Monday, December 20, 2010
Kicking the Hornets' Nest
As someone here wrote in the comments, it sure seems like I kicked the hornet's nest on Friday. That wasn't my intention. Clearly the post was a message to "my readers," that is, to those with a little more background on the esoteric nature of this blog and the foundation on which it builds (i.e., the writings of Another and FOA). But it was a pleasant surprise for me to feel all the warmth and love in the superb comments over at ZH. Some of the silverbugs even posted thoughtful counterpoints to my post, like this one from the author of the ZH piece I quoted.
Perhaps this little episode will dispel the notion that Freegold can be distilled into an easily digestible pill for mass consumption. Of course that's not to say it is not accessible. It is accessible to anyone and everyone with the time and inclination to put in the effort. Just start here:
FOA's The Gold Trail
A more complete list can be found at the bottom of Freegold in the Proper Perspective.
The point is not which metal is going to give you a better return on your investment at any given time in the future or the past. The point is, given a choice between silver and gold, which physical metal should you buy now… today? And this is where Freegold comes in. Because the more you learn about Freegold, the more you will want to buy physical gold only. Dismiss this notion if you want. I don't care. I'm here to help those that want help understanding Freegold.
If you are here reading this blog, then you deserve to know my position on silver in the midst of all this silver hype. That's why I wrote the post.
In our Freegold future, gold will not provide a yield or a return. Instead, it will protect the purchasing power you have earned through hard effort. The idea of a risk free yield is an illusion propagated by the $IMFS.
A real yield can only come from risk taken in the pursuit of economic expansion. The "risk free yields" of today may well be nominally risk free in today's system, but that risk of nominal loss has been replaced with currency risk, the risk of value loss. The risk that your "lines in the sand" might become worth less, or even worthless. And just when nominal yields are reaching their nadir of zero, currency risk is reaching its apex. It is a systemic conundrum.
The purpose of a nominally "risk free" yield in the $IMFS is to try to keep up with inflation. Inflation is always with us, even when it is disguised by the financial system. It is the storage of value in dollar denominated paper assets that disguises the inflation. This slows dollar velocity and masks the systematic expansion. In other words, the Chinese letting their wealth reserves "lie very still" in dollar bonds gives the dollar value.
In Freegold, gold will simply float on the currency and represent the expansion or contraction of the economy. Scepticus was correct that after the Freegold transition, if the economy contracts because of an aging population, or simply from too many Lazy Bens, then gold's purchasing power at that time will fall. It will track the economy, not the currency. It will float on the currency, unlike anything today. But it will also perform better than any supposedly risk free paper investments today as well.
The problem today is that, like Chen on the beach, the Chinese are accumulating a whole lot of worthless "lines in the sand" that they know can never be spent. These lines hold perceived value as long as you don't spend them, but they lose value as soon as you do. And in the case of "non-floating" bonds that accumulate even more of the same thing, the "lines in the sand," the math is simply untenable. And what makes the situation even worse is that these lines are only legal tender in one place, on Ben's beach. So clearly, the necessary hyper-devaluation of Ben's lines will wipe out the stored value of all your past efforts.
On the other hand, in a real world with hundreds of Bens and Chens and millions of people (both lazy and not) behind each money, the floating gold solution works quite well. It can be spent anywhere. It doesn't lose value with the issue of more lines, because it is not denominated in lines like bonds are, but instead it floats and rises priced in that currency. And all the competing Bens will find that they can control the exchange value of their currency with gold. Selling gold will raise the value of your currency, and buying gold will lower it. And because all currencies will be judged relative to their gold price, even if Ben has no more official gold to sell, gold can still be purchased with his currency from other sources at the floating price of gold in that currency, which will be a reflection of management of the currency relative to the domestic economy behind it.
If this works for you, you can think of it as a multilateral floating gold standard. And in this gold standard, the money printer doesn't even need a hoard of gold if he has a strong economy and a well managed currency. Without those, you'd probably want some gold.
Okay, I have to post this video, because Davincij has me laughing hysterically. I watched this at least three times. Every time he laughs, I laugh. I just can't help it. I love this guy! He obviously doesn't get the point of my post, but he sure is fun to watch...
Here's the thing about silver and Freegold. If you really think about it, Freegold is the pure embodiment of Gresham's law. The masses are never going to demand silver money, only the modern Silverites are. The masses always want easy money. And that's because the masses use money mostly to pay expenses and service debt (in case you haven't noticed). And also, if you haven't noticed, there is a big overlap between the silver movement and the various easy money movements like Bill Still and The Secret of Oz.
But the easy money camp has a newer and better easy money in fiat currency today. Silver was out of that job a long time ago. Perhaps that is why it re-trained and found a new job in industry. I doubt that silver will voluntarily go back on "benefits" to please the silverbugs. It may not feel inclined to "lie very still" under a bridge drinking moonshine.
In Gresham's law there is good money and bad money. There are two moneys, not three. Good and bad, not good, so-so, and bad. The bad money drives the good money out of circulation. In other words, the bad money circulates (and becomes the medium of exchange) and the good money lies very still (becoming the store of value). Look at this latest Eurosystem quarterly report again:
You see, the international monetary and financial system (the IMFS) is in transition today. It is transitioning from the old $IMFS into the new IMFS. And through this transition gold is going to replace dollar assets as the monetary reserve asset, and in so doing, will recapitalize the failing system of today. This is the esoteric part, where you need to put in a little effort to understand why I say this with such confidence. Without that effort you will most likely dismiss my words when I say that gold's value will soar during this transition and deliver a one-time gain to physical gold holders in a sort of "punctuated equilibrium."
This means that one day gold is cruising along with its known relationship/ratio to things like silver, oil and bread, and then the next day (or over a brief, one-time period) it gaps up ~40x and then reestablishes a new equilibrium with the aforementioned commodities. And the gain of this transition is only afforded to the physical quantities of gold in the world, which is why the chain of paper promises (of gold) floating throughout the financial system is so dangerous.
Yes, silver will run with inflation just like all physical assets. But it will not have the additional boost of being the new system's official reserve asset. This probably doesn't seem so significant to the silverbugs, but then again, most of you who have taken the time to understand Freegold now call yourselves ex-silverbugs.
The majority of the silverbug articles I read today seem to boil down to the "scarcity = value" argument. This is a weak argument because stock stability is much more important in a monetary metal than scarcity. And stock instability is definitely NOT a plus for a monetary store of value. It is pretty good, however, for the volatility where JPM makes outrageous profits churning, front running and sheering the traders. But it's not what makes for a monetary paradigm shift.
Someone wrote, "Is silver money? I have a bag of 1964 coins that says it is." Good point. But as I said in the post, silver's commodity value overran its monetary face value that year and it has run (just like a commodity) with inflation ever since. Does that make it money? Not in the sense that I am talking about, which is the role of global reserve asset par excellence riding out a systemic phase transition.
Someone else said that I had money all wrong because I wrote that gold is debt. Perhaps I should have said that gold is "a credit" for future goods and services instead of using the loaded word "debt." (But, actually, I did that on purpose.)
All of these are fine arguments. But they are also all completely missing the point of the post.
Yes I still have some physical silver. But I am a seller today and have been for a year now. And I was only a buyer before I discovered the wonderful archives linked above. And for the record, I am not playing the GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it. And if I didn't have any silver, I would probably buy an amount equal in weight to my gold position, as Desperado said in his comment. That means, if I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just me (and Desperado).
Randy Strauss, who has been the sitemaster and an active forum participant at USAGOLD.com since the very beginning, is probably the finest Freegold observer there is (other than a couple of great guys that stopped posting back in 2001). He doesn't write much anymore, but what little he does write is worth following every day. It can be found here following the notation RS View.
He has been on the trail for about 10 years longer than I have. And when the systemic phase transition didn't happen as expected (and thank goodness it didn’t, otherwise I wouldn't be here nor would I have any gold), he started looking for signs in the international monetary realm as to any kind of a sweeping plan. And he found the signs he was looking for! Much has been evolving in the IMFS over the last decade. The signs are everywhere! (I think Costata has been working up a list.)
Anyway, starting around 2005, many international policy stirrings gave Randy every indication that 2010 was to be the targeted year for assertively rolling forth the Freegold paradigm. But the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" – one does not dare rock the boat (if there remains any choice in the matter) when the financial waters have become so turbulent and choppy.
As for a new timeframe, Randy is seeing good indications of a mid-2013 benchmark. Of course he is also cognizant, as are the central bankers, that any number of potential and unplanned events could force the transition at literally any moment. Luckily, for the most part, things are already in place. Which begs the question, is your gold already in place? And with this background, here is Randy's week ending post from last Friday.
[News & Views -- main page]
The beginning of the End of Dollar Hegemony
by Randall Forsyth
Friday December 17, 2010 (Barron’s) — When the monetary history of the year coming to an end is written decades from now, the headlines of European debt crisis and Federal Reserve’s adoption of QE2 may turn out to be mere footnotes to the bigger story: 2010 could be a watershed marking the beginning of the end of the dollar-based, Western-centric monetary system.
… This year, the idea of reform was advanced by World Bank President Robert Zoellick, who proposed in a widely read and commented-upon Financial Times op-ed piece “a cooperative monetary system that reflects emerging economic conditions.” That would include the dollar, the euro, the yen, the pound and the renminbi — plus gold “as an international reference point of market expectations about inflation, deflation and future currency values.”
Zoellick’s November commentary followed the outbreak of the so-called “currency wars,” as Brazil’s finance minister dubbed the tensions in the foreign-exchange markets resulting from Fed’s liquidity expansion through the purchase of $600 billion of Treasury securities, dubbed QE2, for the second phase of quantitative easing. The downward pressure on the dollar from the surfeit of greenbacks was viewed by finance officials abroad from Asia to Europe as well as Latin America as tantamount to a competitive devaluation to boost the U.S. economy while beggaring its neighbors.
… Dissatisfied with the options of the dollar or the euro, the ascendant economic powers are essentially cutting out these middlemen. Just Wednesday, Micex, Russia’s largest securities exchange, began trading in the ruble vs. the Chinese renminbi. It was largely symbolic given the volume traded was equal to about $700,000. More importantly, Russia and China have agreed to settle their bilateral trade of about $50 billion in their respective currencies.
That means Chinese importers don’t need to obtain dollars to buy oil from Russia. Nor does Russia need greenbacks to buy Chinese goods.
[RS Note: Think about this for a good long while...]
… Because the rest of the world uses the dollar for transactions and a store of value, the U.S. has been able to take advantage of that. Indeed, the greenback is America’s most successful export.
So, Americans get the goods, allowing us to consume more than we produce, simply because the rest of the world wants our paper. …… American ingenuity produced triple-A mortgage-backed out of subprime loans, which dollar holders around the globe eagerly scooped up.
These foreign dollar holders are funneling their funds into Treasury securities, effectively funding the U.S. budget deficit. But they’re not doing it as willingly as before.
… None of this suggests that the dollar is about to be toppled from its perch as the premier global currency in 2011. Strains in the original Bretton Woods system were evident long before President Nixon abrogated the promise to redeem dollars for gold at $35 an ounce for foreign monetary authorities on Aug. 15, 1971. Even then, the floating exchange-rate system didn’t come into being fully until 1973.
… How long this process goes on depends on the availability of alternatives to the dollar.
… The demand for dollars from the rest of the world has been of inestimable benefit to the U.S. economy. It quite simply allows Americans to consume more than they produce and save less than they invest; in other words, to live beyond our means. The dollar’s dominance will not be toppled in 2011 but will wane over the coming decade and beyond. And America will have to start picking up the tab for what had been a free lunch.
RS View: For the wealth-preservation minded individual, the important question centers upon this comment made in the article: “How long this process goes on depends on the availability of alternatives to the dollar.”
Frankly, the answer is surprisingly simple, and the preparatory timeline is surprisingly short.
As evidenced in the commentary about the new trade arrangements between Russia and China, it should be obvious and intuitive that bilateral trade between any two given countries could be similarly invoiced in their respective currencies. The timeline is effectively zero given that these currencies already exist and are in local use. At issue, mostly, is the simple matter of breaking with mere tradition — the habit of invoicing/contracting in this third party currency, the dollar. Given the suitable functionality of most national currencies for the invoicing/payment of their bilateral trade, there is no need for the world to spend time and effort conjuring up a new supra-national currency unit to replace the dollar as a universal invoicing agent.
With invoicing/payment alternatives ready and waiting, the only other aspect of usage in the dollar’s international role is that as a reserve currency — that is, as a store of value.
Store of value is a significant element because at the end of any given trade cycle (monthly or annually for example) a nation actively trading with its international peers as described above will inevitably end up with a net position in various foreign currencies. It becomes a matter of national importance to consolidate those paper positions into a more reliable form that is not dependent upon the fiscal policies and monetary management skills of your international trading partners. It is the form of asset chosen for this consolidation of the net position that embodies the “store of value” function from one trade cycle to the next and beyond.
But as this article points out [see the article link to read more than the few excerpts above], “Since 1973, the dollar has been unanchored and has been anything but a stable store of value.” Gold, on the other hand, serves this role uniquely well because it resists the degrees of artificial inflation and depreciation commonly afflicting national currencies driven by naturally self-centric national management.
The central banks of the world, throughout their long history, have more or less developed the requisite infrastructure and ample experience in the fine art and science of gold storage and allocation transfer. Therefore, not only is an alternative to the dollar available for the store of value role, it is readily available with no significant timeline to accommodate the practice. To be sure, many central banks have already in place the mark-to-market accounting structure to accommodate (and benefit from) the significant upward revaluation of gold reserves as would be expected to occur through the dollar-to-gold transition.
Various policy signs over the past several years had indeed pointed toward 2010 to be the watershed point in the international monetary transition, but the depth of the current commercial banking crisis likely argued strongly for a delay under the thought that calmer waters would facilitate a better transition. As such, the existing infrastructure and policy is largely in place at the present time, so a timeline for this store of value transition can be every bit as short as that for invoicing — essentially, no time needed for flipping the switch.
But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next. Hence, it is best that you work to actively establish your desired gold position without undue delay, and then with peace of mind you can turn your full attention to the business of living your life as it was meant to be. Spending significantly further time obsessing over currencies and investments is a fool’s errand.
The bottom line is that silver could do anything short term. The essence of the message here is that silver is not gold's trusty sidekick or heir apparent. The silver price could go up or down, but silver is not part of the Freegold transition. Only time will prove this one way or another. In the interim, here's some more music.