent they needed to. They needed to limit the competition. This was good for the bankers but bad for the people at large.

Imagine this: if the only cars available were Chevy's, and they were put to market. The price discovery that would be found would be regarding those who wished to have a car and those who did not. Price discovery was not found necessarily for a Chevy, but rather for a car in general. If GM limited production for various reasons, be it legitimate or otherwise,a new price discovery would be found. They could manipulate the supply at will, thus causing new price discoveries. However, if we introduce competition of Ford, suddenly we find true price discovery, of not only cars in general, but also for the individual auto maker, one over the other. Even if one wishes to manipulate the supply, true price discovery is maintained.

funthea said...

While Schelling's focal point is certainly a legitimate theory. Your interpretation of his explanation of it, somehow became exclusionary and finite. I believe you took his general description as the outer confines and conclusions rather than the introduction to the premise.

Allow me to explain using his simple example:
Three of the squares are blue and one is red. According to the theory both contestants will pick the red square, and I agree. However, if we add a green square and tell the contestants that they must each pick two in order to win, they will still pick the red and green squares. The focal point theory is still in tacked, and they still win the prize. The theory does not limit the choices to merely one in order to stay valid.

Here is another example of musical chairs.

10 people walking around 9 chairs (8 blue chairs and one black chair). They are told that when the music stops, only those sitting in blue chairs with go on to the next round.

Ok, start the music... and now stop the music. What do we find? There is only one person standing. Why? because humans will always defer to their instinct of reaction rather than inaction. It didn't matter that we said the rules were that only by sitting in the blue chairs would you be taken to the next round. They will not stand idly by while there is an empty seat... even if you tell them it is the wrong one.

Motley Fool said...

"But notice also that the more lines in the sand that Ben issues, the more the value of the gold (representing a debt of fish) rises."

Sometimes I reread old posts.

I would just like to disagree here. :)

The value of Chen's gold is constrained by the future productivity of Ben. In this case it seems the gold is likely worth nothing.

TF

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